Medicover AB

STO:MCOV B

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the third quarter 2021 results presentation. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaking today, Fredrik Ragmark, please go ahead.

[Fredrik Rågmark, CEO & Director]

Thank you. Good morning, everyone. Welcome to our third quarter results reporting. So we have had another very strong quarter, very pleased with the results. Growth is good. We have top line 28% growth in revenue, of which 24% organic. And equally 24% underlying revenue growth of which just short 20% organic. So you will hear us comment quite a bit through this presentation on -- in the strength in the underlying business. A lot of people are only focused on COVID. We have quite a bit of COVID revenue and COVID earnings. But fundamentally really important to look at and understand the strength in our underlying business and how that progresses.We've had a very busy investment quarter. We have put some EUR 57 million to work in M&A work, primarily in Poland in Health care Services but also both a couple of interesting fertility platforms in 2 new markets that we think will bring a lot of value. Alongside that we put also EUR 22 million of organic capital to work. So overall some just short of EUR 80 million of investments put in the quarter, some 90% of that into growth, that will drive growth over quarters to come. So overall from a revenue perspective, underlying total very pleased with the quarter.If we flip to the Page #2, we -- EBITDA grew 15%, up to EUR 58 million. We've had a margin erosion of some 180 basis point. This is explained specifically by last year's the exceptional quarter out of India where in our Indian hospital business we were full on COVID patients. So if neutralize only for the exceptions situation last year in India, as well as the subsidies and grants that we still received last year in the third quarter, our margins are up versus the prior-year quarter. So also happy with the margin development.Looking at the margin in the underlying business. Again, equally we had 170%, sorry, 170 basis point margin compression there.We talked last time around when we talked about the second quarter with you in terms of the change how we allocate some costs between COVID the non-COVID business. That explains about 2/3 of that compression. And subsidies really the remaining. So if we just again exclude those 2 factors, we have a 30, 40 basis point underlying growth in our EBITDA margin. So we're happy and fine with our reported, as well as underlying margins are developing.In COVID impacts us significantly EUR 50 million still in this quarter and contribution of some EUR 16 million. I think I write in my CEO statement that we will learn to live with COVID. I think we see in our markets, we come back to that later on today, a significant increase in virus spread and testing activity. And I think I commented on that last quarter around as well. So I think we will see COVID impacts in general and certainly specifically on Medicover for quite some time to come, we believe.We had the super strong cash flow in the quarter, cash and cash generation is always the best, I think, indication on how really the business is functioning. And our net operating cash flow versus the prior quarter is up some 62%, which I think is a very good indication in terms of how things are going.If we then flip onto Health care Services, and here we report 21% revenue growth, 15% organic, but underlying a strong 27%. And again, I really want to emphasize that in a service business, in the midst of still a lot of COVID around, and particularly in the -- in markets where we operate, that we managed to grow our underlying business 27%, I think it's exceptionally strong.You can see in terms of the numbers here how the COVID revenue has declined since last year. And as you recall, that is primarily a COVID revenue out of our Indian hospitals. Very importantly, we talked several times to you about some potential long-lasting impacts from the pandemic. And one of them being a much more conscious awareness from the general public, organization, employers, et cetera, for the importance of preventative health care access to diagnostics. And I think that is certainly one of the drivers why we see this very strong continued member growth in our core Polish employer-paid business. So 45,000 new members in the quarter, up 11% since prior year. That's a strong number.I've also included here a bullet that if we look through the month of October, so 1 month in addition to the quarter we are reporting now, we are already ahead from a net value member growth perspective of the strongest year we have ever had in our Polish business. So I think that's a very strong illustration of the, both of course our strong market position but also the increasing demand from employers for services like Medicover is delivering.We also have very strong interest in our Medicover Sports activities. We will come back and speak a bit more specifically about the Medicover Sports activities later on in this presentation. We have not focused in prior quarters very much on that. But given the fact that we this quarter around have acquired quite a few gym assets, we will take you through a bit more of our thinking and strategy in the Medicover Sports area.And perhaps it's just worthwhile, you see on the pie chart that we always have shown with you here. Our funded businesses is growing 13%. You see revenue-wise. So, slightly ahead of member account growth. Fee for service up a strong 27%. And our public business, which remains in this division 10% of overall revenue is up 22%. And obviously, as you all know, Poland