Earnings Call: Q2 2019

Jul 26, 2019

And I would now like to hand the meeting over to your host, Frederic Lagmar. Please go ahead, sir. All right. Good morning, and welcome, everyone, and welcome to our second quarter twenty nineteen results. So you all have the presentation in front of you. So we are very happy and very proud of our second quarter results. Medicover has always been a growth company, and I think you see that growth is even accelerating. So we reached revenue of at just short of $2.00 €3,000,000 for the quarter, which is a strong 26% up versus prior year of which north of 14% is organic growth. So indeed, I think that is strong, however, way you want to look at it. The acquisitions, which as you recall, was a good part of the reason why we did the IPO two years ago to be able to step up that agenda, contributes almost half of our revenue growth. So that's a strong sign. The fee for service segment, which is particularly important to us. And again, as we have said many times, it's particularly within the fee for service segment that we have acquisition opportunities. And you can see that now with the fee for service segment for the group being up a strong 31% versus prior year and is now representing just over half of overall group revenue, particularly in Healthcare Services where we have been very active as well on the M and A front. You see fee for service as a share of divisional revenue raising to or rising to 40% versus 35% last year round and growing 51% year on year, some of that being organic growth and complemented by an active M and A agenda. On the Diagnostic Services side, where you know that fee for service has always been a larger proportion and we grew up to 66% versus 65% last year round and again growing 20%, which is also strong on the diagnostic services side. Certainly not of any lesser importance, but the core business in Healthcare Services are funded employer paid model remains very stable and keeps growing well as you will see a bit further on in the presentation. Important as well, the NeoMedics acquisition, which is the largest acquisition we have done now since we became again a public company is consolidated from May. Then the second very important message and good news is that margins keep expanding. Not only do we very robustly grow our top line, we are also able to grow our margins, not just in absolute terms, but also percentage wise. So that's important that you can see. So EBITDA grew just short of 29% to $27,300,000 30 basis points expansion. However, we have also expensed unusually high M and A costs related to the Neomedic closing. So if one adjusts for that looking at the underlying business, we're more than 100 basis points up on the EBITA level, which is significant. That's what we should do. But again, that's a reflection of the increased volumes and improving efficiency we can see throughout the business. Looking at the adjusted EBITDA growing 100 basis points up to 14.5% or 35% growth, so significant. The EBITDA that we introduced together with the new IFRS 16 regulations, which you recall is more akin to the historic EBITDA, which is more or less the proxy for underlying cash flow generation grew some 33% up to $17,500,000 That was a 40 basis point expansion. And if one would look at the adjusted EBITDA L, that would be up 110 basis points. So more or less all in the same direction around that 100 basis point growth, which all confirms in the same direction. We have the public financial profitability target of organic adjusted EBITDA growth of 18% to 20% and we significantly beat that this quarter with 26.8%. So that's strong and good news. Finally, on the profit side, you recall that in the other income category last year round, we significant such income relating to the revaluations of on our options in the MaxCure Indian hospital business that we don't have this year round. So net profit is down a little bit due to that. However, if we exclude the other income category and looking on the underlying business, the net profit growth is a significant 91% up. So I think that's a confirmation of indeed that the business is generating a stronger profit flow through the increased volume both in existing facilities as well as the efficiency in how we operate our businesses. Then if we go in specifically to the two divisions, so I start with Healthcare Services, where revenue was up a very strong 34%, so just short of 109,000,000 of which organic growth was 17%, indeed a strong figure. And here fee for service grew a strong 51% to reach as I mentioned just 40% of divisional revenue. And this was the ongoing organic growth in our existing businesses as well as the various acquisitions that we have done over the past couple of years. Strong EBITDA growth, up 43% to reach €15,300,000 a 90 basis point margin expansion. And you see organic EBITDA growth was just short of 19% of that. And if we look on the alternative performance measures EBITDA that increased 58%, so very significant growth or even 150 basis points margin expansion. And this, you then should interpret as a reflection of you recall that this profit measure looks at actually bringing back all our lease costs. And then of course, the fact that this is expanding much more than the regular beta is then a reflection of that we are operating our facility usage more efficiently, I. E. We're pushing much more volume through the existing facilities that we have across the network. Then on the funded business, our employee paid business, so members grew a member base grew by 13.5% to just short of 1,300,000. And that confirms the position, the outlook that we've had for a number of years. The employer markets remains very tight both in Poland and Romania. We have made the point in several of these calls that at some point the economies will start to soften. And particularly in Poland, the issues around availability of labor where the economy is firing on all cylinders. And at some stage, it will start to soften a little bit, although it is not for the second next quarter. But into 2020 at some stage, we expect a little bit softening