Medicover AB

STO:MCOV B

Earnings Call Transcript 2023-Q2

[Fredrik RÃ¥gmark, executive]

Thank you. Good morning, everyone. Welcome to our second quarter 2023 results presentation. And we have headlined our first slide, strong organic growth, although still difficult macroeconomic environment. I think that summarized very well the environment we're in, still high inflation cost pressures, et cetera, et cetera. But despite that, I think we delivered a very solid, robust set of numbers, fundamentally underlying good, strong organic growth overall 12.9% and neutralizing for the impact of the still quite significant COVID quarter last year around we tick up to 22% organic growth, again, a good solid number.

And of that, just below 10 percentage points represent price illustrating the impact of the quite significant efforts the team has done on price adjustments over the past year.

Also to point your attention to the fact that if we annualize the growth in the quarter, we put on more than EUR 350 million of additional revenue since -- over the last 12 months and the vast majority of that is organic growth. And I think that is a good sort of bookmark in terms of us being well underway in terms of the new 3-year financial targets. We're just 6 months into that new 3-year period. But despite that, I think we have -- we've started that period in a very good and strong way.

Healthcare Services, a very strong quarter. Solid growth in margins improving on the back of price growth, gradually maturing units and just scale. So putting more customers through our fixed cost infrastructure. Equally, Diagnostic Services, optically, the first look, it may look sort of flattish, and that's obviously with COVID unwinding. But as we'll take you through, when you look into the numbers, it's actually really good underlying solid growth volume-wise and mix-wise and also price, although held back, obviously by Germany being big in this division.

And we just recently here inaugurated a new big 200-bed multi-specialty hospital in Bucharest. In fact, that more anecdotal than anything, but it's the first hospital of its size and specialization to open in Bucharest in many decades. So that's going to be an important piece in terms of driving our Romanian business.

And importantly, I make a statement at the end of my CEO comment is that we expect to see continued improved performance during the second half of this year and also into 2024. And that's really on the back of the same drivers that we have seen impacting the results this quarter.

And then a bit more specifically, revenue here for the second quarter then just short of EUR 425 million. So run rate wise, then some EUR 1.7 billion annualized, that's up 17.2%, of which, organic 12.9%. Again, I think that's a very solid result, not to forget all the COVID revenue that we had replaced and in addition to that, has put on quite a bit more revenue. So excluding for that point made before 22% organic growth, excluding COVID, acquired revenue in this EUR 25 million and now Fee-For-Service is up to 58% of the total group.

On the pie chart, perhaps just to bring your attention to 1 data point and that is actually for -- I think it's the first time for quite some quarters where Poland is actually gaining a proportional share. So we see that's up to 48% of our overall revenue base, and that's on the back of growing 30% in the quarter, which is quite an outstanding number. There are some foreign exchange gains in, et cetera. But nevertheless, that's quite an outstanding number. Otherwise, I think the graphs and pie chart on this page will speak for themselves.

Moving on to margins. So strong development despite fall of COVID-19. The second quarter last year we still had EUR 28 million revenue, COVID, I believe. So that's really the -- it's tapering off quite significantly then in the comparative quarters Q3 and Q4 last year. So this is, in a way, the last quarter where we have really tough comps from COVID-19.

And I think you can see that very well in the bar chart to the right, where the -- obviously, the blue is the sort of underlying and you have that light gray being the EBITDA top-up, which you can see sort of topped off in the final quarter 2021, but still was not insignificant for the first half last year.

So I think that's quite a good illustration of what's happening underlying. So just north of EUR 58 million, EBITDA up 10%, 13.7% margin. Again, if we adjust that for COVID, we increased margins 120 basis points to 13.7%. Adjusted EBITDA just north of EUR 61 million and adjusted EBITDAaL at EUR 36.7% million, 8.6%, down from prior year 9.6%. EBIT just above EUR 13 million.

Also important to point out, yes, we sort of comment on that in every quarter, but it's important to remind you that we do have very strong cash generation. That's part of the business model we operate. And that was the same this quarter. So good, solid, strong cash flow, which is good to see.

And moving on to Healthcare Services. So revenue then, EUR 292.5 million, so just short of EUR 1.2 billion run rate revenue in Healthcare Services, quite an impressive number, up 33%, of which organic 22%. And in this 22% organic growth price, it's about 12 percentage points, 10% being volume and a bit of mix, but -- so good solid underlying volume and importantly, price growth.

