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Edited Transcript of MCOVb.ST earnings conference call or presentation 6-Nov-19 8:30am GMT

Q3 2019 Medicover AB Earnings Call

STOCKHOLM Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Medicover AB earnings conference call or presentation Wednesday, November 6, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fredrik Rågmark

Medicover AB (publ) - CEO & Director

* Joe Ryan

Medicover AB (publ) - CFO

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Conference Call Participants

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* James Alexander Stewart Vane-Tempest

Jefferies LLC, Research Division - Senior Equity Analyst

* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the third quarter 2019 results presentation. (Operator Instructions) I must advise you that the call is being recorded today, Wednesday, the 6th of November 2019. I shall now hand over to your host for today, Fredrik Rågmark. Please go ahead.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [2]

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Hello, and this is Fredrik Rågmark and Joe Ryan from our head office here in Stockholm. We're very happy and pleased to present for you our third quarter 2019 interim report.

And then flip on to Slide 3 that you have in front of you, that headline, a long history of sustainable organic growth, we are very, very pleased with the results of the third quarter. It confirms our long history of strong organic growth, which is further ticking up despite the company being several times larger.

We have significant margin expansion, which shows and illustrates our ability to turn scale and efficiency into additional profits. And it also, I think, very well highlights the advantage with Medicover in terms of several dimensions of diversification across geographies, across payers and across service models. So those are the 3 most important messages that I will take you through here.

We have put on the graph that you've seen before in terms of our -- we had a 10-year history when we listed 3 years ago, now we've added 3 more years. We've been compounding more than 20% top line growth now for 13 years. You see we put in the LTMs for the last 12 months figure as of end of September just short of EUR 800 million. And I remind you, we listed in 2017, but '16 being the last full calendar year when we were just short of EUR 500 million, so some 60% larger since we listed less than 3 years ago. So indeed, very strong growth.

This comes across pretty much everything we do. We have put on some pie charts on this presentation that you haven't seen before that will help you -- that will help us illustrate that for you. I will talk you through that just in a second. We're operating in a very favorable growth environment. There's a high level of demand for private pay healthcare services.

We have a super strong brand. Medicover is a very well-established, recognized and appreciated brand, and we have strong market position in pretty much all our marketplaces. And again, the strength of the diversification not to be underestimated.

You see these 2 pie charts. The left one, when we look on payer where fee-for-service, which represents, i.e., where customers pay private out of pocket to us, represents more than 50% of overall revenue, up 29%. That's a figure worth repeating, 29% up. That's a very strong number.

Our funded business, where employer pays us for looking after all of their staff, up 11%, and our public business up on the back of some of our acquisition work, up also a very strong 46%. So it's really important to see the balance of those 3 payer groups giving the stability and predictability both in revenue growth and earnings growth.

Secondly, you see the geography diversification, where Poland, as you know, is still our largest geography, up some 29%, impressive. Germany, second-largest geography, up 19%. Romania up 25%. Ukraine up 40%, and all other smaller places up a combined 28%. So what I want to try and illustrate to you with this is that this is not a one-off thing happening in one country or in one business line, it is solid underlying growth pretty much across everything we do. So indeed very strong.

Then going specifically into the quarter. So revenue grew 27%. So that is organic growth ticking up to above 17%. I think last quarter around, we were just above 14%, which was strong indeed. So this is another 3 percentage points on top of that. And then we're adding some 10% acquired revenue growth on that to come up to 27%.

So if we're looking at annualizing the absolute growth we pulled in this quarter, that's some EUR 179 million or more than 1/3 of the entire size of the group when we listed less than 3 years ago. So one can express the strength in these growth numbers in many ways. But I think I've sort of made that message to you now.

Fee-for-service already mentioned, up 29% and representing more than half of what we do. We have our publicly stated financial targets since the IPO, which are expiring by the end of this year. And we now state that we expect to be above this midterm financial target of 18% to 20%. As we will come to in a second, we are quite significantly above this quarter and the 9-month year-to-date figure. And despite 2018 being below on a weak outcome in Germany, we now confirm that for the 3-year period, we expect to be above. So that's a strong message.

