U.S. Markets closed

Edited Transcript of RHK.DE earnings conference call or presentation 8-Nov-19 12:30pm GMT

Q3 2019 Rhoen Klinikum AG Earnings Call

Bad Neustadt / Saale Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Rhoen Klinikum AG earnings conference call or presentation Friday, November 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Julian Schmitt

RHÖN-KLINIKUM Aktiengesellschaft - Head of IR & Treasury

* Stephan Holzinger

RHÖN-KLINIKUM Aktiengesellschaft - Chairman of Board of Management & CEO

================================================================================

Conference Call Participants

================================================================================

* Oliver Metzger

Commerzbank AG, Research Division - Equity Analyst of Life Sciences

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the conference call of RHÖN-KLINIKUM regarding the results of the first 9 months of the fiscal year 2019. The conference will be hosted by Stephan Holzinger, the CEO, CFO of RHÖN-KLINIKUM; and Julian Schmitt, Head of Investor Relations and Treasury. On our customers' request, this conference call will be recorded. I now hand you over to Julian Schmitt.

--------------------------------------------------------------------------------

Julian Schmitt, RHÖN-KLINIKUM Aktiengesellschaft - Head of IR & Treasury [2]

--------------------------------------------------------------------------------

Dear investors and analysts, thank you very much for dialing in today. I wish all participants from the U.S. a good morning and extend a warm welcome to all other participants. We are very pleased that you are able to join our conference call regarding the first 9 months results of financial year 2019. Stephan will open today's call with the highlights of our first 9 months and a summary of strategic measures to improve our operational performance. Therefore, Stephan presents our new corporate improvement model. Afterwards, I will give you a detailed explanation of our P&L and balance sheet figures. Stephan will close the prepared notes for today with our guidance confirmation for 2019 as well as an outlook about the regulatory environment in 2020.

As usual, we'll offer you an opportunity to raise questions. Before we start, and according to the usual practice, I'd like to draw your attention to the forward-looking statements and disclaimer wording on Page 2 of our presentation. This safe harbor language applies to the presentation, our guidance and all comments to be made today. Again, I'd like to mention that everything will be recorded. After the call, a replay will be available on our website.

Now I'd like to give the word to Stephan. Stephan, please.

--------------------------------------------------------------------------------

Stephan Holzinger, RHÖN-KLINIKUM Aktiengesellschaft - Chairman of Board of Management & CEO [3]

--------------------------------------------------------------------------------

Thank you, Julian. RHÖN-KLINIKUM, like the entire industry, was confronted with a difficult market environment in the third quarter of 2019. The main factors here were excessive regulations and bureaucratization of the business by the legislator, such as for example, the minimum staffing levels in nursing care, the new PPSG or the catalog effect. Further decisive effects were the unusual hot summer with less elective treatments and the shortage of skilled personnel in a few but high performance-related areas of nursing, the medical profession and IT. In addition, there are increasing operational challenges at most of our company's locations compared with the first half of 2019.

At this point, I would like also like to mention the startup effects of the Bad Neustadt campus. The relocation of a total of 4 clinics in Bad Neustadt with a new and ultra-modern campus building complex and the associated initial reduction in the number of patients had a noticeable negative impact on our operating earnings development.

In order to be more precise, we have to solve technical challenges, especially in the first weeks of the year. New processes have to be communicated to test it and implement. New teams have to be brought together to an overall strong team from previously separated teams of overall 4 clinics. This takes a bit more time than originally assumed. But especially due to the relocation, we are particularly lacking patient treatments and related DRG compensations from the first weeks of 2019.

Given the mentioned obstacles, we are only satisfied to a limited extent with our results for the first 9 months. Our revenues grew by 4.6% with 0.5% more for treated patients in the first 9 months of 2019 compared to the last year. Overall, more than 647,000 patients were treated at our hospitals and MVZs. We managed to achieve a 10% EBITDA margin within the first 9 months, but EBITDA was down as anticipated by 4.9% compared to the same period of last year. This can be explained by various contrary effects and one-offs, which Julian will elaborate on later.

