Medicover AB

STO:MCOV B

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Fredrik RÃ¥gmark, executive]

So good morning, everyone. Welcome to our second quarter 2024 report. Welcome to you all. Our summary slide. Our headline continued strong organic growth and cash generation. I think this is a very good quarter. We had a good first quarter in the year, and we follow up with an equally strong and solid second quarter. You are used to us growing. But nevertheless, 20% top line growth, of which it had over 16% organic is significant considering the size of the company nowadays.

Importantly, this is solid across both divisions and within the divisions across our different businesses, there's nothing individual that stands out. Poland has been strong for a long time. Poland remains strong, and we expect that continuing going forward. We had continued good member intake in our corporate business, and we equally had very strong laboratory tests growth.

We're actually back on pre-pandemic organic volume growth levels in Diagnostics which I think is a surprise to some of you, and it's a very good sign again. That's really across the board, including Germany, which is half of the division, as you know, so very strong sign on the diagnostics side. We have always had a strong cash generation. We continue to have strong cash generation.

This jumps 23% relative to the same period prior year. So good cash conversion, that's really important. And the most important of all is that we continue to see the operating leverage that has been expected, has started to be delivered and will continue to be delivered, as we fill up our invested medical facilities with paying customers.

We spent slightly less than historically on CapEx in the quarter, down to 5% of revenue in the second quarter. Looking then at the growth that you recognize revenue just short of EUR 510 million, so solidly [ through EUR 1 billion ] on a run rate basis. I remind you the financial target for 2025 is EUR 2.2 billion in terms of organic revenue. So we're very confident that we will reach that.

You see acquired revenue is rather miniscule within that number, EUR 5 million or so. You remember that we said starting on prior year, the start of '23 that we would have 18 months with very subdued inorganic activity, which we have had, which this acquired revenue number is obviously a sign of -- and as mentioned, we expect to be able to become a bit more active in the inorganic field during the second half of the year.

Looking at the geographic and revenue splits in the middle, perhaps what is worthwhile noticing, you see Poland is now actually increasing. I think it was 49% last year, it's up to 50% of group revenue. Now you see growing 24%, which I think is quite an outstanding number. So half of everything we do in the group is on Polish soil, and that has been ticking up 24% for the quarter, so quite a phenomenal number.

Another number to notice is 18% in Germany. Remind yourself that most of that is Diagnostics revenue, obviously, and where most of that is -- it's KV money where there's still no price adjustments. So having an 18% revenue growth in Germany, very significant, 24% out of Romania. You see a more softish 6% out of India. There's a number one-off factors. One should comment in terms of India. We have sold a couple of hospital units since -- smaller hospital units since the prior year quarter.

We have also revamped the larger unit in Vizag on the East Coast to an oncology facility. That's just recently opened, and we've also sold off or closed other Northern Indian IVF facility. So there's a set of one-off element. So you will be seeing the Indian revenue growth ticking up again in the quarters to come.

But overall, they're very strong. You can also see on the 3 revenue components at the bottom, you see equally strong pretty much across you see public pay, our own funded insurance prepaid and Fee-For-Service. All 3 of them, solidly double-digit revenue growth. If we then go to the profitability side of things, again, we have talked about historically that you would see operating leverage coming through in increased margins.

We really started to see this in the first quarter, and we continue to see that now in the second quarter. And as expected, the further down you go, the profit and loss statement, the more percentage-wise growth is coming through. So you see operating profit jumped more than 60%. You see with more than a full percentage points of margin expansion and adjusted EBITDAaL, which is the measure we spend a lot of time, and Joe will be talking about that much more later on here, up 28% with good solid margin expansion.

So overall, we're very happy with how we see margins expanding in the quarter as real proof and evidence of the operating leverage, particularly as we fill facilities that we have invested into over the past few years. And then if we look in a bit more detail on our 2 divisions. So Healthcare Services, you are used to Healthcare Services growing very strongly.

I think the graph in the middle with the bar chart there illustrates that very well. You can -- you can say a lot of things about those bars, but I think one nice illustration is the second -- the one second from the left is the second quarter 2019. So that's exactly 5 years ago. And you see we are more than 3x the size in this division relative to 5 years ago. So we were a tad over EUR 100 million in Healthcare Services second quarter '19, and now we are above EUR 350 million for the quarter.

