Medicover AB

STO:MCOV B

Earnings Call Transcript 2022-Q3

[Operator]

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

[Fredrik RÃ¥gmark, executive]

Good morning, everyone, and welcome to our third quarter results presentation. So we start on Page #3. And quarter 3 was very much a continuation of the environment we reported in the second quarter. And the headwind that we reported back then have clearly continued. And I think it's fair to say that in terms of the inflationary pressure, if anything, it has probably increased even a bit more in the third quarter. And we see the highest inflation rates in most of our markets and certainly in the larger markets, that is above what we have seen for I guess, the past 20-odd years or something, which clearly has a short-term impact on our profitability, as is quite evident in this report.

We grew well, actually, from an absolute point of view to be able to grow 10% and organically 3%, considering how much COVID revenue we had last year around and effectively replacing that with real underlying business, I think, is a significant achievement. And that is also visible when we look at our business as usual, which I think is a fair measure, i.e., when we isolate the impact of COVID-19 unwinding and likewise, the impact of the war in Ukraine. Everything else we do, we grow just short of 20% organically, which I think is a testament to the strength of the business, the brand and our position in our core markets. So that's really very strong.

In the core employer paid business, we put on more than 40,000, new members in the quarter, up 12.6%. And again, that's a very clear continuation of what we have reported for a number of consecutive quarters, where it's definitely our opinion that in the post-pandemic world on balance, employers are even more interested in providing good quality health care, preventative health care and diagnostics to their staff. So that's a very clear indication.

Our adjusted EBITDA margin at 14.4%, obviously quite a bit down since the prior year and for the 9 months at 15.9%. We go on.

So overall revenue just short of EUR 370 million. So we put on just short of EUR 35 million from an absolute point of view versus prior year. And again, that means with a large amount of COVID revenue dropping out. So 10% top line growth, 3% organic. And you see in terms of COVID revenue, just north of EUR 14 million compared to just short of EUR 50 million last year. So effectiveness to stand still, we've had to replace about EUR 35 million, as you see. And on top of that, we have put on some more business. So again, from a revenue point of view, I think a really good and strong quarter.

We have continued to be busy on the acquisition front, which you know and we have reported throughout the year. So EUR 28.4 million in terms of acquired revenue, and our Fee-For-Service business keeps on growing very well.

You recognize the pie chart. Since before, and I think nothing really out of the ordinary, perhaps to point out which is sort of a theme through the report in terms of our ability to price compensate in our private pay market and the -- and how much more constrained you are at least short term in markets where we have more public funding. I think that is quite evident from the left pie chart here with our large Polish geographies being 30% up, and the German business being 1% up. Now of course, that's not only price in that because we have a large element of COVID unwinding in Germany, which was our largest sort of COVID volume -- COVID revenue market, but there is certainly an element of that in that German rather static number.

You see India continue to grow very well on the back of our very sort of front-leaning expansion. I will take you through the slide shortly here, which I think very well illustrates our pace of expansion. And also to comment on, no surprise, you see the minus 50% in Ukraine.

In fact, I think it's really very strong to only be minus 50%. The fact that we're actually running a business there which is half the size of what it was a year ago, considering the environment in Ukraine currently. I think that's a testament again to the demand and need for the services we provide.

Then moving over to the margins, which are obviously under pressure. As we reported in the second quarter, again, I talked quite a lot last time around about 4 factors, war in Ukraine, that's rather obvious; lower COVID-19 contributions, I've talked about the revenue from that dropping out and as you know, COVID has been a high-margin, high-contribution business for us; increased medical costs; and needless to say; the inflationary cost pressure is most pronounced in us or for us in terms of medical wage costs. And it's not an alternative, not to match that because we need our people and the ability to price, compensate in that is then the most important thing for us.

I stressed in the report that we remain confident in terms of our ability to do that, where we have private-pay revenue. And we've had, I think, a good reception from our broader customer base in terms of understanding the needs for price increases.

EBITDA just short of EUR 49 million, down from EUR 58 million, a margin of 13.3%, so 4 percentage points contraction there. Adjusted EBITDA just short of 53%, 14.4%, as mentioned. And we look at the adjusted EBITDAaL, basically our most good proxy for our cash flow came in just short of EUR 31 million, down from prior year, EUR 45 million and EBIT just north of EUR 9 million.

Then we have put on a slide here, which try and illustrate to you the fourth sort of headline from a margin point -- a headwind -- sorry, from a margin point of view, very clearly is that where we expand very rapidly, and we grow that primarily to taking on a lot of new medical space. These are hospitals in India, BDPs, new labs, these are gyms in Poland, et cetera, et cetera. And clearly, short term, that is margin dilutive. We are very confident. This is the right thing for our business to do to keep up the growth rates for many years to come. And we looked here to try and illustrate this for you in terms of the growth capital that we have deployed over the recent period.

And in the upper part of the table on the right, we look at then the organic growth capital i.e excluding maintenance CapEx. And secondly, inorganic capital, i.e., where we have acquired businesses. And look at that as a proportion of the opening fixed assets 2 years ago. And that's excluding then the IFRS 16 leasehold assets.

So looking at our real fixed assets. And you can see, if we compare to the situation 2 years ago. So over the last 24 months, we effectively invested in terms of growth and M&A, some 73% of the opening balance of our fixed assets. So I think that illustrates that fact very well. And in fact, if you just look over the 9 months this year, 43% of those 73% has been over the last 9 months. So I think that's a really good way of illustrating the pace of expansion we are in.

