Medicover AB
STO:MCOV B
Earnings Call Analysis
Q3-2023 Analysis
Medicover AB
The company has demonstrated a robust momentum with a solid 24% growth in revenue, which was consistent with the growth in the same quarter of the previous year. This signifies a strong underlying growth for two consecutive years, made even more impressive when considering the negative foreign exchange headwinds that the company faced. This performance bodes well for meeting their 3-year financial targets, reinforcing confidence for the future.
Profitability is on the rise with marked improvement in margins and a doubling of operating profit (EBIT line). A notable contribution to this progress comes from the maturity of certain business units, particularly in India, which have recently transitioned from a phase of aggressive investment to generating substantial organic growth and improved margins.
Healthcare Services displayed remarkable growth with a 32% increase in revenue, backed by over 20% organic growth. Price has been a strong growth driver, as the division managed to successfully counteract notable cost inflation. Fee-For-Service continues its impressive growth trajectory, and despite concerns about consumer spending amidst a potential recession, demand remains resilient, as seen in the growth of corporate paid member business.
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Good day and thank you for standing by. Welcome to the Third Quarter 2023 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Fredrik Ragmark. Please go ahead.
Good morning. Welcome, everyone, to our third quarter 2023 results reporting. My summary slide, I think the headline on the summary slide very well summarizes where we are, delivering according to plan. We are 3 quarters out of 12 so 25% of the time into the new 3-year financial target period and I think we are well underway with this set of strong numbers to deliver on those financial targets. We have continued strong organic growth just short of 15%. We report 19.5% growth. And if you would neutralize for the slight remaining COVID revenue element in the prior year quarter, so our underlying total growth is in fact 24% and that is actually identical as the prior year third quarter growth. So we've been compounding ex-COVID 24% revenue growth now for 2 years in a row third quarter, which I think illustrates the very strong underlying growth momentum we have in the business.And it should be recognized that that is despite some quite significant negative foreign exchange headwinds that Joe will talk about later. So indeed, fundamentally a very strong underlying growth. Profitability is improving, margins are expanding. EBITDA margin up quite significantly. Operating profit, our EBIT line absolute is more than doubling. Again this is very much driven by quite a few of our immature units particularly in India, but also elsewhere. It's gradually maturing. That's a point we have raised in quite a few of the recent quarterly calls where, as you know, we have invested quite aggressively over the past couple of years and it's very pleasing to see us gradually filling up these units, both driving top line growth organically as well as obviously marginal contribution improving.We have made the point that we would sort of normalize back to more historic levels our organic capital investments during 2023. And you see both in the quarter and for the 9-month period that we are more or less down to slightly above half of where we were trending this time last year to reflect that ambition. As Joe will talk about later on, that is certainly not that we are stopping investing. We are just bringing it down to more historic levels. Important to point out, I think we've had questions. Perhaps the most frequent questions we've had over the past few quarters has been around how able we are or how quickly we can actually fill the capacity we have taken on in our Indian hospital business. So it's very pleasing to be able to tell you that we are doing well in India and we are well filling up the capacity.We make the point that this is actually first quarter when our Indian hospital business is accretive to the group-wide as well as divisional EBITDA margin. So that's an important milestone for us to report to you. I've already made the point that I think we're well on track to achieve our 3-year financial targets. And also I put on the upfront slide the election that took place in Poland a few weeks back. We still do not have a new government so I'm not going to get into that. But it is indeed pleasing to see the highest voter turnout ever after the fall of communism in Poland and particularly important that it was all the young people that came out to vote that overwhelmingly actually voted for the historic opposition. So indeed, I think you can call that true democracy.If we then look at revenue, I've made the point already. I think we have very strong underlying growth momentum pretty much whatever line you look at and it's not in 1 market. It's very much across the board reflecting of course price. We talk about in the report that price is coming through significantly, but volume as well. So if you look at underlying volume growth, i.e., take out the price component, you see in Healthcare Services, it's 11%. And if we neutralize for COVID in Diagnostic, it's also double digit. So on a fair comparison excluding COVID in the comparative number, both our divisions are volume-wise organically up double digit, which in the environment we operate in I think is a very, very strong result. I think we can go to the next slide, maturing units and strengthened profitability. I think the graph to the right on the slide I think very well sort of illustrates.You see the consistency on how we have been able to put on in absolute terms more and more EBITDA