Medicover AB (publ)

Good day and thank you for standing by. Welcome to the MediCover fourth quarter 2023 results presentation conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star 11 on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw a question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Fredrik Rogmark. Please go ahead.

Good morning, everyone, and welcome to our fourth quarter 2023 and year end 2023 results presentation. So put together a few bullet points as a summary of quarter four. I think we have continued to show strong revenue growth, 16.1% up, which of which 13.5% organic, so confirming the historic trend. And this effect is the last quarter when we will use the terminology COVID. As we move into the first quarter 24, there is no COVID in the comparative quarter. So this is the last time you hear us talk about this. So if we look at organic growth X, the COVID element last year round, we were up organically 16.7%. We have continued the improving profit trend, and we are happy to confirm the path towards reaching our three-year financial targets, where there's then basically two years to go. And this, which we will speak a bit more during the presentation, one should keep in mind that this is why we still carry quite a bit of immature hospital units. And importantly, still no price increases in Germany, which clearly holds back the pace of profitability improvement. Solid underlying organic volume growth in both segments. We'll speak more about that. That's really important. That confirms the robust demand. If we then look at the pie charts that you're used to see. I think it's noticeable if we look at the upper pie chart, you see Poland, as the geography for the group has actually increased up to now 50% of revenue and you see a 30%, so I think quite outstanding growth for Poland as the geography. Probably worthwhile noticing as well, you see Germany, which is down to 18% for the quarter, actually has a negative growth number. You see minus 2%, which largely is the remaining COVID unwinding as that's really where the last sort of material volumes of COVID testing still remained last year around. Romania, 19% up. India, you see 9%. Now that's quite a lot of negative FX in that, so we have quite a bit higher growth in the local currency in India. Quite outstanding number you see for Ukraine, which now represents 4% of revenue for the quarter, is up 32%, which I think is not insignificant in a war-torn country. And you see the other element, which is down 11%, and that's largely driven then of the disposal of Belarus. Noticeable is that perhaps down below you note the funded, so the darkest blue, which is then the 22 percent pie, up 25 percent, as we will speak about later on in the presentation. It's quite noticeable that actually member growth is back, volume growth is back quite significantly in the funded business, which is important. because that obviously drives and carries on into 2024 where we are now. And then the last point to make on this one is we've inserted, if you see the percentage points in between the bars to the right, you see the underlying organic growth. Last year round was 23%, this time around is 18 or just short of 19%. is good solid underlying growth. Then moving to the profitability slide and I draw your attention to my little footnote at the bottom left so everyone is aware of that that we have a significant one-off item in this quarter where we credit back to central admin costs a contingent deferred acquisition payment which is not going to happen. That was two acquisitions made around the time when COVID broke out and the performance targets due to that has not been met. And we credit that back. But overall, the numbers are good. So I just did a beta of 68.3 million up to 14.8%, looking at perhaps the most important alternative performance measure that we looked, adjusted the beta L, which is largely than the old EBITDA, so the best proxy of cash flow that we used. So that was 42.7 million, or a 9.2% margin for the quarter, and EBIT of 19 million. So I think we have used this graph or the bar chart to the right, which I think you will see that through the divisions as well, which I think well illustrates you know, the COVID earnings impact. And you see there in the quarter two, 2020, when obviously COVID broke out and that was rather benign. We dropped in the underlying business. And of course, because we were closed for quite some time. And then you see how the gray bars increased and then slowly have disappeared. And then how the underlying earnings growth has come back. So I think that's a good illustration in terms of how we grow the underlying business. Yeah. Healthcare services continues on this very strong growth path. So just short of 325 million euros for the quarter up 25.2% of just short of 20% organic. So price in that number just short of 9%. So you see, you know, double digit volume growth and then supplemented with just short of 9% price growth on top of that. 31% up for the year of which organic 21. And again, I think a very strong number. Acquired revenue, very benign. You recall that we guided about a year ago that we would significantly reduce the inorganic activity during 23 and first half of 24, which we have done. And hence the acquired revenue, pretty benign as mentioned. So it's a good performance and demand levels in general across the business area. So, you know, we see really good demand. The point I made before, you remember we talked about during the first three quarters of the year that we largely have traded off volume for price in our funded business, i.e. it has been of utmost importance to compensate cost inflation with price growth. And hence we have seen much more subdued volume member growth previously in the year now. In the fourth quarter, that to some extent has reversed, and we've seen actually very good member intake in quarter four. And the point I made before, that's really important because as that momentum builds up, that obviously feeds into the 2024 where we are now to create a strong base for growth into the current year. So important point to make. India traded softer than expected. Slightly softer, I should say, in Q4. That's a market issue. It's not a MediCover issue. The number of factors plays into that. We can take that in a Q&A session in terms of what has caused a slight slowdown in Q4. That is not something which we expect to go on into 2024. But in terms of the quarter such, the whole market was slightly soft in India. Then if we look at the pie charts below, I think I pretty