Medicover AB
STO:MCOV B
Earnings Call Analysis
Q4-2023 Analysis
Medicover AB
In a narrative of resilience and growth, the company demonstrated a robust backing during turbulent times. Although overall revenues trended down by 7%, there was a notable organic growth of 16.6%, excluding the waning impact of COVID-19 - a testament to strong underlying demand. Surprisingly, amidst the chaos, the company's operations in Ukraine showed admirable growth, painting a picture of tenacity in the face of adversity. The resourcefulness of the company was further highlighted by a steady EBITDA margin at 15.4%, especially commendable given that almost half of the Diagnostic Services revenue relies on the German market, which faces a static pricing regime. While the price pressures in Germany inhibited margin growth, efficiency measures have been leveraged to maintain financial health, signaling a commitment to adapt and endure.
There's been a prudent return to historical norms in capital investment, with organic investments sitting just above 6%, aligning with prior guidance, despite a recent period of heightened expenditure. Concurrently, inorganic activities have been minimized with strategic attention shifting towards integrating acquisitions and optimizing operations. Reflective of prudent financial stewardship, the company is sailing on a confident outlook for continued revenue growth and improving profitability through 2024, with an eye to meet or exceed the mid-term financial targets set for 2025.
The company's finances narrate a success story of progress and potential. Joe Ryan, an executive, illuminated the Group adjusted EBITDAaL's uptick to EUR 42 million from EUR 33 million, a figure adjusted for significant costs such as lease, depreciation, and interest. This upward trend is underpinned by the replacement of transitory COVID-19 contributions with sustainable organic revenue and profits. Notably, the Healthcare Services margin slightly dipped to 8.5%, a marginal decline mitigated by the incubation costs of new ventures. The Diagnostics segment is on a trajectory of improvement, with tangible headroom for expansion in profitability. German operations held their ground without succumbing to inflationary pressures, a credit to ongoing efficiency initiatives.
The company's financial prudence shined through despite a hike in net debt by approximately EUR 39 million over the year, linked to growth-focused movements in working capital and strategic inorganic investments. While interest rates have inched up affecting the debt load, around half is fixed, offering a buffer against fluctuating rates. A noteworthy point is the decrease in the tax rate, bolstered by the recognition of deferred tax assets which have favorably impacted the effective tax rate, although it is projected to adjust slightly upwards. The embedded narrative here denotes a company that's carefully balancing growth with financial discipline, ensuring a viable fiscal path while pursuing expansion.
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Good day, and thank you for standing by. Welcome to the Medicover Fourth Quarter 2023 Results Presentation Conference Call. [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.
Good morning, everyone, and welcome to our fourth quarter 2023 and year-end 2023 results presentation. So put together, a few bullet points as a summary of quarter 4. I think we have continued to show a strong revenue growth, 16.1% up, of which 13.5% organic, so confirming the historic trend. And this effect is the last quarter when we will use the terminology COVID as we move into the first quarter '24, there is no COVID in the comparative quarter. So this is the last time you hear us talk about this.So if we look at organic growth ex the COVID element last year around, we were up organically 16.7%. We have continued improving profit trend. And we are happy to confirm the path towards reaching our 3-year financial targets where there's been basically 2 years to go. And this, which we will speak a bit more during the presentation, one should keep in mind that this is why we still carry quite a bit of immature hospital units. And importantly, still no price increases in Germany, which clearly homes back the pace of profitability improvement.Solid underlying organic volume growth in both segments, we'll speak more about that. That's really important that confirms a robust demand. If we then look at the pie charts that you used to see, I think it's noticeable. If we look at the upper pie chart, you see Poland as the geography for the Group has actually increased up to now 50% of revenue and you see a 30%. So I think a quite outstanding growth for Poland as a geography. Probably worthwhile noticing as well, you see Germany, which is down to 18% for the quarter, actually that's a negative growth number. You see minus 2%, which largely is the remaining COVID unwinding as that's really where the last sort of material volumes of COVID testing still remained last year around.Romania, 19% up. India, you see 9%. Now that's quite a lot of negative FX in that. So we have quite a bit higher growth in the local currency in India. Quite outstanding number you see for Ukraine, which now represents 4% of revenue for the Group, for the quarter is up 32%, which I think is not insignificant in a war-prone country. And you see the other element, which is down 11%, and that's largely driven then of the disposal of Belarus. Noticeable is that perhaps down below, you note the funded. So the darkest blue which is then the 22% pie, up 25%. As we will speak about later on in the presentation, it's quite noticeable that actually member growth is back, volume growth is back quite significantly in the funded business, which is important because that obviously drives and carries on into 2024 where we are now. And then last point to make on this one is with -- in certain if you see the percentage points in between the bars to the right, you see the underlying organic growth. Last year around was 23%. This time around is 18% or just short of 19%. So it's good solid underlying growth.Then moving to the profitability slide, and I draw your attention to my little footnote at the bottom left, everyone is aware of that that we have a significant one-off item in this quarter where we credit back to central admin costs, a contingent deferred acquisition payment, which is not going to happen. There was 2 acquisitions made around the time when COVID broke out and the performance targets due to that has not been met and we credit that back. But overall, the numbers are good. So adjusted EBITDA of EUR 68.3 million, up to 14.8%. Looking at perhaps the most important alternative performance measure that we look the adjusted EBITDA, which is largely then the own EBITDA. So the -- I think best proxy of cash flow that we use. So that was EUR 42.7 million or 9.2% margin for the quarter and EBIT of EUR 19 million.So I think the -- we have used this graph or the bar chart to the right, which I think you will see that through the divisions as well, which I think well illustrates the COVID earnings impact. And you see there in the quarter 2 2020 when obviously COVID broke out, and that was rather benign, we dropped in the underlying business, and of course, because we were closed for quite some time. And then you see how the gray bars increased and then slowly have disappeared and then how the underlying earnings growth has come back. So I think that's a good illustration in terms of how we grow the underlying business.Healthcare Services continues on its very strong growth path. So just short of EUR 325 million for the quarter, up 25.2% of just short of 20% organic. So price in that number just short of 9%. You see double-digit volume growth and then supplemented with just short of 9% price growth on top of that, and 31% up for the year, of which organic 21%, and again, I think a very strong number. Acquired revenue very benign. You'll recall that we guided about a