StemCell Therapy

Half Year 2020 Virtus Health Ltd Earnings Call

Greenwich Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Virtus Health Ltd earnings conference call or presentation Monday, February 17, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn Powers

Virtus Health Limited - CFO & Company Secretary

* Susan Channon

Virtus Health Limited - CEO, MD & Director

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Conference Call Participants

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* David Andrew Stanton

Jefferies LLC, Research Division - Equity Analyst

* Thomas Godfrey

UBS Investment Bank, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Virtus Health Limited Half Year FY '20 Results Conference Call. (Operator Instructions)

I would now like to turn the call over to Ms. Sue Channon, CEO. Please go ahead.

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Susan Channon, Virtus Health Limited - CEO, MD & Director [2]

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Thank you, and welcome to the Virtus Health FY '20 Half Year Results, and thank you for joining us. Virtus has demonstrated resilience and outperformed overall market volume growth in Australia. We have focused on improving profitability through cost reduction initiatives, which will be realized in future periods, and our investments in infrastructure in FY '19 have facilitated business development opportunities and growth. It's Virtus' diversified model, scale and geographical reach that provides an unrivaled platform for participation in all key fertility segments, both domestically and internationally, and it has delivered.

Story continues

Moving to Slide 4 and the financial results highlights. Virtus overall fresh cycle growth for the half year was up 1.3% with a total of 10,649 fresh cycles compared to 10,513 cycles in the prior corresponding period. Revenue was up 1% to $142 million on the prior corresponding period, and EBITDA was up 21.9% to $39.5 million, noting that $7.4 million of the increase was the result of adopting the new lease accounting standard.

Australian segment EBITDA increased 18.8% to $39.7 million. Again, $5.9 million of this increase was a result of the new standard. And International segment EBITDA increased 22.7%. Again, $1.5 million of this increase was from the adoption of the new lease standard.

NPAT attributable to ordinary equity holders was up 2.3% to $15 million with earnings per share up 2.4% to $0.1865. Headline earnings have been impacted by fair value gains on put options, lower interest costs and CEO transition and recruitment costs. The company has declared an interim dividend of $0.12 per share fully franked, unchanged from the prior year and payable on the 16th of April.

Turning now to Slide 5. Against the backdrop of a competitive business reproductive services market, we have responded accordingly and maintained our Australian market leadership position. We have adjusted our service model to the patient mix and changes in the market and continued the activities we started in FY '19 to remove cost in the business, which will deliver further benefits in future periods. As a result of our focus on patient care models, Virtus outperformed overall market growth in Australia, and cycle activity in the half increased 2.7% compared to an increase in Virtus available market of 1.2%. Notably, Australian IVF clinic EBITDA increased 4.5%, excluding the impact of the AASB 16 lease standard.

We have delivered strong growth in our Australian TFC low price clinics. And while our Victorian premium cycles were stable and Queensland grew, lower premium cycle volumes in New South Wales have impacted EBITDA, pathology revenue and IVF-related Day Hospital revenue in New South Wales. The investments made through FY '19 new Day Hospital facilities and our focus on business development are starting to deliver, with non-IVF Day Hospital procedure volume increasing 5.7%. International operations maintained EBITDA despite softer volumes, and we have seen EBITDA improvements in Ireland, Singapore and the U.K.

Management's focus on cost-out initiatives for margin improvement continued. However, overall corporate costs were impacted by CEO transition, recruitment and restructuring initiatives, which will deliver improved EBITDA margins in future periods.

Moving to Slide 6. And the Australian segment performance saw revenue up 0.3% to $112.8 million. And Australian segment EBITDA, including the impact of the new lease standard implementation of $6 million, increased to $39.7 million. The initiatives that we'll continue to deliver on this improved position are summarized on Slide 7.

So moving to Slide 7. In our summary at the end of FY '19, we noted that our focus in Australia will be on defending and building premium services, growing low price volumes, growing diagnostic revenue and growing non-IVF Day Hospital revenue.

Available market share increased to 40% in the first half compared to June 2019 closing position of 39.6%. Virtus cycle growth is 2.7% year-to-date compared to an available market growth of 1.2%. Virtus premium service remains our focus. And year-to-date, our premium cycle volume is up in 3 states of Queensland, Victoria and the ACT. Softer market conditions led to a reduction in our New South Wales and Tasmanian volumes. However, additional doctor recruitment is in progress in both states, in parallel with leadership changes guiding operational and cost-out initiatives.

Our TFC low price clinic saw volume growth of 30.2%, with low price cycles now representing 22% of overall volumes compared to 17.3% in the prior corresponding period. Overall, Australian Reproductive Services EBITDA margins have been impacted slightly and are down 0.5%, excluding the AASB 16 lease impact.

