Welcome to the Medicover Q2 2024 report presentation. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to the speakers, CEO Fredrik Rågmark, and CFO Joe Ryan. Please go ahead.
Good morning, everyone. Welcome to our second quarter 2024 report. Welcome to you all. Our summary slide, our headline, continued strong organic growth and cash generation. I think this is a very good quarter. We had a good first quarter in the year, and we follow up with an equally strong and solid second quarter. You are used to us growing, but nevertheless, 20% top line growth, of which a tad over 16% organic, is significant considering the size of the company nowadays. Importantly, this is solid across both divisions, and within the divisions across our different businesses, there's nothing individual that stands out. Poland has been strong for a long time. Poland remains strong, and we expect that continuing going forward.
We had continued good member intake in our corporate business, and we equally had very strong laboratory test growth. We're actually back on pre-pandemic organic volume growth levels in diagnostics, which I think is a surprise to some of you, and it's a very good sign again. That's really across the board, including Germany, which is half of the division, as you know, so very strong sign on, on the diagnostic side. We have always had a strong cash generation. We continue to have strong cash generation. This jumps 23% relative to the same period prior year, so good cash conversion. That's really important. And, the.
But most important of all, is that we continue to see the operating leverage that has been expected, it has started to be delivered, and will continue to be delivered as we fill up our invested medical facilities with paying customers. We spent slightly less than historically on CapEx in the quarter, down to 5% of revenue in the second quarter. Looking then at the graphs that you recognize, so revenue just short of EUR 510 million, so solidly through EUR 2 billion on a run rate basis. I remind you, the financial target for 2025 is EUR 2.2 billion in terms of organic revenue, so we're very confident that we will reach that. You see, acquired revenue is rather minuscule within that number, EUR 5 million or so.
You remember that we said starting of prior years, so start of 2023, that we would have 18 months with very subdued inorganic activity, which we have had, which this acquired revenue number is obviously a sign of. A s mentioned, we expect to be able to become a bit more active in the inorganic field during the second half of the year. Looking at the, you know, geographic and revenue splits in the middle, perhaps what is worthwhile noticing, you see Poland is now actually increasing. I think it was 49% last year, it's up to 50% of group revenue. Now you see growing 24%, which I think is quite an outstanding number.
H alf of everything we do in the group is on Polish soil, and that has been ticking up 24% for the quarter. So quite a phenomenal number. Another number to note, this is 18% in Germany. Remind yourself that most of that is diagnostics revenue, obviously, and where most of that is, is KV money, where there's still no price adjustments. So having an 18% revenue growth in Germany, very significant, 24% out of Romania. You see a more softish 6% out of India. There's a number of one-off factors one should comment in terms of India. We have sold a couple of smaller hospital units since the prior year quarter.
We have also revamped the larger unit in Vizag on the East Coast to an oncology facility that is just recently opened, and we've also sold off or closed out the northern Indian IVF facilities. So there's a, you know, set of one-off elements. So you will be seeing the Indian revenue growth ticking up again in the quarters to come. But overall, a very strong. You can also see on the three revenue components at the bottom, you see equally strong, pretty much across. You see public pay, our own funded insurance, prepaid, and fee for service. All three of them solidly double-digit revenue growth. It will then go to the profitability side of things. Again, we have talked about historically that you would see operating leverage coming through in increased margins.
We really started to see this in the first quarter, and we continue to see that now in the second quarter. As expected, you know, the further down you go the profit and loss statement, you know, the more percentage-wise, growth is coming through. So you see operating profit jumped more than 60%, you see, with more than a full percentage points of margin expansion. And adjusted EBITDA L, which is the measure we spend a lot of time, and Joe will be talking about that much more later on here, up 28% with good solid margin expansion.
So overall, we're very happy with how we see margins expanding in the quarter, as real proof and evidence of the operating leverage, particularly as we fill facilities that we have invested into over the past few years. T hen if we look in a bit more detail on our two divisions, so healthcare services, you're used to healthcare services growing very strongly. I think the graph in the middle with the bar chart there illustrates that very well. You can, well, you can say a lot of things about those bars, but I think one nice illustration is, you know, the second from the left is the second quarter 2019.
