Good day, and thank you for standing by. Welcome to the Medicover AB first quarter 2022 results presentation conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star and one on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Fredrik Rågmark. Please go ahead.
Thank you. Good morning, everyone, and welcome to our first quarter 2022 results presentation. This quarter obviously very much overshadowed by a war situation. You see the headline. I think we have reported really solid revenue growth and profits despite the war going on in one of our major markets. We have a very forward-leaning investment profile in the quarter, which we'll talk you through. We have been able to see what is undoubtedly a historically strong quarter in our core prepaid employee business in Poland with 84,000 new members in the quarter. That's a number we have never seen before.
In fact, it's more than half of the growth we saw in the entire year, 2021, which in itself was, by a long shot, the strongest member growth year we have ever had. One should not underestimate that number. That, in addition, is coming in a period when we are quite aggressively adjusting prices up to deal with the cost inflation. One should recognize the fact that the new member count is also at quite significantly different premium levels. Secondly, we've never had a quarter with so much money being invested to drive future growth. We put some EUR 27 million at work in organic investment growth and more than EUR 100 million in inorganic. EUR 133 million altogether, which 96% is going to drive growth in 2022 and subsequent years.
Again, a very strong investment quarter, strong cash flow for the quarter. Obviously we're putting quite a bit of that back to work to invest for future quarters. Last but not least on this first page we wanted to draw to your attention, we have talked about that over all of the most previous quarters. We also have an unprecedented expansion of our healthcare footprint in the Healthcare Services division, where we think at this time last year, so over the past twelve months, we have put more than 200,000 square meters of healthcare space into use.
That's, you know, more than 50% growth in the footprint in that division across the geographies with, you know, big focus both on Poland and particularly India. That's just really important because it obviously dilutes margins short term, which some people worry about. For us, it's sort of the other way around, that we have an enormous amount of space that we're gonna put customers into over the coming quarters and years, which will drive growth for many years to come. We see that as a very strong and conscious sign in terms of how we are investing. If we move over to the highlights, you know, already made the point.
No one, I think, should be disappointed with 20%+ revenue growth in a quarter where almost half of the quarter saw a war in Ukraine. Most of the questions we get are obviously focused on the war situation, and I will comment on that. But it's important to understand equally everything else that goes on in the business. Obviously, when the war broke out 24th of February, all our attention went to the safety and security of our people. We've had a tremendous coming together and support across our organization, of course, particularly out of Poland, the neighboring country, in terms of providing relief and support to our people. About 1,000 people have left of our workforce, including their families.
About 10% of our staff are now housed primarily in Poland with colleagues, but also in Germany as the second largest host country. We've had fantastic support from our owner foundation financially to make this happen. I'm extremely proud, as I write in the report, in terms of how our values and cultures have been manifested in terms of how we have supported and continue to support our colleagues in Poland in Ukraine, I'm sorry. We will speak more about Ukraine specifically on a subsequent slide. Revenue north of EUR 380 million, 20% growth, as I mentioned, of which just short of 14% organic. You know, COVID continues to be around. We get a lot of questions on what will happen with COVID.
You see this quarter, we actually had more COVID revenue than we had the same quarter last year. Obviously, it is dropping, and it will drop off in the second quarter. I'm sure we will get some questions on this later on, so I will save the commentary to the Q&A session at the end. Good growth in fee for service at 21.8% growth. We continue to see that growth momentum. I draw your attention on the pie charts that we talk about every time. At the bottom, particularly then you see the Ukraine pie chart that up until the 23rd of February had, you know, typically 20-odd% revenue growth. I think it was even 25%.
That then reversed to -27% for the quarter. Otherwise you see, I think strong growth throughout the geographies. You know, Poland up 27%. That's a geography, I think super strong. Germany as a large market, 15% up, certainly very strong. Equally, you see the, on the left pie chart, you know, the funded important business up 15% revenue-wise, and that's despite the zloty being weaker. Particularly strong to see a euro number being reported like that. Going then to EBITDA, EUR 62.6 million, slightly down from last year and a margin contraction of around 4 percentage points. Adjusted EBITDA slightly up versus last year, and a smaller margin reduction.
You know, it's an unusually large difference this quarter between the EBITDA and the adjusted EBITDA number, and that's driven by the you know, the normal IFRS 2 charge that we have. In addition, this quarter, we have a much larger M&A cost charge for coming out of the very intense M&A work that I just talked about earlier with closing fees, et cetera, out of that. You know, we've seen higher medical costs, particularly in healthcare services this quarter. That really is a result of seasonality primarily, but also still a bit of a catch-up effect after they call it sort of pandemic opening up back to normality. We've had an unusually high infection season in the spring, and we expect that to normalize.
Clearly, you have an ongoing underlying cost inflation that we have talked about every report, I think, since we listed that is more accentuated than ever. The good news there is that we are able to price compensate to an extent that perhaps personally I was not expecting a year, a year and a half ago. One must though realize that there is an inevitable time lag between this because the cost impact is instantaneous and the price compensation takes three, six, and even sometimes nine months to effectuate across a very large stable of contracts. EBIT, you know, you see larger deviation on EBIT as you work your way down through the profit and loss account from the Ukraine effect, et cetera.
We also did an impairment charge of EUR 5.1 million relating to assets in Ukraine that either are damaged or to be considered at risk. We speak more about Ukraine later on. On the back of the much higher M&A activity, we also have increase in the acquisition-related amortization charges, as you see. Going then specifically to healthcare services, a super strong revenue, up 32%, of which just short of 23% organic. You know, a little bit of COVID revenue, much less here, obviously, than in diagnostics as we have seen all along. You know, fee for service number here is quite outstanding.
