CompuGroup Medical SE & Co. KGaA (COP) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the full year 2024 conference call and live webcast. I'm Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Claudia Thome. Please go ahead, madam.

Good morning, everyone, and welcome to the CompuGroup Medical Investor and Analyst Conference Call for the Full Year Results 2024. Thanks for joining us today whether you have dialed in on the phone or are following the webcast online. You'll find all the relevant information such as this presentation, the annual report and the press release which we published early this morning, on our website. We will start with the presentation by our CFO, Daniela Hommel, followed by the Q&A session. Before we start, as always, there are some housekeeping remarks. Let me remind you on our safe harbor statement, which is shown at the beginning of the slide presentation and is valid for the entire call. Thank you for your patience. Now let's start. I will hand over to our CFO, Daniela Hommel. Daniela, over to you.

Thank you, Claudia. Good morning, ladies and gentlemen, and a warm welcome to all of you. 2024 marked a year of transition for CGM. We initiated considerable change. With our new CEO, we were fully focused on enhancing customer centricity, operational excellence and innovation for the benefit of our customers. Enhancing our product portfolio is an ongoing focus. The acquisition of Pridok strengthens our excellent market position and creates the opportunity to offer a purely web-based solution to customers in Northern Europe. With the acquisition of AmbulApps, we enhanced the organization, digitization and structured collection of patient data. In France, we acquired our sales and service partner for 25 years, CPS Concept, thus strengthening our sales and distribution capabilities. Looking back at last year, we also focused on IT security. The C5 attestation we received is a testimony to the progress we have made. Once again we have proven our innovative strength with further milestones of launching AI and cloud-based solutions like the AI-driven phone assistant CGM ONE or CGM STELLA supporting our ambulatory and pharmacy customers. We remain fully committed to our purpose. Nobody should suffer or die because at some point medical information was missing. This purpose is more relevant than ever. In several of the countries we are present, medical data is now becoming available through connected products and AI modules in order to prevent patients from suffering or dying. At CGM, this is what drives every one of us to contribute to advancing health care and we aim for adding a new dimension to health care. Leveraging our robust platform strategy and an unrivaled presence across 19 countries, we aim to engage our current customers, attract new ones and ultimately inspire, support and advance the market for digital health solutions. This strong foundation built on over 35 years of experience in the health care industry is further enhanced by the integration of artificial intelligence and data-driven solutions allowing us to make a significant positive impact on the world. Every day the employees of CompuGroup Medical work with passion to develop new innovative solutions for the benefit of our customers. At CGM, we are committed to supporting health care providers, the everyday heroes who play a vital role in patients' lives, including doctors, dentists, pharmacists, laboratory technicians, nursing staff and the entire medical team. We recognize the significant responsibility we carry and are dedicated to delivering optimal solutions that enhance the quality of medical care, alleviate the workload of health care professionals, ensure patient safety, protect medical data and drive advancement in health care through digital innovation, all while addressing rising cost. The digitization and continuous evolution of technology have fundamentally changed how medical information is accessed, managed and shared. We embrace the challenge of navigating these changes and are resolute in our commitment to remain at the forefront of this ongoing transformation. For more than 3 decades, we support our customers in health care with software and IT solutions backed by the founding Gotthardt family. For the next phase of CGM's development, we have found a second anchor investor and strategic partner. In December 2024, CompuGroup Medical entered into an investment agreement with CVC Capital Partners. The investment agreement was subject to the successful closing of a tender offer launched by CVC offering EUR 22 to CGM shareholders. In January, we, the Managing Directors as well the Administrative Board and the Supervisory Board, published a joint reasoned statement recommending shareholders to accept the offer. After the first 3 weeks of the new year 2025, CVC exceeded the minimum acceptance threshold of 17%. After the successful closing of the tender offer, which still depends on several regulatory approvals, a delisting offer is planned most likely during the second quarter. As already announced in the offer document, our Annual General Meeting will be postponed probably to August 1, 2025. As a result of the voluntary tender offer, CGM's shareholder structure has changed considerably. The majority stake held by the Gotthardt family and associated shareholders remains unchanged at over 50% while the free float has fallen below the mark of 25% due to CVC's almost 22% stake. To deliver against our purpose, we are determined to continue investing on a high level going forward. CVC is fully committed to support our strategy of innovation and growth in the envisaged partnership. With CVC's deep health care and software expertise, strong commitment and global network, this potential partnership will provide the support and the resources to catalyze the next phase of innovation, growth and transformation in health care. Now let's take a look at the financial performance of 2024. Two days ago we announced, and we means the Managing Directors, the Administrative Board and the Supervisory Board, that the dividend will be the legal minimum dividend this year amounting to EUR 0.05 per share. The proposal comes against the backdrop of the company's long-term innovation and growth strategy, including investments in infrastructure and resources for greater customer centricity and AI-based processes and products. Based on the consolidated financial statements, it also takes into account the revenue and profitability development in 2024 financial year in accordance with the revised guidance. With this decision, we are focusing on customers and employees. Looking at the organic revenue development in 2024 year-over-year, we were down by 2% thus ending the year within the guidance range as revised in July 2024 after the ad hoc announcement. As we said back in July, this development has been attributable to the one-off revenues which have declined. Recurring revenues grew by 5% and exceeded the guided goal of, as shared, between 65% and 70% by 4 percentage points. Adjusted EBITDA was down year-on-year and ended up with EUR 225 million within the revised guidance range. The margin was 3 percentage points below last year at 19%. Free cash flow exceeded the revised guidance and stood at EUR 66 million. Adjusted EPS stood at EUR 1.27 below the revised guidance range due to higher tax payments. Let's take a look at the quality of revenues over the past couple of years. Recurring revenues have grown with a CAGR of 8% over the past couple of years. As I already mentioned, in 2024 recurring revenues have grown by 5% and they now account for almost 3/4 of total revenues. As we already explained during the last year, the main reason for the revenue decline lies in the development of the one-off revenues, which we have seen a slower progress of -- where we have seen a slower progress of projects in different areas in 2024 while we had very strong onetime revenues in 2023. For the group and for all 3 operating segments, it is an identical picture. Onetime revenues are down year-on-year, but represent the smaller part of the overall business. On the other hand, we see continued growth in recurring revenues in the group and in all 3 operating segments over the prior year, a strong proof point of the resilience of our business model. Now let's go into more financial detail starting with our AIS segment where we recorded a revenue decline of 5%, which is due to the decline in onetime revenues. The reason for the decline in onetime revenues is mainly the high levels in the TI business in 2023 as well as slower module sales across the board. Recurring revenues increased by 3% and now account for 76% of segment revenues. The adjusted EBITDA in the AIS segment was impacted by ongoing investments in product innovation and decreased by 15% with a margin below prior year. Coming to our Hospital segment. Revenues slightly grew by 1% year-on-year. The revenue growth is attributable to growth in recurring revenues. One-off revenues came in lower due to tough comps with large project rollouts in Germany and Poland in 2023. Against this backdrop, the growth in recurring revenues was able to compensate the strong prior year's development. The continued investment into larger projects and G3 technology lead to a slightly weaker EBITDA margin. Finally, let's talk about our Pharmacy segment. In 2024, the PCS segment was also up against tough prior year comps where the segment benefited from onetime revenues especially in the hardware business. The strong development of recurring revenues offset the decline in one-off revenues. Overall, revenues in the segment were on the prior year level. As usual in this segment, the margin stood strong at a level above 30%. In the prior year 2023, the margin was positively influenced, among other things, by research and development grants in Italy and Germany. Now let me give you a short update on the R&D development. The investments in our future-oriented product portfolio and innovative solutions are a key to sustainable success and an accompanying improvement in the work of our customers. In 2024, R&D expenses showed a slight increase while R&D CapEx is below the prior year level. R&D expenses as a percentage of revenue remained high at 22%. Let's move on to the free cash flow. The EUR 66 million free cash flow was below prior year level, but better than anticipated. Due to the decline in one-off revenues, payouts for restructuring and higher-than-expected tax payments already mentioned in the summer, free cash flow was below the prior year. But we see an ongoing improvement in our working capital management, which supports us on our path. Talking about finance. We are recording a leverage above 3x EBITDA of the last 12 months. Net debt has increased from EUR 703 million to EUR 773 million. This includes the share buyback program in early 2024 as well as acquisitions during the last year. At the same time, we remain well financed with more than 80% of our net debt protected against higher interest rates. On the next slide, you find the guidance for the full year 2025. The organic revenue development is expected in a low to mid-single-digit percentage growth range. We expect a continued positive development of recurring revenues with light growth year-on-year. Looking at the adjusted EBITDA, we expect to return to the growth path again after this year of transition supported by at least slight organic revenue growth within each segment. With that, thank you for your attention. I'm now looking forward to your questions and I'm handing over to the operator for the Q&A session.

