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

This is [indiscernible] from CI Capital and we are pleased to be hosting IDH's Third Quarter 2022 Results Conference Call. With us from the company, we have Dr. Hend El Sherbini, the company's CEO; Omar Bedewy, the CFO; as well as Nancy Fahmy, IR Director. I'll now hand over the call to Dr. Hend, who will begin the company's presentation, and that's going to be followed by a Q&A session. Thank you, Dr. Hend. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining our third quarter 2022 analyst call. I'm Dr. Hend El Sherbini, Chief Executive Officer of IDH. And with me today are Omar Bedewy, our CFO; and Nancy Fahmy, our Director of Investor Relations. During our presentation today, I will start with a quick overview of our performance for the 9 months period and discuss some of the key strategic developments since we last spoke in September. Before handing the call over to Omar to discuss our performance in more detail, I will touch on outlook and targets for the remainder of 2022. As always, we'll end the call with your questions. Ladies and gentlemen, as we near the end of 2022, I'm delighted to report that our business is strong and continues to display robust potential for future growth. In fact, midway through the final quarter of the year, we remain well on track to deliver double-digit conventional revenue growth, a remarkable achievement in light of the difficult macroeconomic environment faced across our markets. Here, it's worth highlighting that throughout 2022, we have had to confront significant currency devaluations in 3 of our 4 markets with subsequent spikes in inflation rates eating away at patients purchasing power. Despite this, we have continued to record solid growth in our conventional business backed by sustained rise in the demand for our services. More specifically, during the 9 months period, we witnessed 14% year-on-year growth in conventional revenues on the back of a 7% price in the number of conventional tests performed. As you can see on the chart, on Slide 2. This is our conventional revenues and test volumes currently stand at an impressive 33% and 18% above levels recorded in the same 9 months of 2019 prior to the start of the pandemic. Patient volumes have also grown steadily as we continue to attract patients, thanks to our increasingly compelling service offering, our competitive prices and our targeted loyalty programs. In parallel, we have also witnessed a significant price in our test per patient metric, reflecting a general normalization of patient behaviors and the success of our newly rolled out loyalty programs. As you can see on the following slide, our performance was even more impressive on a quarterly basis, with the highlight being the remarkable 12% growth in conventional revenues versus the previous 3 months, which also represent a solid [ 33% ] growth ahead of the third quarter of 2019. Turning quickly to our performance by geography. As you can see, both Egypt and Jordan continued to record strong conventional revenue growth on both year-to-date and quarterly basis. Across our 2 largest markets, we continue to benefit from an increased patient reach, expanded service offering and a general normalization of patients' behavior following a COVID-19 related slowdown. As expected, both markets continued to witness a rapid decline in COVID-19 related revenues as demand and pricing continued to fall. Finally, across both countries, revenues were supported by the Household segment, which is consistently reporting a contribution to our consolidated top line well above pre-pandemic averages. Meanwhile, in Nigeria, despite the unprecedented surge in diesel prices, Echo-Lab maintained its strong trajectory in particular when controlling for the branch closures that weighed on the ventures results in the first quarter of the year. Last year in Sudan, we are very pleased to report positive top line growth for the second quarter in a row. Further down the income statement, we witnessed a general normalization of margins as COVID-19 related business continues to decline in line with our expectations. At the same time, we also recorded a rise in