Say, welcome to the first quarter 2018 results presentation conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Fredrik Rågmark. Please go ahead.
Hello. Good morning, welcome to our quarterly reporting. We sit in Stockholm here today, me and Joe Ryan, our CFO. We're very happy and proud of the first quarter. Good results overall, really across the board. Revenue growth, good, 14.1%, just short of EUR 162 million. Organically, that was 13.3%. Correspondingly, good growth in EBITDA. Adjusted EBITDA rose just short of 16% with a little bit of margin expansion. Strong growth across both divisions. Healthcare Services with its predominantly integrated member business, with strong underlying growth in member numbers continued, as well as continued good growth really across all private fee-for-service business. Diagnostic Services slightly held back by fewer working days this year round versus last year in the quarter, but despite that, had double-digit top-line growth, which is good and not to be underestimated. We've been busy in India during the quarter.
We've increased our stake in MaxCure, and we have been very busy on a strong continued rollout of new fertility facilities that will be opening throughout the year. We recorded another significant other income, which Joe will speak more about later on, which then pushed up profit after tax and EPS significantly versus prior year. Really very happy with revenue growth. For those of you that have followed us for a while, revenue growth is typically good, driven by this underlying strong organic development that we have seen throughout our history. It doesn't really surprise us, but it's confirming the positive outlook that we have previously stated. The economies in our main markets are all doing well. It's really underlying Poland and Romania particularly that is driving the top-line growth across both businesses, where the economy is strong and labor market is tight.
You see annualizing the current quarter revenue forward, we're just short of 12% growth for the year. Historically, in our history, we've never had a quarter on quarter with declining revenue, we're quite confident to look at that way of projecting revenue growth going forward. I would also expect additional growth to come over the remaining quarters in the year. We're feeling confident and good in that respect. I made a point in terms of Poland, Romania, economies are strong, we're gaining market shares, which is also a good point and strong sign to make. Last quarter round in this call, we spent quite a bit of time commenting on the potential loss of the public reimbursement contracts in the Warsaw hospital.
Although that's a very minor part of our revenue, some 3% in Healthcare Services, it was quite a big matter of principle, I think. We're happy to comment here on that. The contracts were then subsequently extended through the second quarter. As far as we understand, the intention of the NFZ is to issue public tenders for these services within the short future, within which we, of course, will participate. That has taken a much more positive turn than we reported last quarter round. I made a point on adjusted EBITDA growing to EUR 15.5 million, 20 basis point extension. Perhaps more importantly, as we made very clear in the prospectus, et cetera, that the Indian startup losses we treat outside of the adjusted EBITDA that report to you for our financial measures.
Looking at adjusted EBITDA excluding the startup fertility losses in India, we grew a strong 23%, up to EUR 6.5 million, and margins expanding a full 80 basis points to 10.2%. I think that's a good underlying illustration of the strength of the business and the progress. Turning to Healthcare Services, which had a very strong quarter, I must say. You see 19% top-line growth. That was to not insignificant extent, supported by currency. The Polish currency, as you know, is strong on the back of the strength of the economy. So some 4 percentage points out of 19 was currency. Although underlying organic 15% is still very strong, as you see, that's supported really by 15% growth in members in the quarter across Poland, across Romania, and also our risk business in Hungary.
Good growth in EBITDA, even shouldering the full losses in India for the quarter, the division still managed to grow EBITDA, although margins slightly contracted and stripping out India for a fair comparison to what we did last year. A strong 29% EBITDA growth and margin expanding up to 7.7% EBITDA. Really a reflection of putting more volume, more members, more business through our fixed infrastructure across Poland, as well as a good handle on medical management and utilization. Overall, a very good picture for this quarter in Healthcare Services. Likewise, Diagnostic Services, a good growth. It clearly is below the level of Healthcare Services.
Here you have the opposite currency effect, where the Polish zloty is very significant in Healthcare Services and strengthened. The Ukrainian hryvnia is less important than the zloty for Healthcare Services, but is quite significant in this part of the business where we had the opposite effect. Top line growth was slightly held back by currency as is organic underlying 12.2%. Strong considering that we have 2% to 3% less working days than prior year. It's quite impressive actually. 9.5% pickup in laboratory tests and EBITDA expanding by 12% up to just about EUR 13 million and 15.5% margin. Very happy and satisfied with that. We opened another 11 BDPs during the quarter, relatively over 550, something that we have in total that's relatively benign but will drive growth over the coming quarters. I made a point on the Ukrainian hryvnia.
