Cegedim SA (ALCGM) Earnings Call Transcript & Summary

Good morning, and good evening, everyone. Thank you for joining us to discuss Cegedim first half 2021 earnings. I'm Jan Eryk Umiastowski, Chief Investment Officer and Head of Investor Relations at Cegedim. 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, our expectation and our prospects and are based on our view as of today, September 16, 2021. For additional information concerning important factors that may cause our results to differ materially from expectation and underlying assumption, please refer to our investor registration document, specifically on Chapter 7 on risk management. Having this in mind, I will now turn on Slide 3 of the presentation. The presentation can be found on our website. You can download it on our website. So a quick overview of Cegedim. So we are present in 10 countries, we have more than 5,000 employees, and we're making around EUR 500 million of revenue and 84% of our revenue are generated from the health care space. We are now based in Europe, so Continental Europe and U.K. We cover United Kingdom, Belgium, Germany, Switzerland, Italy and Spain and we have some services center for R&D and for serving our clients mostly for the BPO activity in Morocco, Egypt and Romania. And we have a small -- very small business activity in Chile that is just starting. So you know now that we are presenting our activity by the kind of business that we do. So we have 4 big divisions. Software and services, this includes all the kind of software that we deliver to our clients that can be insurance companies in France, but also health care professional in France, Spain, U.K., Belgium, Italy and Romania and all the solution also for the HR department for French clients. On the flow business, we get 2 activities. The first one is digitalization of processes and electronic invoicing for all kind of companies in France, U.K. and Germany and also to manage the process of health care payment reimbursement system, electronic in France. Then, having software and flow, we're able to collect data and to get more information on what's happening on the health care segment, and we're reselling this information in Germany, France, Italy, Spain, Romania and U.K. to health care professionals, to pharma companies, to government, to health utilities, and we also have an activity of digitalization -- advertisement -- digital advertisement in French pharmacies and we are now also launching this activity in U.K. The last one is the BPO. BPO is business process outsourcing for health insurance companies mostly that -- we're doing this for our French clients so we can completely outsource a client processing system through Cegedim. So having said that, in other ways presenting Cegedim, you say that we cover most of the need of all the health care players, interacting with the patient by providing data, exchange, teleconsultation, agenda, prescription, [indiscernible] diagnosis, payment, EHR, PMR, et cetera, and electronic reimbursement system also to all these players of the health care field. And this is a quite unique positioning of Cegedim. Most of our competitors offer 1 piece of this or maybe 2 or 3 pieces of that. So if we would like to summarize the Cegedim business story, we have a solid business model, innovation is very important, we have a very long-standing shareholder support with an entrepreneur culture. All products are now on SaaS. We have a unique integrated health care ecosystem. We have strong position on the market with a recurring revenue base, stable customer. And we have -- we focus now on free cash flow generation and we are uniquely positioned to drive digitalization of the economy from the health care space, but also regarding everything related to electronic invoicing, for example. And we're unlocking all the potential of synergies by creating synergies around Cegedim and one of this example is Cegedim Sante that we just start promoting in April this year and I would come on this in a few minutes. So when you see at -- look at numbers in the first half of this year, if you remember last year in 2020, the first quarter was a little bit up by 3.3% and a sharp decrease in the second quarter due to the lockdown and we ended the first half of the year at minus 2.5% on revenue and our recurring operating income have been divided by 2. So of course, this year, we see a significant increase of revenue by 6.2% and a massive increase on recurring operating income that is coming from this base effect that we get on the H1 last year. So in terms of revenue, we lost EUR 9.6 million in 2020 in H1. And now we gained EUR 15 million. So we generate more revenue. So we exceed the level of 2019 revenue. And on recurring operating income, there is a quite significant increase also on generation. So quickly, how we got through the crisis, telework deployed when needed, we have very limited recourse to partial unemployment and hiring postponed when possible, we have a very robust IT infrastructure. So we have no debt maturing before October 2024. We still have EUR 65 million of RCF undrawn, and we have EUR 24 million of overdraft completely unused. So this is for our positions. And if we look what happened in the first half of this year, we see first on software and services, in the first division, that we get a boost from project-related activity. So project activity has been delayed