More than half of revenue in this division grew 46% for this quarter, obviously on the back of a lot of M&A work. Again, I remind you of the fact I talked about earlier how much new space we have put on which we will be busy over the coming quarters to fill with more business. You know, it's a very sort of strong forward-looking outlook here. I talked quite a bit already about the member growth across the countries where obviously Poland being the largest one, now just short of 1.6 million members. We really see robust demand across the board, really. There's nothing specific which is much stronger than something else. We've been busy then as mentioned, M&A-wise.
We brought in a hospital in Romania, Cluj-Napoca, in the sort of middle northwest part of the country. We bought a quite significant business in Poland that we have talked about, a hospital and a medical service network business down in the southwest. We continue to add to our gym chain businesses across Poland to support the sports card business. We bought a vision care business to build on the existing organic vision care growth we do. We continue our very ambitious expansion in India, both acquisition-wise and a strong organic growth profile. If you look on the...
Perhaps just draw your attention to the geographic, the right pie chart there with India now being up to 17% of healthcare services and growing revenue-wise to 39% year-over-year, which I think is a good reflection of the point I made with expansion. Really in India, relatively speaking, that's where we have most of the new footprint relative to what we have today to be filled over the coming years. You will continue to see a strong growth number coming out of there. EBITDA for healthcare services, EUR 25.7 million. Margin-wise down. Two reasons for the margin contraction here. One being the higher medical loss ratio, which is seasonality on the one hand, and secondly, the cost inflation I commented on.
We are confident that we will recover the lost margin on cost side as price growth increases throughout the year, but there is this inevitable time lag that I commented on. The second reason really is this super strong conscious expansion of facilities, which obviously short term do depress your margins and we're very convinced that is the right decision that we have taken or take on an ongoing basis. I made, I think, enough of points in terms of what we have expanded, but only perhaps making the point in terms of you see 1,900 hospital beds in India alone over the last 12 months.
That is the size of of quite a few hospital groups in total, that we have put on just as additional hospital beds over the last 12 months in India. I think that's covered all the points on that side. Moving on to diagnostic services. Obviously revenue growth here, much more subdued due to the situation in Ukraine, 8% up. In fact, I think it's actually a very strong sign that we are growing 8%, with a major war going on in one of the top markets in this division. I don't think one should underestimate that. EUR 54 million of COVID revenue up from last year.
It's sort of a mixed bag in that, you know, Germany has remained strong throughout the first quarter, whereas COVID related testing had dropped off quite significantly sort of halfway through the quarter in the other markets, and obviously in Ukraine, it sort of disappeared completely midway through the quarter. Quite a mixed bag. Fee for service, which is two-thirds of the division here, grew 3%. Again, that's the Ukraine impact coming through. In fact, the number of tests, as you see, slightly declined. That's also visible, same numbers on the pie charts here. I already made the comment on Ukraine on the group chart, and obviously it's the same number here on diagnostic services, you see. EBITDA reached EUR 44.2 million here for diagnostics.
It's slightly down from last year, and the margin contraction largely for Ukraine reasons. COVID continues to contribute to profitability. We you know continue to invest. I think that's an important message. I've said that two or three times already, and it's the same thing in the diagnostics division, keep expanding the BDP network. We've also completed some acquisitions here, a smaller lab in terms of our Balkan strategy around you know the Serbian business, and then having a regional network around Serbia. We bought a smaller business in Bosnia.
We also completed, which we have talked publicly about before, an acquisition of a real exciting genetics lab where we previously were minority shareholders in Cyprus, and we're now busy integrating that. Just to remind you about Ukraine, you know, we remain positive, optimistic on Ukraine. It's a terrible thing which has happened and which is ongoing. I think it's a testament to the importance of our services that we're actually still can keep operating, albeit at obviously quite reduced level. You see the map there. All of you are, I'm sure, very well aware of the areas in the southeast that is currently under occupation. You know, we left the previous occupied territories all in 2014 when Russia first invaded part of the country.
In terms of the areas that now are at risk, you see the city Kherson just north of Crimea, east of Mykolaiv. There we have a smaller lab, which obviously is closed, and actually then under occupied territory. The second largest city in Ukraine is Kharkiv, and that's also where we have the second largest lab, which is obviously closed. The Kyiv lab, which is by far the largest and most important for us, we have an ambition to be able to open that gradually over the course of next week. Basically, we operate our BDP network in the western and central part of the country. That's sort of from an operational point of view how it looks. I mentioned about 3,500 people.
Three, you know, 400-odd of those employees are now residing with our colleagues in Poland and Germany with their families, et cetera. About 1,000 people in total have left. In fact, since about two weeks back, the flow of people across the border is largely neutral. More or less as much people are coming back from Poland into Ukraine as people are leaving, and that's the same thing for the flow of our own employees. Actually, we've had pretty much the same number for the last two weeks or so. I made the point before. I repeat it again.
I think it's an incredible testament to the culture of our organization to see how our staff really across the board have volunteered, whether it's financial contributions or their own time or their house or their beds to support people in dire needs. We will hear, when this situation is over, there will be many fantastic stories to tell later on. Moving on to the next slide. Again, I mentioned the point we expect to open the Kyiv lab site next week. That's really important because many of the more advanced tests that is in high demand across Ukraine can only be processed in the lab in Kyiv. With that gradually being up and running back again, we can distribute also the much more advanced and needed tests.