year ago that we would significantly reduce the inorganic activity during '23 and first half of '24, which we have done. And hence, the acquired revenue pretty benign as mentioned.So it's a good performance and demand levels in general across the business areas. So we see really good demand. The point I made before, you remember, we talked about during the first three quarters of the year that we largely have traded off volume for price in our funded business, i.e., it has been of utmost importance to compensate cost inflation with price growth. And hence, we have seen much more subdued volume member growth previously in the year now in the fourth quarter. That to some extent has reversed and we've seen actually a very good member intake in quarter 4. And the point I made before, that's really important because as that momentum builds up, that obviously feeds into the 2024 where we are now to create a strong base for growth into the current year. So important point to make.India traded softer than expected, slightly soft, I should say, in quarter 4. That's a market issue. It's not a Medicover issue. A number of factors play into that. We can take that in the Q&A session in terms of what has caused a slight slowdown in quarter 4. That is not something which we expect to go on into 2024. But in terms of the quarter as such, the whole market was slightly soft in India. Then if we look at the pie charts below, I think I pretty much made the points already on the Group chart, but you see Poland obviously is up 30% for the division as well. 2/3 of this division is in Poland. So Poland is incredibly important to us in this business. And yes, I think those are the points to make.Looking then at profitability here, and I made the point that the comment I made on the Group profitability slide where we have the not insignificant one-off item, that's all accounted for in central costs. So the 2 divisions are not impacted by the one-off items. So we do that obviously for the fact that we shall be able to continue -- sorry, we shall be able to compare the quarter-on-quarter and year-on-year without any disturbance on the divisional level.So here for quarter 4 EBITDA for Healthcare Services up to EUR 46.2 million, 21% up. You see 50 basis points off the prior year number, which again is largely driven by the new unit openings that we have, plus what one should say, slightly seasonally higher medical costs in the fourth quarter in the employer-paid business. Full year EBITDA just short of EUR 172 million, 37% up and 14.3% for the year. And I made the point -- actually last bullet point on the slide, you see there medical cost ratio in this division for the quarter some 3 percentage points above the last year quarter, which again is then driven by the facility expansion, but also higher utilization levels in the insured business.And I think you see the bar chart to the right, where obviously, the impact from COVID was much less here. You see the 2 bars where you see high gray areas. Those were the 2 quarters when we had significant amount of inpatient admissions for COVID in the Indian hospital business. But otherwise, which is not shown on this chart, COVID had a significant negative impact on the blue bars. So as COVID obviously is gone in this business for quite some time, we will continue to see I think strong profitability development in this as we gradually fill up the facilities that we have talked about.Diagnostic Services, again, here you see a bit more obviously impact from COVID in the bar chart to the right. So we were basically flat on revenue. You see EUR 143 million this time around versus EUR 144 million. Last year, obviously, a lot of things going on within that number, COVID unwinding, disposal of Belarus, et cetera. So we had organic growth within this number if we exclude the last year COVID of 11.5%, which is not bad. In fact, I think that's pretty good. Price representing some 3.7 percentage points of that. For the full year, revenue of EUR 570 million versus EUR 612 million, so down some 7%, minus 2.5% organic. Same thing, excluding COVID, and we're actually growing 16.6% which is really good. And organic volume growth here is good into double-digits. So reflecting the, if you wish, a strong underlying demand coming back.Then profitability, obviously, here, we are under pressure. We have talked about that for quite some time. You can see the impact of COVID going away. And by far, the biggest issue here being that the element in Germany, which is just short of 50% of revenue in Diagnostic Services. We still have no changes to the pricing regime in Germany. You see there my third bullet point in terms of looking at the full year 2023 EBITDA margin for this division ex-COVID were at 15.4%, which is flat on the prior year, where you obviously, for sure, would like to see growth. But I think with half of the business being in Germany, that's not a bad outcome. In fact, a lot of work has been done to manage to that in terms of efficiency. And as we go into 2024, we remain still optimistic that we'll be able to shift that north.So then just a few quick comments in terms of the full year. So I think very strong growth here, obviously. One reflection that may be worth one to do is when we look back over the 2019 as a base year, that was the last year before we knew anything about war and pandemic, et cetera. If we compare '23 over the 4 years over that period, we have actually more than doubled revenue and we have more than doubled profitability over the 4 years, which I think arguably sort of worst trading years for many decades in Europe. So I think that's a very strong confirmation of the strength of the business.We have brought organic capital investments back down to around 6% or just above 6% in line with what we guided for, and that's in line with our historic levels. You recall that we were quite a bit above for a couple of years, so back down to where we historically have been. That's not insignificant. That is still above EUR 100 million of organic capital deployment. We have point made before basically reduced, if not to 0, but to rather minimum level in '23, the inorganic activities with a big operational focus on consolidating what we have bought, improved operational efficiency, and obviously, fill facilities with patients.Now the war in Ukraine shows no sign of abating, which is a tragedy in itself. And I say in every earnings call here, I think we remain both incredibly impressed and perhaps, to some extent, equally surprised in terms of the performance of our Ukrainian business. You saw the growth number I mentioned before in a country in full war. So yes, I'd say, I think we're in a very robust position and we remain confident on the outlook for '24 with continued organic healthy revenue growth and improving profitability as we progress through the year and on good path towards the mid-term financial targets for '25.Then some details on the year. So basically, you see Poland for the full year is 48%. It was 50% for the quarter, but still for the full year, up 30% as a country. Otherwise, the break-ups are quite similar. You see Germany slightly negative for the year. Ukraine up 26%. India up 11%. Again, a lot of FX as well for the -- negative FX for the full year in India. And you see the base year 2019, that was the point I just made, 844. 2023, more than twice that and basically no impact from COVID in either of those 2 numbers.And the same thing on EBITDA, you see the black components -- sorry, the dark blue component being the COVID contribution. You can actually see a very thin narrow line at the top of '23, but that is basically negligible for the year. So I think good solid performance for the full year and we go in full speed into 2024. The Board has recommended to the AGM a dividend at the same level as last year of EUR 0.12 with a record date of 30th of April and to be paid on the 8th of May.With that, I hand over to Joe for a couple of financial overview slides.