much made the points already on the group chart. But you see Poland obviously is up 30% for the division as well. Two thirds of this division is in Poland. So obviously Poland is incredibly important to us in this business. And yeah, I think those are the points to make. Looking at profitability here, and I make the point that the comment I made on the group profitability slide where we have the not insignificant one-off item, that's all accounted for in central costs, so the two divisions are not impacted by the one-off items. We do that obviously for the fact that we shall be able to compare quarter-on-quarter and year-on-year without any disturbance on the divisional level. So here for Q4 EBITDA for healthcare services up to 46.2 million, 21% up. You see 50 basis points off the prior year number. which again is largely driven by the new unit openings that we have, plus what one should say slightly seasonally higher medical cost in the fourth quarter in the employer paid business. Full year EBITDA just short of 172 million, 37% up and 14.3% for the year. And I made the point, actually last bullet point on the slide you see there, medical cost ratio in this division for the quarter, some three percentage points above the last year quarter, which again is then driven by the facility expansion, but also higher utilization levels in the insured business. And I think you see the bar chart to the right, where obviously the impact from COVID was much less here. You see the two bars where you see high gray areas. Those were the two quarters when we had significant amount of inpatient admissions for COVID in the Indian hospital business. But otherwise, which is not shown on this chart, COVID had a significant negative impact on the blue bars. So as COVID obviously is gone in this business for quite some time, we will continue to see the, I think, strong profitability development in this as we gradually fill up the facilities that we have talked about. Diagnostic services. Again, here you see a bit more obviously impact from COVID in the bar chart to the right. So we were basically just flat on revenue. You see 143 this time around versus 144. Last year, obviously a lot of things going on within that number, COVID unwinding, disposal of Belarus, et cetera. So we had organic growth within this number if we exclude the last year COVID of 11.5%, which is not bad. In fact, I think that's pretty good. Price representing some 3.7 percentage points of that. For the full year, revenue of 570 million versus 612, so down some 7%. Minus two and a half percent organic. Same thing, exclude COVID, and we're actually growing 16.6%, which is really good. And organic volume growth here is good into double digits. So reflecting the, if you wish, strong underlying demand coming back. Yeah. Then, you know, profitability, obviously, you know, here we are under pressure. We have talked about that for quite some time. You can see the impact of COVID going away. And by far the biggest issue here being that the element in Germany, which is just short of 50% of revenue in diagnostic services, we still have no changes to the pricing regime in Germany. You see there my third bullet point in terms of looking at the full year 2023, a beta margin for this division ex-COVID. We're at 15.4%, which is flat on the prior year, where you obviously for sure would like to see a growth. But I think with half of the business being in Germany, that's not a bad outcome. In fact, a lot of work has been done to manage to that in terms of efficiency. And as we go into 2024, you know, we remain still optimistic that we'll be able to shift that north. So then just a few quick comments in terms of the full year. So I think, you know, very strong growth here, obviously. One reflection that may be worthwhile to do is when we look back, you know, over 2019 as a base year, That was the last year before we knew anything about war and pandemic, etc. If we compare the four years over that period, we have actually more than doubled revenue and we have more than doubled profitability over the four years, which I think arguably is the worst trading years for many decades in Europe. So I think that's a very strong confirmation of the strength of the business. We have brought organic capital investments back down to around 6% or just above 6% in line with what we guided for. And that's in line with our historic levels. You recall that we were quite a bit above for a couple of years. So back down to where we historically have been. That's not insignificant that it's still above 100 million euros of organic capital deployment. We have, point made before, basically reduced, if not to zero, but to a rather minimum level in 23, the inorganic activities. Been a big operational focus on consolidating what we have bought, improved operational efficiency, and obviously, you know, fill facilities with patients. Now, you know, the war in Ukraine shows no sign of abating, which is a tragedy in itself. And I say in every earnings call here, I think we remain both incredibly impressed and perhaps to some extent equally surprised in terms of the performance of our Ukrainian business. You saw the growth number I mentioned before in a country in full war. So, yeah, I say, you know, I think we're in a very robust position and we remain confident on the outlook for 2024 with continued organic health and revenue growth. improving profitability as we progress through the year and on good path towards the mid-term financial targets for 2025. Then some details on the year. So basically you see Poland for the full year is 48%, it was 50% for the quarter, but still for the full year up 30% as a country. Otherwise, the breakouts are quite similar. You see Germany slightly negative for the year. Ukraine up 26%. India up 11%. Again, a lot of effects as well for the negative effects for the full year in India. And you see the base year 2019, that was the point I just made, 844. 2023, more than twice that. And basically no impact from COVID in either of those two numbers. And the same thing on EBITDA. You see the dark blue component being the COVID contribution. You can actually see a very thin, narrow line at the top of 23, but that is basically negligible for the year. So I think good, solid performance for the full year. And we go in full speed into 2024. The board has recommended to the AGM a dividend at the same level as last year of 12 euro cents with a record date of 30th of April and to be paid on the 8th of May. With that, I hand over to Joe for a couple of financial overview slides.

