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 customer's request, this conference will be recorded. [Operator Instructions] Q3 2020 financial results will be presented by Mihail.

Good evening, everybody. This is Mihail over here. I'm here with my colleagues. We have together with us on the phone. We have Dorin Preda, who is the Head of Treasury and Finance; and member of the Board. Also, we are having our CFO, Mr. Adrian Lungu; and our Assistant CFO and IR manager; Alina Irinoiu. Actually, she is going to make the presentation today. And after that, of course, we will be with you for the Q&A session. And I will have also a statement about the future and what we are expecting during this time. Thank you, Alina, please take over.

Thank you, Mihail. Good afternoon, everyone, and warm welcome from my side. We want to thank you for joining the conference call. And we hope that you and your families are healthy and safe during this period. I'll start the presentation by presenting the key messages of the 9 months 2020, followed by our financial overview. Here, we are going to take to the consolidated statement of profit and loss, the consolidated statement of financial position and the consolidated statement of cash flow. Regarding the [ financial ] piece of this period, Med Life Group put focus on helping patients and safe institutions during the pandemic and has changed its business model to address the new business and dynamic environment, while still focusing on providing new medical services requested by patients during this period. The top priority of Med Life Group throughout this pandemic period was to support the Department of Public Health by contributing to the growing number of [ PCS ] tests performed and relieving the public hospitals by treating the chronic patients. The preventive measures taken from the beginning facilitated control over the situation and help us to protect our patients and personnel, leading to both support from the population and for the population and financial performance. We have also worked on back with several research studies on the evolution of COVID-19 in Romania, allocating own resources in this regard, and there are more to come. Regarding sales, so there was a significant advance in the third quarter of the current year versus the second quarter with a 47% increase in consolidated sales, meaning it was a full year of recovery of sales lost during the period of strict restrictions on preventive medical activities and traffic. This translated in 8.4% increase year-on-year in sales, reaching RON 770 million on IFRS figures and a 5.1% increase in sales year-on-year leading to RON 747 million on a pro forma basis. What I want to highlight is a quick adaptability to new services, the repositioning on labs and the mix of medical activities in the area of hospitals clinics corporate, pharmacies and dentistry, all help to meet the patient demand and this offer a solid perspective for the group for the period post-COVID. In terms of some figures on this quarter-on-quarter evolution, you will see 85% increase in sales in the third quarter of this year compared to the second quarter and 1.3 million analysis performed during this 3-months period. Another important increase is noted in hospitals with a 64% increase in sales and 24,000 patients in the third (sic) [ 3 ] Month period, followed by somatology. This different line was completely interrupted in April with a 63% increase in sales and 23,000 visits in the 3-month period. Clinics have also increased with 43% and almost 500,000 visits in the third quarter. Regarding the Corporate division, there was a 9% increase in sales and the total number of subscriptions of 715,000. Last but not least, so the pharmacy business line with a 6% increase in sales and 45,000 clients in the third quarter. The development of 4 COVID-19 laboratories in a record time, was one of the important achievements of the group in this period. To this, the company was able to keep to Med Life adjoint space to periodically test medical and axillary staff and patients and -- so very functional as well as supporting the Department of Public Health by conducting the COVID test, as already mentioned. In terms of hospitals, we contributed to reliving the crowded state hospitals by treating chronic patients. We also provided Romanian alternatives for monitoring and treating existing pathologies in conditions of maximum safety. We managed to have hundreds of thousands of domains to evaluate their existing diseases and to come under control with over 1.9 million total digits in clinics and over 6.1 million lab analysis reports. Dynamic activity was also registered in the area of the corporate segment. The company has developed new products to meet the news in this biological context has also designed special projects tailored to support employees of former companies and increase the segment of the medical services and investigations that were a priority. Moving to operating profit and EBITDA. During this period, the group tailored its services to meet the new demand and to optimize the business dynamic. The group managed to increase operating profit and EBITDA as a result of cost-cutting measures that were previously announced that aims to generate sustainable performance improvement in all business lines, but also to lead to a long-term positive effect on group profitability. If we are to look on like-to-like base, if COVID-related press numbers excluded, the margin is preserved and on an upward trend despite the decreased sales in the second quarter. EBITDA increased year-on-year by 36.7%, reaching RON 155 million on IFRS figures and by 38% year-on-year, reaching RON 156 million on a pro forma presentation. Last but not least, for the [ finance-specifics ] is the outlook for end of year and 2021. The strategy is to be prepared for post-COVID period when we expect an increase in traffic in all medical units and a closer relation between general practitioner, small clinics and pharmacies. We will continue development and expansion plans having already-assured financing from creditors, along with significant liquidity generated by the business cash flows. The current net debt to pro forma EBITDA ratio is up to 2.5%. As you know historically, it was around an EBIT of 3%, which we think is a comfortable level, given that the high demand for medical services is expected. We continue to support acute and chronic patients to