Good day, and thank you for standing by. Welcome to the third quarter 2022 results presentation conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link at any time during the conference. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Fredrik Rågmark. Please go ahead.
Good morning, everyone, and welcome to our third quarter results presentation. We start on page number three. Quarter three was very much a continuation of the environment we reported in the second quarter. The headwinds that we reported back then have clearly continued, and I think it's fair to say that in terms of the inflationary pressure, if anything, it has probably increased even a bit more in the third quarter. We see the highest inflation rates in most of our markets and certainly in the larger markets, that is above what we have seen for, I guess, the past 20-odd years or something, which clearly has a short-term impact on our profitability, as is quite evident in this report.
We grew well, actually from an absolute point of view, to be able to grow 10% and organically 3% considering how much COVID revenue we had last year around, and effectively replacing that with real underlying business, I think is a significant achievement. That is also visible when we look at our business as usual, which I think is a fair measure, i.e., when we isolate the impact of COVID-19 unwinding, and likewise, the impact of the war in Ukraine. Everything else we do, we grow just short of 20% organically, which I think is a testament to the strength of the business, the brand, and our position in our core markets. That's really very strong.
In the core employer paid business, we put on more than 40,000 new members in the quarter, up 12.6%. Again, that's a very clear continuation of what we have reported for a number of consecutive quarters, where it's definitely our opinion that in the post-pandemic world, on balance, employers are even more interested in providing good quality healthcare, preventative healthcare and diagnostics to their staff. That's a very clear indication. Our Adjusted EBITDA margin at 14.4%, obviously quite a bit down since the prior year, and for the nine months at 15.9%. We go on. Overall revenue, just short of EUR 370 million.
We put on just short of EUR 35 million from an absolute point of view versus prior year. Again, that is with a large amount of COVID revenue dropping out. 10% top line growth, 3% organic. You see in terms of COVID revenue, just north of EUR 14 million compared to just short of EUR 50 million last year. Effectively, to stand still, we've had to replace about EUR 35 million, you see. On top of that, we have put on some more business. Again, from a revenue point of view, I think a really good and strong quarter. We have continued to be busy on the acquisition front, which you know, and we have reported throughout the year, so EUR 28.4 million in terms of acquired revenue.
Our fee-for-service business keeps on growing very well. You recognize the pie chart since before, and I think nothing really out of the ordinary, perhaps to point out which is sort of a theme through the report in terms of our ability to price compensate in our private pay markets and how much more constrained you are, at least short-term, in markets where we have more public funding. I think that is quite evident from the left pie chart here with our large Polish geography you see being 30% up, and the German business being 1% up.
Now, of course, that's not only pricing in that because we have a large element of COVID unwinding in Germany, which you know was our largest sort of COVID volume, COVID revenue market. There is certainly an element of that in that German rather static number. You see India continue to grow very well on the back of our very sort of front-loading expansion. I will take you through a slide shortly here, which I think very well illustrates our pace of expansion. And also to comment on, no surprise, you see the -50% in Ukraine. In fact, I think it's really very strong to only be -50%.
The fact that we're actually running a business there which is half the size of what it was a year ago, considering the environment in Ukraine currently, I think that's a testament again to the demand and need for the services we provide. Moving over to the margins, which are obviously under pressure, as we reported in the second quarter. Again, I talked quite a lot last time around about four factors, war in Ukraine, that's rather obvious. Lower COVID-19 contributions. I've talked about the revenue from that dropping out. As you know, COVID has been a high margin, high contribution business for us. Increased medical costs, and needless to say, you know, inflationary cost pressure is most pronounced in us, or for us in terms of medical wage costs.
It's not an alternative not to match that because we need our people, and the ability to price compensate in that is then the most important thing for us. I stress in the report that we remain confident in terms of our ability to do that where we have private pay revenue. We've had, I think, a good reception from our broader customer base in terms of understanding the need for price increases. EBITDA just short of EUR 49 million, down from EUR 58 million. Margin of 13.3%, so four percentage points contraction there. Adjusted EBITDA just short of EUR 53 million, 14.4% as mentioned. We look at the adjusted EBITDAaL basically, you know, our most good proxy for our cash flow.
It came in just short of EUR 31 million, down from prior year EUR 45 million, and EBIT just north of EUR 9 million. We have put on a slide here which try and illustrate to you the fourth sort of headline from a margin headwind, sorry, from a margin point of view, very clearly is that where we expand very rapidly and we grow that primarily through taking on a lot of new medical space. You know, these are hospitals in India, BDPs, new labs, these are gyms in Poland, et cetera, et cetera. And clearly short term, that is margin dilutive. We are very confident this is the right thing for our business to do to keep up the growth rates for many years to come.
We looked here to try and illustrate this for you, in terms of the growth capital that we have deployed, over the recent period. In the upper part of the table on the right, we look at then the organic growth capital, i.e. excluding maintenance CapEx, and secondly, inorganic capital, i.e. where we have acquired businesses, and look at that as a proportion of the opening fixed assets two years ago. That's excluding then the IFRS 16 leasehold assets. Looking at our real fixed assets. You can see if we compare to the situation two years ago, over the last 24 months, we effectively invested in terms of growth and M&A some 73% of the opening balance of our fixed assets.
