CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2018-Q4

[Operator]

Dear ladies and gentlemen, welcome to the Preliminary, Unaudited Q4 Results 2018 Conference of CompuGroup Medical SE. At our customers' request, this conference will be recorded. [Operator Instructions]May I now hand you over to Christian Teig, CFO, who will lead you through this conference. Please go ahead, sir.

[Christian Bartlett Teig, CFO & Member of Management Board]

Thank you very much. So a warm welcome also from me. This is Christian Teig reporting on the preliminary and unaudited fourth quarter results 2018 for CGM. We will very much follow the normal format with a prepared presentation, downloadable either from our website, or you can follow it through the live webcast going right now. This presentation will take something like 15 minutes, and then there is a Q&A session at the end.And I will, as always, try to reference the page numbers in the presentation so that those who are watching this offline can follow as we turn the pages accordingly. This brings us to the first content slide, Slide #2, and this is just the disclaimer up front. Notice that these results that we present today are preliminary and unaudited. We have a good track record to be well in time with our financial closing process so that we don't expect any material changes to these figures when they are finally released in audited from, will be towards the end of March.Moving then to Slide #3, where we see the key figures in 2018. This is very much in accordance with how we commented on Q3 back in early November. So if we look back at the year gone, Q4 was quite similar to Q2, meaning strong in revenue, strong in results. And then, we had a Q3 similar to Q1. And altogether, we, as expected, landed pretty much right in the middle of our guidance intervals for the full year. Again, in line with how we commented on this a few months back. So this should not be a surprise to anyone, but it's always good to see the numbers in print and that we were able to deliver on these promises. Slide 4, a little bit more detail on segment revenue. Yes, our AIS business, strong growth for the year, 38%. It's not an annual event, but I guess this is the time to reflect on this in a very much positive sense. In terms of the outlook given for the year, we are fully in the guidance ranges that we gave. For the pharmacy software business and hospital business, we have landed above the indicated ranges in our guidance. Especially the Pharmacy Information Systems business had a very strong year and also very strong finish to the year. HCS, slightly below the range, not material on group level. There are some currency effects related to the claims processing business we do for private insurances, health insurances in Turkey. But altogether, again, the EUR 717 million of revenue is in the middle of our guidance ranges, and all in all, business performed very well in 2018.A little bit more detail on the numbers. This is Slide #5. On the AIS, that's clear, 38% year-on-year growth. For practical purposes, everything organic growth. There needs to be a special driver behind this, and it is indeed the Telematics Infrastructure and the success for first phase of this rollout in Germany. The other businesses developed well, the -- with the exception to the U.S, the normal mid-single-digit organic growth rate. But of course, it does get dominated by this step-up that we've seen in our home market this year, very positive. Pharmacy software, both our markets, Italy and Germany, above expectations, especially Italy towards the end of the year came in with very strong revenue related to special tax incentives given, I guess, across the economy. But it can also be used to invest in IT products and services, which our colleagues and sales force, especially in Italy, has executed well on, so that 2018 stands out as a really stellar year in this business segment. HIS, very happy with how the year has developed. We knew that there were some reductional pass-through invoicing of third-party software that would inherently take revenue somewhat down year-on-year. But this has been compensated with above-expectations revenue in most of our main markets. Yes, and I mentioned the HCS business, some impact from the Turkish lira, somewhat lower than expected sales to pharmaceutical companies. But all in all, not material on group level.This brings us to Slide #6. This is the area that we are tracking, the TI rollout, also in terms of unit numbers. So all in all, we were able to add 8,000 orders in Q4 last year and also, 8,000 installations, which means our backlog remains unchanged at about 4,000 orders. Altogether, 46,000 orders for this product by the end of last year. If we look back into order volumes on a quarterly basis, we had our first quarter of selling this was Q4 2017. We then sold 12,000 units, then Q1, 8,000 units; Q2, 11,000 