Medicover AB (publ)

Good day and thank you for standing by. Welcome to the MediCover first quarter 2024 results presentation 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. Alternatively, you can submit your questions via the webcast. Please be advised that today's conference will be limited to 60 minutes. Also, this conference is being recorded. I would now like to hand the conference over to your speaker today, Fredrik Rogmark. Please go ahead.

Thank you, and good morning, everyone. Welcome to the first quarter result presentation. You see the headline, a very strong quarter, very happy, very pleased with the outcome of the first quarter, confirming expectations and perhaps a little bit more. We continue to grow strongly, so organic growth above 14% and just short of 19% total growth. Very importantly, it's across pretty much all of the business units, certainly both divisions. And also importantly, we have solid double-digit underlying volume growth in both divisions. You remember last year we prioritized price growth. had in some places slightly lower volume growth. Now we have solid volume growth back and also see price growth continue, so very pleased with that. We are a whisper short of annual revenue run rate of $2 billion, and it's a nice little anecdote, as I wrote about in my CEO statement, that it took us on the quarter 25 years to the third quarter 2020, to reach 1 billion run rate and now it has taken us three and a half year on the quarter to be a whisper in within 2 billion euro run rate, which I think gives a good historic perspective on our sort of growth momentum. Very importantly to point out here, you know, I should say we've seen historic weakness, but as the diagnostic division has transferred out of the COVID years It is really important, I think, and positive to see solid double-digit volume growth back in DX and the consequential margin improvements that we see coming out of that. And to be remembered, we talk about that more later, that is within the context of still no price adjustments in Germany. That's half of the division. So it's really a strong performance. Cash flow is up very well, 28% growth in operational cash flow. And again, it sort of confirms and illustrates the operational leverage we see coming through in this quarter. And we are investing our organic growth and maintenance capital in line with expectation this quarter, just a tad below the 6% we have guided towards. Some of the graphic illustrations on growth. You recognize these pie charts and graphs. Since before, a few things to point out. You see Poland as a country, 27% up, indeed significant. We have some foreign exchange tailwinds in there. Joe will talk about that, which we're very pleased to have after many years of the opposite direction of FX for us. You see Germany for the group up 20%. That is a significant number with no price adjustments. And the market is probably growing as such around 4-5%. So that's quite a significant achievement. Also here to point out India at 11%. Now there's been quite a bit of FX headwind out of India. Local currency-wise, we're up about 17% in India, which is good and as planned for the quarter. And below you see our different payer groups. I think the one to point out there being you see public money in the right upper corner or slice is up 30%. And that's really a combination of both. good tariff increases in particular Poland, but also as we grow in Romania with the new hospital and we grow our public side of funding alongside the new hospitals. Looking at the profitability side, I think that is a very important part of this report. We made the point many times over the recent quarters that as we gradually fill up capacity we've taken on and our network matures that will drive profitability improvements and also we work of course on a number of efficiency improvements not the least in Germany to address margin improvements are very pleased to see that coming through and particularly as we've had questions quite many times in terms of that trickling through straight down through the entire length of the profit and loss statement so very pleased and With this, you can look at EBIT RL at the second last from bottom, which is an up a strong 76% versus prior year and likewise operational profit or EBIT up 78%, which I think very well illustrate that point. If we then go to healthcare services, I think the bar chart in the middle of this slide, I think very well illustrates the growth momentum in this division. You see the little drop. One bar is lower than all the others. That's the second quarter 2020 when the pandemic broke out. And then the quarter after you see we're back growing. That was the 1 billion euro run rate quarter. So since that quarter, we have then effectively doubled. And you can see a large part of that doubling is coming from from this division, so growth continues to be strong, just short of 24%, of which 17% organic growth in this division, of which 5% being price. A tiny bit of acquired revenue, and a point I made before, pretty much across the board, certainly in Poland, but equally in Romania, in India, very good growth across the different businesses. That can be well illustrated with the member intake in our original corporate paid business where we're up 54,000 members in the quarter, which in fact is the second highest member growth quarter since we listed. So I think that well illustrates the strong demand for our services. Looking at the margin side of things for healthcare services, EBITDA was up 34.5% to 46 million with good margin expansion, bringing in depreciation. Growth was stronger, up a very robust 54%, so 1 million euros with about 1.5 percentage point. a margin expansion, and then not to be forgotten is that while we have seen very good progress out of India in terms of capacity increases, which is driving margin out of India, that has largely been offset by starting the big hospital unit in Bucharest, which was not operational first quarter last year. So there is still significant operational leverage to come. in future quarters as we also fill the unit in Bucharest and continue to make progress in India and the other countries. Our medical cost ratio is slightly up in the quarter. A mix of things here, you know, staffing in a