And likewise, at the bottom, the amount of space that we have to service all our customers, that is probably the best proxy for in terms of the how that will be transformed into revenue and profits. And you see now we're just short of 0.75 million square meters of service space. And again, that's over the 7 quarters, so since the end of 2020, you see that up almost a mind boggling 74%. And only in this year, you see we have put on some 140,000-something square meters, up 23% only in the 3 quarters 2022.

And I think we made this point quite a few times that we invest in growth. We're very confident. And I think we put up this number. So you will -- in order -- a little bit to be able to quantify specifically what that means. And obviously, a lot of these square meters that we have put on in 2022, we have yet to fill with customers, which sort of explains the short-term, if you wish, diluted margin impact that has.

Then if we turn to Healthcare Services, I think it's fair to also make the comment that a majority of the expansion that I just talked about is related to Healthcare Services. We have certainly had expansion in Diagnostics as well, but relatively, the numbers that just took you through has an overweight towards Healthcare Services.

Revenue here came to EUR 230 million, so up 30%, of which organic was 18%, again, very strong. Now last year around, we had still a reasonable amount of COVID revenue here, which was pretty much all related to India. And now that is virtually all gone. So if we look at the underlying organic growth again in business as usual then, so isolate COVID impact. And you know that the Healthcare Service also has a small presence in Ukraine, but much, much less than Diagnostic Services. So the impact of isolating Ukraine here is rather minimal. But still, when you look at that, we had just short of 26% organic growth in business as usual, which is super good. And of that, we put on here price effectively represented just short of 8% here. So some 18% underlying organic volume growth and some -- just short of 8% underlying price growth.

And as we comment on in the report, has been mentioned before, October is a bit big indexation month for this business. So that is clearly then not yet visible in these third quarter numbers.

I made the point, COVID is largely gone from this division. You see the acquired revenue. I mentioned before how much acquired revenue was in the group. And the point made here you see most of that is then related to Healthcare Services.

In the quarter, we made the most recent, and in fact, the first hospital for us in the capital area of Mumbai in Navi Mumbai, the neighboring city to Mumbai, where, in fact, it's really 1 large city, but the Navi Mumbai is the new part is growing very fast. So Navi Mumbai opened about a month 5, 6 weeks ago by now and is doing well, although, of course, as we will come back to it in a second, again, all these openings, short term, while we fill them up in the medium to short term sort of negatively impacts our margins.

We made 2 -- which we think will be very attractive acquisitions in the dental field in Germany just after the end of the quarter. And the -- on the back of the ongoing success and progress we see in our Polish dental business. We believe it will be a very attractive opportunity for us to also start expanding in the, obviously, much, much larger German market. And we believe the competitive positioning we have in our Polish market will allow us, support us in very much developing the business of the 2 firms we have so far acquired in Germany.

I made a point in terms of healthy member growth. So 1.6 million members by now across the markets where we have the employer paid business where, of course, Poland being the most important one. We do note here at the end that some softening of demand is perceived. I think it's a fair comment to say that, as we move into 2023, we do expect that most economies, certainly in the countries where we operate will come in for a bit of a harder time on the back of the interest rates going up the way they are, et cetera. So clearly, consumer spend on the margin is likely to be impacted.

We haven't really seen that yet, is a fair comment to make, although we really want to flag that it would be surprising if we don't see some of that on the margin into 2023 in some of the more expensive procedures.

Then moving on to margins for Healthcare Services. Again, headline. EBITDA margin down 100 basis points from 15% to 14%. And that's largely on the back of ripping out the COVID contribution from the prior quarter. And likewise, a reduction in the other results items.

Our medical cost ratio ticked up just short of 1%, which again is the most immediate KPI, if you wish, where we see the relationship between basically our medical salary cost, which would be, by far, the largest component of medical costs alongside facility costs were obviously, energy prices going up is an impact as well. But on the other hand, our ability to price compensate. So I think we did pretty well, in fact, to only see a slight -- less than 1% tick up in the medical cost ratio in this business.

On the right-hand bottom side, you see here where we have tried to help you to sort of reconcile what we reported last year with what we're effectively reporting now and what are the sort of, if you wish, adjustment factors to be aware of. And you see we reported 10% last year, EUR 17.6 million. Take out the COVID contribution, we come down to 9.6% margin as basically a fair comparative. We effectively reported here 7.6% or largely from an absolute point of view, actually the same as last year. But given the top line has grown, margin has come down. And then looking at sort of the costs related to new units that are early on. The preopening costs where we're building hospital, things like that and add back in the profit contribution that are coming from businesses that we have acquired since last time around, that brings us back to 9.4%. So you see effect with 20 basis point dilution from the prior year quarter, again, which I definitely argue is a good performance in this division, considering the environment and the fact that we still have a significant element of price compensation to come.

Then shifting to Diagnostic Services, just short of EUR 143 million revenue. Again, here then a much more pronounced negative growth of 13.9% with COVID dropping out. Looking in the same way as on the underlying business, organic growth ex-COVID and Ukraine grew 9%, which is not bad. And of this price represented 2.6%. So you can see both obviously a pronounced lower organic growth in this division ex-COVID and Ukraine than in Healthcare Services and price representing significantly less. The point that we make in the report that Germany, which is largely then a public reimbursement market where we do not control pricing, that is a significant element in terms of price growth currently representing a much lower figure in Diagnostic Services than for Healthcare Services.

Here, you see the dropout of COVID basically EUR 25 million lower than the prior year, just short of EUR 14 million. And one should also say but the very, very, vast majority of the volume we have in COVID-related revenue now would be related to Germany. Acquired revenue here was some EUR 4.2 million. So you see considerably less than in Healthcare Services. And likewise, here on the pie charts at the bottom, I think the point have been made already in the prior division and group on Germany. You see the reduction in Ukraine and most other markets being flat to slightly negative. Again, that would be a consequence of the COVID unwinding across the board in all of these markets.

