Good day, and thank you for standing by. Welcome to the third quarter 2021 results presentation. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Fredrik Rågmark. Please go ahead.
Thank you. Good morning, everyone. Welcome to our third quarter results reporting. We have had another very strong quarter, very pleased with the results. Growth is good. We have top line 28% growth in revenue, of which 24% organic and equally 24% underlying revenue growth, of which just short of 20% organic. You know, you will hear us comment quite a bit through this presentation on in the strength in the underlying business. A lot of people are only focused on COVID. You know, we have quite a bit of COVID revenue and COVID earnings, but fundamentally, really important to look at and understand the strength in our underlying business and how that progresses. We've had a very busy investment quarter.
We have put some EUR 57 million to work in M&A work, primarily in Poland in healthcare services, but also bought a couple of interesting fertility platforms in two new markets that we think will bring a lot of value. Alongside that, we put also EUR 22 million of organic capital to work. Overall, some just short of EUR 80 million of investments put in the quarter, some 90% of that into growth that will drive growth over quarters to come. Overall, from a revenue perspective, underlying total, very pleased with the quarter. If we flip to the page number two, you know, EBITDA grew 15% up to EUR 58 million. You know, we've had a margin erosion of some 180 basis points.
This is explained specifically by last year's rather exceptional quarter out of India, where in our Indian hospital business we were full of COVID patients. If we neutralize only for the exception situation last year in India, as well as the subsidies and grants that we still received last year in the third quarter, our margins are up versus the prior year quarter. We are also happy with the margin development. Looking at the margin in the underlying business, again, equally, we had 170 basis points margin compression there. We talked last time around when we talked about the second quarter with you in terms of the change, how we allocate some costs between COVID and non-COVID business.
That explains about two-thirds of that compression, and subsidies, really the remaining. So if we just again exclude those two factors, we have a 30-40 basis point underlying growth in our EBITDA margins. So we're happy and fine with how our reported as well as underlying margins are developing. You know, COVID impacts us significantly, EUR 50 million still in this quarter, and contribution of some EUR 16 million. I think I write in my CEO statement that, you know, we will learn to live with COVID. I think we see in our markets, we come back to that later on today, a significant increase in virus spread and testing activity. I think I commented on that last quarter around as well.
I think we will see a COVID impact in general, and certainly specifically on Medicover for quite some time to come, we believe. We had a super strong cash flow in the quarter. You know, cash and cash generation is always the best, I think, indication on how really the business is functioning. Our net operating cash flow versus the prior year quarter is up some 62%, which I think is a very good indication in terms of how things are going. If we then flip on to Healthcare Services, and here, we report 21% revenue growth, 15% organic, but underlying a strong 27%.
Again, I really want to emphasize that in a service business in the midst of still a lot of COVID around, and particularly in the markets where we operate, that we managed to grow our underlying business 27%, I think is exceptionally strong. You can see in terms of the numbers here, how the COVID revenue has declined since last year. As you recall, that is primarily a COVID revenue out of our Indian hospitals. Very importantly, you know, we talked several times to you about some potential long-lasting impacts from the pandemic, and one of them being a much more conscious awareness from the general public, organization, employers, et cetera, for the importance of preventative healthcare access to diagnostics.
I think that is certainly one of the drivers why we see this very strong continued member growth in our core Polish employee paid business. 45,000 new members in the quarter, up 11% since prior year. That's a strong number. I've also included here a bullet that if we look through the month of October, one month in addition to the quarter we are reporting now, we are already ahead from a net new member growth perspective of the strongest year we have ever had in our Polish business. I think that's a very strong illustration of the both, of course, our strong market position, but also the increasing demand from employers for services like Medicover is delivering. We also have very strong interest in our Medicover Sport activities.
We will come back and speak a bit more specifically about the Medicover sports activities later on in this presentation. We have not focused in prior quarters very much on that. Given the fact that we, this quarter round, have acquired quite a few gym assets, we will take you through a bit more of our thinking and strategy in the Medicover sports area. Perhaps it's just worthwhile you see on the, on the pie chart, that we always have shown with you here, our funded business is growing 13%, you see revenue-wise, so slightly ahead of member account growth. Fee for service up a strong 27%. Our public business, which remains in this division 10% of overall revenue, is up 22%.
Obviously, as you all know, Poland remains by far the most dominant geography, basically two-thirds of this division. It is also noticeable, India, that where we're obviously growing very fast is just short of 20% of divisional revenue. If we flip onto profits out of healthcare services, that's obviously year on year down quite a bit. EBITDA margin down to 15%, versus 20.2% last time around. In the underlying business, again, 15% versus 17.8% last time around. You know, for your benefit, trying to identify a couple of factors that is behind that.