Thank you, Frederick. So good solid development. So if you look on the right-hand side here with the graph, you can see our group adjusted EBITDA out. So this is EBITDA as reported, adjusted for the lease cost depreciation and interest costs in Q4. So more akin to the old cash flow-based EBITDA. And this is our main measure that we work off because cash flow is where we manage the business. So adjusted EBITDA, you can see that that's developed. So on the adjusted basis, taking out acquisitions and COVID-19, we were at 33 million last time around with 42 million now. We do have this 6.9 million one-off item in there. So even if you strip that out, we make progress. The important point is that we've now for the full year replaced the COVID contributions we had coming through back last year. We've got organic recurring revenue and profits. We have, in terms of the divisions, the healthcare services, on that margin, they are down up to 8.5% versus 8.7%. We took that one-off item through the central cost, so the divisional margins are undisturbed by that. So that's 8.5% versus 8.7%. You might say, well, it's a little bit disappointing. You're a lower margin. But we've got quite a significant amount of new startup costs that we've got going through there. So for us to be able to largely maintain that margin with those not insubstantial startup costs, then that's pretty good. we're looking at something just around about sort of 3.3 million of, sorry, 3.5 million of one-off startup costs operating deficits on those new units. So it's pretty happy with that. If you look at the diagnostics side, we still got a drag to replace the higher COVID-19 business that we had in the quarter. So you can see there that 2 million. So again, on the reported divisional side, and that's 2.2 versus 19.9. So making sort of progress there. We have lots of room for growth in this metric and all the other profit measures in the coming quarters. We've got the maturing profile of the units. So as we move through and we bring volume onto those units, we've got a large operational leverage. And so we start to get a fall through in there. We've seen that many times before and we're very confident we'll get there. And then we also have several initiatives in terms of efficiency which are going on in several of the units. And I think it's quite remarkable for us to be able to maintain a pretty decent performance out of our German business where we haven't had any indexation. And that's partly with these efficiency initiatives that we've been getting going. And several of them are going and starting to accelerate now over the years. So we expect to be able to manage those sort of cost pressures reasonably well through the year. Go to the next slide. Thank you. If we look at the net debt, that's increased. We can put on about $31 million in the quarter and just short of $39 million for the full year in terms of the debt levels. Networking capital, that's increased in the quarter. been very benign situation throughout the nine months we've been able to manage the the networking capital but given the size of the growth of the business then that was going to increase and so we got 14.4 million increase for that for the full year so our sort of working capital investment level is very reasonable and then we've got net inorganic investments we did four million net in the quarter, including some loan advances for some acquisitions, which will be booked as acquisitions this year now in Q1. So we've got then, we looked at the full year, that's 13.2 million. We had to sell and dispose of the Belarus, which offset some of that investment. So we recycled that money into new things. Our interest costs, so those have been the sort of two main drivers in terms of that increase in the net debt position. We've got then an increased higher rates. Our IFRS 16 is sort of like a fixed rate type thing. So it's quite sort of a stable number. The interest charge in relation to that acts like a fixed rate one. And so it's really interest cost increases come through. On our real debt, if you like, I fixed on the floating part of that. We've got about half of it fixed and half of it floating. And our interest-bearing portfolio around about the sort of real interest costs on that is 3.8% at the end of December. Tax rate has come down. We've recognized some deferred tax losses, so in the quarter. So that's had an impact to reduce overall the effective rate. It'll be more like on a sort of ongoing basis. We'll be a little bit higher there, a few percentage points, a couple of percentage points higher there on an ongoing basis. Working capital increase, reasonable. Operating cash flow, 42.5 million for the quarter, 205 million for the full year. I'll come on to then have a look at a little bit more detail in terms of our capital spend. So our capex ticked up a little bit in Q4, so 36.6, so a little bit higher than we've been running for the three previous quarters. So that came in at 6.3% of revenues for the full year, and that's within where we were budgeting and forecasting for the full year. We accelerated a little bit at the Q4 as we had some planned investments that were going to happen in Q1. But some of our suppliers gave us quite strong incentives to bring those forward so that they could book those in this year. And so we got some nice discounts on some of the investments we did before a little bit of that forward into this year. So then for the full year, we're at 110 million, so 6.3%. You can see that's substantially down as a percentage, but still pretty high. Certainly enough in terms of our growth investments. That's about 69% for the full year in terms of growth investments. So still very much supporting our growth. And if you look on the graphs on the lower left-hand side, You can see it there, the darker blue numbers are organic growth investments. So this is new capacity, new facilities, new machinery that adds to our capacity and our ability to deliver future revenues. And we come in now for this year at the second highest level that we have done before, so higher than 2021, 2022. And you can see significantly higher than we were running when we, in 28 and 29. So that is a very strong driver for our future growth. Those facilities will fill up over 24, 25, 26, and those will be driving our growth for several years to come. You can see, and then in terms of the lighter blue bar on the left lower graph, this is a recurring cash flow number. before investment for our growth. So this is based out of our reported operating cash flow, less than our least costs, the least interest and the least depreciation, because that's a cash outflow effectively. So this is then after tax, after working capital, and then after our maintenance, reinvestment in the business, if you like, our maintenance side to keep our cash flows going. So this is a measure of our recurring cash flows. You can see that got boosted in 2020 and 2021 and a little bit in 2022 by COVID-19 higher contribution. We've replaced that revenues now with recurring revenues. So we were flat in terms of diagnostic services. So we've largely replaced that COVID-19 business, slightly lower margins on the diagnostic side. And you can see then in 2023, the amount that we invested in growth investments was generated from that free cash flow. So what we've been doing historically is using that cash flow after maintenance to reinvest in our growth investment. And we took those boosted levels in 2020 and 2021, and we did a higher level of capital spend in 2022. So we took that bonus COVID, COVID-19 bonus, if you like, and reinvested that in 2022, plus also on top of that organic investment, inorganic investment. So it's a strong ability for us to be able to keep on financing that organic growth investment. And that is what's boosting our superior growth levels. So when we get asked the question, can you continue to deliver those growth levels? Yes, because we've done the necessary steps in terms of the investment in the past. So that investment that we did in growth in 2021, 2022, 2023, that's boosting our growth now to 24, 25. And it boosted for several years forward as we go through and fill up those facilities. So that's what's going to be driving our profits improvement and our top line growth. Look at the medical space that we've got. We've got 852,000 square meters, a very large medical space. A lot of that is relatively new. So between 2022 and 2023, we put on 240,000 of that space. It's very immature. So almost a large chunk of that immature space, not quite a third, but not far off a third of that space, is new space, which has been filled up now. And that's what's getting the drag in terms of our reported numbers, and that's what will fill up as we go through 24, 25, through 26. We'll get those space filling up. We put up a not insubstantial 30,000 square meters in 2023 with no inorganic in there, so that's all organic. And just to sort of put that into context, that's a square of 173 meters by 173 meters, or something like about 3,000, sort of like quite decent hundred square meter apartments. So put on quite a stable of new space as well, which we're also continuing to fill up. We look then in terms of where we are in terms of our progress for our three-year targets. So we've got $2.2 billion in terms of revenues and $350 million in terms of adjusted EBITDA. So I think we're well on the way in terms of the revenue side. You can see that our run rate now is If you look at our run rate for Q4, and so take the Q4 numbers, multiply by four, we've got a gap of about 350 million in terms of that 2.2. So it's very confident in terms of being able to deliver on that revenue site. And then if you look at the EBITDA site, that effectively, you take the EBITDA for the now for the year, the margin on there, that implies a sort of 2% move up in terms of the margin from where we are. And that, without our efficiency movements, just from putting on the capacity that we know in the short term we're going to put on, that is very achievable. If we actually execute pretty well, I think, on some of the efficiency improvements that we've got going on, then that will be delivered pretty handsomely.

