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

Hello, everyone. This is Ahmed Moataz from EFG Hermes, and welcome to IDH's First Half of '24 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, CEO; Sherif El Zeiny, CFO; and Tarek Yehia, Director of Investor Relations. As usual, the company will start with a brief presentation, and then we'll open the floor for Q&A.

Thank you, Ahmed. Good afternoon, ladies and gentlemen, and thank you for joining us for our first half analyst call. My name is Tarek Yehia, and I'm the Head of Investor Relations. Joining me today Dr. Hend El Sherbini, our CEO; and Mr. Sherif El Zeiny, our Chief Financial Officer. Dr. Hend will start the call with a brief overview of the key developments of the period and our guidance for the remaining of the year. After that, I will walk you through the operational results and provide a high-level overview of our financials. Following my presentation, Sherif will deliver into the details of our financial performance. Then we will open the floor for any questions. I will hand over the call to Dr. Hend.

Thank you, Tarek, and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. The first half of 2024 has been marked by strong results across our income statement despite persistent economic challenges in several of our key regions. At a consolidated level, we achieved a robust top line of EGP 2.5 billion, representing a 33% increase compared to the same period last year. This revenue growth was driven by higher test volumes, which totaled 17.8 million during the first half of 2024, as well as an increase in average revenue per test, which reached EGP 140. Our revenue growth was further supported by prudent cost management, which allowed us to enhance margins at all profitability levels. Looking at the performance of our individual markets, Egypt remains the primary growth driver, contributing nearly 83% of our consolidated revenues. In Egypt, both our Pathology and Radiology segments achieved solid growth. We continue to expand our branch network, which attracted more patients and improve patient retention, leading to an increase in test performed. Additionally, we implemented price increases, which raised the average revenue per test during the period, mitigating the impact of inflation. Pathology continues to be the dominant contributor, accounting for around 95% of our Egyptian revenues. During the first half of the year, we conducted nearly 16 million pathology tests in Egypt, a 9% increase year-on-year, which led to a 35% growth in revenue compared to the same period last year. Meanwhile, our Radiology venture, Al-Borg Scan, maintained its positive growth with a 65% year-on-year increase in revenue, solidifying its position in the fragmented radiology market. Al-Borg Scan now operate 7 branches across Greater Cairo. Moving on to Jordan. We experienced a 4% year-on-year decrease in revenues in local currency terms. While our average revenue per test remained relatively stable due to government pricing regulations, testing volume declined by 2% during the period. A portion of our Jordanian operations depend on medical tourism and geopolitical instability in the region has impacted our test volume in Jordan during the first half of the year. In Nigeria, we saw a strong 37% year-on-year revenue increase in local currency. Despite the Central Bank's decision to further devalue the Naira in early 2024, which led to significant depreciation against the U.S. dollar and rising inflation. While these challenges were -- have affected patient purchasing power in testing volumes, our impressive revenue growth underscores our ability to overcome and adapt in difficult markets. In Saudi Arabia, we continue to ramp up our operations and are pleased with our progress so far. In 2024, we opened 2 branches in Riyadh, and are on track to expand our branch network across the Kingdom. Regarding our proposal to voluntary delist from the Egyptian Exchange, IDH bought 18.6 million shares at EGP 20 and the remaining shares will be moved to the IDH shares to LSE in the coming weeks. I want to assure you that this proposal to delist from EGX does not impact our day-to-day operation across our geographies or our commitment to our listing and disclosure requirements on the London Stock Exchange, our primary listing. Before I hand the floor back to Tarek, I would like to share our guidance for the remainder of 2024. With economic conditions showing signs of stabilization in Egypt and the strong start we have seen in the first 6 months, we expect to achieve consolidated revenue growth of around 30%. In terms of profitability, we anticipate our EBITDA margin to stabilize around 30% excluding contributions from Saudi Arabia and any nonrecurring expenses. With that, I will now turn it back to Tarek and Sherif, who will provide a more detailed review of our operation and financial results for the quarter. Thank you. Tarek?