Turning to Diagnostic Services margins, quite heavily impacted, obviously. So EBITDA margin of 15.9%, down 21% -- down 6 percentage points as opposed to this 1 percentage point in Healthcare Services. So obviously, a much more pronounced margin contraction here. I will take you through the same step chart as we did in Healthcare Services.

So you get some visibility in terms of what's going on within that reduction. And the same thing is then flowing through straight through the reduced profit measures throughout the P&L. We continue to grow our BDP network, so 24 new BDPs opened in the quarter. We also completed an acquisition of a small genetics laboratory in Greece, and that, one should really understand as a continuation of our genetic strategy, having both the NIPD business out of Cyprus, and building our genetics competence out of Munich in Southern Germany. So this is largely call it a distribution hub into the Greek market in this really interesting and attractive genetics market.

Also to be noticed here is that we have signed an agreement to exit the Belarusian market. That is still subject to regulatory approval and final closing, which we expect to take place during the final quarter of the year. And that is obviously a reflection on the situation with the war and the difficulties or increasing difficulties, I would say, to operate in that country and with increasing sanctions, et cetera.

Then turn over to Joe that will give you some comments on the financial overview.

[Joe Ryan, executive]

Thank you, Fredrik. So I can start off in terms of just having a quick glance to our interest costs. Our lease liabilities have expanded, and therefore, the interest allocated in terms of those lease liabilities has increased as well. So that's up around about 60%, about EUR 2.2 million from prior year quarter. That's obviously a result of our expansion of our facilities footprint, as Fredrik mentioned earlier on, which has been very strong, and this will be driving our -- is driving our revenue growth and will be driving our revenue growth for a few years to come.

Our other interest then in terms of our real sort of interest-bearing debt, if you like, that's up around 52%. So that's around about EUR 1 million increase, and that's up on an increase in our gross debt issued at around about 125% compared back to Q3 '21. The implied interest rate is up slightly on the leases. And our interest -- implied interest cost is down in terms of our gross debt, around about implied interest of about 2.4%.

We issued EUR 277 million of debt back at the end of 2021, and we've now deployed or in the process of deploying it to that capital and investing that. If you look in terms of that EUR 488 million, we've now got about EUR 235 million of that, which is fixed interest rates. So we fixed more about another EUR 100 million of nominal interest exposure. We fixed that in the quarter. So we have around about EUR 220 million of debt, which is floating rate. And so we have quite a decent balance there in terms of our mix, and we have around about the balance there, which is noninterest-bearing, even though it is discounted. So it is has got an interest cost, but contractually, there's no interest in there.

And if you look then in terms of our net debt, the next box down, so we're starting off with EUR 488.5 million gross debt, that comes down to about EUR 406 million net of the cash balances we have. Our last 12 months reported adjusted EBITDAaL in relation to that is the ratio of 2.3. So we're moving up then from, as you can see from last year, at the year-end, we were at 0.6. So we're doing exactly what we intended to do and what we signal to do and what we've raised the debt levels for was to invest in the inorganic and the organic capital investment that we've been rolling out. So in the process of doing that, and that is dragging on the P&L account, as Fredrik mentioned, but it's exactly what we expected to do, and that's going to be driving the revenue levels and driving our profit levels for the next several years. Remember, this is health care infrastructure. So it's recurring cash flows and recurring profit levels for decades to come.

Our cash flow has been very good. So we came in at EUR 54.5 million after working capital changes, relatively benign working capital for the quarter. It sort of normally is in the third quarter, a relatively benign level. Our effective tax rate, we've pushed that up slightly the expected full year rate to around about 30%. So slightly higher than where we were last year at 27%. And that's a reflection also of that expansion level where within the entities we're expanding. We're not necessarily recognizing the deferred tax element on losses at those expansions and start-up phases incur. I expect the tax rate to come down in the future. So I don't think that's going to be a permanent feature of our -- of that sort of level.

If you look then in terms of the right of use lease liabilities, as I mentioned, that's expanded. So we're from EUR 346 million at the end of the year, up to around EUR 413 million now. So that's an increase of some 19%. And that follows then also in terms of the -- what Fredrik was mentioning, the service square meters, the service capacity we have the facilities, which has expanded strongly.

We have then an FX component in that, which then also comes through in terms of the P&L account, where we have some of our leases in foreign currencies in some of the countries we operate in, primarily in Poland, where we have euro-based lease contracts. If we look then at consolidated equity, we have had at the beginning of the year, just over EUR 517 million. That's down to EUR 473 million, so around about a EUR 44 million drop. Obviously, we've got our profits for the period. We've got the translation adjustments for our foreign subsidiaries in our other comprehensive income. That's mainly Poland, where we've got the swing, which is the largest in there. And as Poland is our largest asset base of our investments, then obviously, that is having an impact. And we have then also changed some of the ownerships in some of the subsidiaries in terms of minorities. And we have also liquidity obligations for where we have partners, who have put options to us for their shareholding. Those are recognized as a liability and that also then is reflected in our equity base.

Our capital investment has been very strong. So we've deployed a lot of capital, as Fredrik was mentioning. So over the quarter and over the year-to-date. So round about EUR 100 million of organic capital spend and 77% of that being growth. Very strong facilities growth throughout the whole business.

So if I look at that, EUR 100 million of organic capital spend, around about EUR 77 million of that is growth. So we've got about EUR 23 million, which is the maintenance CapEx in line with sort of where we've been before in prior years. So we've expanded on that growth CapEx, and that is investments in facilities, which are there are going to grow now, provide our extremely strong top line revenue growth. And as they mature, they're going to start to produce the sort of returns that was then normalized for the rest of the business.

