Cegedim SA

PAR:CGM

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Cegedim conference call. Today's conference is being recorded and will be available on the company website. This presentation will be followed by a Q&A session. At this time, I would like to turn the conference over to Mr. Jan Eryk Umiastowski, Cegedim Chief Investment Officer and Head of Investor Relations. Sir, please go ahead.

[Jan Eryk Umiastowski]

Thank you. Good morning, and good evening, everyone. Thank you for joining us to discuss Cegedim's third quarter 2018 revenue. Before we begin, I would like to remind you that this presentation and conference call may constitute forward-looking statements. These forward-looking statements may include comments about our guidance, our expectation and prospects and are based on our view as of today, October 25, 2018.Any such statements and projections reflect various estimates and assumption by management concerning anticipated results. For additional information concerning important factors that may cause our results to differ materially from expectation and underlying assumptions, please refer to our registration document, specifically the Risk Factors section. We undertake no obligation to correct or update these forward-looking statements whether as a result of new information, future events or otherwise.Having this in mind, I will turn on Page 3 of the presentation. But first, all the account presented on the presentation are based on IFRS 5 as we have made a disposal of Cegelease on February 28. So Cegelease is excluded from 2017 and 2018 accounts to help make the comparison difference between the 2 years. The second fact is that we have also applied IFRS 15, and there is no material impact on group revenue from the application of this new loan. Now moving to third quarter 9 months revenue 2018. So revenue continued to grow. And in Q3, revenue came to EUR 108.8 million. This is an increase of 1.8% on a reported basis and an increase of 0.7% on a like-for-like basis. This means excluding the currency impact and acquisition. The main difference between the reported and the like-for-like basis are the acquisition of Rue de la Paye that brings an additional 0.9% of revenue, acquisition done on March 2018.By division, on the first division, Health insurance, HR and e-services, revenue increased by 3.9% on a like-for-like basis. And Healthcare professionals decreased by 4.8% on a like-for-like basis. This translates that for the first 9 months of 2018, revenue came to EUR 336.4 million, an increase of 1.6% on a reported basis and an increase of 1.5% on a reported (sic) [ like-for-like ] basis. We get a negative impact from currency of 0.4%, mainly from the USD, the U.S. dollar, and a little bit from the sterling. And we'll get a positive boost from the acquisition of Rue de la Paye in March 2018 of 0.6%. Still, the margin [ reach ] of revenue, 86.3% is in euro, roughly 10% in sterling and 2.5% on USD. And by division, we see that the first division, Health insurance, HR, and e-services, increased by 5.3% on a like-for-like basis; and Healthcare professional decreased by 5% on a like-for-like basis, and we'll come in a few minutes more in details on these 2 division.But before moving to division, I would first would like to make a focus on the BPO activity. So we get 3 BPO activity, BPO for insurance company. This is mainly outsourcing of all the training processes. We're also doing outsourcing for the HR department, and we're doing outsourcing in the U.S. for the revenue cycle management solution. And on BPO, over the first 9 months of 2018, revenue increased by 10% compared to 2017. So this activity continued to develop quite well, mostly driven by the HR outsourcing activity on BPO. And also on Q3, this is an increase of 8%. And we expect to get other contract from the insurance side in the near future for this activity on BPO.If we look in the headcount, we see an increase of 1.8% between December and June. And between June '18 and September '18, the number of employees increased by 2.8%. This is roughly an increase of 200 people. Most of these people that we have hired in the third quarter, between June and September, are people for our Docavenue activity. This is a Telemedicine activity, and I will come back later on this. This is an important development making quite significant investment. And most of the increase of the number of people between June and September, roughly 100 people, are to develop our Docavenue activity.On the first division, Health insurance, HR and e-services, has total of 65.7% of the total revenue of the group. 