StemCell Therapy

Half Year 2018 Sonic Healthcare Ltd Earnings Call

NORTH RYDE , NSW Apr 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Sonic Healthcare Ltd earnings conference call or presentation Wednesday, February 14, 2018 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher David Wilks

Sonic Healthcare Limited - Finance Director, CFO & Executive Director

* Colin Stephen Goldschmidt

Sonic Healthcare Limited - CEO, MD & Executive Director

* Paul J. Alexander

Sonic Healthcare Limited - Deputy CFO & Company Secretary

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Conference Call Participants

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* Andrew Goodsall

MST Marquee - Healthcare analyst

* David A. Low

JP Morgan Chase & Co, Research Division - Research Analyst

* David Andrew Stanton

CLSA Limited, Research Division - Former Research Analyst

* David Bailey

Macquarie Research - Research Analyst

* Nicholas Cameron

Watermark Funds Management Properietary Limited - Sector Head of Healthcare

* Sean M. Laaman

Morgan Stanley, Research Division - Australian Healthcare Analyst

* Steven David Wheen

Evans & Partners Pty. Ltd., Research Division - Executive Director of Healthcare

* Thomas Godfrey

UBS Investment Bank, Research Division - Analyst

* Victor Windeyer

Citigroup Inc, Research Division - Former VP and Analyst

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Presentation

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Operator [1]

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Hi, good morning. Welcome to Sonic Healthcare's Half Year Results Presentation.

I will now hand you over to our presenter today, Dr. Colin Goldschmidt, CEO of Sonic Healthcare. Go ahead, sir.

Story continues

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Colin Stephen Goldschmidt, Sonic Healthcare Limited - CEO, MD & Executive Director [2]

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Thank you very much, and a very good morning to everyone, and welcome to this half year presentation of Sonic Healthcare's results for the period ending 31 December 2017. I'm joined this morning in Sydney by my colleagues: first of all, Mr. Chris Wilks, who's Sonic's Chief Financial Officer; and also by Mr. Paul Alexander, Deputy CFO of Sonic. I'll give a presentation, as usual, and then we'll probably share the questions when we get to that junction.

I'm going to start the presentation on Slide 3, which is headed "Headlines", and I'm pleased to begin the presentation by giving an update on our market guidance, and we're very pleased to say that we are on track to achieve our full year FY 2018 guidance, and that is after 7 months of trading.

Our headline numbers, if I can put it that way, for the half, we achieved revenue growth of 8% and EBITDA growth of 9%, and the group delivered margin expansion of 20 basis points over the period. This result was achieved on fewer working days and in the prior period, and I'll say a little bit more about that in one of the later slides.

You'll also notice in this result an unusual feature, which we want to draw everyone's attention to, and that unusual feature is seen in our statutory results and it's a one-off net tax benefit of $20 million. This is a noncash benefit of $20 million, which shows up in net profit and EPS lines, and it represents a revaluation of a deferred tax liability flowing from the corporate tax reforms recently enacted in the U.S.A.

In terms of our growth, moving on to the next bullet point, our result shows a healthy mix of solid organic growth but also accretive acquisitions and joint ventures. During the period, we completed the acquisition of Medical Laboratory Bremen in Germany and also completed a joint venture arrangement in New York with NYU, New York University, that commenced in the period as well.

And looking to the future, we have an active pipeline of further acquisition and JV opportunities in train.

In terms of our dividend, the interim dividend increased by $0.01 or 3%, and this does continue our very long-standing progressive dividend policy, which has now been progressive or non-retrogressive for something like 24 or 25 years.

So just giving a summary at the start of this presentation. When we look at the overall picture, Sonic Healthcare is in fairly good shape and very well positioned for ongoing growth and to compete in a modern and changing global health care environment. When we say we have a strong or solid base for future growth, we back that up by that final bullet point on this slide and it's probably in the correct order. We have a very strong culture in Sonic Healthcare, which is very much based around our unique model, a model that we term Medical Leadership. We're very fortunate to have an outstanding global leadership team; and in fact, I'd like to take this opportunity to acknowledge them and even thank them here because I know that many have dialed in to this call from right around the world, some even at crazy hours of the night in Europe.