since the first lockdown in March 2020 and we have seen a recovery of that. So it's very interesting mostly at health insurance companies and for the HR activity. However, we get the impact from the fact that most of our clients have deployed work from home and this leads to some delay on implementing this project at our clients. So it makes longer time than in the past to deploy this solution. Then, we get very positive trend on equipping nursing -- nurses visiting patients in France to practice. We have a very strong boost from our Maiia platform for appointing, scheduling and telemedicine. We have strong boost also from our HR management solutions. Pharmacy in France -- the software for pharmacy in France is recovering. So we see a boost in terms of profitability and all the business related to health insurance is now coming back on track. And then on this business also, we get Cegedim Sante. So Cegedim Sante is a combination of all activities for health care professional in France. So doctor, nurses, data practice, pharmacists, medication database, et cetera, combining a unique entity called Cegedim Sante with synergy of sales team, R&D management, et cetera. But on the same time, we needed more sales team to be able to address all of our new offering on this. So we get some costs related to implementation of Cegedim Sante by having hired some sales team. Then on the flow business, we get positive boost, strong recovery on all process digitalization. So invoicing for all kind of companies, we get a very strong boost from this activity. And several projects have been initiated in the first half of this year, but we needed to hire some people to help us to make this implementation as we get a lot of -- really lot of product, and we needed to deploy them on the same time. So we needed some additional people to do that. On the path related to health care flow business related to the reimbursement, this has been quite affected in the beginning of the year by the fact that French people use less health care system, but we started to see some recovery at the end of the second quarter. On data and marketing, data activity have been very strong. Since the pandemic, we see a real boost on our data activity. On the digital activation, advertisement in French pharmacy, we're back. We are very close to the level of the pre-pandemic with very strong recovery in the second quarter of this year on this activity. Please remember that in April last year, this activity has been completely shut down. So we -- it's quite easy to get recovery. However, we are quite close to the level of 2019. And on the BPO, the same. We have been affected early this year by the fact that people get -- less see doctors, pharmacists, nurses and hospitals. So the trend on that has been affected. However, we have been able to reduce some losses as we'll see in a few minutes by improving processes. So this is already what happened on our businesses, and we can look on what -- how this translate on figures. So the big picture quickly, you'll see that we -- in the first half of 2021, we generated EUR 251.2 million. It's more than the level that we get in 2019. It's an increase of 6.3%. Then on recurring operating income, we have also a strong recovery on this at EUR 10.7 million. We increased our free cash flow generation from operations, EUR 23.4 million and this translate by a little decrease of our net debt. So on revenue side -- so we've been affected really in 2020 in the second quarter, and you see that the second quarter have been stronger, of course, than 2020, but also than 2019 and the first quarter also. So quite strong rebound on activity with roughly no impact from currency and structure. So organic and reported are quite close to 6.3%, 6.2%. If we look by divisions, our software and services came to EUR 140.2 million. This is 56% of the group revenue. You'll see that we get some increase in the first quarter 2020 and then a significant decrease in the second quarter. This is because all the products have been put on hold. So no more project. And then Q3, Q4, Q1, we have been quite flat because we get all the recurring business coming in. And then in the second quarter of 2021, we get some project so the boost of the project coming back again. So this leads to an increase of 4.6% on organic growth in the first half of 2021 for this division. On the fraud business, we get roughly the same. This means a significant decrease in the second quarter of 2020 due to the fact that people have reduced the spending on health care for less reimbursement. And on the same time, electronic invoicing has been put on hold during the first lockdown. Then recurring business coming in. And then in the first quarter of 2021, we get to recover from the invoicing business -- electronic invoicing business and then an acceleration in the second quarter due to the fact that also in health care, we begin to see some recovery. And this led to an increase of revenue of 8.7% and also implementation of new projects that will generate recurring revenue in the second half of the year, but we get some fees of implementation, but also some costs, as we will see in a few minutes. On data and marketing, EUR44.8 million, this is 18% of the group revenue. You'll see that since the pandemic, the revenue, it always, quarter after quarter, increased quite significantly. This led to an increase in the first half