Integrated Diagnostics Holdings plc (IDHC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the IDH 1H '20 Conference Call. My name is Ruby, and I will be coordinating today's call. [Operator Instructions] I will now hand over to your host, Hatem Alaa, to begin. Hatem, please go ahead.

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to IDH's first half 2020 results conference call. I'm pleased to have on the call today, Hend El Sherbini, the company's CEO; Omar Bedewy, CFO; and Nancy Fahmy, Investor Relations Director. I'll now hand over the call to Dr. Hend for a quick presentation. And then we'll open the floor for Q&A. Dr. Hend, please go ahead.

Thank you, Hatem. Good afternoon, ladies and gentlemen, and thank you for joining our analyst call for the first half of 2020. I'm Dr. Hend El Sherbini, Chief Executive Officer of IDH. With me today are Omar Bedewy, our CFO; and Nancy Fahmy, our Director of Investor Relations. I will begin today's call with an overview of the group's performance and key developments amidst COVID-19, after which, Omar will run through -- will run you through our regional and consolidated financials before opening the floor to your questions. Ladies and gentlemen, I'm very pleased with the resilience showcased by IDH during these unprecedented times. The defensive nature of our business and management's proactive strategies allowed us to absorb and limit the impact of COVID-19. Despite nationwide curfews, lockdowns and extended branch closures across our footprint during April and May, IDH top line declined by a modest 10%. This comes at a time when businesses across the globe are facing unprecedented threats. I must also note that the decline reflects the high base effects from the previous year, during which group revenue was increased by the 100 million Healthy Lives Campaign. Excluding this added momentum, top line contraction for the current period narrowed to only 6%. In Egypt, while all branches remained open, government-enforced curfews starting late March led to reduced hours and limited patient traffic. Nonetheless, the accelerated ramp-up of IDH house calls service offered at no extra charge helped reverse this trend. By June, revenue growth in Egypt has reached 37% year-on-year, with house calls constituting almost 1/3 of our top line versus only 11% in Q1 2020. Egypt's performance was also supported by the rollout of target bundles for COVID-19 indicative tests, including inflammatory and clotting markers. IDH has also been called on by the UAE government to conduct PCR testing for travelers coming from Egypt, and this is thanks to our position of running the sole CAP-accredited facility in the country. Meanwhile, in Jordan, a complete lockdown, so 17 of our branches closed between late March and the end of April. However, as Biolab has been conducting PCR testing for COVID-19 since the start, and owing to the strong demand for our service, Jordan delivered growth in local currency terms of 6%. Similarly, in Nigeria, we continue to deliver strong volume growth, even as the country went into lockdown. Echo-Lab is gaining strong brand awareness and recognition for quality, thanks to their innovation and equipment upgrade. Overall patient numbers increased 28%, driving revenue by 28% growth in local currency and 12% growth in Egyptian pounds. The geography also continues the trend of narrowing EBITDA losses. Finally, in Sudan, where the group continues to operate with major branch closures and reduced hours, local currency revenue declined only 2%, a remarkable achievement considering that as of 30th of June, there were only 9 operational branches in Sudan with 12 remaining closed. I'm also pleased to report that despite the limited impact on our consolidated top line, our gross profitability remained intact at a strong 47%. This comes, thanks to cost discipline with the group maintaining the right balance between securing materials and maintaining efficient working capital cycle. Meanwhile, ramp-up cost to support our household service, along with cautionary provisions due to COVID-19, had accelerated our operating costs. Nonetheless, IDH's EBITDA margin recorded 39%, inching down only slightly from the 42% in the same period last year. The group's strong cash generation ability allowed us to maintain our liquidity position, with over EGP 719 million in cash on our balance sheet. As such, owing to the group's resilience and after considering developments in the global pandemic, our Board approved a cash dividend of $28 million. Ladies and gentlemen, there is no doubt that challenges still lay ahead. We continue to witness some disruptions in our operations in Sudan and across the world. There lies the risk of a second wave and associated containment measures. We have test run multiple sensitivity analysis and stress testing that leave me confident in the group's defense position and our ability to meet financial obligations and operational needs, even with the dividend payout. With the onset of the outbreak, IDH has suspended guidance due to the lack of clarity in the early stages of the pandemic. Now as the situation begins to settle and owing to the group's proven resilience, we are resuming our guidance for full year revenue between EGP 2.1 billion and EGP 2.2 billion, and EBITDA margin of around 40%. On the long term, our market's strong fundamentals and our group's leading position will ensure resumption of our historical growth trajectory once the COVID-19 crisis resolves. With that, I will conclude my remarks for today and pass the call over to Omar.