I think it's really the essential nature of our services that is evidencing itself in demand across the country, even in a situation like this. Sometimes perhaps it can be difficult to understand why people want to go and do a blood test when there's a war going on. Healthcare is essential and it's needed in a situation irrespective sometimes of a war going on. Joe, I'm sure will talk a little bit more about the impairment situation later on. The table you have here, where you see the breakdown of our assets and profitability in Ukraine on the corresponding quarter last year and the full year last year. We write in the report that revenue now as we speak is approximately running at 10% of the level before the invasion happened.
Now, what's important to point out there is that, of course, there was quite a lot of COVID revenue before the invasion. So if we strip out and compare to a quarter before COVID came into the world, we're sort of trading at around 20% or 20%+ level now versus a normal situation, which I think is actually significantly above what most people would expect then. Now, it's difficult to predict, of course, and it's highly uncertain. That's important to point out. A war is perhaps the most unpredictable thing. But as long as it stays in the southeast, we expect this trend to continue. With that, I hand over to Joe to talk a little bit about the financial overview.
Thank you, Fredrik. Just a few highlights on here. Net interest cost EUR 6.9 million, of which the EUR 4.8 million is the imputed interest for IFRS 16 leases. Our underlying interest runs about EUR 2.1 million, which then if you sort of annualize and look at our gross debt level of about EUR 490 million, gives us a very good financing rate. FX loss is EUR 2.2 million. Again, EUR 1.4 million of this being non-cash related to the IFRS 16 movements for euro denominated leases in Poland, which then comes through the P&L account and creates a bit of volatility. Tax charge, we're looking around about 28.2%. We're sort of looking forward for the year, outlook would be around about that sort of rate for the year. Cash flow from operations, strong EUR 63 million cash inflow.
Working capital up a little bit at EUR 17.2 million. Our loans, net of cash and liquid short-term investments up to EUR 257 million from EUR 143 million. That's a factor of over EUR 133 million of organic and inorganic investment and then our own generated cash flows. If we move over onto the next slide, we issued our second Schuldschein issue in December last year. Gross, we raised EUR 277 million. We retired our existing Schuldschein EUR 35 million as part of that process. Net, we borrowed EUR 242 million of new debt into the group. Settlements were split between December, January, and the last one was in April. One of the joys and nice things about the Schuldschein is you can be flexible on the settlements. We didn't need the cash, so we could stage it.
We also then in the quarter repaid EUR 40 million nominal of the old Schuldschein, and we made a gain of EUR 2.4 million in doing so. We bought that back at a discount as reflected in the income statement. You look at the Schuldschein, we have something like about EUR 350 million issued now for our Schuldschein financing. That is issued at about an average rate of about 1.15%. It's a fantastic rate. On top of that, of that 350 million, we have about 40%, which is at fixed rates. We're facing an increasing interest rate environment, but we've got 40% of that fixed. If I look at the duration, we've got an average of 5.8 years average duration on the Schuldschein. The fixed part is actually heavily weighted to the longer period.
We're in a very good situation also in terms of riding out the increase in interest rates which are coming. We have a really strong position in terms of liquidity. Got around about EUR 430 million liquidity availability. Within that availability, we've got EUR 237 million, which is cash and short-term liquid investment. We're in a very strong situation in terms of executing our investment agenda. Our leases have increased. Our right of use lease liabilities have increased. Fredrik mentioned that before. This is a really strong driver for growth because those assets are gonna be with us for many years, driving our growth at the end of the year, driving our growth next year, driving our growth for several years.
Those assets, once they become operational and effectively mature then, continue to throw off cash flows. Our capital investment has also been strong, EUR 27.3 million. Because we've upped that level of investment, more of it is going into our growth. Whereas traditionally we've been about sort of two-thirds, one-third in terms of growth, maintenance, we're actually at 81% now. Our agenda to continue that capital investment at a strong pace is also there for the rest of the year. We have, as we mentioned before, our Frankfurt an der Oder new central lab, which we're putting up. We have quite a heavy investment there in microbiology, which will be coming on in the year.
That is automation, which helps us deal with the cost pressures in terms of salaries, and improves our operational efficiency, and again, will be there for many years. A long-term contract we have on that, five years, a locked in pricing, which also helps us to manage the inflationary background. That's a typical sort of thing that we do. We've got the Romanian hospital, which we're continuing to execute on as well in Bucharest. A large new hospital which is in the process of being constructed there as well. IFRS equity, that's down slightly. A few different moving parts in that. We have negative translation movements. We also have movements on this put option liquidity obligations which we have, which goes through equity.
We also bought out the non-controlling interest in our Serbian entity at 20%. We bought out in the quarter. Our loan situation, debt, indebtedness level is good, so we're at loans net of cash and our short-term investments. We're sitting at 1.2 x to EBITDA. We have lots of capacity to continue that very strong investment agenda that you see in the capital spend, the organic side, and also in terms of more inorganic, as we go through the rest of the year. You see that already in the subsequent events that we've been continuing to execute on our inorganic agenda.
If you flip over to the next slide on 15, you can see the investments there in terms of the inorganic and so around about over EUR 133 million that we've invested for the quarter. Laboratories that we've bought, hospitals in several different markets, medical clinics as well. One more gym business to help complete our gym network in Poland. Also a vision care business, which is synergistic with our medical clinics and our services to our prepaid clients, our business paid members in Poland. You can see also in terms of our continuing agenda on the inorganic. Nasz Lekarz is a clinical trials business sitting up in the northeast of Poland.
