Earnings Call: Q1 2019

May 3, 2019

I must advise you that this conference is being recorded today, Friday, 05/03/2019. I would like to hand the conference over to your speaker today, Fredrik Rachma. Please go ahead. Hello. Good morning, everyone, and welcome to our first quarter report announcement 2019. We very soon celebrate our two year anniversary as a listed company on the stock exchange, and I think it's very, very pleasing to be able to start this year with such a strong result. Our top line revenue growth increased from already strong levels last year to 23%, and it's a long time ago since our company had a plus 20% revenue growth. I So think that's notable of which about two thirds being organic, so very significant top line growth. Over the eight quarters we now have been listed, we have grown 41% revenue and of which some 75% being organic growth. So indeed, I think the historic organic growth track record on which we listed the company has carried on an even increased. Run rate wise, you see first quarter EUR 200,000,000. So run rate wise, we're running at EUR 800,000,000, which is already now a 19% growth on full year 2018. And there's plenty more to come for the three quarters yet to go, so very positive start. EBITDA grew at 24% up to $27,500,000 and a 10 basis point expansion. We also introduced a new alternative performance measure, which is EBITDA, also EBITDA after lease costs. So really to try and reflect the historic measure that we used and that measure was up 28% to $18,500,000 also a margin expansion with some 30 basis points. Also the established financial profit target that we have, the organic adjusted EBITDA grew 18.7%, so that's just spot on in our 18% to 20% established target. We had very strong operating cash flow, up 76%. Joe will speak more about that in a second. Our Healthcare Services team and division had outstanding growth of 28% and some 18% organic growth. So again, I think a very strong reflection on the trading conditions both in our integrated employer paid business as well as the fee for service developments that we have underway. You recall, we had some headwinds last year in our Diagnostic Services business that started to come back in the fourth quarter. And we had really now in the first quarter of the year seen a very, very strong comeback there with 19% top line growth for the Diagnostic team, of which plus 70% being organic growth, so really, really good. The NeoMedic acquisition in Poland that we announced some time back has now received competition clearance, and we expect to close that during the month of May, so rather shortly. Also another very important strategic acquisition that we did that we just closed shortly after the New Year being the Klein Genetics Lab in Munich. We've had very good integration work and developments in that acquisition during the first quarter of the year. So overall, indeed very pleased with how this year has started. If we then look at a bit more detail on the Healthcare Services division, and as you recall, the first quarter is typically the quarter in this business or in this segment where we have the lowest margins because of the way that actually quite a lot of healthcare is being consumed in our funded business in this quarter. So mentioned very strong revenue growth to plus EUR 100,000,000. It's notable to see that this is the first quarter ever as well where both our segments have revenue of plus EUR 100,000,000. So organic growth 18% as already mentioned. It's notable to see here the second bullet and you recall that in this division, some 60% is our funded integrated model where the employers pay. And the other short of 40% is the different fee for service lines of business, for example, dental. And this quarter, the fee for service component contributed 55% of the absolute growth. So that's actually very significant, not because the prepaid funded business is not doing well, it's growing very nicely. But that's a good illustration that all of these different fee for service businesses that we are pushing, investing in is really starting to become noticeable in the total picture. One example that we speak about quite often is our dental business in Poland, and you see that grew a very strong 71% versus the last sorry, the first quarter last year, so indeed very significant. EBITDA was just north of €11,000,000 up 26%, a slight margin contraction versus last year of some 20 basis points. Now if you look at the alternative performance measure here, where we add back the lease costs, that is up some 38%, which you really should interpret in a way that we are running our business in a much more efficient way over the rather wide range of leased space that we operate. The member growth was some 14.5%, so indeed a strong member growth quarter as well to adjusted tad about 1,200,000 members. So a strong start for Healthcare Services. On the Diagnostic Services side, also a good top line growth 19%, of which organic being 13%. Significant growth on EBITDA, some 26% up with just short of 21% EBITDA margin. The alternative performance measure also strong growth, 27% up and 16.5% margin on that alternative measure, again, 