So that's exactly five years ago, and you see we are more than 3x the size in this division relative to five years ago. So we were a tad over EUR 100 million in healthcare services, second quarter 2019, and now we are above EUR 350 million for the quarter. T he vast majority of this is organic growth, remind you. I've said it before that, you know, the past five years with pandemics and war and all the kind of things, I think have been largely the most challenging trading conditions since the Second World War. D espite that, we have been able to expand our business like this, I think is a very strong sign of the position we have.
Now, in healthcare services, it was up more than 20%, of which the 16 being organic. Importantly, about half of this being price, so but, but 50/50 split in price and volume growth, again, really importantly for our margin management. But another thing which one tends to forget sometimes is that if we look over a slightly longer time perspective, we have quite a big sort of composition change in healthcare services revenue. So again, if we look at that second quarter, 2019, five years ago, fee-for-service at that time was 40%. You know, it was growing strongly. I think it was up from 35% the prior year quarter, but 40% five years ago.
Now, you see, we're at a tad above 50%, as a proportion of revenue, so it has grown more than 25%, its share in divisional revenue, which obviously is a very specific strategy that we are executing on. But it's important that you see that coming through in numbers. A gain, I made a point before, you know, this is really solid performance across what we do. You see that in the charts to the right, whether you look on the geographies or whether you look on the different revenue types or on streams, we have a very solid growth across the division, and also visible in the member intake for the quarter. So very strong picture, and very strong outlook.
Looking then at margins for healthcare services, so, same thing here. You know, the further down you go, the profit and loss statement, the higher the percentage growth. So EBITDA was up 22%, a bit of margin expansion, EBITDA L was up 28%. If we look at operating profit, it's on. Not on this slide, you have it in the report, but operating profit for healthcare services was up 45%, illustrating the higher percentage, the further down you go, the profit and loss statement with wider and wider margin expansion. A lso not to forget that we still carry quite a load of negative facilities in here.
We talk about that quite often, as you know, and in the report, you see, we write out that the three immature Indian hospitals and the large new hospital opened in Bucharest, pretty much this time last year, were contributing a negative EUR 2.4 million on EBITDA L basis, or some roughly 70 basis points of sort of negative EBITDA contribution. So one thing is to bring those to zero. That will have a 70 basis points, everything else equal impact. T hen, of course, bringing them up to being margin divisional accretive, that's the next step.
So, of course, we will continue to open new facilities, but, we, we're just, anxious to illustrate for you still, despite the good expansion, both in profitability and margin, we still carry, quite a bit of, of drag in terms of our, new facilities. We put on one slide for the Indian hospital network, and, I made the point already. I think you, you see Warangal, in the middle, up there, north of, Hyderabad, which had an official opening with the chief minister and the entire cabinet about 10 days, 2 weeks ago or so. B angalore in the south, in the state of Karnataka, which is our first hospital in Karnataka, has had a soft opening and, will be, opening fully, during the third quarter here now.
Otherwise, you recognize the locations, and the strategy in India is very simple. On the one hand, you know, keep expanding at a slightly lower pace than what we have historically done, but still keep expanding in the current states. Most importantly, fill up our immature hospitals with paying customers, and that will be one of the major contributors to a continuous margin expansion for this division. Then, if we turn to diagnostic services, again, very positive picture. I think people are surprised over the strength of the organic volume and then revenue growth here. So, revenue up just short of 18% to EUR 163 million, with 16% being organic.
We have not had that kind of organic volume growth in diagnostics since before the pandemic, so that's an important, well, it's a very important data point, I would say. You see here price being a much more subdued element of growth at 2.3 percentage points. Of course, that's very much on the back of so much of our business being in Germany, where price is not changed. You see acquired revenue, again, very subdued in this business on the back of being very inactive for the past 18 months or so. Also, as we write in the report, we're actually quite disappointed as all of the diagnostics industry. There has been published during the quarter the outlines of a what is called a price reform.
We don't really think it is a price reform. It's largely just reshuffling how money is being allocated. There's no new money in that proposal being allocated into the sector, which is a big problem. Now, the way it is structured, our own assessment is that it will have very negligible, if any, impact on us. You know, you get paid a little bit more for some tests, then you get paid a little bit less for other things. But overall, for us, we assess it as pretty neutral. But no doubt we are disappointed in that, because we are firmly of the opinion, as many other industry players in Germany, that we need to see more money being added to the system. So perhaps the last word may not be said in that debate, but that's how it looks today.
