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] The conference call for preliminary annual financial results 2020 will presented by Mr. Marcu. May I now hand over to Mr. Marcu, who will lead you through this conference. Please go ahead.

Good evening. Thank you for the introduction. So today, we'll present the preliminary results of MedLife for the year 2020. And it's going to be taken over by my colleague as usual, Alina, that is our IR Manager. And after that, of course, we'll be all the team. Together with you, we have the CFO, Mr. Lungu. We have the Board member and the Treasurer and the financial institution representative in the Board, Mr. Preda, with us. And of course, Alina, you knew, that make the presentation, and at the end, we'll answer your questions. Thank you very much. Please, Alina, take over.

Hello, everybody. Thank you, Mihail, for the introduction. I'll start the presentation for the 2020 preliminary financial results. I'll start with some key messages for this year, followed by a financial overview in which I'm going to present the statement of profit and loss, the statement of financial position and the consolidated statement of cash flow. This year was characterized by rapid switch to the new social and economic context and the calibration of the operational structure of the group, which helps the group to keep up with the needs of the patients in this pandemic context. Despite the traffic decline that was noted in March and April, the group managed to reach pro forma sales that exceeded EUR 250 million, which is translated in a 25.5% increase in pro forma sales as compared to prior year. Please note that pro forma figures include also the acquisitions that were announced in the fourth quarter of 2020 which were not finalized as at 31st of December 2020. And here, we include Veridia, KronDent, Pharmachem and CED Pharm Group. The acquisition creative will opportunities to capture demand for medical services in the post-pandemic recovery period. In addition, the group has seen a gradual improvement in profitability, which is in line with the strategy of recent years. The group represented RON 224 million pro forma EBITDA for this year as compared to RON 147 million EBITDA in 2019. This translates into 51.9% increase year-on-year, while the increase in EBITDA margin was from 15.3% to 18.5%. Moving to the net result. It was RON 69.9 million pro forma net result as compared to RON 18.5 million net result in 2019, which represents basically an increase of 3.8x higher year-on-year. While looking at the net result margin, it increased from 1.9% to 5.8%. Moving beyond this financial performance. So MedLife managed to play also a key role in the society and gained detached leadership in pandemic monitoring through active involvement in medical research activities. We also plan to intensify these efforts for the longer period and to extend the SARS-CoV2 virus sequencing program and also to launch new studies to further support the authorities. We also have, as you know, a solid basis of historical result. And we, based on this, launched a new program for corporate business line, which is focused on anticipating certain trend in health in different industries and companies in order to customize medical services in order to reduce the risk of various pathologies among the employees. Basically, the new program will help companies to protect their employees and customers, and thus to reduce the costs and increase productivity. In terms of core expansion and M&A, the group will continue to strengthen the position at the national level through mergers and acquisitions, but also through the development of projects that aim to help the patient of COVID to recover after this pandemic. The development plan for this year also includes the gradual development of Med Park project, which has the potential to become in the next period the most complex medical project in Romania. That will be also comparable with other large medical projects in Europe. Of course, the new investments and the acquisitions will be carefully calibrated according to the evolution of the pandemic. Some other points that I want to mention are the assessment of IFRS 16 standard adoption and the change in the accounting policy that we made. Management during this period, was preoccupied how to adapt to current economic context its contracts under leasing. And given the complexity of IFRS 16, we are constantly trying to improve how to deal with the implications resulted, and especially, I think, on top of the business restrictions that were generated by COVID-19. The consequence in 2020, management secured the group's strategic locations and renegotiated better commercial terms on the long run. In terms of the reassessment, this led to a RON 2.1 million impact in net results for the period of 2019, meaning decreased from RON 20.1 million to RON 17.9 million in terms of P&L. And an increase in lease liability with RON 36.3 million, while in right-of-use assets of RON 34.3 million. If we are looking at the net debt-to-EBITDA ratio, we also recomputed the ratio in prior year, and it has increased from 3.1x to 3.3x, which is still well accommodated in the bank covenants and the financial ratios that we present. Regarding the impact in 2020, we have included in our consolidation an additional RON 10.3 million, which were recognized in the fourth quarter this year, and this represents allowance for receivables. Management changed and basically stressed the estimate that the -- are done under the IFRS '19 provisioning model. In order to be protected in case of increased probability of default of corporate clients post COVID, anticipating basically a delay of economical behavior of the client as a result of the restrictions that were enforced by the pandemic. And another subject is a RON 5.1 million recognized also in Q4, which comes to the provision for untaken holiday, because the longer lockdown period and the state of alert, which were characterized by work from home and a few options to travel, led to fewer vacations requests from the employees. On top of that, large number of personnel were enrolled in technical unemployment as a