quarter-by-quarter. You see the light gray being that extra COVID contribution. And as that has tapered off, we are I think in a good position to have replaced and will continue to replace and add on top of that increased EBITDA contribution from our units across the market. So slightly more than 30% EBITDA growth and that sort of falls through most of the lines in the profit and loss statement. And as every quarter, we remind you of our strong underlying cash flow. Cash flow remains strong and with us now slightly reducing the pace of our organic capital investments, obviously we are generating more cash to over time reduce debt or do other things with the cash.Looking then at Healthcare Services, impressive growth. I think that sort of summarizes the situation for Healthcare Services. You see the graph to the right there with [ everly ] standing rising revenue. Again something we expect to continue as we have invested particularly much in this division in additional capacity. The revenue was up a very impressive 32% and again there's quite a few negative FX elements in that number and having organic growth north of 20% of course not insignificantly driven by 11.5% of price in that growth. I think that illustrates how well our colleagues in this business have been able to price compensate for the historically high cost inflation we have seen. Fee-For-Service continues to grow well here. Quite often we have had questions recently in terms of if we see consumer weakness or is the recession -- will there be a recession? Will consumers be more careful to spend money?In general, we don't really see that. You can say that in some particularly expensive elective services, you have some demand softness. But in general, I think we are surprised in how resilient consumer demand across the board continues to be in our business. In our corporate paid member business, we grew 5.5% so 13,000 new members in the quarter. That is a slightly slower growth in absolute terms than what we have seen before. And as I comment in the report, I think that's a combination of us being very focused in this year on ensuring price compensation. And where we have not been able to agree with customers, we have focused on margin and price as well as a slight weakening in the economy. That's obviously the case across the board.Now in terms of margin for Healthcare Services, again I think the graph to the right very well illustrates how top line growth and revenue in absolute terms are flowing through to increase the profitability. So 44% growth in EBITDA, good margin expansion not insignificantly supported and driven by our Indian hospital business. But again I draw your attention to the fact that we still have quite a few immature units so this is something that we will see going forward for quite a few quarters. And that's the point I made on the second last bullet here, that strong margin development, increased contribution from early-stage project investments. But again there's quite a few still, not the least the new hospital in Bucharest as well as a number of units in India effectively where we have significant drag on results from early stage investments. I put in 1 slide just for illustration.We get quite a few questions around what's going on in India. I think the clip from the newspaper, this is from last week, out in India where quite a few of the industry experts, et cetera, expect India now to become the third largest economy in the world by 2030 so which is just sort of 7 years away. So only the U.S. and China, if we believe S&P, will have economy larger than India in 7 years' time. And clearly in that environment, that largely explains how the private pay health care market is enjoying high double-digit growth for many years to come and obviously that has knock-on effect on a very large -- a very increasing amount of various deal activity in the health care sector, Obviously we are not sellers, that's not why we put up this. But are more putting it up to illustrate for you that the world is very active or the global investor community is very active in terms of Indian health care.If we then move on to Diagnostic Services, right here healthy development. We still have some COVID in the comparative quarter last year although it is diminishing quite quickly. So revenue here was just short of reported numbers last year so EUR 140.9 million versus EUR 142.7 million last year. Organic growth was 3.5%. So you recall that we have sold our Belarus business. So we have almost made up for the dropoff of the COVID revenue, the dropoff of Belarus as well as quite significant FX headwinds. So I think actually a very strong result for DX. And you see the next bullet here that just short of 15% organic growth in this business ex the COVID element last year, of which price represented about 4 percentage points so 10% plus organic growth.And again you will remember that the difference in terms of price compensation between our 2 divisions being that here in this division just short of 50% of revenue is in Germany, which as you know, we still have not been able to adjust pricing. Fee-For-Service here about 2/3 of divisional revenue. Actually good underlying growth, I already made that point; but it's volume, it's mix and it's price increases. So a good outcome in terms of Diagnostic Services. Now the graph to the right again I think very well illustrates that extra COVID income during couple of years and now we are gradually replacing, building back profitability in the underlying business. We're still slightly down in terms of absolute numbers as you see and margin also the same so slightly down with the comparative quarter. But again when we look at the underlying ex-COVID, we are significantly growing our profits and margin.Then we go into the financial overview and I hand over to Joe.