Then, if we turn to profitability with diagnostic services, as you remember, we have said many times that diagnostic services, the business model, is much more of a marginal nature than services. So you put in more volume into your system, and a higher proportion of that will come through in contribution, increased profitability relative to services, and this quarter is an illustration of that. You see on the back of good volume growth, we had EBITDA jumping 30%, the EBITDAL jumped 40%. A gain, EBIT is not on this slide, but operating profit was up more than 80% in diagnostics, with close to 300 bps margin expansion.
So, a simple, straightforward illustration of the fact that generate more volume into our lab network through our BDP network, we make more money, we expand margin, and that's what we intend to continue to do going forward. So with that, I hand over to Joe for the more detailed financial review.
Thank you very much, Fredrik. So if we look at our preferred measure there, adjusted EBITDA, why do we use that? That's EBITDA after our lease costs. It's more like the cash, a real cash flow, if you like, 'cause real estate leases are a recurring part of our capital structure, so the cash outflows for those leases are recurring items. So it's more indicative of the real cash inflows that we have into the operations. This grew by 28%. We moved that up to EUR 47.1 million. So absolute increase on last year, EUR 10.4 million, and with a margin expansion to 9.2% from 8.6%. So decent performance at that level.
We look then down into the operating divisions, healthcare services, that was at EUR 34.2 million, margin of 9.7%, so margin expansion on there. But, and that's the flow-through on incremental volumes coming through. But we're still held back by new unit startups, that we have, and the Bucharest Hospital being the largest part of that, as Fredrik mentioned earlier up in the presentation, EUR 2.4 million negative results from there, and the Bucharest hospital being the largest component within there, a majority of it. O n diagnostic services, EUR 19.6 million, up from EUR 14.7 million, so a quite decent margin expansion there, up to 12%.
That's the flow-through and the contribution on the increased volume coming on the fee-for-service side, mainly. We still also have integration costs for the acquisition, the small acquisition we did in Berlin, the lab there. So that's also holding back that margin there and the number. Without that, the operational leverage would be even more apparent. We've got continued room for growth in the coming quarters. We've got the maturing profile of the units, which we'll be contributing to this level. We'll also have the volume increments, which we continue to put on, and efficiency initiatives will come through as well. Looking a little bit more in terms of the balance sheet. We took on EUR 45 million new debt issue, a 4-year maturity.
We also, in the six months, have assumed EUR 24.4 million of deferred payments for acquisitions, and non-controlling interest, in our one of our main German specialist lab, labs in Berlin. Non-cash item, but we assumed that. I f we look at the inorganic acquisitions, they've been subdued, as Fredrik mentioned. So, we did EUR 12.6 million in the first half of this year, EUR 8.3 million last year, as you can see, so they're relatively subdued. We also bought in the acquisitions of non-controlling interests.
So we did two of those in the diagnostic side of the business, and that was EUR 24.3 million net cash in the first half. So our net debt increased then by EUR 70.5 million since the beginning of the year. O ur net working capital increased EUR 9.7 million for the half year. Very respectable increase in the working capital, given the size of the business expansion. We're projecting an effective tax rate 26% for the full year. Just to remind you, for 2023, we had 21.8% overall for the full year, effective tax rate. Operating cash flow EUR 47.4 million for the quarter, and EUR 125 million for the half year.
We look at our free, recurring cash flow, that was at EUR 11.5 million versus EUR 11.3 million for the quarter, and EUR 54 million versus EUR 40.6 million for the half year. W e've been reinvesting then EUR 16.8 million for the, for the quarter and EUR 35.3 million for the half year. So, we've continued to reinvest into the, into the business. You can see that on the, bottom left-hand, corner, you can see our free cash flow, and, organic CapEx growth there. Just to remind you what that number is in terms of that free recurring cash flow. We take the operating cash flow in the, financial statements, take off the lease depreciation and interest, because they're a cash outflow effectively, and less our maintenance CapEx.
So, that's quite consistent with our reported GAAP numbers. T hen you can see we've continued to reinvest in growing the business for the future. We have. You can see that in the numbers in terms of the medical space that we've put on, we've got 865,000 square meters of medical space now, and we've put in the last 12 months, 25,000 square meters on that. Just to recap then, in terms of the outlook for our 2025 financial targets, obviously they're getting closer. So now we're 18 months away from the end of that period. You can see quite clearly on the left-hand side, where we're well on track in terms of 2.2 billion euros in terms of organic revenue.