Thank you, Fredrik. So good solid development. So if you look on the right-hand side here with the graph, you can see our Group adjusted EBITDAaL. So this is EBITDA as reported, adjusted for the lease cost, depreciation and interest costs in Q4. So more in terms of the old cash flow-based EBITDA. And this is our main measure that we work on because cash flow is where we manage the business. So adjusted EBITDAaL, you can see that that's developed. So on the adjusted basis, taking out acquisitions and COVID-19, we were at EUR 33 million last time around, we're EUR 42 million now. We do have the EUR 6.9 million one-off item in there. So even if you strip that out, we make progress.The important point is that we've now for the full year replaced the COVID contributions we had coming through back last year. We've got organic recurring revenue and profits. We have in terms of the division, the Healthcare Services, on that margin, they are down to 8.5% versus 8.7%. We took that one-off item through the central costs, so the divisional margins are underserved by that. So that's 8.5% versus 8.7%. You might say it's a little bit disappointing. You're a lower margin. But we've got quite a significant amount of new start-up costs that we've got going through there. So for us to be able to largely maintain that margin with those not in substantial start-up costs, and that's pretty good. We're looking at something just around about sort of EUR 3.3 million of -- sorry, EUR 3.5 million of one-off start-up costs, operating deficits on those new units. So just pretty happy with that.If you look at the diagnostics side, we still got a drag to replace the higher COVID-19 business that we had in last -- in the quarter. So you can see there, that's EUR 2 million. So again, on the reported divisional side, and that's 2.2% versus 19.9%. So making solid progress there. We have lots of room for growth in this metric and all the other profit measures in the coming quarters. We've got the maturing profile of the units. So as we move through and we bring volume on to those units, we've got a large operational leverage. And so we start to get a fall through in there. We've seen that many times before and we're very confident we'll get there.And then we also have very -- several initiatives in terms of efficiency which were going on in several of the units. And I think it's quite remarkable for us to be able to maintain a pretty decent performance out of our German business where we haven't had any indexation. And that's partly with these efficiency initiatives that we've been getting going. And several of them are going and starting to accelerate now over the years. So we expect to be able to manage those sort of cost pressures reasonably well through the year.If we look at the net debt, that's increased. We can put on about EUR 31 million in the quarter and just short of EUR 39 million for the full year in terms of the debt levels. Net working capital, that's increased in the quarter, been very benign situation throughout the 9 months. We've been able to manage the net working capital. But given the size of the growth of the business, then that was going to increase. So we've got EUR 14.4 million increase for that for the full year. So our sort of working capital investment level is very reasonable.And then we've got inorganic investments with the EUR 10.4 million net in the quarter, including some loan advances for some acquisitions, which will be booked as acquisitions this year now in Q1. So we've got the -- if we look for the full year, that's EUR 13.2 million. We had the sale and disposal of the Belarus, which offset some of that investment. So we recycle that money into new things.Our interest costs, so those have been the sort of 2 main drivers in terms of that increase in the net debt position. We've got then increased higher rates. Our IFRS 16 is sort of like a fixed rate type of thing. So it's quite sort of a stable number. The interest charge in relation to that acts like a fixed rate one. And so it's -- the interest cost increase has come through on our real debt, if you like, fixed on the floating part of that. We've got about half of it fixed and half of it floating. And our interest-bearing portfolio around about the sort of real interest cost on that was 3.8% at the end of December.Tax rate has come down. We've recognized some deferred tax losses in the quarter. So that's had an impact to reduce overall the effective rate. But it will be more like on a sort of ongoing basis, we'll be a little bit higher there, a few percentage points -- a couple of percentage points higher than on an ongoing basis. Working capital increased reasonable. Operating cash flow EUR 42.5 million for the quarter, EUR 205 million for the full year.I'll come on to then have a look at a little bit more detail in terms of our capital spend. So our CapEx ticked up a little bit in Q4. So EUR 36.6 million, so a little bit higher than we've been running for the previous quarters. So that came in at 6.3% of revenues for the full year. And that's within where we were budgeting and forecasting for the full year. We accelerated a little bit at the Q4 as we had some planned investments that were going to happen in Q1. But some of our suppliers gave us quite strong incentives to bring those forward so that they could book those in this year. And so we got some nice discounts on some of the investments we did before a bit of that forward into this year.So then for the full year, we're at EUR 110 million, so 6.3%. You can see that's substantially down as a percentage, but still pretty high. Certainly enough in terms of our growth investments, that's about 69% for the full year in terms of growth investments. So still very much supporting our growth. And if you look on the graph on the lower left-hand side, you can see there the darker blue numbers are our organic growth investments. So this is new capacity, new facilities, new machinery that adds to our capacity and our ability to deliver future revenues. And we come in now for this year at the second highest level that we have done before, so higher than 2021, 2022. And you can see significantly higher than we were running when we in [ 28 and 29 ]. So that is a very strong driver for our future growth. Those facilities will fit up over '24, '25, '26. And those will be driving our growth for several years to come.You can see then in terms of the lighter blue bar on the left lower graph, this is a recurring cash flow number before investment for growth. So this is based out of our reported operating cash flow, less than our lease costs, the lease interest and the lease depreciation because that's the cash outflow effectively. So this is then after tax after working capital. And then after our maintenance reinvestment in the business, if you like, our maintenance side to keep our cash flows going. So this is a measure of our recurring cash flows. So you can see that got boosted in 2020 and 2021 and a little bit in 2022 by COVID-19 higher contribution.As I said, we've replaced that revenues now with recurring revenues. So we were flat in terms of Diagnostic Services. So we've largely replaced that COVID-19 business at slightly lower margins on the diagnostics side. And you can see then in 2023, the amount that we invested in growth investments was generated from that free cash flow. So what we've been doing historically is using that cash flow after maintenance to reinvest in our growth investment. And we took those boosted levels in 2020 and 2021 and we did a higher level of capital spend in 2022. So