emeis Société anonyme (EMEIS) Earnings Call Transcript & Summary

Hello, everyone, and thank you for attending this presentation of our half year results end of June 2024. Here is Jean-Marc Boursier, our CFO. And as you will see, these results show a transition that is well underway. Over the past 18 months, we have implemented ambitious transformation measures for the benefit of our residents and employees in order to restore a quality of care that matches our ambitions, the necessary basis to initiate a sustainable turnaround in our operating performance. To achieve this, we adopted a new governance structure as part of the restructuring of our balance sheet and a new identity, really helping to improve the perception of our group by residents and their families. The fundamentals of our businesses are already improving, which shows that we have taken the right direction. Occupancy rates are already recovering across all markets and all emeis businesses. Already, our ability to capture a favorable price effect seems to have been strengthened in all markets and all the group's businesses with price rises outstripping inflation and exceeding those observed among our competitors. We still have a long way to go to maintain and accelerate this momentum, but this is the right direction. Here are a few key figures. Revenue rose by 9.2% and even by 8.9% on an organic basis, outperforming the sector. This is a combined effect of higher occupancy ratios across the board, albeit more modestly in France than elsewhere, coupled with higher rates in all our markets. If EBITDAR is up only slightly, this is the result of the time lag between the immediate effect of higher expenses, notably in personnel costs, and the induced effect of this effort on sales, which increased only gradually. The lack of change in the EBITDAR margin is therefore mechanically transitory phenomenon preceding a more lasting recovery. Our debt is nearly half what it was during 2023 H1, standing at EUR 4.425 billion, adequately covered by our real estate assets, valued around EUR 6.3 billion, latest appraisals at end December. Now the value of our real estate net of the group's total debt is thus close to value of per share of nearly EUR 12. As I said a moment ago, this transformation involves our employees, our residents and our operational efficiency is bearing fruit. We monitor a series of business indicators, indicating the effect of those measures. This is a prerequisite to a sustainable recovery in our businesses. Work accidents, turnover, so all of these are a prerequisite to sustainable recovery in our businesses and occupancy rates and the gradual recovery of EBITDAR margins towards standard levels. Now in concrete terms, we have put in place a number of initiatives across the group and in France, aimed both at optimizing our revenue growth potential and at better controlling our operating expenses. So here are the main points. One, first, the identification of underperforming facilities and the implementation of specific plans adapted to each of them. 40 sites in France are already covered by a specific action plan. Number two, optimization of time to result for new facilities with the aim of achieving standard profitability in less than 1.5 years, if possible, instead of 2 or 3 years. For example, we achieved very encouraging results with the recent opening of the facility in Spain, 100% occupancy in 14 months, but as well in the Netherlands with a dedicated team. Number three, the segmentation principle, which is important in Germany and in France, we can support in a more adapted way the needs and wishes of our residents and their families. And this in turn enables us to be more competitive in certain areas and to broaden the range of services we offer. In France, all clinics are switched to this mode, more segmentation. And just under one nursing home out of two had -- has been applied -- has been implemented this program. Also, we are finalizing the groups of catalog following a detailed analysis of the segmentations in place of each business unit. I know Jean-Marc will come back to this, but we are simplifying processes and sharing experience to align facilities with best practices. And as I said earlier, growth momentum is favorable and partly driven by the turnaround in our occupancy ratio, which has already risen by 4 points in 2 years. This positive trend seems to have been confirmed in Q3 with an occupancy ratio now above 86%, benefiting not only from the measures mentioned above, but also from the work done on the new emeis brand. In nursing homes in France, where we've been particularly hard hit since 2020, and you've been keeping a [ video ] in France, momentum accelerated in Q3. The occupancy rate was more than 100 basis points higher than last year and nearly 250 basis points higher than at the start of the year. We can see a speed up, which is the result of our action plans and the changes we initiated. Now we have a disposal program, another significant step. And emeis continue to achieve a high volume of real estate disposals in a tight investment market where investors are still taking a wait-and-see attitude. The fall in interest rates following monetary policy easing could, however, contribute to gradual recovery in investment volumes. Since mid '22, the group's disposal volumes accounts for nearly 30% of the health care real estate investment market in Continental Europe. You can see that it was to the tune of EUR 451 million. This performance underlines not only the group's expertise in this field but also the quality of our portfolio, especially as the disposals carried out in the first half of the year were made at an average capitalization rate of 5.65%. These disposals, together with capital increases carried out over the past 12 months, contributed to a significant reduction in emeis' debt profile. Net debt was cut by almost 50% at the end of June 2024, down to EUR 4.4 billion. Jean-Marc will come back to this and say what impact it has on our financial expenses. To sum up, operational and financial actions taken over 18 months, 2 years are beginning to bear fruit. Our revenue growth outperforms the industry, both on a current and organic basis. Our occupancy ratios are up everywhere. And our ability to leverage pricing power is also confirmed in all markets, 5.5% in first half. That's very positive, and it means we can fully leverage the drop in inflation. Our debt has been significantly reduced, allowing us to look ahead with confidence. Our financial expenses are down by 24%. This is a crucial milestone we now reached and we can now look forward to the longer term to support the sustainable turnaround that we feel is underway. Before handing over to our CEO, I'd like to conclude by outlining our road map for the coming half years. So that the first signs of recovery we're seeing today have a positive impact in the coming weeks throughout the group. First, we are now concentrating our efforts on extending and accentuating the momentum that we see. Confidence is building up, and we want to get closer to normative levels, to standard levels. We're not there yet. In addition to the occupancy ratio recovery effect, we'll continue to capture the benefits of our pricing power which will contribute to rebuild margins as the inflationary episode is coming to an end. The continued segmentation of our product range should help, but we should also optimize the allocations of our teams in line with our quality ambitions to control the group's overall operating costs, personnel expenses and also other items in our income report. Our balance sheet has been historically strengthened over the past 12 months. Total ambition is to continue to reduce our debt through the disposal of real estate and our operating -- of operating assets to strengthen our balance sheet structure in both short and long term. Now this is what I had to say. I'll now hand over to Jean-Marc to present the group's half year results.