Last time around when we talked to you, that had declined quite significantly. End of last year, that has come back a bit in the early parts of this year. Although that has happened, we're still down some 16% year-on-year. Importantly, and we always comment on that, is the big project in Germany. Good progress. We've grown. We made the comment last time around that we were slipping a little bit on getting physicians into too few of the location. We're improving in that. I'm quite happy with what we've seen over the past 3 months in that respect. We're making progress, and we're trading perhaps a quarter or 2 behind what we originally expected, the point I made last time around. Definitely we have made good progress since we spoke to you 3 months ago.
India, obviously a lot of attention is going to India and as you will see subsequently in this presentation, quite a bit of capital have been deployed there. Very good progress in MaxCure. We've invested, I'll leave to Joe's later on to talk about the amount of money that has gone into MaxCure. Underlying business is doing well. They're busy filling the capacity they have. They're busy working on new locations and busy building their own organization really, to cope with the growth opportunity going forward. We're really excited and supportive of that opportunity. Likewise, on fertility, although we're running that at quite some substantial loss, in line with the guidance we have given, the fact is that the more new facilities we open, the more we're going to push that loss short term. That's a very conscious decision.
We see very good pickup and very good consumer reactions to our more mature facilities in the Delhi area. We're now active up in Punjab to get that business going northwest of Delhi, and later on in the year, we will as well be opening down in Hyderabad in Telangana, around the same area where MaxCure has its core Hyderabad hospital facilities. Overall, very confident and positive on India. Although MaxCure, of course, is not consolidated now, so you don't see the figures being reflected in what we do. Fertility is still a very small revenue recognition, a slightly bigger loss recognition. But this is very important to us in terms of driving midterm growth 2, 3 years down the road. With that, I hand over for Joe to give a bit of the financial overview.
Thank you, Fredrik. We flip over to the summary financial numbers there. We have provided some more detail in line with IFRS 15 revenue accounting disclosures. We've provided some more detail in the release where we've split out on the divisional level, the segment level in terms of public and private funding. There you can see just confirming the point that Fredrik was making earlier on that in the Healthcare Services some 3% of revenue is from public funding and almost all of that coming out of the hospital contracts in Wilanów in Warsaw. In the 2nd quarter and ongoing from there, we will also provide more geographical breakout and analysis at the segment level as well on an ongoing basis. Just flipping over onto the next slide. Both divisions performed very well in terms of margin expansion and profit growth in absolute amounts.
We have Some 11 BDPs which we've now increased in the diagnostic side. If we look at 60 basis points to 7.7% margin for the Healthcare Services. We have here the member growth, which is feeding through into the contribution. That generally takes, there's a little bit of lag there in terms of when you see the member growth. As we said all the way through, since we've been listed and doing these announcements, when you see the member growth, that's really for the future revenue. Those revenues are quite predictable. Now, in the winter quarters, so Q4 and Q1, we have higher demand for medical services and suppliers, you can imagine. This has a tendency on that part of the business to push the profit levels down. This has been managed quite well in these winter quarters.
We've been helped a little bit in terms of how the flu season has come through. This is also then balanced a little bit in the winter quarters where we get a larger demand for pay-as-you-go services, fee-for-service, as we call it, where people are paying for individual services. Particularly also then in the hospital, we see a little bit of a pickup on that. We get a little bit of a balance, and that's becoming more as the fee-for-service grows in absolute amounts of money. Still, we tendency to see the better profit quarters are in the summer quarters for the Healthcare Services. That member revenue is very predictable. When we sold that business, remind you, we have very good retention.
As long as we can continue to provide a good service level, we end up with having a very predictable revenue stream, and we have a very predictable profit stream coming through from that as well. When we grow as fast as we have grown, we have challenges to service the strong growth. You see that in the capital spending side where we are both in the fourth quarter figures and in this quarter, we have quite some expenditure on our medical facilities base. We will have now coming up in the next couple of quarters, we have new medical centers opening, particularly in our Polish market. Diagnostic Services, the reported numbers have been impacted by the foreign exchange.