measure to accommodate the financial effects of the pandemic. Worth to mention is that both these elements are noncash elements, so they won't impact the cash flow. Moving to the consolidated statement of profit and loss It's presented on Page 10. While on Page 11, I summarize the variances. As mentioned before, sales increased by 25.5%, reaching RON 1.214 million. Operating expenses increased by a lower amount, by 20.3%. Operating profit more than doubled, reaching RON 119 million. And this translated in an increase in margin from prior year when it was 5.9% to 9.9% this year. This is due to the improved financial performance and the cost-cutting measures take during this year. In terms of EBITDA, as already mentioned, increased by 51.9%. We published a margin of 18.5%. While in terms of EBITDA before IFRS 16, the increase was by 65.8%, with a 15.4% margin. In prior year, it was 11.7%. The net result increased 3.8x, reaching RON 69.9 million. Regarding the split of the net result between the owners of the group and the NCI, 88% is pertaining to group owners while 12% is pertaining to NCI. I told you about the pro forma adjustment. It includes the financial results of the acquired companies, and they amount RON 136 million in terms of sales for the period January-December 2020. And also, RON 5.2 million one-off expenses. These are related to the acquisitions and consultancy costs for the companies acquired and also one-off expenses related to the research studies undertook during this period. Moving to Page 12, the operational KPIs. The increase in terms of 12 months 2020 IFRS figure versus 12 months 2019 of 11.5% are presenting basically the acquisitions made and consolidated starting with the 1st of January, and here, we mentioned Micromedica and Lotus and a strong operating performance in the rest of the period despite the decrease in traffic in March and April. And this was because of the quick adaptability to new services, the repositioning on labs, the opening of -- for the 6 COVID-19 laboratories, but also on the soft medical activities in the area of hospitals and corporate. This helped us to meet the patient's demand and also offers a solid perspective for the group for the period post COVID. In terms of variances in business lines. So briefly, you will see an increase in revenue in hospitals. As mentioned, we managed to attract chronic patients from the public hospitals that were overburdened during this period with COVID-19. Instead of laboratories, again, the largest increase of 32.2%, which is linked to the PCR laboratories. And here, you can also note an increase by 51.5% in average fee, which also is the translation of the PCR testing fees come with a higher price. On the contrary, you can see a decrease in the number of visits in the clinics, because during the pandemic, we are seeing outpatient who needs to a good figure. And also, in some alternatives that during the case of emergency was completely closed. Regarding the operating expenses evolution at Page 13. I want to summarize the release and what are the manual components of this release of 4.2 percentage points in margin. On one hand, I have an increase in consumable and repair materials of 1.3 percentage point of sales. And this is due to the reagents and materials related to PCR testing that changed a bit the mix in the consumable materials. We have a decrease in rent expenses with 0.5 percentage point of sales, and this is due to the renegotiation of rent contracts. Decrease in third-party expenses and salary expenses with 5.7 percentage point, and this is due to personnel-related cost-cutting measures, the technical unemployment, but also the natural migration to public hospitals during this period. And last but not least, the increase in other administration and operating expenses with 0.9 percentage point of sales. And this is because of the 2 impacts mentioned before, the one of RON 10.3 million additional allowance for receivables and the RON 5.1 million the provision for untaken holidays. In terms of the consolidated statement of financial position, we also presented the reassessment of the 2019 IFRS financial statement with the change in policy in IFRS 16, with the increase of RON 34 million in the right-of-use assets and RON 36 million in lease liability. Apart from that, the increase in noncurrent assets is mainly coming from Grivita for more outpatient needs and the land that we bought this year. The increase in current asset is mainly coming from receivables and from inventory, inventory related to laboratories and also related to the pharma that has increased in terms of pharmacies, the network has increased. The cash and cash equivalents generated by the business. In terms of long-term liabilities and current liabilities, because here, we include the leasing liabilities also. Page 15, I present the snapshot of the net debt of the company, of the group, and also the net debt-to-EBITDA ratio. So in terms of leasing liabilities, so the total has a variety (sic) [ variance ] of 2%. While in terms of financial debt, it increased with 22.5%. This is due to the investing activities undertook during this period, with part of them were financed to loans. So the net debt-to-EBITDA ratio for this period is at 2.8%. So -- and the last one is the consolidated statement of cash flow. You will see on operating cash flow, before working capital and other monetary changes of 2020 -- RON 221 million, which is very in line with our EBITDA. Cash generated from working capital changes of RON 64 million. Other monetary changes, which are the income tax and net interest paid amounting to RON 31.8 million. That the -- or operating -- the net cash from operating activities amounted to RON 125 million, reflecting a 17% increase in net cash as compared to prior period. The cash used in investing activities is around EUR 200 million, while the cash coming from the financing activities in the period was of RON 28 million. This led to the cash and cash equivalents position at the end of the period of RON 82 million. This is my presentation for today. I would like to hand it back to you, and we are waiting for your questions. Thank you very much.