Our reputation is outstanding. That's been achieved over years, if not decades, of hard work. And we have very modern infrastructure as well, which allows us to provide world's best services and to leverage benefits from our scale. And I guess, we're fortunate to be in an industry which has strong growth dynamics to it, and that includes things like aging of the population, new tests especially in genetics, and also the ongoing focus on preventative medicine.

If we move to Slide 4, and just looking at the table, first of all, you'll notice that we presented these results in statutory form rather than constant currency form. And the reason for that is that there was minimal FX impact over this half. Against the Australian dollar, the slightly weaker U.S. dollar was offset almost entirely by slightly stronger euro over the period. And in fact, I think, the total FX impact for the half was a benefit or tailwind of around $700,000 at the revenue line. So it's less than $1 million on the $2.673 billion for the half.

So looking at the table in statutory form, we present the actual numbers: revenue, $2.673 billion, which is 8% growth; and the EBITDA number of $445 million. And then, we've presented both net profit numbers and EPS numbers to show what's going to be reported, including the one-off tax benefit which shows 16% net profit growth and 15% EPS growth. But in effect, our underlying growth is 10 -- it's 10% less than that. So really it's 6% net profit growth, if you take out that one-off tax benefit; and 5% EPS growth, if you take out the benefit as well.

Now just a few comments about the working days. We don't want to make too much of a deal about this, but it was quite significant on this particular occasion. So you'll see in Germany, we had 3 fewer working days; in Switzerland, 2; and everywhere else, 1 less working day in the period. It is quite significant, and if you quantify it, it works out to about a 1.3% difference at the revenue line. So with equal working days, if we normalize it out, revenue would have been $31 million higher. So we would have got to whatever $31 million on $2.673 billion is. We -- our earnings and margins would have been higher too. We haven't quantified that at all because it's obviously going to depend on how much of that $31 million flow through to the bottom line. But it does give an indication that the numbers representing here, the 6% net profit growth and 5% EPS growth, would have been higher had the working days been equal.

Moving on to the next bullet point, the revenue and earnings growth. Our organic revenue growth for the period is approximately 5%. We've -- say, constant currency there and normalized for working days. However, our growth was further enhanced to get up to that 8% by accretive acquisitions and joint ventures. And the group margin accretion was approximately 20 basis points for the period.

The laboratory division achieved strong margin accretion when you normalize for working days. And just a couple of points on that U.S. tax benefit, which I think I've covered already, this is a revaluation of a net deferred tax liability, bringing it down from the 35% to the 21% tax rate recently announced and it's importantly noncash and one-off.

Moving on to the next slide, which covers our guidance. Just as a recap, in August of last year at our full year results for FY '17, the guidance that we gave at that time was 6% to 8% growth on our underlying FY 2017 EBITDA number of $889 million at constant currency levels, and we said at the time that no regulatory changes were assumed. Our guidance has not changed at all since that period and we are maintaining the guidance of 6% to 8% EBITDA growth, despite the regulatory changes that have been announced in both the U.S. and Germany. So really what we're saying here is that we're not altering our guidance as a result of these fee changes, nor in fact are we guiding to either the upper or lower ends of our guidance range. So in other words, we believe that the fairly strong momentum that's currently present in the company is sufficient to mitigate the impacts of both the fee changes in the U.S. and Germany.

The following 3 major bullet points are a repeat of the guidance that we announced in August last year. Just, I guess, to point out again, the bottom line of that CapEx. We certainly expect our CapEx to be significantly lower this financial year as we tail off a fairly substantial infrastructure spend over the last few years.