Then turn on to the earnings slide. So our main results measure EBITDA grew very strong by 41%, up to EUR 32.5 million and 160 basis points margin expansion. You recall, we had quite a strong margin expansion already the prior quarters. So this is a continuation of the trend that we have been reporting for a few quarters. But of course, it is particularly pronounced, so particularly happy to be able to show this to you.

Adjusted EBITDA, similar trend. And the alternative performance measure that we have introduced, as you know, the EBITDAaL where we bring back our lease costs to be [similar] to the owned EBITDA before the IFRS 16 change this year. That was up a whopping 50% versus the prior year to EUR 22.3 million. And the point I just made on the public target, you see up 28.3% for the quarter and 23.4% for the 9 months, vis-à-vis an 18% to 20% target. So indeed strong.

Our net profit, you recall, last year around, we had quite a significant amount of other income relating to the financial instruments around our investment in MaxCure, the Indian hospital business. So if we exclude the other income elements and look at the underlying earnings, our net profit for the quarter is up just short of 26% and for the 9-month period, it's up some 44%. So also the net profit figure, excluding other income, illustrates the growth in profitability coming through the scale and efficiency effect. So all good on that side, I think.

Then looking specifically at our Healthcare Services division and our colleagues there, you see the 2 pie charts to start with where the private pay business, of course, is dominating, as you know, in this division. Private pay growing an impressive 20% and public pay being very, very, very much larger on the back of principally the Neomedic acquisition that we did in Kraków that is performing very well.

And you also see the country split, where Poland, obviously, is very dominating, it is up an impressive 32% revenue-wise as the geography in Healthcare Services, Romania, an even stronger 40% and the Other category here in this division then is mainly India and Hungary. So indeed, a revenue growth of 30%, that's something to salute, I must say, and organic growth just short of 20% in this division, very well done, an impressive figure.

Fee-for-service is growing ahead of the rest here at 32%, largely on the back of a number of acquisitions but also underlying fundamental strong organic growth, and is now reaching up to 39% of divisional revenue. So a strong number.

EBITDA up just short of 30% to 14.9% margin. Good EBITDAaL, the alternative performance measure here, up 33% and a smaller margin expansion. We had member growth of 11%. And it's worthwhile to point out that I consider that to be a strong member growth, and that is despite a very disciplined pricing policy, where we have said goodbye to one particular large client in the financial services industry on profitability concerns. And despite that, we can show strong member growth. So very pleased with that.

And the point I already made, the results we see here in this division, as in DX, is really all lines of businesses contributing to the very, very positive top line and efficiency development, which generates strong profit growth. So a good picture.

Then flipping over to Diagnostic Services. And again, I'll start with the 2 new pie charts. And you look at the payer split here, which is a little bit different. So our private business in DX is up 27%. Again, these are numbers that I sort of never want to forget. 27% growth in our private pay DX business is a very significant number, and 17% up in the public pay business is certainly not poor either. So again, a very strong picture.

You see the geographic split in Diagnostics. Germany, the largest geography, the largest health care economy in Europe, is up 22% for us, significant. Romania, where our diagnostic history started once upon a time, up 14%. Ukraine up 39%, 3-9 percent, up in Ukraine, Poland up 11% and all our other smaller lab markets up a combined 28%.

Again, same message here, you can see that the growth numbers are universal, and they cut across everything we do. So a very solid picture. So organic growth 15% out of this. And fee-for-service is growing strongly, the 27% that I already mentioned.

Now this is coming through. You remember that we arguably had a weaker third quarter last year around, particularly in this division on the back of Germany. I'll remind you that nothing has really changed. That regime is still there, but we just have managed it in a really good way. Our colleagues in Germany have managed that in a really good way. So we have seen a significant margin rebound out of Germany, plus we have grown the business with scale effects in the other geographies.

So you see a 250 basis points margin expansion, up to 18.4%, EBITDA, 43% profit growth, 49% profit growth in the alternative profit measure. So again, just really strong. 11% growth in the laboratory test numbers. We see strong underlying demand for our services really across the board. We have opened a net 18 new BDPs during the quarter, take us up to a total of 627. And we will keep on opening more BDPs as we go forward.