And the vast majority of this is organic growth, remind you. And I've said it before that the past 5 years with pandemics and war and all the kind of things, I think, have been the largely the most challenging trading conditions since the second World War and despite that we have been able to expand our business like this, I think, is a very strong sign of the position we have.

Now Healthcare Services was up more than 20%, of which 16% being organic, importantly, about half of this being price. So -- but 50-50 split in price and volume growth, again, really importantly, for our margin management. Another thing which one tends to forget sometimes is that if we look over a slightly longer time perspective, we have quite a big sort of composition change in Healthcare Services revenue.

So again, if we look at that second quarter 2019, 5 years ago, Fee-For-Service at that time was 40%. It was growing strongly. I think it was up from 35% the prior year quarter, but 40% 5 years ago now, you see we're at a tad above 50% as a proportion of revenue. So it has grown more than 25% its share in divisional revenue, which obviously is a very specific strategy that we are executing on. But it's important that you see that coming through in numbers.

And again, I made the point before, this is really solid performance across what we do. You see that in the chart to the right, whether you look on the geographies or whether you look on the different revenue pipes on streams, we have that very solid growth across the division and also visible in the member intake for the quarter. So very strong picture and very strong outlook.

Looking then at margin for Healthcare Services. So the same thing here, the further down you go the profit and loss statement, the higher the percentage growth. So EBITDA was up 22%, a bit of market expansion. EBITDAaL was up 28%. If we look at operating profit is -- not on this slide, you have it in the report, but operating profit for Healthcare Services was up 45%, illustrating the higher percentage to further down you go the profit and loss statement with wider and wider margin expansion.

And also not to forget that we still carry quite a load of negative facilities in here. We talk about that quite often, as you know. And in the report, you see we write out that 3 immature Indian hospitals and the large new hospital opened in Bucharest pretty much this time last year were contributing a negative EUR 2.4 million on an EBITDAaL basis or some roughly 70 bps of sort of negative EBITDAaL contribution.

So one thing is to bring those to 0, that will have a 70 bps, everything else equal impact, and then, of course, bringing them up to being margin divisional accretive. That's the next step. So of course, we will continue to open new facilities, but we're just anxious to illustrate for you still, despite the good expansion both in profitability and margin, we still carry quite a bit of drag in terms of our new facilities.

We put on one slide for the Indian hospital network, and I made the point already, I think, you see Warangal in the middle, up there, north of Hyderabad, which had an official opening with the Chief Minister and the entire cabinet about 10 days -- 2 weeks ago or so and Bangalore in the South in the State of Karnataka, which is our first hospital in Karnataka, has had a soft opening and will be opening fully during the third quarter here now.

Otherwise, you recognize the locations and the strategy in India is very simple on the one hand, keep expanding at a slightly lower pace than what we have historically done, but still keep expanding in the current states. Most importantly, fill up our immature hospitals with paying customers and that will be one of the major contributors to continuous margin expansion for this division.

Then if we turn to Diagnostic Services, again, very positive picture. I think people are surprised over the strength of the organic volume and the revenue growth here. So revenue up just short of 18% to EUR 163 million, which 16% being organic. We have not had that kind of organic volume growth in Diagnostics since before the pandemic. So that's an important -- it's a very important data point, I would say.

You see here price being a much more subdued element of growth at 2.3 percentage points. Of course, that's very much on the back of so much of our business being in Germany, where price has not changed. You see acquired revenue again, very subdued in this business on the back of being very inactive for the past 18 months or so.

And also, as we write in the report, we're actually quite disappointed as all of the diagnostics industry that have been published during the quarter, the outlines of what is called price reform. We don't really think it is a price reform. It's largely just reshuffling how money is being allocated. There's no new money in that proposal being allocated into the sector, which is a big problem.

Now the way it is structured, our own assessment is that it has -- will have very negligible if any impact on us. You get paid a little bit more for some tests and you get paid a little bit less for other things. But overall, for us, we assess it as pretty neutral. But no doubt, we are disappointed in that because we are firmly of the opinion as many other industry players in Germany that we need to see more money being added to the system.

So perhaps the last word may not be said in that debate, but that's how it looks today. Then if we turn to profitability for Diagnostic Services, as you remember, we have said many times that Diagnostic Services -- the business model is much more of a marginal nature than services. So you put in more volume into your system and a higher proportion of that will come through in contribution increased profitability relative to services.