And this is obviously a key measure through which we have addressed and do address, the still ongoing cost inflation, in pretty much all our countries, but obviously, Poland being, by far, the largest and most important one. EUR 25 million you see most -- basically all of the acquired revenue in the group sits here. Fee-For-Service grew strongly, so up 28%, significant no-COVID impacts on that side. So just a good solid performance, good performance and demand levels, and we see that throughout.

I mentioned before the new hospital in Bucharest that opened, and we have 3 major openings scheduled in India during the second half of the year. So although we say that we have slowed down the investment pace to more historic levels, Joe will talk more about that later on. That does not mean in any way that we have stopped investing. We have more brought it back to more historic normalized levels. We continue to see good member growth to 20,000 new members in the quarter, 7.5% up. So just a little bit north of 1.7 million members in the corporate pay business.

Now volume growth, some maturing and price hardening led to good sort of flow-through for Healthcare Services. So EBITDA just short of EUR 45 million, so up more than 50% versus last year at 15.3%. So 180 basis points or so improvement. So good to see that. And that -- let's not forget that we still have a lot of immature units, not the least the large 1 we just opened in Bucharest. So we're still carrying quite a significant drag in this division from immature units, so EBITDAaL of EUR 26.8 million, again, a good solid growth from prior years. And the factors driving this, I have already commented on.

Then if we flip to Diagnostic Services, revenue, EUR 138.1 million, that's an organic reduction of just 0.4 percentage points. And you see there we have EUR 800,000 from COVID revenue this quarter versus EUR 27 million last year. So comparing underlying like-for-like, the organic growth in this division, excluding COVID, was 21%, of which price represents 5 percentage points. So -- that 16% is then largely volume driven, but a couple of percentage points of mix in there as well.

And you can see if price represents 5 percentage points here. I talked you through before that we had 12 percentage points in Healthcare Services now -- you recall, as you see that at the bottom that Germany is basically -- now it's 48%, I believe, of the division where we had no price movement. So 5 percentage points is quite a figure to be expected relative to the movements we have seen in the other division, i.e., price growth outside Germany has worked really well, but we still wait to see something in that respect in Germany.

Ukraine continues to perform just outstandingly considering the circumstances. We say every quarter, we take off our hats for the colleagues in Ukraine, and we continue to do so. Test volume represented an approximately 80% of normalized levels. So quite an outstanding achievement. So the Fee-For-Service here represented 70% and that was basically flat versus the prior year.

And moving then on to how has that impacted margins in -- in Diagnostics, I think they've performed quite well under the circumstances, EBITDA just north of EUR 20 million. 14.7%, obviously quite a big contraction from prior year with the COVID earnings. So excluding COVID-19, we were at 14.7%. That's down 40 basis points from prior year, which is driven solely by the German situation. So we're actually compensating that significantly much more outside of Germany and then being slightly held back for the time being in Germany.

So EBITDAaL of EUR 14 million, you see approximately 10% margin down from just north of 15% last year. So you see that flows straight through the P&L exactly in the same way. But I think important to point out here is the solid underlying volume growth and price growth in the market -- volume growth across the division really and then price growth outside Germany, we make the point here, still no price adjustments on the horizon in Germany, and that is the situation, and we will see when that comes.

And I think with that summary, I will hand over to Joe and then come back to answer your questions after Joe's session.

[Joe Ryan, executive]

Thank you, Fredrik. So interest rates, interest rate environment, which has increased. So we expect to see our interest rates costs go up. In terms of lease liability interest, this is more of a fixed nature because this is inception of a lease. So that has increased with the -- in line with the increase in the lease liabilities, but there's not been -- no rate impact in respective on that.

Other interest costs, which is -- relates to real debt, if you like, that's around about doubled. So our total interest charge of 11.5. In terms of the implied interest rates, up slightly with the new leases and indexation for lease liabilities on the real debt, then we're pretty much sort of doubled in terms of the effective interest rate cost that's -- for the cost of the debt. Approximately half of the debt is fixed interest rate, and approximately the rest is closing rates.

Average maturity goods. The only maturity we've got on our horizon is 2024 with small rollover in our German Schuldschein debts in the second half of the year. So really, we need to look through to 2025 before we set -- could see our first real maturities coming up.

In terms of the indebtedness levels, loans payable stayed pretty stable since the end of 2022. So since the end of 2022 and loans payable net balances have increased around about EUR 12 million, so I'm very benign. In terms of the indebtedness levels ratios, as reported, that has increased by 3.2 to 3.5 from the end of the year.

