Synlab AG

XETRA:SYAB

Earnings Call Analysis

SYNLAB Reports Solid Growth Amid Disposals

In 2023's challenging market, SYNLAB is on track, exhibiting increased underlying organic growth and a margin rebound. Q3 saw organic growth accelerate to 5.1%, up from Q2's 4.4%, and a 15.6% adjusted EBITDA margin, reflecting seasonal trends. First 9 months' organic growth reached 6.9%, with a margin of 16.9%. Portfolio management excelled, marked by disposals, leading to EUR 346 million in net debt reduction, and a leverage of 2.93x. The company completed 7 acquisitions in 3 countries while also enhancing customer experience, yielding an 87% NPS, and doubling efficiency savings to EUR 30 million. ESG strategy advances with a groundbreaking bipolar disorder test and high ESG ratings. SYNLAB anticipates a full-year EBITDA margin between 16% and 18%.

Stabilizing Financials with a Downward Profit Trend

The company reported a decrease in net profit for the first nine months of 2023, down EUR 297 million year-over-year, concluding at an adjusted net profit of EUR 37 million. This excludes EUR 183 million in profits from disposals. Despite the downward trend in profits, the company shows financial stability with a maintained effective tax rate of approximately 27% and has a stronger cash flow in Q3 2023, signaling healthy operating cash flow generation. The company's days sales outstanding (DSO) have increased, but progress in normalizing working capital is evident.

Focus on Core Business Driving Growth Across Geographies

A deep dive into regional performance reveals contrasting patterns. France and Germany, comprising 20% of group revenue each, encountered challenges like price drops and lower third-quarter figures in 2022, respectively. Nevertheless, they are striving for stabilization, with France's healthcare budget growing modestly and Germany exhibiting positive underlying growth. Revenues in South and North & East segments showcase resilience, particularly with notable base business growth of 12.5% in North & East. Overall, the company's focus on routine and specialty testing offers a strategic advantage as it navigates through seasonal and market shifts.

Leverage and Liquidity Indicate Strong Financial Position

The company's leverage ratio, indicated by debt-to-EBITDA, stands at an improved 2.93x, reflecting a stronger balance sheet due to strategic acquisitions and disposals. Liquidity remains robust with significant cash on hand and undrawn credit facilities, bolstering confidence in the company's financial health and its ability to manage debts efficiently.

2023 Outlook Affirms Positive Trajectory Despite Disposals

Looking forward, the company maintains anticipations of achieving EUR 2.7 billion in group revenues, even after a EUR 65 million reduction due to disposals. This optimistic guidance is fueled by an upwards revision of underlying organic growth to around 6%, surpassing previous expectations. Moreover, despite the pandemic's decline, the firm smartly anticipates EUR 40 million in COVID-19 related revenues, while still aiming to keep the adjusted EBITDA margin within a solid 16% to 18% range.

Earnings Call Transcript 2023-Q3

[Operator]

Hello and welcome to the Q3 Nine Months Quarterly Results Call of SYNLAB AG. [Operator Instructions] Please note, this call is being recorded.I'm now handing over to [indiscernible]. Please begin your meeting.

[Unknown Executive]

Good afternoon and good morning to the U.S. My name is [indiscernible] responsible for Corporate Communications at SYNLAB. I would like to welcome everybody to today's conference call on SYNLAB's financial results in the third quarter and first 9 months of 2023. As usual, today's presentation is available for download on our website, and a replay of the presentation or the whole conference call will be uploaded later on.With me today are Mathieu Floreani, CEO; and Sami Badarani, CFO of SYNLAB Group. And I'm handing over to Mathieu, who will lead you through the call.

[Mathieu Floreani, executive]