post-COVID recovery projects and to the expansion of radiotherapy and oncology services. There are also additional projects related to the area of prevention, research and digitalization that are on our table. Here, I think it's important to mention, for example, self [ for treatment ] and self-payments that were implemented long before this period, and they took to pay off or another example is the online consultations that could be rapidly implemented given that we have the proper infrastructure. We will also continue gradually the development of Med Life Medical Park project, which has the potential to become the most complex medical project in Romania in the last 30 years. Moving on the M&A side. We show interest in several opportunities in the market, including Pharma segment, expected to have an important contribution to economic recovery and to maintain the health of the population in the years to come. In this respect, the group is focusing on relevant add-ons to the business line to further capture value and providing closure for the medical experience of our patients. More precisely, such acquisition is meant to complete the medical uptick we see. Of course, also important to mention that the new investment and acquisitions will be carefully calibrated according to the evolution of the pandemic. Now I'm moving to the second part of the presentation regarding the financial overview, and I will present the consolidated statement of profit and loss. In terms of the variances on a pro forma basis as compared to the same period last year, sales have increased by 5.1%, reaching to RON 747 million. Operating expenses remained flat at RON 672 million levels. Operating profit increased as a consequence by 78%, reaching to RON 78 million, translated at 10.4% margin as opposed to 6.2% in the same period last year. In terms of EBITDA, it increased by 38% translating in a 21% margin as compared to 16% prior year. In terms of EBITDA before IFRS, as we keep presenting figures also before IFRS increased by 47.4%, reaching RON 126 million, and this is translated in a 17% margin as compared to 12.1% last year. Moving to financial results. There was a 17% increase in financial results, which is mainly due to increased unrealized foreign exchange losses as compared to prior period coming from the FX rate. Net result has also increased by 133%, reaching RON 45 million. In terms of the split domestic bonds, 88% is pertaining to group owners and 12% to NCI. And regarding the usual pro forma adjustments that we include, I will mention them again. It's a reclassification of the subsidies in amount of RON 23 million in relation to the National Health program. The financial results of the acquired company in this period for the period of January and March. And COVID one-off expenses in amount of RON 1.5 million. Moving to the operational key performance indicators. You will see that the increase in sales. So as compared to the same period last year can be presented as follows. So on one hand, there was the acquisitions made subsequent to 9 months 2019. There was a strong operational performance in January and February. There was a drop in sales starting with March due to the military ordinance that were restructuring the healthcare system during the state of emergency that led to a 22% drop in sales in the second quarter. And after that, the rebound of sales that I presented in more detail in the previous part, which was 47% higher in the third quarter as compared to the second quarter. But also by 24% higher as compared to the third quarter of 2019. Here is because increased traffic in all business lines, increased traffic in hospitals and PCR testing and translated into the ability to recover the sales that we second quarter. Regarding operating expense evolution, I think it's important to refer to the percentage of operating expenses out of total sales. And here, we can see a reduction of 4 percentage points in margin. The dynamics is coming mostly from salaries and related expenses, where, on one hand, the companies have benefited from the subsidy from the state regarding the technical and employment for the state of emergency period. But on the other hand, there were some measures that we took regarding the restructuring and reshaping the structure of the personnel to better address the needs of the business and that will have the long-term positive effect on profitability that we mentioned before. Another increase so for example, a 0.7% increase in consumable materials and these, then materials is associated to the reagent use in the laboratory business. Regarding the consolidated statement of financial position, there are no significant variances on the balance sheet. The increase in total assets and corresponding liabilities is coming from the consolidation of Micromedica and [ that is mostly ], that was not included on the balance sheet at the end of 2019. And also a remarkable increase in cash and cash equivalents, so that more than doubled since the end of the year. That will be better reflected in our cash flow statement. Before cash flow statement, there is also some short of illustration of our debt position, but Slide 16. You can find the net liability position that followed the 18.4% decrease, which is coming mainly from the repayments made under the IFRS 16 rent contracts. And the financial debt that increased by 19.6%. Here is mainly -- these 2 main investments made this period and the largest one was the one that we also mentioned to the prior call regarding the acquisition of the plot of land here in Grivita and the building, the former outpatient unit. And also, the withdraw of the EUR 5 million facility that was taken or the COVID working capital support in case we may need it. So moving to net debt. You will see a flat position of net debt, which is still translated into a better net debt to pro forma EBITDA ratio for this period. Last but not least. Regarding the statement of cash flow. Cash flow for this period was characterized by a good operating performance and was reinforced by controls and saving measures. You will see a 61% increase in net cash from operating activities or 80% increase in cash used in investing activities. And also an increase in cash with RON 22.9 million on the financing activities. I think that will basically be it so this is the presentation for today. But of course, we are now ready to take your questions, and thank you very much for listening.