So within that EUR 77 million, we've got EUR 15.5 million, which we invested in hospital, which was in India. Our expansion of our footprint in India is extremely -- is really strong. We've got now something like about 4,160 operating beds, and that's as of yesterday and 21 hospitals in India, with 1 opened since the quarter-end, a new one in Hyderabad.

We continue that pace of expansion. So we have 1 hospital, which is -- was opened earlier on at the beginning of the year. We closed that, and we're repurposing that to be a dedicated cancer hospital, a comprehensive, complete cancer care. Everything that you're going to get in cancer with most modern equipment. So that's going to be a leading facility in the city where is in India.

We've got another one in the Maharashtra in Pune, which we'll be opening before the end of the year. So we've got a strong pipeline to continue that expansion of our hospital deployment in India. So we are in the process of becoming a significant player in the in-patient care market in India. And India is a fantastic market to be a growth hospital provider.

We've got EUR 16 million which we've invested year-to-date. It's pretty much all of the investment for our hospital in Bucharest, which will open, probably, beginning of the Q2 in next year. This will be one of the best -- this will be the best private facility hospital in Bucharest. It will be the most modern. It's a really well-designed facility. It's a good size. It's fantastic facility, fully equipped and in a great location in the city as well in terms of catching the market. We've got about EUR 7.4 million in that EUR 77 million, which has gone into greenfield facilities in our dental business in Poland. And that's on top of the inorganic expansion that we've been doing in Poland.

If you look at that, we've invested some EUR 172 million cash flow in terms of cash flow out in terms of our inorganic expansion deployment. And that translates into about EUR 223 million of enterprise value of the businesses, the full enterprise value of the businesses in terms of what we bought and about EUR 30 million of that is coming in the quarter. So a good mix of businesses.

So we've got labs and specialist areas of -- associated with the laboratory business in 4 different countries. We've got, as I mentioned earlier on, a large expansion in terms of -- for the investment into our hospital bases. We've got a new hospital in Romania as well within that mix in terms of the inorganic. And a range of other health care facilities. So really fantastically well balanced in terms of positions in terms of our future growth.

So this is what we said we were going to do. We went out and we've got the balance sheet for this. We went out and raised the debt. The debt is long term. So we've got a 5.1-year average maturity in terms of our debt profile, external debt profile. We've got no issues in terms of 2023 in terms of any refinancing that we need to worry about. So we can pretty much set out this current sort of market volatility. We're not exposed to that. We're not worried about that. So we've matched our funding profile to the investment profile in terms of the expansion of our facility. So really well positioned, I think, in terms of being able to deliver next year and the year afterwards and the year after that in terms of our growth plans.

Coming on in terms of looking at those financial targets. Obviously, with the disappearance of COVID-19 and also then the additional headwinds of Ukraine, we've done fantastically well in terms of our growth. So we've delivered 2.9% organic growth in the quarter. Despite the indexation in Poland, not coming through yet, we see that coming through in Q4. And the 9 months is 3.6%. So a really great process in terms of addressing those headwinds and still delivering growth.

And if we look at the margins, obviously, we are under pressure in terms of with that level and that pace of expansion as well expect. So -- but I think also that's a really good number in terms with those headwinds.

And above our target still for the 9 months. And as Fredrik has iterated earlier on, we expect to be within those targets for the full year numbers.

We obviously now have done what we said we were going to do in terms of using that capital capacity on the balance sheet, raising the debt and deploying that debt. So our indebtedness levels have sort of moved up as we were seeking to do in terms of that expansion process. So we move up now to 2.3x in terms of where we are on our [ indefinite ] levels, on the metrics. And we have to remember our level there of 3.5%. So we still have headroom, but Obviously, that headroom now gets a little bit smaller. So you can probably expect that we will slow down the pace of rollout of the -- of our capital expansion in 2023. But we still have a very strong pipeline still to deliver.

[Fredrik RÃ¥gmark, executive]

All right. Thank you, Joe. So I think with that, we hand over to any questions that you may want to ask us.

[Operator]

[Operator Instructions] It comes from the line of Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

Yes. I have a few. I mean nice to see the underlying progress in Healthcare Services really, but can you help us a little bit on the Diagnostics side? I mean still underlying growth, but with ex-Ukrainian and COVID coming up a mere 4% versus an average sort of 9% in the last 6, 7 years. So what's driving the slowdown? Is it mostly market dynamics? Or is it anything that Medicover can improve? Looking at the sales trajectory, it looks like advanced tests maybe are doing somewhat better. So just a few sentences here would be helpful.

[Fredrik RÃ¥gmark, executive]

I think, Mattias, that you -- I think we had actually a similar question in the second quarter. And I think what we were saying then that the -- there is a -- I think you have an element of COVID dropping out, but not necessarily yet filling that back with regular test activity. So you also had quite a bit of COVID backlog last time around. So I think there is a relative-to-historic, I think you see a slight weakness. I think that's a market feature, that's not a Medicover feature. We expect that to normalize. So that's one element of it.

Secondly, the -- I made the point in my commentary here in terms of ability to increase price, where the impact of Germany when you model that, given the size of Germany in the division, that will be quite significant.

And I think we will be pushing significantly more price growth in our private pay diagnostics markets in '23 on the back of the much higher inflation in '22 than what we expected, perhaps when the year started. So I think those are the 2 main drivers behind if you wish, a lower organic growth rate in diagnostics than what we report in Healthcare Services.