All right. Thank you, Joe. I think that is the slides that we wanted to take you through. So we're happy to respond to any questions you may have.

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star 11 again. This will take a few moments.

And now we're going to take our first question.

And it comes from Lan of Clara from Handelsbanken. Your line is open. Please ask your question.

Thank you. Good morning, and thank you, Fredrik and Joe, for the presentation. I have two questions concerning revenue within health care services. So you mentioned that India and Romania have been negatively impacted by new hospital startups. Do you expect it to accelerate? Meaning, can you quantify the magnitude For instance, how much of India and Romania's growth that you lose from this. And secondly, in terms of revenues within healthcare services, since Q4 2020 and well up until today, what you mentioned as other countries has shown some sort of a growing trend. Of course, it's a small comparison. However, could you please share what two to three countries that are the main revenue drivers within other countries? Thank you.

So I think just for clarity, the first question, now when we talk about drag from the new hospital units, that's not a revenue drag, that's a profitability drag. I interpreted your first question as related to revenue. Yeah. So we're not saying that we have a drag on revenue from the new units. All right. So the only point we're making is that as we open quite a few of them, they still contribute negatively. I think we quote the number in terms of the negative profit contribution from those units. So that's where the drag is coming from. In terms of revenue side of things, they are filling up quite quickly. So the point Joe just made towards the end of his session here being that Given the fact that we have invested so much in new facilities, you see the square meter additions that will drive revenue growth over the years to come. And as we're carrying the cost for that largely already, that sort of marginal contribution is quite significant. So that's sort of where that operational leverage is coming from. In fact, if you see, it's written somewhere in the details in the report negative contribution from those identified units in the quarter for health case, 3.3 million. So, you know, it's not an insignificant number. Then the second question was in terms of other countries for healthcare services. And I think, you know, the largest, the component of that other is most likely Hungary. That's correct, Joja. So the, you know, the Hungarian business, just so everyone remembers that, We actually sold our Hungarian business a number of years ago, but we kept the risk carrier, i.e. we have a risk business in Hungary. We have a capitation arrangement with the local provider, so that's largely Hungary. And the other significant component of that in other healthcare services you know, the dental business that we have in Germany, you know, those two dental businesses that we bought about a year, year and a half ago.

Thank you.

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes to the line of Matthias Wadsten from SCB. Your line is open. Please ask your question.

Hi, good morning. I have quite a few questions today. First one on India. So growing, I guess, sort of 16, 17% or something year on year adjusted for FX in the quarter. If you could just talk a bit more about the performance from your end and maybe give some indications for Q1 based on what you've seen already now and how Medicover internally sort of look at growth rates in India coming year and years. That's the first one.

Shall we do them one by one so we take the first one? Okay. So I'll take the first one, Mattias. So we are, yeah, you know, you're sort of right in terms of that assumption. Now, I made the point that, you know, quarter four was slightly on the softer side as a market and, you know, there are as you know, a number of other public hospice chains in India that has reported and will be reporting. So you see that sort of similar pattern being reported from the other people as well. Now, I think it's important to point out that we don't see that as any lasting thing. It's a quarterly impact. We expect to see good, robust growth coming through already in the beginning of 2024. So there's no change in the outlook in terms of the growth performance out of India. And we have said it so many times, some sort of sounds like a broken record when I say it, but basically growth in India for us is driven by filling up that capacity that we have built. And as we have talked about on previous earnings calls, we have four major projects coming. also in 2024. The first one here now shortly being the oncology hospital up in Vaisag on the east coast where the Linux from Elekta are installed but not yet commissioned. We have a major unit in a city called Warangal outside of Hyderabad coming online in the second quarter. We also have the opening in Bangalore in the state of Karnataka coming through in the second quarter. And towards the end of the year, sort of late third quarter, early fourth quarter, we have a major new hospital unit in the city of Hyderabad coming online. So that's not gonna seriously impact growth in 24, but obviously quite a bit in 25.

Good. Yeah, I think we take the questions one by one. The next one, perhaps two questions but they go hand in hand in my view i think on price we summarize this year with some 11 boost in healthcare service and four percent for diagnostic services with lower price adjustments for q4 which is quite natural i think so how do you look upon it into 24 you know both from index adjustments and your own what you can decide yourself i guess I mean, it must give you confidence that, you know, members still grow about 6% here in quarter four. You don't give number of visits, but I assume that has been quite good as well. So, yeah, just the thoughts here.

You know, we're sort of expressing ourselves a bit sort of diplomatically, but I think the fourth quarter member number, Mattias, is actually very strong. on the back of having had a rather subdued nine months because we pushed price so strongly. And it's not that we have reversed that in the fourth quarter. The fourth quarter member growth has come through despite that. I mean, it's not that sometimes on the 1st of October you start growing the member base. Obviously, that's sales effort for the prior six months. So that's a noticeable number. And again, I reiterate the comment I made before, Mattias, that as that sort of growth in membership, that momentum builds up. Again, it doesn't happen one quarter and then disappears. So you should expect that to build up here going into 2024. So we're pretty confident. I mean, then the spillover on price here is that you will see, I think I made that point last quarter round as well, that you will see lower price growth in 2024 than in 2023, just because you will see lower cost inflation in 2024 than in 2023. It will still be quite a bit above where it was if you go back to 1819, but our position on this has all along been in 2023 and will be in 2024 that price needs to compensate for our cost inflation. but not more than that. So some are finding that balance between trading volume for price is about compensating for cost inflation, but then driving volume growth.