100 basis point margin expansion on both of those measures. That's really driven by principally the resumed performance in our German lab trading business following the weakness in the second and third quarter last year on the back of the price reforms that you remember. We reported a good stabilization in the fourth quarter and the first quarter this year has really carried on that trend. We've also had good mix effects from the integration of the Klein Genetic Laboratory in terms of our German genetics business. We've also seen very, very good development of our German clinics project. You see we had some 16% revenue growth in the German market in our clinics business, which is very significant, not to be underestimated in the German market. And that really flow did flow through in very nice margin and profit pickup with some 60% growth in the EBITDA up to $2,400,000 or just short of 16% margin. And also on the alternative performance measure, we were above 10% margin and that result actually more than doubling versus the prior year, so very significant. Then the other main markets in diagnostic services also traded very strongly, Romania and Ukraine. In Ukraine, we had actually significant currency pickup as well on the back of the Ukrainian currency strengthening. So overall, a strong picture across diagnostic services. Briefly on our Indian venture, so the MaxCure hospital business that you recall, we still do not consolidate as we don't control that yet. So the effective ownership now is 45.1%. We have completed the shared restructuring process. We continue with good progress, I should say, the construction of two cancer centers, one in Hyderabad and one in Nelor, that will open sometime during the second half of this year. Revenue wise was about €16,000,000 in MaxCure, some 18% local currency growth. So remind you again, this is a hospital group with now 11 hospitals operating. You see the most recent one Nashik in the state of Maharashtra on the picture there to the right. And that is off to a very good start having now operated some for four months or so. On the fertility side, volumes are picking up nicely. The volume of fertility treatments ranges from two twenty to two fifty a month currently, and that is more than a doubling on the same period last year. So and already now, this business in India, although it is still loss making as we keep on developing that quite strongly, it already makes up about 40% of our group total activity in fertility. So with that introduction and overview, I hand over to Joe to talk a little bit about the specific financials. Thank you, Frederic. Just, having a look quickly at the, key financial data. We've added on to this the EBITDA margin for the segments, Healthcare Diagnostics for your information to try and give you a little bit more insight. In terms of for the earnings per share, you can see that this is down 4.6¢ versus 6¢. A large part of that reduction despite the very strong numbers that Frederic had just been gone through is the the reduction in that is due to the other income we recognized in the 2018 in respect of revaluation of the options that we have on our Indian positions. And that itself was some 2.5¢. So if you strip that out, then we've had a very good growth of about 31% in terms of the EPS, which is a reflection then of the strong operating profit growth and the flow through of that to the net line. So just reiterating that that's a quarter we're very I'm happy with with results. I think Frederic has given a very good summary of the performance there, and, I don't think you can look at it any other way than than see that as very strong. We're very happy with it. Now this is the results of the work that we've been doing last year, the investments we've been doing, the development work we're doing. And now we've moved on in terms of the investments we're doing now. We're we're looking forward to the growth of 2020, such as the dental, inpatient areas, the blood drawing points that we're putting on and working on over this year to expand the business. So we brought in, in terms of the acquisition update, with Doctor Klein down in in in Bavaria, just, just outside Munich, consolidated that for the for the quarter. We paid 25, €300,000 for this, and we'll see, synergies, coming through, particularly in the second half of the year and through into 2020. In the, acquisition that we announced previously, in in Ukraine, for a lab, this is going very, very slowly. Yeah. It's it's sort of increasingly unlikely that this will will happen. It doesn't really have such an impact for us. The the Ukrainian underlying business is doing fantastic strongly in in there, and we don't think it's going to have any real impact that's going to hurt us whether it happens or not. The NeoMedics acquisition, we have approval for this. We expect to consolidate that in mid May. So the consideration that we'll pay there will be around just north of €70,000,000. So that will be a good acquisition and fit into our Polish lineup of operations and work very well in terms of integrating with our clinical business in the South Of Poland. Just moving on. So we have adopted