Medicover AB (publ) (MCOVB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 results presentation. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Mr. Fredrik Rågmark. Please go ahead, sir.

So good morning, everyone, and welcome to our third quarter 2020 earnings call. And this time around, like in the second quarter this year, with these exceptional times that we are living through, I would like to also this time start this call with sending a strong voice of recognition and thank you, first of all, to our dedicated staff and, particularly, our frontline staff who all work relentlessly and professionally day round to handle the ongoing COVID-19 pandemic. So I really want to start with sending that voice of recognition and thank you. Then over to our results. This is our first-ever, more than EUR 1 billion revenue run rate quarter, so that is quite a milestone, in fact. And for those of you that have had the pleasure of joining us since the IPO 3 years ago, the third quarter 2017 was the first full quarter that we reported, and we are up 82% since then. So in fact, a 22% compounding growth over those 3 years, which I think well illustrates the built-in power in our business and our business models. Clearly, the rebound that we reported in the second quarter has continued quite strongly also in the third quarter with robust demand pretty much across the board for our services. Important to point out is that, if we call the base business or the underlying business, is not yet back fully at pre-COVID-19 levels. And of course, it varies a little bit between business to business. But in general, that's an important comment, and we will show you some graphs to illustrate that a little bit later on. However, this is certainly more than compensating by surging demand for COVID-19-related services, which again, I think, is very well evidencing the resilience of our business. We have strong underlying margin expansion. And again, important to point out that also, when we strip out the COVID impact, we still have quite significant underlying margin expansion in our business, evidencing the effect of scale, cost optimization and ongoing efficiency programs. Always good to remind you what I think I say every time we have this call together, the benefits of our diversification, our diversification on payer groups, our diversification on service models and our diversification across our different geographies. As we talk you through the presentation this time, I think it is as clear this time around as in all other calls how important and strong benefit that is to our business. We have exceptionally strong operating cash flow, again, evidencing the growth of the business. Joe will speak much more about that later on. Our corporate paid business, which, as you know, is very significant in Healthcare Services, as we commented in the second quarter, it's now back, growing again in the third quarter, albeit at lower rates than historically. But I think that's a very important point of principle to show that even in times like we are still living through, that business is back growing. We are all aware -- you are all aware of that the virus spread is again increasing across the world and certainly in our markets as well. And of course, our main operational focus is on protecting and supporting all our staff this way in order to be able to service and help both COVID-19 and other patients and customers as well as possible. Looking specifically at the quarter, so EUR 262.5 million of revenue, just short of 24% top line growth, of which organic growth 12.3%. So indeed, a very strong figure. You see on the graph to the right, the second quarter 2020 then, the prior quarter being the exception to our growth trajectory, so it is nice, good and important to be back with our historic solid growth numbers. EBITDA was at record levels, north of EUR 50 million, 54% up versus prior year with a 19.1% margin. Very significant growth in our Fee-For-Service segment, plus 37%, now up to 56% of group revenue. That is, of course, heavily impacted by the inclusion of Medicover Hospitals India from December last year, as you know. So in fact, I think this is the first time that Fee-For-Service is significantly more than 50% of group revenue. So in order for you to be able to understand as much as possible the results and the underlying business, we have carved out the best estimates possible in terms of the specific contribution from COVID-19. And in this quarter, that is estimated on an EBITDA level to be EUR 12.5 million or 2.8% of the margin increase, which then leaves, as you see, 1 percentage point or 100 basis points underlying margin improvement in the ongoing business. Important to point out then is, of course, that, as you see, when you read through the full report, that we are estimating that we have lost out quite significant amounts of revenue, more or less equaling the additional revenue that we estimate came in from COVID-related services. But the fact that we can grow the underlying margins despite losing out quite significant