This meeting is being recorded.
We're pleased to be hosting IDH's third quarter 2022 results conference call. With us from the company we have Dr. Hend El Sherbini, the company CEO. Omar Bedewy, the CFO. As well as Nancy Fahmy, IR Director. I'll now hand over the call to Dr. Hend, who will begin her the company's presentation, and that's going to be followed by Q&A session. Thank you, Dr. Hend, please go ahead.
Thank you. Good afternoon, ladies and gentlemen, thank you for joining our 3rd quarter 2022 analyst call. I'm Dr. Hend El Sherbini, Chief Executive Officer of IDH. With me today are Omar Bedewy, our CFO, and Nancy Fahmy, our Director of Investor Relations. During our presentation today, I will start with a quick overview of our performance for the 9-month period and discuss some of the key strategic developments since we last spoke in September. Before handing the call over to Omar to discuss our performance in more detail, I will touch on outlook and targets for the remainder of 2022. As always, we'll end the call with your questions. Ladies and gentlemen, as we near the end of 2022, I'm delighted to report that our business is strong and continues to display robust potential for future growth.
In fact, midway through the final quarter of the year, we remain well on track to deliver double-digit revenue growth, a remarkable achievement in light of the difficult macroeconomic environment faced across our markets. Here, it's worth highlighting that throughout 2022, we have had to confront significant currency devaluations in three of our four markets, with subsequent spikes in inflation rates eating away at patients' purchasing power. Despite this, we have continued to report solid growth in our conventional business, backed by sustained rise in the demand for our services. More specifically, during the 9-month period, we witnessed 14% year-on-year growth in conventional revenues on the back of a 7% rise in the number of conventional tests performed.
As you can see on the charts, on slide two, this sees our conventional revenues and test volumes currently stand at an impressive 33% and 18% above levels recorded in the same nine months of 2019 prior to the start of the pandemic. Patient volumes have also grown steadily as we continue to attract patients, thanks to our increasingly compelling service offering, our competitive prices, and our targeted loyalty programs. In parallel, we have also witnessed a significant rise in our tests per patient metric, reflecting a general normalization of patient behaviors and the success of our newly rolled out loyalty programs.
As you can see on the following slide, our performance was even more impressive on a quarterly basis, with the highlight being the remarkable 12% growth in conventional revenues versus the previous three months, which also represent a solid 33% growth ahead of the third quarter of 2019. Turning quickly to our performance by geography. As you can see, both Egypt and Jordan continue to record strong conventional revenue growth on both a year to date and quarterly basis. Across our two largest markets, we continue to benefit from an increased patient reach, expanded service offering and a general normalization of patients' behavior following a COVID-19 related slowdown. As expected, both markets continue to witness a rapid decline in COVID-19 related revenues as demand and pricing continue to fall.
Across both countries, revenues were supported by the household segment, which is consistently recording a contribution to our consolidated top line, well above pre-pandemic averages. Meanwhile, in Nigeria, despite the unprecedented surge in diesel prices, Echo-Lab maintained its strong trajectory, in particular when controlling for the branch closures that weighed on the venture's results in the first part of the year. In Sudan, we were very pleased to report positive top line growth for the second quarter in a row. Further down the income statement, we witnessed a general normalization of margins as COVID-19 related business continues to decline in line with our expectations. At the same time, we also recorded a rise in our raw material to net sales ratio, reflecting a rise in raw material prices following the recent Egyptian pound devaluation.
With regards to raw materials, I'm happy to report that we continue to face no problems in sourcing and acquiring raw materials, our long-lasting relationship with test kit supplier continue to ensure we secure competitive prices for new stock. Finally, over the course of the year, we have incurred additional expenses as we invest in our business. Since the start of the year, we have launched 44 new branches across both our pathology and radiology segments. We also invested to enhance the look and feel of our branches and improve the service quality we deliver and the safety standards we uphold. In parallel, we launched several loyalty programs tailored to our different patient segments and continue to invest in the ramp-up of our Egyptian radiology venture, Al Borg Scan.