Thank you, Dr. Hend. Good afternoon, ladies and gentlemen. I'll quickly run through the key financial and operational highlights for the period and then will highlight some of the assumptions in our stress-testing exercise. After that, we'll open the floor to your questions. I think the key takeaway from our results is that IDH proved to be resilient, has successfully managed the impact of COVID-19 and with the steep recovery in June and sustained growth in July and August, my assumption is that the worst is truly behind. Our consolidated revenues in the first half reached EGP 950 million or a 10% year-on-year decline on account of 2 primary reasons: first was lower patient and test volumes between March and May, owing to branch closures and reduced operating hours; and second is the high base effect in 2019 on account of the 100 Million Healthy Lives Campaign. This campaign ran from November 2018 to June 2019. And during the first half of 2019, IDH served 224,000 patients, performed 2.4 million tests and generated revenue of EGP 47 million under the campaign's umbrella. Factoring out the campaign contribution from 2019 figures, consolidated revenues would record only a 6% decline, which, as Dr. Hend mentioned, is truly remarkable given the unprecedented challenges the businesses are facing. Operationally, IDH served 2.1 million patients and performed a total of 11.2 million tests in the first half of 2020. This represents a 28% year-on-year decline, or 15% if we do factor out campaign tests from 2019. We managed to offset the decline in volumes with better pricing at the mix, where average revenue per test was around EGP 85, an increase of around 24% year-on-year or 10% when excluding the campaign's effect. We also limited the impact of COVID-19 disruption through a ramp-up of our household service in Egypt. Offered at no extra charge, this service was instrumental not only in offsetting limited traffic at our branches, but also in capturing the strong demand of our COVID-19 indicative test bundles. Overall, the household service alone contributed an average of 27% of Egypt's top line figures during the second quarter compared to 12% during Q1. I'm pleased to report that following the slump in April and May, where tests in Egypt had declined 49% during -- year-on-year, the house calls service and COVID-19 indicative test bundles helped reverse the trend in June with total tests increasing 17%. Similarly, revenue followed the same trends and recorded a strong 38% growth in June. This upward trend continued during July and August as well. Overall, Egypt contributed 85% to IDH consolidated revenues in the first half 2020 versus 86% during the same period last year. IDH's performance during the period was also supported by the ramp-up of operations at Al-Borg Scan. The radiology venture's 2 branches performed over 17,000 tests and generated revenue of EGP 9 million during the first half, up 47% compared to last year. It is worth mentioning that Al-Borg Scan's third branch is expected to commence its operational activities during the first quarter of 2021. Regional growth was led by Jordan, which contributed more than 12% to IDH consolidated top line, followed by Sudan and Nigeria, which contributed around 1.5% each. In Jordan, revenues increased by 6% in local currencies, supported by COVID-19 testing, which contributed around 18% of Biolab's revenues during the first half of the year. In Nigeria, operations capitalized on the new state-of-the-art radiology and pathology equipment installed during the second half 2019 and delivered a strong 28% during -- year-on-year revenue growth in local currency, and volume grew by 28% as well, indicating that our Nigerian operation is moving in the right direction. We posted an EBITDA of EGP 367 million with a margin of 39%. The margin contraction was due to lower revenue and booking additional cautionary provisions for doubtful debt due to elongated payment cycles during Q2. As Dr. Hend mentioned, we are cautiously optimistic regarding the remainder of the year. We have conducted multiple sensitivity scenarios and stress tests, including the potential impact of a second wave of COVID-19. Specifically, key assumptions included a complete lockdown with a substantial loss of revenue by 50% from September to December. This was compounded with 0 reduction in fixed cost, and we maintain the budgeted CapEx and the dividend payout of $28 million during October. I'm pleased to report that even with these severe assumptions, the group maintained its ability to meet its financial covenants, such as the debt service coverage ratio, and this is -- was supported by IDH's strong financial position and cash balance of over 17 -- EGP 720 million. With that, I will conclude my remarks and open the floor to questions.

[Operator Instructions] Our first question is from Andrew Whitney of Investec.