And this quarter is an illustration of that. You see on the back of good volume growth, we had EBITDA jumping 30%, EBITDAaL jumped 40%. And again, EBIT is not on this slide, but operating profit was up more than 80% in Diagnostics with close to 300 bps margin expansion. So a simple straightforward illustration of the fact that generate more volume into our lab network through our BDP network. We make more money. We expand margin, and that's what we intend to continue to do going forward. So with that, I hand over to Joe for the more detailed financial review.

[Joe Ryan, executive]

Thank you very much, Fredrik. So if we look at first measure the adjusted EBITDA, why do we use that? That's EBITDA after our lease costs, it's more like the cash -- a real cash flow, if you like, because real estate leases are a recurring part of our capital structure. So the cash outflows for those leases are recurring items. So it's more indicative of the real cash inflows that we have into the operations.

This grew by 28%. We moved that up to EUR 47.1 million, so absolute increase on last year, EUR 10.4 million and with a margin expansion to 9.2% from 8.6%. So decent performance at that level. We look down into the operating divisions, Healthcare Services, that was a EUR 34.2 million, margin of 9.7%. So margin expansion on there.

But -- and that's the flow-through on incremental volumes coming through. But we're still held back by new unit start-ups that we have and the Bucharest Hospital being the largest part of that as Fredrik mentioned earlier up in the presentation, EUR 2.4 million negative results from there and the Bucharest Hospital being the largest component within there the majority of it.

And Diagnostic Services EUR 19.6 million, up from EUR 14.7 million. So a quite decent margin expansion there up to 12%. And that's the flow-through on the contribution on the increased volume in the -- coming on the fee-for-service side mainly. We still also have integration costs for the acquisition -- a small acquisition we did in Berlin. So that's also holding back those -- that margin there and the number. Without that, the operational leverage would be even more apparent.

We've got continued room for growth in the coming quarters. We've got to have the maturing profile of the units, which will be contributing to this level. What I also have is the volume increments, which we continue to put on and efficiency initiatives will come through as well. Looking a little bit more in terms of the balance sheet. We took on EUR 45 million new debt issue, 4 year maturity.

We also, in the 6 months, have assumed EUR 24.4 million of deferred payments for acquisitions and noncontrolling interest in our -- one of our main German specialist labs in Berlin, noncash item, but we assume that. And if we look at the inorganic acquisitions, they've been subdued, as Fredrik mentioned, so we did EUR 12.6 million in the first half of this year, EUR 8.3 million last year, you can see so they're relatively subdued.

We also bought in the acquisitions of noncontrolling interests. So we did 2 of those in the Diagnostics side of the business, and that was EUR 24.3 million net cash in the first half. So our net debt increased then by EUR 70.5 million since the beginning of the year. And our net working capital increased EUR 9.7 million for the half year, a very respectable increase in the working capital, given the size of the business expansion.

We're projecting an effective tax rate of 26% for the full year. Just to remind you, for '23, we had 21.8% overall for the full year, effective tax rate. Operating cash flow, EUR 47.4 million for the quarter and EUR 125 million for the half year. We look at our free recurring cash flow. That was at EUR 11.5 million versus EUR 11.3 million for the quarter and EUR 54 million versus EUR 40.6 million for the half year. And we've been reinvesting then EUR 16.8 million for the quarter and EUR 35.3 million for the half year. So we'll continue to reinvest into the business.

You can see that -- on the bottom left-hand corner, you can see our free cash flow and organic CapEx growth there. Just to remind you what that number is in terms of that free recurring cash flow. We take the operating cash flow in the financial statements, take off the lease depreciation and interest because they are a cash outflow effectively, unless our maintenance CapEx. So that's quite consistent with our reported GAAP numbers. And then you can see we've been continued to reinvest in growing the business for the future.

We have -- you can see that in the numbers in terms of the medical space that we put on -- we've got 865,000 square meters of medical space now, and we've put it in the last 12 months, 25,000 square meters on that.

Just to recap then in terms of the outlook for our 2025 financial targets. Obviously, they're getting closer. So now we're 18 months away from the end of that period. You can see quite clearly on the left-hand side, where we're well on track in terms of EUR 2.2 billion in terms of organic revenue. And if you look then on the second graph adjusted EBITDA, organic number looking at there, I think we're well on track there as well to be able to deliver that EUR 350 million target.

