Clariane SE (CLARI) Earnings Call Transcript & Summary

Hello, and welcome to the Clariane 2024 Half Year Results Conference Call. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Sophie Boissard, CEO; and Philippe Garin, to begin today's conference. Thank you.

Thank you. Ladies and gentlemen, dear investors, good afternoon. Welcome to the Clariane Group 2024 Half Year Results Presentation. I suggest we now move to Slide #1. So I'm Sophie Boissard, I'm the Group CEO and I am today with Philippe Garin, Group CFO. I will begin on Slide 5 with the four key highlights of this half. Firstly, over the first six months of 2024, we recorded dynamic revenue growth that led to an increase in EBITDA. Secondly, this was in part fueled by the strong improvement in German performance. Thirdly, we also moved forward on strengthening our balance sheet in line with our refinancing plan, making significant progress on reducing our debt during the period. Last but not least, we confirmed our 2024 full year outlook and midterm objectives. Let us move to Slide #6. Here, we will have a look at the main indicators that reflect our performance this semester. Firstly, as you see, revenue increased by 6.8% in organic terms in the first half, supported by all businesses and all regions. EBITDA pre-IFRS 16 and excluding disposals, rose 3.5%, while EBITDA post-IFRS 16 was up 7.5%. As a consequence, margin rate expressed in EBITDA pre-IFRS 16 settles at 11%, which, excluding the contribution of real estate development activities, which are at a low point, represents an increase of 75 basis points and reflects a solid performance from the operations. The net profit group share was minus EUR 28 million and includes the loss on the disposal of the service residence business in France in June. The group results from continuing operation is minus EUR 3 million, close to breakeven. Let us move now to operating free cash flow, which rose sharply to EUR 74 million to be compared to EUR 45 million in the first half of 2023. Compared to last year, our net debt decreased by EUR 500 million. And as a consequence, the financial leverage ratio of the company improved by 50 basis points, falling to 3.6x to be compared to 4.8x a year ago. Let us move now to Slide #7. On this slide, you see reflected some improvement we made on a number of milestones in the field of ESG, let me highlight 2 of them. Firstly, on the social component, Clariane received the Top Employer Europe certification, and we are the first care company to get such a recognition. Secondly, we have made good progress in the environmental field. In '23, we made a commitment to join the science-based target initiative, SBTi, and we obtained in June 24, official validation of our targets as regards reducing greenhouse gas emission in line with the Paris agreements. This validation is a testament to the outstanding in-depth work of the teams in formulating a robust and achievable plan that covers all our networks across Europe. Let us move now to Slide #8, where you will find an updated picture on our refinancing plan. As you remember, probably the plan that we announced on the 14th of November 2023 was intended to secure and to accelerate Clariane's debt reduction trajectory and to enable the company to have a financial position suited to a more challenging economic and market environment. Our plan was comprised of four parts, of which we have been already accomplished. The first part was about the creation of two real estate partnerships to raise EUR 230 million equity. The second part was the arrangement of the EUR 200 million real estate bridge term loan. All these two elements have been done and achieved in 2023. More recently, we finalized a successful rights issue of more than EUR 300 million that we had cashed in on the 5th of July. And with that achievement, we have completed the third tranche of the plan to consolidate our financial position. And we have also embarked on the fourth and final part of the plan, which is a EUR 1 billion disposal program, which is outlined in the next slide. So where do we stand on the asset disposals program? As reminded here in the slide, our approach is guided by the twin objective of, first, reducing the debt and maximizing the deleveraging impact. And secondly, refocusing our activities on a more limited number of geographies according to our strategic road map. And of course, we only proceed with the disposal when we have reached a satisfactory level of [ valuation ]. So far, in only one semester, we have been securing more than 40% of the gross proceeds expected from the program through three targeted transactions, one in the U.K., one regarding real estate in the Netherlands and the last one regarding hospital at home activities, non-core activities in France. We are actively pursuing on several disposal scenarios to ensure that we achieved a target of EUR 1 billion in gross proceeds from disposal by the end of 2025. Finally, here on Slide 10, I would like to recall how our reinforced capital structure is now reflected in Clariane's governance. On the left hand, you see the recomposed shareholding structure, post rights issue with the substantial free flow that we have managed to keep 32% of free float. And on the right hand, you see the way the Board has been evolving according to this new equilibrium. We have welcomed 3 new directors representing the new shareholders and all the directors have voiced their strong support and commitment to the company's corporate purpose, values and strategy. And in line with the support, the Board has renewed yesterday, my mandate as Clariane CEO for a period of 5 years as of January 1, 2025. I would like now to hand over to Philippe Garin to present our income statement highlights. Philippe, the floor is yours.