Thank you, Laurent. Good morning, everyone, and thank you for joining us this morning. I am delighted to be here with you today, just a few weeks after joining the group that I've been monitoring for a long time in an industry that I'm particularly fond of. I'm also delighted to work alongside Laurent Guillot, and I thank him for trusting me. The publication of our results, end of June 2024, highlights, in my opinion, four main points that we are going to detail in this presentation. First, solid sales growth of around plus 9% on both a current and organic basis. Second, stable EBITDAR, which grew by plus 0.8% as a result of the stimulus measures implemented last year. Thirdly, a significant reduction in our financial expenses, reflecting the recapitalization carried out over the past 12 months. And finally, our free cash flow, though still negative, has improved by EUR 111 million. Let's start with our revenue. It was a significant organic growth, 8.9%, driven by a combination of three positive factors, first, a price effect of 5.5%. The occupancy ratio effect, as Laurent mentioned, it's been improving and it contributes to the growth plus 1.8%. And the ramp-up of recently opened facilities of 1.6%. You might also notice that this positive growth trend can be observed in the group's two main business lines, nursery (sic) [ nursing ] homes, plus 11.6%, and clinics, plus 5.1%. Other effects, exchange rates and scope of consolidation are totally negligible. Without going into the details of each region, it is important to note that all of our geographies are on the rise. All businesses in all geographies contributed to the group's organic growth. Excluding France, which posted an organic growth at almost 5%, more on this later, the other areas posted remarkable double-digit growth rates. First factor explaining this growth is the ongoing recovery in occupancy rates, which on average rose by 2.6 points between H1 2023 and H1 2024. They now average 85.3%. Once again, you notice it on this slide, this improvement can be seen across all business lines and all geographies. It's worth noting that the average occupancy rate for nursery homes has already risen by 30 -- by 300 bps in just 1 year and stands at 84.5%, a satisfactory performance, although still below the standard level we are aiming for. In Central and Southern Europe, levels reached are close to 90% and are now approaching pre-COVID levels. This rise in occupancy rates is all the more remarkable in [ 2024 ] with an average price increase of 5.5% as we saw. The more modest increase of EBITDAR, plus 0.8% year-on-year, is essentially due to efforts made on staff costs. You will note that payroll accounts for almost 80% of our operating expenses. Recruiting more staff, particularly in France to improve the quality of our services was a prerequisite for improving the occupancy rate of our facilities. This effect has an immediate and full impact on the cost, whereas the benefit in terms of additional sales is much more gradual. It is this time lag that Laurent mentioned between necessary recruitment and the resulting gradual profit improvement that explains the mechanical and transitory drop in our EBITDAR margin. By way of information, half the increase in payroll is due to growth in the group's headcount and the other half to salary increases. The second notable factor here is a 6% rise in other expenses. These are the direct purchases of our facilities, for example, medical care, food, IT and telecoms, energy, or expenses linked to the maintenance of our residences and our clinics. As a percentage of sales, the weight of this item fell slightly. This can be explained by two opposing factors. Firstly, the downturn in energy prices, which had a positive impact; and second, the continuing inflationary trend in other items. We are reviewing our purchasing and procurement processes, particularly in France, and I expect to see some benefits. Difficult to quantify it at this stage as early as the first half of 2025. EBITDAR margin trends varies between different geographies. As mentioned a few minutes ago, France was particularly impacted in the first half of the year by the time lag between the rising operating expenses and their impact on sales. Therefore, France is underperforming to date but this is temporary. Northern Europe, the margin rate is stable, if adjusted for a few nonrecurring provision reversals that were booked in 2023. In the two other major markets, Central Europe and Southern Europe and Latam, there is not worthy increase and suggesting a favorable momentum for the coming half year. If we break down by country, our EBITDAR between H1 '23 and H1 2024, we see the effort made in France is offset by improved margins in all other countries. This chart illustrates both the fact that our actions are already bearing fruit abroad, but also our efforts made to turn France around are now weighing on the group's EBITDAR. This justifies our focus over the coming months on maintaining a favorable occupancy rate trajectory while maintaining an appropriate pricing policy and strict discipline on all operating expenses. Let's move on to the income statement breakdown between EBITDAR and net income. There are two particularly noteworthy changes between 2023 and 2024. First, a significant reduction in financial expenses, minus 24%, as a direct consequence of the restructuring plan implemented in November 2023. Also, the sharp drop in nonrecurring items back to what I think are normal or normalized level. All in all, our group net income improved by EUR 114 million, but remains very negative at minus EUR 257 million. Let's look at our financial results. As I said moments ago, the drop in financial expenses is particularly strong. And if we only look at the first two lines, so bank interest and leasing interest, the fall would even rise to 30 -- minus 38% year-on-year. The reduction in financial expenses is primarily the result of a significant volume effect linked to the historic fall in our debt levels, as Laurent reminded us in his introduction, but also in a positive effect linked to the rise in the average cost of debt over that period. Let's note that the average cost