We'll integrate that into our clinical trial support service. It would also expand the range of what we do, so we can actually provide a more comprehensive service and actually take out some of the synergies from the other clinical assets that we have sitting around in Poland and multiply the effect of that. Three smaller transactions as well, a dental clinic, a laboratory business in Poland. What's very interesting is our first investment in psychology and psychiatric services, a small chain in Poland. A really high demand.
Anyone who's had in their family psychological issues, particularly with adolescents, knows how difficult it is anywhere in the Western world to get access to those services. Those are in high demand, and we've been very fortunate to bring in a good support business there, and that will help us in terms of servicing our clients and looking after them and providing them a comprehensive health range. As I said, anyone who's seen that has been involved with anything in their family or with their friends, they know it's really hard to get access to those services. Bringing that in is a real feather for us. We're really happy about that.
That's sort of the perfect type of synergistic, inorganic investment that we're looking for and great to be able to execute on that. We look at our financial targets, really happy in terms of you look at this, even with all these headwinds that we have against us, a fantastic organic revenue growth. So well ahead of our targets of what we're looking there with. So really strong on that. You look at our profit measure adjusted EBITDA margins. So we're still well ahead in terms of our stated objectives for the end of this three-year period in this year. Our capital structure, really good leverage level.
That's up on where we were at the end of the year, but that's exactly what we wanna do in terms of bringing it up with our aggressive investment expansion. We have lots of capacity in terms of keeping that organic and inorganic agenda full speed, and that's what we're gonna be doing for the rest of the year. I hand back to you, Fredrik.
Good. Thank you, Joe. With that, we wrap up our presentation, and we're very happy to try and answer any questions you may have.
Thank you, dear participants. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for a name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. The first question comes from the line of Karl Norén from Danske Bank. Please ask your question.
Hi, good morning. I have a couple of questions, but maybe if we start with the margin side, of course, quite down year-over-year. I'm just wondering a bit on the pricing side in both divisions, and if we start with Healthcare Services. Is it possible to maybe quantify when you expect to have, let's say, fully compensated for the higher costs that you are seeing right now with higher wage costs and for building new facilities, et cetera? Any comments there would be helpful. Thanks.
Yeah. I mean, you know, Karl, I'll try and answer, but it's, I'll start with sort of commenting that it's, you know, there's two sides to that because on the one hand, you say how, you know, what's the inflation outlook gonna be? You know, there's lots of debates how is inflation gonna abate and start coming down when supply side factors are perhaps a bit more ironed out. You know, that's an uncertain thing. Now, what I'm saying, the kind of inflation price level adjustments we see now, you know, I said three to six months, and if you wanna be conservative, you say three to nine months.
We have, as I think we have talked about before, we have two standard indexation cycles in February and October. Large parts of it happens in those two cycles. Obviously there's activity going on in between, because with the levels we see now, it's just not an automatic thing to send a letter and just increase price. You've got to negotiate. If you take six months as an average, you know, that's probably the best guess you're gonna get, I think.
Yeah.
Remember on all the fee for service businesses, it's quite different because there you know you can much more instantaneously adjust your pricing. It's quite a different dynamic in those two situations.
Yeah, I understand that. Would you say that you have compensated fully in the fee for service business, or are you still maybe lagging a little bit, let's say, to keep affordable prices? I think you wrote something like that in the reports.
Yeah. Absolutely. I mean, you do have a time lag because it is not that you compensate that straight away in one adjustment. I mean, if you know, it's different from different business lines, and also it's different from country to country. You gotta keep it affordable, but over a period of time compensate your cost growth. That's really how we see it. So you do that in different steps, but there's no standard answer to how many steps is it because it relates to the geographic environment, and it relates to the particular business line.
Yeah, that's clear. Can you just remind us maybe of how the situation looks in Germany? Because you have a kind of a different business model in the diagnostic side there compared to how you operate in the Eastern Europe.
You know, the German pricing, you know, the public pricing in Germany is well fixed, so to speak, you know. It happens every now and then that they adjust it, but you know, for now you can assume it's fixed. You know, that's one of the reasons why we argue so strongly in the other places that you wanna have private pay revenue, so you can adjust your pricing. In Germany, you know, the public side of things, prices are stable and regulated by the public authorities. In terms of the private side there, you know, that's the geography where you would see the smallest adjustments, if any adjustments at all.
Okay. A question on the member intake in the integrated healthcare model. I think it's very, very strong. Can you say anything if it's like a one-off that you took one large customer on, or is it very much a broad-based demand for the service?
It's broad-based. I think we talked about last quarter around that, you know, the impact of COVID on the situation where if employers recognize the need for these kind of services before, they certainly recognize it even more now, which I think is one part of the explanation here. It's a very, you know, robust demand across the board, really.
Yeah. Nice to hear. Just the last one from my side on Ukraine, of course, a big tragedy for all. I'm just wondering if you could tell us a little bit more maybe regarding, let's say, the cost base and how you expect it to change versus in the second quarter versus the first quarter. I think you said that you are trying to, of course, to bring costs down, but if you could give some kind of outlook there, I think it would be really helpful. Thanks.
Yeah. You wanna have a go at that, Joe?
Yeah. Karl, obviously, it's a tragedy. We've got a fantastic team of people there, fantastic management team. We've been supportive of our staff in terms of helping them. We continue to pay staff in March and fully in February. From April onwards, we've adjusted the salary level. We continue to pay staff who are working in the business obviously, but at a slightly lower level. People working in the business too, we're starting to pay sort of 30% less to the people in the clinics and the medical facilities and who are working actively in the business.