Diagnostic initiatives have not yet delivered with revenue flat as a result of lower pathology and PGT volumes, resulting in a less favorable revenue mix. Cost management initiatives have been implemented to align with volume softness, and there's a focus on increasing testing utilization within the new Revesby laboratory to drive internal and external referrals and utilization.

In our Day Hospital, non-IVF revenue growth of 6.8% has been achieved following business development initiatives in the 2 new Day Hospitals commissioned last year. Endoscopy procedures have been established in both facilities and are expected to deliver improved performance in the second half.

Moving to Slide #8 and the Australian ARS operations. Virtus Australia's overall cycle activity increased 2.7% in the first half to 8,302 cycles compared to an available Eastern Seaboard market volume increase of 1.2%, with a resulting EBITDA increase of $1.3 million. Virtus Victoria grew 10.2% on the prior corresponding period against a market growth of 1.7%. Premium cycle volume was stable with growth predominantly in low-cost services. Virtus Queensland grew 6.2% on the prior corresponding period against the market growth of 4.4%. Virtus New South Wales, including the ACT, declined by 3.4% on the prior period against the market decline of 0.5%. We had some movement of a few doctors due to retirement and international relocations that impacted this. And Virtus Tasmania declined by 20.3% on the prior period against a market decline of 5%, doctor resources again being the issue in Tasmania.

Virtus has continued to proactively target the low-cost segment with ongoing service model and pricing reviews and delivered a volume increase of 30.2% across the fertility center network with improved performance across all states. The TFC now represent 22% of Virtus Australia cycle volume against 17.3% in the prior period. And whilst we've experienced a small decrease in our EBITDA margins overall as a result of our targeted low price initiatives, EBITDA margins within our TFC to remain in excess of 35%.

Moving to Slide 9. Virtus Diagnostics revenue increased 0.2%, and EBITDA decreased 30.2% over the prior period as a result of less favorable revenue mix and cost. This was caused by continued softness in PGT utilization declining to 12.9% of fresh cycles from 14.6% in the prior corresponding period, impacting margin, and increased compliance costs as a result of the change in NPAAC supervision requirements. The first half FY '20 costs are recorded with a full half year impact compared to only 3 months in the prior period.

We will focus on further growth in Diagnostics by driving internal and external referrals to utilize increased capacity and expanded testing capability in the relocated laboratory supported by the additional scientific and pathologist resources; the introduction of new technologies for noninvasive PGT, which continues through the validation process and molecular genetics; and cost-out initiatives to align with volume.

Diagnostics continues to be an important part of our Virtus integration platform, and we are focused on growing the utilization of these investments made through FY '19 for an improved performance.

Moving to Slide 10 and the day -- Australian Day Hospital operations. The Day Hospitals experienced a difficult year in FY '19 as a result of the delays in commissioning the planned facility development. However, the first half FY '20 has seen an improvement in utilization and business development continues, delivering an increase of 6.8% on the prior corresponding period in non-IVF Day Hospital revenue across all Specialist Day Hospitals.

Overall Day Hospital EBITDA was flat as non-IVF growth was offset by lower IVF procedures impacted mainly by softer premium cycle volume in New South Wales. Business development has delivered a $300,000 EBITDA improvement over the prior period in Alexandria as more non-IVF surgery is secured. And whilst Hobart Specialist Day Hospital is still in early stage of business development, an operational restructure was completed in December 2019. And with the first endoscopy list commencing on the 13th of February, the outlook is more positive.

Moving to Slide 11. We have continued to diversify our revenue since listing through our international operations, which are now 21% of group revenues. We have made good progress through the half and have delivered earnings improvement in 3 territories: Ireland, Singapore and the U.K. International segment revenue is up 3.5% to $29.2 million, and segment EBITDA is $6.8 million.

And looking at the Irish operations on Slide 12. In Ireland, despite fresh cycle volume softness, we have seen EBITDA improvement of 17.1% on the prior period as a result of cost management initiatives. 1,075 cycles performed in the half compared to 1,094 in the prior period. Revenue was flat at EUR 10.5 million despite the lower fresh cycle volumes, which were offset by an increase in frozen cycles.

Moving to Slide 13. In our Danish operations, EBITDA overall was down on the prior period. 849 cycles performed in the half against 930 in the prior period. Revenue across the Danish clinics was down 7.5% at DKK 25.6 million. EBITDA, local currency, was down 45.9% on the prior period. Cycle volume was impacted by changes to Swedish donor regulations, reducing IVF tourism into Denmark. Short-term doctor resourcing issues impacting performance in Aagaard have now been addressed, and the clinic is fully resourced at December 2019. Management resources have been strengthened in Denmark to focus on business development and growth.