Thank you, Dr. Hend. Please, can we go to Slide 2. Thank you. For the first half of 2024, we achieved a remarkable 33% year-on-year growth in revenue, reaching EGP 2.5 billion. This growth was primarily driven by a 23% increase in our average revenue per test, which rose to EGP 140. As mentioned earlier, price increase were implemented to address ongoing inflation pressure in both Egypt and Nigeria. Additional to our test volume increased by 8% year-on-year, recording 17.8 million tests. Most of this growth was attributed by Egypt, our primary market. Looking at patient numbers, we served 4.1 million patients over the 6 months period, up from 3.9% in the same period last year. This increase was mainly driven by contract patients as more of our work in patient moved to contracts. Our average number of test per patient continued its upward trend, reaching a record high of 4.3 tests per patient. This reflects our success in attracting and retaining patients, further supported by our loyalty program, which has been enhancing patient retention since the launch in 2021. Change the slides please, Ahmed. Slide 3, despite the facing challenging across the market in which we operate, IDH has maintained robust growth. In Egypt, the Egyptian pound reached its lowest rate against the dollar in August after its most recent flotation in March of this year, settling at 49. Despite the devaluation, we are seeing a slowdown in inflation as we anticipated in our first quarter call. This suggested greater stability in the coming period. In Nigeria, economic difficulties have worsened with the Naira devaluating further and trading at 1,650 to the U.S. dollar in August. This has led to increased inflation impacting patient purchasing power. While in Jordan, geopolitical instability due to the Palestine-Israel war has affected medical tourists, resulting in a managerial 2% decline -- marginal 2% decline in test volumes compared to the same period last year. However, given Jordan's strong economic fundamentals, we believe this trend will be short term only. Slide 4, please, Ahmed. Turning to our performance in Egypt. IDH has continued to expand its branch network, adding 20 new branches since the beginning of 2024. Our house call service are also contributing a significant share of revenue growth, accounting for 18% of the Egyptian revenue during the first half of the year. We are practically pleased with the performance of our radiology venture, Al-Borg Scan. Radiology revenue now represents 5% of our total revenue, up from 4.2% in the same period last year. This growth is a sentiment to our diversification strategy and underscores our commitment to expand our service offering in this vital sales. Slide 5, please. Focusing on our radiology venture in Egypt, Al-Borg Scan generated EGP 104 million in revenue, a substantial 65% increase year-on-year. This growth was driven by a 33% increase in the number of scan performed, reaching 121,000 and a 24% increase in average revenue per test, which reached EGP 856. Slide 6, please. Now breaking down our results by market. In Egypt, we saw 18% increase in test volumes and a 25% rise in average revenue per test, resulting in a 37% growth in revenue, totaling EGP 2,069 million. In Jordan, despite a 4% decrease in local currency revenue due to geopolitical instability, we experienced a 63% year-on-year revenue increase in EGP terms attributed to a translation effect from the devaluation of the Egyptian part. In Nigeria, while revenue in Naira terms grew by 37%, the translation effect led to a 33% decline in EGP terms, reflecting a multiple Naira devaluation over the past year. In Saudi Arabia, we launched 2 branches in Riyadh and generated revenue of SAR 333,000 with 7,000 tests performed. Slide 7, please. Regarding profitability, IDH achieved improved results across all levels in first half 2024. We reported a gross profit of EGP 925 million, up 41% from the same period last year, with a gross profit margin of 37% compared to 35% last year. This improvement reflects lower direct salaries and depreciation expense. Our EBITDA for the period was EGP 668 million, yielding a margin of 27%, up from 25% last year. Adjusted for nonrecurring items, EBITDA would have been EGP 767 million, reflecting a margin of 31%. Net profit reached EGP 480 million, 127% year-on-year increase with a net profit of 19% -- with a net profit margin of 19%, up from 11% in the same period last year. Now, I will hand over to Sherif, who will provide a detailed overview of our financials.