On this front, over the last 12 months, we have more than doubled Al Borg Scan branch counts to bring them to six full-fledged radiology centers covering all of Cairo and successfully obtaining ACR accreditation for both the ventures in nuclear medicine and ultrasound units. While these recent investments and current operating environment have weighed on our margins in the short term, we are confident that they will play a key role in generating further sustainable growth over the coming years. On the one hand, the expanded reach and service offering, and in particular, the increasingly popular radiology segment, will ensure we continue to attract new patients to the group and remain the provider of choice across our footprint.
Our experience of successfully navigating similar situations will enable us to drive margins back up to our historical averages once the current challenges subside and create long-term value. Meanwhile, as you can see on slide six, we have also been actively working to expand out our footprint into new geographies. Just a few weeks ago, we announced the signing of a joint venture agreement with Izhoor Holding to launch a new full-fledged pathology diagnostic service provider in Saudi Arabia. This deal is directly in line with our long-term regional expansion strategy, which sees us target markets where our operational model and proven expertise are well suited to deliver high quality care to as many patients as possible.
The new venture will be operated by the Biolab team and will benefit from the complementary strengths and experiences brought by IDH and our partners. As showcased on slide six, the Saudi Arabian healthcare market is one of the region's most attractive market with solid growth potential, stemming from both its solid fundamentals and supportive regulatory environment. This makes it an ideal market to add to our portfolio as we look to further cement our place as a regional industry leader. Before moving on, it's important to mention that the new venture will be fully consolidated in IDH accounts and that operations are expected to begin in the first half of 2023.
The recent devaluation of the Egyptian pound, followed by the central bank decision to move towards a durably flexible exchange rate, has seen the overall value lost against the dollar since March of this year reach 55%. While this will undoubtedly weigh on businesses and consumers in the short term, we are confident that the strong fundamentals of our markets remain unchanged. Coupled with our flexible business model and proven growth and value creation strategy, we continue to be well-placed to deliver on our targets and preserve our margins. As you can see on the slide, there are several exciting developments to look forward to in the coming months, which will continue to guarantee further sustainable growth and robust margins for the group.
As such, despite the current macroeconomic challenges, we continue to target a comfortable 15% full year conventional revenue growth for this year, largely in line with our full year guidance prior to recent macroeconomic developments, coupled with an EBITDA margin of around 35%. I will now leave you in Omar's capable hands to go over our nine months performance in more detail.
Thank you, doctor, and good afternoon, ladies and gentlemen. During my today's presentation I'll highlight on the performance of the third quarter of 2022, along with the consolidated financial results for the first nine month of the year. In Q3 2022 conventional performance delivered a solid 17% year-on-year growth, supported by a robust 9% year-on-year growth in test volume and 10% growth compared to the pre-pandemic level in 2019. On a sequential basis, our conventional offering came in 12% ahead of the previous quarter in terms of revenues and 11% in terms of volume. Overall, IDH conducted 8.4 million tests, 98% of which are conventional.
The year-on-year and QoQ increase in conventional sales can be detected in Egypt, Jordan, Nigeria, and Sudan, of course, as well, where Egypt conventional sales grew by 16% and 12% year-on-year and QoQ respectively. While in Jordan, conventional revenues grew by 25% and 13% year-on-year and QoQ during the same periods. In Nigeria, the top line figure continued its upward trajectory, increasing by 43% year-on-year and 15% QoQ. As for Sudan, despite the depreciation of its local currency, still witnessed more than 48% increase year-on-year. Moving on to the aggregate contribution margin, which is of course an important topic given the devaluation of the Egyptian pound.
As you can see from the graph, the aggregate margin in the third quarter is relatively stable and largely in line with the second quarter. The important thing that I need to highlight in this graph is that the slight decrease in Q3 contribution margin is related to the significant reduction in the PCR and other COVID-related test price. While our conventional contribution margin is more or less stable at the 83% level. Since we're addressing the contribution margin and the raw material and following the recent deval, I'm comfortable to say that the last quarter of the year will not witness a significant jump in the raw material cost, as we have adopted a prudent inventory management strategy to partially hedge against the local currency fluctuation.