96.7% are done in France. Revenue increased by 6.2% in the first 9 months. On a like-for-like basis, this is an increase of 5.3%. There was absolutely no currency impact and a small impact from acquisition due to the acquisition of Rue de la Paye for our HR department of 0.9%. The more -- and on a like-for-like basis, in the third quarter, revenue increased by 3.9%. It's important to see that in the third quarter of 2017, revenue had increased by 10%, so we have a negative comparison basis. That explains why we are 3.9% because in Q3 2017, revenue had increased by 10%, so quite already high level of revenue generated in 2017 that translate that to an increase of 3.9% in the third quarter of '18. However, for the full year, we'll be at more than 5% increase of revenue on this division. On this division, the main driver for this increase are still our HR management solution, SaaS, our sales statistic for pharmaceutical products, our activity of electronic payroll and electronic invoicing and electronic reimbursement solution in France. So this is what are driving the increase of revenue for this division.And we may see exactly the opposite in the second one. So revenues increased by 6.1%. Excluding currency and acquisition, revenue decreased by 5%. The main -- there is a [ roughly ] acquisition in disposal, but we have the negative impact of the USD on this activity of 1%. In the third quarter, revenue decreased by 4.8%. We had been flat in 2017. So again, kind of decrease on this, driven still by activity for doctors, GPs in the U.S. and U.K. as we are waiting for the new version that has been released in France -- in the U.K., so we expect to be able to generate some revenue in 2019 from this U.K. activity. So we expect rebound of this activity in 2019. In the U.S., the product would be ready in the coming months, so we expect also a regain of activity in 2019.Second fact is that computerization of French pharmacists has slowed down. This is not related to the software, this is related to the hardware. In the past, we have sold some hardware to pharmacists and software, and now we're selling just mostly software. So it's better for margin, but of course, has some negative impact on revenue.The last point is that the activity in France is developing quite well for doctors and for nurses and chiropractors side. Mostly positive things on this division, but it's not able to offset the negative impact from U.K. and U.S. mostly on the division.The second important fact is that on Docavenue, there is a new regulatory change related to Telemedicine in France in September 15, and we have decided to position ourselves as a major Telemedicine player. So we know that the first player -- the biggest player will be the winner of this market, and we need to be -- so we already have solution, we already have doctors, we're already making advertisement for this solution. And we need commercial team going to see doctors who can bring them to connect to our platform to be able to develop a significant Telemedicine activity in France. And in order to do that, they run as a startup, so this is an integrated company with a dedicated team related to that. They have their own -- their individual commercial team really oriented to success. And of course, on the first stage, so in 2018 and 2019, we'll see mostly cost of this activity before seeing revenue in the future.We have also restructured our debt. So before the change of our debt structure, we get a revolving credit facility of EUR 170 million, with maturity in January 2021 and a shareholder loan of EUR 45 million, maturing also in January '21. We are trying to renew revolver credit facility of EUR 65 million that we have maturity in October '23, with an extension of one year, so we can move to October '24.On the same time, we get Euro PP of EUR 135 million that have maturity in October '25, and we are postponing the shareholder loan to the maturity of 2025. So now the shareholder loan is subordinated to the Euro PP. So we get a long-term financing, that is Euro PP, for the long-term asset of the company, and we get to revolve the credit facility that is completely undrawn at this date in case of -- so this is just in case of, and we still have the shareholder loan also. As a company, you'll see both of the family to the Cegedim company.On the outlook, so in order to be a #1 Telemedicine in France due to the regulatory change, we have decided to significantly invest on our platform for consulting -- remote consulting platform, Docavenue. So this means that revenue will be moderate growth as before. However, on the EBITDA, EBITDA in 2018 will be stable compared to EBITDA of 2017. So no increase of EBITDA. Before this announcement, our expectation was an increase of EBITDA margin in 2018. This means that EBITDA have grown faster than revenue, but now I expect revenue to be between around 1.5%, 1.6% on a like-for-like basis for 2018, and EBITDA in 2018 to be exactly the same as in 2017.Potential impact of Brexit. Most of our costs are in U.K., most of our revenue are in U.K., so offering no negative impact from this. And the second point is, we have absolutely no major European health program at work in the U.K., so we do not expect any change in the U.K. environment regarding the scales of our activity.The second important thing is also that in December 11, we'll have our 9th Investor Summit in the afternoon, at 2:00 p.m., in Paris, in Boulogne. We'll explain how our digital offering had transformed health care sector for our clients. So this will be dedicated to the digital transformation and how Cegedim helped make this transformation for our clients. We, of course, are focused also on Telemedicine and on Docavenue.This concludes my presentation. So we'll ask now our operator to open the line for the Q&A session. Thank you.