remains by far the most dominant geography, basically 2/3 of this division. But it is also noticeable, India, that -- where we're obviously growing very fast is just short of 20% of divisional revenue.IF we then flip on to profits out of Health care Services, that's obviously year-on-year down quite a bit. So EBITDA margin down to 15% versus 20.2% last time around. And in the underlying business, again 15% versus 17.8% last time around. For your benefit, trying to identify a couple of factors that is behind that. But for the most important one is the transitioning from COVID-19 care to the regular underlying care in the Indian hospital business. I referred to the prior quarter last year, third quarter, but if you recall, also this spring 2021 we've had provided a lot of COVID care in our hospital businesses. And as we transition away from COVID care over to the normal care provision in all these care facilities, that doesn't happen from 1 week to another. So we have some transitioning issues.We're very confident everything is going in the right way. But you have time lags of 1 to 2 quarters in that. We also have a normalization of the underlying utilization of care in our integrated model, which you would expect and also want. So people are resuming their regular or -- to a certain extent at least regular visit habits. But it's also important to point out that the digital service delivery remain on much, much higher levels than what the pre-COVID levels were, which again is really important. I've said many times to you that, that is one of the lasting effects we expect from the pandemic, because both our doctors and service staff as well as the customers find that really convenient and helpful. So we expect that to remain on elevated levels.In terms, make the point here that COVID admissions are obvious down in India. They are down in Poland. The increased virus spread that we see in the Eastern part of Europe, very severe in Romania. Romania has by far a much more difficult situation now than they've had at prior virus crisis. The same is true in Ukraine. And we also have a much, much earlier, but we do have a virus pick as well in Poland. And time will tell as we progress into the late autumn winter season in terms of how that spread is. It obviously is very connected to the level of vaccinations in the countries where Romania is not in a very good situation sort of mid-30s kind of vaccination levels across the population, which is clearly not sufficient to keep the infection rates under control.So we expect, as point already made, we will see impacts of that over quite some quarters still to come. Made the point that we've been quite active on the acquisition front during the quarter, both in fertility, in Medicover Sports and gym as well as in the dental area. We come back to that.Flipping over to Diagnostics. As you would expect, tremendous growth here, partly driven by COVID, but also super-strong underlying. So 36% reported growth, underlying 19%. So indeed very strong numbers. The COVID revenue just short of EUR 39 million, you see more than twice what it was last year. Important to point out that we have a, quite some difference in the composition of our COVID revenue in terms of the number of PCR tests, for example. And COVID-related tests are almost 4x the number they were in the prior quarter last year, which is not fully reflected. It is not 4x revenue as you see. So we both have a difference in the mix compositional tests with much more antigen and antibody tests that are, as you know, quite a bit lower priced and full-priced PCR tests.And we also have a difference in terms of the customer groups, where we have, as we have talked to you about before, we have some large customers in the traveling industry, et cetera, where we provide large volumes of PCR tests for their passengers, where obviously price points are quite different. Important to point out, you see 19% test growth. Stripping out the COVID element of that, we still have 13% underlying test growth, which is a very strong number to report in the environment we have.I think it's worthwhile to point out to you in the pie charts, look at the left one with the public versus private revenue. And you see the very different. I think that illustrates the point I make very, very often in terms of how important it is to Medicover to be primarily private pay revenue model where you see 51% growth in our private pay segment, 7% growth in our public pay segment, which obviously represents the different dynamics that those 2 segments represents.And then if we flip onto profitability for Diagnostics. As you would expect, the kind of revenue growth that we have seen is being transformed into profit growth. So good, good margin development. You see a 30 basis point growth in the underlying business net of COVID. Then we need to remember that we also had some 80 basis points of subsidies in the prior-year quarter. So netting that out, we're up more than 1 percentage point. Margin growth in the underlying business in Diagnostic, again bringing home the point to you that that's a really important thing to look at.We've also continued to invest significantly in diagnostics. So we've opened 30 new BDPs in the quarter, which is significant. And we broke through then the 800-level. So we closed the quarter with 809 BDPs in our -- in all our markets outside of Germany.We put in one picture in terms of continued hospital expansion in India. At the end of the quarter that we're reporting, we had 18 units in India. And here in the fourth quarter we will be operationalizing 2 new units. And just for illustrative purposes, we put in a picture on the first