We will see that now trend down over the second half of the year. It's not about the debt levels because, as you can see, the debt levels have stayed pretty static. So we're about the fallout of COVID contribution and the replacing of that with our underlying business. And as those numbers increase on the second half of the year, we'll see the debt levels certain trend down -- the indebtedness levels trend down.

In terms of cash flow, strong cash flow for the first half. So we've done EUR 105 million net operational cash flow. If we look at that in terms of a free cash flow basis, we've invested some EUR 53.9 million cash in terms of capital spending. So that leaves us with about EUR 51 million in terms of free cash flows.

So a strong number they're performing as we reduced our capital investment pace to a level which is commensurate or where we've been in the past, if we look back to prior year on that sort of free cash flow basis, we were in at EUR 73.6 million for the first half in terms of cash flows, and we spent EUR 67.9 million in terms of capital spending, much higher pace back in 2022. So EUR 5.7 million free cash flow on a comparable basis, actually this is sort of an idea in terms of the business cash generation, which we're -- we're generating.

And move on then in terms of lease liabilities. Those have slightly increased there, so we're up about EUR 13 million. The largest movement then is in terms of lease, extensions and indexation, EUR 45 million, so about EUR 25 million of that is actually new leases or extensions, EUR 20 million is indexation impacts, which really come through now rather than we're seeing those come through in 2022 as a trading impact.

Our equity has increased slightly. We've gone from EUR 472 million to EUR 485 million. The largest movement on there has been our translation impact with the increasing strength of the Polish zloty and our large exposure in terms of our balance sheet on Polish zloty assets. We've seen a large movement in terms of the translation of our balance sheets.

And just coming back in terms of the capital investment, so Q2, that was EUR 24.3 million, EUR 53.9 million for the first 6 months, a little bit of that coming over from prior year, where we were investing at a higher pace our Healthcare Services finishing off some of the assets which we had running on there, particularly the hospital in Bucharest, so EUR 39.7 million for the 6 months and EUR 14.2 million for our Diagnostic Services.

If we look at where we're running, it was at 5.7% of revenue in Q2, 6.4% for first half. And if we look through for the year-end, it's going to be sort of similar levels overall for the full year. Now that's down from our 9.9% that we invested in for the full year 2022. So it gives you an idea that we are slowing down our organic deployment of capital. But that's still in line with where we were sort of in prior years. So we had 7.6% back in 2021. And the total amount is going to be north of EUR 100 million that we deploy. So we're not sort of slowing it down historically. We're slowing it down from -- sequentially from our very high levels in 2022.

About 1/3 of the amount that we've invested has gone into hospital facilities in the first half, so Romania, India and Poland, long-lived assets, infrastructure assets, which would be earning us cash for 20, 30 years.

So in terms of the financial targets, we are well on our way in terms of meeting our revenue targets. So you can see there if you annualize our revenues for the quarter, then you can see we've still got quite a chunky number in terms of it to fill that EUR 2.2 billion target, but I think you can be fairly confident that we will be able to deliver on that.

And then in terms of our EBITDA targets, again, we have a way to go in terms of getting to the EUR 350 million. But again, as you can see with a sequential improvement in terms of margins, which we expect to see continuation of that development through to the second half this year and then into 2024. So again, both with the size and the increase of the business and then also with margin development we expect to be on track to deliver on those targets as well.

We are up at our leverage levels, 3.5. We're quite happy to be there. That means we're using our balance sheet, the cash generation, as I alluded to earlier, you can see in terms of we can manage our debt levels quite well, but changing our pace of deployment of new capital. So we're in a good shape to deliver on our 2025 targets.

[Fredrik RÃ¥gmark, executive]

All right. Thank you, Joe. So I think with that, we are happy to take any questions you may want to have for us.

[Operator]

[Operator Instructions] We're now going to go to our first question. And our first question is coming from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

I have 3 questions. First, the better margin you see in the Healthcare business here again. Is that only driven by better utilization? Or is it something else also helping? My second question relates to India. It seems growth is slowing down there a bit sequentially. Or is this just an FX impact, if you could explain that? And finally, on the margin for the Diagnostics business, is there anything you could do there to support margins given the large exposure you have to Germany?