If you look then on the second graph, the Adjusted EBITDA, you know, an organic number looking at there. I think we're set. We're well on track there as well to be able to deliver that EUR 350 million target. So, our leverage levels same as at the beginning of the year, 3.3x, with that increase to EUR 70.5 billion in net debt. W e have our target there of being at or no less than, at or no more than or round about the level of 3.5x.
Just also to recall you, we gave you some extra guidance in terms of where we expected to, or illustration rather, of where we expected to be further down the profit and loss account. So, EBITDA of EUR 235 million, and, and EBIT in excess of EUR 140 million. I think if you look at the numbers that we've reported now, in terms of the delivery of those, those are fairly consistent and fairly clear as well. B ack to you, Fredrik.
Sure. So key takeaways, just to repeat what you have already heard, but what are the most important messages? We continue to grow strongly, 16.5% organic. Expect that to continue going forward. We have good, solid demand, momentum across both divisions and geographies. That's evidenced by member intake. That's evidenced by fee for service growth. That's evidenced by test volume growth. That in itself will drive additional margin expansion as we continue towards the three-year financial targets. Cash generation is super important. We've always had good cash generation. We keep on having good cash generation, and we will continue to have good cash generation. We have slightly brought down the CapEx levels in line with guidance. We have said 6% for the year, and we remain on that guidance for 2024.
You know, we express a high degree of confidence in achieving our 2025 and midterm financial targets. So I think with that, we finish and open up for any questions the audience may have.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad.
The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.
Okay, good morning. I have three questions. First, if you could give some more details about the strong diagnostic growth in Germany. Then I just wonder what you said about divested hospitals in India. Was that the IVF clinics or something more than that? And then I just wonder if you could maybe comment on the current profitability in India, and when do you expect the immature hospitals to break even, and also similar to when you expect this Romanian hospital to break even? Thank you.
So, you know, the two units that we sold, Kristofer, they were two that was not to be confused with the IVF units. We have sold off or closed some smaller IVF units in the northern part of the country, in the Delhi area. But in addition to that, we sold off, I think, in the third quarter last year or so, two smaller hundred type hospital facilities in Telangana. So, that's just from a comparative basis, it makes a little bit of an impact. And that was really just to.
So there were nothing new this quarter?
Say that?
It was.
You didn't divest additional hospital
No, Kristofer.
Oh, okay.
So we have no new hospitals in this quarter. We had in Q1 we had a unit which we closed, and we rebuilt it to make it a cancer hospital unit in Vizag, in the eastern city of Vizag. T hat opened late in Q1.
Then you asked about margins in India. So we are expanding. You know, we're not obviously disclosing the Indian margins, you know, but we have a good solid 100+ bps margin expansion out of India on the back of gradually filling the facilities. So that's good. You know, we're confident on that. But of course, as these two new larger units come in during the... Actually, that I mentioned that are opening here in July. So they will, you know, in the early years, you know, contribute negatively. So, you know, we make good progress as we fill the existing ones, but, you know, we'll also open a few new ones, as you have seen over the prior period. Then the first question, remind me, what was Kristofer's first question?
From the growth.
Yes, from the. Yeah. No. So, again, you know, very solid organic test volume growth, Kristofer, across, including Germany. So, you know, you have a little bit, we write in the report about the extra testing we do more or less for no current reimbursement in Ukraine, but even if you net out of that, you still have sort of 17 odd % volume test growth or test volume growth. So that's... It, it's very, it's very solid. So that's really just strong demand. There's nothing else than that, Kristofer.
In Germany, I think you said you were growing 18% there.
Yeah.
So is that? Yeah, can you say anything about the mix and what's driving that? Because it seems you're taking a lot of market share.
Well, I mean, you were visiting on your trip not so long ago, so you know, you saw those different sort of test components. So you know, especially immunology is growing very strongly, but you know, you wouldn't have that number out of Germany unless pretty much the entire portfolio grew strongly. So you have a solid growth across the entire spectrum, really, in Germany. So that's a... Yeah, of course, some elements are growing faster than others. But in general, it's strong across the board in Germany, Kristofer.
Okay. Thank you.
The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.
Thank you for taking my question. So first one's on India. Should we expect India to be back to double-digit growth in Q3 already, or are there anything in the comparables there we should keep in mind? And is there anything new in the discussion around potential no standardization of hospital rates in India? So those, I'll start there. Thank you.
