Medicover AB

STO:MCOV B

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Medicover AB First Quarter 2022 Results Presentation Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Fredrik Rågmark. Please go ahead.

[Fredrik RÃ¥gmark, executive]

Thank you. Good morning, everyone, and welcome to our first quarter 2022 results presentation. So this quarter, obviously, very much overshadowed by a war situation, but you see the headline. I think we have reported really solid revenue growth and profits despite the war going on in one of our major markets, and we have a very, very forward-leaning investment profile in the quarter, which we'll talk you through.

We have been able to see what is undoubtedly, a historically strong quarter in our core prepaid employer business in Poland, with 84,000 new members in the quarter. That's a number we have never seen before. In fact, it's more than half of the growth we saw in the entire year 2021, which in itself, was with a long shot, the strongest member growth year we have ever had. So one should not underestimate that number. And that, in addition, is coming in a period when we are quite aggressively adjusting prices up to deal with the cost inflation. So one should recognize the fact that the new member count is also at quite significantly different premium levels.

Secondly, we've never had a quarter with so much money being invested to drive future growth. We put some EUR 27 million at work in organic investment growth and more than EUR 100 million in inorganic. So EUR 133 million altogether, which 96% is going to drive growth in 2022 and subsequent years. So again, a very strong investment quarter, strong cash flow for the quarter. And obviously, we're putting quite a bit of that back at work to invest for future quarters.

And last but not least, on this first page, we wanted to bring -- to draw to your attention -- we have talked about that over all of the most previous quarters, but we also have an unprecedented expansion of our health care footprint in the Healthcare Services division, where we have seen at this time last year. So over the past 12 months, we have put more than 200,000 square meters of health care space into use. And that's more than a 50%, 5-0 percent growth in the footprint in that division across the geographies with a big focus, both in Poland and particularly, India. And that's just really important, because it obviously dilutes margins short term, which some people worry about. For us, it's sort of the other way around, that we have an enormous amount of space that we're going to put customers into over the coming quarters and years, which will drive growth for many years to come. So we see that as a very strong and conscious sign in terms of how we are investing.

If we then move over to the highlights. Already made a point. No one, I think, should be disappointed with 20% plus revenue growth in a quarter where almost half of the quarter saw a war in Ukraine. Most of the questions we get are obviously focused on the war situation, and I will comment on that, but it's important to understand equally everything else that goes on in the business. Obviously, when the war broke out, 24th of February, all our attention went to the safety and security of our people. And we've had a tremendous coming together and support across our organization of course particular of Poland and neighboring country, in terms of providing relief and support to our people.

About 1,000 people have left of our workforce, including their families, about 10% of our staff are now housed primarily in Poland with colleagues, but also, in Germany as a second large host country. We've had fantastic support from our owner foundation financially to make this happen. And I'm extreme -- as I write in the report, extremely proud in terms of how our values and cultures have been manifested in terms of how we have supported and continue to support our colleagues in Poland -- in Ukraine, I'm sorry. We will speak more about Ukraine specifically on a subsequent slide.

So revenue, north of EUR 380 million, so 20% growth, as I mentioned, of which just short of 14% of organic. COVID continues to be around. We get a lot of questions on what will happen with COVID. You see this quarter, we have actually more COVID revenue than we had the same quarter last year. Obviously, it will -- it is dropping and it will drop off in the second quarter, and I'm sure we will get some questions on this later on, so I will save the commentary to the Q&A session at the end.

Good growth in Fee-For-Service, 21.8% growth, and so we continue to see that growth momentum. I draw your attention on the pie charts that we talk about every time at the bottom. Particularly, then you see the Ukraine pie chart, that up until the 23rd of February had typically 20-odd percent revenue growth, I think it was even 25%. And that then reverts to minus 27% for the quarter. And otherwise, you see, I think, strong growth throughout the geographies. Poland, up 27% as a geography, I think, super strong. Germany has a large market, 15% up, certainly very strong. And equally, you see the -- on the left side chart, the funded important business, up 15% revenue-wise and that's despite the [ slot ] being weaker. So particularly strong to see a euro number being reported like that.

Going then to EBITDA, EUR 62.6 million, slightly down from last year and a margin contraction of some -- just around 4 percentage points. Adjusted EBITDA, slightly up versus last year and the smaller margin reduction. It's an unusually large difference this quarter around between EBITDA and the adjusted EBITDA number, and that's driven by the normal IFRS 2 charge that we have. But in addition, this quarter, right, we have a much larger M&A cost charge for -- coming out of the very intense M&A work that I just talked about earlier with closing fees, et cetera, out of that.

We've seen higher medical costs, particularly in Healthcare Services this quarter. That really is a result of seasonality primarily, but also, still a bit of a catch-up effect after the, call it, sort of pandemic opening up back to normality. We've had an unusually high infection season in the spring, and we expect that to normalize. Clearly, you have an ongoing underlying cost inflation that we have talked about every report, I think, since we listed that it is more accentuated than ever. The good news there is that we are able to price compensate to an extent that perhaps, personally, I was not expecting a year, 1.5 years ago. One must though realize that there is an inevitable time lag between this, because the cost impact is instantaneous and the price compensation takes 3, 6 and even, sometimes, 9 months to effect it across a very large stable of contracts.

EBIT, you see larger deviation on EBIT as you work your way down through the profit and loss account from the Ukraine effect, et cetera. We also did an impairment charge of EUR 5.1 million relating to assets in Ukraine that either are damaged or to be considered at risk. We will speak more about Ukraine later on. And on the back of the much higher M&A activity, we also had increase in the acquisition-related amortization charges, as you see.

Going then specifically to Healthcare Services, super strong revenue, up 32%, of which, just sort of 23% organic, that's just a really strong number. A little bit of COVID revenue, much less here, obviously than in Diagnostics, as we have seen all along. And the Fee-For-Service number here is quite outstanding, so more than half of revenue in this division grew 46% for this quarter, obviously, on the back of a lot of M&A work. But again, I remind the fact I talked about earlier, how much new space we have put on, which we will be busy over the coming quarters to fill with more business. So it's a very sort of strong forward-looking outlook here.