In terms of management, staff and the support people, we cut that back to 50%. Then in terms of our cost structure, we're in negotiations with our landlords in terms of adjusting our cost base as well. We're sort of fitting the cost base to the revenue levels we have. That still means currently we're making deficits, but not a significant amount. While we still are in a situation where, as Fredrik said, we're actually doing quite sort of like, you know, quite surprisingly high levels of activity, and we've got quite a good base of services open, then, I think, we're in a good position in terms of having a potential for the business to come back very quickly.
That's sort of roughly where we are. Gives you an idea and a flavor.
Yeah, that's clear. Thank you.
Thank you. The next question comes to the line of Kristofer Liljeberg from Carnegie. Please ask your question.
Yeah, thank you. I have quite a few number of questions. Hope that's okay. First one is when it comes to to non-recurring items, I'm trying to understand the bridge here between EBITDA and adjusted EBITDA. You mentioned you had M&A cost of -EUR 2.9 million . You also had the incentive program of a - EUR 2 million. But then also this capital gain of EUR 4.4 million related to the NIPD Genetics business. Where is that showing up in the P&L?
That comes in your other income line. That's on your other income side.
But what-
That's not of the EBITDA number. That's not part of the adjusted EBITDA number. That's not in the operating profit. That's in other.
In the other income cost line, EUR 1.3 million?
Other income costs line. Yes, other income cost line.
Okay. What else is in there? Because the net amount is EUR 1.3 million.
Yes.
You must have had some-
We've got that explained in the commentary. You've got 2.9 negative movement in terms of other investments. You've got then also a positive movement in terms of the buying for this debt issue. The discount that we bought in.
Okay, there must be some big negative factor in there if the net effect is 1.3%. Maybe we could come back to that. My second question coming back to the previous one about the healthcare margin and the negative factors here. Is it possible maybe to give a flavor for how much the different factors impacting? What's worse, is it this lag of price increases relative to inflation, or is it the investments you're doing for future growth?
To clarify on this previous question, Kristofer . We've got the +EUR 4.4 million, which is through other income and costs. We've got then the -EUR 2.9 million in terms of the investment movements, mark-to-market values. Then we've got the +EUR 2.4 million for the discount on the nominal value that we bought in, and that's through other financial income expenses. You've just got the two items, the +EUR 4.4 million and the -EUR 2.9 million through other income. It's not in EBIT, and it's not in the EBITDA number.
Okay, great. Thanks.
The second question, Kristofer?
I can take that job. I think the way to think about your second question, Kristofer, is like this: if you look at the, you know, margin contraction in Healthcare Services, that is approximately 2 percentage points, yeah. Now, if you look at what we call then the Medical Loss Ratio in that business, that is down about 4% for the equivalent period. In fact, everything except overall medical costs are positive margin movement year-over-year. Within that movement of medical costs, you know, I'm not able to give an exact quantification, but, you know, the biggest impact of that is, there's three things going on.
One is costs in general, which we compensate with price growth over, I said, six, nine months. Secondly is utilization of services in the integrated model, which were seasonally, but even for a high seasonality, it was high this quarter, due to these effects that we comment in the report. Third thing is the facility costs we have then taken on at a rather unprecedented scale. Those three matters all end up in the cost pool, medical cost pool, which pushed up the medical loss ratio that way.
Okay. Also, the M&A cost you define as non-recurring. When you report EBITDA for the healthcare service business, that EUR 2.9 million is included there.
No, Kristofer . The M&A costs we take under the central. Within the divisional segment results, when we report those, there's no M&A costs, or it reflects those. That's just the pure business result. We take that on the central part, and that's why if you disaggregate the total, the segments from the total, you see a much higher central cost for this quarter because we've got EUR 2.9 million in there. Now, just to be precise in respect to this, so you understand what that is, that's non-recurring costs, external costs in terms of advisors and success fees and legal fees and insurance fees and stuff like that associated with the acquisitions. We have an acquisition team as well within the business.
Now, that's a recurring cost because we keep them employed, and that's part of our operational costs. That's not adjusted out. It's just the purely non-recurring costs.
Great. I continue. Two more. What's your best guess when it comes to COVID revenues for the diagnostic business in the second quarter sequentially?
Significant reduction. I think you see a significant reduction. Actually, not in infections. I mean, you see that actually the BA.2 variant is spreading very quickly. A lot of countries have taken away testing requirements and consumer behavior follows that quite. Germany probably remains the highest testing country, I think, in Europe. Also in Germany, it's dropping. I think, you know, the big question, of course, will be, you didn't ask that, but I'll answer that anyway. The big question will be what happens after the summer. You know, your guess is almost as good as ours. I don't think we have seen the last of COVID, put it that way.
Okay. The acquisitions you made in the quarter, this might be in the report, but have you disclosed how much that will add to sales on a pro forma basis?
Yes. We have provisional purchase price allocation in the notes there. We also disclose in terms of the figures in terms of revenues and things like that. You can see get that information. We break out the two larger ones, NIPD and CDT Medicus. It's around about 100 and, o n enterprise value, it's over EUR 140 million. Because we have some minorities and things like that, obviously what we pay is less, and some of it is then also deferred as well. That's why we've got EUR 106 million in terms of the cash out for the acquisitions.
We recognize EUR 67.5 million in goodwill, and then also we've recognized quite a bit of intangible value as well. We've got brands, and patents and that type of thing that we recognize and are amortizing. That's why the amortization charge related to acquired businesses has gone up as well.
Great. My last question related to Ukraine. Is it possible to say what the current run rate is when it comes to losses, or if you even think you could be breakeven now with the lower cost you expect to have from the second quarter? When you open this laboratory in Kyiv, how much sales will that add, you think?