By concentrating exclusively on the maximum care providers and specialized houses, we've embarked on a new and courageous strategic path. We're convinced that this is the right way. The key pillars of our strategy are the campus concept, the sharpening of classical hospital processes, smarter overall processes through digitalization in all business areas and focusing on new business models such as telemedicine.

However, we also faced challenges such as the implications of minimum staffing levels in nursing care and staff shortages in selected areas, which, in addition to rising personnel costs, are leading to increasing bed closures.

At most of our locations, operating performance in the third quarter again lagged behind our expectations. What can we do to improve our operational performance? Our extensive improvement program, which I initiated in 2017, is the first answer. I would like to emphasize very clearly that the program is already making an important contribution to our earnings development. For example, we were able to achieve important improvements in the coding of services rendered in purchasing and in the structure of our maintenance and servicing contracts.

The second answer is the medical review of our size. More than a year ago, we've already been very intensely involved with the regional competitive environment and the respective medical service portfolio of our individual sites. From this analysis, we have derived a number of concrete organizational, technical and personnel packages of measures, which are being consistently implemented but also require a certain amount of prep work. The first successes in this respect are already visible at individual locations.

At our Bad Berka site, after several months of intensive searching, we succeeded in appointing renowned chief physicians to the fields of oncology as of the first of August and cardiology as of first of November. At our Frankfurt/Oder site, the replacement appointments have essentially been completed and are showing initial positive trends. These are all measures that are already in place or have recently been initiated, but what else can we do?

In order to be able to leverage the efficiency potentials at our individual locations, we have concentrated on further improvement measures. These are concrete measures that we are intensifying resolutely in order to get the operational challenges under control. Let me walk you through the key points of these efforts. Please move to my next slide.

Throughout the group, we are working on further improvements in patient management in order to increase patient comfort and avoid missed occupations, misallocations and unnecessary resource allocation. It is therefore not only a question of further optimizing the length of stay control, and thus ensuring that our patients in all medical and nursing and intensity levels always receive the quality of care they require, but that we nevertheless do not generate any unnecessary costs.

Our cost unit accounting system provides us with the necessary greater transparency regarding actual profits and losses in the clinics and departments. With this tool, we're also optimizing treatment processes, for example, in the application of TAVIs through a group wide process and cost analysis. Besides that, we will introduce several command and control tools, like a new [desk work] with important KPIs, which will enable our chief physicians and hospital managers to counteract earlier, if there are any [plant viruses]. We plan to make this new tool available as soon as possible so that they all have the essential data for better control of the length of stay, bed occupation and discharge management at their fingertips on a daily basis.

In other words, we put the chief physicians and hospital managers in a position where they can actively control the flow of patients locally in a better and more profitable way.

Our package of measures also includes the triage and control of patient flows with the help of the new tele medical offers. We're working together with the Swiss Telemedicine Pioneer Medgate on this behalf. Just in this week, the Invest, Strategy and Finance Committee, on behalf of the Supervisory Board, unanimously approved the establishment of the operating company Medgate Deutschland. The entire board of management of RHÖN-KLINIKUM had anonymously agreed to the establishment of this new company beforehand. RHÖN holds the majority of this new company, with a 50.1% or 51% share. The aim is to supplement and relieve the existing care structures with upstream telemedicine services like telephone and video solutions as well as a corresponding app. The range of services is directed towards an increasingly digital-savvy society and their demand for efficient, comfortable and rapid health care. The advantages for the patients are self-evident. Advice and treatment, irrespective of time and place, as well as the direct receipt of prescriptions for 6 weeks. We offer access to tele medical services 24 hours a day, 7 days a week, 375 days a year. The treatment permanently employs physicians, is based on established evidence-based medical guidelines. Preparations for establishing the company are already well on schedule. Services will initially be directed towards private health insurance companies and self payers. It is also intended to work with the statutory health insurance companies. Medical agreements for employers, other services such as consultations for travel medication or solutions for psychiatric illnesses or telemonitoring programs would also be offered in the future.