Thank you, Fredrik. So just a slide about adjusted EBITDAaL. I'll just repeat for the audience what that is. That's the EBITDA number, but we adjust that for lease costs and the adjustments are in respect of IFRS 2 noncash charges and then any M&A expenses through the quarter. This quarter we have virtually nothing in terms of the M&A costs so it's just really the IFRS 2 numbers adjusted out noncash. So a very strong growth as you can see. You have the dark blue bars in terms of on the graphic there. So we reported EUR 30.9 million last time around, we report EUR 41.9 million this time around. So just in terms of the reported numbers, that's strong growth. But if we adjust out for the COVID-19 contribution which we had in, then they we come down to EUR 26.8 million as a sort of comparable underlying basis last time around and we do the same here and any acquisition impact, we come down to EUR 42.2 million. That's a 57% increase and a healthy margin increase.We had also then a noncash release of around EUR 4 million through the P&L account in relation to acquisitions in this quarter. So even stripping that out, you come down to a 42% increase. So very healthy and strong growth in respect to this. The other issue is that qualitatively this is a significantly better result because in our last results, we had a contribution from COVID and that has now been more than replaced with our underlying business. So a recurring revenue business so the quality of it is much stronger. You can see this in the segment margins. So if you look on the Healthcare Services, you've got a 9.4% margin versus 7.7%. So the 10% level is a very important point for me. So we need to be well north of 10%. And so going through that 10% margin is an important point for the Healthcare Services.And on the DX, we still have a drag from COVID-19 in the segment so here we still are down in terms of margin compared to last year. We had very strong contribution from the COVID business and we're now replacing this with lower margin business as usual, but we will get back up above those margins as well. So we still have drag of early-stage units, particularly in the Healthcare Services side. So that is dragging down in terms of hospital units and then our normal sort of program in terms of opening greenfield sites, but we still have a number of new hospital units which are in the process of getting to growing and bringing volumes into mature. So we have lots of room to grow in the coming quarters. We've got the maturing profile of the units, we've got the volume contribution and we've got various efficiencies initiatives as well, which will be contributing to growing the absolute amount here and also the margin.If we look at then in terms of some of the balance sheet measures. Net debt has been pretty static now, expense debt. Internal cash generation funding not only our continuing investment program, but also the dividend. And we see leverage coming down static to the year-end, but coming down from Q2. Our interest cost has increased against the backdrop of higher interest rates as you'd expect. On the right hand side in the lower graph, you have the interest cost for the quarter and for the 9 months and you can see the various components. So we have expansion of our facilities so we have the allocation of IFRS 16 lease interest into interest cost and that's more or less the sort of fixed rate of 5.6%. But that's expanded because we've expanded our capacity and our volume of activities. And then we have what I call real interest, if you like, our cash interest in terms of with our external real debt.And the effective all-in cost there, all costs; amortizations, arrangement costs, commitment costs, et cetera; is around about 5.5% all in. That was running around 2.4% in the comparative quarter last year. And if we look at our real cash cost interest on our debt, that's 4.6% at the end of September. Effective tax rate comes down a little bit to 26%. We were running our estimate around 30.3% last year through the 9 months. Our working capital has been quite benign. Our operating cash flow of EUR 57.5 million, up slightly on the same quarter last year. And if we look at the 9 months, we're up around 27% for our operating cash flow after working capital changes. CapEx has reduced to a more normalized level, which we've seen in previous years from the high levels of 2022. This is still to note at levels which will drive superior growth so this is more than enough to ensure we go through our longer-term target and this is very supportive of the growth of the business.Within this, about 1/3 of it is related to hospital facilities both in the quarter and the 9 months, new facilities; Romania, India, Poland. We put on EUR 67.1 million of new lease additions in the 9 months. And we have been -- in terms of our operating medical space, we have at the end of the quarter 850,000 square meters and if I go back to the end of '21, that's up some 238,000 square meters so some 39% increase since the start of 2022. If I go back not very much further back than that so back to the beginning of '21, we have more than doubled our facility space. That's important because that drives our long-term growth, that drives our profitability, that drives our ability to sustain our growth over the next few years.Just to come back then and have a look at our financial targets just to end in terms of reminding in respect of that. So we had EUR 2.2 billion 2022 full year revenue organic. We are well on track to achieve that very much. So look at the run rate now, look at any other measure, we're well on the way to doing that. And if we look at the adjusted EBITDA, we're looking to be in excess of EUR 350 million and we're well on the way to achieving that as well. So we're in a very good position in terms of being able to deliver on those 2025 targets.Back to you, Fredrik.