I talked quite a bit already about the member growth across the countries where, obviously, Poland, being the largest ones, now just short of 1.6 million members. And we really see a robust demand across the board, really, so there's nothing specific, which is much stronger than something else. We've been busy then, as mentioned, M&A-wise, we bought in a hospital in Romania, in Cluj-Napoca in the sort of middle northwest part of the country. We bought a quite significant business in Poland that we have talked about, a hospital and medical service network business down in the Southwest. We continue to add to our gym chain businesses across Poland to support the sports card business. We bought Vision Care business to build on the existing organic vision care growth we do. And we continue our very ambitious expansion in India, both acquisition-wise and a strong organic growth profile.

And if you look on the -- perhaps just draw your attention to the geographic, the right pie chart there, with India now being up to 17% you see of Healthcare Services and growing revenue-wise to 39% year-on-year, which I think is a good reflection of the point I made with expansion. And really, in India, relatively speaking, that's where we have most of the new footprint relative to what we have today to be filled over the coming years. So you will continue to see a strong growth number coming out of there. EBITDA for Healthcare Services, EUR 25.7 million, margin-wise, down. Two reasons for the margin contraction here, one being the higher medical loss ratio, which is seasonality on the one hand. And secondly, the cost inflation I commented on, we are confident that we will recover the lost margin on cost side as we price growth increased throughout the year, but there is this inevitable time lag that I commented on.

And the second reason, really, is this super strong conscious expansion of facilities, which obviously, short term, do depress your margins and we're very convinced that is the right decision that we have taken or take on an ongoing basis. I made, I think, enough of points in terms of what we have expanded, but only perhaps making the point in terms of, you see, 1,900 hospital beds in India alone over the last 12 months. That is the size of quite a few hospital groups in total that we have put on just additional hospital beds over the last 12 months in India. I think that's covered all the points on that side.

Moving on to Diagnostic Services. Obviously, revenue growth here much more subdued due to the situation in Ukraine, so 8% up. In fact, I think it's actually a very strong sign that we are growing 8% with a major war going on in one of the top markets in this division. So I don't think one should underestimate that. EUR 54 million of COVID revenue, up from last year. It's sort of a mixed bag, in that Germany has remained strong throughout the first quarter, whereas COVID-related testing dropped off quite significantly sort of halfway through the quarter in the other markets. And obviously, in Ukraine, it sort of disappeared completely midway through the quarter. So quite a mixed bag. Fee-For-Service, which is 2/3 of the division here, grew 3%. And again, that's the Ukraine impact coming through. In fact, the number of tests, as you see, slightly declined. And that's also visible, same numbers on the pie charts here. I already made the comment on Ukraine on the group chart. And obviously, it's the same number here on Diagnostic Service, as you see.

So EBITDA reached EUR 44.2 million, here. For Diagnostics, it is slightly down from last year, and the margin contraction for -- largely for Ukraine reasons. COVID continues to contribute to profitability and we continue to invest, I think that's an important message. I've said that 2 or 3 times already. And it's the same time with the -- same thing in the Diagnostics division, keep expanding the BDP network. And we've also completed some acquisitions here, a smaller lab in terms of our [ bolt-on ] strategy around the Serbian business and then having a regional network around Serbia, we bought a smaller business in Bosnia. And we also completed, which we have talked publicly about before, an acquisition of a real exciting genetics lab, where we previously were minority shareholders in Cyprus, and we're now busy integrating that.

Just to remind you about Ukraine, we remain positive and optimistic on Ukraine. It's a terrible thing which has happened and which is ongoing. And I think it's a testament to the importance of our services that we actually still can keep operating, albeit at obviously, quite reduced level. You see the map there, all of you, I'm sure, are very well aware of the areas in the Southeast that is currently under occupation. We left the previously occupied territories all in 2014 where Russia first invaded part of the country. But in terms of the areas that now are at risk, you see the city, Kherson, just north of Crimea, East of Mykolaiv there, we have a smaller lab, which obviously is closed and -- but actually then under occupied territory. The second largest city in Ukraine is Kharkiv, and that's also where we have the second largest lab, which is obviously closed. The Kyiv lab, which is by far the largest and most important for us, we have an ambition to be able to open that gradually over the course of next week. And basically, we operate our BDP network in the western and central part of the country. So that's sort of from an operational point of view, how it looks.

3,500 people I mentioned about 400 all of those employees are now residing with our colleagues in Poland and Germany, with their families, et cetera. About 1,000 people in total have left. In fact, since about 2 weeks back, the flow of people across the board is largely neutral. So more or less, as much people are coming back from Poland into Ukraine as people are leaving. And that's the same thing for our -- the flow of our own employees. Actually, we've had pretty much the same number for the last 2 weeks or so. I made the point before, I repeat it again. I think it's an incredible testament to the culture of our organization to see how our staff really, across the board, have volunteered, whether it's financial contributions or their own time or their house or their beds to support people in dire needs. So we will hear when this situation is over, there will be many fantastic stories to tell later on.

Moving on to the next slide. Again, I mentioned the point we expect to open the Kyiv lab site next week. That's really important because many of the more advanced tests that is in high demand across Ukraine can only be processed in the lab in Kyiv. So with that, gradually being up and running back again, we distribute also the much more advanced and needed tests. And I think it's really the essential nature of our services that is evidencing itself in demand across the country, even in a situation like this. Sometimes, perhaps, it can be difficult to understand why people want to go and do a blood test when there's a war going on. But health care is essential and it's needed in a situation irrespective sometimes of a war going on. Joe, I'm sure will talk a little bit more about the impairment situation on. And the table you have here where you see the breakdown of our assets and profitability in Ukraine on the corresponding quarter last year and the full year last year. And we're right in the report that revenue now in -- as we speak, is approximately running at 10% of the level before the invasion happened.

