ADDRESS: WFD: 2010 Annual Meeting Chairman's Address

6 Aug 2010 3:49 pm

WFD 06/08/2010 ADDRESS

REL: 1549 HRS Wakefield Health Limited

ADDRESS: WFD: 2010 Annual Meeting Chairman's Address

Chairman's Presentation to Wakefield Health

Annual Meeting - 6 August 2010 I will now discuss the major issues of the past year impacting both the company and the industry as a whole, starting with an overview of 2010 financial results. Aside from matters financial, perhaps the most significant development involving Wakefield Health was the attempted takeover of Norfolk Investments Limited. As there is an interest that I am associated with that is a shareholder in Norfolk, I took no part in Wakefield's discussions on this matter. I will therefore leave it for Andrew Blair, our Chief Executive to address this matter.

Andrew will also provide some further comment and detail on the 2010 financial results.

As you would be well aware, the 2010 financial year presented something of a contrast to the record year that preceded it. A decline in workload reflected a subdued economic environment as the country emerges from recession, ACC seeking to actively reduce the number of surgeries funded and a reduction in DHB contracting opportunities. These factors all served to suppress revenues, which were down 11% on the previousyear.

Given the substantial investment in fixed costs that a hospital must bear, a decline in revenue will generally result in a magnified decrease in margins and so it proved in the current year. Net earnings were 39% lower than achieved in the prior year.

While earnings were reduced, the Company benefited from the strong financial position that it has built up over a number of years. Gearing remained extremely modest, at levels almost unchanged from a year earlier. This served the company well during less favourable economic times and provides a strong platform as we look to the future. None of the factors that weighed on 2010 results were specific to Wakefield Health. While private healthcare felt the effects of the recession later than most other industries, we believe that the resulting suppression in demand affected many in the industry and the changes in ACC and DHB workflows were a national phenomenon. The changes impacting ACC workflows were twofold, firstly an at times substantial increase in the length of time taken by ACC to approve surgeries and secondly a significant increase in the number of applications for surgery

rejected by ACC. This reflected ACC seeking to actively reduce its treatment costs. While most in the industry would accept that there was some scope for tightening of approval processes, many would also feel that ACC have gone too far and are not being fully responsive to the legitimate treatment needs of those who the scheme was intended to cover. It is also unlikely that the surgical needs of those individuals declined ACC funding will disappear, rather they will simply be transferred onto public waiting lists or will look to private insurance for cover and both of these funding pools are already under strain. Turning to DHBs, we consistently stress the unpredictability of work from this source. There has been investment in additional capacity in the public sector and more recently a strong focus on internal efficiency and containing DHB deficits. These factors have seen a reduction in the amount of elective surgery outsourced to the private hospitals not just in the regions that our Company operates in but, we believe, across most of the country. While from the country's perspective this may be seen as a good thing, whether these solutions are sustainable in light of the oncoming rush of demand created by a rapidly aging population is a key question and one that I will consider further in a moment. Nonetheless, DHB contracting remains a relatively minor part of the Company's business. More important are the trends impacting the private insurance market which underpins a large proportion of the Company's work. A trend that has emerged more strongly in the past year than has perhaps been the case previously has been the pressure that increased cost of claims is putting on insurers. This reflects both an increase in the number of claims being borne by insurers and an increase in the average cost of each claim and has seen premiums increase significantly in the past year for most policy holders. Thus far this has not translated into a meaningful reduction in the number of New Zealanders holding private insurance though some have reduced the extent of their cover.