I think that's just really difficult to answer, Kristofer, because, as I said before, I don't think anything is so unpredictable as to what Russia is up to. I think if you do take the assumption, which can be criticized, but just to try and answer your question. If you do take the assumption that the conflict will go on, but will stay in the sort of areas where it is now, then I think it's a reasonable assumption that we gradually will see a pickup in our business for the remainder of this year across the country. Because the services are so important and so needed.
I said, you know, we're running at about 10%, say 20% ex-COVID, currently. You know, you probably need to sort of double that and perhaps a little bit more to stop losing money. You know, how fast that goes, I think is connected to the recovery. It may go faster than we think, but I think it's just so dependent on the behavior of Russia. Therefore it was-
Sure. No, but I think that comment is very helpful. Absolutely. Thanks a lot.
Kristofer, you know, we're We're such an essential ingrained part of the healthcare system in Ukraine that we see it as we're obliged to continue to be able to support the the population. That's what we're doing currently. It's costing us money. It would probably be cheaper just to shutter everything. The fact is that that is recognized across the community. It is only in the eastern parts where the only people operating. In the western parts, we have other people still operating. I think that that puts us in terms of not only helping our people to keep them focused and keep the whole business organized.
It means that if we do get to a situation where we've got a resolution of any sort, then we'll be very well positioned to rebound very quickly. We do see a future for Ukraine of some sort. You know, take your view in terms of what it will be, but we will be an important part of the healthcare system for Ukraine when it comes back.
Great. Thank you very much.
Thank you. The next question comes from the line of Grace Lee from Jefferies. Please ask your question.
Hi. Thank you for taking my question. I do also have few questions and potential follow-ups. I'll start with the first one. On impairment, because it wasn't asked, how do you sort of currently expect potential further impairment into next quarter and the rest of the year, please? Thank you.
The impairment charge is, well, we've obviously got some damaged assets in terms of the conflict, particularly obviously in the east. If you look at our lab infrastructure, we do not have damage to our lab in Kharkiv, in Kyiv. Actually, none of the laboratory facilities are damaged. We have lost control of one of the laboratories in Kharkiv, and we have obviously damaged and lost control of a number of the BDPs in the occupied areas. That's what the impairment is. Obviously, Kharkiv is at risk. If that situation degrades, then we could have additional impairment charges.
We lost control in Kherson, not in Kharkiv.
Sorry. Kherson. In Kharkiv, that's one of the assets which is exposed, so we could have additional impairment charges coming through. The situation today, we think that that's where it is as we see, Grace. Fredrik's mentioned, it's unpredictable. We can't really see where it's gonna go, but there could be further charges for impairment. It's a non-cash charge, so we see what happens.
Okay. Thank you for that. Just follow up on that sort of margin and also revenue in terms of, again, phasing and the exit rate into 2Q. Could you just a little bit comment more on that sort of January, February versus March, for example, how that revenue and underlying margin you sort of saw phasing of that through the Q1? How do you think about it for the rest of the year? Again, I'll just follow up on that.
If you look at the diagnostic segment side, the impact there in terms of the margin is largely to do with the impact from Ukraine. We have some other issues there as well, but they're minor. It's the Ukrainian situation is the largest impact on the diagnostic side. If you look on the healthcare services side, in terms of, as Fredrik was mentioning, we had 4 percentage points higher in terms of medical loss ratio. Now, we've been doing this for 27 years. We've seen this before. We've been through these cycles before. You see very strong member growth, and you've got that because you've got a backdrop of very strong employment market.
You've got accelerating inflation, partly driven by all the sort of cost things that you see everywhere else, also quite strongly in Poland, in particular, driven by wage salary inflation. The issue for us is not inflation itself. We've had inflation, you know, many times. It's acceleration of the inflation. We've got a lag between when we index and when we're feeling the cost increases. As that inflation decelerates, then we will catch up in that respect. That's what we expect to see. We also have on top of that the high utilization levels. The utilization levels driven by the sort of rebound from COVID for infections, in terms of that's driving utilization. That's a seasonal factor.
We see that before as well. We expect as we go through the year, we'll manage with that quite well. We're not particularly worried about that. We're not particularly concerned that that's gonna be a feature you're gonna see going forward.
Yeah. Thank you. I agree with all those points. Just to relate to mainly sort of, you know, for example, Ukraine, volume, for example, BDP, I think you mentioned 188 as of 26th latest sort of data points you've mentioned. So about those phasing of that, how should we sort of like how that, for example, impacted in your quarterly results and phasing wise month to month and how we should be any help in terms of guiding that phasing into next quarter is mainly my point.
Well, I mean, you know, I think that's what I was trying to answer to Kristofer. Basically, on a run rate basis, if you go back and look at the quarters we reported before this happened, we're saying we're running at about 10% currently. And that's where we are as I speak, perhaps 12%-13%. You know, what's that gonna be in three months' time? That's just really difficult to predict. Perhaps it's gonna be twice that level, 25%. Could be. But you know, we don't really know. And so I don't want to lead you into us having an expectation specifically what it will be. We have a strong expectation, the point Joe just made, that you know, there is a tomorrow for us and healthcare in Ukraine.
Perhaps even a stronger tomorrow because lots of our competition will be gone. You know, until the dust settles, so to speak, it's just difficult to predict how quick the recovery will be.
No, I appreciate that. Thank you. Just following up on the COVID, you mentioned about the significant drop-off in 2Q. Again, can you just help us in terms of, you know, obviously that margin, negative impact will be added pressure on your margins in Q2 versus all this inflation time lag that you mentioned. Again, the dynamics of how to quantify the impact, any quantification around that will also be helpful. Thank you.