Now, what's important to point out there is that, of course, there was quite a lot of COVID revenue before the invasion. So if we strip out and compare to quarter before COVID came into the world, we're sort of trading at around 20% or 20-plus percent level now versus a normal situation, which I think is actually significantly above what most people would expect there. Now, it's difficult to predict, of course, and it's highly uncertain, that's important to point out, a war is perhaps the most unpredictable thing. But as long as it stays in the Southeast, we expect this trend to continue.

And with that, I hand over to Joe to talk a little bit about the financial overview.

[Joe Ryan, executive]

Thank you, Fredrik. So just a few highlights on here. Net interest cost, EUR 6.9 million, of which some EUR 4.8 million is the imputed interest for IFRS 16 leases. So our underlying interest run is about EUR 2.1 million, which then, if you sort of annualize and look at our gross debt level of about EUR 490 million, giving us a very good financing rate. FX loss is EUR 2.2 million. Again, EUR 1.4 million of this being noncash related to the IFRS 16 movement for euro-denominated leases in Poland, which then comes through the P&L account and creates a bit of volatility. Now, the tax charge, we're looking around about 28.2%. We're sort of looking forward for the year and sort of looking to be would be around about -- outlook would be around about that sort of rate for the year. Cash flow from operations, a strong EUR 63 million cash inflow, working capital up a little bit at EUR 17.2 million. Our loans net of cash and liquid short-term investments up to EUR 257 million from EUR 143 million, and that's a factor of over EUR 133 million of organic and inorganic investment and then our own generated cash flows.

If we move over on to the next slide, our -- We issued our second Schuldschein issue in December last year. The gross, we raised EUR 277 million. We retired of existing Schuldschein, EUR 35 million as part of that process. So net, we bought on EUR 242 million of new debt into the group. Settlements were split between December, January and the last one was in April, one of the joys and nice things about the Schuldschein is you can be flexible on the settlements. We didn't need the cash, so we could stage it.

We also then in the quarter, we paid EUR 40 million nominal of the old Schuldschein and we made a gain of EUR 2.4 million. In doing so, we bought that back at a discount, that's reflected in the income statement. We have -- If you look at the Schuldschein, we have something like about EUR 350 million issued now for our Schuldschein financing. And that is issued at an average rate of 1.15%. So it's a fantastic rate. And on top of that, of that EUR 350 million, we have about 40%, which is at fixed rates. So we're facing an increasing interest rate environment, but we've got 40% of that fixed. And if I look at the duration, we've got an average of 5.8 years average duration on the Schuldschein, but the fixed part is actually heavily weighted to the longer period. So we're in a very good situation, also, in terms of writing out the increase in interest rates, which are coming.

We have a really strong position in terms of liquidity. Got around about EUR 430 million liquidity availability. But within that availability, we've got EUR 237 million, which is cash and short-term liquid investments. So we're in very, very strong situation in terms of executing our investment agenda. Our leases have increased, so our right-of-use lease liabilities have increased, and Fredrik mentioned that before. This is a really strong driver for growth because those assets are going to be with us for many, many years, driving our growth, the end of the year, driving our growth next year, driving our growth for several years. And those assets, once they become operational and effectively mature, then, continue to throw off cash flows.

Our capital investment has also been strong, EUR 27.3 million. And because we're up to that level of investment, more of it is going into our growth. So whereas traditionally, we've been about sort of 2/3, 1/3 in terms of growth of maintenance, we're actually at 81% now. And our agenda to continue that capital investment at a strong pace is also there for the rest of the year. We have, as we mentioned before, our Frankfurt on other new central lab, which we're putting up. We have quite a heavy investment there in microbiology, which will be done in the year. And that is automization, which helps us deal with the cost pressures in terms of salaries and improve our operational efficiency. And again, we'll be there for many, many years.

A long-term contract we have on that for 5 years, locked in pricing, which also helps us to manage the inflationary background. And that's a typical sort of thing that we do. We've got Romanian hospital, which we're continuing to execute on as well in Bucharest, a large new hospital, which is in the process of being constructed there as well.

IFRS equity, that's down slightly a few different moving parts in that. We have negative translation movements. We also have movements on this put option liquidity obligations, which we have, which goes through equity. And then we also bought out the noncontrolling interest in our Serbian entity at 20% of -- we brought out in the quarter. Our loan situation in debt at this level is good. So we're at a low net of cash and our short-term investments, we're sitting at 1.2x EBITDA. So we have lots of capacity to continue that very strong investment agenda that you see in the capital spend, the organic side and also, then in terms of more inorganic as we go through the rest of the year. You see that already in the subsequent events that we've been continuing to execute on our inorganic agenda.

So if you flip over to the next slide of 15, you can see the investments there in terms of the inorganic and so around about over EUR 133 million that we've invested for the quarter. Laboratories that we bought, hospitals in several different markets, medical clinics as well, one more gym business to help complete our gym network in Poland and also, a Vision Care business, which is synergistic with our -- with medical clinics and our services to our prepaid clients, our business paid members in Poland.

And then, you can see also in terms of our continuing agenda on the inorganic national cases of clinical trials business sitting up in the Northeast of Poland, and we'll integrate that into our clinical trial support service. And it would also expand the range of what we do, so we can actually provide a more comprehensive service and actually take out some of the synergies from the other clinical assets that we have sitting around in Poland, and multiply the effect of that.

Smaller transactions as well, a dental clinic, a laboratory business in Poland. And what's very interesting is our first investment in psychology and psychiatric services, a small chain in Poland, a really high demand. Anyone who's had in their family psychology issues, particularly with adolescent knows how difficult it is to anywhere in the Western world to get access to those services. And those are in high demand, and we've been very fortunate to bring in a good support business there, and that will help us in terms of servicing our clients and looking after them and providing them a comprehensive offer.