By far the most important one is the transitioning from COVID-19 care to the regular underlying care in the Indian hospital business. I referred to the prior quarter last year, third quarter. If you recall also this spring, 2021, we've had provided a lot of COVID care in our Indian hospital businesses. As we transition away from COVID care over to the normal care provision in all these care facilities, that doesn't happen from one week to another. We have some transitioning issues. We're very confident everything is going in the right way, but you have time lags of one to two quarters in that. We also have a normalization of the underlying utilization of care in our instance in integrated model, which you would expect and also want.
People are resuming their regular, or to a certain extent at least regular visit habits. It's also important to point out that the digital service delivery remain on much higher levels than what the pre-COVID levels were, which again is really important. I've said many times to you that, you know, that is one of the lasting effects we expect from the pandemic because both our doctors and service staff as well as the customer find that really convenient and helpful. We expect that to remain on elevated levels. In terms, you know, make the point here that COVID admissions are obviously down in India. They are down in Poland.
You know, the increased virus spread that we see in the eastern part of Europe, very severe in Romania. Romania has by far a much more difficult situation now than they've had at prior virus crises. The same is true in Ukraine. We also have a much earlier, but we do have a virus pickup as well in Poland. Time will tell as we progress into the late autumn, winter season in terms of how that spread is. It obviously is very connected to the level of vaccinations in the countries where Romania is not in a very good situation. Sort of mid-thirties kind of vaccination levels across the population, which is clearly not sufficient to keep the infection rates under control.
We expect, as point already made, we will see impacts of that over quite some quarters still to come. You know, made the point that we've been quite active on the acquisition front during the quarter, both in fertility, in Medicover Sport and gym, as well as in the dental area. We come back to that. Flipping over to diagnostics, as you would expect, a tremendous growth here, partly driven by COVID, but also super strong underlying. 36% reported growth, underlying 19%. Indeed, very strong numbers. The COVID revenue just short of EUR 39 million. You see more than twice what it was last year.
Important to point out that we have quite some difference in the composition of our COVID revenue in terms of you know the number of PCR tests for example and COVID-related tests are almost four times the number they were in the prior quarter last year which is not fully reflected. It's not four times revenue as you see. We both have a difference in the mix composition of tests with much more antigen and antibody tests that are as you know quite a bit lower priced than full price PCR tests.
We also have a difference in terms of the customer groups where we have, as we have talked to you about before, we have some large customers in the travel industry, et cetera, where we provide large volumes of PCR tests for their passengers, where obviously price points are quite different. Important to point out, you see 19% test growth. Stripping out the COVID element of that, we still have 13% underlying test growth, which is a very strong number to report in the environment we have. I think it's worth noting to point out to you, in the pie charts, look at the left one with the public versus private revenue, and you see the very different.
I think that illustrates the point I make, very, very often in terms of how important it is to Medicover to be primarily private pay revenue model, where you see 51% growth in our private pay segment, 7% growth in our public pay segment, which obviously represents the different dynamics that those two segments represents. If we flip on to profitability for diagnostics, as you would expect, you know, the kind of revenue growth that we have seen is being transformed into profit growth. Good margin development. You see a 30 basis points growth in the underlying business net of COVID. We need to remember that we also had some 80 basis points of subsidies in the prior year quarter. Netting that out, you know, we're up more than one percentage point.
Margin growth in the underlying business in diagnostics, again, bringing home the point to you that that's a really important thing to look at. We've also continued to invest significantly in diagnostics. We've opened 30 new BDPs in the quarter, which is significant. We broke through the 800 levels. We closed the quarter with 809 BDPs in all our markets outside of Germany. We put in one picture in terms of continued hospital expansion in India. At the end of the quarter that we reported, we had 18 units in India. Here in the fourth quarter, we will be operationalizing two new units.
Just for illustrative purposes, we put in a picture on the first unit that we will have in the Mumbai area. We have talked to you many times before that our third state where we're expanding is Maharashtra, where we currently have two main hospital facilities, and this one will be the third unit in Maharashtra. For those of you that have been to Mumbai, you know, this is in the Navi Mumbai, so new Mumbai city that is growing phenomenally fast. This is located very close to the new Mumbai South or Navi Mumbai International Airport that will be opening in 2024, and will start with some 20 million passengers per annum, and will grow reasonably quickly up to about 90 million passengers.
Just give you a context on that, Frankfurt, before the pandemic, was looking after about 70 million passengers per annum. The location of this first Mumbai-based unit of ours is really good. We look forward to get that operational. As mentioned, I wanted to take you through a couple of slides on our Medicover Sports strategy. This is actually really interesting and important element of our Polish strategy for the corporate paid business or our sort of original core healthcare business in Poland. It's a very attractive Polish sports employee benefit market. The structure, it's important to understand the structure because in many other countries, it's the clubs themselves that sell membership, which also happens in Poland.
In addition, you have a layer on top of the gym clubs in Poland where you have a sports benefit market that functions not so dissimilarly to our healthcare cards market, where the employers will buy a benefit card from one of these operators that gives access to a multitude of gym clubs. Very importantly here is that when we look at what is it employees in Poland really want if they can have it as an employee benefit, and then healthcare that obviously is our core offering, if not always, but pretty much since we started, has always been on top of that list. Equally, an unrivaled number two has always been sports benefits and gym benefits.