Moving on to Slide 6, where we talk about our dividend. As I mentioned earlier, the board has ratified a $0.01 increase to the interim dividend, which is 3.2% higher than the previous period. As we have done over the recent past, a dividend reinvestment plan will operate for the interim dividend. We use this, as we have said before, to fine-tune our capital structure, particularly in light of acquisitions that we have made over the period and, I guess, as a general prudent approach to debt management. As before, this DRP will not be underwritten.

Moving on to Slide 7, which is the pie chart of our revenue presented in statutory form here. There's very little change in this pie compared to 1 year ago. I guess the one small change that's occurred is that the Germany segment has increased slightly. That's due to the strong growth in Germany, which included a number of acquisitions and a little bit of FX tailwind versus the U.S. where there was a little bit of FX headwind. Obviously, the whole pie has expanded with our revenue growth as well. But essentially, it's very similar to a year ago, the breakup.

Moving on to Slide 8, a little bit about Australian Pathology. We achieved 5% organic revenue growth in our Australian laboratory division. Earnings growth was strong with margin accretion ongoing. As we've mentioned before, the collection center cost issue, which has dogged not just Sonic Healthcare but the whole industry for the past years, seems to have stabilized and, I guess as a result of that, we are back to, I guess, our legacy benefit of achieving margin -- marginal accretion on a very healthy and widespread infrastructure around the country. So we can look forward to, I guess, ongoing strong organic growth, earnings growth and margin accretion in this division going forward, and it's an important one given that this is our largest division across the group.

Just wanted to update the market on the National Bowel Cancer Screening contract. This was launched officially on the 2nd of January this year and already volumes are ramping up very strongly. This is a very complex project, which we've put together expertly, if I could say so myself on behalf of our whole team. Complex because it combines logistics, laboratory testing and a lot of IT input as well. We're currently sending out something like 10,000 kits per day to participants around Australia and test volumes are ramping up already at about 4,000 tests per day, hopefully going to 5,000 and even 6,000 and possibly even higher tests per day. That's the receipts that we get from those 10,000 we send out each day.

And just a summary on the Australian Pathology or our laboratory division, it's performing extremely well and we can look forward to ongoing strong performance going forward.

Slide 9 deals with our division in Germany. Revenue growth for the period was 20%, organic growth for the period was 4% when we normalize for working days. Acquisitions occurred during the period. The Staber Laboratory Group was acquired before this period, but very much influences the period in terms of revenue. And there's a lot of activity around the Staber acquisition with what -- the first of a series of internal mergers already completed and the next ones are about to happen as well. Medical Laboratory Bremen was acquired in July of 2017, so at the start of the period, and the integration of this lab into Sonic Healthcare Germany is well underway already. And we do have an active pipeline of further acquisitions in train in Germany.

I'd like to say a few words about the regulatory changes in Germany. We can now confirm that changes are going to occur to the EBM, that's the statutory insurance fees from the 1st of April of this year.

Essentially, changes to the EBM fees have been in discussion now for quite a long time. So for us, they were not unexpected. It's essentially a roughly 2.5% reduction in the EBM fees themselves, and EBM fees represent about 40% of our revenues in Germany.

I guess, if you look at this from the payer's point of view, the intention is to apply a gentle break to what is strong underlying and ongoing growth in the lab industry in Germany.

So I guess, we can look at this in a positive light in a sense that this small fee adjustment wouldn't occur had there not been strong underlying growth of the industry. And I guess, as a general comment, fee adjustments like this have been part and parcel of the lab industry over many years. We're certainly used to them and in Sonic Healthcare we have the scale and we have the capacity to absorb them, and I guess, even to use them to our advantage in terms of the ongoing consolidation that they push forward.

So just quantifying the impact for FY 2018. It's going to be an effect of less than 0.4% on total German revenues for the year. Already, we have strategies in place to mitigate the earnings impact. And just a comment, because we do get asked about the other fee structure, which is the private fee schedule, we do not anticipate any changes to these in the medium term.

