Medicover AB (publ)

Welcome to the MediCover Q2 2024 report presentation. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the speakers. CEO Frederick Rugmark and CFO Joe Ryan. Please go ahead.

Good morning, everyone. Welcome to our second quarter 2024 report. Welcome to you all. Our summary slide, our headline continues strong organic growth and cash generation. I think this is a very good quarter. We had a good first quarter in the year and we follow up with an equally strong and solid second quarter. you are used to us growing, but nevertheless, 20% top-line growth, of which a tad over 16% organic, is significant considering the size of the company nowadays. Importantly, this is solid across both divisions, and within the divisions across our different businesses. There's nothing individual that stands out. Poland has been strong for a long time. Poland remains strong. And we expect that continuing going forward. We had continued good member intake in our corporate business. And we equally had very strong laboratory test growth. We're actually back on pre-pandemic organic volume growth levels in diagnostics, which I think is a surprise to some of you. And it's a very good sign again. That's really across the board, including Germany, which is half of the division, as you know, so very strong sign on the diagnostic side. We have always had a strong cash generation. We continue to have strong cash generation. This jumps 23% relative to the same period prior year, so good cash conversion, that's really important. And the most important of all is that we continue to see the operating leverage that has been expected, has started to be delivered, and will continue to be delivered as we fill up our invested medical facilities with paying customers. We spent slightly less than historically on CapEx in the quarter, down to 5% of revenue in the second quarter. Looking then at the graphs that you recognize, your revenue just short of 510 million euros, so solidly through 2 billion euros on a run rate basis. I remind you the financial target for 2025 is 2.2 billion in terms of organic revenue. So we're very confident that we will reach that. You see acquired revenue is rather minuscule within that number 5. 5 million euros or so. You remember that we said starting of prior years, the start of 23, that we would have 18 months with very subdued inorganic activity, which we have had, which this acquired revenue number is obviously a sign of. And as mentioned, we expect to be able to become a bit more active in the inorganic field during the second half of the year. Looking at the geographic and revenue splits in the middle, perhaps what is worthwhile noticing, you see Poland is now actually increasing. I think it was 49% last year. It's up to 50% of group revenue. Now you see growing 24%, which I think is quite an outstanding number. So half of everything we do in the group is on Polish soil. and that has been ticking up 24% for the quarter. It's quite a phenomenal number. Another number to note, this is 18% in Germany. Remind yourself that most of that is diagnostics revenue, obviously, and where most of that is KV money, where there's still no price adjustments. having an 18% revenue growth in Germany, very significant, 24% out of Romania. You see a more softish 6% out of India. There's a number of one-off factors one should comment in terms of India. We have sold a couple of hospital units, smaller hospital units, since the prior year quarter. We have also revamped the larger unit in Viseg on the east coast to an oncology facility that is just recently opened, and we've also sold off or closed the northern Indian IVF facilities. So there's a set of one-off elements. So you will be seeing the Indian revenue growth ticking up again in the quarters to come. But overall, they're very strong. You can also see on the three revenue components at the bottom, you see equally strong pretty much across. You see public pay, our own funded insurance prepaid, and fee-for-service services. all three of them solidly double-digit revenue growth. If we then go to the profitability side of things, again, we have talked about historically that you would see operating leverage coming through in increased margins. We really started to see this in the first quarter, and we continue to see that now in the second quarter. And as expected, the further down you go, The profit and loss statement, the more percentage-wise growth is coming through. So you see operating profit jumped more than 60%, you see, with more than a full percentage points of margin expansion. And adjusted the beta L, which is the measure we spend a lot of time, and Joe will be talking about that much more later on here, up 28 with with good solid margin expansion so overall we're very happy with how we see margins expanding in the quarter as real proof and evidence of the operating leverage particularly as we fill facilities that we have invested into over the past few years and then if we look in a bit more detail on our two divisions so healthcare services you're used to healthcare services growing very strongly i think the graph in the middle with the bar chart there illustrates that very well uh you can uh you what you can say a lot of things about those bars but i think one one nice illustration is if you know the one the second the one second from the left is the second quarter 2019 so that's exactly five years ago and you see we are more than three x the size in this division relative to five years ago so we were a tad over 100 million euros in healthcare services second quarter 19 and now we are above 350 million euros for the quarter and the vast majority of this is organic growth remind you and i've said it before that you know the past five years with pandemics and and war and all the kind of things i think have been the largely the most challenging trading conditions since the second world war despite that we have been able to expand our business like this i think is is a very strong sign of the