From that point of view, sports benefits is really highly synergistic with the corporate healthcare market, whether you look at distribution, whether you look at who are the customers, the corporate, the client is the paying customer, and the individual employee is the using customer. Also, perhaps a more technical element, but important to understand, in Poland, there is a rule that where relatively quickly, even fairly small employers need to set aside a percentage of payroll into so-called social fund. One of the things that you can finance out of a social fund would be these kind of benefits. It's actually very attractive for employers to finance sports benefits through a social fund. Also important, I think I've talked about that at some times, there is really a blurring border between sort of preventative healthcare, fitness, wellness.
If we look at what we do in our historic preventative care to make our customers healthy, to make our customers eat well, exercise, et cetera, to make them more healthy, to drive down our medical loss ratios, the borderline from that into regular gym sports activity is very much blurring. From that point of view, it's quite an easy step into this market, besides. That was obviously the reason why we back in June 2018 acquired the company OK System, as you may recall, that we subsequently then have renamed Medicover Sport. There is one very large incumbent in that market, Benefit Systems. You have the ticker there, where we obviously is David versus Goliath.
We believe that we have a good opportunity to compete with our offering. Clearly, the gym network supply in attractive locations is a very important driver for this sports card market. Now, the pandemic, I think this market is one of the markets everywhere that's been particularly hit by the pandemic for the very simple reasons that gyms were closed from regulatory perspective and in Poland. This didn't really open up until late May. We, you know, the market has been trading for some five months again. We do expect a really strong recovery. Currently, the sports card market is back at around 2/3 of the pre-pandemic level. We have approximately 10% market share where we are right now.
Now, in addition to the sports card market, which clearly is our primary interest, there is also just short of around EUR 1 billion of value in the gyms market, where the clubs individually or the club chains, of course, have cash paying visitors and member-based visitors on the club level. It's important to see those two sort of revenue streams in our sports business, both through the card business that we sell through our own distribution to employers, and then directly into the clubs, whether it's cash paying customers or member-based customers at the club level. Last, I put in one diagram which just sort of gives you a little bit of a waterfall in terms of how this sports market looks.
This is, you know, these numbers come from Polish sources and some Polish broker reports look in particular at the Benefit Systems market. I think the important thing to point out are these sort of three right-hand bars there you see a little bit north of two million considered potential cards currently for sports cards. You know, pre-COVID, you know, there was around 1.2 million cards in the market. That fell down to around half of that or even less than half of that at the trough of the pandemic. Currently, that runs around 800,000 cards, of which I mentioned we have some 10% currently.
That was just a quick introduction of why we're quite excited over the sports market and why we're busy buying up gym capacity in the current market conditions. With that, I hand over to Joe.
Thank you. Thanks, Fredrik. Adam, if you can flip through to the next slide. Our net interest cost EUR 5.3 million, 3.6 arising from the lease accounting. Our underlying interest around about EUR 1.7 million. FX loss EUR 1.3 million, again impacted by the lease accounting. EUR 1.8 million of that loss was movements on euro-denominated leases in Poland and the FX movement that arises from that volatility item. Again, underlying on that, we had a net gain of half a million in terms of the underlying FX movements. Just to remind that lease movements are non-cash. Tax charge EUR 28.1 million.
As we look at our effective tax rate, we're estimating that around about 26.5% for the full year. We were at 26.7%, something like that, for the full year 2020. Strong cash flows, as Fredrik mentioned in his introduction. Cash flow before our tax payment, EUR 70.8 million. A positive movement in respect of working capital for the quarter, negative for the full year as you'd expect with our expansion of the size and activity of the business. Nine months, EUR 175 million cash inflows. Strong cash flow inflows that we've been putting to work and investing.
Cash and cash equivalents up, but within that, we liquidated some EUR 40 million of short-term investments that we had at the year-end to fund the inorganic expansion. Loans payable, you see that in that figure. We've increased there around about just over EUR 40 million since the year end. Remember that's with organic investments of some EUR 65 million in our capital spend and inorganic investments of some EUR 73 million. Very pleased that we've been able to fund a large part of that expansion with our own cash generation. We resumed our Swedish commercial paper program at SEK 24.5 million at the end of the quarter outstanding on that.
We have round about sort of the on-hand ability to fund around about EUR 300 million in liquidity. I'm sure we will be going out and doing some longer-term debt activities as we continue our inorganic expansion. Increase of our lease liabilities around about EUR 100 million. We're very active in terms of pushing both the inorganic and the organic expansion. That then is driving our future lease liabilities we recognize. That is a very good thing. We've got in terms of medical space and gyms probably operating around about 560,000 sq m of facilities there now. That's up obviously since we started our lease accounting transition back in 2018.
