Earnings Call: Q1 2018

Apr 26, 2018

Good day, and welcome to the First Quarter twenty eighteen Results Presentation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Fredrik Ragmarck. Please go ahead. Hello. Good morning, and welcome to our quarterly reporting. We sit in Stockholm here today, me and Johrain, our CFO. So 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 €162,000,000 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 pay 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 we'll 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. So 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. So 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 revenues, so we're quite sort of confident to look at that way of projecting revenue growth going forward. And I would also expect additional growth to come over the remaining quarters in the year. So we're feeling confident and good in that respect. I made the point in terms of Poland and Romania. Economies are strong, and we're gaining market shares, which is also a good point and strong sign to make. Last quarter around in this call, we spent quite a bit of time commenting on the potential loss of the public reimbursement contracts in the Warsaw hospital. And 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. Actually, the contracts were then subsequently extended through the second quarter. And as far as we understand, the intention of the third is to issue public tenders for these services within the short future within which we, of course, will participate. So that has turned taken a much more positive turn than we reported last quarter around. So I made a point on adjusted EBITA growing to €15,500,000 so 20 basis point extension. Perhaps more importantly, as we made very clear in the prospectus, etcetera, that Indian startup losses we treat outside of the adjusted EBITDA that I report to you for our financial measures. So looking at adjusted EBITDA, excluding the startup fertility losses in India, we grew a strong 23%, up to SEK 6,500,000.0 and margins expanding a full 80 basis points to 10.2. So I think that's a good underlying sort of illustration of the strength of the business and the progress. And then turning to Healthcare Services, which had a very strong quarter, I must say. You see 19% top line growth. Now that was to not insignificant extent supported by currency. So the Polish currency, as you know, is strong on the back of the strength of the economy. So some four percentage points out of 2019 was currency, but 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. So really a reflection of putting more volume and more members, more business to our fixed infrastructure across Poland as well as good good handle on medical management and utilization. So 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 sort of opposite currency effect, where the Polish zloty, obviously, very significant in health care services and strengthened. The Ukrainian rivna is less important than the zloty for health care services, but it's quite significant in this part of the business where we had the opposite effect. So top line growth was slightly held back by currency, which is organic underlying 12.2. So strong considering that we have 2% to 3% less working days than prior year. So it's quite impressive actually, 9.5% pickup in laboratory tests and EBITDA expanding by 12% up to just about SEK 13,000,000 and fifteen point five percent margin. So very happy and satisfied with that. We opened another 11 VDPs during the quarter, relatively over five fifty 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 Ryvna. 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. But 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, a good progress. We've grown. We made a comment last time around that we were slipping a little bit on getting physicians into a few of the location. We're improving in that. So I'm quite happy with what we've seen over the past three months in that respect. So we're making progress. And we're trading perhaps a quarter or two behind what we originally expected, the point I made last time around. But definitely, we have made good progress since we spoke to you three months ago. India, obviously, lot of attention to go into India. And as you will see subsequently in this presentation, quite a bit of capital have been deployed there. So very good progress in MAX Cure. We've invested I'll leave to Joss later on to talk about the amount of money that's gone into Max Cure. But underlying business is doing well. They're busy filling the capacity they have. They're busy working on new locations and busy building their organization really to cope with the growth opportunity going forward. So 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. But 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 Talagana, around the same area where MaxCure has its core Hyderabad hospital facilities. So overall, very confident and positive on India. And 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, slightly bigger loss recognition, but this is very important to us in terms of driving midterm growth two, three years down the road. So with that, I hand over for Joe to give a bit of the financial overview. Thank you, Fredrik. So 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 the on the divisional level, the segment level in terms of public and private funding. And there, you can see, just confirming the point that Fredrik was making earlier on that in the health care services, some 3% of revenue is from public funding and almost all of that coming out of the hospital contracts in Vilanov in Warsaw. In the second quarter and ongoing from there, we will also provide more geographical breakout and analysis at the segment level as well on an ongoing basis. So just flipping over on to the next slide. Both divisions performed very well in terms of margin expansion and profit growth in absolute amounts. We have the NFFs. We have some 11 bdps, which we've now increased in the Diagnostics 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. And 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. And 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. And so 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. And 