Cegedim SA (ALCGM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Cegedim Health Care 2020 Call. Today's conference is being recorded and will be available on the company website. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jan Eryk Umiastowski, Cegedim Chief Investment Officer and Head of Investor Relations. Sir, please go ahead.

Good morning, and good evening, everyone. Thank you for joining us to discuss Cegedim H1 2020 Earnings. Before we begin, I would like to remind you that this presentation and conference call may constitute forward-looking statements. These forward-looking statements may include comments about our guidance and expectation and our prospects and are based on our view as of today, September 24, 2020. Additional information concerning factors that may cause our results to differ materially from expectation and underlying assumption, please refer to our universal registration document, specifically Chapter 7 on risk management. I would like to say that in this extremely challenging time, I share our support and solidarity with you and your family. With this in mind, please turn on Page 3 of the presentation. So a quick view about Cegedim, just to remind you that Cegedim is a family-owned company. The families through FCB own 53% of the capital and 68% of the shares of the voting rights. We get 2 divisions. Health insurance, HR and e-services. In this division, we get mostly big clients and this is mostly a French business. And the second division, Healthcare Professional. It's more individuals, one doctor, one pharmacist and this is more international division. We are present in more than 10 countries, as you may see, and we have sold our U.S. activity in August last year. So we are now mostly focused on Europe with a small presence in South America. Our position are still the same. So we are a unique player being present roughly on all segments of the health care space, as you may see, with strong position in each of them. And we also get 2 activities outside the health care segment that's dedicated to all kind of companies. The first one is payroll and the second one is electronic invoicing and digitalization of all documents. So moving to this, we get a quick business review what happened during the first half of this year, it was very specific, and then coming to figures. So quickly, if we start and give a big picture of what happened, you see that in the first quarter of 2020, we've been up by 3.3%, so more or less in line with our expectation that we get at this time. And then in the second quarter during the lockdown in Europe, we've been down by 8%. So in the first half of this year, we are down by 2.5%, thanks to the fact that we've been up in the first quarter. In terms of recurring operating income, we have divided by 2 our recurring operating income during the first half of this year, and I will explain how this happened and where we expect to be at the end of the year in few minutes. So what happens? First, our priority was personal safety and business continuity. So we have activated all of our business continuity plan. We developed telework. I think that roughly 80%, 8-0, 80% of our employees were in telework. We have very limited recourse to partial unemployment. It was around 5% only. And we get a solid business model, mostly thanks to the fact that more than 80% in the health care segment. During this time, we have continued to develop our products, so no postponement, no reducing -- reduction in our R&D CapEx, as you may see. Capitalized R&D increased by EUR 1 million during this time. So on the same time, what's happened on cost reduction, we get a significant reduction in travel, mission and reception costs, as you may expect, during the second quarter. All marketing events have been canceled or scaled back. We also reduced all subtracting (sic) [ subcontracting ] contracts so -- and [ hiring ] people, et cetera, so was significantly reduced. And hiring was postponed when possible to the second half or the next year depending on businesses. You may see that our payroll cost increased in the first half of this year. The reason for that was that we have done some hiring in November and December 2019. And of course, this have an effect in the first half of this year. But really, the increase on the number of people, employees at the group was only up by 2%. We get a solid balance sheet and liquidity is very secured. First, we have a reasonable leverage. We have no debt maturing before October 2024. We have EUR 65 million undrawn on our RCF, and we also get EUR 11 million of unused overdraft facilities. And in the second quarter, we also postponed to the third quarter some rent and social payments. So the rent and social payments are in our P&L, so as recorded as a charge. However, all the cash to pay that have been postponed to Q3 and this have been done right now. So we have paid what in third quarter what we need to pay in the second quarter and this have been done without any increase on our net debt. So this means that