Grace, in respect on the diagnostics side, we don't have the same situation in terms of the inflation. The inflation is particularly strong in Poland and Romania in the healthcare services side because those businesses are very dependent with, you know, labor. Our biggest cost element in both of those business. The inflation that we're seeing is driven in those markets largely by labor. The largest component is labor cost increases. That's what's driving on the healthcare services side. We're gonna face that situation ongoing. You know, it's a strong labor market and, you know, we benefit on one side, and it costs us on the other side.
You know, with the strong member increase on the diagnostics side, the inflation we're managing quite well, so it's not so much a big issue for us. We've got fixed price contracts for a lot of our inputs and supplies. With this, it's sort of covered and managed. We've got a labor cost increase, but you know, as long as we can manage the terms, the pricing with indexation to our customers and with the continuing investment in automation, then we can manage that quite well.
Yeah. No, thank you. Obviously there is that sort of negative margin pressure coming from dramatic COVID testing going away.
Yes.
To two tiers.
Absolutely.
How much of that-
You're absolutely correct, Grace. With COVID going down, COVID is a higher contribution, as we've broken out last year, you can see that, the reduction in COVID will flow through in terms of the overall margin. That's clear.
If I also chip in, you know, we are not gonna quantify what that drop is because, in all fairness, you know, we're sort of through April. I said we expect a significant drop, but we don't really know what the COVID revenue levels are gonna be in Germany in May and June yet. The fact that it's dropping undoubtedly. I also just remind you, Grace, and everyone else that has an interest in that, we made a comment in the last quarter that, you know, the reason why we have stopped now to split out the profit contribution is not that we don't like to be transparent.
I think we have been more transparent than most in terms of the COVID, non-COVID contributions through the COVID situation. It is just that now we are two plus years into this. To compare with a completely undisturbed situation is becoming increasingly difficult and sometimes even impossible. Plus, what proportion of what we have, what we all think about as COVID testing will become permanent, systemic, higher testing that will never go away. Again, that's an uncertainty. It will certainly be a positive equation. I am convinced that a lasting impact of COVID will be a higher testing level in general, but no one really knows at what level. That's really the reason why it's really difficult to sort of put the money in which pocket it should be, so to speak.
You know, it's gonna be lower in the second quarter, significantly lower than in the first quarter, but it's difficult to predict exactly how much.
No, I appreciate it. Thank you. The last question for me, what can we expect in terms of update on your midterm guidance? Thank you.
Well, that's a really good question. Thank you for asking that. I think, you know, we originally had a plan to do that during the spring. You know, this event in Ukraine came onto us. For obvious reasons, you know, we're pushing that. Rather than doing the update during the spring, we will do the update during the autumn, when we see more how the Ukraine situation is being resolved.
Thank you.
Thank you. The next question comes from line of Dani Saurymper from Pacific Asset Management. Please ask your question.
Good morning, Joe. Good morning, Fredrik. Just wanna say, obviously, thank you so much for all the efforts you're doing in Ukraine, and considering all of the turmoil, the progress you're making. Could I ask a couple of questions as it relates to the hospitals that you're operating? In particular, you have expanded the number of beds under operation by about 20%, 25% just from year-end. I was just trying to understand the profit phasing of those incremental new bed openings. If you could also drill down, in particular, as it relates to India, you had mentioned changes in legislation that stalled some utilization around fertility treatments, which then materially rebounded. Long term, you think that's a positive. It's just if you could expand upon that.
That's my first question.
Sure, Dani, you want to go ahead?
Yeah. I'll take the last of that first one. It's been coming for quite some time in terms of legislative changes in Poland to regulate the sector. It came in, and there were some aspects in it which were not clear in terms of how it could be operated. This created a lot of uncertainty, particularly around offsite donations and things like that. That's all been cleared, and we've seen a very good pickup in March.
We have been of the view that legislation and regulation will be supportive for us because obviously we fully comply with all of those type of things, and that will take out a lot of supply, which is questionable in terms of its ethics and how it does their business. We see enforcement of that as well. That's a good thing in terms of what we see. We see that the playing field will become a lot leveler. We see that particularly in the pickup in March now as well. In terms of your question in terms of hospital beds and what we've done.
Today, we're looking at in India. We've got about, in terms of total capacity. That's not operationalized beds. That's where our capacity of the facilities that we have, that we could put together if we wanted to. Just short of 4,300 beds. We've got about of that, just over 4,000, which are operationalized. That's not chargeable beds. We've got about 3,000. That's all beds including inpatient care, obviously dialysis, operating theaters, et cetera. We've got about what we call just short of 3,200 chargeable beds that we charge based upon.
If you look at that in terms of the newest facilities that we've got coming online there, the newest one is a facility called Vizianagaram . There we're doing really well. We've got 200 chargeable beds in that facility. We've got 96 beds occupied yesterday on that, and that's a 48% occupancy ratio. We start to do really well when we get to the break-even level when we get over about 50% occupancy. We start to do really well when we get about 60% occupancy. We're doing fantastic when we've got about 70% occupancy. I hope that sort of gives you some sort of steer, Dani.
Yeah. Just to pick up on this though, I mean, if you think about your Q1 reported margins of 17.7%, you've had obviously, you know, very unfortunate headwinds from Ukraine, which maybe is a 50 basis point headwind. You've had headwinds from, you know, utilization chargeable beds, or at least in the early infancy of operation, you know, a drag on margin. I'm just curious, what do you think in a sort of if we hadn't had this sort of landmark event, and if your operational utilization of hospital beds was nearer the 50%-60% mark, what would you sort of point towards in terms of underlying margin?