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 services, 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. So we get a little bit of a balance. That's becoming more as the fee for service grows in absolute amounts of money. But still, we tend to see the better profit quarters or in the summer quarters for the health care services. That member revenue is very predictable. So when we sold that business, we have very remind you, we have very good retention. And so 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. Obviously, when we grow as fast as we have grown, we have challenges to service the strong growth. And 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. And we will have now coming up in the next couple of quarters, we have new medical centers opening, particularly in our Polish market. Diagnostics, 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 U. S. Dollar euro, where some of our emerging markets where we're translating into euros, but the those markets are very much more linked in, in terms of their foreign exchange flows to the U. S. Dollar. So So we're seeing as much a reflection of that change in the euroU. S. Dollar as we are in the local currencies themselves. And underlying in all of those markets, we have very strong growth. So for the division, we increased the 30 basis points the margin. And this was also on a strong Q1 twenty seventeen, which with the extra working days gave a good performance. So underlying, we're very happy with the development division as well. We have also in the quarter, we've renewed probably our largest or one of our largest outsourcing contracts with a large public hospital in Poland. This was renewed on to for several years. So that is also supportive for future profits. On the National Health Fund, the NSF, in Poland, this is a relatively small issue. Demand we see picking up in our hospital from private pay. So 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, we and 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 the for the freed up space. So we're seeing a pickup anyway in our private business. We're seeing that as with good demand levels. So 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 4,100,000.0, which we recognized in this year. When we're looking at that projection for the effective tax rate, we are taking out that other income. So we're only really applying that to the net profits ex the other income. That is a noncash income, most of it. And so it doesn'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. We have as I mentioned earlier, we've been busy investing. So we have growth CapEx this year this quarter of GBP 6,800,000.0 out of a total of some GBP 10,900,000.0 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. And 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 areas other locations as well. But 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. And 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 for the whole year. So you'll see this unwinding as we go through. And 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 for the earnings per share. Now this is very strong, and this has been supported by the EUR 4,100,000.0 other income line. Now if we look back and 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 twenty seventeen. And that is despite having increasing the number of shares in issue by some 37%. So effectively, we've the company and the underlying profits over this year, we've compensated for that that increase in the share capital base and the issued new shares. Just moving then on to the balance sheet side. We have our revolving credit facility, some GBP 200,000,000. We've got in terms of we that was originally three years. So one year had pretty much expired on that. We have now exercised an option to extend that for one year. So this will again become a new three year facility, and we have one year option further with that facility to extend it as well. So next year, we will be able to extend that to another year. We have repaid our debt, which was secured on 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, and that was completed in the first quarter. Just wanted to talk a little bit about the MaxCure, the Indian investments a little bit in more detail to give you a little bit more flavor in respect to that. We have invested and continue to invest in MaxSure to support their growth over this first quarter. They're busy opening their first hospital in Madarashtra in some three hours outside of Mumbai. That's on track. So that's expected to open end of this quarter, beginning of the following quarter. So that was a greenfield site. And so that's been equipped and so there's funding required for all of the machinery and equipment for the facility. The facility itself, the building is being leased. So that does not have an immediate capital requirement. We've injected some EUR 5,800,000.0 into the business in cash as new share capital. And we also then bought EUR 3,100,000.0 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. And 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. So that was an initial investment recognition, some GBP 3,300,000.0. And then also with the recognition of the option value, so the fair value of those options. So those we have an option valuation model with various different inputs on listed proxies. And 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. So that gives us a total investment cost in terms of the balance sheet, GBP 15,600,000.0 for the quarter. Eventually, when if we take control, then we would those amounts would then translate into the cost of the investment. And consolidated fully, then we would recognize those in 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 the company. And 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. So that will increase then effectively our ownership. In terms of the other income, 4,100,000.0 recognized on the P and L account, we have GBP 3,800,000.0, 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 as 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, but we've deferred that over several quarters. So you will still you will see another 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 1,000,000 for the first quarter, which was what we expected it was going to be. We'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 the Q1. We have another one, which is now already opened. And you'll see that those openings will now accelerate over the coming quarters to achieve that target of 20. Obviously, there's a lead time finding licensing, staffing and getting the clinics opening. And then obviously, when we open them, we have start up costs, which will be expensing. So 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. 