we took that COVID-19 bonus, if you like, and reinvested that in 2022, plus also on top of that organic investment -- inorganic investment.So it's a strong ability for us to be able to keep on financing that organic growth investment. And that is what's boosting our superior growth level. So when we get asked the question, can you continue to deliver those growth levels. Yes, because we've done the necessary steps in terms of the investment in the past. So that investment that we did in growth in 2021, 2022, 2023, that's boosting our growth now for '24, '25 and boost it for several years forward as we go through and fill up those facilities. So that's what's going to be driving our profits improvement and our top-line growth.If you look at the medical space that we've got, we've got 852,000 square meters, a very large space -- medical space. A lot of that is relatively new. So between 2022 and 2023, we've put on 240,000 of that space is very immature. So almost a large chunk of that immature space, they're not quite a third, but not far off 1/3 of that space is new space, which is being filled up now. And that's what's getting the drag in terms of our reported numbers and that's what will fill up as we go through '24, '25 through 26, we'll get those space filling up. We've put up an annoying substantial 30,000 square meters in 2023 with no inorganic in there, so that's all organic. And just to sort of put that into context, that's a square of 173 meters by 173 meters or something like about 3,000 sort of like quite decent 100 square meter apartment. So quite a stable of new space as well, which we're also continuing to fill up.So if you look then in terms of our -- where we are in terms of our progress for our 3-year targets. So we've got EUR 2.2 billion in terms of revenues and EUR 350 million in terms of adjusted EBITDA. And so I think we're well on the way in terms of the revenue side, you can see that. Our run rate now is -- if you look at our run rate for Q4 and to take the Q4 numbers multiplied by 4, we've got a gap of about EUR 350 million in terms of that EUR 2.2 billion. So I'm very confident in terms of being able to deliver on that revenue side.And then if you look at the EBITDA side, that effectively, you take the EBITDA further now for the year, the margin on there, that implies a sort of 2% move up in terms of the margin from where we are. And that without our efficiency movements, just from putting on the capacity that we know in the short-term we're going to put on, that is very achievable. We actually execute pretty well I think on some of the efficiency improvements that we've got going on and that will be delivered pretty handsome number.
All right. Thank you, Joe. I think that is the slides that we wanted to take you through. So we're happy to respond to any questions you may have.
[Operator Instructions] And now we're going to take the first question. And it comes from the line of Clara Arfs from Handelsbanken.
I have 2 questions concerning revenues within Healthcare Services. So you mentioned that India and Romania has been negatively impacted by new hospital markets. Do you expect it to accelerate? Meaning, can you quantify the magnitude, for instance, how much of India and Romania's growth that you lose from this? And secondly, in terms of revenues within Healthcare Services. Since Q4 2020 and well up until today, what you mentioned at other countries has shown some sort of a growing trend, of course, the volume comparison. However, could you just share what 2 to 3 countries that are the main revenue drivers within other countries?
So I think just, Clara, as your first question, now when we talked about the drag from the new hospital units, that's not a revenue drag, that's a profitability drag. I interpreted your first question as related to revenue.
Yes.
So we're not saying that we have a drag on revenue from the new units. So the only point we're making is that as we opened quite a few of them, they still contribute negatively. I think we quote a number in terms of the negative profit contribution from those units. So that's where the drag is coming from. So from a -- in terms of revenue side of things, they are filling up quite quickly.So the point Joe just made towards the end of his session here being that given the fact that we have invested so much in new facilities, you see the square meter additions, that will drive revenue growth over the years to come. And as we're carrying the cost for that largely already, that sort of marginal contribution is quite significant. So that's sort of where that operational leverage is coming from.
In fact, it's written somewhere in the details in the report that the negative contribution from those identified units in the quarter for healthcare is EUR 3.3 million. So it's not an insignificant number. Then the second question was in terms of what other countries for Healthcare Services. And I think the largest component of that other is most likely Hungary.
That's correct, Joe. Yes. So the Hungarian business, just so everyone remembers that, we actually sold our Hungarian business a number of years ago, but we kept the risk carrier, i.e., we have our risk business in [ radio ]. We have a capitation arrangement with the local provider. So that's largely Hungary. And the other significant component of that in other for Healthcare Services is the dental business that we have in Germany. Those 2 dental businesses that we bought about a year, 1.5 years ago.
And the next question comes from the line of Mattias Vadsten from SEB.
I have quite a few questions today. First one on India. So growing, I guess, sort of 16%, 17% or something year-on-year adjusted for FX in the quarter. If you could just talk a bit more about the performance from your end and maybe give some indications for Q1 based on what you've seen already now? And how Medicover internally sort of look at growth rates in India coming year and years? That's the first one.
Shall we do them one-by-one? Should we take the first one? Okay. So I'll take the first one, Mattias. So we are -- yes, you're sort of right in terms of that assumption. Now I made the point that quarter 4 was slightly on the softer side as a market. And there are, as you know, a number of other public hospital chains in India that has reported and will be reporting. So you see that sort of similar pattern being reported from the other people as well.Now I think it's important to point out that we don't see that as any lasting thing, it's a quarterly impact. We expect to see a good robust growth coming through already in the beginning of '24. So there's no change in the outlook in terms of the growth performance out of India. And we have said it so many times, so I'm sort of sounds like a broken record when I say it, but basically, growth in India for us is driven by filling up that capacity that we have built.And as we have talked about on previous earnings calls, we have 4 major projects coming also in '24. The first one here now shortly being the oncology hospital up in Vizag on the East Coast where the LINACs from Elekta are installed, but not yet commissioned. We have a major unit in a city called Warangal outside of Hyderabad coming online in the second quarter. We also have the opening in Bangalore in the State of Karnataka coming through in the second quarter. And towards the end of the year, sort of late third quarter, early fourth quarter, we have a major new hospital unit in the City of Hyderabad coming online. So that's not going to seriously impact growth in '24, but obviously, quite a bit in '25.