And as I said, anyone who's seen that is being involved with anything in their family or with their friends, but they know it's really hard to get access to those services. So bringing that in is a real feather for us. We're really happy about that. That's sort of a perfect type of synergistic inorganic investment that we're looking for and great to be able to execute on that.

We look at our financial targets, on the -- really happy in terms of as you look at this, even with all these headwinds that we have against us, fantastic organic revenue growth. So well ahead of our targets on what we're looking there with -- so really, really strong on that. If you look at our profit measure, adjusted EBITDA margins. So we're still well ahead in terms of our stated objectives for the end of this 3-year period in this year. And our capital structure, great, really good leverage level. That's up on where we were at the end of the year, but that's exactly what we want to do in terms of bringing that up with our aggressive investment expansion. And we have lots of capacity in terms of keeping that organic and inorganic agenda full speed, and that's what we're going to be doing for the rest of the year.

So I hand back to you, Fredrik.

[Fredrik RÃ¥gmark, executive]

Good. Thank you, Joe. And with that, we wrap up our presentation, and we're very happy to try and answer any questions you may have.

[Operator]

[Operator Instructions] The first question comes from the line of Karl Norén from Danske Bank.

[Karl Norén, analyst]

So I have a couple of questions. But maybe, if we start with the margin side. Of course, quite down year-over-year. But I was wondering a bit on the pricing side in both divisions. And if we start with Healthcare Services. Is it possible to maybe quantify when you expect to have, let's say, fully compensated for the higher cost that you're seeing right now with higher wage costs and for building new facilities, et cetera? Any comments there would be helpful.

[Fredrik RÃ¥gmark, executive]

Yes. I mean, the call not -- I'll try and answer, but it's -- I'll start with sort of commenting that it's -- there's 2 sides to that, because on the one hand, you say how -- what's the inflation outlook going to be? There's lots of debates how is inflation going to abate and start coming down, when supply manufacturers or perhaps, a bit more ironed out. So that's an uncertain thing. Now, what I'm saying, the kind of inflation price adjustments we see now, I said 3 to 6 months. And if you want to be conservative, you say 3 to 9 months. We have, as I think we have talked about before, we have 2 standard indexation cycles in February and October. So a large part of it happens in those 2 cycles, but obviously, there's activity going on in between, because with the levels we see now, it's just not an automatic thing to send the letter and just increase price. So you've got to negotiate. So -- But if you take 6 months as an average, that's probably the best guess you're going to get, I think. Then remember on all the Fee-For-Service business, it's quite different. Because there, you can much more instantaneously adjust your pricing. So it's quite a different dynamic in those 2 situations. So...

[Karl Norén, analyst]

Yes, I understand. But what would you say that you have compensated fully in the Fee-For-Service business? Or are you still maybe lagging a little bit, let's say, to keep affordable prices? I think you wrote something like that in the reports.

[Fredrik RÃ¥gmark, executive]

Yes, absolutely. I mean, you do have a time lag because it is not that you compensate that straight away in one adjustment. You -- I mean, if you -- it's different from different business lines and also, it's different from country to country. But you've got to keep it affordable, but over a period of time, compensate your cost growth. That's really how we see it. So you do that in different steps, but there's no standard answer to how many steps is it because it relates to the geographic environment and it relates to the particular business line.

[Karl Norén, analyst]

Yes. That's clear. And then, can you just remind us, maybe, of how the situation looks in Germany, because you have a kind of a different business model in the diagnostic side there compared to how you operate in the Eastern Europe?

[Fredrik RÃ¥gmark, executive]

So the German pricing -- the public pricing in Germany is well, fixed, so to speak. It happens every now and then that they adjust it. But for now, you can assume it's fixed. So the -- that's one of the reasons why we argue so strongly in the other place is that you want to have private pay revenue so you can adjust your pricing. But in Germany, so -- the public side of things, prices are stable and regulated by the public authorities. And in terms of the private side there, that's the geography where you would see the smallest adjustments, if any adjustments at all.

[Karl Norén, analyst]

Okay. And then, a question on the member intake in the integrated healthcare model. I think it's very, very strong. Can you say anything if it's like a one-off that you took one large customer on? Or is it very much a broad-based demand for the service?

[Fredrik RÃ¥gmark, executive]

It's broad-based. I think we talked about last quarter around that the impact of COVID on the situation where if employers recognize the need for these kind of services before, they certainly recognize it even more now, which I think is one part of the explanation here. But -- so it's a very robust demand across the board.

[Karl Norén, analyst]

Yes. Nice to hear. And then, just the last one from my side. On Ukraine, of course, a big strategy for all. But I'm just wondering if you could tell us a little bit more, maybe, regarding, let's say, the cost base and how you expect it to change versus in the second quarter versus the first quarter? I think you said that you are trying to -- of course, to bring costs down, but if you could give some kind of outlook there, I think it would be really helpful.

[Fredrik RÃ¥gmark, executive]

Yes. So you want to have a go at that, Joe?

[Joe Ryan, executive]

Yes. So Karl, obviously, it's a tragedy. But then we've got a fantastic team of people there, a fantastic management team, and we've been supportive of our staff in terms of helping them, so we continue to pay our staff in March and for the full year in February. From April onwards, we've adjusted the salary level. So we continue to pay staff who are working in the business, obviously, but at a slightly lower level. So people working in the business, we're now paying sort of 30% less people in the clinics and the medical facilities and the -- who are working actually in the business.

In terms of management staff and the support people, we cut that back to 50%. And then in terms of our cost structure, we're in negotiations with our landlords in terms of adjusting our cost base as well. So we're sort of filling the cost base to the revenue levels we have, but there still means currently, we're making deficits, but not a significant amount. And whilst we still are in a situation where, as Fredrik said, we're actually doing sort of like quite surprisingly high levels of activity and we've got quite a good base of services open, then we're -- I think we're in a good position in terms of having a potential for the business to come back very quickly. So that's sort of roughly where we are, gives you an idea and a flavor.

