Medicover AB

STO:MCOV B

Earnings Call Transcript 2021-Q1

[Operator]

Good day, thank you for standing by. Welcome to Medicover's First Quarter 2021 Results Presentation. [Operator Instructions] Please be advised that this conference is being recorded today, Thursday, the 29th of April 2021. Without any further delay, I would like to hand the conference over to your speaker today, Mr. Fredrik Rågmark. Please go ahead.

[Fredrik Rågmark, CEO & Director]

Thank you. Good morning, everyone, and welcome to the First Quarter 2021 Results Presentation. This is our strongest quarter ever. It is strong throughout. And it certainly shows the resilience of our business models that despite the crisis roaring on across the world, we can deliver a set of results like this. And it also is important to be clear upfront that despite this is certainly positively impacted by COVID now, as you will see in the numbers, but fundamentally, our underlying business is also recovering strongly and progressing strongly, which gives this set of results. So that's an important thing to keep in mind for context here. So really strong revenue growth, EUR 317 million. Organic growth just below 40% and some 22% of that being COVID related, which means 18% underlying business growth, which is very strong. We've seen pickup in demand during the quarter in our underlying businesses, although we're clear on that. We're not yet back at levels in the underlying business, where we were before the world knew of COVID. We've seen increased admissions into our hospitals during the month of March. With a sharp ramp up towards the end of March, and you all read the daily news of how the situation is in India. So we are obviously very busy there currently to try and deal and support with that very critical situation. We've expanded some of these services that we are providing to different industries. To support in this sort of business recovery, such as the airport support down in Germany or also the cruise line industry that is bringing passengers back to their cruise ships. Fee-For-Service, which is a very core element of what we do was now up to 57% of group revenue for the quarter and was up 41%. And you see there in the left-bottom pie chart that Fee-For-Service and public money is growing roughly the same, and that is, of course, driven by the fact that large parts in Germany of our COVID-related testing is publicly reimbursed as well as in the other countries. So hence, the public funding is growing very strongly. If we look on the profitability side of things, EBITDA being our prime results measure very strongly up, more than doubling, 126%, up EUR 65.5 million, up some 8 percentage points in margin. Again, the underlying EBITDA, we strip out the COVID-related earnings, which is approximately 25% of that result. Look at the underlying EUR 48.9 million, again, more than 6 percentage points margin expansion and 70% up versus last year. Obviously, I remind you that when we reported first quarter last year, we had 2 weeks of COVID impact. And we haven't really had the time then yet to do any corrective measures. Of course, the comparative quarter last year is slightly on the soft side. But nevertheless, that is a very strong result indeed. That's also visible in the cash flow. Joe will talk more about that later on. But just short of EUR 58 million operating cash flow, which is more than 50% up on the prior year figure. Cash is always king, as you know. So that's a very important result measure to look at. If we then go on to the divisions. So Healthcare Services, again, I remind you, same thing we talked about last quarter in terms of COVID impact, 90% plus of the positive impact is on the Diagnostics division. So Healthcare Services remain with predominantly a negative impact from COVID, where some of the services are not yet back at pre COVID levels or some services such as our sports business is outright still closed. So there is still recovery to come in this side of the business. But despite that, revenue up to EUR 157 million, which was organic growth of 23.5%. Approximately 7% of that being COVID related, which leaves 16% organic growth in this business, which is really, really strong. When one considered the point I just made, that there are significant parts of activities here that are not yet back at pre-COVID levels. Fee-For-Service in this division, just short of 50% of the division and was up by 29% for the quarter. I already made the point in terms of significantly increased the patient admissions into our hospitals. And as you know, if you look at the absolute number of hospitals in our group, the vast majority of them we do have out in India, and it should also be made the point that we have been very aggressive in terms of scaling up the number of beds in our Indian operation in order to support the very critical situation India