of debt stood at 5.44% versus 4.71% in the first half 2023. This increase stems from the fact that the debt that was converted into capital carried lower-than-average credit margin on average. Let's move on to the cash flow statement. Although still negative, the group's free cash flow, you see it in this presentation, improved by EUR 111 million versus H1 2023. Two main factors explain this improvement. One, lower capital expenditures as a result of the streamlining of the development of project pipeline, which was started, and that I intend to continue. And secondly, the increase in real estate disposals during the first half, which amounted this year to EUR 143 million, net of costs. Laurent explained that we did a tremendous job in a particularly challenging real estate market. So the average capitalization rate stood at 5.65%. And I wanted to mention that the divestments or disposals generated EUR 13 million. So we sold our facilities at a fair price. Conversely, nonrecurring cash outs increased. These are restructuring-related expenses booked in 2023 but dispersed only in 2024. If you look at the flow chart, you might notice an increase in financial expenses, which have been normalized now. But it is only a reminder that most of the financial expenses have been frozen -- well, frozen for 2023 due to the group's restructuring. In the coming months, we intend to focus our efforts on optimizing working capital requirements and the reduction of development investments. I am to reduce the capital intensity of our businesses and to quickly improve their free cash flow generation. With regard to CapEx, on the next slide, we've been working for several months on optimizing our project pipeline being particularly demanding in terms of expected performance of the potential investments that have been reviewed. By way of illustration, by the end of 2023, the group had over 4,600 potential beds under study. Following a review of the project, this pipeline was reduced to 3,300 beds and the process is still ongoing. This increased selectivity, as you can see on this slide, led us to cancel and review some projects, review some, revise others, and the volume of development CapEx was reduced by 53% year-on-year. On the other hand, maintenance investments were kept. In my opinion, they are completely necessary to maintain the quality of care and accommodation of our residents and patients. They are even essential to the continued improvement of our performance. Same approach when it comes to IT issues, they're at the heart of business process improvement, so they're key factors in future optimization. On the divestment front, Laurent has already mentioned, then the group once again achieved solid results in the first half of the year. Since mid-2022, a total of EUR 451 million worth of disposal have been carried out; EUR 557 million if we include transactions where our commitment has been made and which should be finalized or closed shortly. As Laurent mentioned earlier, this amount represents almost 30% of the health care real estate market in Continental Europe. Our ambition in terms of sales and divestment is very clear, to extend the momentum of debt reduction we are currently serving. Our ambition is to increase the amount of disposal between June 2022 and December 2025 to EUR 1.5 billion versus EUR 1.25 billion previously indicated. This amount, we're very clear, will be achieved through the disposal of real estate assets but also through the sales of operating facilities. Let's now turn to changes in our net debt, which is a result of all the comments I've just made. It dropped by EUR 217 million from the 1st of January to the 30th of June 2024. So in this bridge, a few comments. If I look at the three first blocks of the bridge, so [ EBITDA ], maintenance CapEx and financial expenses, so they account for continuity free cash flow. And we see that the assumptions that we need to keep in mind in terms of organic growth and EBITDAR margin recovery to the well balanced on this indicator can be achieved in the short term. And even that can be below the normative level that we can expect in the years to come. Development CapEx are only for -- related to facilities that generate additional growth and have an accretive impact on our aggregate or relates to programs that have already been presold with the margin. Nonrecurring items to date continue to be impacted by costs related to restructuring operations carried out over the past 12 months, but are going to be reduced over time. And lastly, on this bridge, you see the impact of our latest capital increase for EUR 330 million (sic) [ EUR 390 million ] last February. Overall, the group's net debt, excluding IFRS 16, debt stood at EUR 4.425 million (sic) [ EUR 4,425 million ]. And you have EUR 5.1 billion for gross debt with an average cost of 5.44% for the half year and EUR 653 million in cash. The group's liquidity position is slightly above EUR 1 billion, since this level of cash includes an additional credit line at EUR 400 million that we decided to draw down this week. Let me wrap up with the maturity schedule of our gross debt post restructuring. So I can share with you another aspect of our financial road map. Our ambition is now to strengthen our balance sheet, focusing on restructuring operations carried out over the past 12 months. We are aiming for a further reduction in our debt level by disposing of more real estate and operating assets. We will strive to further improve our access to liquidity as well and we'll gradually extend the maturity of our debt. Before concluding, I can't resist sharing with you an observation I made when reading our balance sheet. The balance sheet is available in the addendum of the presentation. With EUR 1.9 billion equity at the end of June 2024, almost 100% of equity, the single net book value of the emeis Group is almost EUR 12 per share. Laurent talked about the value of our real estate assets. I know that CFO shouldn't comment on the share price he is working for. So I'll let you analyze the stock market discount of around 50% on our net book value alone. Thank you for your attention. And Laurent will now continue with the conclusion.