unit that we will have in the Mumbai area. We have talked to you many times before that our third state where we're expanding is Maharashtra, where we currently have 2 main hospital facilities. And this one will be the third unit in Maharashtra. For those of you that have been to Mumbai, this is in the Navi Mumbai, so new Mumbai city that is growing phenomenally fast. This is located very close to the new Mumbai south, or Navi Mumbai International Airport that will be opening in 2024. And will start with some 20 million passengers per annum. It will grow reasonably quickly up to about 90 million passengers.And just give you a context on that, Frankfurt, before the pandemic, we're looking after about 70 million passengers per annum. So the location of this first Mumbai-based unit of ours is really good. So we look forward to get that operation.Then, as mentioned, I wanted to take you through a couple of slides on our Medicover Sports strategy. And this is actually a really interesting and important element of our Polish strategy for the corporate-paid business or the -- our sort of original core health care business in Poland. And it's a very attractive Polish sports employee benefit market. And the structure, it's important to understand the structure because in many other countries it's the clubs themselves that sell membership, which also happens in Poland, but in addition you have a layer on top of the gym clubs in Poland where you have a sports benefit market that functions not so dissimilarly to our health care cards market.So where the employers will buy a benefit card from one of these operators that gives access to a multitude of gym clubs. And very importantly here is that when we look at what is it employees in Poland really want, if they can have it as an employee benefit, and then health care, that obviously is our core offering has, if not always, but pretty much since we started has always been on top of that list. And equally an unrivaled #2 has always been sports benefits and gym benefits. From that point of view, sports benefits is really highly synergistic with the corporate health care market, whether you look at distribution, whether you look at who are the customers, the corporate client is the paying customer and the individual employees, the using customer.Also perhaps a more technical element, but important to understand, in Poland there is a rule that where relatively quickly even fairly small employers need to set aside a percentage of payroll into so-called social fund. And one of the things that you can finance out of a social fund would be these kind of benefits. So it's actually are very attractive for employers to finance sports benefits through a social fund.Also important. I think I've talked about that at some times. There is really a blurring border between sort of preventative health care, fitness wellness. And if we look at what we do in our historic preventative care to make our customers healthy, to make our customers eat well, exercise, et cetera, to make them more healthy, to drive down our medical loss ratios, the border from that into regular gym, sports activity is very much blurring.So from that point of view, it's quite an easy step into this market. Besides, that was obviously reason why we back in June 2018 acquired the company OK Systems, as you may recall, that we subsequently then have renamed Medicover Sports. There is one very large incumbent in that market, Benefit Systems. You have the ticker there, where we obviously is David versus Goliath but we believe that we have a good opportunity to compete with our offering. Clearly the gym network supply in attractive locations is a very important driver for this Sports Card market.Now, the pandemic, I think this market is one of the markets everywhere that's been particularly hit by the pandemic for the very simple reasons that gyms were closed from regulatory perspective and -- in Poland. And this didn't really open up until late May. So we -- the market has been trading for some 5 months again. And we do expect a really strong recovery.Currently the Sports Card market is back at 2/3 of the pre-pandemic level. And we have approximately 10% market share where we are right now. Now in addition to the Sports Card market, which clearly is our primary interest, there is also just short of around EUR 1 billion of value in the gyms market where the clubs individually or the club chains of course have cash-paying visitors and member-based visitors on the club level. So it's important to see those 2 sort of revenue streams in our sports business, both through the card business that we sell through our own distribution to employers, and then directly into the clubs whether it's cash-paying customers or member-based customers at the club level.Last I put in 1 diagram which just sort of gives you a little bit of a waterfall in terms of how the sports market looks. And this is -- these numbers come from Polish sources and some Polish broker reports looking particularly at the Benefit Systems market. I think the important thing to point out are these sort of 3 right-hand bars there you see, a little bit north of 2 million considered potential cards currently for Sports Cards. And pre-COVID there was around 1.2 million cards in the market. That fell down to around half of that, or even less than half of that at the trough of the pandemic. And currently that runs around 800,000 cards, of which I mentioned we have some 10% currently. So that was just a quick introduction why we're quite excited over the sports market and why we're busy buying up gym capacity in the current market conditions.With that I hand over to Joe.