Good afternoon, everybody. Ladies and gentlemen, I would like to start by thanking Dr. Hend and Tarek for their valuable insights. I will begin by summarizing the key points from their presentations and then provide additional details on our cost and profitability for the quarter. In the first half of the year, we achieved impressive revenue growth of 33% year-on-year, driven by the 23% increase in average revenue per test and 8% rise in the test volume. This growth was primarily fueled by our home market, Egypt, which remains our largest and most promising market, especially given sustainable substantial opportunities that exist in its fragmented radiology sector. Our performance over the last 6 months reflects the strength of our business model, which has consistently helped us navigate economic and political challenges, including currency devaluation in Egypt and Nigeria. Thanks to our operational efficiency, we have seen significant improvements in gross profit, EBITDA and net profit margins. We have also launched operations in Saudi Arabia, where we are currently in the early stages of ramping up. We believe that Saudi Arabia solid economic fundamentals and fragmented diagnostics market presents a promising growth opportunity for IDH. Concerning our voluntary delisting from Egyptian Exchange, IDH bought 18.6 million shares at EGP 20 per share, and the remaining shares will be moved with IDH shares to LSE in the coming weeks. Unfortunately, trading volumes on the EGX have been lower than anticipated. I want to assure you that this proposal to delist from the EGX doesn't impact our day-to-day operations across our geographies and/or our commitments to our listing and disclosure requirements on London Stock Exchange, our primary listing. Although we managed to control raw materials cost increase through suppliers' relationship and cost optimization, inflation over the past year caused a slight uptick in raw material costs. However, we maintained raw materials as a percentage of revenue at 22%, consistent with the previous year's ticks. Our total wage and salaries as a percentage of revenue also decreased on back to our optimization efforts with wages representing 26.5% of revenues in half 1 '24, down from 28% in the corresponding period last year. Our ability to manage costs effectively despite operational challenges early in the year highlights the trends of our business model. We are optimistic about sustaining this positive trend, particularly with the easing the macroeconomic challenges and increased visibility in our key markets. This improved clarity positions us well for continued margin expansion in the second half of the year. Slide 10, Ahmed, please. Turning to EBITDA profitability. We reported EGP 668 million in EBITDA for half 1 '24, marking a 45% year-on-year increase Our EBITDA margins improved to 27%, up from 25% in the same period last year. This slide shows the main expenses leading from our revenues to EBITDA for this and the previous period. Here is a brief overview. Raw materials remain the largest component of our cost of sales, making up early -- making up nearly 34% of COGS. [indiscernible] For the period, raw material costs EGP 538 million, equating to 22% of revenue, unchanged from the last year. Total wage and salaries amounted to EGP 488 million, represented a 19.5% revenue for half 1 '24, comparing to 20.4% in half 1 '23. This decline is a direct result of IDH optimized head count compared to the previous year. Slide 11, Ahmed. Our net profitability saw a substantial increase of 127% compared to half 1 '23, with a net profit margin rising to 19% from 11% last year. This significant net profit growth was largely driven by a foreign exchange gain of EGP 297 million. Even excluding these ForEx gains, we still saw improved profitability. Our adjusted net profit excluding ForEx gain was EGP 183 million, with a net profit margin of 7%, up from 6% last year. This profitability boost was due to higher EBITDA and lower depreciation expenses relative to revenue. Depreciation and amortization expenses were EGP 233 million in half 1 2024, about 8% of trading down from 9% last year. Slide 12. Finally, a brief overview of our balance sheet highlights. Capital expenditures for half 1 '24, excluding translation adjustment was just over EGP 63 million, which is equal to 2.5% of revenue. Most of these expenditures was used in opening new branches and rating existing ones within our network. Our cash balance at the end of June '24 stood at EGP 1.2 billion, up from EGP 835 million at the end of '23. Before we open the floor to questions, let me reaffirm the guidance Dr. Hend provided at the start of this call. Since the flotation of the Egyptian pound, in March, we have observed a recovery in the Egyptian economy, which we believe will lead to greater [indiscernible] in the near future. This positive outlook fuels our options. With that in mind, we expect to maintain a strong margin projections -- projecting our EBITDA margin to be around 30%. This forecast excludes contributions from the expanding Saudi Arabia market and any nonrecurring expenses. Thank you for your attention. And now I welcome any questions you may have. Thank you very much.

[Operator Instructions] We have a couple of questions from Jaina from HSBC. I'll read them one by one, easier. What's the reason for the high selling and marketing expense and advertising expenses as well in the second quarter of '24? Is this expected to come down significantly in the second half, more normalized towards the level that you've achieved in the first quarter of '24?

This is mainly for Saudi and campaigns we did as a start for the year at the beginning and launching of our 2 labs in Saudi, and it will normalize and go back to normal levels in the second half.

Understood. Her second question is, what's the expected gross profit margin for the year?

Our expected gross profit margin for the year for the group to be in the range of 35%.

Understood. Third question is, is revenue in Saudi still expected to reach SAR 9 million or equivalent in Egyptian pounds, EGP 109 million in 2024? And what is the new guidance?

The new guidance for Saudi, we are expecting revenue to reach SAR 1.6 million for -- until the end of the year.

Understood. Her final question, do nonrecurring expenses of EGP 29 million in the first half of '24 include any losses from Saudi? And what are your expectations for total nonrecurring expenses for the full year?

The EGP 29 million, it was for the post of delisting fees in Egypt due to the delisting of our shares in EGX and does not include Saudi.

Understood. Another question, and chat comes from [ Fouad ]. Could you comment on the performance in Saudi so far relative to your expectations? Specifically on volumes, pricing, test per patient, and lastly, the competitive dynamics.