position we have now healthcare services it was up more than 20 percent of which 16 being organic importantly about half of this being price so but but 50 50 split in price and and and volume growth again really importantly for our margin management. Another thing which one tends to forget sometimes is that if we look over a slightly longer time perspective, we have quite a big sort of composition change in healthcare service revenue. So again, if we look at that second quarter 2019, five years ago, fee for service at that time was 40%. You know, it was growing strongly. I think it was up from 35% the prior year quarter, but 40% five years ago. Now we see we're at a tad above 50% as a proportion of revenue. So it has grown more than 25% its share in divisional revenue, which obviously is a very specific strategy that we are executing on. But it's important that you see that coming through in numbers. And again, I made the point before, this is really a solid performance across what we do. You see that in the charts to the right, whether you look on the geographies or whether you look on the different revenue types of streams, we have that very solid growth across the division and also visible in the member intake for the quarter. So very strong picture and very strong outlook. Looking then at margins for healthcare services, so same thing here, you know, the further down you go, the loss statement, the higher the percentage growth, so EBITDA was up 22%, a bit of margin expansion, EBITDA L was up 28%. If we look at operating profit, it's not on this slide, you have it in the report, but operating profit for healthcare services was up 45%, illustrating the The higher percentage, the further down you go, the profit and loss statement with wider and wider margin expansion. And also not to forget that we still carry quite a load of negative facilities in here. We talk about that quite often, as you know. And in the report, you see we write out that three immature Indian hospitals and the large new hospital you opened in Bucharest Pretty much this time last year, we're contributing a negative 2.4 million euros on a beta L basis or some roughly 70 bits of sort of negative beta L contribution. So one thing is to bring those to zero. That will have a 70 bits, everything else equal impact. And then, of course, bringing them up to be margin divisional accretive. That's the next step. So. Of course, we will continue to open new facilities, but we're just anxious to illustrate for you still, despite the good expansion, both in profitability and margin, we still carry quite a bit of drag in terms of our new facilities. We put on one slide for the Indian Hospital Network, and I made the point already, I think you see Warangal, in the middle up there north of Hyderabad, which had an official opening with the chief minister and the entire cabinet about 10 days, two weeks ago or so. And Bangalore in the south in the state of Karnataka, which is our first hospital in Karnataka, has had a soft opening and will be opening fully during the third quarter here now. Otherwise, you recognize the locations, and the strategy in India is very simple. On the one hand, keep expanding at a slightly lower pace than what we have historically done, but still keep expanding in the current states. Most importantly, fill up our immature hospitals with paying customers, and that will be one of the major contributors to a continuous margin expansion for this division. Then if we turn to diagnostic services, again, very positive picture. I think people are surprised over the strength of the organic volume and then revenue growth here. So revenue up just short of 18%, 263 million euro, with 16% being organic. We have not had that kind of organic volume growth in diagnostics since before the pandemic. So that's an important, or it's a very important data point, I would say. You see here price being a much more subdued element of growth at 2.3 percentage points. Of course, that's very much on the back of so much of our business being in Germany, where price is not changed. you see acquired revenue again very subdued in this business on the back of being very inactive for the past 18 months or so. And also, as we write in the report, we're actually quite disappointed as all of the diagnostics industry that has been published during the quarter, the outlines of what is called price reform. We don't really think it's price reform. It's largely just reshuffling how money is being allocated. There's no new money in that proposal being allocated into the sector, which is a big problem. Now, the way it is structured, our own assessment is that it will have very negligible, if any, impact on us. You get paid a little bit more for some tests and you get paid a little bit less for other things. But overall for us, we assess it as pretty neutral. But no doubt we are disappointed in that because we are firmly of the opinion, as many other industry players in Germany, that we need to see more money being added to the system. So perhaps the last word may not be said in that debate, but that's how it looks today. Then if we turn to profitability for diagnostic services, as you remember, We have said many times that diagnostic services, the business model is much more of a marginal nature than services. So you put in more volume into your system and a higher proportion of that will come through in contribution, increased profitability relative to services. And this quarter is an illustration of that, you see. On the back of good volume growth, we had EBITDA jumping 30%. EBITDA L jumped 40%. And again, EBIT is not on this slide, but operating profit was up more than 80% in diagnostics with close to 300 BIPs margin expansion. So a simple, straightforward illustration of the fact that generate more volume into our lab network through our BDP network. We make more money. We expand margin. And that's what we intend to continue to do going forward. So with that, I hand over to Joe for the more detailed financial review.