Moving on to the U.S.A. Revenue growth was 4.4% for the period, with organic growth at around 2% when we normalize for working days and the 2 hurricanes that occurred during the period, that's Harvey and Irma.

We're very active in the hospital lab joint venture space and 3 of these JVs are now operating successfully for Sonic, the latest of which is the NYU, New York University Hospital joint venture, which commenced during the period in October. We have a pipeline of further hospital JVs coming up into the future as well.

Again, we need to talk about the regulatory situation in the U.S. We have spoken before about the PAMA fee cuts. PAMA stands for Protecting Access to Medicare Act. These have now come into being after several postponements. The commencement date is 1 January of this year. It's important to note that the PAMA changes affect only U.S. Medicare fees, which represent about 20% of Sonic's total revenues. The impact for 2018 on our total revenues we estimate to be about $3 million to $4 million. And like in Germany, we have strategies to mitigate the earnings impact of these fee cuts. I guess, it's very important to know that there is a major industry lawsuit against these changes in train at the moment. This is a lawsuit which is being driven by the largest industry association, ACLA, and we expect the outcome of this litigation around the middle of calendar 2018. If the lawsuit is unsuccessful, one of the, I guess, effects of the PAMA fee cuts will be further consolidation of the industry given that many of the smaller labs have much larger exposure to Medicare fees than our 20%.

Moving on to slide 11, which is Switzerland. Revenue growth of 3% organic, and if you normalize for that working day difference it'll be 5% organic revenue growth. The operations are strong. We completed a small acquisition in Zurich in January, about CHF 3 million in revenue, a small anatomical pathology business that's been completely folded into our business in Zurich called Medica. The regulatory environment in Switzerland is stable and, I guess, I could make a summary statement about Switzerland that our operations are performing exceptionally well.

Slide 12, U.K. and Ireland. 5% organic revenue growth, 6% organic revenue growth if we normalize for the working days. Our operations in the U.K. is stable. We've now fully relocated to the Halo Building that was completed during the period, and we're now at full operational strength in this new location. I do need to keep saying that this is a magnificent facility, an ultramodern lab. We're using cutting-edge equipment and technologies, including Sonic's own in-house total lab automation track system known as GLP Systems. I could say that this is arguably the finest lab in the U.K. and something that we're very, very proud of.

During the period, we've added another NHS hospital contract to our joint venture with UCLH and the Royal Free and that commenced successfully in October 27. This is 2 hospitals, Barnet and Chase Farm, and this addition will add about GBP 12 million in annual revenues to our joint venture. And I can also say that there is an active pipeline of further contract opportunities ahead.

Just briefly about Belgium on page -- Slide 13. 6% revenue growth and 7% if we correct for working days. We have set up in-house our noninvasive prenatal testing. That, together with other initiatives, are driving this strong growth for the period. We're focusing on efficiencies and integrating some of the small acquisitions we've made in the Flemish part of Belgium in the last year or 2. And as far as the regulatory environment goes, we've actually had a fee increase, a small one, which commenced this calendar year. And it's approximately 1% of our total revenues and this was an indexation fee increase. But the outlook is stable, looking forward.

Moving on to Sonic Imaging, Slide 14. Strong organic growth in this division, 9% if we normalize for working days, 8% without, and earnings growth is strong as well. In terms of the operations, we are seeing benefits now flowing from the investments that we've made in equipment and greenfield sites over the past years. And we're certainly leveraging these to drive efficiencies. We're working on cost control. And I think we're very lucky to have a very strong and stable team of radiologists, managers and staff. As far as the regulatory environment goes, I'd say that it is stable to positive. The government is looking to implement partial fee indexation for radiology testing from 2020. We're working with the industry association to try and bring that date forward. And I guess, a summary about Sonic Imaging is that the division is performing exceptionally well.

