Med Life S.A. (M) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Med Life S.A. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Mihail Marcu who will lead you through this conference. Please go ahead.

Hello. Good evening, everybody. Mihail Marcu here. I'm CEO of Med Life. As participants from Med Life side, today is Dorin Preda, he is member of the Board and in-charge of the Financial and Treasury; Mr. Adrian Lungu, he is CFO of the company; and my colleague, Alina Irinoiu, she is IR Manager. Alina will start and make first presentation. And after that, of course, we are waiting your questions at the end of the session. Thank you. Alina, please go first.

Yes. Hello, and a warm welcome from our side. It is a pleasure to present you today Med Life's performance for 2019, the preliminary and audited financial statements. The agenda proposed for today can be found on Slide 3. Moving on Slide 5. I would like to recap the main events of the fourth quarter and up to date. This includes the completion of Lotus Hospital acquisition in December 2019. Lotus is the most important provider of private medical services in Prahova County, providing integrated outpatient services, imaging, laboratory, hospital and maternity. The completion of Micromedica Group acquisition in December 2019. Micromedica is 1 of the most important providers of private medical services in Moldova region, Romania. The company has been active on the private healthcare market since 1995 and offers patients a wide range of investigations. The group comprises of 6 medical units located in Neamt and Bacãu counties, which are all equipped with high-quality medical equipment. Moreover, we announced the acquisition of OncoCard Hospital in Brasov, 100% shareholding package in December. The company recorded a turnover of RON 41.8 million in 2018. And currently, the transaction is subject to Competition Council approval. In terms of organic growth, we opened the second hyperclinic in Galati in November 2019. We also announced the development of the largest private medical project in Romania, which will be called MedLife Medical Park. This project involves two stages of development. The first stage involves the development of the new hyperclinic with state-of-the-art imaging and radiotherapy center with a research and development center. The extension of MedLife Memorial Hospital and IVF center, 2 restaurants, a pharmacy and a bio food store in a time frame of 18 to 24 months. In terms of the second stage, it involves the development of MedLife Oncological Institute; are going to be 30,000 square meters in a time frame of 3 to 5 years that will be put into function in this time frame. In terms of key financial data, let me present the financial figures for 2019. First of all, I would like to highlight that we also maintained the presentation of figures before IFRS 16 for comparability purposes. In terms of sale, the company has differentiated itself throughout history with a strong revenue growth of approximately 25% year-on-year for the past 3 years, so growth is there. Compared to prior year, sales increased by 24.5% on a pro forma basis, reaching RON 989 million, out of which organic growth of almost 15%. In terms of EBITDA, pro forma EBITDA increased by 74.7%, reaching RON 166.6 million, a margin expansion of 4.8 percentage points, reaching the 16.8 percentage points from 12% in the prior periods. Or before IFRS 16, there was an increase of 36%, reaching RON 129 million, which is a margin expansion of 1.1 percentage points to 13.1%. In terms of Slide 4 there you can observe the dynamics in sales and EBITDA margin over the past 4 years that was marked by an increase in salaries in the public system in 2018 with effect on the margins in 2018 and 2019. When this downside effect was partially countered by two increases in prices that were performed in May and October 2019. In terms selling it can be noted a strengthened market position through the completed acquisitions and we have continued expectations of robust organic and through acquisitions revenue growth. In terms of Slide 8, the split of pro forma EBITDA before IFRS 16 between owners of the group and NCI was 90.8% belonging to group owners and 9.2% to NCI. The net result on a pro forma basis surged by 84.6%, reaching RON 30.9 million from RON 16.7 million in 2018, while pro forma total comprehensive income by 87.9%, reaching to RON 31.5 million. Before IFRS 16, the increase was of 98.3% to RON 33.2 million for net result and by 101.6%, reaching RON 33.8 million for total comprehensive income. The split of net result improved on a year-on-year basis, increasing from 80% to 83% belonging to group owners. In terms of net debt to pro forma EBITDA ratio, it remained stable in the range of 3 plus/minus, reporting that December ratio of 3.2. In terms of financial overview, moving to the consolidated statement of financial position. The variances are mainly explained by the acquisitions announced and completed during 2019 as well as the adoption of IFRS 16, that brings RON 98 million right-of-use assets in total assets and RON 101 million lease liability and corresponding deferred tax liability in total liabilities. The highlights from the consolidated statement of profit and loss on a pro forma basis are the following. As I already mentioned, the sales increased by 24.5% compared to the same period last year. Clinics and laboratories has the highest dynamics here. This segment recording an increase of 41%, respectively, 25% over the same period last year. They were followed by hospitals and the Corporate division with 17% and 8%. The group has registered significant sales growth also in the pharma division of 9% and in the stomatology division of 35%. This was also linked to the 2 clinics opened in Sibiu this year. In terms of operating expenses, they increased by 21.5% compared to the same period last year. Here are included variable and fixed costs as well as the cost of goods and materials used to provide the group services. And the increase is mainly linked to the overall business increase. As at December 2019, the group EBITDA, as I already mentioned, reached RON 166.6 million, which is an equivalent of EUR 35 million. In terms of net results, the increase basically represents the translation of the increase of the operating profit into the net result. However, it was slowed down by the RON 8 million financial unrealized loss coming from foreign exchange revaluation. On Slide 12, I'd like to continue with the highlights from the cash flow statement. So in the period of 12 months of 2019, we achieved an operating cash flow of RON 110 million, more than double than in prior year. Our net payment for investments amounted to RON 108 million, 70 -- 57% higher year-on-year. Here are included also the investments in business combinations [Technical Difficulty] financing activities amounted to almost RON 2 million. This increase in loans in order to finance the acquisitions performed and that the net cash position remains strong at approximately RON 38 million at the end of December, which is totally in line with prior year. I will move to Slide 14 with the operational KPIs for 2019. Clinics, stomatology and hospitals had the highest increase in terms of number of visits, standing out at a 26% increase for clinics in visits, 20% for stomatology, and 10% for hospitals. Also, the number of health care prevention packages has increased to around 700,000 subscriptions, an increase of 9% as compared to the same period last year. I would also like to draw your attention to the average fee, which increased in all business lines, particularly, in stomatology by 11%, and also in hospitals by 20%, and this is mainly due to increased complexity of the medical procedure, but also the increase in prices that I mentioned before. With this, I would like to close the presentation and we remain at your disposal for the questions. Thank you.