is currently facing. So we are very busy adding beds out there. And as mentioned, some of our businesses are still very heavily impacted where the sports and gym business is the most significant example, where we're still waiting for restrictions to be lifted, so we can open. In terms of the employer pay business, we brought in 30,000 new members in the quarter, which we're happy with. That's a good number. And it shows the strength and resilience of that business. Looking at how that transponded into profit development, EBITDA, again, here, EUR 22.5 million, up strongly from EUR 14.5 million last time around. And relatively benign COVID impact here, just a little bit above EUR 1 million. So most of this or EUR 21.1 million to be specific, relates to the underlying business, and that's 350 basis points margin expansion on the prior year or almost 50% growth. So I think, again, that shows really well the operational leverage we have in the business when volumes gradually now come back. We have also kept acquiring a number of smaller businesses in Poland, in the gyms field, dental businesses and also a network of medical centers in the northern part of the country during the quarter. Overall, we now operate 30 hospitals for in-patient sites where as I just mentioned, the vast majority of them being in India. Then going over to Diagnostic Services, where revenue jumped all the way up to EUR 165.5 million, so up 53% and organic, a super strong 61%. I think I did comment last quarter that it was epic growth. And I don't know if I ever would report organic growth. I think at that time, it was [ 40 ] or something. So this time, we are significantly above the last quarter, of course, largely driven by COVID, where out of the 61% organic growth, 39% relates to COVID-related revenue. But that leaves a strong 22% organic growth in the underlying business, which I think also brings home that message that we are recovering also underlying. Fee-For-Service, as you know, from before, is a larger part of this division, 2/3, 67%, and this was up in line with the overall division, then 53% for the quarter. And how did that fall through into profitability? Of course, a quite sharp profit drop-through here with EBITDA up almost 150% to EUR 47.3 million, with a very significant margin expansion, overall EBITDA margin, 28.6%. Again, here, the COVID EBITDA, just north of EUR 15 million or about 1/3 of the total profitability in the division for the quarter. Stripping that out, leaves some EUR 32.1 million of EBITDA, which again was up some 70% versus prior year. So super strong, 8.5 percentage points margin expansion. So indeed, a very significant. Laboratory tests are looking at the absolute test numbers. They were up 21%. If we strip out the COVID-related tests and look at the underlying ex-COVID-test volumes, they were up 17%. So again, quite corresponding to the underlying organic revenue growth. We kept on growing our BDP network. So now we're up at 756 across our geographies. And then our sort of standard summary page, what has COVID brought to us this quarter? And I think I pretty much covered already all of the points here. So of overall, EUR 52 million, EUR 53 million COVID revenue you see, 80% plus being related to Diagnostic Services for obvious reasons and about EUR 10 million in the Healthcare Services side. And then 90% plus of the sort of profit contribution impact going to the Diagnostic Services and a little bit on Healthcare Services, as has been covered. Important to comment on is that the supply chain issues we talked about in prior quarters are largely sorted out. So that doesn't really impact us -- impact us any longer. If you look at the specific COVID-related revenue, it's fairly much in line for the Diagnostic Services with the prior quarter. So volumes have kept up roughly on about the same level as we saw in the fourth quarter. Now if I look at January, February, March, March was sequentially slightly down from January, February in the core markets here in Europe from a COVID-testing point of view, I think, largely in line with how you see the sort of virus peaks and drops. And the point was already made in terms of the very sharp ramp-up in admissions in Medicover Hospitals, India. Important to say is the ability of us to provide vaccines to our staff and, of course, to customers. But given the fact that each of our frontline medical staff will see and treat many, many patients in a day, the fact that we can vaccinate most of our medical front line staff is really very important. In our ability to keep on providing a service, particularly now, of course, in India, where any staff that we can't keep on up and running, due to that non vaccinations or infections, is a serious shortcoming. So that's a really important thing to point out. All right. With that, I hand over to Joe for the financial overview.