I think we had around about just over 300,000. Lease liabilities, EUR 301 million, and just talked about that in terms of our expansion. Our organic expansion in terms of our own capital spend, just over EUR 22 million, and EUR 65 million for the nine months. Splits around about just over two-thirds of that for the quarter and just under two-thirds of that for the nine months have been in what we cast as growth, new additional capacity coming on versus maintaining our current asset base. Pushing ahead on this, as you can see, as fast as we can in terms of supporting our future growth, that's what drives our future revenue numbers as well.
IFRS equity, just over half a million EUR 332 million. Had some movements in respect of translations there. Some positive stuff on the INR and the Ukrainian hryvnia, a little bit driven by the movements in terms of the dollar, euro, with a little bit of that has been reversed, and that reflects in those currencies. We've got a recognition of future put option liquidity obligations, long word there, but basically where we've written put options for minorities, and we recognize the potential in the future where we would outflow of money in respect to that. So that's recognized on the balance sheet.
Just over EUR 15 million of that is existing ones, of which the largest is for our put obligations in respect of our partners in our Medicover Hospitals India business. Then we have new ones which we recognize for the minorities we have in the two acquisitions we did in Scandinavia, in Denmark and Norway, where we have both call options over their shares and also then we have they have put options to us as well. We're continuing to invest for growth. As you can see, we've got just under EUR 57 million cash flow impact in terms of the quarter, EUR 73 million for the nine months. We ramp this up now. I think as we talked about before in the past, the two fertility businesses, good additions to our fertility franchise.
We've got, as Frederik talked about earlier on, we're expanding our footprint in terms of our owned and operated gyms in Poland. I think we have something about 66 gyms now we operate in Poland under our own management and directly owned. 2 further medical centers, 3 hospitals, 1 in India, 1 in Germany, 1 in Poland. 2 dental businesses in Poland, and a laboratory in Turkey. The net loss we recognize in respect of those acquisitions of EUR 2.6 million. As you'd expect with the gyms, when we've acquired some of these gyms, they've been in not a fantastic financial position.
They've been closed throughout pretty much most of the first half, and they opened now in June, started up the businesses again in terms of getting people through the doors. We've had a fantastic sort of once in a lifetime opportunity to be able to expand that footprint of gyms at pretty good prices. We've taken that to support the wellness, the fitness, employer paid business. I think we're gonna do very nicely in respect of that. Broken out there in the box for you, the enterprise values, as we have some minorities on that. That doesn't reconcile to what we paid. Just gives you an idea in terms of where the sort of our order of magnitude money is.
You can see there in the gyms, some EUR 36 million for the full year. The fertility, EUR 48 million in terms of the full enterprise values for those businesses. The acquisition of the inpatient facility in India, although it's classed as an acquisition, it's pretty much a sort of asset deal, if you like, even though we did buy some organized business structure with it. That's a very good transaction as well in terms of future ROIs. Just coming on, looking quickly then at our financial targets, where we are on that. Obviously the first two growth and profit have been heavily influenced by the COVID side.
Even if you look there in terms of the underlying, Q3 23.9% organic growth including COVID, underlying 19.3%, very far ahead of the targets. If we look at the profit measures, those also very far ahead of the targets. Even if you look at the underlying adjusted figures for the EBITDA margin, you know, this is above the lower end of that range there. We're comfortable in terms of our targets there. Capital structure, you can see we're in a very strong position in terms of our liquidity, very strong position in terms of our balance sheet. Plenty of ability therefore to fund and push our future growth and expansion.
Back to you, Fredrik Rågmark.
Good. Thank you, Joe. You can see we're pleased with our quarter and happy to take any questions you may have.
Thank you. We will now begin the question-and-answer session. To ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound or the hash key. Please stand by while we compile the Q&A. Your first question comes from the line of Kristofer Liljeberg of Carnegie. Please ask your question.
Hi, good morning. I have four questions. Hope that's okay. First of all, I might have missed this, but did you say how much combined sales was in the acquired businesses? The second question relates to this uptick in COVID cases in Eastern Europe. I guess it's good for your diagnostic business, if I could phrase it so. Is there a negative impact here on the healthcare business that you do less surgeries, or are you also treating those patients that's actually a positive effect similar to India? I'm wondering about, in the diagnostic business, how much of the COVID revenues are from the traveling industry, if that's possible to break out?
My final question is on the underlying margin, if you could call it that, because you have, of course, a large boost on profitability from COVID revenues. If I take the EBIT margin, for example, I think it was 7% EBIT margin in the first nine months. It was only 5% in the third quarter, but you said that you had some negative impacts in India. Of course, that's back to the levels we have seen maybe in 2019. Should we use this as a base or a little bit more how we should think about margins here in the coming years? Thanks.
