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

Good morning, everybody. It's John and Anand here. As you can see, we announced this morning our intention to divest Medicover Hospitals India. This is a significant and important deal for Medicover. And today, we want to share the details of the transaction and be able to take any questions that you have. Here, you can see the transaction highlights. Medicover and local partners to dispose 100% of equity capital and -- to global investment firm, KKR, for a purchase price of INR 105 billion, equivalent to EUR 0.95 billion. So a strong valuation for us, and we're very happy with that particular position. On top of that, KKR will acquire the loans -- the Medicover loans that we have of EUR 0.1 billion and the accrued interest. And this transaction represents an enterprise value of EUR 1.2 billion, which is by far the biggest transaction that we've done in our history. So it's pretty significant for us. In terms of the proceeds and how they will be distributed, Medicover was 66.1% and our minority shareholders of 33.9, and Medicover will receive cash proceeds of around EUR 0.74 billion, including EUR 0.1 billion from the loans and the accrued interest. Deal certainty was important to us, and this transaction is subject to the usual kind of merger and control approvals, which will take a few weeks or months to be able to conclude. And closing is expected in the fourth quarter. So that gives you the high-level picture in terms of this deal. I'll hand over to Anand, and he will talk you through a little bit more detail in terms of the deal and what it means for the group.

Thank you, John. Good morning, everyone. As you say, kind of a momentous day for us at Medicover. In terms of what this transaction does, clearly, it gives us immediate value realization versus other options. So obviously, we get 100% cash sale, and that kind of gives us an execution certainty element, which we -- which is important to us as well. What that certainty does and the amounts we're talking about means that clearly gives us an enhanced financial flexibility in terms of strengthening our balance sheet, which naturally means, as a consequence, we have greater strategic optionality to make decisions in our European markets. For now, this is a signing, not a completion call. So our financial targets remain the same for anyone who wants to ask. At completion, we will discuss anything relating to financial -- midterm financial targets further. I guess to give you a flavor of our performance, including and excluding our Indian hospitals. So if you look at the table on the right, you can see the pro forma numbers in the first column that we reported over the last 12 months, which shows revenues of EUR 2.46 billion, EBITDA margin of 16.1%. If you take the indicative MHI numbers, so Medicover Hospitals in India, in the second column, you can see the revenues and margins relating to that business. And then on the far right, we'll say what are the underlying numbers, I'd say, for Medicover, which is RemainCo, let's say, if you exclude Medicover in India. So you can see, as a consequence, you strip out about EUR 220 million worth of sales over the last 12 months. But importantly, what you can see by excluding the Indian numbers, which obviously, as you know, we've had a great first 2 quarters this year. Actually, the margin in the business is lower, as we've said before in the past versus the company average. So as a consequence of doing this deal, naturally, our EBITDA margins increased by about 40 basis points and our EBIT margins increased by about 50 basis points. For those interested in EBITDAaL, clearly, because we use that a lot as it's kind of cash profit, as I call it, given the lease profile in India, which is a bit heavier and clearly leads into the enterprise value that we discussed on the first page, you'd expect another 20, 30 basis point improvement versus the EBITDA margin improvements, I'd say. So if EBITDA and EBIT around 40, 50 basis points, then you can expect EBITDAaL margins to about 80, 90 basis points. In terms of what that means for us, including and excluding India, again, in a little bit more detail from a revenue perspective, a geographic mix perspective and a payer mix perspective. Broadly, broadly, I'd say kind of largely unchanged in terms of the split, you'd kind of expect to see what you're seeing. So I think if you look at the top row, you can see the numbers that we've reported historically either over the last 3 years in terms of revenue and margin growth and the revenue mix is at the end of Q2. And if you look at the bottom row, you can see the numbers are excluding Medicover in India. So I guess one thing to note is actually the underlying business, excluding India hospitals, is pretty strong. So if our CAGR growth on revenues has been 16.3% over the last 3 years, actually, excluding India, it's 17.3%, so stronger. In terms of the second column, which is our revenue mix, you can see that -- I mean, that's just kind of a consequence of splitting out the 10% of revenue sales across the rest of the market. So you can imagine and naturally expect that actually Poland, Romania and Germany kind of soak up the rest in terms of the mix. And finally, in terms of revenue mix by payer perspective, again, small changes, nothing material. But actually, what this demonstrates is as well as a stronger P&L in terms of a margin perspective versus the kind of a revenue perspective, overall, there's a balanced portfolio and more focused Medicover going forward on the back of the hopeful conclusion of this transaction. So with that, I'll hand over back to John.

Okay. So key takeaways. This is an attractive exit for Medicover. We've monetized our investment in India. We went there a decade ago, a really small organization, built it up to be a significant operation that has a good potential for the future. And we feel that this is a good time for our exit given the dynamics of this deal, a much stronger balance sheet as a consequence of this. So it materially strengthens our position and gives us a lot of choices in terms of our existing markets. We've got good existing markets. We've got strong strategic focus. We talked to you back in February about the opportunities that we had in each of our markets. And this will give us a stronger focus in the markets that we operate in Europe. And we've got more than enough opportunity in terms of opportunities to grow in those particular segments, particularly in our fee-for-service line. So over time, this gives us an opportunity to accelerate there. And our platform is strong. So you can see that from what Anand has just gone through in terms of this is a good or great deal for Medicover and that it doesn't significantly impact our shape and our financials in terms of ability to be able to deliver good returns. So we think we're in a good position here. So -- as you can see on the right-hand side, we still expect revenue to grow. We still expect our margins to improve, gives us a lot of flexibility. And of course, we will have even better cash conversion. So we think that this puts us in a strong position. So we'll now hand over to the audience to ask us questions that you may have, and we'll look to answer them. Thank you very much.