Thank you, Jean-Marc. That was very clear. As you can see, this publication illustrates the progress of our transformation program, which already led to significant advances in the quality of care and services offered by the group. And you see our teams are very foundation for an operational recovery that is already taking shape. As you've seen in all our businesses and all our markets, occupancy ratios are up, including in France, although the trend there is more gradual. And since the change in our brand and the implementation of our action plan, these actions are bearing fruit. For instance, we have an occupancy ratio and -- which is up, and indicators are up. So over the last few months, this has been going up, and we want to prolong this in the coming years. We still have a lot of work to achieve. And gradually, this is going to bear fruit. As a result, we're in a position to confirm our guidance 2024 with an EBITDAR growth of 0% to 5% between EUR 700 million and EUR 730 million. And also in 2025, we're going to divest with a cumulative total of EUR 1.5 billion since 2022. Finally, we also confirm that we are doing our utmost to ensure that the group becomes a mission-driven company by 2025. With Jean-Marc, we'll be happy to answer any questions you may have.

Let me take the first question in English. [Audio Gap] [ EUR 5 billion ] [indiscernible] but only EUR 4.4 billion debt reduction. [Foreign Language] Jean-Marc on that. Now clearly, Jean-Marc said that much, our cash flow during the first half was still negative. There's an improvement vis-à-vis last year. It is less negative than last year, but it is still negative. So this is because we gradually reduced our investment debt. So that's what explains this difference between those two figures.