of 2021 of 16.5%. This is a comparison year-over-year, of course, quarter after quarter. The only thing is that the second quarter of 2020, our business of advertisement, our point of sales of pharmacy have been hit by the fact that all our clients have reduced the budget on advertisement. So that we closed -- we shut down the activity in April. So no revenue in the second quarter '20 and then a rebound just after that, year after. And we are quite close to the level of 2019 in terms of revenue for this activity. So this explain a boost from a recovery on advertising business and a significant increase on revenue on the data business. And the last one, BPO. So BPO, you need to remember that in 2019, we get a significant contract from our new clients. And of course, this impacts the first quarters of 2020 as we get this additional revenue. And then after that, we've been impacted once we get a normal base effect from this new contract, we've been impacted by the fact that people in France get less use of health care system, so less reimbursement or less activity for the BPO business, this explains this decrease. However, you see that in the second quarter of 2021, we have been able to reduce the decrease of revenue because we begin to see some recovery on this activity. And we ended the first half of this year at a decline of 4.3% versus 22.9% and EUR 22.9 million of revenue and 9% of the group revenue. So now, if we look quickly at the profitability at the group level from these activities. So we begin in -- in H1 2020, we've been at EUR 6.3 million, a margin of 2.7%, and we moved to EUR 10.7 million this year at end of June, and a margin of 4.3%. This is an increase of EUR 4.4 million. And if you remember well, last year in 2020, for the full year, we have also increased our recurring operating income by EUR 4 million. So in only one half of the year, we have been able to increase by EUR4 million, the same amount that we needed last year, the full year to do that. In terms of revenue, revenue increased by 15%, and we get an increase of the payroll cost by EUR 11.5 million. This is an increase of 9%. So as I mentioned before, we hired more people for the sales team. We hired more people for our R&D team and also for the flow business to help implement this new project. However, also, we get a reduction of capitalization of R&D by EUR 2.1 million. So if we restate the payroll cost from the fact that we have less capitalization of R&D, the payroll cost should have only increased by 6.6%. So an increase of EUR 9.8 million, so more or less in line with the revenue trend. Then, we get a decrease on external expenses. This is mostly traveling and marketing expenses that have been reduced and also less use of external services providers. And then, purchase used is a bit increased and nothing really special after that. If we look segment by segment on margin. So on this table, you get on the left side, the full year recurring operating income from all the segment then the recurring operating income in the first half of 2020 and then from the first half of 2021. So there is very interesting things to see on that. The first one is that we get a very significant seasonality on our activity. If you look, for example, software and services, we ended 2020 with the EUR 23.5 million of recurring operating income, but we started at end of June by only EUR 4.4 million. So this means that we have generated in the first half, only 20% of recurring operating income. So 80% have been generated in the second half. So you need to -- and of course, this translates on margin. So if you look on margin on the left column, you see the level for the full year and then the level in the first half and second half. So very big seasonality on profitability. So it's very important to take just in mind. And then, we may move to see what happened in the different segments. So software and services, we see that revenue increased. However, recurring operating income have been divided by 2. This is really the impact of the fact that we have seen some recovery on product. So we are implementing this product. However, people working from home, not at Cegedim, but from our clients and from the impact that we have some cost because the project takes more time, the implementation will take longer time. So we get some costs at the beginning, and the profit will be generated in the second half of this year and also next year. And on the same time, we have also hired more sales guide for our activity at Cegedim Sante. So of course, in the short term, you get the negative impact of having more sales team, but they will generate revenue and help to make profit in the second half of this year. On the flow business, quite significant increase of revenue. However, if you look on recurring operating income, it's quite stable, there's very small increase. This is due to the fact that we get new hires. We hired more people to help us implement this very -- lot of project that we get. So the projects have been signed. We needed people to make implementation. The implementation also takes some time to do this. So we get, at this time, the first half of this year, which has a negative impact on finding more people, but they will generate recurring revenue in the second half, and this will contribute to increase of margin on this division. Then, data and marketing, a significant boost on recurring operating income. 