amounts of revenue still on the not fully recovered base business, I think one really needs to recognize the importance of that. As we have communicated before, we maintain the 3-year financial targets for 2020 through 2022. On the right-hand side at the bottom, you see the 2 pie charts that we typically show you. What is different this time around? Well, Fee-For-Service has grown quite significantly as a proportion of overall revenue. The funded business, the employer paid business is back growing. It's 3% year-on-year, much lower than historically. But again, of course, the important thing here, it's a positive number. We brought in 24,000 new members during the quarter, which is not insignificant. And on the geographic split, I think the thing to draw your attention to is the German segment, which has now reduced to 23% because of India inclusion. So you see the German pie is growing 26%. That's a number that sticks out. There's very minor elements of acquisition growth in that. So the vast majority of that number is underlying organic growth in the largest and most mature health care market in Europe. So I think that number somehow sticks out. Then move on to Healthcare Services. A very strong quarter for Healthcare Services. Revenue up 29.5% to EUR 146.4 million. Organic growth, just short of 7% of that. EBITDA up a very strong 76% to EUR 29.7 million and north of 20% EBITDA margin. And this very strong performance is coming from, certainly, from contribution from COVID-19 services, but also a lot of work being done with the cost optimizations. We estimate the additional contribution on EBITDA level from COVID in this division at EUR 6.4 million or equivalent of 2.4% of that margin expansion. So you extract that out and you see the underlying margin growth, excluding COVID, was 2.9% up. Again, the point I made on the group just recently here that, remember that, that margin growth, margin expansion is coming despite having them still lost out quite a bit of volume in the still not recovered base business. So that's a very strong number. Fee-For-Service, which in this division now, for the first time, is up to exactly 50% of revenue, never been on that level before, up 68%. Again, of course, most of that being the inclusion from Medicover Hospitals India that were not in the numbers last time around. Members now, just north of 1.3 million, up 24,000 for the quarter. So that's an important number. We had very high demand in India during the quarter for COVID admissions. So we had 5,000 admissions during the quarter, which is significant. That tapered off somewhat towards the end of the quarter as the virus spread somewhat reduced in India towards the end of the quarter. And on the bottom-hand pie charts, I think the only thing which I will draw your -- or want to draw your attention to is, again, India then representing now 20% of revenue in Healthcare Services with the full inclusion and growth of Medicover Hospitals India. Then moving on to Diagnostic Services where revenue was also up a robust 17.5% to EUR 120.1 million. Organic growth was higher, which is then an effect of that. We've had quite a bit of negative foreign exchange movements against us, so pulling that out for an organic number that gets even higher at 18.7%, which is very, very significant indeed. EBITDA at EUR 23.5 million, up 25% to a margin of just short of 20%, supported by significant amounts of COVID-19 testing, which we estimated at EUR 6.1 million of extra or additional EBITDA contribution or 2.9% margin. If you pull out that 2.9% margin, and you see, in fact, in this division, margins contracted 1.7% versus the prior year quarter. Again, just as we commented in the second quarter, that's a direct reflection of the fact that in our underlying business, volumes have not fully recovered. And hence, our contribution from that business -- that part of the business is foregone and margin is slightly lower. So I still make the point, same as on Healthcare Services, the fact that we're having these results despite that revenue not yet recovered, I think it's a very strong sign. So Fee-For-Service, in this division, as you know, has always been higher, and it's 2/3 of divisional revenue, was up 16%. Number of tests increased by 3.3%. And I already made the point that although demand has certainly recovered sequentially, but non-COVID-19 testing still has some way to go to be fully back. We grew our BDPs as well this quarter by 9 of them. And now for the first time, we have more than 700 BDPs across the region. Next slide, we have a nice picture. Just wanted to share with you, we have communicated some weeks back that we have opened at the Munich Airport Terminal 2, a COVID-19 rapid test center. So this is up and running since about a month back. It works really, really well. So this is the way for travelers as well as airline staff to come get their test at the airport, get clearance, get on their plane to whatever destination you're flying. It's easy, it's very reliable and it works really nicely. So if anyone of you on the call