the cash that we generate in the third quarter help give us the possibility to repay completely what have been postponed. What happened on business? In the first division, if we look on Health insurance, HR and e-services, health insurance sectors and Cegedim e-business, so electronic invoicing, we get some delays on big project as company have been focusing on something else. So most of these big projects that we expect to sign in the second quarter have been postponed in the second half of this year. And we also see difficulties in the first half to win new clients, and again, this is postponed in the second half of this year. We also launched a simplified version of our digitalization solution so that attract some clients. The third-party payment had been -- we have seen some reduction on that and BPO for the health care segment. During the lockdown, people have been not going to dentist, to change glasses, et cetera, et cetera. So we have seen less activity in third-party payment for health insurance during the second -- the first half of this year. At Cegedim-Media, so the business was completely stopped during April. No advertisement at pharmacy, everything have been locked down, and all pharma company and cosmetics company postponed the marketing campaign to the second half of the year. What went very well was Cegedim Health Data supplying with health information all the health authorities in different countries about what's happening in France and in Europe. The second segment, Healthcare Professional. So all the recurring business continue and were very stable, so revenue from doctors, from pharmacists, from nurses, from existing clients. When we have direct payment, have been very stable, not affected by, what, these health crisis, et cetera, et cetera. Even, we have equipped some COVID-19 emergency centers, et cetera, et cetera. Of course, it was difficult at this time also to get new clients, to do some marketing. So for example, pharmacist software is a little bit down in the second quarter as it was impossible to go to pharmacy to change the software and the hardware or to try to convince them to switch to our solution. And in the U.K., the government have postponed some launch of new product to next year. So what have been expected to be launched into first half of this year will be postponed to the first half of next year. At the same time, we get some extra revenue from the NHS as we provide some development that is urgently needed to fight COVID. So if we look on our outlook, is in the first half of this year, we are down on revenue on 2.5% on a like-for-like basis, and recurring operating income is down by 50%. For the second half, we expect to be up in terms of revenue and in terms of operating -- recurring operating income. And if we sum both the first and the second half, we expect for the full year to be stable on a like-for-like basis on revenue growth and to be the same recurring operating income for 2020 as in 2019. So we really expect a strong rebound in the second half of this year. And now we are roughly at end of September and we already have seen some effect of that. For example, if we take third-party payment, we have seen some rebound on this activity on Cegedim-Media. Advertisement at pharmacy, we are a little bit up also. As data continues to develop very significantly, we are again able to discuss with health insurance and for electronic invoicing with companies. And we expect to get some new companies and we already get some companies on board. On the Healthcare professional, also, you will see the positive impact of our telemedicine services that have been offered for free in the second quarter that will see revenue coming in, in the second half of this year. And we have been able to again approach some pharmacists, et cetera. So in both divisions, we expect to be up in terms of revenue, to be up in terms of recurring operating income, and that translating that at the end of the year will be flat in terms of revenue and the same recurring operating income as last year for 2020. If we move more in details on figures. So a big picture, you see that revenue declined a little bit. Recurring operating have been divided by 2. At the same time, the free cash flow generated during this period significantly increased, and the net debt decreased by around EUR 4 million during the first half of this year. So if we move again on revenue in Slide 16, you'll see that revenue declined by 2.5% on organic, then we get another decline by 1.4% coming from the fact that we have made the disposal of Pulse. So this lead on a reported basis to a decline of 3.9%, as you may see. Now 88% of our revenue are in Europe and 10% coming from U.K. If we see that in segment, segment by segment, so in Health insurance, HR and e-services, we are down by 1.3%. And on organic growth, you see that in the first quarter, we've been up by 3% and down by 8% in the second quarter. This lead on a like-for-like basis again to a decrease of 2.7%. On Healthcare professional, we are