[Operator Instructions] Your first question is from Bram Buring, Wood & Company. Mr. Buring, your line is now open. Please go ahead. We can't hear you at the moment.

You guys hear me? Yes, okay.

Yes.

My first question is with regards to the third-party expense line, at 28% of revenues was particularly high. If you could explain what happened in that in this quarter? And second question is with regards to price hikes that were implemented in the fourth quarter from October. To what extent have we seen the impact of these on your revenues? And what -- or should we expect in the first quarter? That's all for now.

So I will start with your first question. Looking on a quarter-on-quarter basis in third-party expenses, they amounted to 28%, 29% out of total operating expenses. With an increase correlated with the increase in revenues for the specific quarter because here are included the doctors agreement that most of them are variable and linked to the revenues generated. And also here, we include the expenses with the one-off services provided for the acquisition of companies that in the past quarter was much active, let's say, so than in the rest of the period with the acquisition announced.

I think the M&A costs -- M&A-related costs were included in the other admin and operating expense line. So these M&A costs, one-off costs are now in -- we're seeing them in the third-party expenses?

Yes. Yes. They are in third-party expenses. So if -- we are looking at Page 13, the...

I'm sorry, I haven't received the presentation. So...

We have distributed the presentation to Wood and also on the Bucharest Stock Exchange website. It's public. So if you would like to open the Bucharest Stock Exchange page, you can find it. It's the last one submitted there. So we can have the same figures in front us.

Got it. So you said page -- Slide 12? I'm sorry, it's not loading. That's not unusual though.

Is it okay? It's working?

It's not. It's not. Let's go on without.

Because here -- so we basically have 58.5% coming from third-party expenses and salary and other related expenses as opposed to 57.8% in prior year. So this is an increase of 0.7 percentage points. Out of this increase are the one-offs that were preponderantly in the last part of this year with the increase in M&A activity.

So that's 0.8. I counted it as RON 0.8 million, is that correct, in the fourth quarter?

It's about 0.8.

Maybe, we can do this as a follow-up question. So one-offs in your expenses related to that...

I think your point, yes. And also, looking at the quarter-on-quarter basis, I have 29%. So it's out of operating expenses for third-party expenses and a decrease in salary and related expenses from 32% to 31%. So basically, it might also be a shift in salaries of the doctors.

Ah, okay. So something from salaries is shifting into third-party expenses?

Yes. So I would rather analyze them together. As you can see, there are only 1.5 percentage points in third-party expenses and the decrease of 0.7 in salaries.

Okay. And then with regards to price hikes implemented in the fourth quarter?

And I would also like to add on here what I mentioned before with the increase in salaries because they were gradually performed in 2018. So the full effect of the salary increase was recaptured in 2018, but it is captured now. And in terms of your next question, I would say that no, so the effect of the increase in prices isn't -- or is very limited captured in this year. And this is mainly because on the dynamics of the appointment, let's say so, because depending on the units, the appointment may be made now for the next 2 months. So depending on this, the prices are going to be increased. So very, very limited.

Okay. So limited impact from price increases. And just one last question with regards to the tax rate in this quarter, an effective tax rate of 68%. It's quite high. Is there anything in particular behind that, that we should be aware of either recurring or nonrecurring?

Yes, indeed. So you can note an increase compared to prior year. And this is coming from 2 things. One of them is a revaluation of properties that was performed, and this is bringing deferred tax liability and the deferred tax liability has effect in the income statement in the income tax. And the second one is also from deferred tax liability from the other comprehensive income because the Treasury shares that we have in balance were revaluated as at 31 December, 2019. So they brought again that is presented in other comprehensive income with the corresponding deferred tax liability, which again has an impact on the income tax. That's why the effective tax rate is higher.