in the growth of the economy in Poland. And of course, the results in this segment, the results in Healthcare Services really driven by this ongoing strong underlying member growth and then the increased fee for service activity, which is really across the board. It's if you look at our certainly at our admissions into our hospitals, it's the fee for service activity in our clinics and it's the fee for service activity in our dental network that we're busy developing or expanding. So it really is across the board. And the demand remains very strong both in Poland and Romania for private paid healthcare. If we then switch over to our Diagnostic Services side, again, the private pay business continued to see strong growth here. Overall revenue grew by 18% to just short of €98,000,000 of which organic growth was 11.6%. And here, fee for service represents two third of divisional revenue and was up a strong 20%, so as previously mentioned. So EBITDA grew well at 23.6%, an 80 basis point margin expansion here as well to 17.7%, reflecting good and strong underlying development. And the alternative performance measure here grew 50 basis points to 12.8%, so same dynamic as on the healthcare services side. So 8% growth in the number of lab tests, where most of the growth is coming out from the private pay markets and the growth is weighted towards the advanced test category that as you recall is a very significant part of our strategy and we see that playing out very well across all our main geographies. Important for those of you that were with us twelve months ago in this earning call, that's when we started to talk about softness in the German lab business on the back of a second quarter twenty eighteen reform And second half of last year, we were quite significantly impacted by that. And we have talked about normalization over the first quarter and we can report even more so here in the second quarter where we are more or less it's not 100%, but more or less back to the position we were before we were started to be impacted by that reform. So that's significant and good news for us. Overall, we added a total of 24 new blood drawing points during the quarter across the network, so a total of six fourteen Bdps by end of the quarter. Then if we turn to India and MaxCure, MaxCure is still an associate company as you know, so it's not consolidated in our numbers. MaxCure operates 11 hospitals in three states Telangana, Nirapadesh and Maharashtra in India. They reached revenue for the second quarter of sixteen point four million euros and their local currency growth was 15%. We expect to be consolidating MaxCure into the Medicover Group during the 2019. Our current ownership amounts to 46.7%. Joe will comment on that later. We have slightly increased the ownership during the quarter. Two new cancer centers are under development and they will be open towards the end of this year or early next year. And we also are underway rebranding all of MaxCure's hospitals into Medicover. And you see there on the right hand side of the slide some beautiful images of recently rebranded facilities. So you now if you happen to tour around India, you will see some nice Medicover hospital facilities in a few states. So with that, I hand over to Joe to talk a little bit about the financial overview. Thank you, Frederic. So just having a quick look through the key financial data slide, just to pick up a couple of things there. So we use this measure, alternative performance measure EBITDA equivalent to the pre IFRS 16 EBITDA. We still get a little bit of front loading effect from the lease accounting through that, but it's a number which is reconcilable back to the reported figures. So you can keep track on it. So this is pretty good. We came in 19,600,000.0 so that's a very strong growth there, 42% increase on the same figure in Q2 last year. And for the first half, 38,600,000.0, so that's up 34%. So very strong momentum in terms of the key performance metrics for us, 9.7% margin for this quarter, so up about 110 points and 9.6 for the first half, so up about 70 basis points. We've also included here on this table a new figure for you as some analysts have been asking for adjusted EBITDA. So we include that in there as well. That is $13,700,000 for the quarter, so up from 59%. And if we look for the first six months, that is $26,700,000 up some 43%. So again, a very strong performance there. And even if I look back on an LTM basis, that's good. That's up 26% on an LCM basis. So you can see there we've actually got an acceleration of the performance of that number. So just flipping over in terms of the financial, few points we'd like to make. Yes, can't reiterate really enough that this is very strong growth. We're very happy with this. And on top of that, we keep the margin expansion as well. So definitely growing in the right area and firing away the investments that we've been doing now over the last few periods are starting to come through. We continue to invest. So we're continuing our capital program. So we invested some short of EUR 25,000,000 for the first six months in capital investment, just short of 60% of that being in growth CapEx areas and just over 40% being in maintenance areas to maintain the existing business. Premises, we're increasing dental inpatient facilities, BDPs. We're doing some expansion of the hospital, hospital assets that we have in terms of the physical capacity. So, we can continue to build and that will then be strong and supportive for us for our future growth. Pricing, we've always been disciplined in terms of our pricing in the core employee benefit market with the high levels of growth that we have and dealing with that and making sure that we can maintain our service levels with our customers. We continue to have a strong pricing discipline, which is supportive of margins. NeoMedics, closed this now and consolidated from May. We paid EUR 69,000,000 for that, including the debt that we assumed. And we've expensed both in this year and in last year, we expensed some €1,700,000 associated with that in terms of some M and A costs put