If I start from the back and then hand over to Joe towards the front of your questioning then. On your underlying margin, Christopher, so you know, the points I pointed out being the reasons in this particular quarter, that's what it is in this particular quarter. You know, I don't think that you should put you know, too much emphasis beyond that on what has happened in this particular quarter. I think we need to look at on the nine or 12-month period historically to assess that. You know, clearly margins are down versus the you know, the third quarter last year for those reasons. We have a normalization of care utilization, but as I said, digital care is still higher.
We have these, if you wish, operational disruptions, particularly in the Indian hospital group. Those are the two things that sort of stand out when you look at that. I would not, you know, focus too much on the current quarter, but rather the sort of nine or 12-month historic when you try and draw some conclusions from that, sorry.
Could I follow up on that?
Yeah.
The fact that you stick to this EBITDA margin target for 2022, that's quite a bit below also the 9 or 12-month level. Is that an indication that you expect the reported margin to decline now in coming years or
No, I mean.
Is it too early for you to change that target?
Yeah. You know, the reason why we have not changed the target is exactly the same this quarter as Christopher. We, I mean, we perhaps have had some. I don't know if criticism is the right word, but at least some more increased questioning around if we're too conservative with our financial targets. I've said all along that it is just not the right thing in the middle of the worst crisis the world has seen since I don't know when to change our financial targets. Now we have 14 months left until the three-year period is over. I was saying in this interview in the morning here that whether we clearly, so latest in 14 months' time, we will change or update our financial targets.
If it happens earlier, I think it's very closely related to how we see the sort of winter COVID, spring COVID situation evolve. You shouldn't read anything into that right now more than what we have said in prior quarters. That I think is important to state. On your third question in terms of how much of COVID revenue is related to the travel industry. I'm not gonna give you a percentage on the revenue, but we can say roughly half. On a test basis, it is sort of half-ish, more or less half of tests that we report is coming from the travel industry. The point I made, the price points are quite a bit lower there because we have one or two very large customers.
Revenue-wise, it would be quite a bit below half, but sort of test number-wise, it's about half. Then your second question, in terms of the COVID impact and will we see negatives coming out of it on the service side. You know, the biggest impact we have, which we're dealing with very well right now, is that if we look at Romania and Ukraine, et cetera, you know, we actually have quite a few of our own staff becoming sick again. You know, we have vaccination rates among our own staff of sort of 90+%.
Despite that, as it is reported elsewhere in societies, I think, you know, 25% of people, you know, not 25, but quite a few of the people that turn ill among our staff are vaccinated. That's a bit of an operational challenge. Nothing that we operate now is closed due to this, and we would expect to be able to operate. Again, I point out that's, that certainly is an operational challenge. Where we are today, there is no negative impact on our healthcare services side from the COVID spread. Obviously, the question is most pertinent in Romania. Romania is also where we see most, you know, COVID revenue now.
You know, the Oradea Hospital, the Pelican Hospital that we bought a number of years ago, they are really busy treating COVID patients. In Poland, we don't really see an impact. All the rates are starting to tick up, but from a much lower level. Really, you know, will it get worse during the winter? Will that start to impact us? I think that's a little bit too early to tell. I think last time around, you know, we were impacted, obviously, when societies closed. We really do not think there will be any kind of lockdown the way we saw them before. If there is any impact, Kristofer, I would think it will be rather benign. It's not something that I would sort of put emphasis on.
Joe, you have the number on the first one.
You were asking what our sales revenues were recognized, I believe, Christopher.
No, I was thinking about the acquisitions you did in the quarter, a lot of smaller ones. Is it possible to have the combined sales for the-
Yeah. We disclosed that in the release there. EUR 11.5 million for the three months. EUR 18.5 million for the acquisitions. We had, as said, a net loss recognized of EUR 2.6 million for the nine months, EUR 1.8 million for the quarter in respect to those. Had we had all those acquisitions from beginning of the year, that nine-month figure would be EUR 17.7 million higher for revenues. A lot of it is the gyms and the gyms revenue was pretty much nonexistent for the first five months of the year.
Okay. Okay, thanks. I missed that. Thank you very much.
Thank you. The next question comes from the line of Karl Norén of Danske Bank. Please ask your question.
Yes, good morning. First, I'll touch upon the margin again, and looking at the underlying EBITDA margin, on a rolling 12-month basis, I think it's around 16% right now. Can you just say anything about if you see these margins as, you know, reflecting the current state of the business? Or is there still, you know, do you see room for expansion as demand continues to recover? Or will you still need to add on extra cost? Or how should we see the underlying margin? Because I think it's around 16% now, and it would just be interesting if you could comment on anything of if it reflects the underlying business, if you think.
Well, I think, Karl Norén, the simple way to answer that question is that you have two things going on beyond what we normally talk about. One is that while we talk about underlying business being strong, et cetera, it is not yet back fully to where it was before pre-COVID. You know, it's sort of normalized, but it's not 100% normal, put it that way. You still have an element of catch up to do there. Secondly, you know, we have brought in quite a bit of new capacity. You know, John Stubbington talked about how much square meter space of facilities we have brought on.