That being said, the last quarter, the conventional raw material as a percentage of use will inch up 1% compared to previous quarters. To provide better insights on the margin, I'll compare Q3 results with the pre-COVID year of 2019. During Q3, the group's EBITDA margin reached 31% compared to 42% in Q3 2019. There are a few drivers behind the EBITDA contraction, some of which will phase out, and others are related to our continued investment in the business. Let's start with the first bucket, which is related to around 3% contraction in margin. Which came on the back of the continuous reduction of COVID test prices, along with an additional 1% driven by the aggressive expansion and the ramp-up of our radiology venture.
The second bucket centers around elevating our customers' experience, improving the quality of our services and introducing the new loyalty program, which will reflect positively on the patient's retention and the growth of our business as economic conditions improve. These investments in the form of upgrading our facility management model and substantially enhancing the call center quality together have reduced our margins by approximately 3% compared to Q3 2019. It's also worth mentioning that the significant increase in audit fees being U.S.-denominated have reduced our margin by a further 2%. If we move to the 9-month bottom line results, the slide illustrates a bridge from EBITDA all the way to the consolidated net profit, where the bottom line reached EGP 403 million with a margin of 15%.
The contraction in our net profit is attributable to EGP 141 million losses resulting from transactions completed by the company to secure the US dollar needed to fulfill its 2021 dividends obligation. Meanwhile, we have succeeded to generate an interest income of EGP 83 million, which is more or less around 20% compare compared to last year's figure. We have recorded a Forex gain of EGP 55 million the first nine months of the year. This gain alleviated the loss generated from sourcing US dollar to fulfill the committed dividends to our shareholders. Moving to Al Borg Scan, we are currently operating six branches, as Dr. Hend mentioned, covering Cairo from East to West.
Two of which were opened during the second half last year. One was opened in Q1 this year and another one during Q3. As you can see from the graph, the monthly ramp up is quite solid as the brand equity gets more recognition. Al Borg Scan top line increased by almost 88% on a year-on-year basis, with more than 100,000 tests conducted during the first nine months of the year, representing approximately 95% increase compared to the same period last year. By the end of this year, we expect Al Borg Scan contribution to the consolidated top line to reach around 2.5% up from its current level of 2%.
As at the 30th of September, IDH consolidated cash balance stood at around EGP 700 million following the dividend distribution, with a net debt balance reaching EGP 340 million after considering the medium-term loan from AUB amounting to EGP 86 million, along with other liabilities related to the equipment lease and IFRS 16. During the first nine months of this year, IDH CapEx reached EGP 345 million, representing about 12.6% of net sales. It's important to note that if we exclude the translation effect resulted from the devaluation of the EGP and Al Borg Scan capital expenditure, CapEx as a percentage of net sales would reach 4%.
We have experienced and we have witnessed this devaluation in 2016 and 2017 when the Egyptian pound moved all the way from EGP 8.5 to more than EGP 18 to the dollar. Our EBITDA margin was temporarily affected and eventually reverted back as we have managed to control costs, especially on the raw material side, while opting not to pass on the full inflation impact to our end patients. As for next year, it is early to give specific guidance for now. However, our strategy would be as follows. We will increase our prices by a higher rate compared to previous years.
Given the solid relationship with our suppliers, the increase in raw material costs will not reflect the full impact of the currency devaluation, while we will manage to keep as low as possible our cost base levels and to manage our remaining cost base efficiently. Thank you. I now conclude my remarks, and the floor is open to questions.
Thank you, Dr. Hend, Omar, and Nancy. We will now open the floor to questions. As a reminder, you can type your questions in the dedicated Q&A box, or you can tap the Raise Hand button to have your microphone unmuted to speak directly with company management. We've already got a question in the Q&A box from Matthew. Matthew asks: With the Saudi deal being equity for $4.7 million, but the total cost being $19.7 million, where is the balance coming from? Is this debt, partner investing more, a timing difference? Can you please shed some light on this?