Flip on to MaxCure, our Indian associate hospital business. And I put on some nice-looking pictures on the right-hand side here. And it's very pleasing to tell you that we have since about a month or 2 months back completed a rebranding of the 11 MaxCure hospitals into Medicover. And these pictures, obviously, don't show you a hospital, but I thought this would be more entertaining for you to see this time around.

This is Hyderabad -- the city of Hyderabad, which is sort of origin of MaxCure. And straight through the Hyderabad runs a skylink train. That's the pillars you see on the left, where we now have, I think, there's 60 of these pillars that are plastered with Medicover. And our hospital is sort of just next to this skylink that goes straight through the so-called Hitec City where Amazons and Googles and IKEA and all the big companies have their big campuses.

Now the bottom right picture here is the skylink metro station that has been rebranded, renamed into Medicover Hospitals Hitec City Station. And I think there's about 3 million people passing through that station every day, seeing and hearing the name Medicover. So we're really proud and pleased over how our Indian colleagues have been able to pull this campaign together. So I'm sure we're going to build a very strong brand recognition of Medicover in India on the back of this fairly quickly.

So revenue for our hospital business in India was the EUR 17.6 million for the quarter. Local currency growth of some 20%. I'll remind you these are 11 hospitals, just short of 2,000 beds in the Andhra Pradesh and Telangana states. And so far, one hospital in the state of Maharashtra, which is the most recent one in the city of Nashik that we're busy developing. We hope to be able to launch a second large hospital project during next year in the state of Maharashtra.

We're also busy developing 2 big cancer facilities now in a city called Nellore, next to one of our facilities, and also here in Hyderabad next to the main hospital facility. So all of these development works, plus local currency borrowing has pushed MaxCure for the 9 months period into net loss position. So we have picked up our piece of that. Our ownership now is just short of 50%. And Joe will talk a little bit more about that in a second when it comes on to him.

So we're very pleased about the development in India, and we look forward to the MaxCure Medicover Hospitals to soon becoming part of the group also on a consolidated basis. So with that, I hand over to Joe.

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Joe Ryan, Medicover AB (publ) - CFO [3]

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Thank you, Fredrik. So a very pleasing set of numbers, indeed. So if you flip over to Slide #10 with the figures. So very strong revenues, operating profit up 67%. If you look at the preferred alternative measure that we use EBITDAaL just beneath this where we're up some 46% for the quarter. And if you look also a number which I think a lot of analysts look at, which is the EBITA number, so including the depreciation charges, that is up some 67% as well.

And if you look at the divisions, the margin improvement at the EBITDAaL measure, up 2.3 percentage points in the DX division and in the Healthcare Services side up 0.2%. That's a smaller increase in terms of the EBITDAaL margin. But that's even after some one-off costs, which we have going through which we don't really break out or anything. But underlying, we've got very good numbers.

These are all, just to remind you, IFRS 16 numbers, including the comparators. We did a full restatement the front-loading impact from IFRS 16 in comparison to the old EBITDA measure. That is here in these numbers. So year-to-date, we have about EUR 800,000 impact negative in respect of this new measure, EBITDAaL versus the old measure of EBITDA, so EUR 800,000 front-loading impact last year, that's for the 9 months, that was a EUR 1 million front-loading impact. So a similar sort of size of number.

So just flipping over, strong growth, really happy with that margin expansion. But also the point is worth making that we've been investing now, since always we've been investing in terms of expanding the greenfield. And in addition to that, since the IPO in terms of inorganic acquisitions as well. So this is the culmination really of those previous investments we've done.

And as you see, on the cash flows, in terms of our investments for capital spend, we continue to invest, but that's going to be driving the growth for 2020 and further on, such as the dental, inpatient activities and our BDP networks.

Pricing has been disciplined in our core benefit markets. That's very important that we make sure that we actually get paid and make the right return on the work we've done, and that includes also moving clients out to -- we don't see that as something which they're willing to pay for. We have plenty of demand. We have plenty of people who are willing to pay us the right price for our services. So we prefer to work with those.

Our acquisitions activity over the last quarter, we bought in the minority that we didn't own in OK System. This is a Polish employee benefit fitness product business where they're selling health and fitness really to the same in customer bases we have for our medical services. So we bought in the remaining part of that. We own that 100% now, which is great. It means that we can fully invest in that and expand that without any restrictions from having a minority. So we're busy now expanding our network of our own clinics to support the future expansion of growth and the attractiveness of that product.