units; Q3, 7,000 units; Q4, 8,000 units. So it's been selling at a fairly consistent and stable rate, broadly unaffected by the fairly dynamic changes in terms of regulatory environment and deadlines. We think that's basically a positive thing that the market is taking up this product and these services at a stable and consistent rate. And we are proud and very pleased, I guess, in this environment, where the pressure related to deadlines having eased off during the year. Still, we were broadly able to reach the targets that we set for the year, and almost 50,000 units is a pretty good first phase of this TI rollout. Brings us to Slide 7. So despite the changes in deadlines and regulatory environment, it's now clear that this rollout in Germany will take place both in 2018 and 2019. Deadlines, as you see on this slide, have been shifted. I think the second bullet under doctors and dentists is quite important. We've seen this that it's not as if there is an immediate and strong reactions to the change in financial sanctions and deadlines. We see that doctors and dentists, in the end, will connect and become part of the Telematics Infrastructure, but they will do it somewhat according to their own pace and time it to when they feel ready to join. And this is probably somewhat unrelated to the sanctions, which also means that we -- and this is not being disrespectful to the regulator or all official policy, which really pushes doctors and dentists to get their order in by the end of Q1 and get installed by the middle of the year, we probably think, according or analog to the second bullet, that the stable rate that we have seen will continue, and that it will spread out for all practical purposes, most likely over the complete year of 2019, which is absolutely no problem and is a good thing, yes. And there's no real rush as long as we see that the fundamental uptake is taking place. And hospitals, they have a financing agreement in place. That's nothing new. That came in September last year. Of course, they are waiting for the new applications, there's emergency care dataset, medication plan and the electronic letters. For pharmacies, there is something slightly new that they also have a financing agreement now in place. Very, very similar to doctors and dentists. Their need is also more or less the same. And again, for them, it -- there's no real need to connect before they have these emergency care datasets and electronic medication plan in place. This is, as of today, scheduled for the second half of 2019, which means that should, yes, come during this year. I guess, there is nothing preventing pharmacies or even hospitals to connect already now. That's then more down to salesmanship. Again, it really becomes an interesting proposition for them in the second half of 2019. But altogether, there's a significant tail end with our own customers and the rest of the doctors and dentists in Germany for all of 2019. And then, during the year, most likely in the second half, we will see some hospitals, some pharmacies joining. You shouldn't rule out that some rollout will even take place in 2020, but we're already come, thanks to CGM, a long way in connecting participants in health care to this network in Germany. Those were the slides. Looking back, we now come into the section. There's a placeholder, slide #8, which gives the outlook. We can then move to give a little bit of historical perspective to Slide #9. Yes, this is a track record that we are proud of. Life is seldom a completely straight line. But overall, if you look at these compounded growth rates, there has been a very strong development in our group. If you look at the top line revenue growth, that's more or less 50-50 organic growth and growth by acquisition. We've been able to keep pace on the operating profit side. You see from this graph that '18 surely was a very strong breakthrough after many, many, many years of investments and patient preparations for our home market Germany and the digitization of health care there. And again, a very strong, in our opinion, development if we look back into the last decade. Another important part, we're then on Slide 10, is the sustainability and robustness of our business model. The recurring revenue, software maintenance and other subscription, other recurring revenue, are key component, and growth of this has also accelerated over the last 2 years in '18 and '19. That's also a function of the recurring operating part of the TI rollout in Germany. So last year, or from '17 to '18, we grew this recurring revenue component 6%. 