I think that illustrates that fact very well. In fact, if you just look over the nine months this year, 43% of those 73 has been over the last nine months. I think that's a really good way of illustrating the pace of expansion we are in. Likewise, at the bottom, you know, the amount of space that we have to service all our customers, that is probably the best proxy for in terms of the how that will, you know, transform into revenue and profits. You see now we're just short of a three-quarters of a million square meters of service space. Again, that's over the seven quarters. Since the end of 2020, you see that's up almost a mind-boggling 74%.
Only in this year, you see, we have put on some 140,000 square meters, up 23% only in the three quarters 2022. I think you know, we made this point quite a few times that we invest in growth. We're very confident, and I think we put up these numbers so you will in order a little bit to be able to quantify specifically what that means. Obviously, a lot of these square meters that we have put on in 2022, we have yet to fill with customers, which sort of explains the short term, if you wish, diluted margin impact that has.
If we turn to healthcare services, I think it's fair to also make the comment that a majority of the expansion that I just talked about is related to healthcare services. We have certainly had expansion in diagnostics as well, but relatively you know the numbers I just took you through has an overweight towards healthcare services. Revenue here came to EUR 230 million, so up 30%, of which organic was 18%. Again, very strong. Now you know last year around we had still a reasonable amount of COVID revenue here, which was pretty much all related to India. And now that is virtually all gone. If we look at the underlying organic growth in again in business as usual then so isolate COVID impact.
You know that the Healthcare Services also has a small presence in Ukraine, but much less than Diagnostic Services. The impact of isolating Ukraine here is rather minimal. When you look at that, you know, we had just short of 26% organic growth in business as usual, which is super good. Of that, the price effect effectively represented just short of 8% here. Some 18% underlying organic volume growth, and some just short of 8% underlying price growth. As we comment on in the report, has been mentioned before, October is a bit big indexation month for this business.
That is clearly then not yet visible in these third quarter numbers. I made a point. COVID is largely gone from this division. You see the acquired revenue. I mentioned before how much acquired revenue was in the group, and the point made here, you see most of that is then related to Healthcare Services. In the quarter, we made the most recent, and in fact, the first, hospital for us in the capital area of Mumbai, in Navi Mumbai, the neighboring city to Mumbai, where in fact it is really one large city, but Navi Mumbai is growing very fast.
Navi Mumbai opened about a month, five, six weeks ago by now, and is doing well. Although, of course, as we will come back to in a second, again, all these openings short term, while we fill them up, in the immediate to short term sort of negatively impacts our margins. We made two, which we think will be very attractive acquisitions in the dental field in Germany just off the end of the quarter. On the back of the ongoing success and progress we see in our Polish dental business, we believe it will be a very attractive opportunity for us to also start expanding in the obviously much larger German market.
We believe the competitive positioning we have in our Polish market will allow us, support us in very much developing the business of the two firms we have so far acquired in Germany. I made a point in terms of healthy member growth, 1.6 million members by now across the markets where we have the employer-paid business, where of course Poland being the most important one. We do note here at the end that some softening of demand is perceived.
I think it's a fair comment to say that, as we move into 2023, we do expect that, you know, most economies, certainly in the countries where we operate, will come in for a bit of a harder time, on the back of the interest rates going up the way they are, et cetera. Clearly, consumer spend on the margins is likely to be impacted. We haven't really seen that yet. It's a fair comment to make, although we really want to flag that it would be surprising if we don't see some of that, on the margin into 2023, in some of the more expensive procedures. Moving on to margins for Healthcare Services.
Again, headline EBITDA margin down 100 basis points from 15% to 14%. That's largely on the back of, you know, ripping out the COVID contribution from the prior quarter. Likewise, you know, a reduction in the other results items. Our medical cost ratio ticked up just short of 1%, which again is the most immediate KPI, if you wish, where we see the relationship between basically our medical salary cost, which would be by far the largest component of medical cost alongside facility costs, where obviously energy prices going up is an impact as well. On the other hand, our ability to price compensate.
I think we did pretty well in fact to only see a slightly less than 1% tick up in the Medical Cost Ratio in this business. On the right-hand bottom side, you see here where we have tried to help you to sort of reconcile what we reported last year with what we're effectively reporting now and what are the sort of, if you wish, adjustment factors to be aware of. You see we reported 10% last year, EUR 17.6 million. Take out the COVID contribution, we come down to 9.6% margin. That's basically a fair comparative.
We effectively reported here 7.6%, or largely from an absolute point of view, actually the same as last year, but given that top line has grown, margin has come down. Looking at sort of the costs related to new units that are early on. The pre-opening costs where we're building hospitals and things like that, and add back in the profit contribution that are coming from businesses that we have acquired since last time around, that brings us back to 9.4%. You see effectively 20 basis points dilution from the prior year quarter, again, which I definitely argue is a good performance in this division, considering the environment and the fact that we still have a significant element of price compensation to come.
Shifting to Diagnostic Services, just short of EUR 143 million euro revenue. Again, here then a much more pronounced negative growth of 13.9% with COVID dropping out. Looking in the same way as on the underlying business, organic growth ex COVID and Ukraine grew 9%, which is not bad, and of this price represented 2.6%. So you can see both obviously a pronounced lower organic growth in this division ex COVID and Ukraine than in Healthcare Services, and price representing significantly less.