We acquired -- at the beginning of the quarter, we acquired a dental clinic in Poland at EUR 3.2 million. Not individually that significant, but we now also since the end of the quarter we acquired 2 other businesses [to add] about EUR 4 million that we spent on our dental acquisition in Poland.

We've invested -- since the IPO up to the end of the quarter, we've invested just short of EUR 17 million in acquisitions and also in greenfield investments into Polish dental activity. Now that number is in excess of EUR 20 million with these 2 further ones. And we have made commitments to continue the greenfield expansion over next year as well. So we expect to be around about EUR 26 million in that business for 2019. But really, our run rate is probably nearer EUR 30 million in that business. So that gives you a flavor of what the types of things we're investing in and what's driving our growth there.

Our net profit, this was EUR 6.3 million versus EUR 6.7 million last time around. This was held back on the MaxCure pickup -- EUR 900,000 loss we picked up on that. And then these other fair value movements that we have in respect of the MaxCure options that we have over shares. These will disappear when we consolidate MaxCure. Probably we do that towards the end of this year, most likely in December to incorporate MaxCure into the business as we move about 50% and with our -- take control of the business fully.

Another factor, which is it produces volatility in that net profit line. Just to really emphasize that for you is that you're going to have things going backwards and forwards in respect to this. It's for IFRS 16, we have foreign exchange movements, which we reflect on the lease obligations, which were foreign currencies. We have a loss of EUR 1.2 million reflected in the P&L account FX line in respect of that for this quarter.

And just to give you an idea of the volatility levels that you see in that, we had a profit of EUR 800,000 last time -- last year in the same quarter. So that is a volatile number that will go up and down and just distract a little bit from the underlying growth in the profits. So underlying, as I said, 63% up, EUR 14.3 million versus EUR 8.6 million on our operating profit line.

Net interest cost, EUR 2.8 million for the quarter, which included in that is EUR 1.8 million for the interest charge for leases, lease liabilities, the -- so our net sort of real interest, if you like, on our funding is EUR 1 million. So that's pretty good, I think, in terms of the amount of debt that we're now running in the balance sheet. So quite cost-effective.

Cash flow from operations, this was at just short of EUR 26 million. Working capital was up. So we invested into that in the quarter. Part of that comes from our acquisition in Germany, which we did during -- at the beginning of the year.

Effectively, the way those acquisitions work is that when we do them, we very seldom pick up our working capital balance, so we need to build our working capital. And as we've expanded those businesses, the working capital, the payment effect is delayed. So we ended up with something about EUR 7 million that we've invested over the year in those German acquisitions that we've done. And so that impacts that. But this will normalize and come down. So that will improve.

Projected effective tax rate 27% for the year as we said at the beginning of the year. So we hold that as our projected tax rate. Equity up on the profits, obviously, also, the translation has been relatively benign for this year. So actually, we have a positive movement up 1.3 on translation of foreign subsidiaries.

And net financial debt, including lease liabilities, just short of EUR 350 million, up from 200, just short of -- just under EUR 220 million year-end '18. So if you look at our ratio, on an LTM EBITDA basis to the total obligation that's at 3.1x. Just to remind you, that's down from 3.3x last quarter as we get the annualization impact of the acquisitions we've done.

Net financial debt, excluding lease liabilities, more akin to how we looked at it before in the past, just short of EUR 200 million, and that was EUR 93 million at the year-end. That is then reported in terms of LTM EBITDAaL, which is more akin to the old EBITDA adjusted for leases. That was at 2.6x ratio. And just to remind you, that was 2.8x last quarter, again coming down on this annualization of the earnings from the acquisition with Neomedic that we did.

Lease liabilities has gone up just short of EUR 30 million over the 9 months from the beginning of the year, 2/3 of that being our organic business and 1/3 being the impact from acquisitions. And I think that just reflects the scale of the investments we're doing in terms of that premises. Reflects also the gym expansion as well where we're entering into leases to set up gyms in Poland.

Commercial paper program, we launched that at the -- just before the end of Q2. So we had now at the end of the quarter EUR 180 million of debt funded through that program. That is short term. So that changes our profile, but we have behind that the longer-term revolving credit facility. So there's no financing issue or liquidity issue in respect to that.