And just to add to the price indexation that we've put through, we're very happy with that. We've got substantial price increase in terms of our operational costs, and we see this in both our own directly employed staff, and that's also in terms of where we use contractors. But that's been, you know, very strong increases, and we've compensated for that. So we're very, very happy on that. You see also now, you see now also in Germany, you see the strike wave now, and doctors are also participating in that. So, you know, we're not particularly upset about that. We're quite happy to see that doctors are getting annoyed with the reimbursement rates. This is their directly hits them in the pockets. And we're part of that system in terms of how the reimbursement works. So that pressure is very welcome on the government. And I think that building up gives us a bit of more confidence that we'll see some sort of price changes in some time coming up. I can't give any guidance or any idea when they'll see it, but the pressure is definitely building on the government in terms of doing something in terms of the price and reimbursement levels for medical fees in general.

Yes, very interesting, and I agree. And next one, you know, just looking to IBDIA, I think health services continue to surprise, you know, really strong every quarter. Diagnostics, a bit the opposite, if I can express myself like that, you know, on valid reasons, but it has a tough time. If we set aside sort of Germany in this discussion, could you just talk to triggers for EBITDA to take off in diagnostics? Else than that, perhaps?

You're sort of asking on the EBITDA development in diagnostics year on year, excluding Germany. Is that what you're trying to say?

No, what's the trigger for it to sort of take off and go up? Because it's been quite a tough time and a bit slow. So, you know, other than price adjustments in Germany, what are triggers for this?

No, I think your trigger, Mattias, is, I mean, we were saying that the, you know, you strip out COVID, you look at underlying, I think we said volume growth, revenue organic for the year 16%. for the division. Now, Germany is then growing whatever, five odd percent, six perhaps, something like that. So, you know, you have solid on the 50% outside Germany, you have ex-COVID, you know, 20% plus growth. And you know how marginal the lab business is. So as we put in, you know, I don't want to say restart because that's, you know, sort of is saying too much, but as the sort of diagnostic world gets going again, after the COVID hangover. And as you put in more volume, which we do, I think that number indicates that very well, into our existing lab infrastructure, the marginal contribution on that is significant. So that's what we saw as we built up the lab business before COVID ever existed. So what's the trigger outside of Germany is actually putting more organic growth test volume into our existing facilities with good marginal contribution. And the sort of second trigger, or the second significant driver, Mattias, is in that whole sort of genetic space that we have talked quite a bit about. And we're pushing that specialty diagnostic in genetics quite a bit, I think, with good progress. And I made the point that sort of plus minus 10% of that division right now. It's not insignificant, but as we grow that as a proportion of the division, which we are and will, that will also become more noticeable.

Good. I'll jump back to the Q, but just quickly, can you disclose how much genetics grew in 2023? Just to give an approximate feeling for...

I don't have the number in front of me. I would give it a good guess in the low 20s, but we'll come back and confirm that, Matthias.

Okay, thank you very much.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad. And now we're going to take our next question. And the question comes to the line of Christopher Lilleberg from Carnegie. Your line is open. Please ask your question.

Thank you very much and good morning. I have three questions, I think, taken one by one. First, could you just clarify what items you have removed in the adjusted EBDAL figure of 42.7?

on the adjusted EBITDA, yeah?

Yeah.

Yeah, so we've adjusted just for two things, Christoph. We've got 0.2 million in respect of M&A costs, expense, for the P&L account. And then the balance is the IFRS 2 charges. that we which is some nine point for the full year it's so full year is something so that's about six point five million okay thanks

Then I wonder about the depreciation in the quarter.

Excuse me, I'm looking at the lines. So two items. We've got acquisition-related expenses, 0.2 million. And we've got equity settled. So IFRS 2 charges on the equity program, 1.7 million. So that's some 1.9 million adjustment.

OK, that's clear. Thank you. And I wonder about the depreciation.

Yeah, for the quarter.

Yeah. Okay, so depreciation of PPE in the quarter was up almost 3 million sequentially, and also higher as a percentage of sales, which surprised me a bit. So could you explain that, if there were any write-downs, or if there's a seasonal effect or anything here?

No, no, no. We've put on a lot of facilities, and we've commissioned a lot of facilities. And then as you reconcile and you start to amortize that space, reconciled it, moved it from construction in progress into operational assets, sometimes a little bit of a catch-up then in terms of depreciation for maybe a quarter or something like that on those assets as you move that in. But we put a lot of space on, and that then gets recognized in the depreciation for PPE. So I know on your forecast you were looking at 21.3. We came in at 23.8, so you had about 2.5 million difference on there. What else has changed in that space is that in terms of the amortization related to acquisitions, that has reduced sequentially and also then in terms of against your forecasts, Christopher. So you have in your forecast six million, and we came in at 4.3 million. And that is basically because we've amortized some of the, because some of that amortization we do quite quickly, particularly for some of the customer relationships and some brand stuff and things like that. So we amortize that on a quite fast basis on some cases. So some of that has dropped down. And you wouldn't have been sort of aware of that on your forecast. So I think we're off about 1.7 million in how you were forecasting the amortization related to acquired assets.

But given that you have slowed down investments as a percent of sales, When could we expect the depreciation as a percentage is coming down?