Yes. Thank you, Cedric. Good morning, good afternoon, ladies and gentlemen, and welcome to our call from my side as well. So as usual, I will begin with the highlights. And today, it's of the third quarter of 2023 and the 9 first months. Sami will then provide a deeper dive into the financials before I conclude with the key aspects of our business segments and an outlook. And after the presentation, we will be opening the floor to your questions.So just as a summary before we get deeper, this quarter confirms we are on track on our journey of increased underlying organic growth, recovery of the adjusted EBITDA margin and portfolio management.So now let's start with the highlights, and this is on Slide 5. So we performed the first 9 months in a still challenging macroeconomic environment. And of note, we have no geographic exposure to the Middle East. Our performance continues to show margin recovery, thanks to maintaining solid organic growth, our efforts on productivity management and a successful portfolio management. In Q3, the organic growth further accelerated to 5.1% compared to 4.4% in Q2. And the adjusted EBITDA margin of 15.6% was as expected with this quarter's seasonality.In the first 9 months, our organic growth reaches 6.9% and our EBITDA margin 16.9%. So we successfully continued our portfolio management in this quarter. And as a reminder, this consists in reviewing our portfolio of activity first within each country, for example, terminating unfavorable customer relationships. At group level, our review led to the sale of our non-strategic vet activity and of subscale, Poland and Ukraine countries. So including the Swiss business disposal, the impact on our adjusted net debt of all disposals is EUR 346 million. And then our leverage at the end of September stood as a result at 2.93x. And this shows that our underlying strategy is paying off.Now let's go to Slide 6 for some more details. So we can review the highlights of our ForYou transformation strategy along the 4 usual operational quadrants. So as mentioned, the strong organic growth continued in this quarter and this is driven again by overachieving our ForYou initiatives and by positive price development. As an example, also, our focus on the customer experience in retail paid off with an NPS now at 87%.SALIX on the second quadrant, which is our efficiency program, continued delivering reaching now EUR 30 million savings in the 9 months. And in the previous years, we aimed at yearly savings of EUR 20 million for SALIX and a goal that we have now planned to double this year. We carried on working on our infrastructure footprint also on logistics savings programs and inventory management, while at the same time, preparing the ambitious IT-go live of October at Synnovis, together with our [ London Trust ] hospitals.In the first 9 months on the third quadrant of 2023, we completed 7 acquisitions in 3 countries and as mentioned before, sold our businesses in Switzerland, Poland, Ukraine and veterinary. The fourth quadrant, we continue leading the scientific publications in our industry with now 264 papers since January. And we're also proud to launch our first Foundation project on colorectal cancer detection in challenged communities.So on this, let's dive more specifically on ESG in slide -- with Slide 7. So the implementation of our SYNLAB ESG strategy is nicely progressing on all fronts. With, for example, the implementation of an ESG and human rights due diligence process for the entire value chain. We are also very proud of the launch of the first -- of a first worldwide actually, which is MyEDIT-B. Indeed, the first existing test for bipolar disorder and it is RNA blood test.And finally, also good news on the ratings front with ISS ESG prime status for full year 2023 and MSCI Status A, Grade A for also 2023 on ESG.So let me now hand over to Sami to touch on the financials for today.

[Sami Badarani, executive]