All right. So that's it. So we are very proud and happy over these results and very glad to take any questions someone may have.
[Operator Instructions] We will take our first question from the line of Kristofer Liljeberg from Carnegie.
It's Kristofer from Carnegie. I have 3 questions. The first one is on the sequential margin development for the 2 business segments. So in one way, we don't see the same historical improvement or sequential improvement in Healthcare Services. So if you could explain that if that's due to the dilutive effects from new units? On the other hand, we don't see this seasonal drop as historically has been the case in Diagnostics. If you could explain that strong sequential performance? My second question relates to the rather high minority charge in the quarter. Is that due to the higher profit in India that you talked about? And the third question relates to growth in India that seems to have slowed compared with recent years, if you could comment on that.
All right. Kristofer, Joe will answer those for you.
Kristofer, maybe if I start with the DX one in terms of we see it. We historically see a fall-off in the margin in the summer in terms of Diagnostics and that's because we have lower activity in the summer and that then drives a fall-off in the marginal contribution through to the business and then you see that come through in terms of the margin. But what you've got to consider is you've got to consider the underlying business as usual activity. So we've expanded the business both in Germany in terms of volumes and in the other markets in terms of volumes. So we've got real underlying volume and that has been the driver in terms of the sequential profitability. So we're seeing good levels of activity and that's supporting then the business as usual and as we're now all business as usual, then that's supporting the seasonality. Eventually I think we're going to get back into some sort of seasonality once we're completely through all this COVID thing. So you'll see the seasonality in the Diagnostics side reasserting itself. But I think you've still got some sort of level of confusion happening on there.
And on the Diagnostics side, I guess then we should see even larger or even better margin in Q4 for Diagnostics?
Yes, yes, yes. We'll see the seasonality on the Diagnostics side come through in Q4 now and in Q1. So we'll see that coming through. The problem then on the Healthcare Services side is now India is a significant component of our activities. So the Indian health care dynamics start to assert themselves and no, we don't see it in the reported numbers because you've got a 13% headwind against us for the Indian rupee for this quarter. So you don't see it in terms of the absolute numbers. So India has done pretty well. And our busiest period in India is this quarter just gone plus the first half of this quarter. So October will be a good month in India, but then it starts to slow down through the rest of the quarter and January is the lowest level in the Indian hospitals business. It's just the other way around, it's just how it is. People don't go to the hospital in the winter, they go in the summer. Here in Northern Europe, people go in the winter and they don't go in the summer. So it's just a reverse in terms of the market dynamics. So we'll see that dropping off. And additionally in the Healthcare Services what we'll see is we'll see higher utilization in the prepaid side. So this will be at the peak in December, January, February in terms of the normal seasonality. So we'll see that being pushed down as well as normal in the winter.
Great. That's very helpful. And then just on this higher minority charge further down in the P&L, is that the higher profit in India then I guess?
Yes. We have a significant minority in India. We have a minority in 1 of our German businesses as well and that's done really fantastically, that German business so that's pushed it up a little bit. And then as I said in the India business, that's performing well as well. So those are where we've got the 2 biggest minority positions.
And how much of the minority charge would you say in the quarter is India versus this German unit?
I don't think it's the fact that it's so much. I think that it's the profits are relatively small so when you divide it out, it looks like oh well, this is big. It's just that those have been performing. Particularly the German part, they don't have any interest cost so the profit is -- so they're not paying any interest on that part so there's no debt in that particular structure so that's performed really well. So it looks like that's a bigger share. We have arrangements in that particular business, which means that we have some call options and things. So I expect that we'll probably see some changes in that next year. And I could expect that we would see the minority interest reducing next year or certainly the year after that.
We will take our next question from the line of Mattias Vadsten from SEB.
I have a few questions as well. First one on demand for 2024, if you speak about the Fee-For-Service members, respectively, that would be helpful. You grew volumes double digits ex COVID in both segments right now in Q3, that's impressive I think and you still have sort of a lot of capacity to fill 2024. So would at least sort of high single-digit volume growth be achievable in 2024? I appreciate you're not guiding a specific year, but some thoughts are always appreciated. That's the first one.