Thank you very much, Frederick. So if we look at our preferred measure there, adjusted EBITDA, why do we use that? That's EBITDA after our lease costs. It's more like a real cash flow, if you like, because real estate leases are in a recurring part of our capital structure so the cash outflows for those leases are recurring items so it's more indicative of the real cash inflows that we have into into the operations this grew by 28 we moved that up to 47.1 million so absolute increase on last year 10.4 million and with a margin expansion to 9.2 percent from 8.6 so decent performance at that level We looked down into the operating divisions, healthcare services. That was at 34.2 million, margin of 9.7, so margin expansion on there. And that's the flow through on incremental volumes coming through. But we're still held back by new unit start-ups that we have, and the Bucharest Hospital being the largest part of that, as Frederick mentioned earlier up in the presentation, 2.4 million negative results from there. and the Bucharest Hospital being the largest component within the majority of it. And on diagnostic services, 19.6 million, up from 14.7, so quite a decent margin expansion there, up to 12%. And that's the flow-through and the contribution on the increased volume coming on the FIFA service side mainly. We still also have integration costs for the small acquisition we did in Berlin, the lab there. So that's also holding back that margin there and the number. Without that, the operational leverage would be even more apparent. We've got continued room for growth in the coming quarters. We have the maturing profile of the units, which will be contributing to this level. We'll also have the volume increments, which we continue to put on, and efficiency initiatives will come through as well. Looking a little bit more in terms of the balance sheet, we took on 45 million new debt issue, four-year maturity. We also in the six months have assumed 24.4 million deferred payments for acquisitions and non-controlling interest in one of our main German specialist labs in Berlin. non-cash item, but we assume that. And if we look at the inorganic acquisitions, they've been subdued, as Frederick mentioned. So we did 12.6 million in the first half of this year, 8.3 last year, if you can see, so they're relatively subdued. We also bought in the acquisitions of non-controlling interests. So we did two of those in the diagnostic side of the business. and that was 24.3 million net cash in the first half. So our net debt increased then by 70.5 million since the beginning of the year, and our net working capital increased 9.7 million for the half year, a very respectable increase in the working capital given the size of the business expansion. We're projecting an effective tax rate 26% for the full year, Just to remind you, for 23, we had 21.8% overall for the full year effective tax rate. Operating cash flow, 47.4 million for the quarter and 125 million for the half year. We look at our free recurring cash flow. That was at 11.5 million versus 11.3 for the quarter and 54 million versus 48.6 for the half year. And we've been reinvesting then $16.8 million for the quarter and $35.3 million for the half year. So we continue to reinvest into the business. You can see that on the bottom left-hand corner, you can see our free cash flow and organic CapEx growth there. Just to remind you, what that number is in terms of that free recurring cash flow. We take the operating cash flow in the financial statements, take off the least depreciation and interest because they're a cash outflow effectively, and less our maintenance capex. So that's quite consistent with our reported gap numbers. And then you can see we've been continuing to reinvest in growing the business for the future. You can see that in the numbers in terms of the medical space. We've got 865,000 square meters of medical space now, and we've put in the last 12 months 25,000 square meters on that. Just to recap then in terms of the outlook for our 2025 financial targets, Obviously, they're getting closer. So now we're 18 months away from the end of that period. You can see quite clearly on the left-hand side where we're well on track in terms of 2.2 billion euros in terms of organic revenue. And if you look then on the second graph, the adjusted EBITDA, an organic number looking at there, I think we're well on track there as well to be able to deliver that 350 million target. So our leverage levels, same as at the beginning of the year, 3.3 times with those that increase to 70.5 million in net debt. And we have our target there of being at or no more than or around about the level of 3.5 times. Just also to recall you, we gave you some extra guidance in terms of where we expected to, or illustration rather, of where we expected to be further down the profit and loss account. So EBITDAO of 235 million and EBIT in excess of 140 million. And I think if you look at the numbers that we reported now in terms of the delivery of those, those are fairly consistent and fairly clear as well. And back to you, Fred.