lot of new units, minimum salary increases, a different mix, et cetera. That was to be expected, but still you see margin leverage still coming through despite that. Very strong performance, definitely. Then I put in one slide on India. I think one of the top three questions we always get is to try and understand how we increase capacity utilization in our Indian hospitals. We put this on where we have divided basically trying to show you the maturity of the hospital network. We will show this slide as we progress in future quarters. The point to make with this is that overall occupancy levels will primarily increase as we mature the network, i.e. as hospitals shift from the below a year or the one to three year age level to the above 36 months age level, that will have an outsized impact on the overall level. So this is just to show you. On the picture to the right, you see new hospitals in 2024, which will then come into the youngest category, obviously. And Bangalore in the south, you see in the new state for us of Karnataka, will have a soft opening here in a week or two. Then we have a place called Warangal, you see up to the right, a couple of hours north of Hyderabad, which will equally open here in a couple of weeks. And then towards the end of the year, you see a light blue dot there in Hyderabad, so we put on a major unit in Hyderabad. Then there will be a fourth one, but that's in 2025, which is why it's not shown on this, equally in Hyderabad. So this is a picture you will see, and I put it on again to remind you it's from the maturity of the network that will largely be the main driver of the higher occupancy rate in our Indian business. Then moving on to DX. Delivering organic growth, I put as a headline here, which I think is really important, so 163 million. We're back growing. We've had a number of quarters behind us where we have talked about underlying growth because we deaccelerated out of the COVID revenue. Now we're back. There was a tiny bit of COVID revenue last time around, nothing this, but despite that we're growing 8% organic. Here we have, as a division, we have foreign exchange headwinds. The service division had significant FX tailwind, largely thanks to Poland and the Zloty. Here, it's the opposite. We have about a percent or so headwind from FX in this number. In addition, we have about three percentage points of of growth and acquired revenue here being five million not a lot but slightly more than in the in the other division you see a point i made before that lab test volume growth is up just short of 14 percent and if we exclude the little remaining covid testing last time around and the dead disposal of belarus you know that was seen in january last year we're actually up, test volume-wise, around 17%, which is a very solid number. I made the point, no price increases yet in Germany. The situation hasn't really changed very much since the last quarter when we talked to you. If anything, pressure keeps building up, so we have the same position that we think it's inevitable that at some point it will come, but until we have some visibility, we refrain from trying to predict exactly when that is. If we then go to the margin profit side of diagnostic services, so EBITDA was up 14% to 30 million, and just short of one percentage point margin expansion, then it may also be relevant just to remind you that in the Comparative number, it's just short of 40 basis points of still COVID margin in there. So if you look at the real like for like, and this is the last quarter that you ever hear this because the second quarter last year, then it was completely gone. But in terms of having a transparent picture on margin development, one should remember that. EBITDA L is growing slightly ahead of EBITDA, as should be expected, so 23.6 million or 14.5 percentage point margin. So good volume growth across pretty much all of the businesses, including Germany. I remind you that 12% growth out of Germany is not insignificant. So with that, I hand over to Joe to talk a little bit about the more detailed financial overview. Thank you very much, Frederick.

So, adjusted EBITDA, so EBITDA adjusted for lease costs, interest, and depreciation. It's more like the old cash flow measure of EBITDA, and leases are recurring costs and cash flow for the group, so that's why we use that measure in terms of performance. Strong growth, we came in at 43.5, last time around 33.7, so strong there. And you can see that in the margin expansion, 8.7% versus 8%. We had some adjusting items between the years, mainly COVID and the disposal of Belarus and some small acquisitions we've done over 23 and into this quarter impacting the comparatives. It's qualitatively a significant improvement. We've got the COVID-19 fully gone, Belarus has been replaced with organic recurring revenues, and we're still carrying an immature portfolio of new hospitals. The impact of that was roughly similar in Q1 last year as this year, but obviously the composition of the hospitals having that drag is different as we've got maturity in a year down the line on the Indian hospitals that were new then, and now we have the Bucharest Hospital, which opened at the end of June last year. Healthcare services, that EBITDA margin, 7.6 versus 6.4, so very nice margin expansion on that, despite a slightly higher medical cost ratio and those immature hospitals still dragging there. The driver in terms of that medical cost ratio has been mixed, so we've got some growth changes in different rates that would change the mix slightly, slightly higher medical incidence rate in Poland. And then we also had the minimum wage increase in Poland which came through as well. So we managed all of that and you can see in the numbers for the healthcare services the operational leverage as we're increasing the contribution and that contribution is flowing through to the bottom line and impacting the margin. So then we have on the diagnostic side, 14.5% versus 14% on the EBITDA margin. And that's despite the disappearance of the last drop of COVID business in Q1 last year. And also we are doing a trial to enter a public market in Ukraine as well. So really a very strong performance out there and good to see the expansion in terms of the margin that was falling through again