Thank you, Mathieu. Good afternoon, everyone. I'm pleased to walk you through the Q3 and 9 months 2023 financial performance of the SYNLAB Group. Let's start with the revenue on Page 9, the Q3 revenue performance first. So the reported revenue stands in Q3 at EUR 617 million, negative 12% revenue variance year-over-year. The pro forma revenue includes the additional revenue as if '22 and '23 acquisition had been consolidated on the 1st of January of each year, but also the lower revenue as if the 2023 disposal had been deconsolidated on the 1st January of each years. The disposals in this case, are Switzerland, Ukraine, Poland businesses and veterinary businesses in U.K. from last year, Germany, Belgium and Spain activities.The pro forma revenue in Q3 is at EUR 607 million. We have EUR 98 million of reduction from COVID-19 testing. And Q3 2023 COVID-19 organic nominal revenue stands at EUR 4 million. EUR 29 million of underlying organic growth, 5.1% of organic growth. The Q3 '23 price is up 1.6%, reflecting the positive effect of price indexation in several countries from the North and East and South segments. The Q3 '23 volume is up 3.5%, with strong growth in Germany that we'll see later. We have a nominal FX impact in Q3 with the strength of the Mexican peso, offset by the weakening of the GBP and other emerging currencies. Overall, EUR 13 million revenue from the seven acquisition completed in the first 9 months '23.Let's move now to the year-to-date revenue development. We have the same 4 elements to explain the revenue evolution. COVID-19 testing, EUR 36 million organic revenue in the first 9 months of the year. The underlying growth stands at 6.9%. We have a negative FX impact of EUR 9 million and the 2023 acquisition, EUR 40 million of pro forma revenue, 1.6% growth. Overall, the 9 months reported revenue stands at EUR 1,990 million, a 22% reduction versus the first 9 months of 2022. It includes EUR 85 million reported revenue from disposed businesses at the end of September.EBITDA -- EBITDA performance on Page 12. The September year-to-date 2023 reported adjusted EBITDA stands at EUR 328 million versus the EUR 663 million in the first 9 months of 2022. The EBITDA organic evolution explained the bulk of the variance. EUR 318 million organic EBITDA drop, EUR 6 million price drop from COVID-19, EUR 27 million positive price from underlying business, EUR 51 million negative inflation, 3.4% overall on the base business. We have strong inflation on OpEx, 3.7%, mostly energy and fuel. We have accelerated inflation on PEX at 3.8% and we have increasing but still limited inflation on MATEX at 2.3%, mostly coming from consumables and external labor as our reagent costs are, for the most part, fixed with multiyear contracts. And overall stability of inflation as it was already at 3.4% in H1 2023.The rest of business includes, on the negative side, the impact of COVID-19 volume drop, partially offset by the positive organic volume growth and the SALIX benefits of EUR 30 million. The year-to-date EBITDA margin of the group stands at 16.5%, 0.4 points lower than in H1 and the Q3 '22 -- '23 margin stands at 15.6%. It's lower than in H1 due to the seasonality of the business. Q3 is the lowest quarter in terms of activity due to the summer and the vacation period. We are confident to reach our 16% to 18% margin for the full year.Let's go to Page 13. The earnings, the bridge from EBITDA to net profit and from reported to adjusted financials. EBITDA first, EUR 12 million adjustment, mostly acquisition-related costs, including PMI cost. The adjusted operating profit is at EUR 149 million, it's down EUR 337 million from 9 months 2022, again COVID-19 price and volume reduction. The net finance result is higher by $55 million compared to the 9 months 2022. EUR 23 million net interest expenses increased, EUR 33 million from financial instrument revaluation.Tax line is decreasing compared to the last year and adjusted effective tax rate is stable at around 27%, slightly lower, however, than in H1 2023. The 9 months '23 net profit includes EUR 183 million of profit from the recent disposals. The 9 months 2023 adjusted net profit stands at EUR 37 million, down EUR 297 million year-over-year. The profit from the disposal is excluded from the adjusted net profit.Cash flow. We have a stronger cash flow in Q3. The Q3 EBITDA translate into strong operating cash flow generation. Receivable. DSO is at 63 days, up 9 days compared to September '22. The normalization of the working capital is progressing post-Omicron peak wave in Q1, even though it's not yet complete and it's reflected in the DSO, which is still too high for us. EUR 64 million of tax payment in the first 9 months, the net CapEx, including leases is increasing, EUR 7 million year-over-year as planned. It includes around EUR 50 million spent in Synnovis with the ongoing setup of the new lab. Excluding Synnovis, the net CapEx is down EUR 43 million, despite the inflation that also impact leases and CapEx. Excluding Synnovis, the Q3 unlevered free cash flow conversion to EBITDA is at 30% -- around 30%. Q3 and 9 months unlevered free cash flow performance is back in positive territory, reinforcing the model, we are at low risk in terms of cash generation for this business.Balance sheet, Page 15. The balance sheet expressed is a capital employed and capital resources view. The change versus December is mainly driven by the additions from the 7 acquisitions completed in the first 9 months and the disposals completed in Q3 2023. The normalization of the working capital with the reduction of COVID activity is well underway, again, not fully completed. The net debt of the group, including EUR 620 million of lease is now at EUR 1,339 million, down EUR 236 million versus December '22, of which EUR 346 million from the net proceeds of the Q3 2023 disposal. The group has a strong balance sheet with rounded EUR 400 million cash on hand and $500 million of undrawn RCF at the end of September. EUR 200 million of TLA, Term Loan A, has been reimbursed in 2 steps in the course of October 2023.Page 16, the impact on net debt and low leverage. The adjusted net debt is at EUR 1,314 million at the end of September. The adjusted net debt reduction reflects a EUR 65 million spent in acquisition, offset by the EUR 346 million net proceeds from disposal. The dividend paid to SYNLAB AG shareholders and the LTM pro forma EBITDA stands at EUR 448 million. The leverage ratio, debt-to-EBITDA stands at 2.93x, it's down 47 basis points compared to H1 2023.This concludes the financial section of the presentation, and I will now hand it back to Mathieu for the business review.