2 impacts. The first is the data business that developed quite well. And of course, we get a good margin on the data business. And the second is advertisement of pharmacy with significant -- these have been completely shut down in the first half of 2020. So of course, they recovered in '21. So recovering more to a normal level of margin for this activity. And the BPO, we get some reduction of losses, mainly by improving our process management on this. And of course, we are affected by the fact that of the public health subscription that makes that people use less health care system in France. So when you look on the P&L, we already talk about revenue, recurring operating income. Then, we get other recurring income and expenses. So last year, we got an expenses of EUR 6.2 million. And this year, we have an income of EUR 4.1 million. I will come back on this in a few minutes. So of course, when you take these numbers, you'll see that we're coming from negative -- from a loss of EUR 4.6 million in 2020 to a profit at the group level of EUR 6.5 million. So this is earnings per share of EUR0.5 compared to a loss of EUR 0.3 last year. So a quite significant improvement on the bottom line of the P&L. So on recurring operating, our non-recurring income and expenses, so restructuring charges. Last year, we got a charge of EUR 6.2 million, led mostly by the fact that we make depreciation of goodwill of EUR 5.0 million to the whole software. And in the first half of 2021, we get an income of EUR 4.1 million. And this income, there is some restructuring costs, but this income is coming from the fact that we get 1 client that have paid some termination -- early termination fees of EUR 4.7 million, terminating a contract -- service contract that have been ordered, normally supposed to go to 2027, so very, very long. And we agreed to terminate this contract and to make a one-off payment, an actual value of this contract of EUR 4.7 million. So this leads to this exceptional income in the first half of this year. When you look quickly on the balance sheet, nothing's really changed. Some goodwill -- some small increase on goodwill coming from the fact that we have made the acquisition of Kobus and Medimust. These are 2 small companies. They are very interesting for us that will help us to address more health care professionals. So now in France, we are #1 by providing software to doctors in France, one of the first players. And on Kobus, this offers some additional modules for our data practice solutions. And there was no real impact on all other account, excluding other account -- assets that you see a sharp decrease from EUR 211 million to EUR 78 million. And of course, you get the deposits on current liabilities, we've also shown decrease. This is coming only from fact from -- that you know that for our activity on BPO, the flow business from the insurance companies, we get some payments in advance and then we make payments. And now, we are able to make reconciliation of receivables and debt. So we can make a net position of that and this explains this decrease. So the figure that you see in June 2021 are more realistic, and this is what will be in the future. When we look on the free cash flow from operation, so an increase of around EUR 6 million. No real change on this. One thing that we need to note, it's a change in working capital requirement. So we have a positive reduction of EUR 9 million. This EUR 9 million, it's only due to the fact that we have postponed some payment from social charges in France that the government gives us this facility, so we have used it. So excluding this exceptional effect of postponement of payment, the change in working capital should have been close to 0. So something normal for a group like Cegedim. On net financial debt, so, a small reduction of EUR 5 million. This is coming from the fact that we did more free cash flow from operations, EUR 23.4 million. Then, we have made an acquisition for EUR 5.1 million of Kobus and Medimust. We have the impact of payment -- of course, of payment of leases that now is in our balance sheet, capitalization of interest on our debt that paid in October, and this came to EUR 159.5 million of net debt leverage of 1.5. So on outlook, as we already told you in July 27, we expect revenue to be in the range of plus 3% to plus 5% on a like-for-like basis, so an acceleration. On recurring operating income, we're staying at 4% increase. When you look at seasonality, it's very important you see that we have seen a very sharp decline in our recurring operating income in the first half of 2020. We recovered part of it. But then, you see that we get a very strong second half 2020 on profitability. And in second half of 2020, we already get some recovery from the first half of 2020. So having this in mind, we probably should be -- there is some negative base effect in second half that [ needs us ] to be conservative on recurring operating income to expect that we should see an increase of 4% on a full year basis. The next event will be on October 28, with the third quarter revenue. And then in addendum, you will see a breakdown and split between divisions and sectors to find with our whole presentation and how this fit in terms of revenue, of recurring operating income. And this concludes my presentation today. If you have some questions, I will now open the floor to questions.