with operational leverage with those marginal increases falling through the profit and loss lines. We've got plenty of room for growth in the coming quarters. We've got the maturing profile of a number of our units. We've got increasing volume and then we've got efficiency initiatives as well which will continue to help us to perform well as we go through If we look at a bit more in terms of the balance sheet, we've got reducing debt leverage levels. This is to remind you, despite that we bought in non-controlling interest in our German business in the beginning of this year, so that was a $41.1 million impact in terms of our debt and the payments that we made. And then we have also two smaller acquisitions we did in the quarter, around about $10 million. If you neutralize for those, then we actually reduced our net debt level. Overall, the net debt increased by 23.2 million, so you can see the relative impacts there. Networking capital, very benign. We reduced that by 16 million. That follows a little bit the seasonal pattern where we tend to reduce that in the Q1, and it grows over a little bit over the other quarters. Operating cash flow, very healthy expansion on there. We came in at 78.5 million, 61.4 million last time around, so a healthy expansion in terms of there. What I'd like to concentrate on is what I call free recurring cash flows. Just to remind you on this, this is where we look at our operating cash flow as the financial statements. We adjust that for the recurring lease costs, so we take off the depreciation and the lease costs for the depreciation and the Interest costs for the leases, so it comes down to a more of a kin adjusted operating cash flow if you like. And then take off our maintenance capex. So this came in at 42.6 million, that was 29.3 million last time around. So a good strong number and a good expansion in terms of our recurring free cash flow generation. We then used 18.5 of that in our growth capital spend, so we reinvested 18.5 million of that free cash flow. Last time around that was 21.2. If we look then in terms of the capital spend overall, that was 27.8 million, just short of 30 million last time, 29.6. That's down then in percentage of revenue compared to last year. We were at 7.1% last year for the quarter and we're at 5.6% for this quarter. I just remind you our outlook in respect to that for the full year is around about the 6% of revenues level. So if we look at what we've been investing in, the biggest investment areas have been in India. So we have two new hospitals which will be coming online now in Q2. We have one in a place called Warangal, a Tier 2 city outside of Hyderabad, about 2 million population, and then one in a Tier 1 city, our first hospital in Bangalore, in the Whitefields district. So those two will be coming online now in the coming quarter. So big hospital units, full-service hospitals, multi-speciality, they'll be really nice units. And then we have some wellness gyms in Poland, a clinic, and then we spent a bit of money also in terms of our IT infrastructure as well, upgrading some of that and renewing some of the IT infrastructure. The increase in medical space was about 4.7%, so we're still putting on new medical service delivery space in the quarter, so we still continue to expand. As I mentioned before, have done everything we need to do to reach our targets in 2025. So these investments that we're putting on now are really in terms of our future targets past the 2025 levels. If you look down on the left-hand side in terms of the graph there, you can see our free cash flow, free recurring cash flow, and then also we've got the growth capex in the dark blue. You can see where we're reinvesting. And I think that illustrates very well on the right-hand side where you see quarter one 2024, at 42.6 million in terms of the free recurring cash flows. And that then is 8.5% of our revenues. And so we need to go back to see with the boost from COVID back at those times where we had a higher number in terms of that. If we look then in terms of our financial targets, just to reiterate that in terms of 2.2 billion in terms of our 2025, at least 2.2 billion. I think it's very clear in terms of the 2 billion, just short of 2 billion run rate that we come in now in terms of Q1 that we're going to achieve those targets. And then on adjusted EBITDA in excess of 350,000. million on there and I think the development that you can see now in the quarter also illustrates very well that we're well on track to achieve that. Our leverage, we're at 3.2 on a reported basis and so that's without any LTM adjustment for any acquisitions. We're at a slightly lower level in terms of our covenant ratios. So we're in a good situation in terms of our debt with that coming down, as I illustrated with the buy-in of our non-controlling interest in Germany in the quarter of 41.1 million. If I look then in terms of, we add here a little bit more color in terms of illustration of what it would mean further down the profit and loss account for our 2025 targets. So our adjusted EBITDA, so after leases, as you mentioned, sort of our preferred internal measure, which would be in excess of 235 million euros. Just to put that a little bit in context in terms of what that would imply in terms of the margin on 2.2 billion, that would then be something around about 10.7% in terms of margin. We're at 8.7%, I remind you now, for the Q1. And if we look at EBIT operating profit, this will be in excess of $140 million. And that would then apply a margin of something around 6.4%. And I think what this illustrates for us is the operational leverage from the throw-through of these numbers at the higher level, the $350 million of beta coming through. I mentioned we've pretty much done everything we need to do in terms of the infrastructure to be able to provide and make those numbers. So that's really where you get the operational leverage falling through in terms of the P&L line. And that EBIT margin would be around about 6.4%. That would apply, and just to put that in context, for this quarter we were at 3.8%. So I hope that helps to give you a little bit more guidance in terms of understanding how the numbers would potentially look in 2025. So my hand back to you, Fredrik. Sure. Thank you, Joe.