Because I feel like there's an awful lot of potential hidden expansion as it were or, you know, you've had.
Absolutely.
Had your margin limited.
Absolutely.
Yeah.
Absolutely, Dani. I mean, the best steer on that is if you look at the lease liabilities and how that's grown, because we use leases, operational leases for our real estate. We bought some of the properties. The CDT Medicus acquisition, a lot of that property is actually owned. They have about four hospitals, and we actually own that. If you look at the lease liabilities, you see the expansion in terms of our footprint. As Fredrik mentioned, over 200,000 sq m over the last 12 months. That's a significant expansion. A lot of that is not in the situation where it's accreted to the margin. It's dragging on us.
That process of expansion is what will drive our revenue growth and our margin development in the, you know, end of this year, in next year, and then on the year following that as well. We continue the investment pace both the organic and the inorganic. In terms of the development of the company, we're really strongly positioned. That you'll see in the margin, and that you'll see in the top line.
Thank you. Secondly, just as it relates to M&A, it's been a pretty active Q1 in spite of all of the turmoil. You spent over EUR 100 million on M&A in the quarter. Can you remind me? Sorry, I missed it on the call. Your average cost of debt, I know you talked about 40% of it is fixed, but what's the average cost of debt currently?
For the Schuldschein issue, our average cost to date is 1.15%. Of that EUR 350 million, about 40% is fixed. The average duration is 5.8 years on that portfolio. We're in a fantastic position in terms of our debt capacity, our debt funding, and our cost of debt. We're really good.
Just as it relates to that then, how are you thinking about the M&A pipeline and backdrop? Obviously very tumultuous, macro environment as well. Is that leading to more opportunities, or are you tempted to sort of just, hold fire, given the pace you've already exhibited in Q1?
You know, if you look at our debt levels, you've got 1.2 x leverage if you look a bit in the EBITDA measure. I think that sort of reflects the sort of conservative position of where we are. We have then also some EUR 250-odd million of cash sitting actually available for us to use. We know that we need to invest, and we're working on that. You see that in terms of the deals that we close after the quarter. They're not particularly that significant in total.
Our agenda, Dani, is to continue our inorganic, and we will probably continue at quite rapid pace our organic levels with the projects that we're executing on currently and we have for the rest of the year.
Thank you very much.
Thank you. The next question comes from the line of Kristofer Liljeberg from Carnegie. Please ask your question.
Yeah, thank you. Also a follow-up here on M&A. It seems the acquisition you have made, they are more or less in total break even. Could you explain a little bit the low profitability from these businesses and how soon do you expect it to improve that?
We have a breakdown table here. Joe will take that, Kristofer.
Okay.
Just gotta open up my table here, Kristofer. We're getting into quite sort of technical questions here. The two largest ones that we brought in were NIPD, this business in Cyprus for specialized genetic tests. We're in the process of expanding that, so that's about distribution and bringing that. Part of actually buying that business in was that we could actually invest more in terms of the expansion of the distribution. We made a net loss in respect of that. The EBITDA level, IFRS 16 was something around about 10%-12%, something like that. About 12%, 13%, something like that.
A net loss when we amortize the patents that they have. We have something like EUR 18 million that we recognized on the balance sheet in respect of intellectual property. Our aim there is to expand that in terms of distribution and invest in the distribution to get that on a broader distribution platform. If you look at the CDT Medicus business, we recognized about EUR 4.6 million of revenue on that. We made about EUR 0.6 million in terms of EBITDA. That's doing fine. We made a net loss in respect to that, about EUR 200,000, again, through amortization of brand and other intangibles that were recognized.
We have a hospital in Romania we acquired. On that one, that is a transformation. We acquired the hospital, an existing one, brought new doctors in, invest new machinery, and we completely changed the profile of the hospital. It's more like a sort of a startup type business. It's the same with the Vizianagaram Hospital in India. I mentioned that's treated as an acquisition. We don't recognize any goodwill in respect of that. That's again a transformational type issue in there, and that's the one I mentioned that we are running now today around 48%-50% in terms of occupancy on that facility.
That sort of gives you a flavor for the acquisitions that we've done in the quarter. Does that help you, Kristofer?
Yeah, absolutely. The net contribution to earnings that you showed there, that's after M&A amortization?
Absolutely. Yeah, because that's what it is.
Okay.
The acquisitions.
Okay, that explains it. Okay.
When we include those that are dilutive to the EPS. You know, part of that process of some of these things is we're buying assets at good prices. For instance, the one in Romania, we bought that asset. We've got no goodwill reflected in respect of it, that we can transform that asset, bring in the new doctors, which are there now, build up the volumes, and we'll make a fantastic return on the equity.
Okay, great. That's all from me. Thank you very much.
Thank you. There are no further questions at this time. Dear participants, thank you for all your questions. I would like now to hand the conference over to your speaker for closing remarks.
Yeah. Thank you all for listening in. Obviously, I started out saying a quarter overshadowed by Ukraine, and I will wrap up with saying that again. We stand by Ukraine. We support Ukraine. We have fantastic people in Ukraine and elsewhere. Super proud over that. I think the quarter is strong, et cetera. Not repeating all of that. Most importantly going forward, will be to see how the Ukraine situation will be resolved and support our teams there. You know, we're very confident. I think we have tried to communicate that throughout this call. With that, I wrap up. Thank you for listening and look forward to reporting the second quarter when the summer arrives. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.