[Joe Ryan, Chief Financial Officer]

Thank you. Thanks, Fredrik. Hanna, if we can flip through to the next slide.So net interest cost, EUR 5.3 million, EUR 3.6 million arising from the lease accounting. So our underlying interest around about EUR 1.7 million. FX loss, EUR 1.3 million, again impacted by the lease accounting. EUR 1.8 million of that loss was movements on euro-denominated leases in Poland and the FX movement that arises from that, that volatility item. So again, underlying on that we had a net gain of EUR 0.5 million in terms of the underlying FX movements. Just to remind that lease movements are noncash.Tax charge, EUR 28.1 million. So we look at our effective tax rate, we're looking estimating around about 26.5% for the full year. We were at 26.7%, something like that for the full year 2020. Strong cash flows, as Fredrik mentioned on his introduction. So cash flow before our tax payment, EUR 70.8 million, movement -- positive movement in respect to working capital for the quarter, negative for the full year, as you'd expect with our expansion of the size and activity of the business, 9 months, EUR 175 million cash inflow. So strong cash flow inflows that we've been putting to work and investing.Cash and cash equivalents up. But within that, we liquidated some EUR 40 million of short-term investments we had at the year-end to fund the inorganic expansion. Loans payable. You see that in that figure we've increased there around about just over EUR 40 million since the year-end. And remember, that's with organic investments of some EUR 65 million in our capital spend and inorganic investments of some EUR 73 million. So very pleased that we've been able to fund a large part of that expansion with our own cash generation.We resumed our Swedish commercial paper program at EUR 24.5 million at the end of the quarter outstanding on that. We have around about sort of on-hand ability to fund around about EUR 300 million in liquidity. But I'm sure we will be going out and doing some longer-term debt activities as we continue our inorganic expansion. Increase of our lease liability is around about EUR 100 million. We're very active in terms of pushing both the inorganic and the organic expansion. So that then is driving our future lease liabilities that we recognize. So that is a very good thing.We've got -- in terms of medical space and gym probably got about -- operate around about 560,000 square meters of facilities there now. And that's up obviously since we started our lease accounting transition back in 2018. I think we had around about just over 300,000. Lease liabilities, EUR 301 million, and just talked about that in terms of our expansion. Our organic expansion in terms of our own capital spend, just over EUR 22 million, and EUR 65 million for the 9 months. Splits around about just over 2/3 of that for the quarter and just under 2/3 of that for the 9 months have been in what we cast as growth, new additional capacity coming on versus maintaining our current asset base.Pushing ahead on this, as you can see on -- as fast as we can in terms of supporting our future growth. That's what drives our future revenue numbers as well. IFRS equity, just over [ half a million 332 million ]. Had some movements in respect of translations there, some positive stuff on the INR and the Ukrainian hryvnia, little bit driven by the movements in terms of the dollar-euro where a little bit of that has been reversed, and that reflects in those currencies. We've got a recognition of future put option, liquidity obligations, long word there, but basically where we've written put options for minorities, and we recognize the potential in the future we would -- outflow of money in respect to that. So that's recognized on the balance sheet. Just over EUR 15 million of that is existing ones, of which the largest is for our put obligations in respect to our partners in our Medicover Hospitals India business. And then we have new ones which we recognize for the minorities we have in the 2 acquisitions we did in Scandinavia, in Denmark and Norway, where we have both call options over their shares and also then we have the put options to us as well.We're continuing to invest for growth. As you can see, we've got just under EUR 57 million cash flow impact in terms of the quarter, EUR 73 million for the 9 months. So we ramp this up now. I think as we talked about before in the past, the 2 fertility businesses, good additions to our fertility franchise. We've got, as Fredrik talked about earlier on, we're expanding our footprint in terms of our owned and operated gyms in Poland. So I think we have something about 66 gyms now we operate in Poland under our own management and directly owned. 2 further medical centers. 3 hospitals, 1 in India, 1 in Germany, 1 in Poland. 2 dental businesses in Poland and 1 laboratory in Turkey.Net loss, we recognized in respect of those acquisitions of EUR 2.6 million. So -- and as you expect with the gyms, when we've acquired some of these gyms, they've been in not a fantastic financial position and they've been closed throughout pretty much most of the first half, and they opened now in June, started up the businesses again in terms of getting paid people through the doors. So we've had a fantastic sort of once-in-a-lifetime opportunity to be able to expand that footprint of gyms at pretty good prices. And we've taken that to support the wellness, the sickness employer paid business, and I think we're going to do very nicely in respect of that.Broken out there in the box for you, the enterprise values as we have some minorities on that. That's not -- doesn't reconcile to what we paid. Just gives you an idea in terms of where the sort of order of magnitude money is. So you can see there in the gyms some EUR 36 million for the full year. But -- so to see EUR 48 million in terms of the full enterprise values for those businesses.The acquisition of the in-patient facility in India, although it's classed as an acquisition, it's pretty much a sort of asset deal, if you like, even though we did buy some organized business structure with it. So that's a very good transaction as well in terms of future ROIs. Just coming on, looking quickly then at our financial targets, where we are on that. So obviously the first 2, growth and profit, have been heavily influenced by the COVID side. And so -- but even if you look there in terms of the underlying, so Q3, 23.9% organic growth in terms of including COVID, underlying 19.3%. So very, very far ahead of the targets. And if we look then at the profit measures, those also very far ahead of the targets.Even if you look at the underlying adjusted figures for the EBITDA margin, this is above the lower end of that range there. So we're comfortable in terms of our targets there. Capital structure. You can see we're in a very strong position in terms of our liquidity, very strong position in terms of our balance sheet. So plenty of ability therefore to fund and push our future growth and expansion.And back to you, Fredrik.

[Fredrik Rågmark, CEO & Director]

Good. Thank you, Joe. So you can see we're pleased with our quarter. And happy to take any questions you may have.

[Operator]

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

[Kristofer Liljeberg-Svensson]

I have 4 questions. I hope that's okay. First of all, I might have missed this, but did you say how much the combined sale was in the acquired businesses? The second question relates to this uptick in COVID cases in Eastern Europe. I guess it's good for your diagnostic business, if I could phrase it so. But is there a negative impact here on the health care business that you do less surgeries? Or are you also treating those patients, it's actually a positive effect similar to India? And I'm wondering about in the diagnostic business, how much of the COVID revenues are from the traveling industry, if that's possible to break out. And then my final question is on the underlying margin, if you could call it that, because you have of course a large boost on profitability from COVID revenues. And if I take the EBIT margin, for example, I think it was 7% EBIT margin in the first 9 months. It was only 5% in the third quarter, but you said that you had some negative impacts in India. But of course, that's back to the levels we have seen maybe in 2019. Should we use this as a base or a little bit more how we should think about margins here in the coming years?

[Fredrik Rågmark, CEO & Director]

So if I start from the back and then hand over to Joe towards the front of your questioning then. So the -- on your underlying margin, Kristofer, so the points I pointed out being the reasons in this particular quarter, that's what it is in this particular quarter. So I don't think that you should put too much emphasis beyond that on what has happened in this particular quarter. So I think we need to look on the 9 or 12-month period historically to assess that. Clearly margins are down versus the third quarter last year for those reasons. We have a normalization of care utilization. But I said digital care is still higher. And we have these, if you wish, operational disruptions, particularly in the Indian -- in the Indian Hospital group. So those are the 2 things that sort of stand out when you look at that. But I would not focus too much on the current quarter, but rather the sort of 9 or 12-month historic when you try and draw some conclusions for that -- from that.

[Kristofer Liljeberg-Svensson]

Could I follow-up on that?