[Joe Ryan, Chief Financial Officer]

Thank you, Fredrik. So just having a look here in terms of the detailed financial numbers. And the thing I'd like to put out on here is to numbers are great help by COVID, some impact from negative impact from COVID in second half of March 2020 in the comparatives. But the thing that really want to draw away is the underlying performance. So we had stripping out the COVID-related revenues, EUR 26.5 million increase in the in our euro reported revenues, so really strong numbers. And if we look at the divisions, we have with Healthcare Services, EUR 13.3 million. So that's just sort of 10% against the euro figures prior year around and EUR 15.7 million in the Diagnostic Services, so some 14.7% increase. So really strong numbers in terms of the increase in terms of stripping out the COVID numbers. And you see that reflected also in the margins. So for the Healthcare Services, we have 3.5 percentage point increase in the underlying. And in the Diagnostic Services, we had 8.5 percentage points. Now that's in euro reported numbers with quite strong headwinds on the FX side against us in almost -- in all non-Europe markets. So really strong numbers to take away on the quarter on the underlying as well as then with the COVID figures. So just looking at some of the financial aspects, net interest cost, EUR 4.5 million has reduced in the prior year. Interest charge for leases of that is EUR 2.8 million, so up slightly on prior year. And that gives an underlying debt and discount release of EUR 1.3 million. We refinanced in the prior year the debt in our Indian subsidiary, and we had a [ 1.2 ] on non-cash cost in the comparatives for writing up arrangement fees, which are amortized over time. FX loss is EUR 1.2 million. Most all of that is euro-denominated leases in Poland for IFRS 16, where we book in advance the exchange rate movement, and that's an noncash item. Tax charge, we estimate at EUR 10.2 million. We've used an effective tax rate estimated at 28%. We used 30% last time around, maybe that will be slightly lower for the full year, but we are earning money in countries where we have operations where we have a higher tax rate than our average. Tax paid EUR 2.6 million, EUR 3.3 million last time. Cash flow from operations with those strong results are obviously very strong, EUR 60.3 million. Working capital quite benign, an increase of EUR 5.2 million in line with the increase of the business. Cash and cash equivalents have increased as a result of that strong operating cash flow. So excluding our short-term liquid investments, where we're parking money to manage that, EUR 65.9 million, up from EUR 46.7 million. And also then our loans, net of cash and those short-term investments have reduced to EUR 61.3 million, so down just almost EUR 20 million from the year-end. Our business continues to expand. We've done some small acquisitions in the quarter, which have increased our lease liabilities. And then we've also done some expansion in terms of adding new facilities as well. So our lease liabilities increased just over EUR 10 million to EUR 211 million from EUR 200 million at year-end. Capital investments, we continue to invest in expanding our business, EUR 19.4 million overall in terms of cash flow, the capital spending and just below half of that being in growth-orientated investments and just over half of that being in maintenance investments. Expansion of our facilities in India, it's about 1/4 of the investments. We now have some 20 facilities running in India. Just to remind you, when we first took our steps into India in end of 2017, we had 9 facilities, both of our cancer facilities are now running. Dental, greenfield dental and our [ other 2 ] clinics in Poland. And we've also been increasing laboratory capacity and investing in servicing our clients and related to COVID treatments as well. IFRS equity expanded relative benign translation adjustments. So that's out of EUR 513 million from year-end. So a good increase on that. Seeing the profits flow through to our equity line. And our liquidity is really strong. We have our revolving credit facility, EUR 220 million, which is undrawn. And then with our own balance sheet liquidity, that gives us an immediate liquidity of some EUR 320 million. And certainly, more ability to leverage the balance sheet and that means we're extremely strongly placed in terms of organic and inorganic growth. Just going back and having a look at our financial targets. With the COVID boost, we sail through those by long margin. So growth, 39.7% in underlying growth, organic growth and EBITDA margin, obviously, sail through those medium-term targets and our capital structure with our strong cash flow is largely unleveraged at the moment.

[Fredrik Rågmark, CEO & Director]

All right. Thank you, Joe. So those were the slides to take you through. So we're very happy to take any questions you may have on these results.

[Operator]

[Operator Instructions] Your first question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Just one question from me, and it's about what appeared to be a much better operating leverage than in the past because if we strip out the COVID effect, it seems EBITDA adjusted for leases were something around EUR 25 million. And at the same time, you're saying you're not back at the previous levels for the underlying business, as you were before COVID, still, this is kind of more than twice as high as in 2019, earnings wise. So have you done something structural with the costs? Or does the extra COVID volumes also help cover overall fixed cost also for the underlying business? Or if you could just help me explain what's going on here?

[Fredrik Rågmark, CEO & Director]

Sure, Kristofer, I'll let Joe do that.

[Joe Ryan, Chief Financial Officer]

Yes, Kristofer. We've seen a strong flow through. Yes. It's difficult to unpick the COVID impact. Remember, last time around, we were impacted just at the second half of March on that and it impacted the 2 divisions in different ways, and it was the start of the process. So we lost EUR 13 million to EUR 14 million in terms of revenues, and we were hit quite hard. So I think had we not had that situation, you would have seen a strong good pickup in terms of margins in that first quarter comparative. So there's a little bit of sort of like what we would have -- we're expecting to see anyway coming through. But then on top of that, even though we're not back at previous levels in all of our businesses, we are doing well on an underlying level in quite a few of our businesses. And that is showing through, particularly on the Diagnostics side, where we're seeing good levels of underlying demand where people have adapted to the situation's restrictions they have in terms of COVID and they're coming back and getting the testing that they need. We have our gyms business, which is closed. So we have no revenues pretty much from this business. We have our pharmacy business, which we still seem to be continuing strong impact on that. So we have quite a few businesses areas where we have -- where we're feeling a COVID impact. We dedicated hospitals in our facilities to COVID, where we're giving up good margin activities and replacing them with relatively low low-margin and activities, restructuring costs in there. So there's a lot of negative aspects still coming through in terms of COVID. We have also been investing quite substantially over several years. And these are long-term assets, which take time to put in place. And then we start to get them to work. I think, particularly the extension of our wing of the hospital in the West of Romania, as an example. So then we had a little bit of structural stuff as well, where we have people adapting how they get healthcare because of COVID. And that doesn't necessarily mean we've driven less healthcare. It does mean we could leverage some of the online assets that we have. So I think, overall, you're seeing a combination there in terms of incremental revenues coming back. And also maybe being a bit higher in certain areas, and that is then flowing through. And then also some multitude of different factors of investments performing and working and contributing and then some negative impacts from COVID continuing as well.