A robust market for private insurance is obviously very important to the private healthcare industry and funding pressures are an issue for insurers, specialists and hospitals. Due to imbalances in the market for qualified staff and pressure on wages feeding through from the public sector and advances in technology, medical inflation continues to exceed basic inflation and trends in the insurance market have implications for our ability to pass these cost increases on to the end consumer. While we have so far focused on issues of current impact, it is important to remember that running hospitals is a business characterised by long-term investments. When evaluating such investments it is vital to consider the demographic factors that will influence the return on that investment over its life. As we have consistently stated, we consider the long-term industry demographics have some very favourable features. The demand for healthcare services is only likely to increase, as it has done for many years. And indeed, this growth is likely to accelerate as a result of an aging population. This graph, published by Statistics New Zealand, ably demonstrates this. We are just at the beginning of a period where the "baby boomer" generation is reaching retirement age that will see the over-65 age group more than double,

both in absolute terms and as a proportion of the total population. Given the substantial healthcare needs of this age-group, the wave of demand that this will create is a serious concern for health planners in the public sector with its implications for workforce and facilities and the funding burden that this will create. This increase in demands will intensify the pressure that is already evident in public healthcare. We have already seen substantial increments to the health budget by successive governments, yet largely all this has allowed the public sector to do is keep pace with existing demand and not grow services to meet accelerating future demand. There are a number of operations such as varicose veins that are generally no longer funded by the public purse. It is likely this will apply to more treatments in order to balance the almost unsolvable supply and demand equation in the public sector. At the same time, there is an increasing awareness amongst health consumers of their options in this information age and this has brought with it increased expectations around choice of treatments and means of delivering them. Technology too is having an increasing influence, with advances creating new treatment options, but the flipside to this is increasing cost and complexity for service providers. All these factors point to a substantial opportunity for the private healthcare sector to make an increasingly large contribution to meeting the total healthcare needs of New Zealanders. However, there are challenges too, particularly as to how this will be funded in the future in light of the previously discussed constraints on private insurers and other funders. But what of the immediate prospects for the Company? As I have just set out, the long-term demographics point to a favourable future demand for the companies services. However, there is a tension between the long-term indications and the short term factors discussed earlier that have weighed on recent results. This creates considerable uncertainty about what the next 12 months will look like. There is currently no basis to predict when and to what extent private patients will increase. Our industry lagged the rest of the economy into recession and it may be that we also lag it out of recession. There is also little basis for projecting the inherently uncertain DHB work. It is however worth noting the changes in national policy regarding contracting with the private sector implemented last year, encouraging longer term sustainable contracting that provides certainty to both parties. While this does not yet appear to have resulted in substantial changes in practice, it does create the possibility of a shift from ad hoc to longer term contracting that could be mutually beneficial. It is also our current expectation that there will be no significant change in ACC workflows as ACC will seek to continue to contain expenditure on surgery. In line with these trends, trading for the first quarter of the 2011 financial year has been consistent with the prior year. Finally, as a number of other companies have noted, the changes to tax depreciation rules regarding buildings will have an impact on companies such as Wakefield that have a significant investment in property. At the same time as posting our annual meeting presentations today we have also provided a separate release to the NZX discussing the expected impact of these tax changes on Wakefield. This includes a one-off non-cash adjustment of approximately $6 million to the Company's deferred tax balance that is expected to be recognised within results for the six months ending 30 September 2010. Before closing my section of the address, I would like to briefly touch on matters pertaining to the Board itself. As is established practice, a third of the Board must retire by rotation at the annual meeting and may then offer themselves for re-election. This year, Alan Isaac and Jacqui Gray are the Directors retiring and both are offering themselves for re-election. We also welcomed Professor Geoffrey Horne to the Board during the year. Professor Horne is an orthopaedic surgeon who works at Wakefield Hospital and has had a long and distinguished career in both the public and private sector and was previously the Chair of the Group Consultant Liaison and Clinical Advisory Committee. In accordance with the Company's Constitution, the term of Director appointments made by the Board is only until the next annual meeting, at which point the Director may offer themselves for election by shareholders.

Accordingly, Professor Horne offers himself for election today. As a final point, in light of the challenging economic conditions that the Company faces, the Board has decided to leave Directors fees unchanged which is the second year in succession that this has been the case. I will now hand over to our Chief Executive Andrew Blair for further discussion of the past year. End CA:00198104 For:WFD Type:ADDRESS Time:2010-08-06:15:49:10

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