[Fredrik Rågmark, CEO & Director]

Yes.

[Kristofer Liljeberg-Svensson]

The fact that you stick to this EBITDA margin target for 2022, that's quite a bit below also the 9 or 12-month level. Is that an indication that you expect the reported margin to decline now in coming years, or is it too early for you to change that target?

[Fredrik Rågmark, CEO & Director]

No, no, I mean the -- no. The reason why we have not changed the target, it's exactly the same this quarter's Kristofer. I mean, we perhaps have had some -- I'm not sure if criticism is the right word, but at least some more increased questioning around if we're too conservative with our financial targets. And I've said all along that this is just not the right thing in the middle of the worst crisis, the world has seen since, I don't know when, to change our financial targets. Now we have 14 months left until the 3-year period is over. I was saying in this interview in the morning here that whether we -- clearly, so latest in 14 months' time we will change our -- or update our financial targets. And if it happens earlier, I think it's very closely related to how we see the sort of winter COVID, spring COVID situation evolve. But you shouldn't read anything into that right now more than what we have said in prior quarters. That's I think is important to state. Then on your third -- in your sort of third question in terms of how much of COVID revenues related to the travel industry. I'm not going to give you percentage on the revenue, but you can say roughly half, on a test basis is sort of half-ish, more or less half of tests that we report is coming from the travel industry. But the point I made, the price points are quite a bit lower there because we have 1 or 2 very large customers. So revenue-wise, it will be quite a bit below half, but sort of test number wise it's about half. And then your second question in terms of the COVID impact and will we see negatives coming out of it on the service side. Now the biggest impact we have, which we're dealing with very well right now is that if we look at Romania and Ukraine, et cetera, we actually have quite a few of our own staff becoming sick again. And we have vaccination rates among our own staff of sort of 90-plus percent. But despite that, as it is reported elsewhere in societies, so I think 25% of people, not 25%, but quite a few of the people that turn ill among our staff are vaccinated. So that's a bit of an operational challenge. Nothing that we operate now is closed due to this. And we would expect to be able to operate. But again, I point out that certainly is an operational challenge. So where we are today, there is no negative impact on our health care services side from the COVID spread. Obviously the question is most pertinent in Romania. Romania is also where we see most COVID revenue now. The Oradea hospital, the PELICAN hospital that we bought a number of years ago, they are really busy treating COVID patients. And in Poland, we don't really see an impact. All the rates are starting to tick up, but from a much lower level. And then really, will it get worse during the winter, will that start to impact us. I think that's a little bit too early to tell. I think last time around we were impacted obviously when society is closed. We really do not think there will be any kind of lockdown the way we saw them before. So if there is any impact, Kristofer, I would think it will be rather benign. So it's not something that I would sort of put emphasis on. And then, Joe, you have a number on the first one.

[Joe Ryan, Chief Financial Officer]

Yes. So you were asking what our sales revenues were recognized, I believe, Kristofer, yes?

[Kristofer Liljeberg-Svensson]

No, I was thinking about the acquisitions you did in the quarter, a lot of smaller ones. But is it possible to have the combined sales for…

[Joe Ryan, Chief Financial Officer]

Yes, yes, yes. We disclosed that in the release there, EUR 11.5 million for the 3 months, 18 months -- EUR 18.5 million for the acquisitions. We had, as I said, we had a net loss recognized of EUR 2.6 million for the 9 months, EUR 1.8 million for the quarter in respect to those. And we had all those acquisitions from the beginning of the year. That 9-month figure would be EUR 17.7 million higher for revenues. A lot of it is the gyms. And the gyms revenue is pretty much nonexistent for the first 5 years -- and 5 months of the year.

[Operator]

The next question comes from the line of Karl Noren of Danske Bank.

[Karl Norén, Analyst]

So first, if I touch upon the margin again. And looking at the underlying EBITDA margin on a rolling 12-month basis, I think it's around 16% right now. And can you just say anything about if you see these margins as reflecting the current state of the business? Or is there still -- do you see room for expansion as demand continues to recover? Or will you still need to add on extra cost? Or how should we see the underlying margin? Because I think it's around 16% now. And it would just be interesting if you could comment on anything if it reflects the under business if you think.

[Fredrik Rågmark, CEO & Director]

Well, I think, Karl, the simple way to answer that question is that you have 2 things going on beyond what we normally talk about. One is that while we talk about underlying business being strong, et cetera, it is not yet back fully to where it was before pre-COVID. So it's sort of normalized, but it's not 100% normal, put it that way. So you still have an element of catch-up to do there. Secondly, we have brought in quite a bit of new capacity. Joe talked about how much square meter space of facilities we have brought on. And quite a bit of that is to be filled up. Whether you talk about gym space, you talk about a hospital space in India or we talk about dental space in Poland, that's the sort of strong side of Medicover we wish. So investing, sort of front-loading our underlying growth investment the way we have always done and continue to do perhaps increasingly so is in a way, sort of short-term depressing your underlying margin. So that was a long way of saying that you should expect that to still improve over. We're going to continue to invest. So don't get me wrong on that. So you will sort of have that element there all the time. But if you look at -- at long enough at times here, you will still see that start sort of going in the right direction.