Moving to Slide 14. Complete Fertility has improved revenue and EBITDA performance this half from stronger donor activity and improved activity from the National Health Service. Complete Fertility performed 215 fresh cycles against 228 in the prior period, and revenue was up 13.4%. EBITDA was up 125% over the prior period driven by revenue initiatives and effective cost management.

And Singapore continued its positive performance with 208 cycles against 176 in the prior period. Revenue is up 13.5%, and EBITDA is up 77.4% on the prior period. The Singapore team has just celebrated their fifth year anniversary and continues to delight with consistently high patient survey results and the NPS score leading our group and benchmark for pregnancy and live birth success rates the highest across our network.

I'll now pass you over to Glenn Powers, CFO, to provide the detailed financial summary.

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [3]

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Thank you, Sue. Good morning, everybody, and turning to Page 17. So the statutory results, obviously, for Virtus, as with most companies, there is quite an influence of AASB 16, the new leasing standard. I think we just put it straight down to the bottom, the profit after income tax attributable to ordinary equity holders, that is up by 2.3% overall. The net AASB 16 impact on that was to reduce that NPAT number by approximately $200,000. Obviously, within the body of the P&L, you've got movements in terms of the segment EBITDA, the depreciation number and also the interest number. And those are noted at the bottom of the page, the actual numbers.

Looking at Slide 18, we just call out the net movement from noncash transactions, transaction expenses and also, this time, the CEO transition costs. And you can see there, there was a fair value adjustment related to the settlement of the final options in respect of Ireland and Tasmania. And I think the other cost movements are pretty much self-explanatory.

Slide 19, we do provide a detail of our AASB 16 adjustments. I don't propose to go through that in detail, but you can see there is that net decrease or that net impact to the actual profit after income tax of $0.02 million.

Turning to Slide 20. I think Sue has covered, obviously, a lot of the key drivers for the revenue and group EBITDA. I think a couple of key points to note. Firstly, Australian IVF clinic EBITDA increased by 4.5%. So we think that's a pretty positive result given the change in mix. So we have seen continued shift and increase towards more low price IVF. But the businesses have responded very well in terms of their operational management, and we have seen that 4.5% increase in our core clinic EBITDA.

We also saw EBITDA growth in Ireland. That was at 17%, so that was a very, very positive result there. And Singapore has continued to improve its EBITDA. U.K., which gave us a little bit of an issue last year, U.K., we've actually seen a recovery in performance and, again, a combination of good development of the business around our core IVF activity but also good cost management as well.

Two main headwinds, really, that we saw in the second -- in the first half with Diagnostics EBITDA and the impact of a shift in revenue mix away from the PGT activity. And also, as Sue said, we absorbed the full year -- a full half year of the compliance cost increase in this half. The other area was very much Denmark. Denmark, the doctor resource change in the Swedish donor market were both significant factors in the first half. But the businesses are very much set up now for the second half. We have doctors in place. We've added doctors in both clinic locations. So we do anticipate an improvement in performance in our Danish businesses in the second half.

I think we've covered the leasing position extensively. So again, although the movements don't look significant, in some ways, I think there are some positives around individual clinic performance and particularly our core Australian business.

Cash performance on Slide 21. We actually saw a very focal performance compared to the prior year comparison. And again, unfortunately, leasing does impact 2 or 3 numbers there: so the group EBITDA number, the lease interest number and also the lease principal payments number. They all flowed from the AASB 16 adjustments. But some of the core factors that actually show -- led to that improved cash performance, lower CapEx. Last year, fiscal year '19 was a big year in terms of capital expenditure. This year is more modest. And most of the CapEx this year continues to be around technology and laboratory enhancements, primarily EmbryoScope in 2 or 3 locations we've added the facility. We also saw improved working capital in this half, and that contributed to a turnaround of $9 million in free cash flow after dividends compared to the prior year.

Slide 22, the statement of financial position. Again, AASB 16, obviously, it impacts the net asset -- net financial position. So the net asset reduction includes a net impact of $8.7 million resulting from that new accounting standards, and that's covered in the first part of the slide. Dividend proposed, no change in this half year, so the dividend of $0.12 per share, fully franked, will be payable on the 16th of April. Sue?