[Karl Norén, analyst]

Yes, that's clear.

[Operator]

The next question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Yes. Have quite a few number of questions, I hope that's okay. First one is when it comes to nonrecurring items, I'm trying to understand the bridge here between EBITDA and adjusted EBITDA. You mentioned you had M&A cost of EUR 2.9 million negative. We also had the incentive program of a negative minus EUR 2 million. But then also, this capital gain of EUR 4.4 million related to the NIPD Genetics business, where is that showing up in the P&L?

[Joe Ryan, executive]

That comes in your other income line. So that's on your other income side. It's not part of the EBITDA number. It's not part of the adjusted EBITDA numbers. So the adjusted -- so that's not in the operating profit, that's in other...

[Kristofer Liljeberg-Svensson, analyst]

So in the other income cost line, EUR 1.3 million or...

[Joe Ryan, executive]

Other income costs line? Yes, other income cost line.

[Kristofer Liljeberg-Svensson, analyst]

Okay. [ But what then says ] in there because that amount is -- the net amount is EUR 1.3 million. So that's...

[Joe Ryan, executive]

Yes. We've got that explained in the commentary. So you've got EUR 2.9 million negative movement in terms of other investments. You've got then also, a positive movement in terms of the buying for this debt issue, so the discount that we bought in.

[Kristofer Liljeberg-Svensson, analyst]

But there must be some big negative factor in there. If the net effect is EUR 1.3 million. But maybe, we could come back to that. My second question coming back to the previous one about the health care margin and the negative factors here. Is it possible, maybe, to give a flavor for how much the different factors impacting? What's worse? Is it this lag of price increases relative to inflation? Or is it the investments you're doing for future growth?

[Joe Ryan, executive]

Yes. So just to clarify on this previous question, Kristofer. So we had -- we got the EUR 4.4 million positive, which is through other income and costs. And we've got then a EUR 2.9 million negative in terms of investment movements, some mark-to-market values. And then, we've got the positive EUR 2.4 million for the discount on the nominal value that we brought in, and that's through other financial income expenses. So you just got the 2 items, the EUR 4.4 million and a negative of EUR 2.9 million through other income. But it's not in EBIT, and it's not in the EBITDA number. The second question, Kristofer?

[Fredrik RÃ¥gmark, executive]

I can take that, Joe. So I think, the way to think about your second question, Kristofer is like this. If you look at the margin contraction in Healthcare Services, that is approximately 2 percentage points. Now, if we -- if you look at the, what we call, the medical loss ratio in that business, that is down about 4% for the equivalent period. So in fact, everything except overall medical costs are positive margin movement year-on-year. And within that movement of medical costs, I'm not able to give an exact quantification, but the biggest impact of that is -- there's 3 things going on. One is costs in general, which we compensate with price growth over, I said, 6, 9 months. Secondly, is utilization of services in the integrated model, which were seasonally, but even for a high seasonality, it was high this quarter due to these effects that we commented in the report. And third thing, is the facility costs we have then taken on at a rather unprecedented scale. So those 3 matters all end up in the cost pool -- medical cost pool, which pushed up the medical cost ratio that way.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And also, the M&A costs you define as nonrecurring, when you report EBITDA for the Healthcare Service business, that EUR 2.9 million is included there?

[Joe Ryan, executive]

No, Kristofer. We -- the M&A costs we take under the central, so within the divisional segment results, when we report those, there's no M&A costs or -- reflecting those. So that's just the pure business result. We take that on the central part, and that's why if you disaggregate the total the segments from a total, you see a much higher central costs for this quarter because we got EUR 2.9 million in there. Now, just to be precise in respect to this, you understand what that is, that's nonrecurring costs, external costs in terms of advisers and the success fees and legal fees and insurance fees and stuff like that associated with the acquisitions. So we had an acquisition team as well within the business. Now, that's a recurring cost because we keep them employed. And that's part of our operational costs. So that's not adjusted out. So it's just the purely nonrecurring costs.

[Kristofer Liljeberg-Svensson, analyst]

Great. I'll continue. Two more. What's your best guess when it comes to COVID revenues for the Diagnostic business in the second quarter, sequentially?

[Fredrik RÃ¥gmark, executive]

Significant reduction. So I think, you see a significant production in -- actually not in infections. I mean, you see it actually the BA2 variant is spreading very quickly. But a lot of countries have taken away testing requirements and consumer behavior follows that quite -- Germany probably remains the highest testing country, I think, in Europe. But also, in Germany, is dropping. And then, I think the big question, of course, will be -- you didn't ask that, but I answer that anyway. The big question will be what happens after the summer. And your guess is almost as good as ours, but I don't think we have seen the last of COVID, put it that way.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then, the acquisitions you made in the quarter, this might be in the report, but have you disclosed how much that will add to sales on a pro forma basis?

[Joe Ryan, executive]

Yes. So we have provisional purchase price allocation in the notes there, and we also then disclose in terms of the figures in terms of revenues and things like that. So you can see -- get that information. We break out the 2 larger ones, NIPD and CDT Medicus. So it's around about 100 -- on enterprise value, it's over EUR 140 million, but because we have some minorities and things like that, obviously, what we pay is less, and some of it is then also deferred as well. So that's why we've got EUR 106 million in terms of the cash out for the acquisitions. And we recognized EUR 67.5 million in goodwill. And then also, we've recognized quite a bit of intangible value as well. So we've got brands and patents and that type of thing that we recognize and are amortizing. And that's why the amortization charge related to acquired businesses has gone up as well.

[Kristofer Liljeberg-Svensson, analyst]

Great. And my last question related to Ukraine. Is it possible to say what the current run rate is when it comes to losses or if you even think you could be breakeven now with the lower cost you expect to have from the second quarter? And when you open this laboratory in Kyiv, how much sales will that add, you think?