You see here when we talk about the organic EBITDA numbers later on you'll see that there is a divergence here, whereas in the previous quarters we haven't had very much of a divergence. This is as much a story of the US dollar/euro, where some of our emerging markets where we're translating into euros, but those markets are very much more linked in in terms of their foreign exchange flows to the US dollar. We're seeing as much a reflection of that change in the euro/US dollar as we are in the local currencies themselves. Underlying in all of those markets, we have very strong growth. For the division, we increased the 30 basis points the margin. This was also on a strong Q1 2017, which with the extra working days, gave a good performance.
Underlying, we're very happy with the development of the Diagnostics division as well. Also in the quarter, we renewed probably our largest or one of our largest outsourcing contracts with a large public hospital in Poland. This was renewed for several years. That is also supportive for future profits. On the National Health Fund, the NFZ in Poland, this is a relatively small issue. Demand we see picking up in our hospital from private pay. If the worst comes that we don't have any renewal of the contract, the tenders, we get no business out of it. This is really a transition issue. Which is why when we're giving guidance, the full year impact is a bit less because it's delayed. It's really about replacing that space with privately paid business, and removing for the freed up space.
We're seeing a pickup anyway in our private business. We're seeing that is with good demand levels. This is not really something which we focus on or we really worry about to any extent. Our effective tax rate we're looking at for 29% for the year. We have the other income line. We have EUR 4.1 million of which recognizing this year. When we're looking at that projection for the effective tax rate, we are taking out that other income. We're only really applying that to the net profits ex the other income. That is a non-cash income, most of it. Isn't really have any tax impact.
That means that overall for the year, when you look at our net profit at the end of the year, you will see a lower effective tax rate on our net profit level than 29%, but we're looking at it and projecting 29% on our operating profit items, if you like. As I mentioned earlier, we've been busy investing. We have growth CapEx this quarter of EUR 6.8 million out of a total of some EUR 10.9 million for the quarter. We have also now had in Q4 quite a large capital spending as well, which a large portion of that was also growth CapEx. This is going into our medical facilities base. Not only in Poland, where we have a strong member growth, but also in some of the other locations as well.
The dental, where we're rolling out greenfield locations and our medical centers in Poland, these are probably the single largest area in terms of growth CapEx. We need to build that out. When we've got those sort of membership growths, we need to be able to increase the physical capacity to be able to keep the same level of service, and therefore drive the retention, and therefore drive our future profits. Operating cash flow. This was good. No real surprises there in terms of before working capital. We've increased our working capital. This has been into stock levels and prepayments. This is a little bit cyclical in terms of the whole year, you'll see this unwinding as we go through. We have a larger tax paid amount this quarter as we settle up taxes estimates for the year and make provisional payments based upon that.
Just a quick word before I move over to some of the other more balance sheet issues. In terms of earnings per share, we increased this quite strongly. Some 67.5% increase there in terms of the earnings per share. This is very strong, and this has been supported by the EUR 4.1 million other income line. If we look back at that in terms of excluding that other income, then we're pretty much the same level of earnings per share as we were in the first quarter 2017. That is despite increasing the number of shares in issue by some 37%. Effectively, we've grown the company and the underlying profits over this year. We've compensated for that increase in the share capital base in the issued new shares. Just moving then on to the balance sheet side. We have our revolving credit facility, some EUR 200 million.
That was originally three years. One year has pretty much expired on that. We have now exercised an option to extend that for one year. This will again become a new three-year facility, and we have one year option further with that facility to extend it as well. Next year, we will be able to extend that to another year. We have repaid our debt, which was secured on our Warsaw hospital, which was locally sourced in Poland. We have repaid that and refinanced that through our revolving credit facility, which is the slightly lower cost to us of funds. That was completed in the first quarter. Just wanted to talk a little bit about the MaxCure, the Indian investment, a little bit in more detail to give you a little bit more flavor in respect to there.