[Kristofer Liljeberg-Svensson]

And the comment you made about in a more online customer interactions, how important has that been for installation for improved earnings? Is that a significant explanation core factor there or?

[Joe Ryan, Chief Financial Officer]

If you look at where you're seeing the margin improvement, it's larger on the Diagnostics side. And in the comparative figures, they were hit quite hard because it's such a marginal business. So in the comparative figures, we lost quite a bit of margin in the second half from March from the fall off in terms of COVID. So there's a bit of that coming back in that 8.5.

[Kristofer Liljeberg-Svensson]

I mean that's the reason I'm comparing with 2019. And it seems like if you have like EUR 50 million, EUR 60 million higher sales now per quarter, almost half of that is just falling through down to bottom line. And that hasn't been the case historically. As I understand.

[Joe Ryan, Chief Financial Officer]

So -- and then this is what I was saying in terms of had we not had COVID, you would have seen a good margin improvement I think in the underlying in the first quarter 2020. So if you want to take it back further, then you can attribute part of that over time. The Diagnostics side is a higher operational leverage business. So when you put more volume through, you get a very good flow-through in terms of the margin, the contribution. You see on the Healthcare Services side, we got 3.5 percentage points impact. Now they were also impacted on Q2 as well, but to a lesser degree because the prepaid business was most largely untouched. The employer paid business was largely untouched. So there, it's a more subdued margin increase, more in line with just general increase in terms of investments and performance and held back still by some negative aspects of COVID.

[Fredrik Rågmark, CEO & Director]

Well, I guess, just adding to that as well that we commented on that last year that we took quite some significant sort of permanent cost structure measures, which is also part of the explanation here in addition to what Joe was saying. So overall, if you look back 2 years to Kristofer, the question you're asking, we put on, quite a lot of business. We grow strongly. And a larger portion in what you saw historically of that has fallen through. And Joe has given various reasons for that. And I think that's just important to see that I think a lot of people were historically asking that, how strong is the operational leverage when you put on more scale and what's your fixed cost base. And so I think it's a good illustration of how scale matters in our business.

[Operator]

Next question comes from the line of Karl Norén from Danske Bank.

[Karl Norén, Analyst]

So I have a question regarding the Healthcare Services side and if it's possible to quantify maybe the negative impact that you have seen now in Q1, if that's possible to explain a bit more about the trends you are seeing in the Healthcare Division, excluding -- or yes?

[Fredrik Rågmark, CEO & Director]

If you look back at our quarterly reporting since the crisis broke out, we -- previously, we have given an estimate on the negative impact. Now this is the first quarter we don't do that. And the reason for that being is that we, as I think probably all other businesses, we are running this at 12-month running forecasts. So 12 months into the future, you have a pretty good pick on what you think is going to happen. And as this broke out in March last year, basically, the month of February was the last month we had, call it, an undisturbed forecast what the world would look like when -- before we knew what COVID was. And we're at 14, 15 months beyond that now. We have no original undisturbed forecast, and we just feel that the -- it's just too much uncertainty to try and estimate what we think it would have been -- had not COVID happened. Now clearly, there is still, as we have made on this call, a quite significant negative impact from these various businesses that both myself and Joe have talked about, but we refrain from trying to quantify for this particular reason.

[Operator]

[Operator Instructions]

[Hanna Bjellquist, Head of Investor Relations]

We have a few questions online. The first one is, do you mind elaborate about the situation in India and how it affects your business there?

[Fredrik Rågmark, CEO & Director]

Yes, I can comment on that. I mean the situation in India now is, by far, the most severe situation we have seen anywhere since the crisis broke. And I think, there was a new world record set today, in terms of number of daily new infections, 360-, 370-odd thousand. So it's a really, really difficult situation for India as a country. Now what are we doing? We're operating a reasonably large number of hospital beds across the country, southern part of the country. So we are doing absolutely everything we can to provide this support possible. I think about 75 -- 75% of all beds we operate now are filled with COVID patients. We are -- as another example, we rented an entire hotel behind one of our main hospital sites to provide additional nursing bed capacity. That may not be a hospital, but it's much better than no beds at all. So we are really doing -- rather our colleagues, I should say, in India, are doing a formidable task to try and deal with what is arguably a very, very difficult situation.