Sure. So key takeaways, just to repeat what you have already heard, but what are the most important messages? We continue to grow strongly, 16.5% organic. Expect that to continue going forward. We have good, solid demand momentum across both divisions and geographies. That's evidenced by member intake. That's evidenced by fee-for-service growth. That's evidenced by test volume growth. That in itself will drive additional margin expansion as we continue towards the three-year financial targets. Cash generations is super important. We've always had good cash generation. We keep on having good cash generation, and we will continue to have good cash generation. We have slightly brought down the CapEx levels in line with guidance. We have said 6% for the year, and we remain on that guidance for 2024. And, you know, we express a high degree of confidence in achieving our 2025 mid-term financial targets. So I think with that, we finish and open up for any questions the audience may have.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Christopher Liljeberg from Carnegie Investment Bank. Please go ahead.

Good morning. Three questions. First, if you could give some more details about the strong diagnostic growth in Germany. Then I just wonder what you said about divested hospitals in India. Was that the IVF clinics or something more than that? And then I just wonder if you could maybe comment on the current profitability in India and when you expect the immature hospitals to break even. And also similar to when you expect this Romanian new hospital to break even. Thank you.

So, you know, the two units that we sold, Kristoffer, that was not to be confused with IVF units. We have sold off or closed some smaller IVF units in the northern part of the country, in the Delhi area. But in addition to that, we sold off, I think, in the third quarter last year or so, two smaller 100-type hospital facilities in Tallinn, Ghana. So that's just from a comparative basis, it makes a little bit of an impact.

And that was really just to... So there was nothing new this quarter? Say that? It was...

No, Christopher, we have no new hospitals in this quarter. In Q1, we had a unit which we closed and we rebuilt it to make it a cancer hospital unit in Visag, in the eastern city of Visag. That opened late in Q1.

Then you asked about margins in India. So we are expanding. You know, we're not obviously disclosing the Indian margins, you know, but we have a good solid 100 plus bps margin expansion out of India on the back of gradually filling the facilities. So that's good. You know, we're confident on that. But Of course, as these two new larger units come in during the, actually, that I mentioned that are opening here in July, so they will, you know, in the early years, you know, contribute negatively. So, you know, we make good progress as we feel the existing ones, but we'll also open a few new ones, as you have seen over the prior period. Then the first question, remind me, what was Christoph's first question? From DSRF. Yes, so again, you know, very solid organic test volume growth, Kristoffer, across including Germany. So, you know, you have a little bit, we write in the report about the extra testing we do more or less for no current reimbursement in Ukraine. But even if you net out of that, you still have sort of 17 odd percent increase.

volume test growth or test volume growth so that's it's very solid so that's really just strong demand there's nothing else than that christopher and in german i think you said you were growing 18 percent there yeah so is that uh yeah what's can you say anything about the mix and what's driving that because it seems to taking a lot of market share

Well, I mean, you were visiting on your trip not so long ago. So, you know, you saw those different sort of test components. So, you know, special immunology is growing very strongly. But, you know, you wouldn't have that number out of Germany unless pretty much the entire portfolio grew strongly. So you have a solid growth across countries. the entire spectrum, really, in Germany. Of course, some elements are growing faster than others, but in general, it's strong across the board in Germany, Christopher.

Okay, thank you.

The next question comes from Ricard Anderkrans from Handelsbanken. Please go ahead.

Thank you for taking my question. So first one's on India. Should we expect India to be back to double-digit growth in Q3 already, or are there anything in the comparables there we should keep in mind? And is there anything new in the discussion around potential standardization of hospital rates in India? So I'll start there. Thank you.