We have invested and continue to invest in MaxCure to support their growth over this first quarter. They're busy opening their first hospital in Maharashtra, some three hours outside of Mumbai. That's on track. That's expected to open end of this quarter, beginning of the following quarter. That was the greenfield site. That's been equipped. Funding required for all of the machinery and equipment for the facility. The facility itself, the building is being leased. That does not have an immediate capital requirement. We've injected some EUR 5.8 million into the business in cash as new share capital. We also then bought EUR 3.1 million of existing shares from other shareholders.
We have this liability, which we disclosed and talked about in the financial accounts at the year-end, where we have a performance-related arrangement with the people who found the investment for us and are assisting us in terms of developing and sourcing new investments. For each tranche of shares that we invest in, we recognize that liability initially, discounted back over time of what we expect we will pay. That was an initial investment recognition, some EUR 3.3 million. Then also with the recognition of the option value, the fair value of those options. Those, we have an option valuation model with various different inputs on listed proxies. We recognize for the share options that we've exercised, we recognize the amount that those share options were in value in the capital carrying value.
That gives us a total investment cost in terms of the balance sheet of EUR 15.6 million for the quarter. Eventually, if we take control, those amounts would then translate into the cost of the investment. If we're to consolidate it fully, then we would recognize those as effectively as our acquisition cost. The share capital ownership that we have now is the share capital as it is registered currently, as you'd expect. But as part of the investment agreement in terms of investing with MaxCure, we have a restructuring which will be done in terms of the capital of company. Effectively, what that will mean is that our share ownership would increase some five percentage points at no cost to ourselves with that capital restructuring. That we would expect to have fully completed before the year-end. That will increase then effectively our ownership.
In terms of the other income, EUR 4.1 million recognized on the P&L account, we have EUR 3.8 million, which is the fair value changes over these put and call options with MaxCure. You will see coming out on the next quarter, another release of part of that, because when we did the initial acquisition, we did not recognize the full value of those share positions in terms of the fair value of those. We've deferred that over several quarters. You will see another other income, a sizable amount in Q2 and some smaller amounts subsequently. The options are net in the money, the pricing is reasonable for us in terms of the investment. The fertility business in India, this reported a loss of EUR 1 million for the first quarter, which was what we expected it was going to be.
They're busy now in terms of investing to expand the number of clinics. We have a target of having some 20 clinics at the end of the year. We have nine at the end of Q1. We have another one, which is now already opened. You'll see that those openings will now accelerate over the coming quarters to achieve that target of 20. There's a lead time finding, licensing, staffing and getting the clinics opening. When we open them, we have startup costs, which will be expensing. Even though the existing clinics develop well as we roll out the new clinic plan, then we will see continuing losses to be expensed for that business.
All right. Thank you, Joe. We drafted a new slide here that we call investing for growth. Just to give you a picture of what have we invested since the IPO, both in terms of M&A activity and also that's important to really, to give you a view on how much of our capital are we ongoing putting into growth capital to keep on growing the existing business. As you see here, we've done close five transactions for around just about EUR 13 million since IPO in the Polish, Romanian, and German markets in dental field, clinic field in Romania, and then genetics mainly in Germany. That is an activity that you should expect to be carried on and if anything, increase in frequency. We have put in terms of cash, a total of EUR 31 million into India, of which you heard the most recent just now from Joe.
On top of that we have put some just short of EUR 21 million since the time of the IPO into growth CapEx in our current business. Overall, some EUR 65 million have been deployed into our business since the end of May last year, to give you a flavor of the magnitude of what we do. As we have communicated on each call we have an ambition to step up the M&A agenda, and we're busy with that. We have a positive outlook in terms of what we can do there, and we will for sure keep on investing organic growth capital into our existing business. Remind you of our targets. 9%-12% organic revenue growth. We came out 13.3%, so good, we tick that box.
Joe made the point that this time around it actually makes quite a big difference on the EBITDA number when we look at the organic EBITDA growth considering how the currencies have swung around. We came out at 20.5% for the quarter. Actually ahead of the top of the guidance still including the startup losses in India and excluding that some 24+%. A good outcome and almost no debt. We have a little bit of debt coming on this quarter, really from
MaxCure,
Exactly, the MaxCure under the recapitalization in Poland. Half a turn of EBITDA on indebtedness by the end of the quarter, so still quite a way to go there. That I think summarizes up what we wanted to say in terms of this quarter. Finish off with saying good quarter, happy, and have a positive outlook going into the second quarter here end of April. Happy to take any questions that the audience may have.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Richard Koch from SEB. Please go ahead. Your line is now open.