[Operator Instructions] The first question comes from Knut Woller from Baader Bank.

A couple of questions. When do you expect to return to margin expansion again? You're guiding for an absolute EBITDA growth again, but when should we expect CompuGroup to return to margin expansion again? Then the second question on the cash flow. We have seen a burden by tax, but also by a reversal of provisions. You're not guiding on free cash flow anymore, but is it fair to assume that the free cash flow should improve noticeably in 2025? And then on capitalization, when we look at reported EBITDA, we saw that the quality of EBITDA basically improved out of my perspective. If we would adjust for the decline of capitalization, reported EBITDA would have been broadly flat. So how should we think about capitalization in 2025 and the years beyond?

Many thanks, Knut, for all your questions. I'll start with the first one on the margin expansion, we stated already in November that it is important that we invest and not overly steer the margin to not miss market chances. That's why, for us, it's a balance of where do we invest and what do we want to obtain in the margin and that's why, yes, we aim for increase, but not for an overall margin increase. We don't want to miss investment chances especially now with soon a strong partner on board, and that is the answer that I can give you. It will be a balancing of investments and operational excellence measures that we have in place at the same time. For free cash flow, yes, we didn't guide this explicitly. We also looked at our peers what they guide, but your implicit assumption that free cash flow will rise is correct. We assume this. We need to steer free cash flow in that direction. We have working capital measures in place and that's why, yes, we expect a higher free cash flow. With regard to capitalization -- and thanks for your comment on improvement of the EBITDA, we really appreciate this. With regard to capitalization, you know that we are impacted there by IAS 38, which requires a certain cost to capitalize. And yes, you are also right, there is some management decision beyond this, which we can either choose or not choose. Our expectation is that capitalization will be around flattish because we put always new products that we want to churn out into the market in that phase of development where we can capitalize cost.

Maybe just one quick follow-up. Is there any plan of a restructuring this year, or just asking in different terms, how should we think about the adjustments? Will there be any extraordinary expenses this year or a larger restructuring program or not?

Knut, as of now, I'm not aware of any restructuring programs planned for 2025. However, it's equally important to note that our focus remains on driving operational efficiency. I stated this in my speech and also when I explained the margin question. And we want to enhance our strategic initiatives. With these initiatives, we continuously assess our business landscape and we want to become better and cleaner every day. That's also our strategy now. We do not want to hinder ourselves from growing and not counting on the best people we can find. Therefore, from time to time, yes, there may be layoffs. But as I said, I'm not aware of a restructuring program planned for 2025 as of now.