6% is also the year-on-year growth, if we just take the January run rate, now in 2019. Altogether, we have EUR 443 million in this portfolio, which is pretty much exactly 5x more than what we had 10 years ago. So that has been a disproportionate or an overproportionate growth in recurring revenue, which is very much a strategic goal for managing CGM.Brings us to Slide 11. What is the roadmap for near-term growth. Near-term then would mean 2019. And this is a slide that we also used in our Capital Markets Day in October last year. So obviously, the continued rollout of the Telematics Infrastructure, doctors, dentists and from the middle of the year, pharmacies, hospitals, still an important growth driver. We have the further applications, the mentioned 3 areas plus the drug safety part, the AMTS coming as already decided and prescribed in the eHealth Law in Germany. We have our new applications, that's a global opportunity, especially highlighted on our Capital Markets Day, CLICKDOC and video consultation also supported by a positive regulatory environment. And yes, we have our hospital business, which is in the process of being rejuvenated under the leadership of the new board member colleague, Hannes Reichl. Yes, so on the first point, the continued TI rollout. This is then Slide 12. Here we see the current TI offer. We remain the one-stop shop of preference in Germany. We are promoting this offer directly and through various channels under different brands to all doctors and dentists in Germany. We see that roughly 1/4, 25%, of the orders to date have been from non-CGM customers, that means doctors that do not use the primary software application from CGM. We see this as a positive sign that we should be able to take some market share out of our own customer base also in 2019. In terms of price levels, this is now the third quarter unchanged. And the EUR 2,880 including VAT is also the price point that the alternatives in the market, the competition, are offering these packages for. Brings us to Slide #13. This is the electronic doctors' letters. This is planned to be released in 2019 around August, is the current plan, and this would enable doctors to move from largely paper-based communication to electronic, secure exchange of electronic documents. There is actually no financing earmarked for this, and using it is a voluntary feature. Having said that, we believe, and we know this from other markets, that this is a key utility for doctors, for hospitals and other participants, and it's something that we, in the second half of the year, can use to promote, yes, services related to this exchange of electronic documents to our own customers.Looking to Page 14. These are just the description of these mentioned statutory required and planned new services in 2019, the emergency care dataset and the electronic medication plan. And related to the medication plan, also there's medication safety applications, AMTS, very important utilities, and there is a lot of drive now from the ministry, from gematik, to get these new applications out to really show to the doctors and everyone who have connected to the TI, it's not just about checking valid insurance cards. That's important enough, but it's also bringing true quality in terms of health care provision and also in terms of safety to the overall insured population in Germany. So I think it moves now in -- at a good pace, and these will be important new areas of utility for every insured citizen of Germany. Brings us to Slide 15. These -- this is related to the prior slide only to show that in terms of the emergency data set and medication plan, there is financing available that we will use to promote and to upsell with new applications into our existing user base and, of course, to those who are connected to the TI. Some things have not been fully decided yet, prices, in terms of modules for our AIS. You see that at the bottom of the page here. We will probably introduce this more towards the middle of the year when the release of the required new software for the connector and the related components are ready to be released, and then we will start on this promotion into the markets. So altogether, on the revenue side, as a summary, you see on Slide 16, how we are giving also some indications per segment. So AIS, in terms of revenue growth, it's plus-minus flat. We do expect less revenue from TI rollout. That means a lower number of units to be installed. However, this will be offset by normal organic growth in the rest of the business. It's not the easiest part to forecast, this is the third bullet because of the speed of market penetration. We really hit it spot on, more or less, for 2018. So let's hope and assume that we will do this also for 2019. Altogether -- and then, of course, we have taken a very strong step forward in expanding our presence with direct sales and distributions in Germany. That adds about EUR 19 million of revenue to the business, so that altogether, yes, we are at the EUR 464 million to EUR 488 million of our largest reporting segment, AIS. In terms of pharmacy software, '18 was a special year, and it's probably more relevant to see '18 and '19 based on the 2017 base to be averaged out. So this