So we get 1 question already from Patrick Jousseaume. Patrick?

Yes, Jan Eryk. Can you hear me?

Yes, very well.

Perfect. So I have 1 first question, which is about the contribution to corporate to recurring operating income. In fact, it's really small figure, but it goes from minus EUR 0.4 million last year to plus EUR 1.2 million this year. So if I calculate well, it's 1/3 of the improvement of recurring operating income that comes from this contribution. So could you explain? Second, could you give us more information about the early termination fees? What was the contract? What is the reason for this early termination? What was the size? And are you going to have to make some people redundant because the contract is over? And my third question is about the implied operating profit on the second half based on your guidance. Again, if I calculate well that the profit would be around EUR 32 million or minus 8% versus last year. What is the explanation for this?

Yes. So maybe the last one. On our guidance, yes, we have a very strong second half of the year last year, as you see on this slide, EUR 35.2 million so compared to EUR 6.3 million only in the first half. So a very competitive -- demanding base effect. And of course, last year, we see some reduction on traveling, on expenses, on marketing, et cetera. We may expect in the second half, right now of this year, some recovery on some business traveling, on some marketing campaigns, et cetera. So we have a small increase of some of the costs related to the business activity. So in comparison, there will be a little more cost probably at the group related to that. We have also some project base that we have signed, a lot of projects for insurance companies, mostly. And for the flow business, and we're implementing this, but we need more people to do that. So we need to hire them. Of course, we know that we have quite significant amount of project. So we'll keep these people in the future because we'll have something else to do with them. But on the short term, of course, we need to pay the salary and the recurring revenue from this project will be generated in the second part or the second half of the year from the last quarter and mostly in the beginning of next year. So there will be some delay. So we'll have more costs right now. And the revenue related to that will be mostly at the end of the year or at the beginning of next year. So this is why also we are a little bit cautious about our guidance for -- the main reason is we get a very significant amount in 2020. And we expect some -- a little more cost related to traveling, marketing, et cetera, and the product-based solution needed more people, so we have some hires, and there will be some effect on that on our cost. On the contract that have been handed is related to the fact that you remember that in 2015, we have sold our CRM and Strategic Data division to IQVIA. And then IQVIA signed a contract with us to provide them some facilities on data centers and IT services and they have decided to accelerate and to terminate this contract because they have a new strategy, et cetera, so they no more needed our solutions. So this is how we negotiate an actual value of the remaining part of this contract that's going through 2027. So this is an early payment for that termination fee. So it's very specific to a very specific client. And there is no need to make some layoff of people, et cetera, as we'll need these people to help us develop our activity and the demand from other sectors. So...

And what was the size of the contract and the division in which it was recorded?

This contract was recorded in corporate and others -- as this is a solution for IT services and data centers, this is recorded in the corporate and other division. On corporate and other, we get a boost from our cloud solutions, data centers, a very strong demand from that. We have been also able to manage more efficiently some costs. There is less traveling cost, there is less activity, et cetera. So this explains why you see this improvement in recurring operating income from this division. If there was a question you can first press the button and raise your hand on the platform. We get a question from Sebastien Bourget. Sebastien?

Just the rebound on the previous question about your cloud solution and strong demand. Should we understand that this corporate and other will positively contribute going forward?

No, this is more to say that corporate and other will be more or less flat, close to 0 on recurring operating income. So in the past, if you have seen on our numbers, most of the time, this has a negative contribution. And now, there's some more breakeven, maybe a small positive impact, but the impact will not be very significant at the group level on the full year basis.