[Mattias Vadsten, analyst]

Perfect. And then my second one, I mean, you have had sort of -- if we look on the substantial increase to organic CapEx, you were through that just not in absolute, but also a percent of revenue, I think, from 4.5% to 5% to around about 6.5% to 7% of revenues. I think you said maybe if I misunderstood, but you should expect this to fall a little bit in 2023. So should we then expect it to come down more towards historical normal levels? Or how should we view that pace going forward?

[Joe Ryan, executive]

Yes. I mean we've -- Mattias, it's an aggressive expansion. So we raised that money, particularly at the end of last year. We had the balance sheet capacity for that because we have the opportunities in terms of that deployment. But obviously, with the market has been a little bit more uncertain. And also, I think it's a little bit difficult for in terms of -- for the markets to really appreciate really the scale of what we're doing. So I think it's quite a reasonable thing for us to pull back a little bit on that. Like what we've already invested matured. People can see that actually, wow, these guys can actually do this and then come back. I don't think that the opportunity for us in terms of -- it's going to go away. I think there's going to be a sort of general pullback in terms of expansion of all business areas, I think, in the economic outlook. So I don't think any of the opportunities are going to go away for us to the fact that we pulled back a little bit and reduce the levels isn't necessarily a bad thing for us in terms of our balance sheet and the P&L development.

So I think you can go back. If you look back a year ago, you can look back to those sort of levels. You see there in terms of the mix, in terms of the split between maintenance, got -- about EUR 23 million in terms of maintenance CapEx, which is sort of in line with where we've been in terms of our sort of historical sort of run rate. And it's been on the growth side. So maintenance, we will sort of carry on at sort of similar levels, but it will be the growth side that we'll pull back a little bit in terms of the amount of CapEx we're spending -- in organic capital spending.

Then on the inorganic, we will probably be slowing down a little bit in terms of the pace. We've been very aggressive also in terms of that over this last 12 months. So I think on both of those, we'll pull back a little bit and slow down the pace.

[Mattias Vadsten, analyst]

That's perfect flavor. And then price adjustments, if you could just expand on the indexation increase in October for the integrated health care model and to that, Healthcare Service part, which is the most flexible for you, how much have you done here on price increases? And how much is left just to understand approximately how far you've come? Now, of course, when you also had some further inflation in Q3 that will lead to think of. But would you largely sort of in the private side of things, the compensated sort of March, April next year? Or how do you view that? .

[Fredrik RÃ¥gmark, executive]

Well, that's a long -- a slightly longer answer, Mattias. Just for reminding everyone the context here and I know you know that, but I still sort of give you an extended answer in terms of the integrated model or the funded insured model. We indexed in February, we indexed in October. Obviously, both of those are government statistics. The February one, the CPI regular. And the October one is the health care industry specific CPI.

And obviously, the prior 12 months is what is taken into account. So the February '22 one was then largely the situation in '21, which was vastly different from a sort of running inflationary point of view. The October '22 one is largely then '22. So the proportional impact in October will be several times higher than what the February one was.

Now remember, though, that as we show it is only a proportion of Healthcare Services revenue that is in that model. And we said in the report here that out of the underlying organic business as usual growth rate, so I believe, was it 25.8% in Healthcare Services. And we said that 7.7% of that was price for the third quarter. So that is going to tick up significantly on the back of the October indexation.

Then on the rest of the revenue, which is private, the various different Fee-for-Service businesses have increased prices in a similar fashion although the point I made last time around, that is a little bit different depending on the geography and the competitive positioning, but it's significantly double-digit type of price increases.

And then finally, in Healthcare Services, you have, as you know, about 10-odd percent public money. Vast majority of that would be in Poland. And there was a quite significant public rate increase coming through in the early part of the third quarter, which was very positive to see. So that sort of gives you, I think, a flavor of the summary of the Healthcare Services perspective.

[Mattias Vadsten, analyst]

That's very good. The last one for me is a little bit on the business case here in dental in Germany. I mean, what are the attractiveness in synergies that you see in short? And when do you expect margins -- where do you expect margins to arrive at a mature state versus sort of the rest of your business? Will it be accretive? Or how should we view that?

[Fredrik RÃ¥gmark, executive]

Well, I think the attractiveness to us of the German market is to -- and likewise, if you wish, the synergy aspect is to look at what has driven -- what is driving our success and progress in Poland, I think, is largely an ability to improve the -- gradually -- well, fill up the dental chairs, obviously. But then gradually improve the mix of business, we sell, i.e. the sort of the overall value of the services, dental services, people buy from us. And that's really, I would say, sort of a consumer marketing-related element. And in terms of the -- of how the consumer is changing, if you wish, dental consumption over time.

And we believe we can do a similar thing in Germany over time on the back of the strategy we have successfully deployed in Poland. And given the size and the spending power, obviously, of the German market, if that is true, we believe that will be very good. And there's no reason why the margins in our German business over time, clearly not short term, but over time will be significantly different from the Polish margin. So -- and again, I said it before, when you're in Western Poland, take a city of Poznan, it's going to take a couple of hours to drive from Poznan to Berlin. So it's very close proximity. So yes, we think that can have a lot of good prospects for us.

[Operator]

We will now take the next question. It comes from the line of Kristofer Liljeberg from Carnegie. .

[Kristofer Liljeberg-Svensson, analyst]

Three questions. First on CP depreciation, which, of course, going up here with the investments you're doing, but is it possible to indicate what that level will be in the fourth quarter and whether we should expect it to continue up the quarters after that?

Then on this topic when it comes to price increases, would it be possible for you to give some sort of indication what we could expect maybe for the group or for at least for Healthcare Service in fourth quarter and 2023 and if you compare that with what we have in the third quarter.