Just 2, if I may, probably directed to Omar. In the release and in your presentation call, you talked about the month-on-month trajectories in June in Egypt was plus 38% revenue. I think you alluded in your commentary to July and August being strong as well. Are you able to share what those growth rates are? I'm just trying to work out what you need to do for the last sort of 3 or 4 months of the year to get to your guidance that you've given. And then the second question is just on the house calls bit, which seems to be going really well. It's up to 1/3 of revenue in Egypt. Just on the midterm, do you think that the house calls piece is a structural change? Do you see that going away when COVID sort of lifts a bit more -- concerns around COVID lifts a bit more? And if it doesn't, does that represent a little bit of margin pressure in the midterm?

So regarding July and August, we witnessed a double-digit growth compared to last year. This is number one. Regarding how did we reach the EGP 2.2 billion, we were conservative in our assumption. We estimated that revenues from September to December will remain as 2019 figures. That's how we reached the EGP 2.2 billion. Can you just please repeat the [ second ] question and raise your voice a bit because your voice is so...

Sure, sure. Sorry about that. So the second question was just on the house calls. And do you think there is a structural shift in the market? And if it's not, does that -- could that represent a bit of margin pressure in the midterm or you think that the house calls will ultimately reduce in proportion in Egypt once the concerns on COVID lift?

There is no pressure on the margins on the long term or in the midterm regarding house calls. I mean, the house calls, they have the same margins as the walk-in patients, so it doesn't -- there is no difference in the margins regarding house calls.

Our next question is from Deepak Tolani of 7Summits.

Just a clarification question, firstly. On the June revenue growth that you've mentioned in Egypt, that's 37% month-on-month or is that year-on-year? If you can help clarify that. And the second question was on the cash flow statement that you released for this 6 months, there's a line in there saying change in other investment acquisition. It's about EGP 251 million. If I can get some clarity on what that represents.

So regarding your first question, the increase of 37% is year-on-year, okay?

Okay.

What's the second question, please?

Sorry, on the statement of cash flows that you've released, there's a line in here under investing activities, change in other investment acquisition of EGP 252 million. What does that represent?

It's in investing activities?

Just change in other investment acquisition. Was there an acquisition? Or is this -- EGP 252 million for June 2020?

It can be for -- the total net cash flow from investment activity is what we experienced, so how come that's EGP 250 million? Okay, we'll check the cash flow and then we'll get back to you on this at the end of the call.

Okay. And just one final clarification. The dividend that's been announced, that's not represented in this cash flow statement yet, right? It hasn't been paid out, the 400...

No, no, it's not [indiscernible] the dividend. The dividend, the amount reflected in the cash flow will be paid in October.

We have a question from George Birch of Somerset Capital.

Could you please clarify on the average revenue per test -- per patient? You mentioned that, that increased 10% if you strip out the campaign from last year. Can you just tell us what is behind that, whether you have done a price hike or whether there is some mix impact there? And also can you comment on what your competitors have been doing in terms of pricing, too?

So as you know, there was a price increase at the end of -- at the beginning of this year by 10%. The average revenue per patient actually increased by 14%, not 10%, and the revenue per test increased by 24%, but this is due to the low level of 2019 because of the 100 Million Campaign. Regarding our -- and of course, it -- the 24% includes the effect of price and mix, in addition to the translation effects when translating revenues from Jordan and Sudan to Egyptian pound. Regarding our competition, Dr. Hend will address this point.

Yes. So usually, competition, they follow IDH in terms of price increase, so we always see them increasing prices after we raise our price but -- in the beginning of the year. But during this COVID crisis, we've also seen labs increasing their prices after -- again, during the year, during the COVID crisis.

Okay. And just one follow-up question on Nigeria. Could you comment on FX, the ability to repatriate FX or what your strategy is for reinvesting any revenues in Nigeria?

As you know, there was -- the Nigerian model witnessed some sort of devaluation during 2020. We're currently speaking and negotiating with several banks to do some sort of forward contracts to hedge the position of our investments there in Nigeria. We still did not sign this contract. However, as you know, the -- in terms of repatriation of -- or some sort of having money repatriated from Nigeria, it's a bit soon to tell. We're still in the investment phase. And if things do well, as expected, the company will post positive EBITDA during 2021. Then we would do an additional investment. So what we will -- what we're currently doing now is that we will hedge the position of the investment that we already did throughout the past couple of years. And then any additional investments we would do, we will include it in this forward call.