[Operator]

[Operator Instructions] So we have our first question from Charles Bordes, Kepler Cheuvreux.

[Charles Bordes, Equity Research Analyst]

First, concerning the doctor software offering in the U.S. and the U.K., your release says about the effect on the results before 2019, but your previous release suggested that there could be some revenues kicking in during Q4. So what would be the cause for this change? And as a follow-up, concerning the new guidance, are the investments in Docavenue [ at any cost ] for the EBITDA downgrade? Are they -- are these additional investments one-offs? Or should we consider they are long-term effects? And finally, concerning Docavenue, do you have a clear view on the pricing level? And is there a possibility of a price pressure in order to gain market share?

[Jan Eryk Umiastowski]

Yes. So first, software for doctors in U.K. and in the U.S. So in U.K., the software have been already released. So we still expect some revenue in the last -- in Q4 from U.K. doctors, a little bit of revenue. However, most of the impact will be in 2019. So from the U.K. side, we expect there'd be no difference as before. So some of the revenue will be generated in Q4, but the majority of revenue will be in 2019. This is a little bit different from U.S. doctors as we have postponed the release of the new version because we need to add some modules requested by the U.S. government or the U.S. agency for health care. All of this will be fixed in the coming weeks, so we expect to release this very soon. However, this means that no revenue, probably, will be generated in 2018 from U.S. doctors. So no trend for U.K. In the U.K., we'll get more revenue in Q4, however, less revenue from U.S. And all of this will generate revenue in 2019. On the guidance side, yes, the investments of -- 2 kind of investments. We get investment on the software, on the platform for Telemedicine, investment on bringing smartphone to doctors in order to help them make Telemedicine, et cetera. So this is a one-off investment. On the second hand, we also need to hire people for our commercial team, our sales guy. So we are increasing our sales force. So this means that our people that we're hiring, so the salaries, so this means that we increase the payroll of the company. And of course, this will be -- this increase will be in '18, and this cost will still be there in 2019. So I will say that 1/3 of the cost is one-off and 2/3 are really hiring people. So this is the cost that we'll continue to do in the coming years. However, we expect, starting from next year, to see some revenue. On the pricing, we have quite clear view now on different pricing from most of the competitor. We have very aggressive politics on pricing. Pricing is one way to attract clients or patient. The other and the most important part is to get the right technology throughout the medical health care records from the patient, this is very important. And the last point is to get doctors. And all of this connect together, and we need to be very cautious about regulation because regulation is very strict of what we can do and what we can't do. So on the pricing, we'll give more color on pricing in December at the Investor Day. As now we are more looking at what all other players are doing in order to be sure that we get the best pricing on the market.

[Operator]

The next question is from [ Saibonia ].

[Unknown Analyst]

Just one question from my side. If we come back to Docavenue, could you give us some color on the amounts you plan to invest in this company? And do you have any target in terms of future sales margin in France?

[Jan Eryk Umiastowski]

Again, it's a little bit too early to give some assumption to disclose some amounts as there is a very competitive market. We are seeing that a lot of startups are trying to move on it, a lot of different players, et cetera. However, in term of investment, the biggest investment is in people. As we have announced in the summer, in August, we expect to hire around 200 people at the company. That does give you a little bit of indication of the investment. We have already hired 100, so we need to double this number of people in the coming months. This probably will be done at the end of March or end of May of next year. So over the next 5, 6 months, we expect to hire around 100 people only for our Docavenue activity, and this is the majority of the investment. Now if you look at the -- what we have expected on EBITDA, so this means that our EBITDA -- we have decreased our indication on -- our expectation for EBITDA of around EUR 3 million. So this gives you the amount of investment that we expect on Docavenue.