Good. Yes, I think we'll take the questions one-by-one. The next one, perhaps 2 questions, but they go hand-in-hand in my view, I think on price. We summarized this year with some 11% boost in Healthcare Services and 4% for Diagnostic Services with lower price adjustments for Q4, which is quite natural I think. So how do you look upon it into '24, both from index adjustments on your own, what you can decide yourself? I guess, I mean, it must give you confidence that members still grow about 6% here in quarter 4. You don't give number of visits, but I assume that has been quite good as well. So just the thoughts here.
No, I mean, we're sort of expressing ourselves a bit sort of diplomatically, but I think the fourth quarter member number, Mattias, is actually very strong on the back of having had a rather subdued 9 months because we pushed price so strongly. And it's not that we have reversed that in the fourth quarter. The fourth quarter member growth has come through despite that. I mean, it's not that sometimes on the 1st of October you start growing the member base. Obviously, that's sales effort for the prior 6 months. So that's a noticeable number.And again, I reiterate the comment I made before, Mattias, that as that sort of growth in membership, that momentum builds up. Again, it doesn't happen in one quarter and then disappears. So you should expect that to build-up here going into '24. So we're pretty confident. I mean, then the spillover on price here is that you will see -- I think I made that point last quarter around as well that you will see lower price growth in '24 than in '23 just because you will see lower cost inflation in '24 than in '23. It will still be quite a bit above where it was if you go back to '18, '19. But our position on this has all along been in '23 and will be in '24 that price needs to compensate for our cost inflation, but not more than that. So some are finding that balance between trading volume for price is about compensating for cost inflation, but then driving volume growth.
And just to add in terms of the price indexation that we've put through, we're very happy with that. We've got substantial price increase in terms of our operational costs. And you see this in -- we see this in both our own directly employed staff and that's also in terms of where we use contractors. But that's been very strong increases and we've compensated for that. So we're very, very happy on that.You see now also in Germany, you see the strike wave now and doctors are also participating in that. So we're not particularly upset about that. We're quite happy to see that doctors are getting annoyed with the reimbursement rates. This is their -- directly hits them in the pockets. And we're part of that system in terms of how the reimbursement works. So that pressure is very welcome upon the government. And I think that building up gives us a bit of more confidence that we'll see some sort of price changes in some time coming up. I can't give any guidance or any idea when you'll see it, but the pressure is definitely building on the government in terms of doing something in terms of the pricing, the reimbursement levels for medical fees in general.
Yes, very interesting, and I agree. And next one, just looking to EBITDA, I think Healthcare Services continued to surprise, really strong every quarter. Diagnostics a bit the opposite, if I can express myself like that on valid reasons, but it has a tough time. If we set aside sort of Germany in this discussion, could you just talk to triggers for EBITDA to take off in Diagnostics else than that perhaps? Are there...
You're sort of asking on the sort of EBITDA or development in Diagnostics year-on-year, excluding Germany. Is that what you're trying to say?
No. What's the trigger for it to sort of take off and go up because there has been quite some tough time and a bit slow. So other than price adjustments in Germany, what are triggers for the...
No, I think in my previous, Mattias, is -- I mean, we were saying that the -- you strip out COVID, you look at underlying, I think we said volume growth -- revenue organic for the year is 16% for the division. Now Germany is then growing whatever, 5%-odd, 6% perhaps, something like that. So you have solid -- on the 50% outside Germany, you have ex-COVID 20%-plus growth. And you know how margin on the lab business is. So as we put in -- I don't want to say restart because that's sort of is saying too much, but as the sort of diagnostic world gets going again after the COVID hangover. And as you put in more volume, which we do, I think that number indicates that very well into our existing lab infrastructure, the marginal contribution that is significant. So that's what we saw as we build-up the lab business before COVID they have ever existed.So what's the trigger outside of Germany is actually putting more organic growth test volume into our existing facilities with good marginal contribution. And the sort of second trigger or the second significant driver, Mattias, is in that whole sort of genetic space that we have talked quite a bit about. And we're pushing that specialty diagnostic and genetics quite a bit I think with good progress. And as I made a point that's sort of plus, minus 10% of that division right now. So it's not insignificant. But as we grow that as a proportion of the division, which we are and will, that will also become more noticeable.
Good. I'll jump back to the queue. But just quickly, can you disclose how much genetics grew 2023? Just to give an approximate drilling for...
I don't have the number in front of me. I would sort of give it a good guess in the low-20s, but we'll come back and confirm that, Mattias.
[Operator Instructions] And now we're going to take our next question. And the question comes from the line of Kristofer Liljeberg from Carnegie.
I have 3 questions I think taken one-by-one. First, could you just clarify what items you have removed in the adjusted EBITDAaL figure of EUR 42.7 million?
On the adjusted EBITDAaL, yes?
Yes.
Yes. So we've adjusted just for 2 things, Kristofer. We've got EUR 0.2 million in respect of M&A costs expensed through the P&L account. And then the balance is the IFRS 2 charges that we -- which is some 9 points for the full year. So full year is something -- so that's about EUR 6.5 million I think.
Okay. Then I wonder about the depreciation in the quarter...
Sorry. Excuse me, I'm looking the lines. So the 2 items. We've got acquisition-related expenses of EUR 0.2 million. And we've got equity settled, the IFRS 2 charges on the equity program, EUR 1.7 million. So that's some EUR 1.9 million adjustments.
Okay. That's clear. And I wonder about...
That's for the quarter.
Okay. So depreciation of PPE in the quarter was up almost EUR 3 million sequentially and also higher as a percent of sales, which surprised me a bit. So could you explain that if there were any write-downs or if there's a seasonal effect or anything here?