[Operator Instructions] I receive first question. It is from Laura Simion of BRD.

I can work 2 short questions about this quarterly results. I noticed that the average price per patient in the hospital business increased by 15%. If you could detail how much of this increase is due to price increase? And how much do you book the complexity of the intervention? And the second question is regarding the business in Hungary. If you saw there the same part as in Romania, I mean, a drop in the second quarter and the strong rebound in the third quarter. And is overall the plans for this business from now on? And if you tell us something about your view as the medical experts on 2021 pandemic evolution? How do you see the evolution of the pandemic, there will be, I don't know, first wave of the virus, how do you see the vaccine approval and implementation and so on?

Okay. Thank you. I will take your 2 questions. And being the second one. And after that, we will address also your first question. So regarding the increase in the average stay in hospitals. As Ari mentioned, the in-vitro increase as compared to the third quarter of 2019 and it's linked to the complexity of the cases handled during this period. You will also see an increase in the number of patients. So we had 25,000 patients in the first quarter this year versus 20,000 last year -- the same period last year. And if you also compare to the second quarter of this current year, you will see that basically, we recovered the number of patients that we couldn't address during the state of emergency. And yes, once again, it's related to the complexity of cases because we now address more sophisticated interventions related also to chronic patients and their pathology because many patients that couldn't pursue their interventions of the public hospitals, now will move to the private hospitals.

I will take the second question, if you allow me. Regarding the project of medical centers which is the company that we own the majority stake in Hungary. Now as Alina was explaining the evolution of the Romanian, let's say, market, until now. I would just say that the evolution in Hungary is pretty similar. They were under lockdown in the second quarter, and they succeeded to remain open those during that period. And also, they were able to provide COVID tests for their patients. We were able to take their stock, they were able to test most patients they are obviously also supposed to do more complicated procedures. As we know, by now, the project -- the company is looking well. They recover completely after the lockdown. Even if right now, the number of cities in Hungary are still high. So they are back in business. That is something that we tried to do in the third quarter in Hungary, we tried to do an expectation. But unfortunately, we couldn't finalize it for various reasons. So if you ask us, which is our plan in Hungary, it is to expand our branch and are there. And it seems that the thought is to acquire businesses in locations where we found a good position for [ Micromedica ] when we think about various -- the business lines that we have.

Has your question been answered?

I have one more question. I think the first. Yes. The third question was regarding the pandemic situation and how this has evolved next year and the end of this year. It seems that we are -- we have been hit by the second wave in the European countries. What we have found out from the analysis that different -- the vaccines that has put in the market is there is a hope. Pfizer is very near to get all the approval for distributing their vaccines. As you can see, there is European efforts to allocate pretty equilibrated vaccines around the European countries. But if you ask me, the news that there is a vaccine on the market is mainly good for us because it will set up the division that they hope. I mean people will run out of this fear, that says coming together with the funding. So even if we'll have the vaccine in December or whatever, for sure, we will not be able to immunize ourselves in a large-scale until mid-next year. So if you ask our opinion is that the pandemic will continue. The pandemic will continue also next year. But we have the -- we have in front of us a pandemic, which is not so furious.

Okay. This was also my opinion, I think we will see 2021, much like this year, maybe not with the first shock that we had in spring, but we have now the second wave will then probably -- there will be decline in cases. And then after that people start to move about, again we have our third wave and so on. So I think 2021 will be in terms of pandemic evolution with up and downs.

Yes.