Did not raise estimate EBITDAR for end of '24. We've done a best estimate at the end of July for EBITDAR target for the end of '24 and it remains the target that we have. We were taking into account in this estimate the acceleration, we were already positive about the outlook of France. And we confirm today this estimated EBITDAR. Next. About cash flow issues in the midterm. And can you rule out a new capital increase? Yes, I can rule out a new capital increase. You've seen that there will be a combination of operational improvement, and this is key operational improvement in all the regions across Europe and in France, in particular, and the combination of disposals -- disposal of our real estate assets and disposals also of operational assets. And this combination will allow us to continue and to fuel both the growth and the financial situation of the company. Could you touch upon the stock price of the company? What are explanations for the rapid decline in stock price during the last months? Well, it's not my habit to comment on the stock price. What we can say is obviously after the rights issue, there was limited liquidity on the market and significant shareholders that were historically bondholders of the company. I'm sure this had an impact, but how much, how and what is the perception, I cannot comment that.

Questions. Do you want to take the first? What is the percentage of the debt and the real estate debt that you showed earlier?

Thank you for these questions. I showed you a table of banking debt, EUR 400 million, '25. It is fungible. It is not specific to any given activity. Furthermore, there are financial lease reprocessing. You will find those details in Page 40, so you should add another treatment of EUR 3.871 billion.

Two other financial questions. What is the impact of the SI rate change in France?

Unfortunately, we're not there yet in France. As you probably know, there will no -- there'll be no cash impact on possible changes in corporate taxes. If your sales are above EUR 2 billion, that could well happen in France. Furthermore, there are no deferred taxes on our deficit stock, and we don't anticipate any action along these lines. '25 CapEx. At this point, we don't have any guidance. We focus on pulling off our trajectory before the end of the year. We will keep on looking at development CapEx with a very BDI and we'll be very demanding. We'll focus on the best return, the best payback developments. So we will keep on being in a phase of reduction as a whole.

Another question. How do you anticipate the development of the prices in 2025? What is your assumption for the plus 5% on H1 2024? Well, we'll give you a more detailed presentation with more information about that at the end of the year. But to date, we are focusing really on the achievement of our objectives and the execution of our guidance for 2024 and our divestment operations, which are our two main objectives. But clearly, we see that inflation is decreasing. We will stick to our dynamic pricing policy, and we will use the pricing power as we've shown today. It should be under 5% but we will see to what extent we can increase our prices at the beginning of the year. SMR, what is the total part of clinic in France? Well, in France, we have two types of clinics. We have psychiatric clinics and care clinics, the SMR rehab, how they're called in English. We have 123 clinics in France, so 55 psychiatric ones. And the rest, so let me do the math, 68. So 55 out of 123. So 55 on one hand, and 68 SMR. And the revenue for clinics, it's about half of the revenue in France. And in terms of order of magnitude, SMR, 55% and -- well, 40 -- 50% or 55%, 40% for our clinics. A few comments about procurement in France. If you want to comment that. If you want to say what you've been doing?