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

Quite a number of questions. I'll start with 3 and then get back to the queue. So first of all, it seems like a fantastic deal. Would you be able to provide a figure how much euro you have invested in India so far? That's my first one. And then the financial figures here you provided for India, has the margin profile changed much year-to-date? Or is it the same type of dilution we could expect as you provided for last 12 months? And then the third question is if you maybe could provide a bridge for taking us from your share of the EUR 1.2 billion enterprise value and the cash proceeds.

Yes, I'll handle that. It's Anand. So I guess I'll take it in reverse order. So in terms of the share of EUR 1.2 billion, so EUR 1 billion of that is about -- is equity and then about EUR 100 million is the loans that we've invested from a Medicover Group perspective in Medicover, and about EUR 100 million, you'll have seen before. India is quite heavy from a lease perspective, yes. So that totals up the EUR 1.2 billion. In terms of our split, and we've got -- so we've got 66% of the business versus our minority partners. So in terms of the equity, clearly, we get 66% of it, which equates to just EUR 0.7 billion. But obviously, we've given the loan. And so that's kind of the EUR 0.1 billion that goes on top, which as a consequence of deal will get paid at closing of the transaction or a few days afterwards.

In terms of the margin profile, I think, look...

So could I ask, will there be any tax impact here?

Yes. So obviously, we've got lots of very highly paid advisers that look at these things. We reckon anything from gross to net will be around 1% to 1.5% of the cost -- of the value of the gross proceeds, yes. So if there will be a cost -- at the moment, we assume it's going to be relatively small considering the actual transaction size. We're talking about EUR 700 million coming into Medicover. And yes, 1% to 1.5% of that is relatively small amount as a consequence, gross to net. In terms of the margin profile over the last 6 months versus the last 12 months, it's broadly the same in all honesty. So obviously, you've seen our margins -- our revenues have grown materially in H1 this year. But obviously, as I think we've always said before, you invest in the doctors, then the revenues come and then ultimately, you get margin improvement later down the chain. So I'd say the last 6 months are broadly similar to the 12-month numbers that we've shown. And in terms of what we've invested in India, I mean, look, I'm not going to tell you the exact numbers, but it's a good deal for us. You can work out the EV to EBITDA multiples yourselves. But look, we've invested, as I said, over EUR 100 million of loans in India, which will get paid back at completion. And naturally, there's been maybe about a similar level of equity investment that we've made over time.

The next question comes from Mattias Vadsten from SEB.

Congrats on this deal. It looks very good. My first question would be if you could resonate a bit around growth opportunities in core markets, Poland, Germany, Romania and general capital requirements as of now. Should we anticipate the same sort of compounding growth profile of Medicover? Or do you see any larger opportunities now that you're almost or nearing up to a net cash position post deal?

Well, I guess in terms of growth of Poland, Romania and Germany, so look, yes, I think when we did our investor call in February, I think, we talked about 4 strong markets and great opportunities across all 4 markets. Now going forward, if this transaction concludes, then clearly, we still think there's ample opportunities across 3 of the markets. Now Poland is still obviously 50% of our business. And we've demonstrated and have shown, I hope as well that as well as kind of historic growth that we've got further opportunities going forward. So I'd say, actually, in terms of a risk profile, if anything, it kind of improves it from a company perspective. You take out 1/10 of the revenue of a business that's, let's say, below company margins. So that naturally strengthens. But fundamentally, in terms of the countries that we kind of operate in, if you look at holistically, then there's further growth there, I believe, still. So yes, the splits will be the same. We'll have the same conversations in terms of Poland being Poland in terms of the kind of engine room, let's call it that, with over 50% of the revenues, and we still believe there's growth there. Romania is still a growth opportunity. And Germany, which we've always said is kind of a big market. But even though there's challenges in that, and there's been material reform over the last couple of years, as we all know about, and there'll be further reform. But we still seem to find a way of growing our revenues, our volumes and our margins in that market.

That makes a lot of sense. And then in terms of -- you still guide for margin improvement in the coming years. So if you look on your margin improvement guidance that you gave through 2028 at the Capital Markets Update, how much of that was related to recovering margins in India vis-a-vis the other markets? I guess the margin curve will be a bit milder now.

Yes. I mean India, obviously, was at position where we had a lot of capacity. And therefore, there was a lot of drag. And as a consequence, you were -- we would fully expect that to fill up and have an impact on margins. But we've signed the deal. We'll move towards closure. We'll look at all of our positions and review them. But we still got -- from our perspective, we've still got other immature points within the group and within the infrastructure that we've got. And of course, we'll make further investments on top as well. And our aim, of course, is to grow our business. And at the same time as we're doing that, is to move our margins positively as we grow. So we'll clarify that as time goes by.

Yes. And I think just to add to that as well, actually, if you think about it, India is 10% of the business, right, not 50%. So naturally, as you can imagine, as we fill up the revenue and kind of increase capacity utilization from what we face, we'd expect those margins to improve. However, it's still only 10% of the business. And if you extrapolate forward 3 years, it will still be relatively small. Hence, you would expect the kind of margin impact of this to be muted overall.

That makes sense. Then I was wondering if you could give any guidance on what EBITDA lease-adjusted margins that you have in MHI last 12 months. Is it similar to the EBITDA margin or something like that?

Yes, yes. So I think -- look, what I would say, and I'm not going to give the exact numbers, obviously, but if our -- and you can figure it out through a smart way. If our margins improve by about 50 basis points at EBIT and EBITDA levels, we are heavier on leases in India. So you strip out MHI and RemainCo, as I call it, which is Medicover excluding India, you would expect margin improvement of about 80 to 90 basis points.

The next question comes from Bram Buring from Wood.