The point that we make in the report that Germany, which is largely then a public reimbursement market where we do not control pricing, that is a significant element in terms of price growth currently representing a much lower figure in Diagnostic Services than for Healthcare Services. You see the dropout of COVID basically EUR 25 million lower than the prior year, just short of EUR 14 million. One should also say, but the very vast majority of the volume we have in COVID-related revenue now would be related to Germany. Acquired revenue here was some EUR 4.2 million, so you see considerably less than in Healthcare Services.
Likewise here on the pie charts at the bottom, I think, you know, the point had been made already in the prior division and group on Germany. You see the reduction in Ukraine, and most other markets being flat to slightly negative. Again, that would be a consequence of the COVID unwinding across the board, in all of these markets then. Turning to Diagnostic Services margins, quite heavily impacted, obviously. EBITDA margin of 15.99%, down 6 percentage points, as opposed to just a 1 percentage point in Healthcare Services. Obviously a much more pronounced margin contraction here. I will take you through the same step chart as we did in Healthcare Services, so you get some visibility in terms of what's going on within that reduction.
The same thing is then flowing through, straight through the, you know, reduced profit measures, throughout the P&L. We continue to grow our BDP network, so 24 new BDPs opened in the quarter. We also completed an acquisition of a small genetics laboratory in Greece, and that one should really understand as a continuation of our genetic strategy, having bought the NIPD business out of Cyprus, and building our genetics competence out of Munich in Southern Germany. This is largely, call it a, you know, a distribution hub into the Greek market in this really interesting and attractive, you know, genetics market. Also to be noticed here is that we have signed an agreement to exit the Belarusian market.
That is still subject to regulatory approval and final closing, which we expect to take place during the final quarter of the year. That is obviously a reflection on the situation with the war and the difficulties or increasing difficulties, I would say, to operate in that country and with increasing sanctions, et cetera. Over to Joe.
Give you some comments on the financial overview.
Thank you, Fredrik. If we start off in terms of just having a quick glance at our interest costs, our lease liabilities have expanded and therefore the interest allocated in terms of those lease liabilities has increased as well. That's up around about 60%, about EUR 2.2 million on prior year quarter. That's obviously a result of our expansion of our facilities footprint, as Fredrik mentioned earlier on, which has been very strong, and is driving our revenue growth and will be driving our revenue growth for a few years to come. Our other interest then in terms of our real sort of interest bearing debt, if you like, that's up around 52%. That's around about EUR 1 million increase.
That's up on an increase in our gross debt, issued around about 125%, compared back to Q3 2021. The implied interest rate is up slightly on the leases, and our implied interest cost is down in terms of our gross debt, around about implied interest of about 2.4%. We issued EUR 277 million of debt back at the end of 2021. We've now deployed or in the process of deploying it for that capital, and investing that. If you look in terms of that EUR 488 million, we've now got about EUR 235 million of that which is fixed interest rate.
We fixed more about another EUR 100 million of normal interest exposure. We fixed that in the quarter. We have around about EUR 220 million euros of debt, which is floating rate. We have quite a decent balance there in terms of our mix. We have around about the balance there, which is non-interest bearing, even though it is discounted, so it has got an interest cost. It contractually there's no interest in there. If you look then in terms of our net debt, the next box down, we're starting off with EUR 488.5 million gross debt. That comes down to about EUR 406 million net of the cash balances we have.
Our last twelve months reported adjusted EBITDA in relation to that is a ratio of 2.3. We're moving up then from, as you can see, from last year at the year-end, we were at 0.6. We're doing exactly what we intended to do and what we signaled to do, and what we raised the debt levels for, was to invest in the inorganic and the organic capital investment that we've been rolling out. In the process of doing that, and that is dragging on the P&L account, as Fredrik mentioned, but it's exactly what we expected to do, and that's gonna be driving the revenue levels and driving our profit levels for the next several years.
Remember, this is healthcare infrastructure, so it's recurring cash flows and recurring profit levels for decades to come. Our cash flow has been very good. We came in at EUR 54 and a half million after working capital changes. Relatively benign working capital for the quarter. It sort of normally is in the third quarter a relatively benign level. Our effective tax rate, we've pushed that up slightly at the expected full-year rate to around about 30%. Slightly higher than where we were last year at 27%.
That's a reflection also of that expansion level where within the entities we're expanding, we're not necessarily recognizing the deferred tax element on losses that those expansions and startup phases incur. I expect the tax rate to come down in the future. I don't think that's gonna be a permanent feature of our that sort of level. If you look then in terms of the right-of-use lease liabilities, as I mentioned, that's expanded. We're from EUR 346 million at the end of the year, up to around EUR 413 million now. That's an increase of some 19%.
That follows then also in terms of the, well, Fredrik has mentioned the service square meters, the service capacity we have, the facilities which has expanded strongly. We have then an FX component in that, which then also comes through in terms of the P&L account, where we have some of our leases in foreign currencies in some of the countries we operate in. Primarily in Poland, where we have euro-based lease contracts. If we look then at consolidated equity, we had at the beginning of the year just over EUR 517 million. That's down to EUR 473 million, so around about a EUR 44 million drop. Obviously, we've got our profits for the period.
We've got the translation adjustments for our foreign subsidiaries in our other comprehensive income. That's mainly Poland, where we've got the swing, which is the largest in there. As Poland is our largest asset base of our investments, then obviously that is having an impact. We have then also changed some of the ownerships in some of the subsidiaries in terms of minorities. We have also liquidity obligations for where we have partners who have put options to us for their shareholding. Those are recognized as a liability, and that also is reflected in our equity base. Our capital investment has been very strong.