[Karl Norén, Analyst]

Okay. Very good answer. And just a question on the Indian business. Is it fair to assume that this business was not really profitable in Q3 or at least very small amount of positive profits given that the profit for minorities in the P&L was close to 0 in Q3?

[Joe Ryan, Chief Financial Officer]

Karl, we financed -- we took over the debt, which was external in India for the -- with our partners. So all of the debt on the balance sheet of the Indian operation is provided by the parent. So we pick up all the interest cuts. So the net profit after interest was small. So that's why you've got a small minority. So we pick up pretty much, in the last quarter, pretty much all of the profits that we generated or the money coming out of the business.

[Karl Norén, Analyst]

Okay. And then just a question on the Medicover Sports business. Is it possible to say how this has impacted the profitability, both in Q3 but also maybe year-to-date on how the profits have been in that business? Because I guess in the first half it's been negative, I would assume.

[Fredrik Rågmark, CEO & Director]

Yes. I mean, that's -- I'm not going to give you that number. We're not going to split it out, but that's a very good illustration, a point I just made. You can say -- the reason for really sort of talking a bit more lengthy about the sports strategy here is because perhaps someone would scratch their head and say, well, why in the world are these people spending EUR 30 million and buying closed gym businesses. But I'm saying, this is the very time you should buy these businesses if you have the strategy in sports we have. But of course, the short-term consequence of that is that we're actually incurring a loss. So in terms of the current quarter and the year-to-date period, that actually operates at a loss. So -- but I'm sure that's going to reverse going into future periods.

[Karl Norén, Analyst]

Yes. That's great. I'm just trying to get a sense of how the underlying is performing. And then just the last question on the top line side. I think you had a sequential decrease in diagnostic services revenues if we look at the underlying business. Is it possible to give some more color on what the drivers has been? And is this a seasonal effect? Or is it something that COVID has impacted the underlying business negatively? Or how should we see it?

[Fredrik Rågmark, CEO & Director]

Well, Q3 is always a weak -- I mean, Q3 is the weakest seasonality quarter in diagnostics and has always been. So I think that's really what it is. Or is there anything else you want to add on that, Joe?

[Joe Ryan, Chief Financial Officer]

No.

[Karl Norén, Analyst]

No, that's what -- it's a seasonality effect, Karl…

[Operator]

Your next question comes from the line of Klas Palin of Erik Penser Bank.

[Klas Palin, Research Analyst]

Yes. And my first is related to the Indian business. And I just wonder how many hospital beds you expect to have after expanding with 2 new hospitals? And my second question is related to wage inflation. And I just wonder if you would like to comment how you expect to play out in 2022? Would it be on historical levels or picking up as economies are expanding?

[Fredrik Rågmark, CEO & Director]

All right. Sure. So in terms of the in the Indian Hospital business, we -- including the 2 units then in quarter 4 that I talked about, we will be on total beds about 4,000. Now it's important to distinguish between total beds and what we call operational beds. So operational beds would be where we sort of -- where we currently have patients in them. And I think with adding those 2, you probably get up to operational beds of about [ 25, 27 ], somewhere there. But as we fill up the then current 20 units, including those, that's going to take us about 4,000. For context, I think in terms of current hospital groups in India. I think from a sort of bed count perspective, that brings us to #5, 6-typeish of national networks to give you context there. Wage inflation class, that's a very good question. That's a super big topic for the industry for us. One of the aspects of the pandemic is the fact that if -- I think in every call, I talk about recruitment and retention as our biggest operational business challenge. That has certainly not become easier in the pandemic. Just to give you a flavor of that, if we are now roughly approaching like 40,000 employees in our group we have an annual churn of some sort of 12-ish percent or so. So to stand still, we need to recruit 5,000 new people, and we need to recruit on -- I think if I look back over the prior 12-month period, we have probably recruited another sort of 7,000, 8,000 people for growth. So put that together, you get to 12,000, 13,000 people, which is not bad-sized company to start with. Now clearly, wages are significantly up. So that sort of sounds like rather dire news. Now then I say what is really important for everyone to sort of appreciate is the reason why we push so much for Medicover being primarily private-pay revenue model is that in private pay if you have a strong brand and a strong service offering, we are in a position to largely over time compensate that price inflation -- sorry, cost inflation with price increases. And now if you are stuck in public pay fixed price contract, that's a very, very different thing. But that is what we largely are not. So while cost inflation, I think, for our industry is probably the biggest topic to be focused on. I think we are -- and it's something that we work on day in and day out, particularly from sort of a headcount retention recruitment perspective. But we're also in a position where I think we can compensate for most of that through price and operational efficiency.

[Operator]

Your final question comes from the line of Grace Li from Jefferies.