our raw material to net sales ratio reflecting a rise in raw material prices following the recent Egyptian pound devaluation. With regards to raw materials, I'm happy to report that we continue to face no problems in sourcing and acquiring raw materials and our long-lasting relationship with test kit supplier continue to ensure we secure competitive prices for new stock. Finally, over the course of the year, we have incurred additional expenses as we invest in our business. Since the start of the year, we have launched 44 new branches across both our pathology and radiology segments. We also invested to enhance the look and feel of our branches and improve the service quality we deliver and the safety standards we uphold. In parallel, we launched several loyalty programs tailored to our different patient segments and continue to invest in the ramp-up of our Egyptian radiology venture Al-Borg Scan. On this front, over the last 12 months, we have more than doubled the Al-Borg Scan's branch count to bring them to 6 full-fledged radiology centers, covering all of Cairo and successfully obtaining ACR accreditation for both the ventures nuclear medicine and ultrasound units. While these recent investments and current operating environment have weighed on our margins in the short-term, we are confident that they will play a key role in generating further sustainable growth over the coming years. On the one hand, the expanded reach and service offering, and particularly, the increasingly popular radiology segment, will ensure we continue to attract new patients to the group and remain the provider of choice across our footprint. On the other hand, our experience is successfully navigating situations -- similar situations will enable us to drive margins back up to our historical averages once the current challenges subside and create long-term value. Meanwhile, as you can see on Slide 6, we have also been actively working to expand out our footprint into new geographies. Just a few weeks ago, we announced the signing of a joint venture agreement with Izhoor Holding to launch a new full-fledged pathology diagnostic service provider in Saudi Arabia. This deal is directly in line with our long-term vision expansion strategy, which sees us target markets where our operational model and proven expertise are well suited to deliver high-quality care to as many patients as possible. The new venture will be operated by the Biolab team and will benefit from the complementary strengths and experiences brought by IDH and our partners. As showcased on Slide 6, the Saudi Arabian health care market is 1 of the region's most attractive market with solid growth potential stemming from both its solid fundamentals and supportive regulatory environment. This makes it an ideal market to add to our portfolio as we look to further cement our place as a regional industry leader. Before moving on, it's important to mention that the new venture will be fully consolidated in IDH accounts and that operations are expected to begin in the first half of 2023. The recent devaluation of the Egyptian pound followed by the Central Bank decision to move towards a durably flexible exchange rate has seen the overall value lost against the dollar since March of this year reached 55%. While this will undoubtedly weigh on businesses and consumers in the short-term, we are confident that the strong fundamentals of our markets remain unchanged. Coupled with our flexible business model and proven growth and value creation strategy, we continue to be well placed to deliver on our targets and preserve our margins. As you can see on the slide, there are several exciting developments to look forward to in the coming months, which will continue to guarantee further sustainable growth and robust margins of -- for the group. As such, despite the current macroeconomic challenges, we continue to target a comfortable 15% full year conventional revenue growth for this year, largely in line with our full year guidance prior to recent macroeconomic developments, coupled with an EBITDA margin of around 35%. I will now leave you in Omar's capable hands to go over our 9 months performance in more detail.