We've deployed a lot of capital, as Fredrik was mentioning. Over the quarter and over the year to date, around EUR 100 million of our organic capital spend, and 77% of that being growth. Very strong facilities growth throughout the whole business. If I look at that 100 million of organic capital spend, around EUR 77 million of that is growth. We've got about EUR 23 million, which is a maintenance CapEx, in line with sort of where we've been before in prior years. We've expanded on that growth CapEx.
That is investments in facilities which are there are gonna grow now provide our extremely strong top line revenue growth, and as they mature, they're gonna start to produce the sort of returns that normalize for the rest of the business. Within that EUR 77 million, we've got EUR 15.5 million which we've invested in hospitals in India. Our expansion of our footprint in India is extremely you know is really strong. We've got now something like about 4,160 operating beds, and that's as at yesterday. 21 hospitals in India with one open since the quarter end, a new one in Hyderabad.
We continue that pace of expansion. We have one hospital which was open earlier at the beginning of the year. We closed that, and we're repurposing that to be a dedicated cancer hospital. Comprehensive, complete cancer care, everything that you're gonna get in cancer with the most modern equipment. That's gonna be a leading facility in the city where it is in India. We've got another one in Maharashtra, in Pune, which will be opening before the end of the year. We've got a strong pipeline to continue that expansion of our hospital deployment in India. We are in the process of becoming a significant player in the inpatient care market in India.
India is a fantastic market to be a growth hospital provider in. We've got EUR 16 million, which we've invested year-to-date. It's pretty much all of the investment for our hospital in Bucharest, which will open probably beginning of the Q2 in next year. This will be the best private facility hospital in Bucharest. It will be the most modern. It's a really well-designed facility. It's a good size. It's got fantastic facilities, fully equipped, and in a great location in the city as well in terms of catching the market. We've got about EUR 7.4 million euros for the in that EUR 77 million, which has gone into greenfield facilities in our dental business in Poland.
That's on top of the inorganic expansion that we've been doing in Poland. If you look at that, we've invested EUR 172 million cash flow in terms of cash flow out, in terms of our inorganic expansion deployment. That translates into about EUR 223 million of enterprise value of the businesses, the full enterprise value of the businesses in terms of what we've bought. About EUR 30 million of that has come in the quarter. A good mix of businesses. We've got labs and specialist areas of associated with the laboratory business in four different countries.
We've got, as I mentioned earlier on, a large expansion in terms of further investment into our hospital bases. We've got a new hospital in Romania as well within that mix in terms of the inorganic. A range of other healthcare facilities. Really fantastically well balanced in terms of positions, in terms of our future growth. This is what we said we were gonna do. We went out, and we've got the balance sheet for this. We went out and raised the debt. The debt is long term, so we've got a 5.1-year average maturity in terms of our debt profile, external debt profile.
We've got no issues in terms of 2023 in terms of any refinancing that we need to worry about. We can pretty much sit out this current sort of market volatility. We're not exposed to that. We're not worried about that. We've matched our funding profile to the investment profile in terms of the expansion of our facilities. Really well positioned, I think, in terms of being able to deliver next year and the year afterwards and the year after that in terms of our growth plans. Coming on in terms of looking at those financial targets, obviously, with the disappearance of COVID-19 and also then the additional headwinds of Ukraine, we've done fantastically well in terms of our growth.
We've delivered 2.9% organic growth in the quarter despite the indexation in Poland not coming through yet. We see that coming through in Q4 now. The nine months, 3.6%. A really great progress in terms of addressing those headwinds and still delivering growth. If we look at the margins, obviously we are under pressure in terms of with that level and that pace of expansion as you well expect. But I think also that's a really good number in terms of with those headwinds. Above our targets still for the nine months.
As Fredrik iterated earlier on, we expect to be within those targets for the full year numbers. We obviously now have done what we said we were gonna do in terms of using that capital capacity on the balance sheet, raising the debt and deploying that debt. Our indebtedness levels have moved up as we were seeking to do in terms of that expansion process. We move up now to 2.3 times in terms of where we are on our indebtedness levels, on the metrics. We have, remember, our level there of 3.5. We still have headroom, but obviously that headroom now gets a little bit smaller.
You can probably expect that we will slow down the pace of rollout of our capital expansion in 2023. But we still have a very strong pipeline still to deliver.
All right. Thank you, Joe. I think with that, we hand over to any questions that you may want to ask us.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. For the webcast, please use the Q&A box available on the webcast link. We will now take the first question. One moment, please. It comes from the line of Mattias Vadsten from SEB. Please go ahead.
Yes. Hi. I have a few. I mean, nice to see the underlying progress in healthcare services, really. Can you help us a little bit on the diagnostic side? I mean, still underlying growth, but with ex Ukraine and COVID coming up a mere 4% versus an average sort of 9% in the last six, seven years. What's driving the slowdown? Is it mostly market dynamics, or is it anything that Medicover can improve? Looking at the sales trajectory, it looks like advanced tests maybe are doing somewhat better. Just a few sentences here would be helpful.
Well, I think Mattias that you, I think we had actually a similar question in the second quarter. I think we were saying then that, you know, there is, I think you have an element of COVID dropping out, but not necessarily yet filling that back with, you know, with regular test activity. You know, you also had quite a bit of COVID backlog, you know, the last time around. I think there is a relative to historic, I think you see a slight weakness. I think that's a market feature. That's not a Medicover feature. We expect that to normalize. That's one element of it.