No, no, it's -- we've put on a lot of facilities and we've commissioned a lot of facilities. And then as you reconcile when you start to amortize that space, you reconciled it, moved it from construction in progress into operational assets. Sometimes there's a little bit of a catch-up then in terms of depreciation for maybe a quarter or something like that on those assets as you move that in. But we've put a lot of space on. And that then gets recognized in the depreciation for PPE. So I know on your forecast you were looking at EUR 21.3 million, we came in at EUR 23.8 million. So you had about EUR 2.5 million difference on there.What else has changed in that space is that in terms of the amortization-related to acquisitions, that has reduced sequentially and also then in terms of against your forecast, Kristofer. So you have in your forecast EUR 6 million and we came in at EUR 4.3 million. And that is basically because we've amortized some of the -- because some of that amortization we do quite quickly, particularly for some of the customer relationships and some brand stuff and things like that. So we amortize that on a quite fast basis in some cases. So some of that has dropped down. And you wouldn't have been sort of aware of that on your forecast. So I think we're up about EUR 1.7 million, and now you were forecasting the amortization-related to acquired assets.
But given that you have slowed down investments as a percent of sales, when could we expect depreciation as a percent of sales coming down?
Not really. I mean, this is what I was trying to demonstrate on that graph at the end there. We've invested in terms of total capital organic spend over the year, EUR 110 million. And if you look at the growth component on that, that's about 69% of that. So -- and that's the sort of second highest level. So it was only last year that we spent more when we boosted our inorganic expenditure. So it's...
Yes, yes, I understand in absolute terms. But I guess, as you're filling up the capacity now that has been built in recent years, shouldn't depreciation now over time come down as a percentage of sales?
Absolutely, Kristofer. But I think that that demonstrates just how much capacity we've got and put in place and the ability to fill that up, that 239,000 square meters of space that we've put on in 2022 and 2023. We've got enormous capacity there in terms of being a fill up. So I've got substantial capacity in India that we're bringing in and it just takes time to bring that in. You've got a whole thing of building up the whole network effect around you. You've got a whole thing of building up, the team of the doctors, you got the whole thing -- and I've seen it before. I've seen it very much in our early days when we started off the Warsaw Hospital now. That's full. We've got a new operating case that we've put on there. And so we've seen that time and time again in terms of that capacity being filled up.
But would it be possible to provide any sort of indication what depreciation as a percent of sales should be in 2024 and maybe also 2025?
Yes. I think I'll take it offline with you maybe, Kristofer. We can have a separate call scheduled at maybe in the coming days and I can walk you through a little bit sort of how the model works.
Because that leads me to my final question and your EBITDA target of EUR 350 million. Maybe not for now, but for the future, it will be possible to provide a bridge what that is first adjusted for leases? And maybe also, yes, what type of depreciation you expect that?
So what you're asking is, below the EUR 350 million target...
Yes. But I think the problem with -- and we have had this discussion before, but I think the problem with EBITDA is that it's just -- it's -- that figure is so inflated by leases. So the more you grow and expand, the higher EBITDA will be in a way. Is that base effect?
Kristofer, we've had the discussion many times and you know that we couldn't agree more with you. It's just that we're not allowed to have an alternative performance measure as a financial target.
No, I understand. But if it's possible in some way to have some sort of bridge, what that would mean further down in the period?
And that's why, Kristofer, we have such a focus on EBITDA adjusted for lease costs because that's the...
We will consider that, Kristofer. We understand very well the question you're asking and we'll try and work something out to make that more visible.
Now we're going to our next question.
Maybe we take some questions on the -- any written questions.
My apologies. There is one more question coming through. So it is from Mattias Vadsten from SEB.
I just have a follow-up. Maybe how we should look on Q1, the sequential margin development you expect for Q1? If you could talk through at least how you look upon things. And I guess, now adjusted EBITDA falling EUR 1 million or so or Q-over-Q if you adjust both the Q3 and Q4 number from the positive one-off. So are there any reason to not believe the absolute earnings and margins will mix into Q1? That's perhaps the question.
Well, I guess, we're sort of seeking to avoid too much to comment on the quarter we're trading in. But the point I made here, Mattias, that the new openings that will come in Healthcare Services that would negatively impact short-term margins out of India is not -- will not be coming through in the first quarter any material elements of it. And so I think if you look at the historic, you go back and look at the historic sequential margin development from Q4 to Q1, there's nothing magical going on this quarter one around other than the fact that we have more -- you will have an element going on that where we fill up capacity. So we're reducing the losses out of existing facilities. That's the only thing I would say that is different from the historic sequential development Q4 to Q1.
Okay. And I guess, if we -- not last year, but if you go back further, I think India typically is a bit better in Q1 compared to Q4, at least what I'm seeing. And maybe that's even more accentuated this time around?
Yes. India is a little bit where it turns. So you normally start off the quarter, January being a little bit softer and March then is normally a pretty decent month. So you've got that sort of transition. We've got an extra day this year as well. So we've got the same working days in February and March. The diagnostics normally does very well in Q1. You've got a marginal flow-through in terms of the additional volumes that come in the winter months. And then you've got a sort of a mix side in terms of the sports side where normally you've got people with the employer-paid part of that business where you've got lots of people with resolutions going to the gym, so you've got sort of like lower performance on that in the first half. But by the end of the quarter, they stop going to the gym, so the margins sort of recover. And then you've got the employer-paid stuff where you've got higher demand in Q1. So that's normally a bit softer on the Healthcare Services side. But we've got such a weight in terms of the hospitals now where that's built-up, but it sort of gets a little bit all mixed up on there as well. So a bit of ups and downs. But I think with the additional volume coming through, we'll see progress.
So we have some questions here. First question, could you comment on historic MCR in fourth quarter? This past, we have seen significant growth up from -- should we treat the levels around 84 as standard the fourth quarter going forward or was it somewhat one-off and the neutral is closer than what was seen in 4Q '22?That was the point I made that it's higher than where it normally is and it's higher than where we expect it to be largely on the back because most of these facility costs fall into medical cost. So that's where you see the costs coming through, plus we did have a higher utilization level than last year around in the employer-paid business. But that happens sometimes and it doesn't happen all the time. So I wouldn't pay too much attention to that. So by far, the largest element there is the facility expansion.
