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.