happens to fly via Munich, this is Terminal 2, and I really do emphasize, come and see us at this test center. So looking at some specific impacts for the 2 divisions. So the net impact, if we take the -- we comment on this in more detail in the full report. So if we take the net impact of the estimated additional COVID-19-related revenues and pull-off, the lost revenue from fully not recovered business, in Diagnostics, we estimate that to be a positive EUR 4 million to EUR 7 million on the revenue line. We performed just north of 0.5 million COVID-19 tests in the quarter and a little bit more than 0.75 million year-to-date. So you can see the ramp-up in the third quarter relative to the first half of the year. And that test capacity is then further ramped up as we progress. And we just made the point that we continue to invest in infrastructure and machinery. We are upgrading really machine in terms of capacity. Us, as anyone else in the diagnostic industry, do have supply chain challenges, whether that is obtained in the high-throughput machinery or obtaining the required reagents or utensils around to operate. We manage that, but that is for us, as for everyone else, an ongoing challenge. And I just commented on the Munich Airport site with the pictures we looked at. On Healthcare Services, we estimate the net impact, so the additional revenue is less, therefore, gone so far from a negative EUR 3 million to a positive EUR 1 million. Now the integrated health care model has certainly shown a strong resilience, not the least by growth on the member level returning in the third quarter. Our utilization is returned to much more normalized levels. That's important to point out because that reassures us that any potential backlogs of care needed is being looked after and cared for. Our fitness membership business is still impacted where the -- some of these additional restrictions that has been put in on the back of increased virus spreads do impact the gyms business. So that is impacted. And demand for COVID-19 treatment has been significant in India. I already made that point. And we see that has been slightly weaker towards the end of the quarter, which, from a public health perspective, is good because that's on the back of the virus surge somehow reducing in India. At the end of the quarter, we had 630 dedicated COVID-19 beds in 11 hospitals across India. We have kept investing in bed capacity and also in machinery such as ventilators. I think the jury is certainly out in terms of where the virus spread is going to go from here. So we are not predicting. We're staying out of the prediction game, but it may very well be that the virus trends start swinging back up again in India, and then we want to be in a position to be able to put in our effort to support what needs to be done to help out. And elective services is still lower than normal levels. I think I made that point a number of times. We have then put on -- these are 2 diagrams. You remember in the spring when the crisis first hit, one way we tried on these update calls then to illustrate for you where we put on 3 graphs like this, which were shown in the German, the Romanian and at the time, the Polish Fee-For-Service Diagnostics business to show how demand dropped and then sequentially recovered. Here, we have done the same graph. This is just Germany and Romania to stay on one page. The point we made in the spring -- this is very reflective as well if we were to do the graphs of Fee-For-Service activities in Healthcare Services. So this is just really to show you, in terms of the trend lines, you see 2 colored graphs. The bottom one, which is slightly paler, that is the revenue levels, excluding COVID impact. And the more colored red is the total revenue level. So the point really to make with these 2 graphs is if you have the starting point at the very left and then you see where these 2 graphs end up, that you can see that the Germany point we made many times in the spring recovered pretty quickly and then has hovered along. The underlying business you can see in Germany has still not recovered fully, but it's more than compensated with additional COVID-19 services. And in Romania, that's even more pronounced, where you see at the right-hand side of the graphs, you see a -- we have some disturbance on the line there. [Technical Difficulty] Yes, yes, right. We apologize for that little technological interruption. So I was just chatting about the right-hand graph showing the Romanian daily revenue line as an illustration. And I made the point that while this is Romania diagnostics, on the left is Germany diagnostics, these 2 lines are very illustrative. Whatever Fee-For-Service business in the group we would put on, obviously, they wouldn't all be identical, but the trend lines would be very similar. So base business, not fully recovered; combined business, quite significantly ahead in diagnostics; in services, recovered but slightly below in base business. And with that, handing over to Joe for a bit more detail on the financial comments.