You know, quite a bit of that is to be filled up, whether you talk about gym space, you talk about hospital space in India, or we talk about dental space in Poland. You know, that's the sort of strong side of Medicover if we wish. Investing, sort of front-loading our underlying growth investment the way we have always done and continue to do, perhaps increasingly so, is in a way sort of short-term depressing your underlying margin. It was a long way of saying that, you know, you should expect that to still improve over time. You know, we're gonna continue to invest, so don't get me wrong on that. You will sort of have that element there all the time.
If you look at long enough a time frame, you will see that start, you know, sort of going in the right direction.
Okay. Very good answer. Just a question on the Indian business. Is it fair to assume that this business was not really profitable in Q3, or at least very small amount of positive profits, given that the profit for minorities in the P&L was close to zero in Q3?
Karl, we took over the debt which was external in India with our partners. All of the debt on the balance sheet of the Indian operation is provided by the parent. We pick up all the interest costs. The net profit after interest was small, so that's why you've got a small minority.
Yeah.
We pick up pretty much, in the last quarter, pretty much all of the profits that were generated or the money coming out of the business there.
Okay. Just a question on the Medicover sports business. Is it possible to say how this has impacted profitability, both in Q3 but also maybe year to date, on how the profits have been in that business? Because I guess in the first half it's been negative, I would assume.
Yeah. I mean, you know, that's a. I'm not gonna give you that number. We're not gonna split it out. You know, that's a very good illustration, the point I just made. You know, you can say, you know, the reason for really sort of talking a bit more lengthy about the sports strategy here is because, you know, perhaps someone would scratch their head and say, "Well, why in the world are these people spending EUR 30 million and buying closed gym businesses?" I'm saying, you know, this is the very time you should buy these businesses if you have the strategy in sports we have. Of course, the short-term consequence of that is that we're actually incurring a loss.
You know, in terms of the current quarter and the year to date period, that actually operates at a loss. I'm sure that's gonna reverse going into future periods.
Yeah. That's great. I'm just trying to get a sense of how the underlying is performing.
Yeah.
Just a last question on the top-line side. I think you had a sequential decrease in diagnostic services revenues if we look at the underlying business. Is it possible to give some more color on what the drivers has been, and is this a seasonal effect, or is it something that COVID has impacted the underlying business negatively, or how should we see it?
Well, you know, I mean, Q3 is the weakest seasonality quarter in diagnostics, and has always been. I think that's really what it is. Or is there anything else you wanna add on that, John Stubbington? No. That's all you. It's a seasonality effect, Karl.
Okay.
So-
Yeah, great. Thank you.
Thank you. Your next question comes from the line of Klas Palin of Erik Penser Bank. Please ask your question.
Yes, hello there, and thanks for taking my question. My first is related to the Indian business. I just wonder how many hospital beds you expect to have after expanding with it to new hospitals. My second question is related to wage inflation. I just wonder if you would like to comment how you expect it to play out in 2022. Would it be on historical levels or picking up as economies are expanding?
All right. Sure. In terms of the Indian hospital business, we, you know, with including the two units then in quarter four that I talked about, we will be on total beds about 4,000. Now it's important to distinguish between total beds and what we call operational beds. Operational beds would be where we sort of, you know, where we currently have patients in them. I think, with adding those two, you probably get up to operational beds about 2.5-2.7, somewhere there. As we fill up the then current 20 units, including those, you know, that's gonna take us above 4,000.
For context, I think in terms of current hospital groups in India, I think from a sort of bed count perspective, that brings us to number five, six type-ish of national networks, to give you context there. Wage inflation, Klas, that's a very good question. That's a super big topic for the industry, for us. You know, one of the aspects of the pandemic is the fact that if... I think in every call I talk about recruitment and retention as our biggest operational business challenge. That has certainly not become easier in the pandemic. Just to give you a flavor of that, if we are now roughly approaching, like, 40,000 employees in our group, we have an annual churn of some sort of 12%-ish or so.
To stand still, we need to recruit 5,000 new people, and we need to recruit. I think if I look back over the prior 12-month period, we have probably recruited another sort of 7,000-8,000 people for growth. Put that together, you get to 12,000-13,000 people, which is a not bad-sized company to start with. Now clearly, you know, wages are significantly up. You know, that sort of sounds like rather dire news.
I say what is really important for everyone to sort of appreciate is the reason why we push so much for Medicover being primarily a private pay revenue model is that in private pay, if you have a strong brand and a strong service offering, we are in a position to largely over time compensate that cost inflation with price increases. If you are stuck in public pay fixed price contract, that's a very, very different thing. That is what we largely are not. While cost inflation, I think for our industry is probably the biggest topic to be focused on, I think we are, and it's something that we work on day in and day out, particularly from sort of headcount, retention, recruitment perspective.
We're also in a position where I think we can compensate for most of that through price and operational efficiency.
Perfect. Thank you so much for the answer.