down by 9.1%. The reason for that, if we look on quarterly revenue on like-for-like basis, we are up by 4% in the first quarter, down by 8% in the second. This lead to, for the first half, a decline only by 2.2%. We get onto the negative impact of the disposal of Pulse that happened in August last year. So excluding that, we are down by 2.2% in the first half of this year. If we look now on recurring operating income, what this translate and why we divided this by 2. So first, we get revenue decreased by EUR 9.6 million in the first half, then the payroll decreased by EUR 3.3 million, and the reason for the increase on payroll is only the fact that we have done some hiring in November and December 2019. And of course, we have the full impact of the salaries, and so an increase on the payroll cost in the first half. Then we have external expenses that decreased by EUR 3.8 million. This decrease is that we get less travel, less marketing and that less subcontracting contracts. This leads to this decrease. Purchase used decreased by EUR 3.2 million. This is a direct link that the fact that we get less revenue, so we're selling less hardware, et cetera. So at the end of the day, we came to the EUR 6.3 million decrease. If we look by division, you see that on revenue decrease on the first segment, it's only by EUR 2.2 million, but we had a significant decrease on recurring operating income that decreased by EUR 6.6 million. I will explain in a few moments why this happened is that we get a lot of fixed cost. And the second division, we have a decline of EUR 7.4 million in revenue but an increase of recurring operating income by 0.1%, and the main reason for that is the disposal of Pulse. So we have sold Pulse, so the decrease of revenue. But on the same time, as this was a loss-making company, this have a positive impact on our recurring operating income. So now moving to the first division, Health insurance, HR and e-services. So you see that revenue on a like-for-like basis decreased by 2.7%, and recurring income moved from EUR 10.7 million to EUR 4.1 million. And most of this is that on the third-party payment, we get a significant reduction of volume for all the health care segments for making reimbursement, people stop going to doctor, to hospitals, to opticians, to dentists, et cetera, and this have translate that will make less downpayment on reimbursement for health from insurance companies and -- insurance companies. The second fact is that the Cegedim-Media, that is our advertisement at pharmacy completely stopped activities in April. So even if we reduced the number of employees like partial unemployment, et cetera, we get some fixed costs that it's complicated to absorb when the business is completely closed for 1 month and very, very little activity in end of March and beginning of May. So this is why we get the significant decrease in the first division. However, we expect for the full year to be up, to be flat on recurring operating income and to be flat in revenue and because we'll be up in the second half of this year as we have recovered in terms of third-party payments. Cegedim-Media is still on track for our business, and we get some clients coming in for Cegedim electronic invoicing and from the insurance companies. In the second division, yes, for the second division, you see that we are down on a like-for-like basis only by 2.2% and that we are more or less stable in terms of recurring operating income. The first reason for that is that we get a negative impact from the Pulse disposal of EUR 5.5 million on revenue, but positive impact of EUR 2.8 million on recurring operating income. You remember that this company was a loss-making. This is one of the reasons we've done the disposal. The second thing is that all recurring business, so existing clients, pharmacists, nurses, doctors, the business remained as usual. There was nothing changed, we get paid, et cetera. Of course, it was complicated to attract new client during this time. We have some postponement in U.K. and if we get extra revenue from the U.K. business, U.K. authorities for that. And the last point is telemedicine. Telemedicine was very strong during the lockdown. So in April and May, we get a lot of doctor interested. But we have offered this for free, free of charge doctors, as all of our competitors, et cetera. Then since end of June, we start charging them for using the service, but the number of user declined and we get less people using it again even if this is higher than before the crisis. And all the revenue generated by the telemedicine it's coming in the second half. So Maiia is making some losses as a start-up business. So we get some losses, and I will say roughly no revenue in the first half. In the second half we'll still make losses, but we get some revenue. So some of the losses will be absorbed by the fact that we get more revenue from existing users that will just starting paying for the service that we are rendering. So if we look on the P&L on Page 22, although the line