Thank you, Sophie. Moving to Slide 12 now, the analysis of our income statement. We begin with our revenue numbers. The group consolidated revenue in the first half of '24 totaled EUR 2.6 billion, representing reported growth of 6.1% and organic growth from 6.8%. That performance confirms the relevance of the Group's strategy and the business model, which is based on diversified portfolio of businesses, each growing well and geographical markets. Long-term care shows strong dynamism, thanks to an improved occupancy rate and positive effect on pricing. Medical Care is a bit behind, mainly due to the regulatory change in France. On Slide 13 now, the Long-Term Care, organic growth was driven by the rising occupancy rate, which averaged 89.5% in the first half of '24 versus 87.9% in the first half of '23. I'd like to highlight, sorry, 2 key elements. Starting in Q2 of '22. So occupancy rate has been increasing quarter after quarter, rising by roughly 400 basis points over the period. Secondly, it should be noted that the average occupancy rate at end of June '24 was 90.5%, up 220 basis points on the 88.3% at the end of June '23. We expect and have room for further growth based on the potential embedded in existing capacities. Slide 14. Looking at our performance breakdown by geography on Slide 14, we were pleased to report a well-balanced performance on all our geographies. To note, Germany's strong revenue growth at 8.3%, driven by higher business volumes and improved pricing and Spain that is further developing on both nursing home and mental health activities. Slide 15 set out the bridging revenue from last year. Revenue growth of 6.1% came from higher business volume that accounted for 3.2 points of the increase and price increases that accounting for 3.6% of the progression. The change in perimeter effect was negative due to the disposal of UK assets. Looking at our EBITDA performance by geography on Slide 16. EBITDA increased by 4.1%, even if margin was down slightly. Excluding real estate development, margin is up. This was especially true in France. Excluding the real estate development impact, EBITDA margin would have increased by 90 basis points in the first half. Indeed, contribution from real estate development activities amounted to EUR 33 million in the first half of '23 and was only EUR 4 million in the first half of '24. In Germany, EBITDA improved by 170 basis points in line with this recovery plan target, driven by the initial positive result of its efficiency measure. We are continuing to refocus our network in Germany with the aim of bringing profitability back to normal levels in '25. To note, the strong performance of Italy that grew its EBITDA by 100 basis points, thanks to strong cost and price management in a low volume increase [ environment ]. Turning to the EBITDA bridge on Slide 17. EBITDA was up by 1.7% as reported and 3.5% excluding disposal to EUR 290 million. Overall, the positive effect were essentially higher volumes that generated an increase of EUR 24 million, higher price generating additional EUR 92 million, with an increase in operating expenses of EUR 79 million, resulting in a net positive price effect of EUR 13 million or 10 basis points. This is the first time that the increase in pricing has more than offset the growth inflation in the past two years. EBITDA margin, including IFRS 16 was 11%, excluding -- sorry, IFRS 16 was 11% in the first half of '24 versus 11.5% in the same period of '23. As explained previously, the margin reduction is due to the decrease in the contribution of real estate development activity representing EUR 29 million. Looking on Slide 18 at our revenue convert to EBITDA. EBITDA was up to EUR 22 million and EUR 27 million if we exclude the U.K. disposal. This was the result of efficient revenue management with pricing adjustments. Staff cost ratio was down by 140 basis points as it benefited from the steady occupancy recovery. EBITDA was up by EUR 5 million and EUR 10 million, if you exclude the UK disposal. Our active portfolio management led to stable external rents despite a lower ownership rate. Excluding the [ estate ] development impact, our EBITDA margin would have increased by 75 basis points. Looking at our P&L on Slide 19. The group made a net loss of EUR 3 million from continuing operation in the first half of '24 versus a profit of EUR 32 million in the first half of '23. The decrease was mainly due to EUR 17 million increase in amortization arising from the opening of new facilities, a EUR 33 million increase in net financial expense due to the reduced positive impact of hedging and the cost of transitory loans to ensure the group liquidity pending the capital increase completed in July and the disposals. This negative factor were partly offset by a EUR 40 million reduction in tax expense. Finally, client made a net loss group share of EUR 28 million, taken into account the negative impact of EUR 24 million related to the sale of the Les Essentielles, the resident service activity in France, which took place at end of June '24. This EUR 24 million loss includes impaired cost of EUR 10 million and capital losses of EUR 14 million. Turning to our cash flow statement in Slide 21. Net debt decreased by EUR 95 million in the first half of '24 compared with EUR 232 million increase in the same period in '23. This reduction in the net debt is a result of a very sharp fall in investment in the first half of '24, down 33% to EUR 139 million versus EUR 375 million in the first half of '23, an increase of operating free cash flow, EUR 74 million versus EUR 45 million last year. And EUR 236 million of proceeds from disposal carried out on the first six months of the year. On Slide 22, we have mapped out the evolution in the first half conversion rate from EBITDA to operating free cash flow over the past 8 years. You can see how this year figure of 25.6% final return to normal after the particularly low level of last year. It is a positive development in our way to returning the normative full year levels of around 40% conversion rate. Moving to our balance sheet on Slide 24. You have on Slide 24, the bridge of our real estate value through the first semester. The decrease of EUR 336 million compared to end of December '23, is explained by disposal of around EUR 246 million, mainly related to the U.K., CapEx for EUR 40 million plus, and finally, on a like-for-like basis, the negative impact of around EUR 129 million includes positive indexation effect of EUR 15 million, but a 6.3% cap rate increase with an impact of EUR 144 million. As a reminder, our cap rate was an average of 5.9% at end of December '23. On Slide 25, you have the main elements of our balance sheet structure. Net debt stood at EUR 3.7 billion at end of June '24, down around EUR 100 million from end '23. Taking into account the proceeds of the rights issue, the net debt number will be lower by around EUR 300 million at the end of June to EUR 3.5 billion. Compared to last year, this is a EUR 500 million decrease in net debt. Moving to Slide 26. We can begin with the loan-to-value level. Indeed, LTV is 63% against 58% at end of June '23 and 61% end of '23. The group syndicated loan agreement include an LTV covenant at 65% and our objective remains to reach 55% after the refinancing plan. This level of 63% reflects the lower level of debt of the assets sold off that, together with increasing cap rates lead to a transitory high level of LTV. The debt maturities of the second half will offer us many ways to lower the transitory level. Turning to the financial leverage. This ratio now takes into account the EUR 234 million net amount of proceeds of the rights issue and as a result, stand at 3.6% at end of June '24, down 50 basis points. I will now hand back to Sophie to conclude.