the IFRS 16 in respect of leases. We have applied a full retrospective application for that. So we had restatement release, which we did, and a separate call in respect of that. So all of these numbers that you see have been fully restated to comparatives. That's why we haven't really spent any time talking about IFRS 16. We also then did the, IFRIC 23 restatement, and applied the adjustments to the opening balance for the for the start of the year, which is a €1,900,000, impact in terms of retained reserves. As I mentioned earlier in terms of the earnings per share, other income was low in this quarter compared to the prior year quarter. We had this one off revaluation with the Indian options. So there's no real large movement in respect of that for this quarter. And as I said, that's about €2.5 cents of the profit earnings per share that we had back in Q1 in the comparative quarter. Net interest cost has gone up on the back of IFRS 16. So we had 2,400,000.0 net, 2.7 interest charge and 0.3 income. And of that charge, one and a half million euros was related to lease charges, 1.4 last time around. So you can see that the underlying interest is 1,200,000.0 and we have 1,300,000.0 last time around. So, also within the although we show an f foreign exchange gain for the quarter, within that, we have a loss of of €300,000, in respect of the, lease revaluations during the IFRS 16 call. I mentioned that that will be a feature going forward will be volatility in respect to foreign exchange, impact of our foreign exchange denominated leases on our balance sheet. It's mainly in Poland and Romania where we have euro denominated leases and we need to mark those to market every every quarter and and that resulted in a 300,000 loss for the for for the quarter mainly coming out of the weaker currency in Romania. Net operating cash flow, very good, 28,800,000.0, 22.7 last time around. So I'm happy with that. Good development in there. The working capital was quite benign, and we had then, some 5,100,000 of tax payments. Normally, it's a higher quarter in terms of tax payments for q one as we settle, the the prior year and start to make new, new, interim, payments for for for the current year. We have in terms of the tax rate of projected 27%. We had for the full year an effective tax rate of 23% last year for 02/2018. But when you strip out these revaluation, incomes that were recognized in respect of India, that came up to more like about 29, 29%. So, we're expecting this to come down to around about 27% this year, and that's what we're providing for currently. In terms of equity, that's grown up to 320, just short €322,000,000, from 317. That also takes account of the, opening balance restatement of 1,900,000.0 for IFRIC '23 in in respect of uncertainty for income taxes. Net financial debt, this has increased to €243,000,000 from 218,000,000. And if you look at the ratio of, on a LTM basis to a beta, that's gone up to 2.5, times leverage level. Within that, that is an increase of about 15,500,000 for our lease liabilities since the end of the year. And within that, about half of that increase in lease liabilities is in relation to acquisitions when we've consolidated on the balance sheet. So some 6,700,000.0 is is pickup of of lease liabilities, which are recognized within acquisitions. And the rest is then just lease extensions and and some new leases. It goes up pretty quickly. You know, you sign a ten year lease, you're gonna end up with 1 to €2,000,000 coming on for each new lease into onto onto the So it moves quite quickly when we start to expand. I expect to see that number expanding as we continue to grow the business and as we continue to add new premises and we're always gonna see that number, that lease liability level expanding. Net financial debt excluding lease liabilities, which is more akin to how we expressed our leverage previously before IFRS 16 and more in terms of, in relation to the, the covenant levels that we have with with that with our external debt. This was a €102,000,000 versus 93,000,000. So that's gone up a little bit. And if you look at the ratio on an LTM basis to EBITDA, a metric which is more in line to the previous EBITDA, then you see that at being 1.6 times leverage, which was the same as we had at the end of the year. So leverage in terms of that level has remained static. We have increased our debt facilities, to €300,000,000 from €200,000,000. We did that now, just in in in in the New Year. And the same terms as we had previously, the same lending banks, and we have also now, after the quarter end, extended that maturity of that by another year. So that's through to June 2022. So just coming on to recap in terms of our, our financial targets. Growth, very strong there. Our organic growth, 15.4. So, we're we're we're north of that target there. And if you look on a full year basis, we've more than already achieved pretty much our our full year targets if you do it on a run rate run rate basis. If you look at our profit, our EBITDA EBITDAO growth, which is similar to the previous EBITDA levels, that is 18.7% on growth. It's around about a half a million euro difference in terms of lease acceleration, in respect of EBITDAL versus how we would have reported under the old standard. So, under the old standard, the EBITDA level would have been, a little bit higher. But on the new measure, EBITDA was 18.7 growth, so within the, our target levels. And if you look at our capital level, then on we're on a 2.5 times leverage, including lease liabilities, to EBITDA and excluding lease liabilities compared to EBITDA, then we are on a 1.6 times level, same as year end. Thank you. And so I hand over to Thank you, Joe. And now I think we are open to take any questions the audience may have. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press the sound one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. And the first question is coming from the line of Caroline Caroline Elbit from Danske Bank. Please go ahead. Hi. Good morning. So I have a couple of questions. The first one is on the M and A pipeline. So you've made a lot of acquisitions during the year. How do you see the pipeline going forward? Will you be able to keep up the high pace? Shall we answer them one at a time? Okay. Yes. So we start with your first question. We are yes, there's never going to be exactly a straight line of acquisitions happening quarter by quarter. But we are certainly very busy on developing our pipeline. So you should expect to see us being busy on M and A as we go forward. And clearly, the more acquisitions we have done, the more of the work also is being focused on successful integration. So, a lot of work is going into that now with the Neomedics closing in a few weeks. So it's, you know, we're conscious to finding that right balance to ensure successful integration and going after additional deals. But the short answer is we will remain active on M and A. Okay. Thank you. And then also a question on the Max Qure. So where are Max Qure now in terms of numbers of beds? And where is it in terms of capacity utilization? Well, the 11 hospices, they're just sort of just short of about 2,000 beds, so 1,700, 1,800 somewhere number of beds. And capacity utilization is a little bit tricky, because you sort of need to look at an overall capacity utilization won't necessarily tell you that much, because it depends on where is the particular location. But if you want to have one overall number, it probably is in the sort of 60 percentage range somewhere in terms of overall bed capacity utilization. Thank you. And then also, because you talked about the Polish dental operations and high growth, how large is that operation in absolute numbers? It's about 5% of segment revenue. And growing. Okay. Perfect. Thank you. That was all for me. Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. There are no further question at this time. Please continue. Sorry. We have a question again from Caroline Carolina Elvin. Please go ahead. Hi again. I I just realized I forgot to ask you, about the next steps in MaxCure. What is it now? Yeah. When we end up consolidating, MaxCure, probably q four, I expect they're probably gonna have something like about €26,000,000, that sort of order of money, in terms of, net debt that will come on. So that will mean that that will probably have a small effect of of pushing up our net debt leverage level, but it will not be anything of of any significance overall. Yeah. And, what's the interest rate on that debt? Yeah. Pretty high. So we haven't got a pickup for this quarter. So the net profit was pretty much around about zero. So we haven't got any pickup in terms of net profit for our participation. So we're running around about somewhere between depending on the particular loan line anywhere between 10%, 1112% in terms of debt, interest cost. We will look once we bring that on in terms of restructuring that debt to bring that cost down. So, we'll we'll we'll work on on that, when we, when we bring it in, in as a as a fully owned when we consolidate in as a subsidiary. So, that's something we'll work on. Yeah. And do you still expect to consolidate, next year by mid two thousand nineteen? No. No. Probably more like about q four nineteen will be when we would, when we would take control of the investment. We have a shareholders agreement which, which stipulates that the other parties are in control at the moment even though we have the largest shareholding block, 45.1%. But we expect that that will go, through the 50% level and then under the shareholders agreement we would become the controlling party. We expect that that will probably happen in q four this year. So starting from q four or during in who knows this one? Yeah. So we'll pick up not a full quarter in in in q four, but we will we'll consolidate that in. Okay. Thank you. You're welcome. Thank you. Star one on your telephone and wait for your name to be announced. There are no fewer question at this time. Please continue. So that's it. Yeah? No more questions? All right. Okay. Well, then we say, thank you for participating in our earnings call, And we look forward to, if not before, here you see you again on the phone, at the July for our second quarter announcement. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.