Thank you. Your final question comes from the line of Grace Lee of Jefferies. Please ask your question.
Hi. Thank you for taking my question. I have three questions. One sort of overview, larger picture, and then two much more sort of detail. I'll just ask for the first question. First, in Q2, you had mentioned sort of in terms of outlook, you were well ahead of FY 2022. In Q3 press release, you sort of mentioned remain optimistic regarding both short and medium term outlook. If you interpret that as sort of a slight change of tone, is this reflecting any sort of key headwinds that you started to see in Q3 that you are sort of reflecting in this thing, or and my sort of sub B question with that is how much of this relate to MHI India COVID case stabilizing in Q3?
Because at Q2, you also had mentioned that you were expecting sort of another wave in Q3, and also you had mentioned that you expanding more quicker to capture this growth opportunity. That's my first question. Thank you.
Yeah. Well, that may be my terminology, and then I should rephrase myself. The way I singled out short and midterm is really, I mean, we never really worried about our long-term outlook. There is no difference in our positive opinion on long-term outlook. The reason why I phrased myself the way I did now is that, we've had quite a few questions coming in terms of our short-term outlook. Therefore, I wanted to emphasize that both short and midterm, you know, we're positive. Now you read that into that, well, are you then not positive on the long term? We are certainly positive on the long term, as we are on the short term.
How about the sort of Q3? Have you seen any headwinds that you are seeing now versus Q2?
Well, what do you mean? No. I mean, you know, I think we have hopefully quite comprehensively covered our view in the reporting and the commentary here. Rather the opposite. I mean, you know, I said we are super expansive in India, obviously. You know, if we started to be concerned, I don't think we would have the sort of expansion pace that we currently see. You know, the fact that we talk quite a bit about margins being lower out of India is that we wanted you to appreciate the fact that if you ask me, we would much rather not have another COVID wave in India. Obviously, from a public health perspective, that's what we all wish.
You could say financially for Medicover Hospitals India, perhaps that wouldn't be a bad thing, but it is actually much better for us to be able to keep growing our occupancy rate with the regular customer and patient basis we should have in those hospitals. The disruption that it causes to shift from COVID care to regular care and back potentially to COVID care is quite significant. That's the point we were trying to emphasize in terms of understanding the sort of profitability level in the current quarter in the Indian hospital. That does not give any commentary that we have a six, nine, 12-month different outlook on our Indian hospital business than we had before. Otherwise, if anything, I think you know, I don't necessarily think we change our outlook quarter on quarter.
I think it's more, you know, we push this commentary on the underlying business because for you to be able to see that the I think the best way is to do the longer time series of how the underlying business is growing revenue-wise, margin-wise. We have now lived with 20 months of COVID. We will probably live with, I don't know how long it's gonna last, but as I mentioned initially, I think it's gonna take quite a bit of time when we still will have a lot of COVID revenue and COVID earnings around. Clearly, you know, that's not how you're gonna value or appreciate Medicover. That's why we talk so much about the underlying activities.
No, that makes sense. Thank you for that. The second question is about acquisitions, and obviously you're very active in this and you've given us, thank you for the Q3 sort of breakdown of those details. In terms of CapEx guidance, I may have missed this, but are you sort of expecting increase in the CapEx spend in this area? Sort of in terms of profile acquisitions that you're looking at from the pipeline perspective, is it sort of similar in terms of what's disclosed in Q3? Thank you.
In terms of what we call organic or inorganic CapEx. In terms of our organic CapEx, in terms of the outlook in respect to that, you see that hovers around about two-thirds being what we call growth CapEx. That's new facilities, new capacity expansion. We've got about one-third, which is maintenance CapEx. That's held pretty good as we've gone through. I expect that ratio two-thirds, one-third, that you're gonna see that sort of ratio continuing. In terms of the maintenance CapEx, that's to do with the asset base that we have. As a percentage, that sort of keeps there.
In terms of the growth CapEx, we're pushing that. You know, this is a great return on investment. We've got the opportunities, so it's really about rather than our balance sheet isn't limiting our ability to invest in our own organic CapEx. It's our ability to get the facilities operational, to get the people in to get them working. You see what we've done, we've expanded that as the business footprints. We've expanded the resources, so we're expanding also our ability to deploy capital. Our ambition is to continue with a strong organic CapEx investment rate. If you think about it, if we're gonna keep these growth rates up, we've got to do that.
If we're gonna keep up, you know, our strong organic growth rate, then we need to continue to invest in our facilities because our business models are largely facility-based. If you look at our inorganic capital spends on our acquisitions of businesses, I'm glad to see that we get that going a little bit more. Our ambition is to keep going on that. Expect to see more inorganic expansion. That's definitely in there. We've got teams of people working on it. We're working on transactions, so expect to see that still coming. Timing and amounts and sizes will obviously vary with the deal flow. Prices are good.
Synergies are strong in terms of what we're looking at, so we're quite ambitious in that as well.