[Fredrik RÃ¥gmark, executive]

So if I take the first one, Joe. So the better margin in Healthcare Services, I gave you 3 points. So when I think of the 3, probably the most important 1 is the first one. So you -- you do have a quite significant price impact. I mean, you can work that backwards, I gave you the -- if you look at the organic starting point last quarter around at 12%, you see the amount of money we generated in Healthcare services from price growth and which is the largest driver of margin improvement there.

The maturing impact is relatively limited, not because we are not maturing, but because we're also putting on additional new units. So -- and then you have a general volume impact. But the first 1 is by far the biggest driver of that, of what you see. And then I'll take the third one, and then I'll give the second 1 to Joe.

[Kristofer Liljeberg-Svensson, analyst]

Could I just follow up on that?

[Fredrik RÃ¥gmark, executive]

Sure.

[Kristofer Liljeberg-Svensson, analyst]

So -- and I guess you stated in the report that you expect to continue to increase prices. At the same time, there also seems to have been some customer loss due to the price increases. So how would you view the price elasticity here and would you expect that if you continue to increase prices there, it will be more difficult to grow volumes at the same time?

[Fredrik RÃ¥gmark, executive]

Yes. I mean there's inevitably always going to be a trade-off 1 way or the other Kristofer. So the question is correct. I think the sort of answer to give is that relatively speaking, it will become more difficult to negotiate price increases, the more you have historically raised prices, no doubt about that.

But on the other hand, the change in pace of inflation is also coming down. So I think the majority of price compensation for cost growth is probably behind us, but there's still some to come. So that's 1 piece of the answer.

The second piece of the answer is that different customers will inevitably have different kinds of price elasticity. So -- you -- when you operate the network, which is -- which the -- in terms of the corporate paid business, that's largely utilized, you run that asset base pretty much fully utilized, so to speak.

So if you replace the customer with where you can't negotiate the price to an appropriate level, as long as you replace that customer with someone with a better price, that's fine somehow. So we're not nervous at this point in time that you will see significant sort of volume drop due to this.

What we have commented on, I think, in every quarter, so I can make that comment in relationship to this question as well. We haven't really seen any weakening in the sort of corporate demand. Now everyone talks about this much weaker economy. And I mean there's a lot of signals that the economy will weaken. Now that has not been seen at all in Poland yet somehow I think the economy is actually performing very well.

But at some stage, you may see a weakening of the economy, which would then knock on to some demand levels in the corporate business, but we haven't seen that yet, which I think is quite noticeable. And then perhaps I'll just do that then. Was that fine? Did I answer your question, Kristofer?

[Kristofer Liljeberg-Svensson, analyst]

Yes. Yes. Excellent.

[Fredrik RÃ¥gmark, executive]

And then on -- you can now go ahead, Joe.

[Joe Ryan, executive]

Yes. So on India, Kristofer, I think you're probably a little bit used to sort of like maybe the spectacular growth rates that we get coming out of Poland because we still have year-on-year very strong growth in India. So the -- we come out of the quieter periods in the second quarter. So the start of the second quarter is normally quieter, which -- and also the first quarter is quieter for Indian business seasonally. So we're still up some 13% in our Indian hospitals business in euro terms.

For the quarter, there's no real impact in terms of exchange rates, so -- year-on-year. But for the first half, there is quite a significant exchange rate weakening for the average rate that we use. So it's 88.9 for the average for this time around, it was 83.3 last time around. So on the first half numbers, it might be that you've got a bit of foreign exchange weakness, but not on the -- not on the Q2 numbers themselves.

So we're quite happy with the development. We're not particularly concerned in any respect, we've got 4 new units with now less than 12 months old. One is positive in the quarter, 3 are still negative. They obviously are quite large units. So the negative contribution is quite large. And -- some of them are still relatively new. So they've got to be -- get all the doctors in there or the referral networks, get all the accreditations, get all the insurance companies signed up. So there's a lot of work in terms of building up the revenue stream for new hospitals. So it's all going fine there. We're not worried about that. It's on track and 13% growth year-on-year is pretty good. That's it.

[Fredrik RÃ¥gmark, executive]

And your DX margin question, Kristofer. So as long as you can't impact the price, you can impact your cost levels. So -- so basically, in terms of how you -- your network optimization, in which labs do you run which kind of tests and obviously, your basic of fixed cost structure, which is largely headcount. And so making sure that you let you run everything as cost efficiently as is possible. That's really the key lever you have as long as price is not addressed.