[Operator Instructions] We have a first question. It's from Christian Petres Giorgios .

[ Christian Petres from Hanan. ] I just have a several question. First one is related to -- can you hear me?

Yes, yes. Go on.

Okay. First one is related to Table Page 12. I see very strong growth across all lines in average fee. I don't know if this is related to pricing power to the mix of products that you sell. Do you think this is sustainable? If you can elaborate more on this. Another question would be on leverage and on covenant. If -- where do you -- and also on M&A, where do you have any particular sectors that would you like to focus on? Where do you see opportunities? And also how are plans abroad -- discussion abroad going? and further question -- I mean I see -- for me, it's a little bit -- I see that the level -- absolute level of debt is going up, although the, let's say, ratios are pretty stable or is a little bit decreasing. And the third question would be on the Grivita project, how things are going there? And when do you think we'll see some -- see the first savings?

I will take over here. Mihail Marcu here. I will take over the last question. Number one, as we already discussed with all the investors, Med Park, with that is the Grivita project, will be financed and is not going to be made step-by-step in the further years. And actually, the second stage, which was defined very clear in the materials that we have published on the [indiscernible] website, will be done only after some discussions and some feedback from the main investors, of course. But again, it's ongoing. We hope that to -- for the time being, we just moved off, we just said that -- we have done that in the right time during the pandemic. So we moved all the offices that we are not paying rent anymore. And actually, we have improvised a bit because, initially, that space was projected to be the, let's say, learning buildings and trying to teach some of the nurses, not necessarily to make a new school, no, don't understand that level. But any -- the cost of labor with the medical staff is important, and we can leverage that by this in-house lessons and trainings. So we have moved there. Second will be to open, if possible, a new clinic in a new building that we have in the -- already built. And it was a clinic before. So that should not be an important amount to be invested. So don't expect an invested higher than RON 5 million, let's say, in the new facilities. And of course, it will succeed also to make some investment into the oncologic side. That means, especially on the radiotherapy, that, of course, the investment in medical are going to be a bit higher for this pipeline. The rest of the project, which means moving from one time to another different clinics and in larger hospital in the first stage, can be financed, easily financed by our present cash flow and not necessarily to have additional funds. If we go to the second project, which can be a beginning of, let's say, 5 floors and -- with the minus 3 floors for the parking. That is subject to maybe one year later to see the pandemic as it has. Maybe next year, we can discuss the project sooner, not sooner than -- for sure, that is not going to be a subject opened before January. So that's the subject. For the acquisitions because, you asked that, the appetite and for the Romania and the rest, you should see some acquisitions. Now we are trying to cover some cities that we are not present. It means cities with maybe 100,000 to 200,000 inhabitants. We have some discussions in different places. Some others, maybe you can open greenfields, but that's not necessarily an important amount. So we expect -- comparing previous years when we acquired company even of EUR 20 million, let's say, value. I think projects of 2 million to 3 million are going to be much more likely to have. It's true. We have discussions with some entities that are a bit larger, but they will not make a difference to have big, big investment in this respect. If we