Let me now conclude based on Slide #28 on our outlook for 2024. We expect organic growth revenue to remain above 5% and EBITDA expressed in pre-IFRS 16 terms and excluding expected disposals to remain at least stable. Our 2023, 2026 outlook as presented at the Capital Markets Day in May is also reaffirmed. As we move ahead, our group will continue to focus on improving its performance in a balanced way and on maintaining a high level of quality in all its activities in line with our "At Your Side" corporate project. Thank you very much for your attention, and we are now open for Q&A. Operator, can we move to questions?

[Operator Instructions].

We have a first question, Sophie and Philippe on the webcast. Regarding the M&A program, could you tell us what the status of the program is to reach the target of EUR 1 billion?

Yes, I will. Thank you, Sarah. I will take this one. As I recalled, we have concluded three transaction over the first half. Firstly, we have sold our U.K. platform WholeCo so meaning Opco and Propco. Secondly, we have signed an agreement in order to sell our hospital at home business segment in France, and the transaction is expected to be closed over the second half of the year. And thirdly, we have also sold a Propco asset in the Netherlands. So these are the 3 transactions that have been achieved over the first semester. We are now actively working on several scenarios in order to secure the remaining 60% of the program to reach the EUR 1 billion proceeds expected from that disposal program by the end of 2025.

Thank you, Sophie. We have a question that has come in on the new build program. Can you provide more information on the new build program. As I mentioned in the question of 10,500 beds have all been ready built, how many are remaining and in which countries over which time period, what is the average investment? And so a question overall on the pipeline, and the size of the pipeline.