We have a question from Florian Gueritte of LGM.

My question relates to any comments you can have on the PCR testing by private labs in Egypt and how some of your competitors have been able to circumvent that monopoly from the state labs, especially through the Ministry of Higher Education. Any update you can give us in PCR testing in Egypt and how IDH is dealing with the regulation and any expectations there?

Yes. So PCR testing in Egypt is actually done in the Ministry of Health. It's also done in the university hospitals in Egypt. It's also done in some private labs as well. And there are no clear regulations regarding the PCR testing. So the file for the coverage keeps on moving from the Ministry of Health to the Ministry of Higher Education.

And maybe -- I'm referring to Speed Medical Group, who's actually offering PCR testing as a private laboratory in Egypt, is it something that you could get around?

Excuse me. I didn't hear the question. Could you repeat this, please?

Yes. I'm wondering if you could follow a model a bit like one of your competitors, Speed Medical, who is basically providing the swabs and the test and outsourcing the testing itself to the -- to some of the university hospitals, where they eventually benefit and make a margin on all PCR testing which is...

I'm sorry. Can you repeat your question again? Your line is cutting. We cannot hear you.

No, I was just [indiscernible] to hear the question. But the question was whether you could do something like Speed Medical who are taking some tests for PCR in Egypt.

Hatem, were you trying to repeat the question because your line was breaking as well? You -- can you repeat, I'm sorry?

Yes. No, his question was whether you will -- you expect at some point to do PCR testing given that some players like Speed Medical are doing PCR testing already?

Okay. Whether we'd be able to offer PCR testing because Speed is offering, is that the question?

Yes, yes. Like since they are like -- Speed Medical is offering testing, yes.

Actually, Hatem, we're currently offering the PCR testing for travelers traveling from Egypt to UAE. That's what we're offering currently. There is no clear guidance from the Ministry of Health or Higher Education about the PCR testing for private labs until now.

We currently have no further questions, but I will reiterate. [Operator Instructions] We have a question from Michel Said of CI Capital.

And congratulations for the results. I had a couple of questions, one on the revenue side and one on the margin side. On the revenue, we witnessed a pickup in average revenue per test during the quarter, which probably could be related to, as you mentioned in the release, to the COVID-19 prognostics tests. So on your numbers and on your -- what your budget for 2020, do you expect such a hike of -- from EGP 140 revenue per test for the walk-in to EGP 150 to continue over the remaining of the year? Or do you see it in July and August? Or do you expect it to go down to your -- to the range of EGP 140 on 1Q '20?

Michel, sorry, you were asking about the average revenue per test, is that your question, what's the expectation for the remaining part? Because, again, line was breaking in the second half of the question.

Yes, exactly. Whether the hike we saw in 2Q, do you see it sustainable for 2020 or not?

You mean in the walk-in segment.

Yes. Or the revenue of the blended one. It's more than -- the average we saw in 2Q, do you see it sustainable for 2020? Or do you see it reverting back to 1Q '20?

Yes, yes. Correct. You're correct. Going forward, during the second half of the year, if we do continue offering the same quantum of COVID-related tests, it is expected that average revenue per test increases. Yes, correct.

And now that you offer the travel certificate for Dubai travelers, and now people start knowing more that you do the PCR test, do you expect the amount of COVID-related test to increase as you are speaking or not? Or do you see it more related to the situation and number of cases in Egypt?

Yes, yes. Let me tell you that the contract with Pure Health was signed during the last week of July. And yes, it contributed to our top line figures during August by around 5%, 6%, 7%, almost like that. So if it continues like that, we expect an uptick in our top line figure. However, as you know that during August, there was plenty of travelers, but -- and that's it. Yes.

Yes. Okay. So given that -- given such a hike of average selling prices and that -- what that you took -- and took you on number of patients, so you could assume that assuming a flattish revenue for the full year is more on the conservative side. Am I right?

Sorry, Michel. Your line is breaking again. Please, if you can raise your voice and repeat the question. It's very difficult to hear you.

I'm sorry. So given such a rise in average blended price per test and potentially rebounding number of patients during the second half of the year, so assuming a flattish top line for the year in 2020 is more on the conservative side on your budget, right?