Now to further improve our liquidity and funding profile, we -- just after the quarter end, we placed EUR 120 million for longer maturities, 5 and 7 years in the German Schuldschein loan market. For anyone who's not familiar with that, that is a type of bond. It's not really a bond, but it's between a bond and a loan, and that's a particular feature of the German market.

But it's not only German investors, it's also international investors. So we're very happy to have Polish investors, a strong presence from Germany. And then also another range of international investors as well that helps diversify our funding base and was well received in the market.

So that money is now reduced in the CP program. And it's a market where we'll come back to in the future for financing. It works very well with us. It fits very well with our profile with our German presence and the types of banks that invest in there see us as a good credit.

Then coming on to the -- just a summary of where we are versus our targets. So growth has been fantastic, really happy on that, well above our guidance. So great set of growth figures coming through. On top of that, then we have the inorganic acquisitions that also have boosted the growth. But just even on their organic growth, it's fantastic.

And then we have our profit targets. So as Fredrik mentioned earlier, we expect -- we're above there. We expect to come in above our 3-year stated targets, '17, '18, '19 for the whole period.

And then on the infrastructure and the debt -- on the debt structure and the debt levels, we have those coming down from 3.3 last time to 3.1 now for total debt versus EBITDA, and from 2.8 to 2.6 for the EBITDAaL figure. I'll hand back to you, Fredrik.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [4]

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Yes. So that was the message and the information we wanted to take you through. So we're happy to take any questions you may have on these results.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question for today is from Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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Can you hear me?

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [3]

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Yes. We can hear you, Kristofer.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [4]

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Very good. I have quite a number of questions. So I will start with 3 if that's okay, and I'll then get back to the queue.

The first one is the pretty impressive margin in Diagnostics in the quarter. I think, seasonally, we have seen in the past that margin is rather down third quarter versus the second quarter. That's not the case this time. So if you could explain that. And how much that might be an effect of the positive currency development in Ukraine?

The second quarter also on the margin, but for the health care business and quite similar, but the other way around, why that margin is not more -- up more sequentially in a seasonally strong quarter? If there are any extra type of costs there?

And then I wonder if you could comment on fee-for-service, very strong growth, but how much of that is organic growth? I guess quite a lot of it comes from the acquisitions.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [5]

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Yes. So on the DX side, I think you can say like this, Kristofer, that more than half of the margin improvement is not due to Germany. It's due to just a very underlying strong volume, and hence, margin development in other countries.

I mean if you look at that geographic split out and the growth numbers on the DX side, you will see pretty much all geographies pushing their revenue much stronger than historically. And that turns into a significant profit growth, which is feeding through to that margin despite a third quarter. So it's a solid picture.

Across the German rebound, if I use that word, is significant. But as said, it's less than half of the overall picture. So you can only say it's good. I mean you can't sort of really pronounce it in any other way. And then on the -- sorry, Joe wants to --.

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Joe Ryan, Medicover AB (publ) - CFO [6]

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No. And then just on the Ukraine about the currency impacts, obviously that helps a little bit. But in our organic numbers that we report, those are adjusted for constant currency.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [7]

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Yes -- sorry. On Ukraine, I was thinking more about the Diagnostic margin. I guess, that means you're not lowering prices, but you could purchase reagents, et cetera?

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Joe Ryan, Medicover AB (publ) - CFO [8]

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There is a little bit of that. Remember, this currency strength has been from the beginning of the year. So in the earlier quarters of the year, we still had our old stock that we bought at more expensive exchange rate. So there is a little bit of that coming through. But it's not that significant. The volume impact is considerably more significant.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [9]

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And on the Healthcare Services side, I would say, it's sort of the other way around. It's -- underlying is good. I made the point that we have -- we're sticking to really disciplined pricing. So in the quarter, we have terminated one particularly large financial services contract, which -- arguably over a month or 2. So you're actually dropping out quite a bit of contribution short term from that. But we're filling it up quickly with other business. That has a little bit of impact, although not particularly pronounced.

And then we're -- we have a number of development projects. So I wouldn't read too much into that, Kristofer. It's not a seasonal issue. It's not something which will change the picture. So that's going to be good going forward. So I wouldn't be particularly worried about that.