[Qihui Li]

I have 3 questions, 1 sort of overview, larger picture, and then 2 much more sort of details. So I'll just ask the first question. First, in Q2 you had mentioned sort of in terms of outlook, you are well ahead of FY '22. But in Q3 press release you sort of mentioned remains optimistic regarding both short- and medium-term outlook. If you interpret that as sort of a slight change of [ PON ], is this reflecting any sort of key headwinds that you started to see in Q3 that you are sort of reflecting in this thing or, and a sort of sub B question of if that is how much of this relate to MHI India's COVID case stabilizing in Q3 because at Q2 you also had mentioned that you were expecting sort of another wave in Q3? And also you have mentioned that you're expanding more quicker to capture this growth opportunity. So that's my first question.

[Fredrik Rågmark, CEO & Director]

Yes. Well, that may be my terminology. And then I should rephrase myself why I singled out short and midterm is really -- I mean, we never really worried about our long-term outlook. So there is no difference in our positive opinion on long-term outlook. The reason why I phrased myself the way I did now is that we've had quite a few questions coming in terms of our short-term outlook. And therefore, I wanted to emphasize that both short- and midterm, we're positive. Now you read that into that -- well, are you then not positive on the long term, we are certainly positive on the long term as we are on the short term. Is that…

[Qihui Li]

How about the sort of Q3, have you seen any headwinds that you are seeing new first of Q2?

[Fredrik Rågmark, CEO & Director]

Well what do you mean? No. I mean, I think we have -- hopefully we have quite comprehensively covered our view in the reporting and the commentary here. So rather the opposite. I mean, I said we are super-expansion in India, obviously. If we started to be concerned, I don't think we would have the sort of expansion pace that we currently see. The fact that we talk quite a bit about margins being lower out of India is that we wanted you to appreciate the fact that if you ask me, we would much rather not have another COVID wave in India. Obviously, from a public health perspective that's what we all wish. But you could say, financially, for Medicover Hospitals India, perhaps that wouldn't be a bad thing, but it is actually much better for us to be able to keep growing our occupancy rate with a regular customer and patient basis we should have in those hospitals. So the disruption that it causes us to shift from COVID care to regular care and back potentially to COVID care is quite significant. And that's the point we were trying to emphasize in terms of understanding the sort of profitability level in the current quarter in the Indian hospital. That does not give any commentary that we have a 6-, 9-, 12-month different outlook on our Indian hospital business than we had before. Otherwise, if anything, I think, I don't necessarily think we changed our outlook quarter-on-quarter. I think it's more we pushed this comment there on the underlying business because for you to be able to see that the -- I think the best way is to do the longer time series of how the underlying business is growing revenue-wise, margin-wise, then we have now lived with 20 months of COVID, and we will probably live with, I don't know how long it's going to last. But as I mentioned, initially, I think it's going to take quite a bit of time when we still will have a lot of COVID revenue and COVID earnings around. But clearly, that's not how you're going to value or appreciate Medicover. That's why we talk so much about the underlying activities.

[Qihui Li]

No, that makes sense. And the second question is about the acquisitions. And obviously you're very active in this, and you've given us. Thank you for the Q3 sort of breakdown of those details. In terms of CapEx guidance, I may have missed this, but are you sort of expecting increase in the CapEx spend in this area? And then sort of in terms of profile acquisition that you're looking at from the pipeline perspective, is it sort of similar in terms of what's disclosed in Q3?

[Joe Ryan, Chief Financial Officer]

In terms of -- we called it organic or inorganic CapEx. So in terms of our organic CapEx, in terms of the outlook in respect to that, you see that is around -- that was around about 2/3 being what we call growth CapEx. So that's new facilities, new capacity expansion. And then we've got about 1/3, which is maintenance CapEx. So that's held pretty good as we've gone through. So I expect that ratio, 2/3, 1/3, that you're going to see that sort of ratio continuing. And then in terms of the maintenance CapEx, that's to do with the asset base that we have. So as a percentage, that sort of keeps there. But in terms of the growth CapEx, we're pushing that. This is a great return on investment. We've got the opportunities. So it's really about rather than our balance sheet isn't limiting our ability to invest in our own organic CapEx, it's our ability to get the facilities operational, to get the people in to get them working. And you can see what we've done. We've expanded that. That's the business footprint. We've expanded the resources. So we're expanding also our ability to deploy capital. So our ambition is to continue with a strong organic CapEx investment rate. And if you think about it, if we're going to keep these growth rates up, we've got to do that. If we're going to keep up our strong organic growth rate, then we need to continue to invest in our facilities because our business models are largely facility-based. If you look at our inorganic capital expense on our acquisitions of businesses, I'm glad to see that we get that going a little bit more. Our ambition is to keep going on that. So expect to see more inorganic expansion. That's definitely in there. We've got teams of people working on it. We're working on transactions. So expect to see that still coming. Timing and amounts and sizes will obviously vary with the deal flow. So prices are good. Synergies are strong in terms of what we're looking at. So we're quite ambitious in that as well.

[Qihui Li]

And sorry, my final question is about the wage inflation, if I can follow-up on that. I think in the previous question you had sort of mentioned that a total 12,000 staff recruiting including those growth components. That's a quite significant percentage of employees of -- out of 40,000. So how much wage inflation are you seeing in terms of margin impact? If you can comment on Q3, if possible, because I'm sort of -- I've heard about sort of 3%-ish wage inflation that people are seeing. But any commentary on that would be helpful.