Sorry, I would just interfere Mihail over here for one second. So I don't think that's a subject anyway for this topic today for our results. But very, very short. So Med Life is prepared for the worst scenario, that means even a longer pandemic and this is the reason why we have developed services and we have adapted in the second half of this year to offer services that are needed and also to, let's say, to help the public system to offer fast and high-quality tests for these COVID patients and also for some of them to monitor their health situation, especially for the health problems that together with COVID they do to award, let's say, evolution of the patients usually. But one thing is clear, we are preparing for the COVID even for a longer period but it doesn't mean that we believe it's going to take a longer time or a second, third, fourth wave. We are a medical company. We are also comp -- a vaccination resolution. And as long this vaccine, they work with 90% as announced, and they will be approved by the European medical, let's say, authorities and by FDA, that the solution and most probably will diminish strongly the pandemic. We don't believe into the third wave. And of course, we don't -- let's say, I don't want tone from the conversation from this conference obligated with our results that any kind of the third way is expected. Thank you very much.

We'll now go to the next question is from Alex of Fiera Capital.

Congratulations on the results. I just had one question. You kept saying in the summary of the financials that there was a kind of benefit from COVID, I believe, related to testing. I couldn't work out what the quantity of that was. What was the impact there? What was the positive benefit of COVID in the Q3 results in terms of testing?

I'll answer that. I will take it over. So we will not export that that's for sure. What I can tell you is that we -- if this COVID wouldn't happened, that is very clear, Alina, has explained during the presentation, Med Life would still be able without any COVID test performed to keep the margins as strong to the shareholders and even increase it a little bit. So despite the decrease of sales, Med Life was able to increase a little bit the margins despite this decrease. And the measures we have taken to cut down this for -- starting with the second half of March and April, will put us in that situation. That doesn't mean all the risk belongs to the lab test and to the COVID test. It's a long readjustment of the services, which include, if you want, even the fact that we are discussing last year a lot about the informatic and the digital measures that we are taking. And I can tell you that it was interesting, in March, Med Life had in place, just to give you an example, self checking, self check out in most of the clinics and self pay, imagine during pandemic how useful was that. So how much use we got out of them. The second, we knew how to adjust and to come and to welcome our patients because we have already prepared an online medical assistance to the patients, which was ready just in January last year, and we could use it during the pandemic. So of course, it is an important part is the COVID test. But very -- not all. So it doesn't mean that represents, let's say, a very large majority of these COVID thing. The second one, we believe today, if the pandemic we still -- will still stay with us for 1, 2, 3 or 6 months, the demand of services is high. So immediately after the lockdown is raised, or of course, the number of cases encourage people to come then to see the check their [ immunization ]. This is happening. So I believe me, there are hundreds of thousands, maybe millions of Romanians that have stayed mostly at home. They were afraid to go out and to have the checkup, even some -- I will tell you something important. The number of oncologic patients has decreased dramatically, maybe not in Romania, in all throughout Europe. So these patients will need a system immediately after that. And that happened also during the short time when the number of cases decreased during the summer. So we had quite a good summer for usual services. I mean, even we are surprised. We have a very good summer and not from the COVID because in the summer the COVID number in that decreased because there were no demand. Everybody believe that it was only one way. It was a V-shape of the social and economic evolution, and nobody wanted to have COVID tests. So again, the result is not -- the COVID tests are important. We are not going to invest figure. But it's a mixture of services that Med Life had the flexibility and intelligence to adjust and to compensate services that they are usual and before the pandemic happening with other services, which, of course, they were in the mind of the people, especially related with COVID, let's subset associated like I would just give you an example, heart diseases, blood pressure, lung problems or diabetes. So these are services that were largely addressed in the post when the COVID tests were not -- they don't have a big demand and when the number of cases decreased for a while Romania during the summer.

I see. That's very clear. And so does that mean I appreciate there and losses and the situation is very volatile. But I mean looking ahead 2021 and is this kind of a potential new normal in profitability, if, as you said, the core business has improved fairly organically? And these margins, you're talking about is significantly higher than you've ever already achieved before. And would you expect assuming some form of stability? Would you expect that trend to continue into 2021?

I would not expect this, let's say, margin to stay as it is today. But I do not expect that the margins will collapse. That's for sure. I would expect the big demand in services. And again, what we did in March and April was to adjust the fixed cost, and this we are going to stay with us.

The next question is from [ Stephane Bethere ] of Fiera Capital.

Can you hear me now?

Yes, we can.