On the fee-for-service side, that's mainly inorganic growth. The fact that that looks such a super strong figure is driven by our acquisition activity underlying. So that's really where you see this.

We made the point many times before that in the -- in Healthcare Services, you're really not buying anything in the funded business. So -- but of course, then all the acquisition activity in that part of the business is concentrated in that fee-for-service segment.

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Joe Ryan, Medicover AB (publ) - CFO [10]

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But in terms of for the last 12 months numbers, Kristofer, you haven't got very much coming from inorganic growth. We've invested heavily in terms of the capital spend that we invested. A lot of that goes into the business service arena. So it's not such a big -- the inorganic part in this quarter is not such a significant amount. The organic part is way, way, way bigger. And that's a reflection of the investments that we've done in the past and -- where we've got greenfield and where they start to fill up and where we can start to expand them.

And remember, these are held back as well. I mean in the margin things, where, for instance, take a dental clinic, where it's 2x or 2.5x the size that we have -- that we actually used at the beginning. So you got 50%, 60% extra capacity, which we carry with us. And then we -- as we build up the volumes, we expand the facility in terms of putting more chairs in, for instance, for dental clinics.

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Operator [11]

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(Operator Instructions) The next is from James Vane-Tempest from Jefferies.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [12]

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Just a comment on Poland if I can. I think previously, you sort of mentioned that the employment generally across the country is quite high. So I'm just curious how we should think about growth in plan membership as we get into 2020? And particularly, if there is any wobbles in the economy in Poland?

And second question is, again, on the Healthcare business. Just looking at the split on the publicly funded, it looks as if in Q3, there was strong growth in the public from around EUR 2 million to EUR 12 million in revenue. So if you could clarify that, that would be helpful.

And then if you are also anticipating to, third question, consolidate MaxCure now that it's close to 50%. Just wondering when that does come across the threshold, how we should think about capital allocation? Two other quick -- other questions, if I can, please, just as I'm here.

The minority in Poland you mentioned, what is the benefit of that on a full year basis, please, just for modeling purposes so we can look at the minority line?

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [13]

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Okay. So I kick off, and then I'll give over to you. So James, on the Polish employment growth, we have made the point many times that I think the sort of biggest midterm issue for Polish GDP growth and the Polish economy is the access to labor where we're sort of approaching 0 unemployment in all urban areas. So that's a significant issue.

Now that's obviously, in one way, short term, good for our funded business because on the margin, the attraction of having an additional benefit package for your people is increasing in importance.

But growth rates will start to trickle down because employers will be unable to find the amount of labor they are looking for over the midterm unless something more sort of structural happens. So that's an issue. It's an issue we talked about and many other people talked about it. I'm sure we're going to see that going into 2020 a bit more pronounced.

And then on the public funding side, you're correct. That's on the back, James, on -- of our Neomedic funding. So that's sort of in the Neomedic acquisition. So the -- most of the work in the hospital group down in Kraków is publicly funded work. So that's what you see coming through in that amount of money being much, much larger like that.

Then regarding MaxCure consolidation and the minority, I'll let Joe comment on that.

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Joe Ryan, Medicover AB (publ) - CFO [14]

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Thank you, Fredrik. So, MaxCure, James, I expect we'll probably go over that threshold, probably I expect December, something like this. So we have contractual rights to buy additional shares. And then we've also done some funding with them with convertible loans. So I think we'll probably convert a part of those loans as well, probably December or early next year. But I think that we'll go through that consolidation level in December. So I think you'll see in the year-end numbers, you'll see MaxCure being consolidated.

What does that mean really in terms of the business? Well, you can see how we disclosed the quarterly revenues. So you can get an idea of the size of the business from there. Then we have around about external debt, something like around about EUR 25 million-odd of external debt, not including the debt that we've -- we provided them, which is convertible, which sort of disappears upon consolidation.

And then you're looking at sort of where they are in terms of the run rate for the EBITDA level, sort of mid-teens, around about there in terms of the EBITDA level.

We will most likely refinance some of the debt, reduce the cost of that post acquisition, and that should help us. We'll do that off our own balance sheet, where we have still a considerable minority. Obviously, they will be picking up through the minority part of the cost of the debt that we bring into this. So yes, we expect that to go reasonably well over next year and continue the development.