Secondly, I made the point in my commentary here in terms of ability to increase price where you know the impact of Germany, when you model that, given the size of Germany division, that will be quite significant. I think we will be pushing significantly more price growth in our private paid diagnostics markets in 2023 on the back of the much higher inflation in 2022 than what we expected, perhaps when the year started. I think those are the two you know main drivers behind, if you wish, a lower organic growth rate in diagnostics than what we report in healthcare services.
Perfect. And then my second one, I mean, you have had sort of if we look at the substantial increase in organic CapEx, you went through that, you know, not only in absolute, but also percent of revenue, I think from 4.5-5 to around 6.5-7% of revenues. I think you said, maybe if I misunderstood, but you should expect this to fall a little bit in 2023. Should we then expect it to come down more towards historical normal levels? Or how should we view that pace going forward?
Yeah. I mean, we've Mattias, you know, it's an aggressive expansion. We raised that money, particularly at the end of last year. We had the balance sheet capacity for that because we had the opportunities in terms of that deployment. Obviously, the market's been a little bit more uncertain. Also, I think it's a little bit difficult for the markets to really appreciate really the scale of what we're doing. I think it's quite a reasonable thing for us to pull back a little bit on that. Let what we've already invested mature, and people can see that actually, you know, wow, these guys can actually do this.
Come back. I don't think that the opportunity for us in terms of is gonna go away. I think there's gonna be a sort of general pull back in terms of expansion of all business areas, I think, in the macro-economic outlook. I don't think any of the opportunities are gonna go away for us. The fact that we pull back a little bit and reduce the levels isn't necessarily a bad thing for us in terms of our balance sheet and the P&L development. Yeah, I think you can go back. If you look back a year ago, you can look back to those sort of levels.
You see there in terms of the mix, in terms of the split between maintenance. We've got about EUR 23 million in terms of maintenance CapEx, which is sort of in line with where we've been in terms of, you know, our sort of historical sort of run rates. It's been on the growth side. Maintenance, we will sort of carry on at sort of similar levels, but it will be the growth side that will pull back a little bit in terms of the amount of CapEx we're spending in organic capital spending. On the inorganic, we will probably be slowing down a little bit in terms of the pace. We've been very aggressive also in terms of that over this last twelve months.
I think on both of those, we'll pull back a little bit and slow down the pace.
That's a perfect favor. Then price adjustment, if you could just expand on the indexation increase in October for the integrated healthcare model. To that, on the fee-for-service part, which is the most flexible for you, how much, you know, have you done here on price increases, and how much is left? Just to understand approximately how far you've come. Now, of course, when you've also had some further inflation in Q3 that we need to think of, but would you largely sort of in the private side of things be compensated sort of March, April next year, or how do you view that?
Well, that's a long, you know, a slightly longer answer, Mattias. Just for, you know, reminding everyone the context here and I know you know that, but I still sort of give you an extended answer in terms of you know, the integrated model or you know, the funded insured model. We indexed in February, we indexed in October. Obviously, both of those are government statistics. The February one, the CPI regular, and the October one is the healthcare industry specific CPI. And obviously in the prior 12 months is what is taken into account. The February 2022 one was then largely the situation in 2021, which was vastly different from a you know, sort of running inflation point of view.
The October 2021 is largely the 2022. You know, the proportional impact in October will be several times higher than what the February 2021 was. Now, remember though that as we show, you know, it is only a proportion of Healthcare Services revenue that is in that model. We said in the report here that out of the underlying organic business as usual growth rates of, I believe, was it 25.8% in Healthcare Services? We said that 7.7% of that was price for the third quarter. You know, that is gonna tick up significantly on the back of the October indexation.
On the rest of the revenue, you know, which is private, the various different fee-for-service businesses have increased prices in a similar fashion, although the point I made last time around, that is a little bit different depending on the geography and the competitive positioning. You know, it's significantly double-digit type of price increases. Finally, in healthcare services, you have, as you know, about 10-odd% public money. A vast majority of that would be in Poland, and there was a quite significant public rate increase coming through in the early part of the third quarter, which was very positive to see. That sort of gives you, I think, a flavor of the summary of the healthcare services perspective.
That's very good. The last one for me is a little bit on the business case here in dental in Germany. I mean, what are the attractiveness and synergies that you see in short? You know, when do you expect margins, where do you expect margins to arrive at the mature state versus sort of the rest of your business? Will it be accretive or how should we view that?
Well, I think, you know, I think the attractiveness to us of the German market. Likewise, if you wish, the synergy aspect is to look at what has driven, what is driving our success and progress in Poland. I think it is largely an ability to improve gradually, well, fill up the dental chairs obviously, but then gradually improve the mix of business we sell, i.e. the sort of the overall value of the services, dental services people buy from us. That's really, I would say, sort of a consumer marketing related element and in terms of how, you know, the consumer is changing, if you wish, dental consumption over time.
We believe, you know, we can do a similar thing in Germany over time on the back of the strategy we have successfully deployed in Poland. Given the size and the spending power, obviously, of the German market, if that is true, we believe that will be very good. You know, there's no reason why the margins in our German business over time, clearly not short term, but over time would be significantly different from the Polish margin. Again, I said it before, let you know, when you're in Western Poland, you know, take a city of Poznań, you know, it's gonna take you a couple of hours to drive from Poznań to Berlin. You know, it's very close proximity.