through the P and L account. So very happy with that. We recognized €5,200,000 of revenue in the quarter in respect to that for two months. So the other few things that we've done now after the quarter end, we acquired all of the shares of Okay System, the employee benefit health care in Poland, and we're underway expanding the gym network to support that business' growth. We acquired also then a dental practice in Poland and are continuing expansion both organic with greenfield sites and inorganic with acquiring good quality dental practices in Poland. The consideration for that is about €3,600,000 Just going over to the next slide. Just to remind you, these figures are restated for IFRS 16. We did a full restatement. So everything that we talked about here in terms of the comparatives has been restated. So no confusion and full transparency for you to be able to understand the figures. Frederic mentioned about the net profit, the net figure being impacted. So we had a relatively low figure in terms of the other income. We had quite a high in the prior periods with the revaluation under IFRS nine for our options in the MaxSCure business. We now have increased by 1.6% our investment into MaxSCure. So we took that up to 46.7%. So we bought some secondary shares under the arrangements that we have. So that's good for us and we'll continue probably to pick up some more shares now over the rest of the year and expectation probably in the fourth quarter that we would pass through the control barrier and we would then consolidate from then. Net interest $3,300,000 for the quarter, 1,800,000.0 of that is the IFRS 16 lease interest charge. So that's a little bit up increased on the higher debt levels that we have compared to last year. Net operating cash flow before working capital tax, this is good. So we're doing well there. And our tax rate, we're projecting 27%, not taking into account any of these fair value movements, which are non taxable by their nature. Equity has been developed quite well. So we're just short of EUR $330,000,000 on an IFRS basis for our equity. So that's the net profit falling through plus also we had a quite benign situation in terms of the foreign exchange translation rates for foreign subsidiaries. So that helped a little bit there as well. Net financial debt including lease liabilities, this has gone up. So we're at €332,000,000 at the end of the period. The increase on this is also the acquisitions where we have to recognize the IFRS 16 lease liabilities as well and plus also expansion of our own facilities as well. And if you look at the increase in lease liabilities, it's about half and half between acquisitions and between our own organic growth. Excluding lease liabilities, net financial debt that came to a 180 short of €186,000,000 And if we look at that in terms of the ratio to, EBITDAO, which is the correct figure to compare it to, then that came out to 2.8 times. So that's picked up there. It spikes a little now on the back of the acquisition that we've done with NeoMedic, which is a little bit more sizable. So I expect that to trend downwards as we recognize through the year the profits from that. And that spike goes away. And also as we grow profits through the year, all things being equal without any other acquisitions. If we look at the commercial paper program, which we launched at the June, so we put in place a SEC 2,000,000,000 program. We've got €89,000,000 funded under this. So this is quite cost effective for us. And we should see a reduction in our cost of funding over the next twelve months on the back of this and some other activities that we'll do in terms of our funding. This changes the profile in terms of the balance sheet with part of the debt being reclassified as short term. However, we have our revolving credit facility standing behind this program. So there is no risk in terms of funding. The funding risk stays exactly the same as we had before. So that's all managed. So just to recap in terms of our organic growth, we've been above our midterm targets now. So very happy with the development there. Good strong momentum in the business. And I think if you look at the run rates, can work it out yourself that we have very strong forward going growth in terms of our revenue line. In terms of profits, we're above the targets again. I think as we mentioned when we gave you updates last year with the reform processes in Germany that we expected over the medium term to pick up and come back to our targets. And we're certainly doing that now in terms of picking up and catching up on those targets as we said we were going to last year. Capital structure, you can see here now we're deploying debt in terms of acquisitions, which is what our objective was. So we're executing on that. That spikes a little bit now up to 2.8, but we expect that to come down, all the other things being equal, towards the end of the year. All right. Well, thank you, Joe. So that was a run through of our results for the second quarter, and we're happy to take any questions you may have on this. Thank you. Ladies and gentlemen, we will now begin the question and answer And we do have a question here from the line of Christopher Liebergh of Carnegie. Please go ahead. Yes. Hi. Thank you. Good morning. I have three or four questions. First, could I just ask you about the operating leverage differences between the two business areas? It seems much stronger in the Healthcare service relative to Diagnostics, but I thought it should have a higher fixed cost. So what's the reason for that? Is it just because of the much higher or much but the even better growth in Healthcare? Or are you doing some investments in Diagnostics? If you could maybe talk a little bit about that. No, I think, Christoph, how you should view that is that Germany, I mean, it really is on the Diagnostics side. Germany is a big piece of Diagnostics, as you know. And although I say it's we're basically back normalized for the corresponding period last year, if you recall, we said this really started to hit us from May. So the relative comparison last year