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Susan Channon, Virtus Health Limited - CEO, MD & Director [4]

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Thanks, Glenn. So moving to Slide 23 and our summary. Fertility, as we have talked about previously, affects 1 in 6 couples' reproductive age worldwide, and the social and demographic factors that contribute to this global dynamic continues to drive demand for ARS. Our strategy has been to ensure that Virtus has the platform to self-sustain ongoing growth. And investments in people, technology and additional day hospital and diagnostic capacity support this strategy, the outcome of which is evident in our first half FY '20 results. As we continue to develop our approach and model to ensure we remain relevant to the patients we treat and the markets in which we operate, our network is well established in the all-patient demographics. Revenue growth will be achieved through a combination of service expansion and market penetration.

Our strategy is to focus on defending and building the premium ARS business, and we remain committed to growing our service and presence within the low price segment. Our day hospital strategy has seen a focus on attracting non-IVF surgical activity to our improved facility, and this is delivering. Our diagnostic throughput will be enhanced through our research into NIPT and business development activities to maximize internal and external diagnostic and genetic referrals. We have made good progress through the half across the international business and have addressed performance, resourcing and cost-out initiatives. And our international operations continue to contribute positively to the diversification of our revenue.

Our focus on margin improvement is ongoing with efficiencies and cost savings expected through recent management restructures and a greater emphasis on process improvements to ensure optimal patient care and experience. We have a very clear program of work to drive earnings growth through our cost-out initiatives, many of which have been completed in the first half. We are well positioned to deliver further earnings improvement across Virtus in the second half.

As you know, Kate Munnings will join Virtus on the 4th of May. Kate, most recently Chief Operating Officer with Ramsay Health Care Limited's Australian business, has a successful track record leading commercial improvement, organizational and business transformation across multiple sectors and industries. Kate's relevant experience, especially alongside specialist doctors, means she's well equipped to lead Virtus Health and the continued delivery of exceptional services to patients. I had the pleasure of having dinner with Kate last week, and I believe the organization is in good hands. I am confident she will continue to lead Virtus successfully into the next phase.

Glenn and I will be happy to take questions regarding Virtus Health results now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from David Stanton, Jefferies.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [2]

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First, I'd like to say a big thank you to Sue for all her help over the years. You'll be greatly missed. But my first question is, as an overall statement in Australia, can you give us an idea of why you think the premium market as you see it is declining?

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [3]

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Yes. I think the -- if we look at it -- well, the interesting thing is that it's not across -- it's not consistent across states. For example, we actually saw good growth in our Queensland premium service in the first 6 months. Victoria, we were stable in terms of the market. I think if you look at New South Wales, which is obviously the biggest market, the market was down generally in New South Wales. So of all the 3 big states, New South Wales was, by far, the weakest state in terms of market performance. So okay now, I don't think we feel necessarily that the premium is in decline. There's been a bit of talk overnight around fertility rates. And I think it is important just to note that the utilization rate of IVF continues to increase. And we've seen that again in the latest reports and comparing [ANZA] birth information compared to national birth numbers. So I think what we are just continuing to see is premium is possibly stable, but the growth in the sector does continue to be TFC/low price IVF. So -- and I think our record in the first 6 months shows that. Whether in New South Wales -- I think there may have been some local market conditions that have impacted the general state of the market in New South Wales, I think we'll see that over time in the next 6 to 9 months.

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Susan Channon, Virtus Health Limited - CEO, MD & Director [4]

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And David, sorry, as we've talked about previously, there will always be patients where the low-cost service is just not suitable. So the PGs, the genetics, et cetera, where patients will always need access to those higher-end services.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [5]

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Very good. Understood. And stop me if I'm wrong, regarding international, there were like 1 or 2 that weren't like this, but international cycles have decreased pretty much across the board. Is it -- would it be fair enough to say that that's due to the rest of the world playing catch-up on increasing the amount of frozen cycles or the fresh cycles, please, that we saw maybe 2 years ago in Australia?

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [6]

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Yes, we have seen a little bit of that. Certainly, in Ireland, we've seen that shift on more frozen cycles. So the business mix has changed a little bit. Again, if you look at the impact on our results then, our Irish business has improved EBITDA by 17% in the half. So it's sort of a bit of a natural evolution, it comes to a finite point. And we've seen that in the Australian sector. A couple of years ago, people were saying that it will be a one-for-one relationship between fresh and frozen, and that hasn't transpired. So yes, we've seen a little bit of transition as well in the Danish market. I think if you look at the Danish market, our volume decline, which is a good part of the decline in the international cycle, it has been more around doctor resource. So I think we feel we've got the doctor resource in place in both of our clinics now, and we'd like to think that we can see some business development activities, particularly in Denmark, in the next few months. And we'd like to think that we'll see our Danish business grow cycles in over the next 12 months.

Link:
Edited Transcript of VRT.AX earnings conference call or presentation 17-Feb-20 10:00pm GMT - Yahoo Finance

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