Yeah, we think that can have a lot of good prospects for us.
Good. Thank you.
Thank you. We will now take the next question. It comes from the line of Kristofer Liljeberg from Carnegie. Please go ahead. Your line is open.
Thank you. Three questions. First on PPE depreciation, which of course going up here with investments you're doing.
Would it be possible to indicate what that level will be in the fourth quarter and whether we should expect it to continue up the quarters after that? On this topic, when it comes to price increases, would it be possible for you to give some sort of indication what we could expect maybe for the group or for at least for Healthcare Services in fourth quarter and 2023, and if you compare that with what you have in the third quarter. My final question, when it comes to accelerated investments you're doing this year, do you see any risk there doing this considering a weakening economy? Also, how long do you think it will take before the investments you have done this year to not being dilutive to margins any longer?
Thank you.
Kristofer, I think you need to repeat the first one because we actually didn't hear the first part of your first question.
The first question was just, PPE depreciation. The level here going forward, will it increase further in the fourth quarter? If we take that fourth quarter level, how much additional should we expect it to go up in the coming quarters after that? Thanks.
I think if I get it right, Kristofer, on that first question, that was about depreciation, yes?
Correct.
Yeah. You know, this is a factor of IFRS 16. Because the depreciation, you've got two depreciations in your depreciation line now. You've got real assets.
Sorry. Yeah, I'm not interested in the lease one. The PPE one.
Yeah. Our deployment of our fixed assets. Our asset base has gone up as we've expanded. We're depreciating that asset base as we go up. If you look at the number in terms of for Q3, you know, that's gonna be a good guide for you for Q4, plus a little bit more as we deploy a little bit more capital and some of the Construction in Progress turns gets capitalized, and it's started to be depreciated. I think this gives you a guide in terms of that, the rate in terms of the way we're deploying capital. You know, we have the balance sheet for that.
This is what we've said we were gonna do, and this is what effectively we're doing. The most fantastic thing is that we've got the ability to deploy this capital in terms of deploy that, and get it working in different markets. In Poland, in Romania, in India. The pace of our development in India is very strong, and that's because we've got a fantastic operational team being able to deploy that capital and also because the economy is supporting it. The economy is quite different from the economy in Europe. Here, we're very much in the sort of back foot in terms of looking at recession, worried about energy or the other issues. That's not the situation in India. They're coming out of the COVID situation, and they've got fantastic growth.
They've got a really strong development of their middle class. The pace and the rate of development is enormous. The demand for healthcare is also there as well with employer-provided insurance coverage in terms of out-of-pocket coverage as well, and also the increase in terms of state and national government coverage for healthcare needs. You were asking about on that third question, and that follows into that in terms of the economy. You know, how long is it gonna take us from these being diluted to being supportive of the margin? Well, you know, we're starting up quite big facilities.
If I look back, Kristofer, to the beginning of the big COVID peak in 2021 in India. We opened up our largest facility in March 2021 in a city called Vizag. It's about a 600-bed hospital. It's a really big facility, really a great building. We used that primarily for COVID business back in Q2 2021. It only really started in terms of really being an operating hospital in the sort of like, you know, the sense that we mean in Q3 2021.
That now is operating around about 60% capacity utilization. It's got a good mix of its customers, and it's approaching the yield that we would expect in terms of a leased building contract hospital in India. It gets up towards the sort of 15% EBITDA IFRS 16 measure in terms of there. It's not quite at 15% yet, but it's getting up towards that level. That is effectively what that's in terms of really operating as a hospital, that's some five quarters. That's a good performance.
We're not getting to those sort of levels in 8-9 quarters, then we're sort of getting into the area where it's a bit of a drag, and we'd expect it to be better performing in India. If we look at the new hospital, which we're gonna open up next year in Bucharest, that we would expect to be able to get up to a level where it's non-dilutive, probably about eight, again, 8-10 quarters, something like that. That area of performance we'd be really happy with. It can take longer, it can be quicker, but that's the sort of level in terms of these larger, discrete, hospital investments that we're doing.
In terms of the dental side, for instance, these are smaller facilities. Normally we will let—we set them up, and they've got capacities from anywhere between six and 12 dental chairs. We would normally start with half that capacity commissioned and then, depending on the size of the unit, half that capacity. We'd look to get that capacity up to the full utilization levels, again, about somewhere between two and three years into opening from when opening. At some places it's been spectacular, where we've got up to the full level within 12 months. Some places it takes that full three years in terms of getting that up to full capacity.
That sort of gives you an idea of the sort of drag in terms of the margins you've got in terms of the expansion. Price? Maybe I'll leave that with you, Fredrik.
Yeah, I mean, you know, your price question, Kristofer, in the middle, you know, I'm not gonna quote a specific number, but I'd say, you know, the impact that we still have to come in Healthcare Services is significantly more than what we've had so far. You know, we have more price compensation to come than what we have realized so far in terms of this year.
Okay. For diagnostic, we shouldn't expect much more than the current level?
No, you should expect a bit more, but significantly less than in Healthcare Services on the back of what I've tried to explain. We are bringing up price growth in DX private pay markets, so that will accelerate. Obviously, short-term, we are constrained by the size of Germany in that business, not to be forgotten.
Yeah.