Thank you, Dr. Hend. Good afternoon, ladies and gentlemen. During today's presentation, I'll highlight on the performance of the third quarter of 2022, along with the consolidated financial results for the first 9 months of the year. In Q3, Q3 2022 conventional performance delivered a solid 17% year-on-year growth supported by a robust 9% year-on-year growth in test volume and 10% growth compared to the pre-pandemic level in 2019. And on a sequential basis, our conventional offering came in 12% ahead of the previous quarter in terms of revenues and 11% in terms of volume. Overall, IDH conducted 8.4 million tests, 98% of which are competitive. The year-on-year and Q-on-Q increase in conventional sales can be detected in Egypt, Jordan and Nigeria. And Sudan, of course, as well, where Egypt conventional sales grew by 16% and 12% year on Q-on-Q respectively. While in Jordan, conventional revenues grew by 25% and [ 15% ] year-on-year and Q-on-Q during the same period. In Nigeria, the top line figure continued its poor trajectory, increasing by 23% year-on-year and 15% Q-on-Q. As for Sudan, further depreciation of the total currency witnessed more than 48% increase year-on-year. Moving on to the aggregate contribution margin, which is, of course, an important topic given the devaluation of the Egyptian pound. And as you can see from the graph, the aggregate margin in the third quarter is relatively stable and largely in line with the second quarter. The important thing I need to highlight in this graph is that the slight decrease in Q3 contribution margin is related to the significant reduction in the PCR and other COVID related test prices, while our conventional contribution margin is more or less stable at the 83% level. And since we are addressing the contribution margin and the raw material and following the recent deval, I'm comfortable to say that the last quarter of the year will not witness a significant jump in the raw material cost, as we have adopted a prudent inventory management strategy to partially hedge against the local currency fluctuation. That being said, the last quarter, the conventional raw material as a percentage of revenues will inch up 1% compared to previous quarters. Now to provide better insights on the margin. I'll compare Q3 results with the pre-COVID year of 2019. During Q3, the group's EBITDA margin reached 31% compared to 42% in Q3 '19. There are a few drivers behind the EBITDA contract. Some of which will phase out and others are related to our continued investment in the business. Let's start first -- let's start with the first bucket, which is related to around 3% contraction in margin, which came on the back of the continuous reduction of COVID test prices, along with an additional 1% driven by the aggressive expansion and the ramp-up of our radiology venture. The second bucket centers around elevating our customers' experience, improving the quality of our services and introducing the new loyalty program, which will reflect positively on the patient's retention and the growth of our business as economic conditions improve. These investments in the form of upgrading our facility management model and substantially enhancing the full center quality together have reduced our margins by approximately 3% compared to Q3 '19. And it's also worth mentioning that the significant increase in audit fees being U.S.-denominated have reduced our margin by a further 2%. If we move to the 9-month bottom line results. The slide illustrates a bridge from EBITDA all the way to the consolidated net profit, where the bottom line reached EGP 403 million with a margin of 15%. So the contraction in our net profit is attributable to EGP 141 million losses resulting from transactions completed by the company to secure the U.S. dollar needed to fulfill its 2021 dividend obligation. Meanwhile, we have succeeded to generate an interest income of EGP 83 million, which is more or less -- which is more or less around 20% compared to last year figures. And we have recorded a ForEx gain of EGP 55 million during the first 9 months of the year. And this again alleviated the loss generated from sourcing U.S. dollar to fulfill the committed dividends to our shareholders. Moving to Al-Borg Scan, we are currently operating 6 branches, as Dr. Hend mentioned, covering Cairo from East to West, 2 of which were opened during the second half last year. One was opened in Q1 this year and another one during Q3. And as you can see from the graph, the monthly ramp-up is quite solid as the brand equity gets more recognition and Al-Borg Scan top line increased by almost 88% on a year-on-year basis with more than 100,000 tests conducted during the first 9 months of the year, representing approximately 95% increase compared to the same period last year. By the end of this year, we expect Al-Borg Scan contribution through the consolidated top line to reach around 2.5% from its current level of 2%. And as at the 30th of September, IDH consolidated cash balance stood at around EGP 700 million following the dividend distribution with a net debt balance reaching EGP 340 million after considering the medium-term loan from AOB amounting to EGP 86 million, along with other liabilities related to the equipment lease and IFRS 16. During the first 9 months of this year, IDH CapEx reached EGP 345 million, representing about 12.6% of net sales. But it's important to note that if we exclude the translation effect resulted from the devaluation of the EGP and Al-Borg Scan capital expenditure, CapEx as a percentage of net sales would reach 4%. We have experienced and we have witnessed this devaluation in 2016 and 2017 when the Egyptian pound moved all the way from 8.5 to more than EGP 18 for the dollar. And our EBITDA margin was temporarily affected and eventually reverted back as we have managed to control costs, especially on the raw material side. While opting not to pass on the full inflation impact to our end patients. As for next year, it is early to give specific guidance for now. However, our strategy would be as follows. We will increase our prices by a higher rate compared to previous years. And given the solid relationship with our suppliers, the increase in raw material costs will not reflect the full impact of the currency devaluation, while we will manage to keep as low as possible in our cost base levels and to manage our remaining cost base efficiency. Thank you. And I now conclude my remarks and the floor is open to questions.