We'll have to change the name. We call it MaxCure now, but now it's rebranded as Medicover, so we'll have to stop referring to as MaxCure.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [15]

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Yes.

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Joe Ryan, Medicover AB (publ) - CFO [16]

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The minority in Poland. This minority is the only real minority, I think, where we have in Poland was in this business with OK System. But it's still relatively small. It's not something which we really talk about that much because it's not really from a group perspective significant. So taking in the minority isn't really going to change anything in -- I think the minority interest that we have are larger elsewhere we have in Germany and somewhere else.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [17]

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And just kind of for my third question, if I can, on MaxCure. I'm sort of mainly interested in, in terms of as we get into next year, how you're going to prioritize CapEx needs across the business between what you're building in Poland, Romania, et cetera, versus what you're trying to achieve in India?

And then just another follow-up question. On Germany, I didn't see the revenues and margins of the Diagnostic business. I was just wondering if you could clarify those for me, too, please.

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Joe Ryan, Medicover AB (publ) - CFO [18]

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On the first question there, in terms of capital allocation for India, we will invest. We have a project which probably won't start next year, but we'll certainly be investing over next year for another hospital in Maharashtra. So that will be an amount of money, but we were only investing in the real estate. We will lease the real estate. So the amount of money will not be so significant.

Likewise, for the cancer care facilities, we've actually invested quite a bit of the money already this year in the physical structure. Here, we own one of them outright the facilities, and one of the other one is leased, but we're doing the fit-out costs. So we've put quite a bit of that through already on the balance sheet in MaxCure.

So I don't think from a group perspective, it's going to be -- you're going to see some big change in terms of our capital allocation. So I expect next year that it will probably be less than EUR 10 million of the order of money that we will put into capital spend through our activities in India. There could be some smaller acquisitions, which make sense. But we're not seeing really in terms of that we're going to be doing anything larger in India.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [19]

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Great. And Germany?

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Joe Ryan, Medicover AB (publ) - CFO [20]

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I didn't quite understand the question, James.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [21]

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Oh, I didn't see -- I mean historically, you've given us a sense of clinics and revenue growth in the German piece of the business within Diagnostics, but I didn't see that this time around. I was wondering if you can give us a comment on the profitability of the German clinics business now as you've done over previous periods -- and the revenues. Apologies, if I did miss it in the release.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [22]

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No. I mean we're -- we actually -- we did not comment on that. We can comment on it in the call like this. So where we grow the business, you saw the pie chart on Germany, which I showed where, I think, what did I say, Germany is up in the -- did I say 16%, I think, that's what I said, yes. Just hold on 1 second.

No, I said even 22%. So Germany is up 22%. Now a good chunk of that, James, is inorganic on the back of the client diagnosis -- sorry, the genetic acquisition. But there's good underlying organic growth and the margins keep progressing. So we're pleased with the development. But we have -- we've stopped splitting it out in our public reporting, but we're progressing the margin, so we're pleased with developments.

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Operator [23]

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(Operator Instructions) I think we have a follow-up from Kristofer.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [24]

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Two follow-up questions, if that's okay. The first one is the impact we could expect on the Healthcare business from the slower membership growth. So it's been going from 15% to 17%, now down to 11%. So how will that impact organic growth for the Healthcare business in 2020? And what's the possibility to compensate with [stronger growth] for fee-for-service? That's the first one.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [25]

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So I think there's no scientific answer to that, Kristofer. Now the points we have made before many times that the employer paid business is a cyclical business. And I've said that at the worst troughs we have had that has probably grown 4%, 5%. And at the very peaks, it's sort of been growing 14%, 15%. Now it's down to sort of 11%-ish.

What do we expect for next year, probably sort of high single digits, low double digit, that sort of thing. I think that level of area. So I think it's going to trickle down a little bit versus what we have seen this year. I think we will have a good opportunity to more than compensate that overall with fee-for-service growth. We see a very significant demand in that market.

And Joe was commenting particularly on dental. But there's other things that we're busy buying over next year. So I think you will see over calendar year '20 an ongoing -- a little bit of sort of reshift of revenue composition towards fee-for-service in the Polish business, partly on the back of employers slowing a little bit and fee-for-service keep growing strong.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [26]

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But the slower growth you'll have in the number of members this fiscal year compared with last fiscal year, is that really impacting the sales growth year-over-year in value, so to say, already?