Yes. So you're asking in terms of 84.2%. Should we take that as a sort of standard for the fourth quarter. I think the weight of the new facilities in there is having an impact on there. So our expectation is we've put more capacity on today, as you'll see that coming down. So we will be looking for a lower percentage Q4 this year.
In Healthcare Services, we're 9% price in '23, but price effect you anticipate in '24 from the hangover there in price and how do you expect the subscriber base?I sort of answered that midway through my conversation I think that we expect lower price growth in '24 and we expect more volume growth in '24. So I'm not going to be more specific than that, but if it was 9% in '23, it will be a couple of percentage points lower in '24 and volume will grow more in '24 than it did in '23.And that also sort of links to another question there is, do you think that strong new member additions were more driven by increasing attractive service offer or prices advantage as compared to your competitors or maybe strong market as a whole. I am very much of the opinion that we're winning business on our service offer. We're certainly not winning business on reducing price. If anything, we are premium priced to competition. Now the market is robust. The Polish economy -- Romanian economy are doing okay, not fantastic. And you have a number of sectors in both countries where -- which is under pressure, construction, et cetera. So it's not -- as you all know, we're far away from some kind of economic boom scenario. So I think it's much more driven by ourselves than at this stage than it's driven by the market.Then it's one. In the report, you said you plan to resume more inorganic investment in '24. Could you please indicate what business segments would be prioritized?Again, we typically answered that question and that's the same way now, in relationship largely to the sort of geographic footprint we have right now. So if -- when that will be restarted, you should expect that from an inorganic perspective, largely to be around Poland. It's half of the business, half of the geography. It's also the currency where we will have by far the largest synergies with bringing acquisitions into the existing customer base. India is not an acquisition market for us. As you know, it's an inorganic growth, somewhat mentioned in India in terms of inorganic activity. So Poland, Romania, and to some extent, Germany. And now diagnostics, we'll be doing inorganic activity. But of course, with the Healthcare Services now being almost sort of 3 times the size of the Diagnostics business, that will also be reflected in terms of where inorganic activity will happen.Do you want to take Dani's question?
Yes. So you've got a question here on capital expenditure. Should that pull back to capitalization pull back up to the high levels over the last 2 years. And then you asked what is the expected future tax rate. In terms of capital expenditure, we would expect to be around about that sort of 6% of revenue. We would expect then in terms of being around about 2/3 of that in terms of growth and 1/3 of that in terms of maintenance. So that's the sort of guidance we give going forward. So effectively, that cash that we generate from the operations after maintenance, a large part of that we would expect to continue to reinvest. So you could expect a little bit higher overall capital expenditure than you see this year for next year as well.In terms of tax rate, I expect that to go up a couple of percentage points in terms of sort of a more longer term rate. So you'd be around about 24% to 25% the effective tax rate on a sort of ongoing basis. You have this Pillar 2 coming in now into effect for 2024. So that's all quite okay. We've got quite sort of like an uncontroversial tax structure within our Group. So that doesn't really have such an impact in any real way for us. So that's not going to have increased our tax rate. We'd expect that to be around about sort of 24%, 25% effective tax rate. It's more a sort of one-off recognition of deferred tax losses that we've recognized in this quarter that's put it down overall for the year.And then you asked, is there any impact on increase in profit contribution of India over the medium term. I think maybe that's in terms of the tax rate. No, our tax rate is sort of like takes that into account overall, I don't think that would move it. But yes, your question is, do we expect to actually see some profit coming out of India? Yes, I mean, we're very much in that sort of accelerated expansion phase now. So on a sort of net basis, after interest costs and everything else, we've got a negative situation in India. That's the net line. But yes, definitely. If you look at the unlisted Indian groups, they're running around somewhere between 20% and sort of 26% in terms of IFRS 16 EBITDA levels. We're considerably below that with the dilution of the new start-ups. But if you look on individual units for the more mature ones, then we're definitely up towards those sort of levels. So that's where we would expect to get to drive that business.
You recently added to the Diagnostics business, can you talk us through where future capital allocation priorities lie in terms of augmenting the business in Diagnostic Healthcare Services.Yes, you're referring to this small acquisition that we announced in Berlin, which happened then as an early January event. So that was really an acquisition to drive efficiency in our Berlin operation. So actually be able to locate in a new lab environment so we can allocate COVID test volumes more efficiently across different labs. So not a terribly large acquisition, but something that we think is very timely and handy in the German environment.Then in terms of future catalog in terms of Diagnostics Healthcare Service in India and France. What I made the point then in terms of Healthcare Services, Dani, I think I'm not saying Poland only is the focus, but you look at the divisional footprint being 2/3 in Poland. So from an acquisition perspective, I think you should very much be looking at Poland and Romania as a runner up. We consider all capital deployment in India as organic, you should not be expecting us to acquire activities in India. We're very happy, comfortable with the sort of organic expansion model we have in India.In terms of Diagnostics, it's always the same thing. Half of the business is in Germany. Now obviously, one is a bit sort of careful right now. You want to see the -- understand the reimbursement environment in Germany as we progress through 2024. But clearly, there's a lot of synergies for us in terms of finding potential acquisitions in Germany in the right place.And then I keep coming back to the sort of specialty diagnostics where there are specialty lab activities, be it in genetics or other specialist fields that is synergistic with what we do. That's always interesting for us. So those I think are the sort of guidance I would give in terms of geographies and the 2 segments.We have a question then from Anders. Thanks for your presentation. When you deliver EUR 350 million EBITDA, what would you expect your free recurring cash flows to be?
Well, if you look at where we are now, we're sort of around about sort of 4% in terms of that metric that I showed you in the presentation as a percentage of revenue. So that's the -- just remind you what that was. The cash flow -- operating cash flow less the lease cost, interest and depreciation, less our maintenance capital spend. So as we fill up this capacity, that will shift upwards. So you'll probably have something up towards around about sort of 2 percentage points moving up from there. We will then obviously also have new stuff that we'll be starting that will be diluting that slightly as well. So you can think in terms of 2 percentage points higher of the revenues. So we're talking about EUR 2.2 billion in terms of revenues, so you'd be looking at somewhere up quite a bit north of EUR 100 million.