for these six months, it's basically two out of six months. And for the quarter, it's two out of three that was impacted last year around. So on relative comparison basis, we actually still quite significant impact on Germany, although on a run rate basis going forward, we're more or less back. So I think that's given the size of Germany in the Diagnostic division, that's the largest explanation to that. Then the operational leverage in Healthcare Services is really because we have much more square meters there. So by filling all of those with more volumes, that point of view, you will see more leverage coming through. So those would be the two reasons for that. And for the Healthcare Service, how much more volumes could you fill with in the existing you know, I think it was facility. You know, you can't really give a good answer to that because, you know, it's no good use because it really depends on where the facility is. If you have an average utilization, it's not going to tell you very much because if you chock a block full in one city and empty in another one, the average just tells you nothing. So the I think the right answer to give you is that we keep expanding our facility network as we fill them. And we I'm sure we're going to continue to grow our facility base next year. But the fact that you see more operational leverage coming through is and particularly you see on the EBITDA L line in Healthcare Service, that's because facility in general are more full than they were a year ago or two years back. And and also for for the health care service, the the membership growth still very impressive, almost 14%, you know, somewhat slower than last year. Is that any first sign of of a cool down of the economy as you mentioned? Or is this just maybe normalization after exceptional strong growth? No, I would say it is not, Christophe, a first sign of slowdown. I think Joe had in his commentary price discipline. And if anything we have always been certain to maintain price discipline. And so we haven't seen any slowdown. I keep mentioning that the economy is firing away on all cylinders because I think probably us as most other people perhaps are somewhat surprised how long this economic expansion just keeps on going. And I've mentioned it because at some state it's going to start to weaken in Poland, although we have no signs of that happening yet. So the fact that it's slightly slower this it will vary from quarter to quarter depending on how much new contracts come in, etcetera. So there's nothing other than that this time around. Okay. Thanks. And then just two short ones. Could you comment on the profitability also in Max Cure? And then on M and A contribution, do you have a figure how much M and A in total we contribute in 2019 based on the acquisition done so far? That will be helpful. Thank you. You want take it, Joe? So just the two questions there. I'll take the MaxCure one. In terms of for MaxCure, they're expanding quite well. You see there in terms of the revenue growth. So have the new hospital which we opened in Maharashtra, and and and that's that's that's going well. That's still obviously not profitable. So, we're still still still in in it's been opened for just less than a year. So, normally, it would take two years to get to a level where you've got an okay level of profitability. So so that's still a drag in terms of the the overall numbers. And then we're also expanding with the, with two cancer centers as well. Overall, profitability has in terms of the net number, we're still in a position where we haven't really got anything to pick up in terms of the net line. We're bringing on debt to fund these acquisitions. And so on a net basis, we're still not producing anything. EBITDA, with those investments we're doing, that's a little bit softer, but we're quite happy with the development. We're quite happy with how that's going. We're still creating value and developing. But yes, I could fully understand, of course, margins are under pressure due to this expansion. But for modeling purposes, if you're now going to consolidate that from at some point in the fourth quarter, would be good to know what type of margin we should assume modeling this. Yeah. You need to be somewhere in in the double digits, but in the in the low end of the, the teen range. Yeah? Okay. Thanks. Thank you. And we also have a question from the line of Caroline Elvin of Danske Bank. Please go ahead. Hi. Good morning. I just have a short question on the financial expense. Is that the financial expenses were in Q2, is that a good proxy for the next coming quarters? Yes. I mean in terms of the lease side, yes, definitely. Well, I mean we'll continue to expand our facilities as we continue to invest. So that number will keep going up. But as a baseline then it's that's sort of the same number you're going see recurring. In terms of the cost of debt, our aim is to actually reduce that in terms of the cost of debt and not necessary as an absolute number. The commercial paper program we've put in place should help us in doing that. And we also expect to do some more actions over the rest of this year in terms of our debt structure to both increase maturity and reduce costs. Mr. Dragi yesterday decided to help us in that endeavor as well. Okay. Thank you. Thank you. And we do have a follow-up from Christopher Lejuez. Please go ahead. Yes. Just my last question about the M and A contribution, if you have that. We have quite a bit of disclosure in the back of the report there, Christophe, in terms of net acquisition and what that's contributed. So there's full IFRS disclosures in there. So I think there's quite a bit of information that will answer your questions in that. Okay. Thanks. There are currently no further questions. Please continue. Is there no further questions? All right. Good. So, thank you for listening in. Again, we're very happy with the second quarter and we look forward to talking to you again at the end of our third quarter. So you all very much. Bye. That concludes the presentation today. Thank you for participating. You may disconnect.