And then my final question, when it comes to accelerated investments you're doing this year, do you see any risk here, doing this considering a weakening economy? And also, how long do you think it will take for the investments you have done this year to not being dilutive to margins any longer?

[Fredrik RÃ¥gmark, executive]

Kristofer, I think you need to repeat the first one because we actually didn't hear the first part of your first question.

[Kristofer Liljeberg-Svensson, analyst]

And the first question was just PPE depreciation, the level here going forward. Will it increase further in the fourth quarter? And if we take that fourth quarter level, how much additional should we expect it to go up in the coming quarters or below?

[Joe Ryan, executive]

I think if I get it right, Kristofer, that first question, that was about depreciation, yes?

[Kristofer Liljeberg-Svensson, analyst]

Correct.

[Joe Ryan, executive]

Yes. This is a factor of IFRS 16 because the depreciation -- you've got 2 depreciations in your depreciation line now. You've got real answer...

[Kristofer Liljeberg-Svensson, analyst]

Sorry. Sorry. Yes. I'm not interested in the [ neat ones ], the PPE ones?

[Joe Ryan, executive]

Yes. So our deployment of our fixed assets. So our asset base has gone up as we've expanded. So we're -- depreciation on that asset base as we go up. So if you look at the number in terms of -- for Q3, that's going to be a good guide for you for Q4. Have clustered it a little bit more as we deploy a little bit more capital and some of the construction in progress gets capitalized as it started to be depreciated. So I think this gives you a guide in terms of that -- the rate in terms of where we're deploying capital. We have the balance sheet for that. This is what we've said we were going to do, and this is what effectively we're doing.

And the most fantastic thing is that we've got the ability to deploy this capital in terms of deploying that and get it working in different markets, so in Poland, in Romania, in India. And the pace of our development in India is very strong. And that's because we've got a fantastic operational team being able to deploy that capital and also because the economy has been supporting it. And the economy is quite different from the economy in Europe. Here, we're very much in the sort of back foot in terms of looking at recession, worried about energy or the other issues. That's not the situation in India. They're coming out of the COVID situation. They've got fantastic growth. They've got a really strong development of their middle class, the pace and the rate of development is enormous. And the demand for health care is also there as well.

With employer provided insurance coverage in terms of out-of-pocket coverage as well and also the increase in terms of state and national government coverage for health care needs. So you were asking about on that third question, and that follows into that in terms of the economy.

How long is it going to take us to -- these being diluted to being supportive of the margin. Well, we're starting up quite big facilities. So if I look at -- if I look back, Kristofer, if I look back to the beginning of the big COVID peak in 2021 in India. We opened up our largest facility in March 2021 in the city called [ Vizag ]. It's about a 600-bed hospital. It's a really big facility, a really great building.

We went into that and we used -- we used that, it's preliminary for COVID business back in Q2 '21. So and really started in terms of really being an operating hospital in the sort of like the sense that we mean in Q3 2021. That now is operating around about 60% capacity utilization. It's got a good mix of its customers, and it's starting to -- it's approaching the yield that we would expect in terms of a leased building contract hospital in India. So it gets up towards the sort of 15% EBITDA IFRS 16 measure in terms of payment there. It's not quite a 15% yet, but it's getting up towards that level. And that is effectively what that's in terms of really operating as a hospital, that's some 5 quarters. So that's a good performance.

We're not getting to those sort of levels in 8 to 9 quarters. Then we're sort of getting into the area where it's a bit of a drag, and we'd expect it to be better performing in India. If we look at the new hospital, which we're going to open up next year in Bucharest. That we would expect to be able to get up to a level where it's non-dilutive, probably about 8 -- again, 8 to 10 quarters, something like that. That area of performance we'd be really happy with. It can take longer. It can be quicker, but that's the sort of level in terms of these larger discrete hospital investments that we're doing.

In terms of the dental side, for instance, these are smaller facilities. Normally, we will set them up and they've got capacities from anywhere between 6 and 12 dental chairs. And we would normally start with half that capacity commissioned and then depending on the size of the unit, half that capacity. And we'd look to get that capacity after the full utilization levels again, about somewhere between 2 and 3 years into opening from one opening. Some places, it's been spectacular, where we've got up to the full level within 12 months. Some levels, some places, it takes that full 3 years in terms of getting that up to full capacity. So that sort of gives you an idea of the sort of drag in terms of the margins you've got in terms of the expansion. Price, if you want to lead that issue, Fredrik?

[Fredrik RÃ¥gmark, executive]

Yes. I mean your price question, Kristofer, in the middle. I'm not going to quote a specific number, but I'd say the impact that we still have to come in health care services is significantly more than what we've had so far. So we have more price compensation to come and what we have realized so far in terms of this year.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And for diagnostic, we shouldn't expect much more than the current level?

[Fredrik RÃ¥gmark, executive]

No, you shall expect a bit more but significantly less than in Healthcare Services on the back of what I've tried to explain. But we are bringing up price growth in DX private pay market. So that will accelerate. But obviously, short term, we are constrained by the size of Germany in that business, not to be forgotten.

[Joe Ryan, executive]

Yes. Germany, Kristofer, is still not really in our hands. It's a state level and a bundles level decision in terms of the reimbursement programs. What -- maybe we will get is some of the sort of budgetary cap systems being eased a little bit in Germany instead of just a straight price increase. But some time or later, given the scale of inflation background, the prices have got to move up. So it's just the timing of it. It's not really in our hands.