And then we've got 3 general questions not related to full year '23 results. Diagnostics, could you give an update on the strategy and the development of the division as the division experienced; one, multiple leadership changes since IPO; two, margins have been lagging peers as there's is still [Indiscernible] dependence. So where are we on that margin expansion trajectory by country? And three, lack of acquisitions out of Germany. As I do, the plan was to spend 2/3 of M&A in this division.
Sure. Well, I mean, the multiple leadership change, I'm not sure the leader that we have for Diagnostics at IPO left us after a number of years and then we recruited in the current COO for Diagnostics. So Benedikt von Braunmuhl was there at the time, he did a good job and then he left for another position and Staffan Ternstrom is there now came in. So in terms of leadership changes in Diagnostics, I think that's fine. We're very happy with current leadership.An update on the strategy and development of the division, I think the best way to answer that question is to ask you to login to the recording we have from the Capital Markets Day that you find on our website where I think Staffan is giving a very good run through in terms of the strategy of growth and profitability in that division. So I wouldn't do it a service to try and give sort of a 30-second reply on that here, but you have that on our website. I think that's a good run through of the strategy for both divisions effectively. So do spend some time on that.Margins have been lagging peers such as similar country size, to bend this over that margin expansion trajectory by country. Again, the -- clearly, we are on the margin level for that division significantly below where we should be and where we wanted to be. I think enough has been said about Germany. The work we do in Germany to manage the current pricing situation. And we will see -- Joe made the point that at some stage, we think there will be price adjustment, but we have no transparency in that. So until then, we can't comment on it.Outside of Germany, margin progression is good. So we're not doing badly outside of Germany. And I answered the question from Mattias from SEB earlier here what will drive further margin expansion. That is simply to put more organic revenue growth through existing lab infrastructure that will have a significant impact on margin in that business.Then you're asking lack of acquisitions outside Germany. Yes, now in terms of 2023, we have as guided, not really wanted to do acquisitions. In prior year, we have done some, but you're right in saying that probably less than what we had expected and wanted in Diagnostic, not because we have not wanted to, just because there really hasn't been those targets that we have been looking for to the extent that we thought perhaps at the time of the IPO. That may very well look different going forward.Now I think there's is the last part of the question, it's better you answer it, Joe, the capital allocation.
Yes. So I think you're asking about the return on invested capital. So if you look at that in terms of for the year, we're at 6%, including goodwill. We could take out the goodwill, we're about 11.7% on that. So if I go back to 2019 before COVID time, we were at 6.4%, excluding goodwill, 10.9% excluding. So we -- with the weight of the new activities on the balance sheet and the -- with the capacity there, then we've got plenty of room in terms of moving that up. So if you look at the LTIP scheme, then that's 8% to 10%. Then we have quite plans and visibility in terms of getting it to that sort of 10%. That's where we want to move that. Now that's a specific type of calculation. That's not the same basis as I was quoting you those figures. That's a more sort of classical one after an adjustment for tax. So the 6% and the 11.7% % was the notional tax level. So I think we're well on the way on that and we've got very clear visibility how to make those assets which are actually dragging on us today because they're new and not full and how those perform. And so we've got very clear visibility about how we fill those up. So we're quite comfortable in respect of that.
Then we have one more. Could you also provide an update on leadership as Joe, John and you essentially build this business from scratch? CFO search, potential CEO succession? And three, stability of second line management.CFO search is ongoing. And we expect to do that transition in a controlled and good manner during 2024. And Joe is not leaving until that has happened. He has promised me. So we're comfortable with that. There's no identified candidate yet, but we're working with it.Potential CEO succession. As in every company, we have good succession planning. I have no intention personally to quit. So for the time being, knock on wood for health matters and other things. I am very happy to keep running this company as long as I'm given the privilege to do so. And if and when succession is due, we have good internal candidates for that.Three, stability of second line management is very good. I think one of the things that has driven our success over many years and still do is the quality and the stability of our senior leadership, which is very, very good. So I'm very happy, very confident with that.Then the last question, you're right. As the year progresses, we are also likely to be more active on our acquisition agenda, but would it not be better to reduce the quite high net debt indebtedness. So I mean, the point on that is if you go back and look at our communication, we said about a year ago that we would reduce our inorganic activity for 18 months because we wanted to integrate what we have bought and we wanted to bring our debt ratios down. Now that is largely the -- absolutely, the net debt ratio and the absolute indebtedness if you compare the past 12 months has remained very stable.Now as we fill our capacity, we have talked a lot about that and profitability improves as '24 progresses, the debt ratios will change quite significantly. Now the indebtedness in absolute terms is unlikely to change very significantly, but the debt ratios will. And as the debt ratios will, that's where we see we are sort of restarting our acquisition agenda. So we're very happy.We are always making the point that in terms of the debt levels we carry now, we're very, very comfortable with that. But obviously, we're above 3. And I think a lot of people in the market are more comfortable to seeing that debt ratio being somewhere perhaps in mid-2 or something like that. And as we see that, we will then become more active on the inorganic front. So that's really how you should sort of read that statement.
And remember, our debt profile in terms of maturity is very good. So we've got a relatively long profile in terms of our debt structure. So we haven't got any refinancing or any small refinancing towards the end of this year. But other than that, we're pretty good in terms of that debt financing profile. So there's no issue about us carrying this level of debt. Obviously, it costs us money. It's a higher level than it was before when we put it in place, but we're creating that value using that to put those new facilities. And that's what we're executing on coming quarters in terms of putting that volume in there. You'll see that high operational leverage as you see that flow through with the contributions falling through to the bottom line.
So that was -- unless there's some additional calls from the audience online, I think we have extended the questions. So we'll move ahead. Thank you for your patience with us today. That was a long call. So thanks for all the questions. And we speak again when we report the first quarter. Thank you.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.