[Fredrik RÃ¥gmark, executive]

I think that's just really difficult to answer, Kristofer. Because as I said before, the -- I don't think anything is so unpredictable as to what Russia is up to. So I mean, I think if you do take the assumption, which can be criticized, but just to try and answer your question, if you do take the assumption that the conflict will go on but will stay in the sort of areas where it is now, then I think it's a reasonable assumption that we, gradually, will see a pickup in our business for the remainder of this year across the country. Because the services are so important and so needed. I said we're running at about 10%, say, 20% ex-COVID, currently. You probably need to sort of double that and perhaps, a little bit more to stop losing money. And how fast that goes, I think, will -- is connected to the recovery. It may go faster than we think, but I think it's just so dependent on the behavior of Russia. So therefore, it's...

[Kristofer Liljeberg-Svensson, analyst]

I think that comment is very helpful. Absolutely.

[Joe Ryan, executive]

Kristofer, we're such an essential in growing part of the health care system in Ukraine, that we see it as we're obliged to continue to be able to support the population. So that's what we're doing, currently. It's costing us money. It would probably be cheaper just to shut down everything. But the fact is that, that is recognized across the community. And it is certainly in the eastern parts, we're the only people operating. In the western parts, we have other people still operating. And I think that, that puts us in, in terms of not only helping our people to keep them focused and keep the whole business organized, it means that if we do get to a situation where we've got a resolution of any sort, then we'll be very well-positioned to rebound very quickly. And we see -- we do see a future for Ukraine of some sort. Take your view in terms of what it will be, but we will be an important part of the healthcare system for Ukraine when it comes back.

[Kristofer Liljeberg-Svensson, analyst]

Great.

[Operator]

The next question comes from the line of Grace Lee from Jefferies.

[Grace Lee, analyst]

I do also have a few questions and prepared follow-ups. I will start with the first one. On impairment, because it wasn't asked, how do you sort of kind expecting potential further impairments into next quarter and the rest of the year, please?

[Joe Ryan, executive]

So the impairment part is -- we've obviously got some damaged assets in terms of the conflict, particularly obviously in the East. If you look at our lab infrastructure, we do not have damage to our lab in Kharkiv, in Kyiv and actually, none of the laboratory facilities are damaged. We have lost control of one of the laboratories in Kharkiv, and we have obviously damage and lost control of a number of the BDPs in the occupied areas. So that's what the impairment is. Obviously, Kharkiv is at risk. If that situation degrades them when we could have additional impairment charges.

[Fredrik RÃ¥gmark, executive]

[ In lost controlling currency ]...

[Joe Ryan, executive]

Sorry. So in Kharkiv, that's one of the assets which is exposed, so we could have additional impairment charges coming through. But the situation today, we think that that's where it is as we see, Grace. So as Fredrik has mentioned, it is unpredictable. We can't really see where it's going to go, but there could be further charges for impairment. But it's a noncash charge, so we see what happens.

[Grace Lee, analyst]

Okay. And then, just a follow up on that sort of margin and also, revenue in terms of again phasing and the exit rate into Q2. Could you just a little bit comment more on that sort of January, February versus March, for example, how that revenue and underlying margin you sort of saw phasing of that through the Q1? How do you think about it for the rest of the year, again, just a follow-up on that?

[Joe Ryan, executive]

If you look at the Diagnostics segment side, the impact there in terms of the margin is largely to do with the impact from Ukraine. We have some other issues there as well, but they're minor. It's the Ukrainian situation is the largest impact on the Diagnostics side. If you look on the Healthcare Services side in terms of, as Fredrik was mentioning, we have 4 percentage points higher in terms of the medical cost ratio.

Now, we've been doing this for 27 years. We've seen this before. We've been through these cycles before. You see very strong member growth, and you got that, because you've got a backdrop of very strong employment market. So you've got accelerating inflation partly driven by all the sort of cost things that you see everywhere else, but also, quite strongly in Poland, in particular, driven by wage salary inflation. And the issue for us is not inflation itself. We've had inflation many times. It's acceleration of the inflation. So we've got a lag between when we index and when we've got feeling the cost increases. So as that accelerate -- that inflation decelerates, then we will catch up in that respect. So that's what we expect to see.

We also then have on top of that, the high utilization levels, the utilization levels driven by the sort of rebound from COVID for infections and on -- in terms of driving utilization. But that's a seasonal factor. We see that before as well, so we expect as we go through the year, we'll manage with that quite well. We've don't particularly -- not particularly worried about that. We're not particularly concerned that that's going to be a feature you're going to see going forward.

[Grace Lee, analyst]

Yes. I agree with all those points, it still relates to mainly sort of, for example, Ukraine. I mean, volume, for example, BDP, I think you mentioned 188 as of 26th latest sort of data that you mentioned. So about the phasing of that, how should we sort of like, how that, for example, impacted in your quarterly results and phasing-wise on the month and how we should be -- any help in terms of guiding that phasing into next quarter is mainly my point.

[Fredrik RÃ¥gmark, executive]

Yes. Well, what I mean -- I think that's what I was trying to answer to Kristofer, at least. Basically, on a run rate basis, if you go back and look at the quarters we reported before this happened, we're saying we're running at about 10% currently, and that's where we are, as I speak, perhaps 12%, 13%. What's that going to be in 3 months' time, that's just really difficult to predict. Perhaps, it's going to be twice that level, 25%. It could be, but we don't really know. And so I don't want to lead you into us having an expectation specifically what it will be. We have a strong expectation, the point Joe just made that there is a tomorrow for us in healthcare in Ukraine. And perhaps, even stronger tomorrow, because lots of our competition will be gone. But until the dust settles, so to speak, it's just difficult to predict how quick the recovery will be.

[Grace Lee, analyst]

No, I appreciate that. And just following up on the COVID, you mentioned about the significant drop off for 2Q. Again, can you just help us in terms of obviously, the margin negative impact would be EBIT pressure on your margins to Q2. First is all this inflation time lag that we mentioned, again, that dynamic of have impact quantify. Any quantification around that would be also helpful.