[Kristofer Liljeberg-Svensson, analyst]

And just a follow-up there on your rather detailed answer when it comes to dilutive impact. So I guess then we will continue to see a dilutive impact from the launch investments we have done in the past 1.5 years into 2023, but less so may be done in 2022.

[Joe Ryan, executive]

Yes. We've constantly been doing this, Kristofer. So we've constantly been deploying growth capital since forever. But...

[Kristofer Liljeberg-Svensson, analyst]

I guess -- the difference now is that you have accelerated investments, and that's why it's seen more on the margin than...

[Joe Ryan, executive]

Exactly. And if you look at our growth, we've been growing organic growth has been extremely strong, consistently as far back as you want to go in terms of looking at our history of the business, that's what we do. We deploy capital. It's a fantastic return on investment because those facilities fill up over time.

And once you start to get to a -- once you get past that critical facility level in terms of utilization levels, it generates cash forever. And those facilities are infrastructure. So they are there for not just the next 5 years, it's there for decades and decades and decades. And those -- it becomes institutionalized within the health care infrastructure for that country, for that city, for that area. And we're providing health care forever out of those facilities.

[Operator]

It comes from the Grace Lee from Jefferies.

[Grace Lee, analyst]

Could I ask 3 questions, please. To start with one on health care. If you look at sort of underlying organic growth, excluding COVID, you mentioned top growth was 26% in Q3, but that's actually declined from 2% to about 30%. Despite the fact that price has increased 7.7%. Is it fair to sort of take that away as an implied volume decline? I think you mentioned earlier, demand is softening. So if you can help that bridge, that would be helpful. And I'll follow up with the 2 other questions.

[Fredrik RÃ¥gmark, executive]

That's largely India, Grace. If you remember, we talked about last quarter around that the -- while we now say that third quarter COVID in Healthcare Services was largely India, but second quarter last year was even more COVID in India. But that meant that the -- basically everything was filled up with COVID. So there really was no other business. So when you then look at the organic i.e., or everything else, you had a massive growth in the prior quarter this year. So quarter 2 this year, in terms of underlying organic growth in Healthcare Services was significantly pushed up by India having a lot of normal business this time around, yes.

[Grace Lee, analyst]

Specific to growth...

[Joe Ryan, executive]

If you think back -- if you go back to last year, we had no sort of business as usual in the Indian hospitals because it was all COVID because we have the Delta wave going through then. So the COVID's got away in Q2, yes. And so that's why the organic looks bigger in Q2 at 30%. But from Q3, we already were going back to business as usual. So we had sort of business as usual already back into the Indian hospital mix in Q3 2021. So that's why it looks a little bit lower.

[Grace Lee, analyst]

But this is organic growth, excluding COVID that you noted?

[Joe Ryan, executive]

Yes, you're right. But what you're looking at is that there was no business as usual in 2021 in Q2 because we weren't taking anything except emergency admissions. We were just -- we had a whole hospitals dedicated just to COVID. So you take the COVID away, the comparative was empty in Q2. So whatever you do in Q2 2022, it's an increase. But that was a smaller impact in Q3 because we'd already started to go back to doing proper business, normal business in Q3 2021.

So the comparative looks higher. So that's a large part of that impact. But whatever you look at it and strip out the price, you've still got 18% organic growth, 18% organic growth in ex-price in our Healthcare Services.

[Grace Lee, analyst]

So earlier when you mentioned demand -- sorry, earlier when you mentioned about demand softening, what does that relate to?

[Fredrik RÃ¥gmark, executive]

When we said demand softening, and we're raising the flag and saying that I think it's a reasonable expectation in terms of 2023, that we will see some demand softening for the more expensive Fee-for-Service procedures. We haven't really seen that yet. So there's nothing of that in our numbers currently. But I would be surprised. We would be surprised if that will not be forthcoming. So I think it's a fair comment to make now in terms of looking into the next year.

[Joe Ryan, executive]

Yes. Some of the procedures we do are elective, Grace. So people have got to be able to afford that out of pocket. So if you think IVF treatment, for instance, people are normally paying for that. It's nonreimbursed. Most of their clients are paying for that out of pocket. So I wouldn't be surprised if you see some softening on there. If you're getting a complete new set of implants in your teeth, it's quite important people for their -- point to their lives, but maybe some people are not being able to afford that in their work situations. So they may well delay that treatment or look for something cheaper. So I wouldn't be surprised or we wouldn't be surprised that we see some softening in terms of the elective part of the procedures. Obviously, nonelective stuff, things which are really critical. I don't think we're going to see softening in that.

[Grace Lee, analyst]

Great. And then another second question is on the exit rate. If you can sort of comment on either later in Q3 or early Q4. How has the both sort of growth and margin both directionally presses in Q3?

[Joe Ryan, executive]

Grace, little bit of interference on the line. Could you repeat that question, please?

[Grace Lee, analyst]

Yes. In terms of exit rate for Q3 in late Q3 or early Q4, how has this changed both growth and margin directionally versus Q3?

[Joe Ryan, executive]

Yes. I think you're asking about what trend we're seeing going into Q4, growth and margin, yes?

[Grace Lee, analyst]

Yes.

[Fredrik RÃ¥gmark, executive]

Well, you see in the report, Grace, that we reiterate the statement we did in the second quarter that we expect to come in within the range of the stated financial margin targets. And I think it's fair to say that we are likely to come in towards the lower end of the full year target, but I think it's considerably strong in the current environment to do that. And if you work your math backwards, I think that will give you a good indication in terms of where the fourth quarter will come out. So I think that's the direction you can work that out yourself. So we have strong top line growth. That's not going to change, if anything, we bring them with us into the fourth quarter. We have talked extensively on this call about the growth that's going to come up next year through the investments we made. So that's going to carry on. So I don't expect any change from that, Grace.