Yeah, I mean, you know, you should expect India to tick back towards double-digit revenue growth. So, definitely. And in terms of the regulatory discussion on pricing, there's nothing really new. I mean, you know, we talked quite extensively about that last quarter. There's nothing really new on that topic since three months back. And you know, so I would very much refer to what we said last time around. Situation is very similar today.
Very helpful. Thank you. You called out there was a small margin drag from Germany in diagnostic services in the quarter. Could you please quantify that or add some more granularity just to get a sense of the underlying dynamics there? Thank you.
Yeah, this is the acquisition we did. And now we're busy integrating this lab acquisition we did in Berlin at the start of the year.
But, if we were going to quantify it, Rick, we already would have in the report. So, just to point out that we have got a drag in terms of that. It's not accretive at the moment, and it's dilutive at the moment in terms of that. So, it's costing us money in terms of restructuring that business, moving the tests around, redundancies and that type of stuff.
Very helpful. F inal one on Germany. You mentioned that the change or the legislation in regard to reimbursement is likely going to be neutral. Is there anything else you can do to sort of get a more margin uplift in the German diagnostic service business? Or do you feel quite happy with the contribution as is, regardless of any potential boost from reimbursement increase?
No, absolutely, Rick. I think we've talked about this on previous calls, and we've lost quite a substantial amount of the margin over since before COVID. So if you go back to 2019 and currently, in terms of the business, because we've had no price increases and things have cost us more. As we've gone through rents, staff costs being the main component of that. So we have a process that we're working through in terms of trying to bring that back up to the same margin where it was before, through efficiency, centralization, moving tests around.
You can see over the last couple of years, we've spent quite a significant amount of capital deployment in Germany, specifically with the objective of being able to automate some of those, some of the processes. Now we're shifting tests around and working then in terms of the staff. As is the same with everyone else in Germany, in the sort of larger scale labs, that we're just trying to take people costs out because people are where our costs are, and we're doing that through automation and centralization. So, everyone is going down the same path. Everyone is taking the same road. All that this current, they call it a reform. There's no real reform in it at all, really.
All this does is just play around, really. There's nothing of real effect. It's as much for political cover as for anything else to be seen to be doing something. So we don't see it will have a signif what we said, I think we said is that it won't be materially positive, neither negative. We'll have to see and do more work in terms of the detailed nitty-gritty of what it would be, because they've shifted around how they reimburse things. So, depending on the lab, you'll get, you know, a positive impact or a negative impact, and probably overall, it will net out for us within our network. It will have an impact on some individual labs that will have a negative impact.
So it could actually have a positive impact in terms of pushing more consolidation for certain labs.
Very clear. Thanks for taking my questions.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.
There are some written questions.
There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
We have one question. Prices in healthcare services accelerated again, 8% year-on-year. Could you indicate in what part of the business the hikes were most significant? Now, you know, in general, that's, you know, across the board. To remind you, we have made that point many times that an important feature of Medicover is that the vast majority of our revenue is private pay. Really, the large exception being Germany in diagnostics that we just talked about. So in our private pay business, obviously, we continuously adjust pricing to reflect the cost and inflationary nature we find ourselves in, and that has continued, as evidenced by that price growth, and that's really largely across the board of our private pay fee-for-service and funded activities.
So, you know, we haven't had any questions today on inflation, but inflation has quite significantly come down relative to... I think we peaked in February last year, so about a year and a half ago. T hen the core inflation, as we write in the report, has come down, but we are still impacted, particularly in the healthcare sector, by a wage growth inflation. In Poland, for example, we wrote in the report that we had these minimum salary adjustments, another such adjustment in first of July. So while inflationary pressures are significantly off where they used to be, one should be clear on that it certainly is not gone. So it is very important that we can keep adjusting pricing where required, that where we're also sort of confident that we can do so, which the numbers indicate.
I have another question. Other central costs increased visibly to EUR 10.5 million. What was the main driver? Well, you got to remember within that EUR 10.5 million, you had EUR 3 million of, IFRS 2, non-cash charges for share-based payments. W e also had EUR 800,000 for M&A costs, external M&A costs, majority of which was related to past transactions, past things that happened. So, those, when you strip those two numbers out, then there's nothing particularly unusual in the central costs.
All right. So, unless there's no more questions, which we don't hear, we thank you for. We thank you for participating in today's call, and we look forward to listen to you or see you on the speaker phone for the third quarter.