So if I-
Yes. Hi. Just to shed light on the Saudi deal, it's $19.7 million, yes. It's 48% equity, 52% debt. The amount that you are quoting from the release is related to the equity portion related to IDH. This $4.7 million is the amount of equity that will be channeled from IDH Holding and Biolab together, and the remaining is debt. It's 48% equity and 52% debt. Hope this answers your question, Matthew.
Thank you, Nancy. I see Khaldoon has hand up.
Hello.
Khaldoon, go ahead.
Thank you for this presentation. I feel a bit like confused about the last maybe three years. Maybe the last slide you just showed about EBITDA evolution from pre-COVID till today. You compared EBITDA of 2022 with 2019. Again, the explanation of that drop you included as part of the drivers, COVID. In 2019, there was not COVID at all. I'm just a bit confused. This is one thing. The second thing, I know you just said that it's pretty early to discuss about some guidance on a normalized level if fully exclude COVID and even COVID related tests.
Maybe if you can touch base on this, give me some, even if it's not solid, normalized estimation but at least just be more clear with regards to the normalized revenue, full year 2022, gross margin and net margin. Thank you.
Just to address your first question, Khaldoon, you're asking about why Omar is attributing a drop in EBITDA margin related to COVID. He's not referring to the base. He's not referring to 2019 as a base. Yes, 2019 did not have COVID, as you rightly mentioned. However, it is reflected on this year's quarter. That's the thing, Q3 of 2022. This is what he's trying to address. He's trying to address the impact of the small portion of the COVID tests on your EBITDA. This has because the drop of prices which was dropping consistently after the pandemic has subsided, it ate up automatically a 3% for this quarter of your EBITDA. This is like a temporary effect that he was trying to explain on that 31%.
Look, there is a slide where we do present the contribution margin, dissected between COVID and conventional. If you can go to Nancy again.
Yeah.
You will see that it is the contribution margin is around 8%. While the conventional test contribution margin. Here it is. Yes.
Yeah. One sec.
We have 83%. The conventional contribution, conventional raw material as a percentage of revenues is around 17%, which is more or less the same, by the way, compared to 2019, Q3 2019. That's why I'm saying that there is a 3% related to... There is a 3% related to PCR and other COVID-related tests. It's obvious from the graphs that between Q2 and Q3, the conventional, the COVID PCR contribution margin went all the way from 58% to 44%, only one quarter. It was around 85% last year. Again, there is a 3% reduction in our contribution margin related to-
Q3 alone.
COVID-related tests and PCR. Compared to 2019, where there were no COVID at all.
Does this address your question, Khaldoon?
Yeah, I mean, it, to some extent, Like, okay, now the margins of EBITDA used to be around 42%, right?
That's specifically in quarter two, quarter three, 2019. They hovered around the 40% historically, yeah.
Like for like, if you compare Q3 alone with Q3 2019 where there is no COVID, there is a 3% reduction only attributable to COVID. That's the point.
Okay.
If we remove it from Q3 to 2022, then there will be as per.
My point, maybe, I'm, I'm trying to figure out, after excluding COVID completely and taking into consideration, the recent acquisition of the Pakistani business, as well as the material price surge, after the FX devaluation, where we are right now with regards to the EBITDA margins, as well as the second question, the normalized, unnormalized basis for revenue, for the gross margin and net margin.
Hello?
Khaldoon, you're asking about the guidance going forward, what's the normalized rate of EBITDA margin, right?
Yeah, this is the second question.
Sure. Sure, and specifically for next year, it's difficult to give you an exact number. However, the normal course of business that we have always run is a 40% EBITDA margin. This has been how our historical rate has been, and this what we will eventually reach. However, next year in specific, it remains to be seen. As Omar noted, so far here is what we are sure going to do. We are gonna raise prices by a higher rate than historical levels, because historically we used to raise walk-in by around 10% and corporate by around 5%-7%. Definitely next year, because it is an unusual year for inflation levels and everything, we will raise by a higher rate. This is the first component.