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 and 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? So as you see here, we've done close five transactions for around just about €13,000,000 since IPO in the Polish, Romanian and German markets, in dental field, clinic field in Romania and then genetics mainly in Germany. And 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 SEK 31,000,000 into India, of which you heard the most recent just now from Joe. And on top of that, we have put some just short of €21,000,000 since the time of the IPO into growth CapEx in our current business. Overall, some EUR65 million have been deployed into our business since the May. To give you a flavor of the magnitude of what we do. Clearly, as we have communicated on each call, we have an ambition to step up the M and A agenda, and we're busy with that. So 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. Then remind you of our targets. So 9% to 12% organic revenue growth, we came out 13.3%. So good, we ticked that box. The Joe made a 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. So we came out at 20.5% for the quarter. So actually ahead of the top of the guidance still including the start up losses in India and excluding that some 24 plus percent. So good outcome and almost no debt. We have a little bit of debt coming on this quarter really from Joe mentioned the exactly the MAX cure and the recapitalization in Poland. So half a turn of EBITDA on indebtedness by the end of the quarter, so still quite a way to go there. So that I think summarizes up what we wanted to say in terms of this quarter. So finish off by saying good quarter, happy and have a positive outlook going into the second quarter here April. So happy to take any questions that the audience may have. Thank you. We will now take our first question from Richard Koch from SEB. Please go ahead. Your line is now open. Hello there. You mentioned 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? Richard, yes, this will be the order of at least a couple of million euros We also have a real estate project for which we complete 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're doing the roadshow. And that will probably provide up to around about EUR 1,000,000 also additional income as well. Then it will step down subsequently for the third and fourth quarter. When we consolidate, so let's say, for instance, if we consolidate the Indian venture in 2019, then all those amounts would then be translated into cost of the investment. So we wouldn't see any subsequent amounts being recognized. Okay. So another SEK 3,000,000 in Q2. But you say that do you mean that you also see a positive impact in Q3 and Q4? Yes, but it will be a lesser amount. It may be the order of GBP 1,000,000 or maybe less. Okay. And the And just to be precise on that because it might be confusing for some people. Effectively, what this is, 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. And 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 market a fair market, open market valuation would necessarily be for the Indian investment. And really, that's why you end up with such a divergence is because this is a developing company. So we're putting money in and develop 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, etcetera. We will now take Sorry. Our next Yes. Yes. Could you hear me? Yes. Yes. Okay. Good. Also a question on MaxCure. So I couldn't find any profit contribution on the associate line. Is that correct for MaxCure? Yes. In India, you have a year end, which is March year end, which fits to their tax year, so a hangover from the British times. And so we have an audit ongoing now for the year end financial statement. So 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 will reflect a pickup for the short period that we've owned in Q2 already. Do have quite a heavy level of debt. So for the size of the business. And so therefore, you've got between the EBITDA figures, which we that they have, I think, which we you have quite large interest costs and some other costs as well. So your net profit is not such a big item in relation to Medicover's numbers. So it's not such a material number. So 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. So is it possible to quantify that debt since it will be incorporated into the overall figures next year? Try I'm just want to make sure we don't overestimate 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. Yes. When we consolidate, obviously, we would have a higher financial cost, 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. You have they have subsidiaries and they have minorities within those subsidiaries. So on a proportionate basis, you're running around in terms of their debt about INR 1,200,000,000.0. And on a full basis, that's something over around about 1.35 or something of that sort of order on a 100% basis. So that sort of gives you an order of magnitude of the level of debt. The exchange rate today is around about RUB 81 to the euro. At quarter end, it was just over INR 80. Okay. So in euros, debt is what? Yes. Depending on which one you're looking around, yes, about EUR 14,000,000, 15,000,000. So it's not significant in terms of for the total Medicover size of the business. And as we mentioned in here, we've done underlying 16.6% growth in the business. And so it's 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 for the business, it's quite important. But I think the focus should be on the underlying business that we have existing now. Sure. Sure. Okay. Thanks. It appears there are no further questions at this time. I'd like to turn the conference back to you for any additional or closing remarks. Okay. Very good. So with that, we wrap up. And thank you for attending and look forward to hearing 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.