[Mathieu Floreani, executive]

Thank you, Sami. Let's cover indeed, our main geographies and we start with France on Page, I think, it's 17. France is 20% of our group revenue and we reached revenues of EUR 120 million and AOP of EUR 10.8 million, with a margin -- at AOP margin at 6.4%. So the Q3 2023 decline in revenue and AOP margin versus the first half of this year was mainly driven by the food effect of the price drop, a negative working day effect and also seasonality, which were partially offset by a lower inflation impact on OpEx and positive productivity.As a reminder, the negotiations regarding the new 3-year plans were finalized earlier in the year, resulting in a health care budget growth of 0.4% per year in 2024 to 2026. And the plan was designed at the previous 3 years' plan, balancing the market-driven volume growth in France with price adjustments in line with our long-term growth expectations for the France segment.On Slide 18, Germany 20% of group revenue also. Revenue in Germany for Q3 was EUR 134 million. AOP and AOP margin came positive at EUR 1 million and 0.7% respectively, which is an improvement versus H1. As mentioned previously, a portfolio review to improve performance throughout our business is ongoing in Germany also. We saw strong underlying growth of 13%, impacted by new customer wins and positive price, against also a weaker third quarter in 2022, but still well above the long-term growth of this segment.On the next Slide South, 31% of our group revenues. So in this segment, revenue for Q3 was at EUR 173 million, AOP EUR 8.7 million, resulting in a margin of 5%. The AOP margin improved strongly in LatAm and Portugal and was offset by continued margin pressure in Spain. Italy is improving its underlying margin, excluding the impact of prior year revenue one-off. And finally on this segment, the underlying growth adjusted from the Italy one-off last year was 4.5%. We saw strong price increases across all countries except for Portugal and Ecuador.And finally on Slide 20, North & East, 29% of our revenue. There we reported revenues of EUR 188 million, with an AOP at EUR 17.8 million and a margin of 9.4%. In this segment we saw a continued, particularly strong base business growth of 12.5%, which is also way above long-term growth in this segment. The growth was again driven by significant increases in the underlying testing volume plus 5.7% and prices plus 6.9%.So, now going to the outlook. So, let me conclude today's presentation with the confirmation of our outlook for 2023. And then going into the Page, in the third quarter, we continue to be well on track with our published expectations for the fiscal year 2023. Based on our strong core business of routine and specialty testing, we are very well positioned for the future. So, we continue to expect group revenues of around EUR 2.7 billion and that despite the EUR 65 million reduction from the performed disposals. This assumption is driven by continued strong underlying organic growth, which now we expect at around 6% throughout the year and it was previously stated at more than 4%.The COVID-19 revenues are expected at around EUR 40 million. Our 2023 adjusted EBITDA margin is still expected to be in a range of 16% to 18% and this incorporates all factors we mentioned previously, adding COVID-19 capacity rundown costs being offset by a positive effect of the sale of the operations in Switzerland and the strong development of the underlying organic growth. And also to be noted trajectory of the inflation net of price is in line with our expectations. There were no changes regarding our M&A planning, so we aim at spending up to EUR 100 million in 2023.So in conclusion, the company continues to perform as we expected, even over performing in many areas. We manage to refocus efficiently on our core business of routine and specialty testing and to simultaneously embark very successfully on reshaping our portfolio. We are strategically increasingly well positioned for the future. With this, I would like to hand back to the operator to open the line for Q&A.

[Unknown Executive]

This concludes our presentation. Thank you for your attention and we will now open the call for your questions.

[Operator]

Thank you. [Operator Instructions] It seems there are no questions at this time. I turn the conference back to you speakers.

[Mathieu Floreani, executive]

Yeah. Thank you. We will wait for some more minutes in case some further questions pop-up. Please don't hesitate.

[Operator]

The first question comes from the line of Christophe Ganet from ODDO.

[Christophe-Raphael Ganet, analyst]

Actually, I have 2 questions. One is related to the COVID activity. Can you update us in terms of ramp-down regarding your structure, headcounts deployed during the pandemics? And the second question is related to M&A, 2 things. What about the current multiples? How do they evolve? What are the multiples you've paid during the 9 months? And second question related to M&A, again is when do you expect or intend to return to M&A stronger, I mean, to the previous level?

[Mathieu Floreani, executive]

So, COVID-19, I think our ramp-down is completed as to the structure and the headcount as your question was. We still are of course to avoid any doubt, we still are performing PCRs and are continuously able to perform PCR, but it's part of our say regular activity stream here. On M&A multiples, overall the market has really slowed down very, very significantly, meaning that it's a bit difficult to really have a position on how the multiples have evolved. They are rather trending down as we would expect.The 9 months multiple, I will maybe let Sami give details.