Okay. I will take this one. And of course, Philippe and Stephane can add the missing details here. To be very clear, the 10,500 new beds were in the pipeline before we went to the refinancing plan. So we have significantly cut the new build program in -- according to the deleveraging priority in order to only keep to date 2,700 beds to be delivered over the 3 next years. Those new beds are almost all financed because they are covered by the real estate partnerships we have put in place, mainly with the bulk with the cash [ deposit ] subsidiary, so that we-- [indiscernible] for clinics in France and with Predica and [indiscernible] again for the HLD pipeline. So again, not 10,500 new beds, but 2,700. All of them being already prefinanced by the joint ventures we have put in place with [indiscernible] in one case, and [indiscernible] and Predica in the other case.

Thank you, Sophie. We have a new question that's come in around the cash flow. The cash burn has significantly improved in H1 compared to a year ago, but the operating free cash flow at EUR 74 million wasn't sufficient to cover the CapEx in H1. Is the company still planning to ensure CapEx is self-sufficient and be covered by the cash flow for 2024?

I may take this one. Yes, you are right. Our cash flow has improved, it is back to a normal situation for H1 and we are committed on two targets. The first one is to be back as soon as possible to a 40% conversion rate end of this year and to reduce our investment to EUR 200 million. Both targets are still there and will allow us to be cash positive. So [ auto ] self finance for the year of '24.

Thank you, Philippe. We have a fourth question coming in regarding the agreement between Clariane and the banks regarding to the [ GPT ] hybrid bond with potential redemption next year. Are you allowed to call it? Or is this subject to deleveraging criteria? If so, which criteria is that?

I think it's a bit -- it's still a bit too soon to speak about. As you know, we have not called it in June. So this hybrid is still in place. And we have as an objective to find a solution for this hybrid. But today, it's a bit too soon to share this topic.

Thank you. Under Stephane's control, I think we'll take a first question from the telephone line and then come back to the chat.

I have a question coming through the line of Ethan Garber from Imperial Capital.

It seems that Germany has rebounded strongly. It's something that you'd guided on over the last six months at 19.7% EBITDA margin, what are your prospects for German pricing and recouping that inflationary hit on the nursing costs over the next, say, 12 to 24 months?

So we are currently -- we have actively started negotiation -- pricing negotiation program for '24 and this is actually -- it covered the next 12 months, and we include the expected inflation on all cost dimension, meaning the wage, we expect another wage increase to happen in next gen and the inflation in the cost. So I expect actually the repricing to fully covered and more than covered the inflation on the various cost items first. And second, we see also good development in the volume, in the occupancy in Germany, and this definitely contributes to margin rebound. And as Philippe Garin explained, we expect margin to be back to normal level end of '25 in Germany.

So I think we have another question on the web chat concerning the real estate debt maturing in the second half of the year. Are we expecting all of this to be rolled over? Or will it be used? Or will the cash in hand be used to pay this down?

Yes, even though we are at a low point for this first semester, we have been able to secure around EUR 70 million of real estate. So we are still -- and we are obliged to renew our real estate debt quarter-after-quarter. And we have plenty in file -- our files which are to be renewed. So we have the capacity to renew our debt, and you are fully right, some bridge which we are going probably to be resized as it was committed we have reimbursed our bridge of EUR 100 million or EUR 200 million, which has been reduced the first time with U.K. to EUR 175 million. Now in July, it has been fully on both, and we will put in place new facilities based on real estate in the months to come. So I don't see a big case as we should have too much of real estate debt as we have some opportunity to adjust it. And I don't see, as of today, we have plenty -- of plenty -- we have some file, which are moving the right way, and I would not say either to have not enough real estate debt. I hope it's answering your question.

[Operator Instructions]

In the meantime, we have a similar question but this time concerning the EUR 154 million of other corporate debt maturing in H2 '24, [ are you expecting this ] to be rolled over?

Exactly. And this is a relevant question. Actually, this refers to the factoring facility that is in place. So it is indeed expected not expected. It will be rolled over.

Sophie, there is a question concerning the occupancy rate at the end of H2 '24. Has this been adjusted for new openings? That's the first question. And maybe I'll [ give ] the next question after afterwards, sorry.