Yes. That's the short answer, Mattias. We do expect to see continued good demand for our services and we made the point many times over that we have quite a bit of capacity to fill up. So we wouldn't in any material way expect the demand outlook to change. I think that's the summary.
Perfect. Then some questions on prices, 1 on Healthcare Service and 1 on Diagnostics here. On Healthcare Service, price is up 11.5% this quarter, 7.7% Q3 last year, almost 20% over 2 years. So could you give us any thoughts on how sequential cost inflation looks currently and how we should look at prices for 2024? That's the first one. And on Diagnostics, the question only relates to Germany if you've seen anything new there?
So I think sequentially going into '24, we expect inflation and cost inflation to trend down. We do not expect to see price compensation on the levels we are reporting now as inflation will come down. We don't think that you will see inflation in '24 being on historic levels. So we think those perhaps 2% or 3% extra will take longer to get out of the economy than perhaps what some people expect today. So with historic measures, we think we will probably trade in a slightly higher inflation and price growth environments for slightly longer than perhaps people expect. But relative to the past 12, 24 months, it will be significantly lower and as well on the pricing side, which probably will in itself then impact volume growth in that particular business in a positive way. And then in Diagnostics and on Germany, no, we have not seen or been informed of any movement from the authorities in terms of adjusting price. We are reiterating the comment in the text of the report that we believe at some stage it has to come and that's something that we -- as we wrote, it is something obviously we believe, but we remain neutral as in terms of when that will come. There's no indications to build any assumptions other than that at some stage, we are firmly of the opinion it has to happen.
Yes, I think these are good answers. A follow-up on Germany. Do you see any sort of business opportunities emerging? Cost pressure has been high for some time now and I believe some of your competitors might have a hard time. So could you share any thoughts around that?
Yes. Well, I would be careful to draw out any conclusions on that, Mattias. I think at the stage we're in Germany right now, we're focused on making sure that we manage the situation as well as we can, which I think we do. I think we actually do well under the market circumstances in Germany. Now there may be opportunities coming out of this. So your question is pertinent and correct, but I wouldn't sort of draw any conclusions out of that today. I think that may be slightly too early for us.
Good. The next one relates to investments. Appreciate all the guiding you've done this year, it helps a lot. So now if you could guide a figure for next year in relation to this year and then also if you could remind us just an opening from here and 12 months forward?
You mean organic capital investments?
Exactly.
Well, I think we have given that before, Mattias. We said we're going to trend down to historic levels of 5% to 6%, which is I think now we're actually below 5% in the quarter. But I think that 5% to 6% level that we've indicated for '23 I think is a fair representation of where we were historically and where we think we will be going forward. Now that's a pretty chunky number with the assumption you have on revenue in total, et cetera, for 2024. So it certainly is not a lack of investments. It's just bringing it down to historic levels. Where will those openings be? We have a continued ambitious program in India. I think we wrote in this report that we opened the mother and child unit in Hyderabad. In the summer behind us, we will open a dedicated cancer unit on the East Coast towards the end of the year.And I believe from memory that over '24, we have 3 larger units coming online. We enter the state of Karnataka in Bangalore to the southwest of Hyderabad in the first or early second quarter next year with a big unit. We will open a large new additional unit in Hyderabad sometime second half of next year. So that's an ambitious program. And back in Europe, you will see the same pattern as we have reported this year, Mattias. So you have in terms of some dental rollouts slightly slower than what we have seen over the past couple of years, but still we're adding units. And with that underlying volume growth in our regular Fee-For-Service business in Poland and Romania, there will be some ambulatory clinic expansions, obviously not in hospitals where we have plenty of capacity for the moment. So quite sort of the same pattern that you've seen over the past year I would say.
I think that's a very good answer. And the last one is very quick. On Diagnostics, the laboratory test volume increased 3.5%. What would this figure be excluding the Belarus effect?
11%, 11.1%, I think. So really good numbers in terms of the underlying growth and that goes back to the answer to Kristofer in terms of we see sequentially good figures and it's the volume in the business units and that's across the board. Germany, Romania, Serbia, Poland; all the markets we've been growing volume ex Belarus.
Thank you. [Operator Instructions] There seems be no further questions from the phone lines.
All right. Well, thank you all for listening in. Again a very good quarter behind us and looking forward to talking to you all when it's time to report the fourth quarter next time around. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.