[Joe Ryan, executive]

Grace, in respect on the Diagnostics side, we're not -- we don't have the same situation in terms of inflation. The inflation is particularly strong in Poland and Romania in the healthcare services side because those businesses are very dependent with labor. So our biggest cost element in both of those businesses. And the inflation that we're seeing is driven in those markets largely by labor. The last component is labor cost increases. So that is what's driving on the Healthcare Services side. So we're going to face that situation ongoing. And it's a strong labor market, and we benefit one side and it cost us on the other side. So with -- you see with a strong member increase. So on the Diagnostics side, the inflation, we're managing quite well. So it's not such a big issue for us. We've got fixed price contracts for a lot of our inputs and supplies. So we're not sort of -- this is sort of covered and managed. And we've got labor cost increase, but as long as we can manage in terms of pricing with indexation to our customers and with the continuing investment in automization and we can manage that quite well.

[Grace Lee, analyst]

Yes. But obviously, there is that sort of negative margin pressure coming from dramatic COVID testing going on into 2Q. So how much of that -- yes, sorry.

[Joe Ryan, executive]

Yes, you're correct, Grace. So with COVID going down, COVID is a higher contribution as we've broken out last year, and you can see that the reduction in COVID will go through in terms of the overall margin. That's clear.

[Fredrik RÃ¥gmark, executive]

And I also chip in and we are not going to quantify what that drop is, because in all fairness, we're sort of through April, I said we expect a significant drop, but we don't really know what the COVID revenue levels are going to be in Germany in May and June yet. So the fact it's dropping undoubtedly. I also just remind you, Grace and everyone else has an interest in that, we made the comment in the last quarter that the reason why we have stopped now to split out the profit contribution, it's not that we don't like to be transparent. I think we have been more transparent than most in terms of the COVID, non-COVID contributions through the COVID situation.

It is just that now, we are 2-plus years into this. So to compare with a completely undisturbed situation is becoming increasingly difficult, and sometimes even impossible. Plus, what proportion of what we have -- what we all think about as COVID testing will become permanent, systemic higher testing that will never go away. Again, that's an uncertainty. So it will certainly be a positive equation. I am convinced that a lasting impact of COVID will be a higher testing level in general, but no one really knows at what level. And that's really the reason why it's really difficult to sort of pool the money in which pocket it should be, so to speak. So it's going to be lower in the second quarter, significantly lower than in the first quarter, but it's difficult to predict exactly how much.

[Grace Lee, analyst]

I appreciate it. And the last question for me, so what can we expect in terms of update on your midterm guidance?

[Fredrik RÃ¥gmark, executive]

Well, that's a really good question. Thank you for asking that. I think we originally had a plan to do that during the spring. And then this event in Ukraine came on to us. And for obvious reasons, we're pushing that. So rather than doing the update during the spring, we will do the update during the autumn, when we see more how the Ukraine situation is being resolved.

[Operator]

The next question comes from the line of Dani Saurymper from Pacific Asset Management.

[Dani Saurymper, analyst]

Just wanted to say, obviously, thank you so much for all the efforts you're doing in Ukraine, and considering all of the turmoil progress you're making. Could I ask a couple of questions as it relates to the hospitals you're operating in particular, you have expanded the number of beds on the basin by about 20%, 25% just from year-end. And so I was just trying to understand the profit phasing, those incremental new bed openings. And if you could also drill down, in particular, as it relates to India, you mentioned changes in legislation that stalled some utilization around fertility treatments, which then materially rebounded, and long term, you think that's a positive. So just if you could expand upon that. That's my first question.

[Fredrik RÃ¥gmark, executive]

Sure, David. Do you want to...

[Joe Ryan, executive]

Yes. So I'll take the last one and the first one. So it's been coming for quite some time in terms of list of changes in Poland to regulate the sector. It came in and there were some aspects in it which were not clear in terms of how it could be operated. And this created a lot of uncertainty, particularly around off-site donations and things like that. So that's all been cleared, and we've seen a very good pickup in March, and we were -- have been of the view that legislation regulation will be supportive for us because, obviously, we fully comply with all of those type of things, and that will take out a lot of supply, which is questionable in terms of its ethics and how it does their business. And we see enforcement of that as well. So that's a good thing in terms of what we see. So we see that the field of playing will become a lot level. And we see that particularly in the pickup in March now as well.

Then in terms of your question in terms of hospital beds and what we've done. Today, we're looking at, in India, we've got about in terms of total capacity. So that's not operationalized beds, that's where our capacity at the facilities that we have that we could operate, put together if we wanted to. Just short of 4,300 beds. And we got out of that about 4 -- just over 4,000 which are operationalized. That's not chargeable beds. We've got about 3,000. So that's all beds including inpatient care, obviously, dialysis, operating theaters, et cetera.

So we've got about what we call that just short of 3,200 chargeable beds that we charge based upon. And so if you look at that in terms of the newest facilities that we've got coming online there. So the newest one is a facility called [ DHINAKARAN ]. And there, we're doing really well. So we've got 200 chargeable beds of that facility, and we've got 96 beds occupied yesterday on that, and that's a 48% occupancy ratio. So we start to do really well when we start to get -- we start to sort of get to the breakeven level, we get over about 50% occupancy. We start to do really well and we get about 60% occupancy. We're doing fantastic when we've got about 70% occupancy. So I hope that sort of gives you some sort of steer, Dani.

[Dani Saurymper, analyst]

Yes. And just to pick up on this, though. I mean, if you think about your Q1 reported margins of 17.7%, you've had, obviously, very unfortunate headwinds from Ukraine, which maybe, is a 50 basis point headwind. You've had headwinds from utilization of chargeable beds or at least, in the early infancy of operation, a drag on margin. I'm just curious, what do you think in a sort of if we hadn't had this sort of landmark event, and if your operational utilization of hospitals was near the 50% to 60% mark, what would you sort of point towards in terms of underlying margin? Because I feel like there's an awful lot of potential -- hidden expansion as you've had your margin limited -- yes.