So actually, we have done some -- in and out in terms of available capacities because we have been exiting some facilities in Belgium and exhibiting also one facility in Germany. So actually, the ins offsets the out. So the occupancy you see is actually totally consistent in terms of underlying available capacities. I hope this helps, but we are ready -- we can provide further detail if needed. And I see a second question on the chat of -- do we think if we are going to complete a new property partnership by the end of the year? The question here -- answer here is yes, we are working, as Philippe just explained on further partnerships on our Propco -- on various Propco assets and we cannot commit on the fact that this would be done by the end of the year that it is definitely on our prospect to have further vehicles to be delivered.

Sophie. There's a question which is quite wide ranging. Have we seen any deterioration in our discussions related to disposal given the political -- French political concerns that have emerged recently?

As I recalled, the hospital at home transaction, which is the significant transactions we have done on the French scope has been signed beginning of May. So before actually the latest political development in France. So I don't see any headwinds on the transaction program coming from the recent events from France.

So there's a question here about Slide 21, which shows that there is a coupon payment on the hybrids of EUR 73 million. I think this is for you, Philippe, can you explain this amount which is -- can you explain that amount?

Coupon payment of EUR 73 million. I think you wanted to speak about the EUR 26 million of equity impact. As it is explained in this slide, in fact, we have net the equity impact. And during the first semester, we have 2 big equity impact. The first part of the capital increase of EUR 73 million net and some payment of hybrid -- on the hybrid side. And on the real estate side, as you may remember, when we dispose of our U.K. assets, we reimburse the [ Omega ] setup, which has been put in place end of December '23. So we have a minus EUR 99 million and a positive EUR 73 million. So positive EUR 73 million is the plus EUR 90 million of the capital -- reserve capital increase, the first part of the capital increase and the EUR 20 million negative regarding payment of coupon for hybrid.

And Philippe, if I may complete, I think the EUR 73 million, which is also on this slide is actually the reserve capital increase with some impacts of different coupons over the period. I think then that gives a full view.

The next question is again related to the real estate, expecting on the new capacities, nursing home clinics and which region is this development CapEx focused? Is it only in France? Or is that in different areas across the network?

For the time being, most of the 2,700 new capacities will come in two regions. The first one being France with our JV program plus the clinic development in France. And the second region is definitely the Netherlands with a significant pipe of new build to come. For the time being, we have not planned to open additional capacity in Germany in the nursing home segment in Germany. We first want to secure full margin and pricing recovery and fully leverage the existing capacities. We have another small 10% of additional capacities to be fully leveraged plus the result of active revenue management, additional services on existing capacities. So actually, all countries will contribute to growth, some of them with better leverage of existing capacities and active revenue management and some of them with new capacities to be open, and this is mainly in France and in the Netherlands. And we might also see that this is not reflected in the pipe so far, further development in Spain, where we have recently taken over 3 nursing homes in the northern part of Spain through a kind of a management contract. So we have not borne the weight of the investment there but we have extended our network by 3 new facilities that we are operating with actually a very good contribution of this these 3 new facilities. And I see further contribution to be expected in similar transactions or agreements.

We have a question from our analyst, David Cerdan, who asked the question of assuming that we complete the EUR 600 million of disposals. How do we expect to proceed? I assume that this question is aiming on the types of debt that we would reinvest. But obviously, David if it's a different angle than [indiscernible].

Yes, for sure. We are committed to reimburse our debt. So this proceed will go to reimburse debt. And after we have some steps if we are below a level of leverage, we are less committed to [ reimburse our bank ] than if we have above. So the target is to reduce the debt by EUR 1.5 billion. So as a consequence, all these proceeds will be used for those reimbursements.

Thank you, both. At this stage, I think we have management...

And to complete this question, it is not only this commitment of anticipated reimbursement of the existing debt is not only for the additional EUR 600 million to come, but this is mainly also for the already secured transaction. So the first proceed to come in the second half coming from hospital at home disposals, for example.

[Operator Instructions] There are no further questions from our audio participants so I hand the floor back to Sophie Boissard to conclude.

Yes. So ladies and gentlemen, dear investors and analysts, thank you very much for attending to the call. Again, we have -- are well on track and delivering on our road map, and I expect the second half to be very much the first half alike. Thank you very much for your attention, and don't hesitate to reach out if you have further questions or points you want to investigate further with us. Have a Good afternoon. Bye-bye.

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