So our leverage levels, we -- same as at the beginning of the year, 3.3x with those that increase of EUR 70.5 million in net debt, and we have our target there of being at or no less -- at or no more than or around about the level of 3.5x. Just also to recall, we gave you some extra guidance in terms of where we expected to -- or illustration rather than where we expected to be further down the profit and loss account. So EBITDAaL of EUR 235 million and EBIT in excess of EUR 140 million. And I think if you look at the numbers that we've reported now in terms of the delivery of those, those are fairly consistent and very clear as well. And back to you, Fredrik.

[Fredrik RÃ¥gmark, executive]

Sure. So key takeaways, just to repeat what you have already heard, but what are the most important messages. We continue to grow strongly, 16.5% organic. Expect that to continue going forward. We have good solid demand momentum across both divisions and geographies. That's evidenced by member intake, that's evidenced by Fee-For-Service growth, that's evidenced by test volume growth.

That in itself will drive additional margin expansion, as we continue towards the 3-year financial targets. Cash generation is super important. We've always had good cash generation. We keep on having good cash generation, and we will continue to have good cash generation. We have slightly brought down the CapEx levels in line with guidance. We have said 6% for the year, and we remain on that guidance for 2024. And we expressed a high degree of confidence in achieving our 2025 and midterm financial targets. So I think with that, we finish and open up for any questions the audience may have.

[Operator]

[Operator Instructions]

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

3 questions. First, if you could give some more details about the strong diagnostic growth in Germany. Then I just wonder what you said about divested hospitals in India. Was that the IVF clinics or something more than that? And then I just wonder if you could maybe comment on the current profitability in India. And when do you expect the immature hospitals to break even and also similar to when you expect this Romania new hospitals to -- hospital to break even?

[Fredrik RÃ¥gmark, executive]

So the 2 units that we sold, Kristofer, they were -- that was not to be confused with the IVF units. We have sold off or close some smaller IVF units in the northern part of the country in the Delhi area. But in addition to that, we sold off, I think, in the third quarter last year. So that 2 smaller 100 type hospital facilities in Telangana. So that's just from a comparative basis, it makes a little bit of an impact. And that was basically just...

[Kristofer Liljeberg-Svensson, analyst]

So that's sort of nothing new this quarter?

[Fredrik RÃ¥gmark, executive]

Say that?

[Kristofer Liljeberg-Svensson, analyst]

It was...

[Joe Ryan, executive]

No, Kristofer. We have no new hospitals in this quarter. We had -- in Q1, we had the -- we had a unit which we closed and we rebuilt it to make a cancer hospital unit in Vizag -- in the eastern city of Vizag that opened in the -- late in Q1.

[Fredrik RÃ¥gmark, executive]

Then you asked about margins in India. So we are expanding. We're not obviously disclosing the Indian margin, as you know, but we have a good solid 100-plus bps margin expansion out of the India on the back of gradually filling the facilities. So that's good. We're confident on that.

But of course, as these 2 new larger units come in during the -- I mentioned that are opening here in July. So they will -- in the early years, contribute negatively. So we made good progress as we fill the existing ones, but we'll also open a few new ones, as you have seen over the prior period. Then the first question, remind me what was -- Kristofer's first question.

So again, very solid organic test volume growth, Kristofer, across, including Germany. So you have a little bit -- we write in the report about the extra testing. We do more or less for no current reimbursement in Ukraine. But even if you net out of that, you still have sort of 17-odd percent volume test growth or test volume growth. So that's -- it's very solid. So that's really just strong demand. There's nothing else than that, Kristofer.

[Kristofer Liljeberg-Svensson, analyst]

And in German, I think you said you were growing 18% there.

[Fredrik RÃ¥gmark, executive]

Yes.

[Kristofer Liljeberg-Svensson, analyst]

So is that -- yes, what's -- can you say anything about the mix and what's driving that? Because it seems you're taking a lot of market share.

[Fredrik RÃ¥gmark, executive]

Well, I mean, you were visiting on your trip not so long ago. So you saw those different sort of test components. So especially, Immunology is growing very strongly. But you wouldn't have that number out of Germany, unless pretty much the entire portfolio grew strongly. So you have a solid growth across the entire spectrum really in Germany. So that's -- of course, some elements are growing faster than others, but in general, it's strong across the board in Germany, Kristofer.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

So first one is on India. Should we expect India to be back to double-digit growth in Q3 already? Or are there anything in the comparables there we should keep in mind? And is there anything new in the discussion around potential standardization of hospital rates in India? So those -- I'll start there.