[Operator]

We have no further question at the moment. [Operator Instructions] We have a question from Sébastien Bourget from Quaero Capital.

[Sébastien Bourget]

My question is regarding your debt refinancing. I was a bit surprised by the amount of the refinancing regarding the debt you published end of June. It looks like here you'll be quite generous on the debt side. So I'm wondering if you're -- what is your plan with your new financing? Do you plan accretion on your investments?

[Jan Eryk Umiastowski]

Yes. So if you look at our debt level at end of December, we have an envelope of EUR 200 million, that our revolver credit facility been of EUR 200 million. Then we have made the disposal of Cegelease, and we have reduced our asset to EUR 170 million, 1-7-0. And the goal of this refinancing was to come back to, again, to EUR 200 million, the total amount. So the level that we have in December. And the main reason for that, this is a long-term financing. So the first reason for this was to extend the maturity and to become locked over the next 7 years, with a fixed interest rate of 3.5% so to avoid an increase on interest, et cetera. And yes, the difference, the EUR 30 million, 3-0, EUR 30 million additional debt is only over the 7 years period to be able to do some small acquisition. We do not plan to make big acquisition, but we may do maybe EUR 40 million, 4-0, EUR 40 million of acquisition per year if we get some target for denouncing this year, excluding Rue de la Paye, that was EUR 7 million around. But maybe next year, a small acquisition can be expected. But nothing significant. It's more to get this flexibility already and to be able to finance some acquisition if we have the trends to see some target.

[Sébastien Bourget]

And talking about acquisition, what could be the perfect fit for you at the moment?

[Jan Eryk Umiastowski]

So at the moment, what we are looking for is money for our Cegedim e-business activities. So electronic invoicing. This is an activity only based in France, and it will make sense to be also present in other country in Europe because most of our client are big French client, like Air France, Saint-Gobain, Lafarge, Michelin and would like to add them also to be able to do electronic invoicing in Germany, in Italy, in Spain, in the U.K. So this is one of the priority of the group in terms of acquisition. After that, we are not present, like, for example, in the German market, for software for doctors. This can maybe be a small acquisition on this country, a small one and systemic. So this can be software for doctors one side, software for electronic invoicing to move more international or very small bolt-on acquisition to -- for technology.

[Sébastien Bourget]

But in Germany, first, for doctors, there is already strong players in this market. Do you think you have the product, the technology or the software to enter this market?

[Jan Eryk Umiastowski]

Yes. There is a very -- there's one big player in this market. We think that the fact that we have the solution on cloud and PaaS, it can be the opportunity to move to this market. However, we know that we'll be still the smaller player on this, the small -- to be a challenger. If we get 5% or 10% of the market share, this can be interesting. The main interest for that will be able to collect information from German doctors and to resend this to the pharma company. So -- but this will be -- we'll look for very small player just to get some footprint, then to bring our software that is based on cloud and PaaS, this is an advantage for doctors, and to offer an opportunity for the doctor to have the choice between 2 offering and not just to be with the major player. There is no time frame for that. This can be done next year or over the next 5 years. This is just that we notice that in Europe, we are not present in Germany, and one day, we'll need to be present in this country.

[Operator]

We have no further question.

[Jan Eryk Umiastowski]

If we have no other question, before we end this presentation, I would like to remind you that the main key takeaway were revenue continued to grow in the third quarter, the first division continued to do quite well, with an increase of 5.3% over the first 9 months. We are doing a significant investment in Telemedicine. We'll disclose more information about this during our Investor Day in December 11. This means that we need to address a little bit our outlook for 2018 by reducing the EBITDA level. So we expect now EBITDA 2018 to be in line with EBITDA of 2017. Thank you very much. I wish you a happy day or happy evening. Thank you very much. Bye.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.