There is -- we also got a comment here on the web I see here, which -- so I can take that right away where we make a mention in the running text of the report that we -- expectation of reimbursement rate increases in Germany are building up. And the reference to that comment should really be read in terms of that there's a lot of pressure across the industry, because you can imagine with the cost inflation, the smaller you are as an operator, the more you're exposed to these factors.

So the smaller you are, the more difficult it is to compensate yourselves what I just talked about to sort of cost optimize. And obviously, still in Germany, a very large part of the Healthcare sector, including diagnostics, would be relatively small operator. So that's the background to that statement. So -- but as long as nothing has happened, nothing has happened. So it's more that the sort of, call it, industry expectations are indeed building up, so we will see where that comes out.

[Operator]

We're now going to move on to our next question. Just transfer now. And our next question is coming from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

My first question was also on the same question on India. And I guess I missed a little bit. Did you give the year-on-year growth in constant exchange rates there, Joe?

[Joe Ryan, executive]

Mattias, no, I didn't. I gave it in euro terms. So in euro terms, it's 13% up -- 13.4% up year-on-year for the quarter. And for the 6 months, it's up 15.8% in terms -- in euro terms. So as I said, in terms of for the Q2, the number I get -- just gave you, that's pretty much what it would be in constant currency as well and it will be a higher number for the 6 months. We've got quite an exchange rate movement against us in terms of -- for the 6 months.

[Mattias Vadsten, analyst]

Okay. Perfect. Do you expect that this rate year-on-year will increase or it'd be higher towards the second half and into next year given the new sort of facilities that you have and so on?

[Joe Ryan, executive]

Well, we have no facilities opening in the second half, but they're not going to contribute significantly in terms of revenues because they'll be new opened over the 6 months and maybe even 1 of them will go into next year. So we've only got 1 which will be opening shortly, the women and child one in Hyderabad. The others will be well into the second half.

So I don't think we're going to see very much movement in respect to them, and it's just about otherwise spitting up the capacity that we have open and running now. So we will see sequentially reasonable growth. There's nothing spectacularly different, I think, from our Polish or our other high-growth markets. In terms of India, we see it as quite similar.

I think what you're seeing in terms of the fantastic growth that we see coming out of the Polish assets, it's just again, the size of the scale of what we've done. Remember, the Polish assets also supported by inorganic activity whereas the -- all the Indian stuff is organic.

[Mattias Vadsten, analyst]

Next question on margins historically and referring to before the pandemic, you expanded the margin by a percentage point or so into Q3 from Q2. Could you not give an exact figure, but help us understand the drivers into Q3? And if you could expand margins maybe more quarter-over-quarter than what we've seen in the past, referring to this percentage point expansion into Q3 from Q2 as a seasonal pattern. That's the next one.

[Joe Ryan, executive]

Yes. You've got seasonality going into 2 different directions for the businesses. So for -- well, 3 different -- maybe I'll put it into 3 different business boxes, if you like. So you've got diagnostics, where you've got lower volumes coming through, you know very well. That is very dependent in terms of volumes. So you get a small drop off in volumes you see it impacting in terms of the margin contribution and likewise, the other way around. So we've got lower volumes in the Q3 in the summer months for the diagnostics so that goes down.

In terms of the employer paid and funded business, we see that going up as we get less utilization in the summer. So we get less demand for our services. So we see a higher contribution in the third quarter, which comes through. And then you've got the sort of new business areas, if you like, that we've developed since in the last few years, which is the sort of hospital inpatient type of activities, and they're much also driven by activity. But India is going the other direction to Europe. So we see more demand in the summer months and less in the winter months, the Northern Hemisphere winter months. And we see it the other way around in Europe.

So we get the -- we get the usage raining very heavily in India. You get a lot of -- you've got a lot dengue, you get a lot of malaria and things like that, infectious diseases, which come in, so you got emissions on those. So those gives you a good demand base level as well. So -- those are the sort of factors driving it.

We're going to see in terms of our margin development, we're going to see, as we've invested a lot of money over 2022 as we repeat it time and time again. We've done a lot of inorganic expansion as well, where we expect to take synergies out as we integrate those into our network. We've got a lot of investments that we developed over a period of time over several years, which starts to come to fruition.

So we're seeing the impact in terms of the margin increase driven by the utilization of those investments. So as we sequentially add the capacity utilization into those assets, we see the contribution flow through, and that flows all the way through to the bottom line because the marginal cost in terms of adding that -- servicing that extra business is very small.