But not really. I mean, this is what I was trying to demonstrate on that graph at the end there. We've invested in terms of total capital organic spend over the year, 110 million euros. And if you look at the growth component on that, that's about 69% of that. And that's the sort of second highest level. So it was only last year that we spent more when we when we boosted our inorganic expenditure.

I understand in absolute terms, but I guess as you're filling up the capacity now that has been built in recent years, shouldn't depreciation over time come down as a percentage of sales?

Absolutely, Christopher. But I think that that demonstrates just how much capacity we've got and put in place and the ability to fill that up, you know, that 239,000 square meters of space that we put on in 2022 and 2023, we've got enormous capacity there in terms of being able to fill up, fill up. So I've got, you know, I've got substantial capacity in India that we're bringing in, and it just takes time to bring that in. You've got a whole thing of building up the whole network effect around you. You've got a whole thing of building up the team of the doctors. You've got a whole thing of... And I've seen it before. I've seen it very much in our early days when we started off the Warsaw Hospital now. That's full. We've got a new operating theatre that we put on there. And, you know, so we've seen that time and time again in terms of that capacity being filled up.

Would it be possible to provide any sort of indication... what the appreciation as percent of sales should be in 2024 and maybe also 2025?

Yeah, I think I'll take it offline with you maybe, Kristoff. We can have a separate call and schedule that maybe in the coming days and then I can walk you through a little bit sort of how the model works.

Because that leads me to my final question and your EBITDA target of 350 million. Maybe not for now, but for the future, if it will be possible to provide a bridge, what are these first adjusted for leases? And maybe also... Yeah, what type of depreciation you expect that.

So what you're asking is below the 350 million target.

Yeah, but I think the problem with, and we have had this discussion before, but I think the problem with EBITDA is that it's just, you know, that figure is so inflated by leases. So the more you grow and expand, the higher EBITDA will be in a way. Yes, that lease effect.

Kristoffer, we've had the discussion many times, and you know that we couldn't agree more with you. It's just that we're not allowed to have an alternative performance measure as a financial target.

No, I understand. But if it's possible in some way to have some sort of bridge, what that would mean further down in the piece.

And that's why, Kristoffer, we have such a focus on a beta adjusted for lease costs, because that's the... We will...

We will consider that, Kristoffer. We understand very well the question you're asking, and we'll try and work something out to make that more visible. Yes. That's fantastic. Thank you very much.

Thank you. Now we're going to take our next question.

Maybe we take some questions from the written questions.

My apologies. There is one more question coming through.

it is from matthias vatsten from scb your line is open please ask your question thanks i just have a you know follow-up maybe how how we should look uh on q1 the sequential margin development you expect for q1 if you could talk through at least you know how how you look upon things and i guess you know now adjusted the falling a million or so or two q over q if you just both the q3 and q4 number from the positive one off. So, you know, are there any reason to not believe the absolute earnings and margins will lift into Q1? That's perhaps the question.

Thanks. Well, I guess we're sort of seeking to avoid too much to comment on the quarter we're trading in. But, you know, the point I made here, Mattias, that The new openings that will come in healthcare services that would negatively impact short-term margins out of India will not be coming through in the first quarter and the material elements of it. If you look at the historic, you go back and look at the historic Q1, sequential margin development from Q4 to Q1. You know, there's nothing magical going on this quarter one around other than the fact that we have more, you know, you will have an element going on that where we fill up capacity. So, you know, we're reducing the losses out of existing facilities. You know, that's the only thing I would say that is different from the historic sequential development Q4 to Q1.

Okay, and I guess if we, not last year, but if you go back further, I think India typically is a bit better in Q1 compared to Q4, at least what I'm seeing. And maybe that's even more accentuated this time around.

Yeah, India is a little bit where it turns. So you normally start off the quarter of January being a little bit softer and March then is normally in a pretty decent month, so you've got that sort of transition. We've got an extra day this year as well, so we've got the same working days in February and March. The diagnostics normally does very well in Q1. You've got that marginal flow through in terms of the additional volumes that come in the winter months. And then you've got a sort of mixed side in terms of the sports side, where normally you've got people With the employer-paid part of that business where you've got lots of people with resolutions going to the gym, so you've got sort of like lower performance on that in the first part. But by the end of the quarter, they stop going to the gym, so the margins sort of recover. And then you've got the employer-paid stuff where you've got higher demand in Q1, so that's normally a bit softer on the healthcare services side. But we've got such a weight in terms of the hospitals now where that's built up that it sort of like gets a little bit all mixed up on there as well. So a bit of ups and downs, but I think with the additional volume coming through, we'll see progress.

Thank you so much.

Thank you.

So we have some questions here. First question, can the readers see this? Could you comment on historic MCR in fourth quarter? This pathway has seen significant growth up from 84. Should we treat the levels around 84 as standard for fourth quarter going forward, or was it somewhat one-off and neutralized closer to what was seen in 4Q22? That was the point I made, that it's higher than where it normally is. and it's higher than where we expect it to be largely on the back because most of these facility costs fall into medical costs. So that's where you see the costs coming through. Plus we did have a higher utilization level than last year around in the employer paid business. But that happens sometimes and it doesn't happen other times. So I wouldn't pay too much attention to that. So by far the largest element there is the facility expansion.

Yeah, so you're asking in terms of 84.2, should we take that as a sort of standard for the fourth quarter? I think the weight of the new facilities in there is having an impact on there. So our expectation is we put more capacity onto theirs. You'll see that coming down. So we will be looking for a lower percentage Q4 this year.