[Hanna Bjellquist, Head of Investor Relations]

And then we have one question about, could you provide more layers around the key drivers driven this margin improvement in both Healthcare and Diagnostics side. Mainly curious if whether that is a trend it is expected to continue whether this is one-off impact, and we go back to more normal margin pre-COVID?

[Joe Ryan, Chief Financial Officer]

So I think we've already answered with Kristofer's question, the first part of that question. So I won't go over that again. But however, on the second part of that question, does this continue? I think the operational leverage that continues. And remember, we've got headwinds in terms of foreign exchange as well. So of the inputs that we have for some of the markets, particularly on the DX side, are foreign exchange denominated. So that's also compensated already in those figures. So our expectation is that we're going to see a strong underlying COVID, a stronger COVID business through this quarter 2 and then in terms of the underlying business, fundamentally, we don't see that, that's going to weaken. So we expect to see that is going to -- this trend in terms of the profitability side. We don't see that, that's going to -- going to weaken in the near term.

[Hanna Bjellquist, Head of Investor Relations]

Thank you. We also have one on -- could you help us with guidance for [ EBIT ] ex-COVID?

[Joe Ryan, Chief Financial Officer]

Yes. In terms of the -- in terms of the COVID-related revenues, we're not particularly using additional facilities for COVID. So we're using our existing facilities. We've added some small new locations. And then in terms of the [ DAR ] side in terms of the depreciation related to COVID. Obviously, we've invested quite a bit of money in terms of the capital side. But again, that's not such a significant number. So we estimate that -- so the difference between the 2 is not so significant. So in terms, if you strip out and roll the numbers down. So we disclosed, I think, on Page 4 in terms of the presentation. The EBIT for the underlying business, we disclosed that at 25.4%, so a margin of 9.6%.

[Hanna Bjellquist, Head of Investor Relations]

You already referred to 2022 targets, but how are you seeing facing this year with tougher comps in the second half?

[Fredrik Rågmark, CEO & Director]

Yes. I mean, we're clearly performing well ahead of the financial targets set for 2022. And I think last quarter around, we got a question isn't it up for revision given the performance. And I think the answer 3 months ago, I think is the same answer as we see now that clearly, if we see when the uncertainty in the world has reduced a little bit, I think one should recognize that perhaps it's the end of the beginning of this virus crisis. So I think we still have a long way to run with uncertainty ahead of us. So we don't really feel. It's a time when you reassess your financial targets. But would that look different in 6 to 9 months' time? Perhaps that is the time one reassess it. But clearly, we are confident that we're trading ahead of those expectations that we set for 3 years.

[Operator]

So I have one question on the line, sir, from Mattias Vadsten from SEB.

[Mattias Vadsten, Analyst]

Yes, I missed a minute or so on the call. So sorry if I missed the answer of this question. Just one from me. It was much better profitability on the COVID-19-related revenues in Healthcare Services segment in Q3 versus what we have seen now in Q4 and Q1. Of course, on lower sort of revenue contribution from COVID-19, but can you give some flavor here and how we should think about it going forward?

[Fredrik Rågmark, CEO & Director]

Well, I think you -- I think the way to think about that, Mattias, is that the most -- the point we made before is that most of the positive impact in Healthcare Services from COVID has been or was in the hospital business in India. And with those very significant admission numbers back in the third quarter last year. Now you had a little bit of pickup as I said, sort of second half of March, but you didn't really see that vastly impacting quarter 1. You will see a more significant impact from that in quarter 2, no doubt. However, one should be clear on that, the pricing in India is now come down compared to where it was 6 to 9 months ago. So although it is certainly from a financial point of view, an attractive activity for us. But from a comparative point of view, it's going to be slightly less than what you saw in the third quarter last year.

[Operator]

No further questions over the phone. Please continue.

[Fredrik Rågmark, CEO & Director]

Right. [indiscernible]

[Hanna Bjellquist, Head of Investor Relations]

I think a question mark about the EBIT margin for the underlying business.

[Fredrik Rågmark, CEO & Director]

We said that...

[Hanna Bjellquist, Head of Investor Relations]

[ 9.6. ]...

[Fredrik Rågmark, CEO & Director]

Okay. So I think we've answered all your questions, and we thank you for having participated, and we're busy looking after all our customers in India and elsewhere and look forward to talking to you at the end of the second quarter next time. Thank you.

[Operator]

Thank you. And this concludes our conference today. Thank you all for participating. You may all disconnect. Thank you all for joining. Stay safe, everyone.