So that's what we'll see sequentially quarter-on-quarter as we go through as we continue to bring in that. There will be ups and downs due to seasonality, but we're going to see that through to the end of the year. We're going to see that through 2024. And that will impact in terms of our net numbers, net profit the other profit metrics we use and also then in terms of the return on the invested capital that we've got, which we deployed a lot of.

So that's -- we've expanded enormously on the balance sheet. We've expanded enormously in terms of the capacity. Our job now and what we're doing sequentially quarter-on-quarter is putting more capacity utilization into those assets, and that will go up over time. We will see that trend up over the second half. We'll see that trend up over 2024.

[Mattias Vadsten, analyst]

Okay. Good. I mean net-net, quarter-over-quarter, would you say that the seasonality help into Q3 is more accentuated today versus years before the pandemic, less diagnostics today, more India, for instance.

[Joe Ryan, executive]

No, I would say it's got less transparent. It used to be quite simple because I had 2 businesses which were about half and half. Now I've got -- as I said, I've got sort of 3 or 4 different dynamics playing around in terms of the seasonality.

1 moves up slightly or differently with 1 market or another 1 -- we see more people going back to Ukraine for the summer. So families and things like that. So that could well drive demand there in the summer, which would [indiscernible] there and you got too many different factors, Mattias, for me really to be able to give you a good steer.

[Mattias Vadsten, analyst]

Good. And then on cash flows I see it's quite clear, and I appreciate the comments, but I see us build some working capital in Q2. So if you could just remind us on how to think about the Q3 and to give us some color there on how to think about it?

[Joe Ryan, executive]

Yes. You look at the first half, it's about 6.4% in terms of revenues, 70% growth CapEx, 30% maintenance. If you look through for the full year on those sort of like levels, then you're probably not going to be far off wrong, we'll be north of EUR 100 million in terms of total amount of capital that we spend maybe up around about EUR 110 million, something like that. And then...

[Mattias Vadsten, analyst]

Sorry, I was referring to working capital -- sorry.

[Joe Ryan, executive]

Working capital, yes. No, it's good. It's -- you can look at where we are now in the last couple of quarters and a few quarters and project that forward, and that's going to be fun. Working capital is relatively benign for us. We have a lot of business that pays us as we go. So working capital is not really an issue for us at all.

[Mattias Vadsten, analyst]

Good. And then the last 1 from me is genetics. And if you could talk about the momentum in that business and how you see it develop here in Q2 and for the remainder of the year?

[Fredrik RÃ¥gmark, executive]

Yes, we have a continued good development in the, call it, sort of core NIPT market in Germany. That you recall, we got reimbursement from basically a year ago there in July last year. So that is moving well. We are continuing the what we call the tech transfer build-out, where we basically -- the same thing as I have explained, I think, several times where we initially did a tech transfer from the supriotic entered into our Munich genetic lab that we have operated for a number of years ourselves. So that same tech transfer model is then applied to other companies, labs globally. I believe that the latest 1 that was actioned or commission here is a large lab in Japan during the second quarter. So that is moving quite nicely.

So in general -- and we also have some international contracts that have been won -- not of any great significance for this current quarter, but where we bring samples into Munich and they will start to be more impactful for the second half and certainly into 2024. So in general, a pretty good outlook, Mattias. Certainly, not less than what we would have expected in terms of planning.

[Mattias Vadsten, analyst]

Perfect.

[Operator]

We're now going to move on to our next question. Just transferring now. And next question is coming from Klas Palin from Erik Penser Bank.

[Klas Palin, analyst]

My first question will be, you indicated in the report that you expect salaries to increase in the second half. And maybe if you could give some sort of indication what kind of size of salary increase that you expect? And perhaps if there are any particular market that you will see higher wage pressure during the second half?

And my second question is about newly opened hospital in Bucharest and you seem to have got a good media attention and haven't been that many hospitals opened in many years, as you mentioned. Do you see good patient inflow and maybe if you could comment anything about what's your expectations for the coming 12 to 24 months?

[Joe Ryan, executive]

Joe here. So salaries, yes, I mean we've just got that general background of salary pressure in terms of the full employment market in our Eastern countries. And -- and also we see it in Germany as well. But so -- so it's just that general background, but more particularly, we have also then the increase in Poland in terms of the public healthcare sector. We have mandated increases in the minimum wage, which then impacts us well and Healthcare workers. That's really part of the political backdrop in terms of the elections coming up in the autumn in Poland.