[Joe Ryan, executive]

Absolutely. Absolutely, Dani. I mean, the best here on that is if you look at the lease liabilities and how that's grown. Because we use leases, operational leases for our real estate. We bought some of the properties, so that the CDT Medicus acquisition, a lot of that property is actually owned 4 hospitals and on that. But if you look at the lease liabilities, you see the expansion in terms of our footprint. And as Fredrik mentioned, over 200,000 square meters over the last 12 months. So that's a significant expansion, and a lot of that is not in a situation where it's accretive to the margin. It's dragging on us. And that process of expansion is what will drive our revenue growth and our margin development in the end of this year, next year and on the year following that as well. So -- and we continue the investment base of both the organic and inorganic. So in terms of the development of the company, we're really strongly positioned and that, you'll see in the margin, and that, you'll see in the top line.

[Dani Saurymper, analyst]

And secondly, just as it relates to M&A, it's been a pretty active Q1 in spite of all of the turmoil. You spent over EUR 100 million on M&A in the quarter. Can you remind me -- sorry, I missed it on the call. Your average cost of debt, I know you talked about 40% of it is fixed, but what's the average cost of debt, currently?

[Joe Ryan, executive]

So for the Schuldschein issue, our average cost today is 1.15% and of that EUR 350 million, about 40% is fixed, and the average duration is 5.8 years on that portfolio. So we're in a fantastic position in terms of our debt capacity, our debt funding and our cost of debt. So we're really good.

[Dani Saurymper, analyst]

Just as it relates to that then, how are you thinking about the M&A pipeline and backdrop? Obviously, very tumultuous macro environment as well. Is that leading to more opportunities? Or are you attempt to sort of just hold fire given the pace you've already exhibited in Q1?

[Joe Ryan, executive]

If you look at our debt levels, you've got 1.2x leverage, if you look at it in the EBITDAaL measure. And so I think that sort of reflects the sort of conservative position of where we are. But we have then also some EUR 250-odd million of cash sitting out available for us to use. So we know that we need to invest, and we're working on that. And you see that in terms of the deals that we closed after the quarter. Now, they're not particularly that significant in total, but our agenda, Dani, is to continue our inorganic and we will probably continue a quite rapid pace, our organic levels with the projects that we're executing on currently and we have for the rest of the year.

[Operator]

The next question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Also, a follow-up here on M&A. So it seems the acquisition you made, they are more or less, in total breakeven. So could you explain a little bit the low profitability for these businesses? And how soon you expect to improve that?

[Fredrik RÃ¥gmark, executive]

Do you have that breakout take there? Joe will take that, Kristofer.

[Kristofer Liljeberg-Svensson, analyst]

Okay.

[Joe Ryan, executive]

Just got to open up my table here, Kristofer. Getting into quite sort of technical questions here. So the 2 largest lines that we brought in were NIPD, this business in Cyprus for specialized genetic tests. We're in the process of expanding that. So that's about distribution and bringing that. So part of actually buying that business in was that we could actually invest more in terms of the expansion of the distribution. So we made a net loss in respect of that, and the EBITDA level, IFRS 16 was something around about 10%, 12%, something like that on -- about 12%, 13%, something like that. But a net loss, when we amortize the patents that they have. So we have around about intellectual properties, something of EUR 18 million that we recognized on the balance sheet in respect of international property. So our aim there is to expand that in terms of distribution and invest in the distribution to get that on a broader distribution platform.

If you look then at the CDT Medicus business, we recognized about EUR 4.6 million of revenue on that. We made about EUR 0.6 million in terms of EBITDA. So that's best doing fine. Again, we made a net loss in respect to that, about EUR 200,000, again, through amortization of brand and other intangibles that were recognized. We have then a hospital in Romania we acquired. And on that one, that is a transformation. So we acquired the hospital, an existing one, brought new doctors in, invested in new machinery, and we completely changed the profile of the hospital. So it's more like a start-up type business. It's the same with the [ DHINAKARAN Hospital ] in India. I mentioned that's treated as an acquisition. And -- But we don't recognize any goodwill in respect to that. And that is, again, a transformational type issue in there. And that's the one engine that we are running now today, around about 48%, 50% in terms of occupancy on that facility. So that sort of gives you a flavor of the acquisitions that we've done in the quarter. Does that help you, Kristofer?

[Kristofer Liljeberg-Svensson, analyst]

Yes, absolutely. So when you -- the net contribution -- or the contribution to earnings that you showed there, that's after M&A amortization?

[Joe Ryan, executive]

Absolutely, yes. Because that's what -- when we include that, are dilutive to the EPS. And then, part of that process of some of those things is we're buying assets at good prices. So for instance, the one in Romania, we bought that asset. We've got no goodwill reflected in respect of it, and so that we can transform that asset, bring in the new doctors, which are there now, build up the volumes and we'll make a fantastic return on the equity.

[Kristofer Liljeberg-Svensson, analyst]

Okay. Great. That's all for me.

[Operator]

Thank you. There are no further questions at this time. Dear participants, thank you for all your questions. I would like now to hand the conference over to your speaker for closing remarks.

[Fredrik RÃ¥gmark, executive]

Yes. So thank you all for listening in. Obviously, I started out saying a quarter overshadowed by Ukraine, and I will wrap up with saying that again. We stand by Ukraine, we support Ukraine, we have fantastic people in Ukraine and elsewhere, super proud over that. And I think the quarter is strong, et cetera, not repeating all of that. But most importantly, going forward, we'll be to see how this Ukraine situation will be resolved and support our teams there. And we're very confident. I think we have tried to communicate that throughout this call.

So with that, I wrap up. Thank you for listening and look forward to reporting the second quarter when the summer arrives. Thank you.

[Operator]

That does conclude our call for today. Thank you for participating. You may all disconnect. Have a nice day.