And a question about your personnel cost, and we understand that you have hired people for -- on 2 sides. First, to merge or develop your -- and continue to develop your software and Cegedim Sante. And on the other side, hiring people to implement new projects, but could you help us to understand what would be your normative personnel costs on a full year basis and if you expect to see these costs continue to increase going forward?

There will be 2 impacts at the end of the year. The first one, there will be the full year impact. So when we hired someone in May, of course, in the first half of this year, you get only the May and June months on the account. And then, you will get the next 6 months. So there will be some increase, even if we stop any hiring right now, you will see an increase of our cost related to the fact that we get them on a full year basis. The second is that on R&D, to continue to improve our solution, we need a little more people, but most of these people not hired in Morocco and Romania, so with lower salary. So the impact on the P&L will be lower. And on Cegedim Sante, we still need to hire some sales team to increase our sales team to get better coverage with our solutions. But if you take figures from the first half, as I said, an increase of 9%. So we have also decreased our capitalization of R&D. So the total amount of capitalization of R&D. So of course, this have some impact on the payroll cost, but you see the increase of 9%, we may expect something between 7% and 10% increase on a full year basis.

Okay. And for...

[indiscernible] too, we do not expect any more significant increase, excluding only the full year impact of all this hiring that happened in 2021. We'll get one question online from people. So the top line contribution of Medimust, it's around EUR 1.3 million on revenue per year. So you see it's not real significant. And Kobus, it's really a start-up. So on the revenue side, it's a very small one. However, they get a very good technology that is very easy to implement in our existing software that will boost the sales of our existing software by integrating these solutions. So of course, Kobus are not generating -- they're making some losses, but normal losses from startup. And Medimust, it's a positive. So they have a positive margin. And this will not be dilutive. So it will be a positive margin. If we look on the margin per divisions for the full year basis, we may expect some improvement compared to last year on margin due to the fact that on the first half, for example, in data and marketing, we had a strong boost. We have reduced some costs -- some losses on BPO. The flow business is more or less stable and will have the positive impact of the implementation of this new project and new clients that will generate recurring revenue that will improve margin. And on software also, we have the project. Once the implementation is done, this have a positive contribution also on profit. So probably, you take margin from the full year 2020 and some improvement on the full year basis. On the BPO business, we've been profitable last -- we've been breakeven last year, so breakeven on a full year basis. As you may see, we have already improved or reduced the losses in the first half of this year compared to last year, even if we see a decrease of revenue. If we see no more public health -- public restriction, and we see that people continue to come back to see doctors and going to hospitals, et cetera. So if we see a recovery of this activity in terms of activity, yes, we'll be breakeven, even a little bit positive on the BPO business on a full year basis, but it depends how the public restriction [ and else ] will happen over the next half of the year. There is some questions on Maiia, what we may see on Maiia. It's developing very positively. It's more complicated [ enough than the contribution are ] as the module for teleconsultation and the module for appointment is included in our software. So it's completely included and we're selling this together. Of course, we can still provide for a doctor using other software solution also, but it's more included some -- we'll cancel in different ways -- or different channels. However, we continue to see strong demand from our product. And the vaccination campaign, the fact that Maiia [indiscernible] government have given a very strong spot light on our activity and the brand now, it's more -- people in front are more aware that Maiia exists, and they can take appointment through this solution, this platform. On teleconsultation, we have seen a strong boost during pandemic and on the lockdown -- during lockdowns. And when you see that the lockdown, it's added. We see some slowdown on teleconsultation. So it's up and down. However, it's coming more and more used by people anyway. In terms of losses, we are more or less at the same level of losses than last year as we still maintain our strong sales team to take the maximum number of doctors with our solution. So, in terms of recurring operating income, it's the same impact on losses than last year. And in terms of revenue, this explains also part of the increase of revenue from this division. Do we have other questions or someone would like to ask? Anyway, you can always reach me by e-mails and phone calls, and we can set up another call, answer any questions. And probably some [ more show ] will be able to be put in place a little bit later this year. So do not hesitate to contact us if you need more explanation on numbers for activity. Thank you very much for listening to this presentation, and have a good day and good evening. Bye. Thank you.