We continue to negotiate with our suppliers, this depreciation in the pound. This is the second step that we focus on. However, if you look back at our negotiation during 2017 post the deval, our suppliers actually absorbed part of the depreciation on their books like us. We didn't have a full impact on our raw material, and this is what will likely happen for next year again. On a normalized level, going forward, definitely the 40% is targeted. However, for next year in specific, it's yet to be seen after we finalize all the price increases and negotiation.
Sorry for, I know there are other, questions from other people. on the... For our revenue,
Yes.
to come.
It's going to be double digit like we've always grown.
Okay. Okay.
Thank you for that. Jayna from HSBC is asking if you can please repeat the guidance on revenue and EBITDA for the full year 22?
As Dr. Hend noted, we expect our conventional revenue to comfortably grow at a rate of 15% for the full year of 2022, with an EBITDA margin of around 35% for the full year.
Okay, thank you. A few questions from Fouad. Referring to the bridge presented on EBITDA margin and setting COVID impact aside, how are you thinking about the return on investment into the customer experience? Do you expect this to increase revenue growth above historical levels, or is this to fend off competition? Looking back at presentations from around the time of the IPO, it was claimed that the second largest competitor in Egypt was significantly smaller, and commentary on the last earnings call indicated that this has narrowed. Can you please comment on this?
Sure. Starting with the last bit of your question, you are right. The gap between us and the second competitor in the market remains to be the same. If you look at the whole market, actually we believe that a lot of smaller players have gone actually out of business during the recent wave. We've seen a more difficult operating environment and that has driven operating, smaller operating labs to go out of business. That's in comment with regarding the last bit of your questions. We're running over 500 branches in Egypt. Our second competitor would mostly run maybe around 200 labs.
The gap between us and the second one remains the same as the time of the IPO, and we think a lot of smaller players have gone out of business during the past time. This is the last bit of your question. Regarding the first bit of your question on EBITDA margin and this one, EBITDA margin and setting COVID aside.
Return on investment.
Return on investment. It's difficult to really give an a specific return on investment for this. It cannot really be calculated like this. However, what we know for sure, it definitely supports customer retention. When you have a solid loyalty program that encourages people to gain points, the more they do tests in your lab, we have noticed instantly it brings them back again to your lab to redeem those points and most probably they add on more tests. In the during in addition to the test that they were or they are able to do. Actually, if you look at at the corporate part in the test per patient, it's very clear. It's very clear that the test per patient has risen to actually to the highest level since our IPO.
It's crossed the 4.1 on the corporate side. We believe that that has been driven by the loyalty program. As economic conditions improve, we believe that that loyalty program will continue to gain traction, more people will use it, and it will enhance customer retention for sure. That's regarding to the loyalty program. Does that address your question?
I can ask a follow-up while we're talking about ROI, also from Fouad. Specifically with respect to the radiology business, what metric are you using to measure this? It seems there has been over EGP 400 million in cumulative investments into this segment. How should we think about the return on this going forward?
Sure.
When we did our analysis to go into this venture, we always look after 35% plus return. The venture is continuously ramping up as you saw from the graph. The brand equity for the radiology is getting more and more recognized. That's why we were opening new branches. We're on track on achieving our 30-plus return on our investment.
Okay. Thank you. Again from Fouad: Could you help us understand the framework you use to decide whether to allocate excess capital to dividends versus buybacks? Given the share price, it seems, there may be an opportunity or a foregone opportunity not to be buying back shares aggressively. Can you comment on this? Also Fouad says there, he understands that there's a requirement for FY results of subs to be out before this can be done, but could you please help us understand your latest position on this?
Sure. Okay. Yeah. For buybacks, definitely they have to be done outside any close period, which is 30 days before any release of results or any, of course, material news that would impact results or stock price in general. That's correct. Regarding buybacks or dividends, we're actually open to buybacks as we speak. We have an annual AGM approval for buybacks up to 10%. That has been already in place, and we're open to the idea just being under discussion. As you all have also seen, our CEO have been also buying back shares. She's bought back during the open period before material announcements around 7 million shares, and that would continue to be the case should the share price remain depressed.