Great.
In Germany, Kristofer, is still not really in our hands. It's a state level and a Bundes level decision in terms of the reimbursement programs. What maybe we will get is some of the sort of budgetary cap systems being eased a little bit in Germany instead of just a straight price increase. At some time or later, given the scale of inflation background, the prices have got to move up. It's just the timing of it is not really in our hands.
Just follow up there on your rather detailed answer when it comes to dilutive impact. I guess then we will continue to see a dilutive impact from the large investments you have done in the past one and a half years into 2023, but less so maybe than in 2022?
Yeah. You know, we've constantly been doing this, Kristofer, so we've constantly been deploying growth capital since, you know, from ever. But, because.
Yeah, I guess the difference now is that you have accelerated investments, and that's why it's seen more on the margin numbers.
Exactly. If you look at our growth, we've been growing, you know, organic growth has been extremely strong consistently as far back as you wanna go in terms of looking at our history of the business. That's what we do. We deploy capital. It's a fantastic return on investment, because those facilities fill up over time. Once you get past that critical facility level in terms of utilization levels, it generates cash forever. Those facilities are infrastructure. They are there for not just the next five years, it's there for decades and decades and decades. You know, it becomes institutionalized within the healthcare infrastructure for that country, for that city, for that area.
We're providing healthcare, you know, forever out of those facilities.
Thank you very much.
Thank you. We will now take the next question. It comes from the line of Grace Liu from Jefferies. Please go ahead. Your line is open.
Hi. Thank you for taking my question. Could I ask three questions, please? To start with one on healthcare. If you look at sort of underlying organic growth excluding COVID, you mentioned core growth was 26% in Q3, but that's actually declined from Q2, about 30%, despite the fact that price has increased 7.7%. Is it fair to sort of take that away as an implied volume decline, as you mentioned earlier, demand softening? If you can help that bridge, that would be helpful. I'll follow with the two other questions. Thanks.
That's largely India, Grace. If you remember, we talked about last quarter while we now say that third quarter COVID in Healthcare Services was largely India, but second quarter last year was even more COVID than India. That meant that basically everything was filled up with COVID. There really
But-
There really was no other business. When you then look at the organic, i.e., everything else, you had a massive growth in the prior quarter this year. Quarter two this year, in terms of underlying organic growth in Healthcare Services, was significantly pushed up by India having a lot of normal business this time around, yeah.
Just on growth.
If you think back, if you go back to last year, we had no sort of business as usual in the Indian hospitals because it was all COVID, because we had the Delta wave going through there.
No
The COVID's gone away in Q2, yeah? That's why organic looks bigger in Q2 at 30%.
Yeah.
In Q3, we already were going back to business as usual. We had sort of business as usual already back into the Indian hospital mix in Q3 2021. That's why it looks a little bit lower.
This is organic growth excluding COVID that you noted.
Yeah. You're right. What you're looking at is that there was no business as usual in 2021 in Q2, because we weren't taking anything except emergency admissions. We had whole hospitals dedicated.
Yes
Just to COVID. You take the COVID away, the comparative was empty in Q2. Whatever you do in Q2 2022, it's an increase. Yeah? That was a smaller impact in Q3 because we'd already started to go back to doing proper business, normal business in Q3 2021. The comparative looks higher.
Okay.
That's a large part of that impact. Whatever you look at it and strip out the price, you still got 18% organic growth. 18% organic growth in ex price in our Healthcare Services.
So-
You know,
Earlier when you mentioned about demand softening, what does that relate to?
Well, when we said demand softening and we're raising the flag and saying that I think it's a reasonable expectation in terms of 2023, that we will see some demand softening for the more expensive fee-for-service procedures. We haven't really seen that yet, so there's nothing of that in our numbers currently. But we would be surprised if that will not be forthcoming. I think it's a fair comment to make now in terms of looking into the next year.
You know, some of the procedures we do are elective, Grace. People have got to be able to afford that out of pocket. You know, if you think IVF treatment, for instance, people are normally paying for that. It's non-reimbursed. Most of our clients are paying for that out of pocket. I wouldn't be surprised if you see some softening on there. You know, if you're getting a complete new set of implants in your teeth, you know, it's quite important for people at a point in their lives. You know, maybe some people are not being able to afford that in their work situation. They may well delay that treatment or look for something cheaper, you know.
I wouldn't be surprised, or we wouldn't be surprised that we see some softening in terms of that elective part of the procedures. Obviously, non-elective stuff, things which are really critical, I don't think we're gonna see softening in that.
Great. Thank you. Another second question is on the exit rate, if you can sort of comment on either later in Q3 or early Q4, how has the both sort of growth and margin in both directionally versus Q3? Thank you.
Grace, with a bit of interference down the line, could you repeat that question, please?
Yes. In terms of exit rate for Q3 later in terms of late Q3 or early Q4, how has this changed both growth and margin directionally versus Q3?
Yeah. I think you're asking about what trend we're seeing going into Q4 on growth and margin, yeah?
Yes.
Well, you see in the report, Grace, that we reiterate the statement we did in the second quarter that we expect to come in. I think it's fair to say that we are likely to come in towards the lower end of the full year target, but I think it's considerably strong in the current environment to do that. If you work your math backwards, I think that will give you a good indication in terms of where the fourth quarter will come out. I think that's the direction, and you can work that out yourself. We have strong top-line growth. That's not gonna change. If anything, you know, we bring that with us into the fourth quarter.