Thank you, Dr. Hend, Omar and Nancy. [Operator Instructions] We've already got a question in the QA box from Matthew. Matthew asks with the Saudi deal being equity for $4.7 million, but the total cost being $19.7 million, where is the balance coming from? Is this debt partner investing more timing difference? Can you please shed some light on this?

So just to shed light on the Saudi deal, it's $19.7 million. Yes, it's 48% equity, 52% debt. So the amount that you are quoting from the release is related to the equity portion related to IDH. This $4.7 million is the amount of equity that will be channeled from IDH Holding and Biolab [ together ]. And the remaining is that so as 48% equity and 52% debt. Hope this answers your question, Matthew.

Thank you, Nancy. I see Khaldun has hand up.

Thank you for this presentation. I feel a bit like confused about the last maybe 3 years, but maybe the last slide you just showed about EBITDA evolution from pre-COVID till today. You compare EBITDA of 2022 with '19, and again, the explanation of that drop, you included as part of the drivers COVID. But in 2019 there was not COVID at all. So I'm just a bit confused. This is one thing. The second thing, I know you just say that it's pretty early to discuss about some guidance or a normalized level with fully [indiscernible] COVID and even COVID-related test. Maybe if you can touch base on this, give me some even if it's not a solid normalized estimation, at least us be more clear with regard to the normalized revenue, full year 2022 gross margin and net margin.

Just to address your first question, Khaldun, you're asking about why Omar is attributing a drop in EBITDA margin related to COVID. The is not referring to the base. He's not referring to 2019 as it is yes 2019 did not have COVID, as you rightly mentioned. However, it is reflected on this year's quarter in Q3 of 2022. This is what he's trying to address. He's trying to address the impact of the small portion of the COVID tests on your EBITDA, this has -- because the dropping of prices -- which was dropping consistently after the pandemic has subsided, it ate up automatically at 3% for this quarter of your EBITDA. This is like a temporary effect that he was trying to explain on that 31%.

Look, when there is a slide where we do present the contribution margin dissected between COVID and conventional. So if you can put the 2 again? So you will see that it is -- the contribution margin is around 80%, while the conventional test contribution margin is, yes. So we have 83% -- so the conventional contribution conventional and raw material as a percentage of revenues is around 17%, which is more or less the same by the way compared to 2019, Q3 2019. That's why I'm saying that there is a -- there is a 3% related to PCR and other COVID related tests, and it's obvious from the graphs that between Q2 and Q3, the conventional -- the COVID PCR contributing margin went all the way from [ 58% to 44% ] only one quarter. And it was around 85% last year. So again, there is a 3% reduction in our contribution margin related to COVID related tests and PCR, compared to 2019, where there were no COVID at all.

Does this address your question, Khaldun?

Yes. I mean to some extent, but we like, okay, now the margins of EBITDA used to be around 42%, right?

That's specifically in quarter 2 -- quarter 3 2019, however, we hovered around the 40% historically, yes.

So like-for-like, if you compare Q3 alone, with Q3 2019, where there is more COVID, there is a 3% attributable -- a 3% reduction only attributable to COVID. That's the point. So if we remove it from Q3 2022, then there will be a [indiscernible].

So my point, maybe I'm trying to figure out, after excluding COVID completely and taking in consideration the recent acquisition of the Pakistani business as well as the material prior served after the FX devaluation where we are right now with regards to the EBITDA margins as well as with the second question, do you normalized -- on a normalized basis for revenue, for the gross margin and net margin.

You're asking about the guidance going forward, what's the normalized rate of EBITDA margin, right?

Yes. This is the second question. This is the second question.

Sure. Specifically for next year, it's difficult to give you an exact number. However, the normal course of business that we have always run is a 40% EBITDA margin. This has been what our historical rate has been, and this is what we will eventually reach. However, next year, and specific, it remains to be seen. As Omar noted, so far here is what we are sure going to do. We are going to raise prices by a higher rate than historical levels because historically, we used to raise walk-in by around 10% and corporate by around 5% to 7% definitely next year because it is an unusual year for inflation levels and everything. We were raised by a higher rate. So this is the first component. We continue to negotiate with our suppliers this depreciation in the pound. So this is the second step that we focus on. However, if you look back at our negotiation during 2017 post the deval, we managed to -- or our suppliers actually absorb part of the depreciation on their books like us. So we didn't have a full impact on our raw material, and this is what will likely happen for next year again. But on a normalized level, going forward, definitely, the 40% is targeted. However, for next year in specific, it's yet to be seen after we finalize all the price increases and negotiations.