In Saudi, we opened 2 branches till now, and this will continue until the end of the year. It takes time to get market share and to increase our market share. As for the first half, we did around 7. And also our plans in Saudi, that's to increase the contracting more than -- to have more contracts because we have got the license more than walk-in. And to count on this, not on opening new branches to reduce the cost of opening new branches and also having more volume. Now, number of tests as for the first half reached 7,000 number of tests, and number of patients reached 1,000 patients for the first half. Our sales revenue for Saudi for the first half reached SAR 340,000. If we compare it to [indiscernible], total revenue for Q1 increased in Q2 versus Q1, was 427% and number of walk-in of patients increased, also number of walk-ins increased to reach 3,596 patients in Q2. This is came because we opened our second branch in Q2 and also in -- because of our promotional campaign, which already resulted in having better branding and revenue to us.

Thank you very much. Another question in the chat. How much would you say that the volumes are growing in the Egyptian market? This is not specifically for IDH. I think some -- the question is trying to get a sense of the overall market growth and whether you're gaining market share, losing market share or it's flat?

I think we don't have a specific number for the growth in the Egyptian market. However, we know by experience that we are definitely above the normal growth of the market in Egypt. And this also gives us an indication that we are gaining market share. We know the part from the contract. However, the overall market, we don't have an exact figure. This needs to be done through a quantitative market research and this has not been done this year.

Understood. Do you see any other growth areas in Egypt that you would consider penetrating or in general being as attractive as the pathology, radiology and the examples that were given was fertility?

Yes, we're always looking at other services to add to our network in the health care. So as you mentioned there, we've been looking around the fertility, radiology, and we started and we decided to venture into Radiology in 2018. We opened so far 7 branches. We thought -- we are always on the look for other services, but there is nothing specific to be shared today.

Understood. Another question in the chat. How much further can cost, and this is in terms of both COGS and SG&A, be optimized? Specifically because of your head count optimization, et cetera.

We believe that things are -- would be better for depreciation because it's revenue, not because of reducing the depreciation as an amount, but because of percentage of revenue. And we could have room also in the head count because of our efficiency trend. This would also lead to decreasing the percentage of the direct and indirect sales.

[Operator Instructions] So there are a couple of more questions in the chart. First one, what is the expected pace of annual branch openings in Saudi for the next couple of years?

For Saudi, we are expecting to reach 6 branches by next year, end of next year, with increasing the contracting volumes, as I said before. It's not just -- the gross will never come only from opening branches, but we are expecting to have some contracts to have -- to sustain our increase in direct.

[indiscernible] is asking a question, I think it has been somewhat answered, but I'll repeat it again in case you want to add something. Cost controls appears to be a problem with staff costs in particular, ballooning quite rapidly. Can IDH realistically get back to EBITDA margins over 40%? Or is the 30% the new norm? So then in Nigeria are volatile locations that do not add value, why not sell or close these businesses and focus on Egypt?

So we're trying to optimize our cost structure. So we actually decreased our cost per -- I mean HR costs down to 18% of revenue, as Sherif has mentioned. So we are working on this, and we are also improving our EBITDA margin as we're -- I mean, we've been doing this during the year, during the first half of the year, and we'll continue to do this, this year and next year. So you have to keep in mind that there was a major devaluation of the Egyptian pound. So now the dollar is at EGP 49. And when you go back to the -- when we IPO-ed in 2015, it was around EGP 8. So just to put things into perspective, so the EBITDA was at 40% or above 40%, and we're working to get it back to the 40% level. However, it will take a while because of what is going on in the market and the devaluation that is happening, the major devaluation that is happening. However, we are working on the cost control. Yes, you're right that Sudan and Nigeria are very volatile. We -- Sudan, we don't have anything now in Sudan given the situation there. So we do not really comment anything on Sudan for the time being. Nigeria, we have a strong growth in the revenue side. However, as you mentioned, there is also devaluation and instability there. So we're trying to achieve growth and maintain our market there or our position in the market there, and we'll see how it goes.

Understood. Maryna Roesch has 3 questions. What are the typical types of pathology tests performed in Egypt, and how does it differ from Jordan and Saudi? That's number one. The second is, could you please elaborate on the foreign exchange gains on intercompany balances? Does this relate to the dollar balances that you have? And the last one she has is, what is your dividend policy going forward given the healthy cash balance?

So when you look at the pathology tests that have been performed in Egypt, Egypt is a mature market. So we do all types of tests. We do the routine test, and we do also the esoteric testing. So we have everything that is done here in Egypt, starting from -- as I said, the routine chemistry, hematology and microbiology test to the more sophisticated genetic testing, pathology testing and all the types of tests are done here in Egypt. Jordan is the same thing. So Jordan also is a mature market. Biolab is a leading brand in Jordan. So they are also doing all sorts of tests. In Saudi Arabia right now, we're also doing all the main tests, and the tests that are not done in Saudi are sent to Biolab in Jordan.