Let's see. In healthcare service, we're 9% price in 23%. What price effect do you anticipate in 2024? How do you expect subscriber base? I sort of answered that midway through my conversation, I think, that we expect lower price growth in 2024 and we expect more volume growth in 2024. So I'm not going to be more specific than that, but if it was 9% in 2023, It will be a couple of percentage points lower in 24 and volume will grow more in 24 than it did in 23. And that also sort of links to another question. Do you think that strong new member additions were more driven by increasing attractive service offer or prices advantage as compared to your competitors or maybe strong market as a whole? I am very much of the opinion that we're winning business on our service offer. We're certainly not winning business on reducing price. If anything, we are premium priced to competition. Now, the market is robust. The Polish economy and Romanian economy are doing okay. Not fantastic. And you have a number of sectors in both countries where which is under pressure, you know, construction, et cetera. So, you know, it's not, as you all know, you know, we're far away from some kind of economic boom scenario. So I think it's much more driven by ourselves than at this stage that then it's driven by the market. Then it's one in the report, you said you plan to resume more inorganic investment in 24. Could you please indicate what business segments would be prioritized Again, we typically answer that question, and that's the same way now, in relationship largely to the geographic footprint we have right now. So when that will be restarted, you should expect that from an inorganic perspective, largely to be around Poland. It's half of the business, half of the geography. It's also the country where we will have by far the largest synergies with bringing acquisitions into the existing customer base. India is not an acquisition market for us, as you know. It's an inorganic growth. I'm not mentioning India in terms of inorganic activity. So Poland, Romania, and to some extent Germany. Now, Diagnostics will be doing inorganic activity, but of course, we're the Healthcare services now being almost sort of three times the size of the diagnostics business, that will also be reflected in terms of where inorganic activity will happen. Do you want to take Danny's question?

Yeah. Hi, Danny. So you've got a question here in capital expenditure. Should that fall back to – confirm that capital expenditure will fall back after the high levels over the last two years? And then you asked what is the expected future tax rate? In terms of capital expenditure, we would expect to be around about that sort of 6% of revenue. We would expect then in terms of being around about two thirds of that in terms of growth and one third of that in terms of maintenance. So that's the sort of guidance we give going forward. So effectively that cash that we generate from the operations after maintenance a large part of that we would expect to continue to reinvest. So you could expect a little bit higher overall capital expenditure than you see this year for next year as well. In terms of tax rate, I expect that to go up a couple of percentage points in terms of sort of a lot more longer term rate. So you'd be around about 24, 25% the effective tax rate on an ongoing basis. You have this pillar two coming in now into effect for 2024. So that's all quite okay. We've got quite a sort of like an uncontroversial tax structure within our group. So that doesn't really have such an impact in any real way for us. So that's not gonna have increased our tax rate. We'd expect that to be around about the sort of 24, 25% effective tax rate. It's more a sort of one-off recognition of deferred tax losses that we've recognised in this quarter that's brought it down overall for the year. And then you asked, is there any impact on the increasing profit contribution of India over the median term? I think maybe that's in terms of the tax rate. No, our tax rate is sort of like... takes that into into account uh overall i don't think that would move it but yes if it's if your question is do we expect to actually see some profit coming out of the india yes i mean we're very much in that sort of accelerated expansion phase now so on a sort of net net basis after interest costs and everything else we uh we've got a we've got a negative situation in india at the net line but um yes definitely um if you look at the enlisted indian groups they're running around somewhere between 20 and sort of 26% in terms of IFRS 16 and beta levels. We're considerably below that with the dilution of the new startups. But if you look on a individual units for the more mature ones, then we're definitely up towards those sort of levels. So that's where we would expect to be able to drive that business. You've got this question, part of that question for you.

Second part of the question. Can you talk us through... Fredrik, you recently added to the diagnostics business. Can you talk us through where future capital allocation priorities lie in terms of augmenting the business in diagnostic healthcare services? Sorry, you're referring to this small acquisition that we announced in Berlin, which happened at an early January event. So that was really an acquisition to drive efficiency in our Berlin operation. So I should be able to locate in a new lab environment so we can allocate test volumes more efficiently across different labs. So not a terribly large acquisition, but something that we think is very timely and handy in the German environment. Then in terms of future catalogue, in terms of diagnosis, healthcare service in India, France. Well, I made the point that in terms of healthcare services, Danny, I think, you know, I'm not saying Poland only is the focus, but you look at the divisional footprint being So from an acquisition perspective, I think you should very much be looking at Poland and Romania as a runner up. We consider all capital deployment in India as organic. You should not be expecting us to acquire activities in India. We're very happy, comfortable with the sort of organic expansion model we have in India. It's always the same thing. Half of the business is in Germany. Obviously, one is a bit careful right now. You want to understand the reimbursement environment in Germany as we progress through 2024. But clearly, there's a lot of synergies for us in terms of finding potential acquisitions in Germany in the right place. And then, I keep coming back to the specialty diagnostics, where where there are specialty lab activities, be it in genetics or other specialist fields, that is synergistically what we do, that's always interesting for us. So those, I think, are the sort of guidance I would give in terms of geographies and the two segments.

We have a question then from Anders. Thank you for your presentation. When you deliver 350 million EBITDA, what would you expect your free recurring cash flows to be? Well, you know, if you look at where we are now, we're sort of around about sort of 4% in terms of that metric that I showed you in the presentation as percentage of revenue. So that's the, just remind you what that was. That was the cash flow, operating cash flow less the lease costs, interest and depreciation, less our maintenance capital spent. So as we fill up this capacity, that will shift upwards. So you'll probably have something up to around about 2% points moving up from there. We will then obviously also have new stuff that will be starting that will be diluting that slightly as well. So you can think in terms of a percent to two percent points higher of the revenues. We're talking about 2.2 billion in terms of revenues, so you could be looking at somewhere up quite a bit north of 100 million euros.