actually means -- and we had a very, very an exceptional support for our business, especially in Italy, which will not be repeated in 2019, so that we are then back to the more normal low to mid-single-digit growth rates organically, for pharmacy software EUR 109 million to EUR 111 million. HIS, we're still in the phase where we're ramping this up and investing into stronger products, stronger offerings, and hopefully, which will translate also into stronger growth. We see this now picking a little bit up, 2% to 4%, that's at least where we start and would bring us to EUR 104 million, EUR 106 million. HCS, yes, it's still in a stable sideways state. We get back the Italian part of our communication data business, which went out of the group after the merger with a Competitor, FabLab. This is now an integrated entity that comes back and brings about EUR 3 million from this change of control effect, which means, it's back under our control and consolidation. So that's the revenue side. If we move to Slide 17. On the surface, of course, our EBITDA guidance looks very flattering. Everyone, hopefully, should be aware that there is -- there are 3 big IFRS reforms that came 2018-2019. It's IFRS 9, financial instruments; IFRS 15, revenue recognition; and now, the last one, IFRS 16, leases. Simple mechanics, you book out all operating expenses related to, for us mostly, office space lease and company cars lease, brings EBITDA up, the same amounts going to annual depreciation and a little small component on the interest expense. The net effect is 0. Why on earth the FASB spends time on all this, I have no clue. For us, this is just a comply-and-follow. All of this brings just costs and work for every corporate, and I guess, for you as investors, it's only internal shifts on the P&L. Little bit on our balance sheet, we will add about EUR 40 million of assets, which are the, say, fair value of the right-of-use period, and that's it. And before I do Slide 18 and 19, again, to comment a little bit on our EBITDA development, if you take EUR 15 million, which is the net effect, the positive effect, from the IFRS change, that's actually 2 percentage points. And if you look into our guidance range, we are adding 1 percentage point. So 1 percentage point margin is then lost. Why? Well, we have some important areas where we will continue to invest in 2019. They will not be related to any type of revenue opportunity for this year, but we are looking to strengthen our organic growth profile. One important area is here listed on the Slide 18. It's the electronic patient record, the personal health record, where there is a very strong push in Germany to bring this into the market in 2020, 2021, as you see on this slide. And of course, we will do what it takes to play in this interesting business opportunity, which would mean significant extra costs in year 2019, which will go through our P&L.And on Slide 19, we see a similar area. This is something that we covered very extensively on our Capital Markets Day. It's about connecting our doctors more to the online world, and this is a year, 2019, where we want to do a lot and to catch up in some ways and also, bring this -- these products and services, which connect consumers, patients to their designated doctors through this CLICKDOC concept that we have already presented on our Capital Markets Day and are launching this year. And also, the video consultation, telemedicine applications. And we will spend more than what we will generate consciously to drive growth, not necessarily in 2019 in financial terms but in all other metrics, so that we have a stronger and more solid basis for future organic growth. So these factors altogether, you will see on Slide 20. Of course, reported figures are reported figures. They are really, from the year 2014 pointing in the right direction. And altogether, we are guiding for an EBITDA margin 26% to 27% this year. Yes, and the summary you see on Slide 21, revenue and EBITDA. Revenue ranged EUR 720 million to EUR 750 million, including the mentioned acquisitions. And then, EBITDA EUR 190 million to EUR 205 million, and that's as accurately as we see the next 12 months as of today's date.Yes, the true accuracy of this outlook and how this will be reported, you see on Slide 22. This is the financial calendar. So March 29, the audited figures come out. They should be very similar to what you have seen today. May 6, a very normal or then the following quarters come at a very normal schedule. And then of course, the constitutional highlight of any corporation, the Annual General Meeting, is this year May 15. This concludes the prepared part of today's conference call. We are now into the Q&A session on Slide 23. You see the instructions. If you would like to raise questions, you can press 01 on your telephone. You will be queued then, and we will take your questions sequentially. So please.