But the good news in respect to that is that we also then have -- where we have direct contracts with the National Health Fund, they will be indexed in July as well. So we'll see the impact coming through in terms of those salary increases reflected directly in there. So the public system is making sure that the money is there to pay for those salary increases. So that sort of gets passed through straight away.

But then in terms of our other businesses, we're sort of like what we expect to have anyway. So we've got our medical inflation is always running at a high level because there's a shortage in terms of medical workers. So we're constantly seeing salary increases as we bring in new people into the business to service the demand in that element as well. So that's taken into account in terms of our pricing on new business and then also in terms of our indexation, which we're constantly working on with our corporate and privately paid business. So I don't see any pressure or issue for us in terms of addressing those salary increases. And maybe, Fredrik, can you talk about this?

[Fredrik RÃ¥gmark, executive]

Yes. Bucharest, yes, we had a good, good attendance when we had the opening. And in fact, I was talking back to last week, so I had a little Romania tour. So I was in Bucharest visiting new hospital. I was up in Oradea visiting our Pelican Hospital, where we -- where we time slice now. So that was in the middle of -- or just as COVID hit, I think we commissioned a new wing there at the Pelican Hospital with about additional 100 beds, and that's all filled up, looks nice.

And then I went to Cluj, which is the second city of size in Bucharest after -- sorry, in Romania after Bucharest, where we have our Polisano hospital, which is a big facility. As we, I believe, alluded to in the report here, we are very positive in terms of having a good extensions on our -- and I've said, Joe said in -- I said Polisano, I mean, Polaris excuse that Polisano is something else in Romania, a business that we don't own.

Correctly, to Polaris. So we have good extensions money-wise, Joe talked about and have set the indexing in Poland from July. Likewise, we have good increases in our publicly funded contracts for the second half of '23 in Romania, which is particularly important actually in that country because we have this legislation in Romania that some of you are aware of, where you can coordinate payments between the public reimbursement and private pay.

And so actually, to drive your private pay business, it's really important to have enough of public money allocated. So that's a really important element to drive a growth in our Romanian hospital business. So I think when I was there last week, Klas, I think we had 24 or 25 admissions that may not sign so terribly much with 200 beds, but it just opened, and it's in the middle of the summer.

So we will clearly have a not insignificant drag for a few quarters from that facility, but I don't think 1 can underestimate the importance of that new flagship hospital in Bucharest for us to drive both growth and competitive positioning in the Bucharest market. So I'm very happy actually with that. And then we want to see that obviously in the same way soon all other facilities increase its utilization levels. But I think we're -- it's fair to say we're quite confident on that given the increase in funding we have just received.

[Klas Palin, analyst]

Okay. And also a question in Romania, if you could comment how the subscription business develops?

[Fredrik RÃ¥gmark, executive]

From -- actually, very well is the short answer. So sequentially, we have grown our membership base plus we've been able to push through price growth. We were later of the block, so to speak, in Romania to push price growth than we were in Poland. And that was partly because the inflationary impact hitting us also came later in Romania than it did in Poland. So -- but over the past couple of quarters, we have seen both good volume growth in terms of members and increasingly price growth. So that's -- that box, you can tick it last.

[Klas Palin, analyst]

Perfect.

[Operator]

There's no more questions in the queue at this time. [Operator Instructions] But while there's no more questions at this point, I'm going to hand you back to Fredrik Rågmark.

[Fredrik RÃ¥gmark, executive]

Hello. So we had 1 question in terms of -- through the chat with David from Poland. You were asking about the P&L impact in terms of preopening costs and M&A -- new M&A on EBITDA. You asked is it higher or lower than EUR 1 million in 1Q.

Yes, definitely higher. We've got some -- we've got something like about 30 new BDPs, we've got in the DX side. Those are relatively smaller because they turn profitable quite quickly. We've got something about 9 or more dental units. We've got 2 IVF clinics, we've got the hospital in Bucharest that's now just open, plus we've got 3 immature units in India, which is still loss making.

So in terms of on a net contribution line in terms of those new units, it's a significant number. We put a lot of money into new units. And because of the scale of the investment we did over 2022, that's much higher if you did compare that to Q2 2022. So we take a lot of negative numbers -- negative contribution in our numbers.