Sorry for that, there are other questions from other people. For revenue -- for the revenue...

Yes. It's going to be double digits like we've always grown.

Okay. Thank you for that. Gena from HSBC is asking if you can please repeat the guidance on revenue and EBITDA for the full year '22?

As Dr. Hend noted, we expect our conventional revenue to comfortably grow at a rate of 15% for the full year of 2022 with an EBITDA margin of around 35% for the full year.

Okay. Thank you. A few questions from -- for Ed, referring to the bridge presented on EBITDA margin and setting COVID impact aside, how are you thinking about the return on investment into the customer experience? Do you expect this to increase revenue growth above historical levels? Or is this defend off competition? Looking back at presentations from around the time of the IPO, it was claimed that the second largest competitor in Egypt was significantly smaller and commentary on the last earnings call indicated that this has narrowed. Can you please comment on this?

Sure. So starting with the last bit of your question. You are right. The gap between us and the second competitor in the market remains to be the same. However, if you look at the whole market, actually, we believe that a lot of smaller players have gone actually out of business during the recent wave because -- we've seen a more difficult operating environment, and that has driven operating -- smaller operating labs to go out of business. So that's in comment with regarding the last bit of your question. We're running over 500 branches in -- sorry, in Egypt. Our second competitor would mostly run maybe around 200 labs. So the gap between us and the second one remains the same as the time of the IPO, and we think a lot of smaller players have gone out of business during the past time. So this is the last bit of your question. Regarding the first part of your question on EBITDA margin and this one, EBITDA margin and setting COVID aside, return on investments. It's difficult to really give a specific return on investment for this. It cannot really be calculated like this. However, what we know for sure, it definitely supports customer retention. When you have a solid loyalty program, that encourages people to gain points the more they do tests in your lab. We have noticed instantly, it brings them back again, to your lab to redeem those points and most probably they add on more tests in addition to the test that they were or they are able to do. And actually, if you look at and the corporate part and the test per patient is very clear. It's very clear that the test per patient has risen to actually to the highest level since our IPO. It's crossed the 4.1 on the corporate side. And we believe that, that has been driven by the loyalty program. And as economic conditions improve, we believe that, that loyalty program will continue to gain traction. More people will use it and it will enhance customer retention for sure. So that's regarding to the loyalty program. Does that address your question?

I can ask a follow-up while we're talking about ROI, also from Ed specifically with respect to the radiology business, what metric are you using to measure this? It seems there has been over [ EGP 400 million ] in cumulative investments into the segment. How should we think about the return on this going forward?

Sure. So when we did our analysis to go into this venture, we always look after 35% plus return. And the venture is continuously ramping up, as you saw from the graph and each and every -- and the brand equity for the radiology is getting more and more recognized. That's why we were opening new branches. So we're on track on achieving our 30-plus return on our investment.

Okay. Again, from -- for Ed, could you help us understand the framework you use to decide whether to allocate excess capital to dividends versus buybacks? Given the share price, it seems there may be an opportunity or a foregone opportunity not to be buying back shares aggressively. Can you comment on this? And also, he -- [ Ed ] says, he understands that there is a requirement for FY results of subs to be out before this can be done. But could you please help us understand your latest position on this?

Sure. Okay. Yes. For buybacks, definitely, they have to be done outside any close period, which is 30 days before any release of results or any, of course, material news that would impact results. So stock price in general. So that's correct. Regarding buybacks or dividends, we're actually open to buy backs as we speak, we have an annual AGM approval for buyback up to 10%. So that has been already in place and we're open to the idea just being under discussion. As you have also seen, our COO have been also buying back shares. She's bought back during the open period before material announcements around 7 million shares and that would continue to be the case should the share price remain depressed.