[Operator]

First question is from Andreas Wolf from Warburg Research.

[Andreas Wolf, Research Analyst]

It's Andreas Wolf, Warburg Research. A couple of questions from my side, Christian. And the first one is on the pharmacy business. So since the tax subsidies in Italy were finished or have went out in 2018 -- in the end of 2018, and you are guiding, obviously, for similar revenue level as last year, do you already expect connector sales supporting this business during the course of H2? This would be my first question. The second is related to the Telematics revenue, and how much revenue have you tailored into your AIS expectations for 2019? Just to get the feeling, how many connector sales you expect during course of the year? And the last one is on the hospital software business. I think you had recently quite strong order intake in this business, so do we already see first signs of growing these orders, or at least revenues? Will these revenues be built -- baked when the projects will be carried out, i.e. maybe in 2020, '21? So is this still on the books? Or are you already carrying out these projects?

[Christian Bartlett Teig, CFO & Member of Management Board]

Okay, so for the first question on the pharmacy business and whether we have included connector sales in the guidance, the answer is, no. We have not included this, and we expect some sales in the second half but not at a material level. So maybe EUR 1 million to EUR 2 million altogether in terms of volume, but not -- so far, not fully included or with significant volume. On your second question, which is overall, say, revenue, units. Yes, this is, of course, where we intentionally try to not make it too transparent. We don't think that would be in anyone's interest. Having said that, we also try to be a little bit helpful. I guess, it's fair to say that for this year, 2019, altogether, we are looking at 20,000 to 30,000 installations more on top of, yes, what we already have. That's the order of magnitude. And we saw -- I mean I remember that for 2018, we said 50,000 to 60,000. We ended up with 46,000, so that's lowered units. But we've also been able to generate more revenue from the units that we have done, so that we landed again, in the middle, more or less, of our guidance range. But hopefully, that's helpful that we say 20,000 to 30,000 as what's included for 2019. Third question, hospital software business, order intake. Yes, good. There are also some larger tenders that will be decided during 2019. I mean, the continued success on the booking side will really translate into more significant revenue growth beginning 2020. So the lead time in this business is a little bit longer. We start maybe a little bit cautiously. But again, some of the timing in terms of ramping it up and also the revenue recognition related to the project accounting means that the main effect from the success we have had and hopefully continue to have in the market, will really come revenue-wise, next year, 2020.

[Operator]

Next question we received is from Knut Woller of Baader Bank.

[Knut Woller, Analyst]

Yes. Christian, 2 questions. The first one, looking at the investments that will eat a part of the IFRS 16 tailwind, can you give us some idea, how we should think about them? Are they rather onetime in nature? Or are they recurring? And then secondly, on the M&A side, you have been relatively inactive in terms of M&A in terms of the sizable impact in your P&L in the last years due to the health card rollout. Should we expect some more activity comes your side going into 2019? I think you mentioned in the past, the PCS market in Spain, which I didn't find in your presentation this time, is that still on the agenda? And also in the HIS segment, some ideas to improve that inorganically?

[Christian Bartlett Teig, CFO & Member of Management Board]

So on the investment side, you should think of that more as onetime. Meaning that if they succeed, they will be accompanied by additional revenue. And then -- so it would be analog to, say, the first phase related to the whole TI. But yes, you have to front-load your costs. They will be mostly expensed as they are not just technology development, it's also building your organization to be ready to execute if we are successful in the market. If we are not successful, those costs will go away. If we are successful, they will be supported by additional revenue and will turn into profits. In my book, that's onetime. Questions on M&A are always difficult to answer with any type of precision, so I will be intentionally imprecise. PCS, Spain is still on the agenda as would be any other similar acquisition that we have done in the past, meaning any business, which have an element of success and presence in our current markets and operating segments, we would be interested to buy for the right price. This also includes the hospital business. Finding those targets at the right price has been very challenging over the last 3 years in addition to our own management attention on organic growth. This may or may not change, but our interest to continue on the buy-and-build strategy, including acquisitions, is unchanged also for 2019.

[Operator]

Next question received is from Robin Brass of Hauck & Aufhäuser.

[Robin Brass, Equity Analyst]

My first question is also regarding the possible cross and upselling to new customers. I guess, you have 12,000 new customers from the TI rollout, is there anything included in your guidance on how do you see any potential up and cross-selling? And the second question is, you didn't release yet cash flow statement, but the cash went down from EUR 30 million to around EUR 25 million this year. Was it on top of the regular cash flow? Any one-offs that might be reversed next year? Or is there anything you can clear here?

[Christian Bartlett Teig, CFO & Member of Management Board]

So upselling to the 12,000 non-CGM customers is not included in the guidance. We do see additional applications and revenue opportunities. We mentioned mitigation plan, emergency dataset exclusively related to our own customers of the primary software. In terms of cash flow and cash, the actual cash position is probably not the relevant item to look at because we have a revolving credit facility, which we will always buffer cash against. So you should probably look at net debt instead and see how that develops.

[Operator]

[Operator Instructions]

[Christian Bartlett Teig, CFO & Member of Management Board]

There appears to be no further question, then I thank you sincerely for your interest and listening in on this call. And hopefully, we'll hear you back soon at the next conference call for CGM. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.