We have talked extensively on this call about, you know, the growth that's gonna come up next year through the investments we made. That's gonna carry on. I don't expect any change from that, Grace.
Great. Thank you. Going back to earlier question on this margin versus growth, sort of thinking about it on the high level, I mean, margin continued to sort of come under pressure, you know, 3Q lowest year-to-date. I appreciate that you're accelerating your growth expansion here, and that will flow through in terms of growth over time. The concerns are really around sort of near-time challenges. You mentioned earlier potential pullback. I guess my question is, how much pullback level are we talking here? Then how should we think about the margin evolution near-time?
I don't think you should look at that as a pullback. I think what we've done is we've accelerated this year. We've accelerated because we've got the opportunity and we've got the ability to deploy that capital. We raised that capital specifically at the end of last year with this deployment plan and the projects in view. We've done that now. Given that we've increased our debt leverage levels, given that we've got a lot more uncertainty, we're gonna be a bit more cautious in terms of utilization of the rest of the firepower we have. I think that's more in terms of reflection of the economic sort of outlook and situation and the pace that we've done.
I think what you're gonna see, Grace, is that we go back to a more sort of like normalized level in terms of the pace of deployment of new capital. In terms of margin versus growth, I think we've done fantastically well. We haven't broken out, for instance, in terms of the margins there. The full basis of that sort of like evolution, which I think we discussed with Kristofer earlier on in terms of the deployment and new facilities and filling those up. We haven't done that because we sort of like used that within the margin that we've. It's sort of been in the earlier margins there.
That has had an impact in terms of these reported numbers in terms of particularly out of India with the pace that we've developed there. You've definitely seen some drag in that respect. We never sort of really worry too much about it because we've done so much of this over the past. We've got a very good profile in terms of making sure of knowing how that's gonna develop. We're sort of quite comfortable in respect to that, but that obviously does impact our reported numbers now, because of the pace of what we're doing.
We're extremely confident that that is gonna come back and be contributing in the next coming quarters, so the 2023 and into 2024.
Understood. Thank you.
Thank you. There are no further questions on the phone at this time. Please continue.
All right.
I think we have a few questions online.
Okay.
Perhaps some of them we have.
Yeah.
Answered already, but I'll read them. Can you please elaborate on the divergence in lab capacity, +9% year-on-year to one out of eight labs, and growth in test volumes of around 4% year-on-year, Q4 nine-month, excluding COVID and Ukraine. Is the slower test than capacity growth solely due to lower volumes in the eight labs in Ukraine and/or other factors at play?
If you look at our growth level in terms of the ex-COVID, ex-Ukraine, obviously, it's not related to Ukraine, and it's not related to COVID. What we've seen in terms of you look at this quarter year-on-year versus the prior quarter year-on-year is you still had COVID impacts back in Q3 2021. I think we had a little bit of a backlog in terms of medical demand. We saw that also in terms of the utilization in Poland on the employer paid business as well.
We've seen a lower level of utilization within our employer paid business, and maybe some of that is that there was more of a backlog last year. There could be some of that, but we see that coming through in terms of the testing profile as well. We had in Germany, I think in Q3, a little bit of an unusual vacation period as well. I think that's the factor also of no COVID restrictions as well on people's vacation timings and where they were going and what they were doing were different out of Germany. We saw some impact in terms of demand levels in Q3, which we may allocate that to. It's unscientific.
It's a little bit difficult to be precise. It doesn't take very much in terms of, you know, those volume changes to impact the margin as well.
Thank you. How do you see your ability to stay in the strong cash conversion, 104% in the coming quarters?
You know, our cash conversion has always been around about the sort of 100% level, so a little bit up, a little bit lower. That's just a normal factor in terms of what we do in terms of our business and the profile of our customers. Most of them are paying as they go. Our cash conversion is what you'd expect to see in terms of our operating cash flows.
How should we read your comment that your strong competitive positioning in Poland will support the recent dentistry acquisitions in Germany?
I think that's, you know, the sort of comment I did before on a question on the call here where we believe a lot of the progress we are doing in Poland. We will be able from a sort of marketing and positioning perspective to bring with us in terms of supporting the two acquisitions. There may be some cost synergies over time. Time will tell. My comment was much more related to in terms of how we drive you know revenue and service mix over time.
When and to what extent can we expect an adjustment of the public lab reimbursement in Germany to compensate for the inflation pressures?
Yeah, not only us, I think a lot of other people in the German market would like to know that as well. I don't think there's any real ability to predict where the timing will be. You know, there will have to be some price change at some point in time because the levels of inflation are substantial cumulatively. Even though we've got high inflation levels now, we've had no price increases for as long as we've been in the market. At some point in time, there will have to be some sort of price indexation. The healthcare system is relatively well-funded on a European sort of level or comparative basis in Germany.
The money is there. I think the lab industry as a whole has demonstrated its key importance, and a large part of the success with Germany dealing with the COVID situation. I think that recognition will be there as well. When it will happen, we just can't really predict. At some level, whether it's through some of these sort of like budgetary systems of controlling expenditure or whether it's through actual price changes, there need to be some movement.
Thank you very much.
All right. I think, conscious of time. Thank you all for listening. Thank you for all your good questions, and look forward to talking to you, next quarter round. Thank you very much.
That does conclude our conference for today. Thank you for participating.