have been explained, G&A is our -- quite stable. And also look on other nonrecurring operating income and expenses, so this is special items, we see a significant decrease of special items. And if we look really on what are specific item, we see that restructuring cost is only EUR 0.8 million. Other nonrecurring income, it's only EUR 1.3 million. So roughly, these costs are quite stable compared to last year. What happened then is that last year in the first half, we get EUR 14.8 million related to the Pulse disposal. And this year, we get EUR 4 million that are related to some very old acquisition that we have done in U.K., and we have decided to make some write-offs. Acquisition have been performed 3, 4 years ago, and the goal was just to write-off. So this is the reason for this. But remember that now our real nonrecurring operating income and expenses are already down and will decrease over the times. So then if we move to balance sheet, nothing really changed. If we look goodwill and intangible asset together, they are stable. We have seen some translation between goodwill and intangible assets happened in the first half. But at the end of the day, if you look goodwill plus intangible assets, they are stable. All other lines are more or less stable compared to December. The only change is other current assets, and this reason that we see the significant increase in other current assets is that we get some liabilities -- some asset, sorry, with some insurance companies that give us some money to make reimbursement if people use the health insurance as we're doing BPO for insurance companies. And of course, that we received some cash at the beginning of the period, we use less of them because we get a reduction of volume. So these are the reason why we get higher level of that in December. Now if you look on Page 24 for the free cash flow. From operations, again, all of the line are more or less the same as last year, a little bit less than cash flow before tax and interest because we get less profit, of course. But however, if you look, all of this are more or less stable, excluding working capital requirement. That working capital requirement at Cegedim is very complicated to understand why this change from year-to-year and from half year to half year, et cetera. This year, we get EUR 15 million boost from the fact that we postponed some payment of social charges and rent payments. So of course, as we make payments in the second half, we get the cash in the first half, so we get a positive impact from that. On the same time, we get a negative impact from the fact that last year in June 2019, we get some nonrecourse factoring agreement that have been canceled in the second half of '19. So we get no more any recourse factoring, so we have no factoring in the first half of this year. And as this was a nonrecourse, we get a negative impact. The positive impact in June '19, negative impact in June '20. And we get some, again, some changes in advanced pay by clients at the health insurance BPO business as I just explained a few minutes again -- ago. So if you take all of this, this explain why our working capital requirement decreased by EUR 18.1 million. But at the end, I still want to remind you that normally working capital -- change in working capital should be stable. So starting from 2020, we'll get something more clean. So this will reduce, and we'll see less change in working capital requirement in the quarter -- half year after half year. If we move to the net debt structure, so you see a decline by EUR 4 million on the net debt during the period. So of course, we get positive impact from the fact that we have postponed some payment upfront and social charges from the H1 to H2 EUR 15 million. So even if we get that, our net debt would have increased by EUR 10 million. However, at the end of the year, where you will see a decrease of our net debt situation as we generate some cash in the second half of the year. And then I would like just to remind you that revenue for the third quarter will be released on October 28, and the Investor Day will take place in December 15. And we'll focus really on telemedicine, we'll focus on the BPO activity, we'll focus also on electronic invoicing to explain us -- to explain you how we differentiate from most of our competitors and our offering is more interesting and how we get synergies between our different businesses. So I would just want to remind you at this stage that our guidance for the full year, even if we see a significant decrease on recurring operating income in first half is really to be flat on revenue and recurring operating income at the end of the year. So a strong rebound in the second half of 2020. And in terms of revenue in October 28, when we release revenue for the third quarter, you will see that already in terms of revenue we are back on track and we are very close to our goal to be flat in terms of revenue. This concludes my presentation, and now I will ask the operator to open the line for the Q&A session.