And that just goes back to what I was saying before about how we improve the margin and how we improve the net line is in terms of getting capacity in pinning up, reducing the losses, turning those into profits and then maturing those units. That's what we've done always. Just the scale of what we do is much larger at the moment because of the scale of what we did in terms of the deployment of organic and inorganic capital spending back in the last 18 months. So I think that probably concludes the question and...

[Operator]

We have 1 more question from James Vane-Tempest.

[Fredrik RÃ¥gmark, executive]

All right. Okay. Go ahead, James.

[Operator]

I'm just going to transfer him now. And the next question is coming from James Vane-Tempest from Jefferies International.

[James Vane-Tempest, analyst]

Just got 1 left, actually. And that is just on Germany. I mean you say how there's no price adjustments on the horizon. Can you help us sort of understand how much of a drag that is to the business and how much or how many levers you've got to essentially mitigate that impact and when you potentially see the environment becoming more favorable?

[Joe Ryan, executive]

Maybe we do that together. Maybe I'll just start off maybe a little bit in terms of some of the sort of background aspects of it. We've got a strong inflation environment in terms of cost of labor, partly driven by a lack of labor, and then also the asking salaries are going up as well. We have now in Q2, the crisis payment, which is the German government put in place, which is basically a tax-free bonus type payment that can be paid to employees in April.

And obviously, we [indiscernible] and that supposed to compensate for some of this pressures in terms of in view of salary increases. So we have EUR 1.5 million that we expensed through the P&L account on the DX side in Germany in respect to that in lieu of salary increases for the year. So -- so that helps us to sort of mitigate the sort of salary pressures. We may well see salary pressures building up again next year, maybe the German government has a similar type thing next year. But that impacts us directly in this quarter in terms of reported results, that has an impact to benefit over the whole year.

But -- that's a sort of salary part of what it is. But obviously, rents and property costs sort of like -- have moved up in terms of indexation. We have a lot of fixed contracts with our suppliers in terms of supply costs, and those are multiyear. We entered into some of those just before the sort of crisis entered up in terms of renewal, some of those. So we've got a few years in terms of some benefit from those.

And on the whole reimbursement side, both for the privately paid, privately insured and the publicly insured we've seen no movement in terms of reimbursement rates. But remember, this is a marginal business. So if we put a marginal extra additional volumes, the contribution from that is very strong. So we've got 1 side, which is where we are growing in terms of the underlying business, ex-COVID. So that helps to mitigate against us.

And then the other factor is just in terms of how we automate the processes that we're doing and being -- to try and mitigate that labor cost. So we've got a new plant in terms with microbiology, we've got other work going on in terms of other automization of some of our activities and line. So we've got a fair number of levers in terms of how we do the lab work in a large lab environment, which we -- which we're playing with.

And then we also have optimization in terms of where we do the lab work as well, being in several different lenders. So that helps us a little bit to work on that as well. But I'd say we've got an ability, James, to mitigate to maintain our margins for some time for the next -- next 18 months, 24 months, we can probably manage this. And I expect we're going to see some sort of change in that sort of time period in terms of pricing.

[James Vane-Tempest, analyst]

That's great. And then just a quick follow-up. I noticed the number of bug drawing points as well went down to about 840 from closer to 900. Are we there? Or is that sort of another sort of an area where we could potentially see some further rationalization to help maintain profitability?

[Joe Ryan, executive]

No. In the underlying business areas, we've increased, James. So we disposed the 3 better Russian business which had a number of units. That's the -- what you're seeing there is the impact of that. So in our other markets, we've been adding new units. So added 9 in first quarter and another 9 or so in second quarter. So we continue to develop those. There's nothing unusual there.

In terms of -- we also had a comment where we talked about the German -- the reforms to the German hospital activity. So this is not about the lab work, which is about the wider reforms in the German Healthcare system aimed at where the hospital work can be done. And I think that -- that's a sort of long overdue reform in the hospital sector, which will impact the total cost of delivering Healthcare in Germany, which will then be positive in terms of being more efficient in terms of a total local funding for Germany. So that's, I think, quite an important reform. It doesn't impact us directly, but can have a positive impact on the overall Healthcare system in Germany.

[Operator]

There are no more questions in the queue at the moment. So I would now like to hand you over to your speaker, Fredrik Rågmark.

[Fredrik RÃ¥gmark, executive]

All right. Well, thank you all for taking the time to listen and for asking relevant questions. And with that, we wrap up. And if not before, we will speak to you after the third quarter. Thank you.