No, thank you. Sorry, my final question is about the wage inflation, if I can follow up on that. I think in the previous question, you had sort of mentioned that a total of 12,000 staff recruiting at the, including those growth components, that's a quite significant percentage of employees out of 40,000. How much wage inflation are you seeing in terms of margin impact? Or if you can comment on Q3, if possible, because I've heard about sort of 3%-ish wage inflation that people are seeing. If any commentary on that would be helpful. Thank you.
That is largely an impossible question to answer, because you have so many different pockets of different geographies and types of medical staff where that would vary incredibly. If I give you a number, it's invariably gonna be wrong. Now you have some extremes where you have, you know, 20%+ cost inflation today versus a year ago. And the more scarce the resource is, the higher the cost inflation is. And the opposite is equally true. Now I think the general medical cost inflation, if I use Poland as an example, being our largest market, I think that sort of runs in the high single-digit %, which is significant if you consider the levels of general inflation.
The point I made before, I think we're in a position to largely compensate that in price. Will we expect that to grow further? Probably, yes. I don't know how much. Now if we look in Germany, our second-largest market, that would be much less because the starting point is much higher. Again, you know, it sort of is misleading to put a percentage onto it because it is so different from country to country.
I think sort of the most important message to send to you on that question, even though that's not the answer you're looking for, is when you look at different businesses and business models, I think the most important is to look at to what extent you think different businesses are in a position to compensate themselves for cost increases in price. That's my view.
Thank you.
Thank you. There are no further questions on the line, sir. Please continue.
We have a few questions in the chat, and the first one is, what is the branding for Medicover Sport gyms in Poland, and is it only open to employees with employers or broader population? Is there differential pricing for the two customer groups? Is this a premium gym offering or low cost? How many gyms of the total 2,100 total markets do Medicover now hold, and where do you want to get to? When you look at the cost of acquiring the gyms, what is the expected ROIC, and what does a steady-state EBITDA margin look like for this business?
All right. I had a go at that. The branding for Medicover Sport is Medicover Sport. That's the sports benefit market. As I explained, you have two distinctly different markets here. You have the market for sports benefit cards that we sell to employer groups to look after their staff. To be a beneficiary of a Medicover Sport card that is being sold to an employer, hopefully together with healthcare coverage that we also provide. That's the whole idea. Now, the gyms as such that we have and are acquiring, we are not rebranding them to Medicover in any way. The gyms continue to carry the respective names that they carried when we acquire them.
Because on the gym level, you have then the, you know, cash paying customers that come to those gyms, and typically, if not all, but very many of the gyms, certainly if there are gym chains, they also have membership businesses on their club levels. Medicover Sport is the brand for the benefit card that we sell alongside our healthcare offering, as opposed to the gym levels where we don't put our own Medicover brand on the club. Whether, you know, the gym offering that we're buying, we're sort of trying to get a, if not full, but a relatively broad spectrum of the gym market from top to sort of mid-end, perhaps not low-end. How many gyms out of top 2,100 do Medicover now hold?
I think we said we have about just short of 70, I think right now.
66.
66. You know, we will never be a 200 gym network. That's not the idea. The idea is to, for the sports cards business, we need to be present with good coverage in the main urban areas of Poland. That certainly will require a few more than the 66 we have now. But you know, not indefinitely more. What is the expected return on investment now? Again, you know, we're not gonna quote a number here, but the reason, again, be very clear, the reason for this is the sports cards strategy. When we look on the returns, if we are successful with building a broader sports card offering, which we sort of think we will be, but obviously, that's for everyone to gauge and wait to see.
If we're able to build a broader sports card business together with the business that the gyms will generate themselves as gyms businesses, it is gonna be a very good return, undoubtedly. I gave the answer that way because, you know, we're not going into the gyms business to be in the gyms business. We're in the gyms business because of the sports cards business. One sort of need to overlay the two, to get the sort of returns. Then there's another. Can you provide millions or outlook for CapEx going forward split between maintenance and growth CapEx? That's, you can comment that. It's sort of the same, you can comment.
Yeah. Great. I think we already covered that one off in terms of where we expect to be.
Average cost of debt is the last one.
Yeah. You know, if we look at our out in the market, we have the German debt instruments, Schuldschein instruments. We have some EUR 160 odd million out in terms of gross levels. We pay around about just over 1.2% on that in terms of the headline cost of that. But you need to then roll in all the arrangement fees and everything else. We have our standby facilities as well that we pay commitment fees on. You know, if you look at our debt and divide our interest costs, then you're gonna be higher.
We also have the discounting for deals where we pay later in rather than at closing for them. We have discounted obligations there as well that comes in. If you're counting around about in your modeling something a little bit north of sort of 2%, then you're not gonna be too far wrong. Obviously, you see yield curves moving up now. We could see some moving up of that over the next couple of years.
All right. I think that's all questions. All right. Thank you all for listening, and talk to you next quarter round. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.