Hello there. Joe, you mentioned that in other income, you will have another gain in Q2 from MaxCure. Could you quantify that roughly so we know what to expect?
Hello, Richard. This will be the order of at least a couple of million EUR. We also have a real estate project which we completed now, where we had excess land in Warsaw. I think I mentioned it on the roadshows, or certainly on the analyst presentations where we were doing the roadshow. That will probably provide up to around about 1 million EUR or so additional income as well. It will step down subsequently for the third and fourth quarter. When we consolidate, let's say for instance, if we consolidate the Indian venture in 2019, all those amounts would then be translated into cost of the investment. We wouldn't see any subsequent amounts being recognized.
Okay. Another 3 million EUR in Q2. You say that, do you mean that you also see a positive impact in Q3 and Q4?
Yeah, it'll be a lesser amount. Maybe the order of 1 million EUR or maybe less.
Okay.
Just to be precise on that because it might be confusing for some people. Effectively what this is we're forced to recognize these numbers by IFRS fair value accounting, the whole concept of sort of a market value for assets and liabilities. This just really is a reflection that you've got a differential in terms of the valuation that we're investing at, and the valuation that a free market where if you take some discount for size and everything else, what a fair market, open market valuation would necessarily be for the Indian investment. Really that's why you end up with such a divergence is because this is developing company.
We're putting money in and using that money to grow the business and also bringing in expertise and attention to develop and grow the structures and the quality of the management and the infrastructure and processes, et cetera.
Okay. Thank you.
We will now take the next. Sorry.
Yeah, hi. Could you hear me?
Yeah.
Yeah. Okay, good. Also question on MaxCure. I couldn't find any profit contribution on the associate line. Is that correct for MaxCure?
Yeah. In India you have a year end, which is March year end, which fits to their tax year. A hangover from the British times. We have an audit ongoing now for their year end financial statements. Rather than make an estimate of the number and put that into the financial statements, we wait for those financial accounts to be finalized, and we'll reflect a pickup for the short period that we've owned in Q2 already. They do have quite a heavy level of debt for the size of the business. You've got between the EBITDA figures which they have, I think, which you have quite large interest costs and some other costs as well. Your net profit is not such a big item in relation to Medicover's numbers. It's not such a material number.
Rather than having an estimate where you've got a degree of uncertainty, we decided to wait until we have a more certain number for the pickup.
Okay. Is it possible to quantify that debt since it will be incorporated into the overall figures next year? I just want to make sure.
Yeah
That we don't overestimate the numbers also what will be included here from next year. Maybe so that the financial cost will be much higher than what we have in our numbers. I don't know.
Yeah. When we consolidate, we would have a higher financial cost and that debt would then be consolidated in as well. They're running at today around about, on a proportionate basis, because it's a group they have subsidiaries and they have minorities within those subsidiaries. On a proportionate basis, you're running around in terms of their debt about INR 1.2 billion. On a full basis that's something over around about 1.35 or something of that sort of order on a 100% basis. That sort of gives you an order of magnitude of the level of debt. The exchange rate today is around about 81 rupees to the EUR. At quarter end it was just over 80.
Okay. In euros, the debt is what?
Depending on which one you're looking around, yeah, about EUR 14 million-EUR 15 million.
Okay.
It's not significant in terms of for the total Medicover size of the business. As we mentioned in here, we've done underlying 16.6% growth in the business. We've done a 16.6% underlying growth in the business. We don't want to get such a focus that it becomes a discussion about the Indian investment. In terms of the business, it's quite important, but I think the focus should be on the underlying business that we have existing now.
Sure. Okay. Thanks.
As a reminder, if you wish to ask a question, please press star one on your telephone keypad. It appears there are no further question at this time. I'd like to turn the conference back to you for any additional or closing remarks.
Okay. Very good. With that, we wrap up. Thank you for attending and look forward to hear you or rather meet you next quarter round. Thank you. Bye.
This concludes today's call. Thank you for your participation. You may now disconnect.