[Fredrik RÃ¥gmark, executive]

Yes. I mean you should expect India to take back towards double-digit revenue growth. So definitely. And in terms of the regulatory discussion on pricing, there's nothing really new. I mean, we talked quite extensively about that last quarter. There's nothing really new on that topic since 3 months back. And so I would very much refer to what we said last time around. Situation is very similar today.

[Rickard Anderkrans, analyst]

Very helpful. And you called out there was a small margin drag from Germany in Diagnostic Services in the quarter. Could you please quantify that or add some more granularity just to get a sense of the underlying dynamics there?

[Joe Ryan, executive]

Yes. This is the acquisition we did in -- and now we're doing -- busy integrating this lab acquisition we did in Berlin at the start of the year. But we're going to quantify it, Rickard, we already would have in the report. So just to point out that we have got a drag in terms of that it's not accretive at the moment it's dilutive at the moment in terms of that. So it's costing us money in terms of restructuring that business, moving the test around the redundancies and that type of stuff.

[Rickard Anderkrans, analyst]

Very helpful. And final one on Germany. You mentioned that the change or the legislation regarding to reimbursement is likely going to be neutral. Is there anything else you can do to sort of get a margin uplift in the German Diagnostic Service business? Or do you feel quite happy with the contribution as is regardless of any potential boost from reimbursement increase.

[Joe Ryan, executive]

Absolutely, Rickard. I think we've talked about this on previous calls. And we've lost quite a substantial amount of margin over since -- before COVID. So if you go back to 2019 and currently in terms of the business, because we've had no price increases and things will cost us more as you've gone through, rents, staff costs being the main component of that.

So we have a process that we're working through in terms of trying to bring that back up to the same margin where it was before through efficiency, centralization, moving tests around. You can see over the last couple of years, we spent quite a significant amount of capital deployment in Germany, specifically with the objective of being able to automate some of those -- some of the processes. And now we're shifting tests around and working then in terms of the staff.

As the same with everyone else in Germany, in the sort of larger scale labs that we're just trying to take people cost out because people are where our costs are, and we're doing that through [ automization ] and centralization. So everyone is going down the same path.

Everyone is taking the same road. And all that this current -- they call it reformer. There's no real reform in it. It's all really. All this does -- is just play around really. There's nothing of real effect. It's as much of a political covers or anything else to be -- seem to be doing something. So we don't see it will have a significant -- what we -- I think we said is it won't be materially positive neither negative.

We'll have to see and do more work in terms of the detailed mitigate of what it will be because they've shifted around how they reimburse things. So depending on the lab, you'll get a positive impact or a negative impact from probably overall, it nets out for us within our network. It will have an impact on some individual labs that will have a negative impact. So it could actually have a positive impact in terms of pushing more consolidation for certain labs.

[Operator]

[Operator Instructions]

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Fredrik RÃ¥gmark, executive]

We have one question, prices in Healthcare Services, extended again 8% year. Could you indicate in what part of the business the hikes were more significant?

Now in general, that's across the board. We have -- to remind you, we have made that point many times that an important feature of Medicover is that the vast majority of our revenue is private pay, really the large exception being Germany and Diagnostics that we just talked about.

So in our private pay business, obviously, we continuously adjust pricing to reflect the cost and inflationary nature we find ourselves in, and that has continued as evidenced by that price growth, and that's really largely across the board of our private pay fee for service and funded activities.

So we haven't had any questions today on inflation, but inflation has quite significantly come down relative to -- I think we peaked in February last year, so about 1.5 years ago. And then the core inflation, as we write in the report, has come down, but we are still impacted, particularly in the healthcare sector by wage growth inflation.

In Poland, for example, we wrote in the report that we had these minimum salary adjustments another such adjustment in 1st of July. So while inflationary pressures are significantly off where they used to be, one should be clear on that it certainly is not gone. So it is very important that we can keep adjusting pricing were required, that we're also sort of confident that we can do so, which the numbers indicate.

[Joe Ryan, executive]

Another question I have is a central cost increase visibly to EUR 10.5 million. What was the main driver?

Well, you got to remember within that EUR 10.5 million, you have EUR 3 million of IFRS to noncash charges for share-based payments. And we also had EUR 800,000 for M&A costs -- external M&A costs, the majority of which was related to past transactions passings that has happened. So those -- when you strip those 2 numbers out, then there's nothing particularly unusual in the central costs.

[Fredrik RÃ¥gmark, executive]

All right. So unless there's no more questions, which we don't hear, we thank you for participating in today's call, and we look forward to listen to you or see you on the speaker phone for the third quarter.