Thank you, Fredrik. On this slide here, we broke out the COVID-related revenues as well for a little bit of visibility. So overall for the quarter, COVID revenues were some 12%. And if you look down to the 2 segments on the Healthcare Services, that was a little bit lower at 11% and a little bit higher in terms of the Diagnostic Services at 12.7%. And that's obviously, as the diversity of the businesses in the Healthcare Services, there's only certain parts which then access and provide COVID-related services, whereas across the Diagnostics, it's much broader. And towards the end of Q3, we launched family services also in Ukrainian market and better Russian market. So that started to pick up a little bit towards the end of the quarter. If you look at our preferred measure, EBITDAaL at EUR 38.1 million for the quarter, 14.5%. And last time around, that was EUR 22.3 million, so 71% up. So really fantastic financial performance on the back of that recovery and on the back then in terms of the services that we've been able to provide to support patients and governments in addressing the pandemic. So I'm very happy to be here. If we look at then in terms of government grants, we had some EUR 1.2 million government grants recognized in the 3 months. And on the 9 months, we had EUR 2.4 million of government grants recognized within these figures, and that was treated as a reduction of costs. And if we look at the IFRS 16 lease adjustments, so the landlord-agreed reductions and assistance that they gave us in Q2, we recognize a small part of that now in Q3, so some EUR 200,000. And for the 9 months, that was EUR 1.4 million. So again, a reduction of costs. If we go look at some of the financial items, interest costs, EUR 3.5 million. Although we've reduced our debt levels, we still have the lease interest, of which EUR 2.5 million of that EUR 3.5 million. And so our underlying debt and actually mostly our winding -- or unwinding of discounting for various different items in the balance sheet, some EUR 1 million. FX loss was more volatile. As when IFRS 16 came in, I predicted, we will see volatility in that line. So we had EUR 2.3 million loss in the quarter, and EUR 1.2 million of that was due to euro-denominated lease liabilities on our balance sheet are getting washed into the FX line. Q3 cash flow is very strong, EUR 43.4 million. And this is with also increase in working capital or something, just over EUR 9 million. And for the year, we had positive inflows in terms of working capital. Tax charge, this we start to normalize as we are showing a good profitability level. We're looking to have something like probably at the order of a little bit higher than prior year, probably around 28.5% effective tax rate for the full year. Tax paid was lower as we have some ability to defer with some government schemes, so that was EUR 7.6 million actual cash paid for taxes. Cash and cash equivalents, very strong, just short of EUR 110 million, so up some just short of EUR 35 million since the year-end, obviously, with the proceeds from the share issue we did earlier in the year and then also our debt repayments. All of our commercial paper program has been repaid, so we have no commercial paper outstanding at the end of the quarter. The loans payable, net of cash, down to a very low 60 -- just short of EUR 62 million. Our lease liabilities, they've increased EUR 9.5 million. The other side of that FX movement going through the P&L account is the lease liabilities increase. So if you look on the 9 months, EUR 9.5 million, so just over half of that is due to FX movements. Lease liabilities then up to EUR 185 million from the year-end level of EUR 176 million. We've been expanding in our footprint in India. We're adding new facilities in there as we did a press release earlier on in the year, and then also in terms of adding new facilities in Poland as we put our expansion plans back into process. Liquidity, very strong. We have pretty much our full revolving credit facility undrawn. And then in addition, our cash balance is on hand. Debt markets are very accessible. Our credit rating has increased. So we're very well positioned in terms of being able to make use of our balance sheet in the future. Capital investment, EUR 10.5 million, have resumed our capital program as we put that on hold in Q3 with the uncertainty we have, for instance, firstly, coming online now in Q4 in one of our Indian facilities, and the next one should follow quite quickly early in the new year. We -- COVID-19 helped us to really crystallize some of our thinking and review of some of our development units. And we have an impairment charge, EUR 5.2 million on some goodwill and other assets, which have gone through in the 9 months. IFRS equity, just short of EUR 500 million, so EUR 479 million, up from the year-end, up from the share issue, up on the strong financial performance. We also had quite a large translation adjustment movement in terms of our net investment in foreign countries. We broke that out there. You see Poland is the largest of those. And obviously, with Poland being our largest footprint, even though the FX movements were -- the FX movements were large enough with our large exposure there in Poland to have an impact on that. Just to remind you, we look at our cash flow underlying in terms of the countries. And in all of those 3 countries there, we've got fantastic cash flows coming through, and that's really what it's about is our ability to generate cash out of our investments there. We look at our financial targets, so extremely respectable. So Q3 organic growth, 12.3%. And do bear in mind that when we look at the COVID-related revenues for the Healthcare Services side of the business, a large part of that actually is in the acquired part of the organic -- of the growth. So very respectable. And even if we look at the 9 months, still a very good growth organically, even taking in the big shortfalls that we had in Q2. Our adjusted EBITDA margin, 19.8%. So again, very respectable. And even for the full year, 15.5%, which then is already at the target levels for 2022, obviously helped by the COVID-related business. And then our capital structure, very, very respectable again, so 0.7x in terms of our loans payable net of cash looking to our EBITDA figure. So I think that just reemphasizes, in terms of the liquidity point I made earlier on, that we have a very good position in terms of being able to leverage the balance sheet further with both organic and inorganic growth. So Fredrik, maybe I'll hand back to you.