And then we've got three general questions not related to the full year 23 results. Diagnosis. Could you give an update on the strategy and the development of the division as the division experience? One, multiple leadership changes since IPO. Two, margins have been lagging. Peers have been still up. Country and size dependence. Where are we on that margin expansion trajectory by country? And three, lack of acquisitions out of Germany. At IPO, the plan was to spend two-thirds of M&A on this division.

Sure. Well, I mean, you know, the multiple leadership change, I'm not sure, you know, the leader that we had for diagnostics at IPO left us after a number of years, and then we recruited in the current COO for diagnostics. So, you know, Benedikt von Braunmühle was there at the time, he did a good job, and then he left for another position, and Staffan Penström, who is there now, came in. So, In terms of leadership changes in diagnostics, I think that's fine. We're very happy with current leadership. An update on the strategy and development of the division. I think the best way to answer that question is to ask you to log in to the recording we have from the Capital Market State that you find on our website, where I think Staffan is giving a very good run-through in terms of the strategy of growth and profitability in that division. So, I wouldn't do it a service to try and give sort of a 30-second reply on that here, but you have that on our website. I think that's a good run-through of the strategy for both divisions effectively. So, do spend some time on that. You know, margins have been lagging peers, such as SINLA, country-sized dependence, where all of that margin expansion trajectory by country. Again, clearly, you know, we are on the margin level for that division significantly below where we should be and where we want it to be. I think enough has been said about Germany, the work we do in Germany to manage the current pricing situation. And we will see, Joe made the point that at some stage we think there will be price adjustment, but we have no transparency on that. So until then, we can't comment on it. Outside of Germany, you know, margin progression is good. So we're, you know, we're not doing badly outside of Germany. And I answered the question from Mattias from SEB earlier here. What will drive further margin expansion? That is simply to put more organic revenue growth through existing lab infrastructure that will have a significant impact on margin in that business. Then you're asking lack of acquisitions outside Germany. Yeah. Now, in terms of 2023, we have, as guided, not really wanted to do acquisitions. In prior year, we have done some, but you're right in saying probably less than what we had expected and wanted in diagnostic, not because we have not wanted to, just because there really hasn't been those targets that we have been looking for, to the extent that we thought perhaps at the time of the IPO, that may very well look different going forward. Now, I think perhaps the last part of the question is that you asked, Joe, the capital allocation.

Yeah, so I think you're asking about the return on investor capital. If you look at that in terms of for the year we're at 6% including goodwill we could take out the goodwill we're about 11.7% on that so. If I go back to 2019 before the Covid time we were at 6.4% including goodwill and 10.9% excluding so we with the. With the weight of the new activities on the balance sheet and with the capacity there, then we've got plenty of room in terms of moving that up. So if you look at the LTIP scheme, then that's 8% to 10%. Then we have quite plans and visibility in terms of getting it to that sort of 10%. That's where we want to move that. Now, that's a specific type of calculation. That's not the same basis. as I was quoting you those figures. That's a more sort of classical one after an adjustment for tax. So the 6% and the 11.7% of the notional tax level. So I think we're well on the way on there and we've got very clear visibility how to make those assets which are actually dragging on us today because they're new and not full and how those perform. And so we've got very clear visibility about how we

fill those up so we're quite quite comfortable in respect to that then we have one more could you also provide us with an update on leadership as joe john and you essentially build this business from scratch cfo search potential ceo succession and three stability of second line management cfo search is ongoing we expect to do that transition in a controlled and good manner during 2024. And Joe is not leaving until that has happened. He has promised me, so we're comfortable with that. There's no identified candidate yet, but we're working with it. Potential CEO succession. As in every company, we have good succession planning. I have no intention personally to quit. So for the time being, knock on wood for health matters and other things, I am very happy to keep running this company as long as I'm given the privilege to do so. And if and when succession is due, we have good internal candidates for that. Three, stability of second line management is very good. I think one of the things that has driven our success over many years and still do, is the quality and the stability of our senior leadership, which is very, very good. So I'm very happy, very confident with that. Then the last question, you're right, as the year progresses, we are also likely to be more active on our acquisition agenda, but would it not be better to reduce the quite high net debt indebtedness? I mean, the point on that is if you go back and look at our communication, we said about a year ago that we would reduce our in-net organic activity for 18 months because we wanted to integrate what we have bought and we wanted to bring our debt ratios down. Now, that is largely because the absolute net debt ratio and the absolute indebtedness, if you compare the past 12 months, has remained very stable. Now, as we fill our capacity, we have talked a lot about that, and profitability improves as 24 progresses, the debt ratios will change quite significantly. Now, the indebtedness in absolute terms is unlikely to change very significantly, but the debt ratios will. And as the debt ratios will, that's where we see we are sort of restarting our acquisition again. You know, we're very happy. Joe is always making the point that, you know, in terms of the debt levels we carry now, we're very, very comfortable with that. But obviously, we're at above three. And I think, you know, a lot of people in the market are more comfortable just seeing that debt ratio being somewhere perhaps in, you know, mid two or something like that. And as we see that, you know, we will then become more active on the inorganic front. So that's really how you should sort of read that statement.

And remember, our debt profile in terms of maturity is very good. So we've got a relatively long profile in terms of our debt structure. So we haven't got any refinancing of any small refinancing towards the end of this year. But other than that, we're pretty good in terms of our debt financing profile. So there's no issue about us carrying this level of debt. Obviously, it costs us money. It's a higher level than it was before when we put it in place, but we're creating that value with using that to put those new facilities, and that's what we're executing on in coming quarters in terms of putting that volume in there. You'll see that high operational leverage as you see that flow through with the contributions falling through to the bottom line.

Unless there's some additional calls from the audience online, I think we have extended the questions. So we move ahead. Thank you for your patience with us today. That was a long call. So thanks for all the questions. And we speak again when we report the first quarter. Thank you.