Thank you, Nancy. I see Yasmin has her hand raised. Yasmin, go ahead. Until Yasmin has an opportunity to unmute her microphone, we can ask another question asked by Fouad. Could you comment on LFL performance of C-labs versus pre-COVID and the performance of new labs versus old vintages?
The increase is more or less the same. It's the conventional growth of double-digit for the whole company and for the C-lab. Again, as we always mention, the new labs, the new C-labs that we do open, they contribute to our top line figure, around 1%. The new C-labs opened each year, they do contribute 1%, and they add on year on year to our top line figures. Yes. Remaining balance of course is the old-
The vintage ones.
The vintage one. Yes.
Okay. Thank you. Just checking in again with Yasmin to see if she'd like to ask any questions. As a reminder to everyone else, this is an opportunity to type your question in the QA box or to raise your hand if you have any final questions. Okay, Farouk has their hand up. Go ahead, Farouk.
Hi, guys. Thank you very much for the call. Just two questions, please. Could you expand on the fair value loss, EGP 141 million, for the quarter? Exactly the mechanics and if FX issues remain, should we expect you to do it again the next time you need to give out dividends? Second question is just again going on the bridge on EBITDA margin. 8% of the 12% contraction seems like it was proactive decisions from your side, loyalty program, call center, and so on. Are these expenses one-off big expenses? In a year's time and going forward, they will start going down or is this longer term?
For the next 12, 24 months, we might expect margin pressure as you continue to spend more money on, you know, call center expenses or whatever it may be. Thank you.
Regarding your first question about the 141, the fair value loss. As you know that we, given the economic circumstances at the time of dividend distribution, we were not able to source the dividends from the usual sources, meaning the Egyptian bank, the banking system. We had to secure the amount via GDRs. We had to buy GDRs from Again, from here, from Egypt and or buying the stock here and sell it on the London Stock Exchange. The differential between buying and selling is around EGP 141 million. That's the mechanics in a very brief or in a nutshell. That's question number one. For question number two, as you know, the
Those expenses were meant to improve and enhance the branches and enhance the, and improve the customer retention. Going forward, there will be an increase. We expect, of course, an increase in the top line figures, so those expenses will be diluted. Their contribution to the top line figure will diminish. Consequently, there will be an increasing in our EBITDA margin.
Just from the fair value loss, though, I mean, do you think going forward, as someone asked about dividends, previously? Going forward, if there's continued dollar access issues, would you factor that in in terms of dividends? Because you don't want to continue to have to buy in Egypt, sell in London and take these fair value losses? Would that affect the dividend policies if FX becomes an issue?
I think that the Egyptian government now has devaluated the Egyptian pound, so at the end of the for the sake of having, you know, having access to foreign currency. I think that by next year when we will distribute dividends, I think the normal course of business for the Egyptian banking system will resume, so we'll be able to secure dividends to our shareholders via the conventional channels.
Okay, thank you very much.
Okay, thank you. We brought up price increases before, but if we can just bring that up again. Janesh is asking, are you planning larger price increases for FY 23, given the EGP devaluation? Do you have a sense of the size of price increases needed heading into 23?
Yeah. Yes. We have addressed that point. Yes. We are planning a higher than our usual price increases for both walk-in and the corporate segment. However, we cannot quantify it precisely at the moment. Yes, we are planning a higher than usual price increases with the beginning of next year.
Okay. Thank you, Nancy. At this point, it doesn't seem like we have any unanswered questions. Would you like to make any final remarks before we conclude the call?
Hello. Do you have any more questions, Amir, or that's it now?
It appears that we've asked all the unanswered questions. If we have nothing to add, I'd like to thank you, Dr. Hend, Omar and Nancy. Thank you to IDH's management team, thank you all for dialing in today to the IDH 3Q 2022 results conference call hosted by CI Capital. A recording of this call will be made available shortly. Please get in touch with your contact person at either CI Capital or IDH for access to the recording. Have a nice day, everybody. Goodbye.
Thanks all.
Thank you very much.
Thanks to all of you.
Thank you. Bye-bye. Have a good one. Bye-bye.