Moving on to Sonic Clinical Services, which is the last of the divisions, and I'll cover this on Slide 15. Just a reminder that SCS is an amalgam of IPN, our medical Center business and Sonic HealthPlus, which is our national occupational health business. We are the largest primary care operator in Australia and the largest occupational health provider as well. We currently have 233 medical centers and 2,260 GPs working our medical centers right around the country. We achieved 3% revenue growth for the period, 4% if you normalize for working days. Earnings growth was moderate for the period. If we look at operations, our doctor recruitment and retention is successful, as it has been in the past, and that is continuing we're pleased to say. And we're also in the process of, I guess, measured rationalization of our centers to enhance efficiencies. And in fact, if you compare those numbers at the top to 6 months ago, our medical center numbers have decreased by 3 whilst our GP numbers have increased by about 60. So that's a healthy trend and we will continue along those lines. The regulatory outlook is relatively stable, if not stable to positive. The government is implementing fee indexation progressively for GP services over the coming years. I guess, just a final point, on SCS, we now have a strong and stable management team in place, headed up by a relatively new CEO, Dr. Ged Foley. And I have to say that the services that are delivered by both IPN and Sonic HealthPlus are quite amazing and certainly very impressive, and we see the future for SCS as being pretty bright.

Slide 16 is our slide on capital management with numbers for your information. Just, I guess, a couple of points. The total debt has increased slightly due to acquisitions and exchange rate changes, which have been partly offset by strong operating cash flow. Something just to announce that in October during the period, we refinanced a EUR 160 million tranche of our debt with 7- and 15-year tenor periods at 2% fixed rates, which is something very pleasing to achieve, such long-term money at such low fixed rates. And I guess, for information, our current total weighted pretax cost of debt sits at around 2.5%. We have $650 million in headroom before payment of the interim dividend.

Moving on to the final slide. Just repeating that we are on track to achieve our full year guidance after 7 months of trading. When we're looking ahead -- when we look ahead at the long term, we certainly do expect organic revenue growth to sit at around our long-term historical trend of around 5%. That growth is underpinned by industry drivers and well-established Sonic Healthcare brands.

Bolstering that underlying organic growth, we do have an active pipeline of opportunities, that's acquisitions, contracts and joint ventures. These opportunities are being created over the long term and they come about as a result of confidence generated in Sonic Healthcare and in Sonic's culture, in our quality, and I guess, in our excellent reputation as well.

We make the point that the CapEx that we spend on infrastructure is put to good use in the company because not only does it allow us to deliver state-of-the-art services but it also drives revenue and earnings growth.

We're now operating in 8 countries in the world and on 3 continents, and we are always keen to make the point that our geographical diversification does give us protection against, I guess, any sort of regulatory change in one particular market. So it's very much a risk mitigation strategy and gives us opportunities for growth as well.

I've mentioned before that our progressive dividend policy is set to continue. That policy is supported by consistent earnings, strong cash flow as well.

Integral to Sonic Healthcare is our ongoing commitment to corporate responsibility principles and we really want to shout out to the team that put the document together, which really outlines what actually goes on in the company and details of that document can be found on our website under our Corporate Responsibility report.

And I guess finally, and possibly most importantly, the outlook for Sonic as a highly respected global health care company remains pretty positive. And I say that because of a number of factors, but most particularly about our deeply embedded Medical Leadership culture, which serves to bind our global team, which is now sitting at 34,000 people, and it also gives us critical market differentiation.

Thank you very much, Drei. Maybe we'll move on to question time now, if that's all right with you.

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Questions and Answers

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Operator [1]

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Our first question, from David Stanton, CLSA.

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David Andrew Stanton, CLSA Limited, Research Division - Former Research Analyst [2]

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Usually within the presentation, we do get a comment regarding Australian Pathology margins. I know that it's not in there this time, perhaps you could give us some color on where the margins have increased or decreased in the half on PCP.

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Original post:
Edited Transcript of SHL.AX earnings conference call or presentation 14-Feb-18 11:00pm GMT - Yahoo Finance

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