[Grace Lee, analyst]

Great. And then going back to earlier question on this margin versus growth, sort of thinking about it on the high level, I mean margin continued to sort of come under pressure 3Q lowest year-to-date. Appreciate that you're accelerating your growth expansion here, and that will flow through in terms of growth over time. But the concerns are really around sort of near-term challenges. You mentioned earlier potential pullback. So I guess my question is, how much pullback level are we talking here? And then how should we think about the margin evolution near time?

[Joe Ryan, executive]

I don't think you should look at it as a pullback. I think what we've done is we've accelerated this year. we've accelerated because we've got the opportunity, and we've got the ability to deploy that capital. So we raised that capital specifically at the end of last year with this deployment plan and the projects in view. So we've done that now. But given that we've increased our debt leverage levels, given that we got a lot more uncertainty, we're going to be a bit more cautious in terms of utilization of the rest of the firepower we have.

So I think that's more in terms of a reflection of the economic sort of outlook and situation and the pace that we've done. So I think what you're going to see, Grace, is if we go back to a more sort of like normalized level in terms of the pace of deployment of new capital. And then in terms of margin versus growth, I think we've done fantastically well. We haven't broken out, for instance, in terms of the margins there. The full basis of that sort of like evolution, which I think we discussed with Kristofer earlier on in terms of the deployment and new facilities and filling those up. And we haven't done that because we sort of like use that within the margin that we -- it's sort of been in the earlier margins there. But that has had an impact in terms of this -- these reported numbers in terms of particularly out of India with the pace that we've developed there. So you're definitely seeing some drag in that respect.

We never sort of really worry too much about it because we've done so much of this over the past, we've got a very good profile in terms of making sure -- of knowing how that's going to develop. So we're sort of quite comfortable in respect to that. But that obviously does impact our reported numbers now because of the pace of what we're doing. But we're extremely confident that is going to come back and be contributing in the next coming quarters over 2023 and into 2024.

[Operator]

There are no further questions on the phone at this time. Please continue.

[Hanna Bjellquist, executive]

I think we have a few questions online. Perhaps some of them you've answered already, but I'll read them.

Can you please elaborate on the divergence in lab capacity, plus 9% year-on-year to 108 labs and growth in test volumes of around 4% year-on-year. Q3 9 months excluding COVID and Ukraine? Is the slower test than capacity growth solely due to lower volumes in the asset class in Ukraine and/or other factors at play?

[Joe Ryan, executive]

Yes. So if you look at our growth level in terms of the ex-COVID, ex-Ukraine, Obviously, it's not related to Ukraine, and it's not related to COVID. But what we've seen in terms of you look at this quarter around versus the prior quarter around is you still had COVID impacts back in Q3 2021. I think we had a little bit of a backlog in terms of medical demand.

We saw that also in terms of the utilization in Poland on the employer paid business as well. And we've seen a lower level of utilization within our employer-paid business. And maybe some of that is that there was more of a backlog last year. So there could be some of that, but we see that coming through in terms of the testing profile as well.

Then we had in Germany, I think in Q3, we had a little bit of an unusual vacation period as well. And I think that's a factor also of no COVID restrictions as well on people's vacation timings and where they were going and what they were doing with different out of Germany. So we saw some impact in terms of demand levels in Q3, which we may allocate that to, it's unscientific. It's a little bit difficult to be precise. It doesn't take very much in terms of those volume changes to impact the margin as well.

[Hanna Bjellquist, executive]

How do you see your ability to sustain the strong cash conversion, 104% in the coming quarters?

[Joe Ryan, executive]

Our cash conversion has always been around about the sort of 100% level. So a little bit up, a little bit lower. So that's just a normal factor in terms of what we do in terms of our business and the profile of our customers. Most of them are paying as they go. So our cash conversion is what you'd expect to see in terms of our operating cash flows.

[Hanna Bjellquist, executive]

How should we read your comments that your strong competitive positioning in Poland, which is -- recent [indiscernible] acquisitions in Germany?

[Fredrik RÃ¥gmark, executive]

I think that's the sort of comment -- that's the sort of comment I did before on a question on the call here, where we believe a lot of the progress we are doing in Poland we will be able, from a sort of marketing and positioning perspective to bring with us in terms of supporting the 2 acquisitions. So it's -- there may be some cost synergies over time, time will tell, but my comment was much more related to in terms of how we drive revenue and service mix over time.

[Hanna Bjellquist, executive]

And one on what extent, can we expect an adjustment of the public lab reimbursement in Germany to compensate for the inflation pressures?

[Joe Ryan, executive]

Yes, not only us, I think a lot of other people in the German market would like to know that as well. I don't think there's any real ability to predict where the timing will be. There will have to be some price change at some point in time because the levels of inflation are substantial cumulatively, even though we've got high inflation that was now, we've had no price increases for as long as we've been in the market.

So at some point in time, there will have to be some sort of price indexation. So the health care system is relatively well-funded on a European sort of level or comparative basis in Germany. So the money is there. And I think the lab industry as a whole has demonstrated its key importance and -- a large part of success, Germany dealing with the COVID situation. So I think that recognition will be there as well. So when it will happen, we have -- we just can't really predict. But at some level, whether it's through some of the sort of like budgetary systems of controlling expenditure or whether it's through actual price changes, there will need to be some movement.

[Fredrik RÃ¥gmark, executive]

All right. I think conscious of time. So thank you all for listening. Thank you for all your good questions. And look forward to talking to you next quarter round. So thank you very much.

[Operator]

That does conclude our conference for today. Thank you for participating. [Audio Gap]