Yes, you're correct. It's our top line figure. Our estimate on the top line figure is more or less on the conservative side. And yes, we expect some uptick if things continue like that.

We now have a question from Nikhil Arora of Franklin Templeton.

Dr. Hend, Omar and Nancy, many congratulations on a good set of results. Two questions from my side. Number one is I see that there is quite a drastic improvement on the raw material costs in the first half of '20 versus the first half of '19. So I mean, as a percentage of sales, it has gone down from almost 20% to 16%. So just wanted to check with you. Is this because of the EGP appreciation this year? Or is it something that you feel is sustainable for the rest of the year? And then the other question I have is on your inventory and payables. So I think inventory has increased in the first half. You have mentioned that it's because of higher sourcing to avoid any disruption during COVID, but maybe if you can elaborate on that point. And on the payables, interestingly, I see like a negative EGP 77 million outflow from your operating cash flow on the cash flow statement. However, on the balance sheet, there is not much change in the payables account. So what really was that outflow, if you can touch upon that, please?

So on the raw material side, there are several reasons behind the decrease of raw material percentage of revenues. First, during the first half of 2019, the percentage was high because of the 100 Million Lives Campaign that are characterized by lower margins, so that's why we have an increase of raw material percentage of revenues, this is number one. Number two, during Q1 2020, we had special discounts for -- from our suppliers, which pulled down the raw material percentage of revenues during Q1, and it contributed positively during the first half of the year. The second question was...

The second question is actually twofold, so related to your working capital. So I think within the working capital, there has been quite an increase in inventory, if you can explain why was that.

Yes. In our working capital, we were trying as much as we can to manage our inventory during the first half. And following the pandemic, we tried, in anticipation of any disruption during May and June, to increase our inventory balance to secure our inventory for -- to extend it from -- to more than 90 days and 100 days and 120 days in some tests. This is number one. Number two, we tried as well as much as we can to manage our cash balance in terms of receivable and payable. That's why you can witness an increase in the payable days along with the receivable days. So that's the point of trying to manage our working capital on a monthly basis with agreements with our suppliers to elongate a bit their payment to manage this experience of our receivable as well.

Right. So I mean, that part is clear, but my question was that on payables, when I'm comparing, let's say, the June 30 number to December 31, 2019, the payables have actually decreased, right, from EGP 320 million to almost EGP 300 million. But yet, on the cash flow statement, there is an outflow of EGP 77 million. So I just wouldn't tie up the cash flow statement with the balance sheet here.

Okay. We'll check this out, and I will get back to you separately.

We now have a question from Julie Simmonds of Panmure Gordon.

I was just wondering in terms of sort of moving back to the sort of normal expansion plans you have, what were your plans for opening branches in the second half of this year? And if there are any, whether they would all be in Egypt or whether you'll be looking at some of the other territories as well?

We will resume our rollout plan during the second half of this year with more into -- in Egypt and in the regions in which IDH operates.

So given the sort of the growth you're seeing in Nigeria, is there plan to go back to sort of putting in new sites there? Or are you still at the sort of refurbishment stage of the sites you currently have?

Neither in Nigeria nor in Sudan, as previously communicated with you, that we will not open any new branch in Nigeria until the company posts a positive EBITDA. And Sudan, we'll not open any branch. We're planning to open a new -- one new branch in Jordan before the end of this year.

Our next question is from Zeeshan Bagwan of Abu Dhabi Capital Group.

I had question pertaining to the liquidity of the stock. The liquidity of the stock seems to be very, very dismal. So is there any plan that the management has to improve the liquidity and trading in the stock, in particular?

Yes. We're actually -- yes, it has been an issue since the start, the issue of the liquidity. And we're exploring different options. Dual listing is one of them.

Okay. And any time lines that the management has in mind by when we could see some progress on this front?

We're working on a definitive time line, and we'll share it with you.

We currently have no further questions. [Operator Instructions] We have a question from Brad Virbitsky of Equinox Partners.

I was wondering if you can give an update on the Wayak initiative. I'm not sure if I'm pronouncing that right. But are you still doing that? Or did you put that on hold? And if you're still doing it, how is it going?

Yes, Wayak is still ongoing. We're still investing in the company, and it's taking slow steps as we speak.

We have no further questions.

Thank you, Dr. Hend, Omar and Nancy, for your time. And thank you, everyone, for dialing in.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

Thank you, everyone, for dialing in.