Fantastic. Well, stunning results. I'm really impressed. In fact, I wanted to ask a similar question to what Alex just asked. But maybe just to clarify, if you don't mind. So I appreciate, of course, it was an unusual quarter. But of course, there were impacts in terms of top line as well as on the margins. But I think really sort of what we're trying to establish here is if we take this quarter, and of course, there will be growth going forward. Is it completely wrong to assume this is the new normal? And hence, if we multiply this by 4, this is broadly what to look at as a normalized P&L going forward after these distortions in the second quarter? And that's my one question. And the other one, I was hoping you can maybe talk a little bit about your plans on the M&A side. You referred to briefly, appreciate you might not be able to go into a lot of detail that perhaps at least we can talk about scale in terms of like what size of investments you have in mind, just thinking really about the balance sheet and in terms of how much you think you might be able to stretch it.

[ Stephane ], for the question. So again, it is a very unusual facts. We have adjusted our services, and we believe it's not for the short term. It is the first time in the history of the mankind when the people realize, health insurance is not enough for you to survive or to keep you safe. It means that if you are healthy, you will -- you'll face the any new pandemic. So that will stay with us. The masks have been present for all of us traveling to Asia, and we are surprised they're wearing it. We did know that the first SARS was a different animal for that part of the world. So the masks will stay and the checkup, which everybody will say -- we strongly believe will stay with us, and we are readjusting ourselves for the new world that is going to come. So that's the one, the #1. So we believe, yes, there is going to be a very good demand of medical services, and we just had our strategic meeting last week mostly in line with some of us is some improvise TV studios to be able to discuss and to have an interactive discussion how to position ourselves. And we believe, yes, we can position ourselves well in order to capture economically, our position, which is very strong at this point in time. So -- but that is to tell you, yes, [ Stephane ], we are prepared, and we'll do -- we know what is going to happen, that's a bit too much for this point in time. And nobody should be, but I will say, yes, we know that's the formula to win the game. But we believe we are very well positioned. Secondly, the M&A is linked with my first -- with the first answer that I will give you. So we believe the fact that pharmaceutical and subscription were very resilient during the lockdown and the pandemic, it's true. So we intend to consolidate this sector. So if it's going to be M&A, as you could read throughout the lines in our press release today, yes, we wish we were having a bit more pharmaceutical into our model 6 months ago and now. So that would be expected to be a bit more developed and to have an eye on that. Of course, it doesn't mean that the next medical company will not switch to a pharmaceutical or to a network of pharmacy, no way. It means that we believe that GPs, which we said in Romania, [Foreign Language], which they were empowered by the government to keep the contact with most of the COVID patients will have a much bigger role in the future and his linked with pharmaceutical. And with the first aid will be a key point in the years to come. And expect net large, we have moved into these respects and -- but don't believe as scale Med Life will make acquisitions at -- in big scale of -- in this sector, maybe will make gradually some acquisitions and don't expect Med Life -- we are saying during the press release, we have EUR 20 million loans which we haven't used for acquisition. And of course, we have some ammunitions because, obviously, as you can see from our figures, we are very liquid. So we can generality, and we can generate leverage because today, it's the first time a long time, our debt-to-EBITDA ratio, it went down to 2.5%. So we have some room here. We want to develop, and we want to -- we have our strategy. We have discussed our strategy. We have a few points, but we are not going to rush into that. We will expect some pharma business to come soon, some new -- to complete our services, which happens, but not at a large scale. And of course, you should expect also us to be prepared for lab tests, which we are doing very well. And then larger bit and any kind of virus test may come because the people we test themselves for viruses for a long time by now. So I cannot tell you more in long answer, but I hope it covered your question. I'm not going to go into market. Yes because of this...

Fair enough. But just to clarify that, that suggests that your debt ratio, even the net debt-to-EBITDA might pick up again a little bit since you are seeing such opportunities. And obviously, we have potential medical talk. There's, of course, another, say, slightly larger investment project have a view as well. Is that a fair assumption?

Expect that leverage to, yes, to go up back not to 4 because -- and you get that done. But for sure, it's going to be a bit higher than is today. That's one. In Medical Park, that's the fourth question of this question. Don't expect us to rush. To be honest, we are very comfort, these medical park, which we both the land and this building. For the time being, we succeed to switch very rapidly and to occupy some of the spaces, especially with head office because now we are -- we have been in a cost a lot with this. But -- and we moved a lot of personnel there. And we believe the future, if we speak about margins, is, as we always said, to concentrate the 24/7 costs, which are huge at this point -- at this time in less places than we have to take.

The next question is from Bram Buring of Wood & Company.

So I realize we'll reach the end of the call, but I see we have quite a few questions. May I ask them one by one, please?