[Operator Instructions] So we have the first question from Geoffroy Michalet from ODDO BHF.

Jan Eryk, this is Geoffroy from ODDO. Two questions for me. The first one relates of the growth that you expect between 2 divisions in H2 in division 1 and division 2, I mean organic growth and if you could give us a bit of color on which subdivision will drive that growth. And the second question has to do with Maiia. Could you give us some figures of the growth during H1 and even in the last few weeks, some figures as well on the operating cost of Maiia in H1 and what can we expect in H2? And also, how do you -- what's your feeling about Doctolib strategy versus yours?

Thank you, Geoffroy. A lot of questions. So the first one is organic growth in terms of revenue. In terms of revenue for the full year basis, we expect to be flat in both divisions. So on organic growth, so again, on organic, we expect to be flat in the first division and in the second division as we are roughly down by 2.2% in both divisions in the first half. So a rebound of 4% expected in the second half. The main driver for the recovery in the first division are coming from our third-party payments that we already have seen some increase in volume in August and September. So we see that more people going to hospitals to see doctors, et cetera, so making more reimbursement for cost, et cetera. So a rebound from this part. The second is Cegedim-Media, so advertisement at the pharmacies. We already have seen some rebound in July and August, and this seems to continue in September, so we'll see in October, November. The advertisement business is more volatile, so it's more complicated. However, we already have seen some rebound on this business, so it's positive and contribute to this increase. Also, we see that on our electronic invoicing, we have a lot of interest from companies that want to be equipped with our solution in case as something go wrong in the coming months. So they want to be able to charge the clients, et cetera, so they're moving to electronic invoicing. And the data business is continuing to be very strong as more and more health authorities, governments, pharmaceutical companies need information of what's going on, on the market. So this is for the first division. On the second division, the recurring business will still be flat, so no change on that. However, we are able to win new clients. So we get some new boost from some new clients, so this will contribute to growth. And the second is Maiia that will -- you will see some increase on revenue on Maiia in the second half of the year. So this will also help to be flat in terms of revenue. Of course, if we get -- if we look at Cegedim, roughly 75% of our costs are more or less fixed. So if we get more revenue, we are able to absorb most of our costs, and then we turn positive. So this is why by having just more revenue, we'll be able to reduce our losses and to be flat in terms of recurring operating income also at the end of the year again in both divisions. So if you took revenue and recurring operating income from 2019, you may see the same for 2020. So this is the response for the first question. The second one is more specific on Maiia key figures, et cetera, et cetera. We have decided to no more provide any information on Maiia as more of our competitors -- already as we release some figures -- are able to release some figures, we don't know how, but they are 20% higher, et cetera. So there are some -- there's something crazy coming in because when you added all these numbers, it's coming more than 100% in terms of market share, et cetera. So make no sense to provide some number if some competitors just take your numbers and increase them by 20%. So we have decided no -- to provide no more numbers. We'll provide some of them at the Investor Day as we'll see after the lockdown what really happened to market in the second half. This is the more interesting part. During the first half, you see a significant increase, a lot of doctor use this, et cetera, et cetera. However, they pay nothing for that, so it's easy to use something if you have nothing to pay. Now we charge them since July, and Doctolib charged them also since July, et cetera, and other player also. So we'll see really what happen in the market. In terms of the strategy, we know that Doctolib is very strong on taking for appointment scheduling on website, et cetera. They are also moving to telemedicine. And probably in the future, they will move to software for doctors. We have a strong response to that. We are able to combine all of our product to address this. You will see strong announcement in the coming months about a new strategy at Cegedim in terms of addressing all the health care segment, specifically, doctors, nurses, pharmacists together with a unique offer. So you will see some changes coming from this in the coming months. And by the end of the year, we will have some important news to deliver. And we will show that we are very strong against Doctolib and that we are able to win on this market to increase our market share and to move further. But you need to wait a little bit to get more information on this as this will be released in October/November.

We're going to pass to another question from Patrick Jousseaume from Societe Generale.

Jan Eryk, can you hear me?

Yes, very well.

So 2 questions, if I may. First one, on the financial cost. Do you expect the same amount of financial cost, more or less, on the second half? And second question, could you confirm that there is no more Pulse impact in H2 versus H2 last year?

Yes. So the first on financial cost. As you already may see, the first half '20 was very close to first half '19. So now as we get a fixed interest on our Euro PP, our financial cost is very stable. So you may take the number from the first half and multiply then by 2 to get the full year basis for financial cost. In terms of Pulse, in the second half, we get only the months of July and August, so 2 months of revenue and losses in the second half. So there will be a little bit of impact, but already -- you may take the figures from the first half divided then by 6 and multiply them by 2, and this will give you a little bit of impact that we expect in the second half.

And so if I am not wrong, based on what you say about H2 and full year, what you expect basically on the second half is a revenue which is more or less slightly up by maybe EUR 5 million, EUR 10 million. And EBIT, that would be up -- underlying EBIT, it would be up by something like EUR 6 million or 25% to achieve your goal, which is to have a stable revenue, stable underlying EBIT.

Yes. So stable revenue in the second division, it's an organic growth, excluding Pulse, but the number that you give us makes sense.

So we have another question. [Operator Instructions] We have another question from Sebastien Bourget from Quaero Capital.

Sorry, I was on mute. So I just want to rebound on the very important news that you gave us with your new strategy and new products that could address doctors, pharmacists and nurses from the same entry point. And regarding this new product or the evolution of existing products to this new product, presumably, you have already developed a part of it because if you talk to on this product is that it's quite ready to launch. So just to understand that, could you confirm that it has impact your cost, increasing your cost with developing cost and with no revenue yet from this new product?

Yes. So it's a mix of new product, existing product, combining different things together, et cetera. But all the costs to do that have been already in our P&L, so this have been spread over the last 2 years doing this with an acceleration in the first half of this year. And of course, we get no revenue from this product at this stage, so revenue will be generated probably in 2021 from this new product that we already have all of the cost of this new product in our P&L and balance sheet.

And one more question, if I may. The improvement of your operating margin in H2 that you expect, is it something sustainable? And is it something that you could improve again going forward?