speak about going abroad, again, we should take into consideration also small investments. Maybe we'll enlarge in Hungary. Maybe we'll come -- we like Belgrade a lot. We like some of the neighboring countries like Croatia, we like, we have visited. We like Slovenia. We like Slovakia for the time being. But for the time being, we don't have a concrete discussion, except some -- 2 of them with some limited companies in Hungary today. If we find out, for sure, we'll find a way to announce if the investments are going to be larger than EUR 1 million, EUR 2 million, EUR 3 million somehow to give the sign to the market that we are going to do that move. So this is about the 2 questions I had answered. Thank you.

And I will take your first question regarding the increase in the average fees. Because you mentioned it correctly, it's related to the mix of services during this period, a point in case (sic) [ a case in point ] is [ pharmacology , which shifted very much to implantology services. In terms of hospitals, more complex in -- are performed in the hospital area. In terms of laboratories is the effect of the PCR pricing. In terms of corporate, they brought some add-on services like triage at the headquarters of our corporate clients and so on in order to help them deal with the pandemic. And last, the pharmacies, it's coming mainly from the online website, because we also had antigen testings included there, and the orders were significant. So that would be, yes.

Okay. And going forward, where do you see the market? It will be, let's say, high to higher single digit to low double-digit. Where -- at what type of growth should we look like -- to take into account current structure of the group?

Christian, I'll answer that. For this moment, to be honest, we are not -- we have -- we see a same growth as happened the previous years. That means not 2020. 2020 is not something. It's not any reference to us because that was totally, of course, everybody knows, totally unusually. Keep that in mind. We have succeeded to grow despite the fact, almost 2 months, we have been blocked and any prevention activities have been forbidden by law. So basically, starting with 15 of March by the end of April, any kind of, let's say, prevention type of health care was not performed. And for MedLife, that was half of the business. Despite that, we succeed to find other fields, the complexity of the company, the fact that we have so many other -- we have hospitals. We have clinics. We have labs. We have corporate. We have some pharmacies. We have also some stomatology, some dental business. So we try to find that. For this year, because I don't want to get to too much, we expect growth of the market like 2 digits. I cannot say for the sake of competition which -- where we find that, but we think we can get there. That's our feeling for the time being. It doesn't mean is -- don't expect 2 figures higher than 11, so -- or 12 maybe, I don't know, that can be just supposed. But should be like 2 digit, the growth of the sector -- of the health care service sector in Romania. It also will depend very much of the public policies. Don't forget that all Europe and Romania has advanced higher figures for the health care. Why I'm saying higher because if you look at the pure budget of Romania in health care, that is going to be decreased a bit. But basically, it decreased because some of this budget was used for treating COVID patients, which number has decreased. And it's not expected to be at the same number, except maybe the next few months. Of course, that may happen, because we believe that it might be 1/3, maybe a bit smaller wave into Romania due to this U.K., let's say, mutation, which is present. And actually, MedLife was able to announce into the market and was first to identify this increase. But going back to the question, we don't expect this cries in the pandemic to go as much as all the year, and that will make very much difference. Still, we believe in 2 figures growth of the sector.