Sure. Thank you, Joe. So before handing over to questions you may have, just a quick wrap-up. So we clearly have a very strong quarter behind us. In fact, I think it's a stronger quarter -- strongest quarter we have ever had. We see continued strong and growing demand for all COVID-19-related diagnostics as we go forward. We see some signs of early change in consumer behaviors for elective services due to the increased virus spread in our markets, but so far really only marginally. We do expect our strong growth trajectory to continue as historically. And I think we are very well positioned, considering where we are and, certainly, our balance sheet and the demand situation for -- certainly for the remainder of 2020 and also into 2021. And with that, we'll wrap up, and very happy to see if there's any questions.

[Operator Instructions] Your first question comes from the line of Kristofer Liljeberg from Carnegie.

I wonder about the COVID positive effect on sales in the Healthcare segment. Is this mostly related to India? Or have you had in-patients in other countries as well?

Yes, Kristofer, it's mainly related to India. We do have it elsewhere as well, but it's mainly India.

Okay. And your comment about the continued strong demand for COVID-19, I don't know if you phrased it services or whatever, was that -- is that...

I said related diagnostics.

Okay. So it's -- so where you see it now is in the Diagnostics side, not in the Healthcare side?

I said that we are certain to see continued strong demand in the Diagnostics side. And the demand on the Healthcare Services side is very much related to how the trajectory of the virus spread will go and particularly in India. And I don't want to get into speculating. That was the point I made. We invested to be able to be in a position if it start to go north again, but time will tell how the virus spread in India evolves.

Okay. But right now, in India at your hospitals, do you have fewer COVID patients than the average for the third quarter?

Yes.

Okay. Yes. And if and when volumes -- the COVID volumes are going down in India, how quickly do you think you could compensate that by the normal business? Or is it likely to see India declining year-over-year now in the next few quarters?

No, I wouldn't say so. I mean it's not one-to-one, week-to-week. But I think it's fairly compensatory, so to speak, the -- over a quarter or 2, it sort of equals up.

And also, Kristofer, I think you need to make sure you don't underestimate what we've been doing in India as well. So we've added quite a number of facilities, and we still are adding new facilities as well. So like-for-like -- sorry, so year-on-year, you're going to have that driving growth as well.

Okay. And just last one. The strong growth in Germany you mentioned, how much of that is COVID testing?

Well, I mean we stripped out the amount of COVID testing for you, and most of it is -- so a large chunk of that is Germany. So that very over-significant growth, so to speak, is largely COVID-19-related testing.

And that graph that we put on there, just to illustrate the COVID versus non-COVID, we have Germany there as well. So you can actually see day by day what the split is, if you like.

Your next question comes from the line of James Vane-Tempest from Jefferies.

Just 2, if I can, please. On the Diagnostics business, it's very helpful to see the revenue progression with and without COVID. I'm just kind of curious, when you consider sort of seasonality and things from where we are, is the 3Q number sort of representative of what we can expect to see in 4Q? And then my second question is on the Healthcare Services margins, clearly, very strong in Q3 compared to history. I know you've given some qualitative statements in terms of what's driven that, but it would be helpful to try and go into that in a little bit more detail to think how that can impact or benefit Q4 and as we go into next year and if that's representative of the business mix.

Yes. James, so I think Fredrik was quite emphatic about on the Diagnostics side that we're going to continue to see large levels of demand in terms of COVID-related services. So I think that that's not controversial if you look around what's going on in our markets. And I think that, that can be kind of fairly -- clearly see that that's going to be the case. In terms of Healthcare Services, yes, the margin underlying has been very good. We took Q2 to clear out, as you see in terms of the impairment charges and things which we had less confidence in a more difficult economic environment, we're going to get to the point where we needed them to be to justify themselves. So we went through and looked at that. We obviously went through on our cost structure as well and looked at that. And then also in terms of the whole digital shift in terms of -- that's been helpful as well for us in terms of being able to provide services in a more cost-effective way. How much of that will stick? We'll see over time. And then you see, we came back to growth in terms of the Q3. So I think that is a very strong indication about the level of demand, the employment situation that you're seeing, particularly in Poland. So I think those are the things that are driving it really. On top of which, you then have the COVID-related business, which we broke out for you.

Sure. But I guess the margins were north of 20%, which is in a new sort of phase of evolution, so -- because it is such a big uptick. I understand what you're saying kind of qualitatively, but are there any kind of one-off kind of cost-reduction measures which are expected to come back or mix shifts expected as we kind of get into next year? Just because it is a standout number, it would just be helpful to understand perhaps how much those measures you mentioned benefit to the profitability.