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [27]

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Well, I mean, you know how this is accounted for in terms of -- we sell business this month, we only account for 1 month and 11 months is rolling forward. So the -- when you have significant member growth, you always have a lag on the sort of revenue of that. So when members are growing very quickly, you front-load your growth, yes. When member growth is slowing down, you sort of backload the revenue slowdown, if you see what I mean, because over the coming 3, 6 months, you will see accounted for the growth that we have sold over the past 6 months.

So if growth is slowing down in member intake in the fourth quarter a little bit, sort of in revenue-wise, that's going to start to be visible second, third quarter next year. That's how the -- that's how it works out model wise, as you know. So I'm just saying it's difficult to track this for you on a month-by-month basis. But overall, when you look over 12-, 18-, 24-month period, you're going to see growth in that employer business coming down from perhaps 15% to sort of 10%-ish overall. That sort of level, I think.

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Joe Ryan, Medicover AB (publ) - CFO [28]

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Kristofer, just to add a little bit of flavor to that. Part of the reason that we've been investing in the other areas of health care paid services is to diversify a little bit away from the employer paid side. So we've got a very diversified payer mix base. And now with Neomedic coming in, that's a really great business. Quite heavily dependent in terms of public revenues.

But here, we can -- we combine that with some of the other products that we have. And they've got a really good name, and that helps us both on the fee-for-service, both on the employer paid. And then we also have an additional diversification in our funding with the public paid. So that's been our strategy for -- since before the IPO and it's working out very well.

So I think what we don't lack is growth. So anyone looking at this company should not be worried about our growth line. We've got plenty of pockets of growth, good diversification across different markets. And we see our job more about making sure we can extract synergies, making more that we can extract the running of the businesses and get the performance so we can manage our margin well.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [29]

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Sounds very good. The other follow-up question I had going back to MaxCure and the fact that you reported a net loss there. So if you have a mid-teen margin, I guess, EBITDA in the quarter should be somewhere in the range of EUR 2 million, EUR 2.5 million --.

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Joe Ryan, Medicover AB (publ) - CFO [30]

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Just -- I understand where you're going, Kristofer. That pickup is for the 9 months.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [31]

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Okay. But still, financial cost, how much do you pay? Is it like 10%, so EUR 2.5 million a year?

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Joe Ryan, Medicover AB (publ) - CFO [32]

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Even a little bit more than that. So if you work it out, you're going to take around about EUR 3 million in terms of costs for financing, take that back from around about for the 9 months a loss of just over EUR 2 million. Our pickup has changed over the year. So you come back then to about a profit about EUR 1 million.

But you've got to -- we -- the depreciation charge, you've got quite a big heavy asset base, and we depreciate it at the same rates as we depreciate in our European business. So it's a much faster depreciation rate than is normal in India. They use the assets for much longer, but we unified the depreciation rates. So they're quite aggressive depreciation rates. So you've got quite a big dollar level in there as well.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [33]

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Okay. So depreciation of sales, what's that approximately?

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Joe Ryan, Medicover AB (publ) - CFO [34]

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You're looking at around about -- in most of the assets, you're looking around about -- you can take an average period of around about 6 years, something like that, has been the depreciation, that sort of level.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [35]

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Okay. And if I take that as part of sales, what would that be?

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Joe Ryan, Medicover AB (publ) - CFO [36]

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I can't remember the number now off the top of my head here, Kristofer.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [37]

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Okay. But I think it will be important now when you consolidate this, so we get estimates correctly.

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Joe Ryan, Medicover AB (publ) - CFO [38]

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Yes.

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Operator [39]

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Currently, there are no further questions waiting.

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Fredrik Rågmark, Medicover AB (publ) - CEO & Director [40]

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All right. Well, thank you for listening, and thank you for the questions. And we look forward to, if not before, seeing you and talking to you at the year-end in 3 months' time then. Thank you.

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Operator [41]

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Thank you very much, sir. Ladies and gentlemen, that does conclude the call for today. Thank you all for participating. You may now disconnect.