[Fredrik Rågmark, CEO & Director]

That is largely an impossible question to answer because you have so many different pockets of different geographies and types of medical staff where that would vary incredibly. So if I give you a number, it's invariably going to be wrong. Now you have some extremes where you have 20%-plus cost inflation today versus a year ago. And the more scarce the resources, the higher the cost inflation is, and the opposite is equally true. Now I think the -- I think the general medical cost inflation, if we -- if I use Poland as an example, being our largest market, I think that sort of runs in the high single-digit percent, which is significant if you consider the levels of general inflation. The point I made before, I think we're in a position to largely compensate that in price. Will we expect that to grow further? Probably, yes. I don't know how much. And now if we look in Germany, our second largest market, that would be much less because the starting point is much higher. So again, it sort of is misleading to put a percentage on it because it is so different from country to country. So -- but I think sort of the most important message to send to you on that question, even though that's not the answer you're looking for is when you look at different businesses and business models, I think the most important is to look at to what extent you think different businesses are in a position to compensate themselves for cost increases in price. That's my view.

[Operator]

There are no further questions on the line, sir. Please continue.

[Hanna Bjellquist, Head of Investor Relations]

We have a few questions in the chat. And the first one is, What is the branding for Medicover Sport gyms in Poland, and it's only open to employees with employers or broader population. Is there differential pricing for the 2 customer groups? This is the premium gym offering or low-cost. How many gyms of the total 2,100 total market does Medicover now hold? And where do you want to get to? When you look at the cost of acquiring the gyms, what is the expected ROIC? And what does the steady state EBITDA margin look like for this business?

[Fredrik Rågmark, CEO & Director]

All right. So I'll have a go at that. So the branding for Medicover Sports is Medicover Sports. So that's the sports benefit market. So as I explained, you have 2 distinctly different markets. You have the market for sports benefit cards that we sell to employer groups to look after their staff. So to be a beneficiary of a Medicover Sports Card that is being sold to an employer, hopefully together with health care coverage that we also provide. So that's the whole idea. Now the gyms, as such, that we have and are acquiring, we are not rebranding them to Medicover in any way. So the gyms continue to carry the respective names that they carried when we acquired them. Because on the gym level, you have then the cash-paying customers that come to those gyms. And typically, if not all, but very many of the gyms, certainly if there are gym chains, they also have membership businesses on their club levels. So Medicover Sports is the brand for the benefit card that we sell alongside our health care offering as opposed to the gym levels where we don't put our own Medicover brand on the clubs. And whether the gym offering that we're buying, we sort of try to get a, if not full, but a relatively broad spectrum of the gym market from top- to sort of mid-end, perhaps not low-end. And how many gyms [ are top 2001 ] do Medicover now hold, I think we said we have about just short of 70, I think, right now.

[Joe Ryan, Chief Financial Officer]

66.

[Fredrik Rågmark, CEO & Director]

66. We will never be a 200-gym network. That's not the idea. The idea is to -- for the Sports Cards business we need to be present with good coverage in the main urban areas of Poland. That certainly will require a few more than the 66 we have now, but not indefinitely more. What is the expected return on investment now. Again, we're not going to quote a number here. But the reason, again, be very clear, the reason for this is the Sports Cards strategy. And when we look on the returns, if we are successful, we're building a broader Sports Card offering, which we sort of think we will be. But obviously, that's for everyone to gauge and wait to see. But if we're able to build a broader Sports Card business, together with the business that the gyms will generate themselves as gyms business is going to be a very good return, undoubtedly. I gave the answer that way because we're not going into the gyms business to be in the gyms business. We're in the gyms business because of the Sports Cards business. So one sort of need to overlay the 2 to get the sort of returns. Then there's another [ EUR 25 million output ] CapEx going for a split between maintenance and growth CapEx. And that's -- you can comment on that. It's sort of the same. You can comment.

[Joe Ryan, Chief Financial Officer]

Yes. Great. So I think we already covered that one-off in terms of where we expected…

[Fredrik Rågmark, CEO & Director]

The average cost of debt is the last one.

[Joe Ryan, Chief Financial Officer]

Yes. If we look at our -- out in the market we have a -- in the German debt instruments Schuldschein instruments, we have some EUR 160-odd million out in terms of gross levels. We pay around about just over 1.2% on that in terms of the headline cost of that. But you need to then roll in all the arrangement fees and everything else. And we have our standby facilities as well what we'll pay commitment fees on. So if you look at our debt and divide our interest costs, then you're going to be higher. We also have the discounting for dealers where we pay later in, rather than closing for them. So we have discounted obligations there as well. That comes in. So if you're counting around about in your modeling something a little bit north of sort of 2%, then you're going to sort of -- you're not going to be too far wrong. Obviously you see yield curves moving up now. So certainly with our organic expansion abilities we will be going out in the markets to raise more debt. So you could see some moving up of that over the next couple of years.

[Fredrik Rågmark, CEO & Director]

All right. I think that's all the questions, Hanna. All right. So thank you all for listening. And talk to you next quarter around. Thank you.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.