I see Yasmin has her hand raised. Yasmin go ahead. Okay. Until Yasmin has an opportunity to unmute her microphone, we can ask another question asked by for Ed. Could you comment on LFL performance of C Labs versus pre-COVID and the performance of new labs versus old vintages?

So the increase is more or less the same. It's -- the conventional growth of -- is double digit for the whole company and for the C Labs. And again, as we always mentioned, the new labs, the new C Labs that we do open and they contribute to our top line figure so of around 1%. So the new C Labs opened each year, they do contribute 1% and they add on year-on-year to our top line figures yes. And the remaining balance, of course, is the -- the vintage one, yes.

Just checking in again with Yasmin to see if she'd like to ask any questions. [Operator Instructions] Okay. Farooq has their hand up.

Just 2 questions, please. Could you expand on the fair value loss, EGP 141 million for the quarter. So exactly the mechanics and if FX issues remain, should we expect you to do it again the next time you need to give out dividends? And then second question is just, again, going on the bridge on EBITDA margin. So 8% of the 12% [ contraction ] seems like it was proactive decisions from your side, loyalty program, call center and so on. Are these expenses one-off big expenses. So in a year's time, and going forward, they will start going down? Or is this longer-term, so for the next 12, 24 months, we might expect margin pressure as you continue to spend more money on [ call center ] expenses or whatever it may be.

So regarding your first question about the EGP 141 million, the fair value loss. As you know that we -- given the economic circumstances at the time of dividend distribution, we will not be able to source the dividends from the usual sources, meaning the Egyptian bank -- the banking system. So we had to secure the amount via GDRs. So we had to buy GDRs from again, from here, from Egypt or buying the stock here and sell it on the London Stock exchange. And then the differential between buying and selling is around EGP 141 million. That's the mechanics in a very brief nutshell. That's question #1. For question #2. As you know, the -- those expenses were meant to improve and enhance the branches and enhance the -- and improve the customer retention. So going forward, there will be an increase. We expect, of course, an increase in the top line figures. So those expenses would be diluted. So their contribution to the top line figure will diminish consequently there will be an increasing in our EBITDA margin.

Just on the fair value loss though, I mean, do you think going forward, as someone asked about dividends previously going forward, if there's continued dollar access issues, would you factor that in, in terms of dividends? Because you don't want to continue to have to buy in Egypt, sell in London and take these fair value losses. Would that affect the dividend policies if FX becomes an issue?

I think that the Egyptian government now has devaluated the Egyptian pound. So at the end of -- for the sake of having any -- having access to foreign currency. So I think that by next year, when we will distribute dividends, I think the normal course of business for the Egyptian banking system will resume. So we'll be able to secure dividends to our shareholders via the conventional channels.

We brought up price increases before, but if we can just bring that up again, Janish is asking, are you planning larger price increases for FY '23, given the EGP devaluation, do you have a sense of the size of price increases needed heading into '23?

Yes. We have addressed that point. Yes. We are planning a hire than our usual price increases for both walk-in and the corporate segment. However, we cannot quantify it precisely at the moment. But yes, we are planning a higher-than-usual price increases with the beginning of next year.

Okay. Thank you, Nancy. At this point, it doesn't seem like we have any unanswered questions. Would you like to make any final remarks before we conclude the call?

Hello, do you have any more questions, Omar or that's it now?

No. It appears that we've asked all the unanswered questions. So if we have nothing to add, I'd like to thank you, Dr. Hend, Omar and Nancy, thank you to IDH's management team, and thank you all for dialing in today for the IDH 3Q '22 results conference call hosted by CI Capital. A recording of this call will be made available shortly. Please get in touch with your contact person at either CI Capital or IDH for access to the recording. Have a nice day, everybody. Goodbye.

Thank you very much.

Thank you. Bye-bye. Have a good rest of the day. Bye-bye.