For the devaluation of -- or the ForEx loss or gain of EGP 296, and this impacted, of course, drastically our net profit by increase. But as I said in my presentation that this was between ForEx, again, between our intercompany balances, one in dollar and one Egyptian pound made this difference, because of the devaluation of our currency. But again, in my presentation, when I eliminated this, it's still -- our net profit margin increased from 6% to 7% same period last year. For the dividends, we cannot comment on this for the time being because we already paid quite big amount of money to -- for the delisting because we purchased the shares in Egypt, about EGP 400 million. We expanded during this time. And this will, of course -- and we have some investment opportunities. We are working on them until end of the year to expand, especially in Radiology. So we cannot comment now or give any promise about the dividends before end of the year.

Understood. Two questions from [indiscernible]. First one, how will the Saudi strategy defer to Egypt given it seems Saudi will be a low branches approach in order to control CapEx? And the second question he has is, first quarter of '24, adjusted net income was almost EGP 100 million. And then in the second quarter, it was EGP 78 million. So he's asking, what are the drivers for the drop between the second and first quarter of this year?

So here, when we're talking about the difference between Saudi Arabia and Egypt, when you look at the dynamics in Saudi Arabia, so we have the test per patient much higher in the Saudi market than Egypt. So, we are targeting 10 tests per patient in comparison to 4 tests per patient in Egypt. So we're trying to increase the number of tests and the number of patients who are coming to the branches rather than opening -- so of course, we're going to open branches, but the main focus would be to increase the patients and the number of tests coming to each branch, given the high cost of the branches unlike Egypt. So this is brief, but this does not mean that we're not going to open branches. It means that we are going to focus on the test per patient and we're also going to focus on attracting more insured patients as well as walk-in patients.

Regarding second question for net profit in Q1 versus Q2. In Q1, normalized net profit after removing the ForEx reached EGP 100 million, while in Q2, after adding back the delisting fees, which was a one-off, it reached EGP 108, which show an increase of 8% quarter versus quarter.

A question is on your strategy going forward for branch openings in Egypt. And in addition to it or kind of a relevant point to it is, what are the location or the criteria that you have in place to select the locations and how much further white space do you see?

So we continued our strategy in opening 20 to 30 branches in a year. And this depends -- the location really depends on the areas where we are not present or there is an increase in the population size or there is a need due to presence of clinics and hospitals. So we really, are always on the look for new areas where we're not present. And this is -- this has been our strategy since the beginning.

Understood. CapEx in the first half of '24 was considerably lower than the first half of '23. Is that because of no radiology branch opening so far in 2024?

Yes, absolutely right.

And a relevant point to it, another follow-up from another investor is that, what are your -- what is your strategy in general when it comes to the openings of radiology branches going forward?

So we are now operating 7 branches in Greater Cairo. We're looking for the areas same as pathology, we're looking at areas where there is a need for radiology service, trying to consolidate the market as it's highly fragmented. However, we do not open with the same rate as the pathology due to the high CapEx in the radiology centers.

Could you comment on access to foreign currency in Egypt for the purpose of paying dividends and/or buybacks?

Actually, we already -- lots of devaluation is our ForEx losses, and now we are in a better position actually and we have dollars and we are in a better position regarding the ForEx. So we are not expecting to have any ForEx loss in the coming, if any devaluation happens.

But the question was more on the availability of FX rather than the P&L impact.

Yes, about sourcing the dollars, until now, we don't have any problem. And we didn't need actually because all our contracts are in Egyptian panel. And even if we need any dollars, we can avail it from the banks. In the purchasing or the buyback, it was 100% by Egyptian pound.

How do radiology margins compared to pathology ones? Would you like me to repeat the question? Yes?

Yes, please.

Sure. Someone was asking, how do the margins in radiology compared to that ones in pathology that you currently generate?

So here, we are looking at EBITDA margin of 14% in Al-Borg Scan in Egypt, which is lower than the pathology.

Understood. We currently have no further questions in the chat nor there is hand function. So I'll pass it back to you in the case you have any concluding remarks. Otherwise, we can conclude the call.

Thank you so much for the call, Ahmed, and we are happy to have any follow-up call with anyone who have any further questions. Thank you, everyone, for attending today.

Thank you.

Thank you very much.

Thank you to IDH's management and to everyone who participated today. This concludes today's earnings call. Have a good rest of the day, everyone.