[Sami Badarani, executive]

Yes, the multiples or the acquisition we've done in 2023, if we exclude an outlier which is German hospitals that we have acquired for regulatory purposes, the rest of the acquisitions have been done on a multiple of 7 x N plus 2, which is consistent with our historical trend and our target. We had a higher level in '22, where it was at 8 x. So where -- it's -- I'm not sure, it's an indication that shows that the trend that we are talking about of reduction is being reflected in our performance.Now for the future on M&A, I think we're still working our case here. We are in the middle of the budget, so we have not firmed up the view on 2024 onward. And so it's too early to say, but we will continue doing M&A and -- but it needs to be looked at over time and not necessarily a 1 year number, but we will not stop doing M&A, but the magnitude of it we'll reconfirm it at a later stage.

[Mathieu Floreani, executive]

Yes, that the market overall is -- the markets are overall massively unconsolidated in most countries, so the opportunities are there and will stay there.

[Operator]

[Operator Instructions] We do have a question from Keval Dattani from Permira Credit.

[Keval Dattani, analyst]

I was just wondering on the kind of full-year guidance that you've given, obviously, for Q4, it's quite a range if 1 does the simple math of [ EUR 2.7 billion ] and the 16% to 18%, I mean, it's a range of plus 15% to plus 75% EBITDA year-on-year. So I'm just wondering if you could potentially give us a better steer on that, directionally it's good, but just hoping for a bit more granularity there if possible?

[Sami Badarani, executive]

Yes, I think we have reported Q3 year-to-date at 16.5% knowing that Q3 was lower and we have a pro forma number at 16.9%. So these are 2 additional data points that can help -- I would say, give you a view on where it could land without changing our guidance.

[Keval Dattani, analyst]

And on the kind of working capital normalization, what's the expected sizing for that for Q4?

[Sami Badarani, executive]

I mean, we have normally in a normal year, I mean there is always seasonality in our working capital and it increases during the year and reduces in the second part. So usually in Q4 we have a reduction in working capital to year end. Now we have the specificities of the rundown of COVID in terms of working capital and here it's true that we have experienced some delays in collection in some of the Latin American countries from the States. It's all provisioned, but it's -- we were expecting this for 2023 and we're still working towards this, but it may slip a little bit to 2024. So that's 1 item to flag. Beside that, we are also -- we know that December 31 this year is a Sunday and so in some countries we may have some payments on the 1st of January or 2nd of January instead of the 29th of January -- December. So this could have also small impact on our activity, but nothing, it's pure timing, there is nothing else.

[Keval Dattani, analyst]

And I guess lastly, just on the kind of Cinven process, I appreciate the Board put out the statement essentially not giving a view, but is there any kind of sharing of the calculation that was come to reach the conclusion that the Cinven offer wasn't necessarily the best valuation? Is that going to be made public as to what a kind of fair valuation would have been.

[Mathieu Floreani, executive]

No, I think we will stick to the fiduciary obligations of giving an opinion, which was an inadequate -- opinion of inadequacy on the price. Of course, there are plenty of say, different methodologies applied to come to something that is a range, but we'll stay at the opinion as per our recent statement of financially being inadequate.

[Keval Dattani, analyst]

Where it sounds like...

[Mathieu Floreani, executive]

[indiscernible]

[Keval Dattani, analyst]

Will you disclose what you would have thought would have been inadequate price?

[Mathieu Floreani, executive]

No.

[Keval Dattani, analyst]

And sorry, just 1 last 1 is on -- is there kind of a deadline, sorry, I'm sure it must be in press release, but deadline for the kind of remaining shareholders to accept or decline the offer?

[Mathieu Floreani, executive]

There is a very strict deadline which is the 20th of November, Friday night, midnight and there will be no extension.

[Keval Dattani, analyst]

And is there a level by which someone can start to squeeze out if they get a certain amount of uptake or?

[Mathieu Floreani, executive]

Yes, it's 90% in our present case, the bidder being a German company.

[Operator]

[Operator Instructions] There are currently no further questions at this point, I hand the conference back to you, speakers.

[Unknown Executive]

So thank you very much. If there are no further questions, then this would leave us thanking you for your participation in today's conference call. If you have any questions, feel free to reach out to our investor contact anytime and we will now close today's call and hope to meet you again for the full year 2023 call on the 25th of March. Thank you very much and good-bye.

[Operator]

Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.