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.

Good run through. So we put in just a summary slide so you remember the key messages. Robust organic growth that we have always had and we are very confident we will continue to have. So I think very solid performance, good margin expansion, good operational leverage. We have a very strong outlook. We are very confident. And as Joe just pointed out, we are well underway. So next quarter we are halfway. So we are well underway to achieve our financial targets for 2025. So with that, we hand over to any potential questions you may have.

Thank you, dear participants. As a reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 11 again. To ensure everyone has the opportunity to ask a question today, please limit yourself just to two questions. You also have the ability to submit your questions via the webcast. Please stand by. We'll compile your Q&A.

We'll take a few moments.

And now we're going to take our first question over the phone. And the question comes from Mattias Batsten from SCB. Your line is open. Please ask your question.

Thank you. I'll try to use my two questions wisely here. First on India, if you could give us some further thoughts on demand in Q1 and also the trading into Q2. And then to that question, did I get it correctly that you have two openings in Q2, one in Q4, and then one into 2025? If you just can confirm this and speak a bit about how the two openings will hit sort of cap breaks and profits for the second quarter. That's the first one.

Yeah, so I can comment on that, Mattias. So, you know, I made a point that I think we're up 17% in local currency for the first quarter. That's in line with plan. We think it's good. We commented last quarter, fourth quarter, and last year that we saw some weakness in the industry or the society second half of last quarter. That is not the case this quarter, so we're happy with revenue. We've had good flow through to margin and profits. In fact, we're ahead of budget for India for the first quarter, which gives you a good feel, I think. So we're in a good place. I can confirm what you said regarding openings. So two here in the second quarter, the ones Joe mentioned, Warangal and Bangalore. And then it's a larger unit in Hyderabad, either late. third quarter or into the fourth quarter, so a bit, whether it's October or November time, or September or October time, time will tell, but towards the end of the year. And, you know, most, if not all of the, well, there's still some capex to be spent, but most of the capex for those units opening now have been spent, not yet for the larger one towards the end of the year. And the two ones that will open will start having obviously negative impact on P&L from sort of late second quarter, put it that way. And then you have the same comments as we've been asked a number of times before in terms of those sort of three stages. Stage one, bring them to cash flow break even. Stage two, bring them to an overall profitable situation. And stage three, bring them up above a level where they are accreted to division margins.

Good. I think that's perfectly clear to me. Then the next one on testing, I'll speak a bit slow here, but so the underlying true growth. So I take 13.7, which is the lab test growth, subtract the 4.5% impact from your train, get to 9.2%. Then I add back 3.7% what seems to be Belarusian COVID impact. So I get to 12.9% underlying true laboratory test growth. If you could confirm that this is correct to begin with. And then the next one is obviously, you know, how could it be so strong suddenly? Because it looks to be a really good demand in diagnostics. So that's the next or my last question.

Yeah, I think that's a little bit too complicated to be able to answer just straight here in terms of this, but we sort of look at it a little bit more simpler, really, which is we look at what it was last year, we're looking at what it is this year, and the only real one which we have which is a little bit unusual is the 1.4 million tests in the Ukrainian, where we're working with the public system to see if See if that can actually be something that we can do. So it's more like a test, really. No real revenue associated with that. And so if you neutralize for that 1.4 million and just look at the top line numbers, then you come out about the same. Because trying to adjust for COVID and for Belarus isn't really going to help you. I mean, it gets a little bit too complicated, a little bit too difficult to desegregate it. What is happening though, and I can mention that, is that we do have got mixed changes in there. So we've got price changes where we've increased the prices on some of the business lines where we have flexibility to increase it. We've also grown the business where we've got some large corporate contracts which have then a lower average price but are very contributive to overall to the margin. So we've also got within there a bit of mixed change happening as well which then sort of makes it a bit difficult in doing what you're doing which is trying to sort of unpick it really. um so it just gets really quite complicated quite quickly so we haven't tried to do that for you we just did it in a much simpler way okay but uh i think it looks strong no matter how you look at it so it's super strong it's in germany it's in poland it's in romania it's across all of our markets there so yeah it's super strong good thanks so much thank you

Dear participants, as a reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad. Dear speakers, there are no further questions at this time. I would now like to hand the conference over to the management team for any written questions.

Then we have a question from Christopher. Congratulations, Great Quarter. Can you please give some info on how you expect PPE depreciation will develop as a percentage of sales going forward? Financial net, are there any other one-off items in addition to the FX gain? Reason for smaller minority impact on earnings. So thank you very much, Christopher, for the congratulations. We think also it's a great set of numbers as well. If we look at the PPE depreciation, I think in terms of what you see now in terms of the quarter, in terms of what you see in there now, that gives you as a percentage, that gives you a good indication. As we fill up the extra facilities, you should see some dilution there. But offsetting that, you're going to see with the new units coming in. So I think if you look at that Q1 number as a percentage and factor that forward with a little bit of operational leverage on there, then that will give you a good guidance. Financial net, there are no other particular strange items in there. We've got, in terms of the interest cost, we've got a little bit which is in Q4 and a little bit in this quarter which is sort of one-off interest costs, but nothing significant to really talk about. You're talking about overall something like about a million, a million and a half between those two quarters. So nothing really that's going to disturb any comparative basis or anything else. And then the smaller minority impact, this is where we acquired a minority, $41.1 million for a minority which we had in one of our German units, quite a profitable German unit as you can imagine by the price that we paid for that. And that then has an impact in terms of the NCI and also our EPS. Remind you then in terms of what's remaining in the NCI, the biggest components then are in terms of the Indian activities, and then we have some gyms, sport wellness fitness facilities in Poland, which where we have a minority as well. And those are the other contributors in terms of the NCI.

And then we have a question. last year installed an MRG FES device for Parkinson's therapy at the hospital in Warsaw. What are the sales results for the first few months and do you plan more such devices at other sites? And yeah, we started that back I think back in the summer of 23. So it's sort of nine months running and it has been very popular, very successful. I don't have an exact number in front of me, but I think it's been well above 100 treatments fulfilled. That was quite some time ago, so I think it's significantly more than that right now. But it's doing really well, and we do have ideas to bring that also elsewhere in our network, although that has not yet happened.

Back to operators.

There are no further questions at this time. I would now like to hand the conference over to our speakers for any closing remarks.

Very good. When you have good numbers, you get fewer questions. I think that's the conclusion from this session. So we thank you for listening in today and see you next time around. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.