Yeah, I mean, you should expect India to take back towards double-digit revenue growth. So definitely. And in terms of the regulatory discussion on pricing, there's nothing really new. I mean, we talked quite extensively about that last quarter. There's nothing really new on that topic since three months back. And, you know, so I would very much refer to what we said last time around. Situation is very similar today.

Very helpful. Thank you. And you called out there was a small margin drag from Germany in diagnostic services in the quarter. Could you please quantify that or add some more granularity just to get a sense of the underlying dynamics there? Thank you.

Yeah, this is the acquisition we did, and now we're busy integrating this lab acquisition we did in Berlin at the start of the year. But if we were going to quantify it, Rick, we already would have in the report. So just to point out that we have got a drag in terms of that. It's not creative at the moment, and it's dilutive at the moment in terms of... So it's costing us money in terms of restructuring that business, moving the tests around redundancies and that type of stuff.

Very helpful. And final one on Germany. You mentioned that the change or the legislation in regarding to reimbursement is likely going to be neutral. Is there anything else you can do to sort of get a margin uplift in the German diagnostic service business? Or do you feel quite happy with the contribution as is, regardless of any potential boost from reimbursement increase?

Absolutely, Rick. I think we talked about this on previous calls. And we've lost quite a substantial amount of the margin over since before COVID. So you go back to 2019 and currently in terms of the business, because we've had no price increases and things have cost us more as we've gone through, rents, staff costs being the main component of that. So we have a process that we're working through in terms of trying to bring that back up to the same margin where it was before through efficiency, centralization, moving tests around. You can see over the last couple of years, we've spent quite a significant amount of capital deployment in Germany, specifically with the objective of being able to automate some of the processes. And now we're shifting tests around and working then in terms of the staff. As I was saying with everyone else in Germany, in the sort of larger scale labs, We're just trying to take people costs out because people are where our costs are. And we're doing that through automation and centralization. And so everyone is going down the same path. Everyone is taking the same same road. And all that this current they call it reform. There's no real reform in it at all, really. All this does is it's just. play around really there's no there's nothing of real effect it's it's it's as much for political um political cover as for anything else to be seen to be doing something so we don't see it will have a significant what we said i think we said is is it won't be materially positive neither neither negative um we'll have to see and do more work in terms of the detailed nitty-gritty of what it would be because they've shifted around how they reimburse things so um depending on the lab you'll get you know a positive impact or a negative impact and probably overall it will nest out for us within our within our network it will have an impact on some individual labs um that will have a negative impact so it could actually have a positive impact in terms of pushing more consolidation for certain maps very clear thanks for taking my questions

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

We have one question. Prices in healthcare services accelerated again 8% year-on-year. Could you indicate in what part of the business the hikes were most significant? Now, you know, in general, that's, you know, across the board. We have, to remind you, we have made that point many times that an important feature of Medicare is that the vast majority of our revenue is private pay. really the large exception being germany in diagnostics that we just talked about so in our private pay business obviously we continuously adjust pricing to reflect the cost and inflationary nature where find ourselves in and and that has continued as evidenced by that price growth and that's really largely across the board of our private pay fee for service and funded activities so uh you know in we haven't had any questions today on inflation but inflation has quite significantly come down relative to i think we peaked in february last year so about a year and a half ago and then the core inflation as we write in the report has come down but we are still impacted particularly in the healthcare sector by wage growth inflation. In Poland, for example, we wrote in the report that we had these minimum salary adjustments, another such adjustment in 1st of July. So while inflationary pressures are significantly off where they used to be, one should be clear on that the circle is not gone. So it is very important that we can keep adjusting pricing where required, where we're also sort of confident that we can do so, which the numbers indicate.

Another question. Are the central costs increased visibly to 10.5 million? What was the main driver? Well, you've got to remember within that 10.5 million, you have 3 million of IFRS 2 non-cash charges for share-based payments. And we also had 800,000 euros for M&A costs, external M&A costs, majority of which was related to past transactions, past things that happened. So when you strip those two numbers out, then there's nothing particularly unusual in the central costs.

All right. So unless there's no more questions, which we don't hear, we thank you for participating in today's call. And we look forward to listen to you or see you on the speakerphone for the third quarter.