What else? Moreover our package of improvement measures includes targeted personnel campaigns and a variety of other measures to attract new employees. Our international scholarship program, which has been successfully established at the Campus Bad Neustadt for many years, is one of the numerous personnel measures. Due to the positive experience in this area, both in the integration of foreign doctors and in nursing care, we want to roll out this program to our other locations promptly. The aim is to counter the shortage of personnel with the structured and systematic recruitment of qualified medical and nursing staff from abroad and to supplement the site-related personnel measures with the programs. We do not have any personnel problems in the nursing and medical professions across the board. However, there are very different areas specific to each location and some selectively highly specialized areas that need to be strengthened separately, which are de facto difficult to fill on the labor market at present. Therefore, we have already agreed on special incentives, for instance, in the operating theater, anesthesia and intensive care sectors in the current collective agreements and ongoing collective bargaining negotiations in the form of collectively agreed activity and specialist training allowances. These are unique compensation features. We've made good progress in this area.

The promotion of our junior staff is also particularly important to us. We've expanded the number of training capacities at our nursing schools due to the high level of interest and demand. In this context, it should be mentioned that we have intensified professional training, focused on the training of practice and structures, upgraded the training occupations and offered employees a wider range of opportunities to retain them. The central factors to be named here are the provision of employee housing, child care and the expansion in this framework of planned cooperation with child minders and external providers as well as the establishment of holiday care for kindergarten and school children.

With our new building complex in Bad Neustadt, we have united 4 clinics, which have worked independently and side-by-side for decades, under one roof in order to further improve the treatment of patients in the sense of a holistic approach. The basis for this innovative health care approach is close networking with regional Corporation Partners and interdisciplinary cooperation across the boundaries of departments and sectors. Starting with prevention, followed by outpatient and inpatient care, ended with rehab services.

In order to further improve patient care, in line with our campus concept, we're working on the development of a regional care model for the prevention and treatment of heart failure in the Bad Neustadt and Marburg region, which also includes the development of an alternative reimbursement model. We're particularly proud that the project has been awarded EUR 3.8 million in funding from the innovation fund of the GBA. We see this as a confirmation of our ability to rethink and implement modern patient care.

As part of the further development of our Bad Neustadt campus, we've begun implementing the second phase of construction which includes not only the construction of outpatient operating theaters, but also the extension of our psychosomatic clinic to include inpatient rehab. This will enable us to meet the increasing demand from patients for precisely these services. The expansion of our range of services on the Bad Neustadt campus to include neurosurgery from the 1st of January '20 and the establishment of a center for orthopedics and accident surgery from the 1st of October '19 is particularly promising.

Last but not least, I would like to mention the very successful introduction of AI-based coding support will henceforth be mandatory for hospital managers throughout the group. In this respect, I'll give the floor back to Julian, who will guide you through our financials of the first 9 months.

--------------------------------------------------------------------------------

Julian Schmitt, RHÖN-KLINIKUM Aktiengesellschaft - Head of IR & Treasury [4]

--------------------------------------------------------------------------------

Thank you, Stephan. In the first 9 months of fiscal year 2019, we increased sales by 4.6% to EUR 970.8 million. Our EBITDA decreased by around 4.9% to EUR 97.5 million, after EUR 102.5 million in the same period of the previous year. The EBITDA margin reached 10% after 11% in the previous year, taking into account higher depreciation and amortization based on mainly on the capitalization of the Bad Neustadt campus in the balance sheet and higher financing costs. EBITDA resulted in a consolidated profit of EUR 37.8 million.

Several factors influenced the development of our EBITDA. In the third quarter of the previous year 2018, we were able to realize positive results from the agreement on separate accounting at the Giessen and Marburg University Hospitals, for the first time. So that the first 9 months of the 2018 financial year were influenced by a one-off positive EBITDA contribution of EUR 20 million. So please always keep that in mind when comparing 2019 with 2018. Contrary to the challenges facing the industry and the operating burden, such as the implications of minimum staffing levels in nursing care and personnel bottlenecks, which in addition to rising personnel costs, are causing increasing bed closures, we recorded higher revenues from our university outpatient departments in the first 9 months of 2019 as well as a positive follow-up effect from the Fresenius Helios transaction. Stephan already mentioned the ramp-up effect of the Bad Neustadt, which had a negative impact on the development of our operating results in the first 9 months.

Let me walk you through the individual P&L figures. Our revenue growth comes primarily from a stronger case severity mix from our acute care facilities. Revenues also include cost reimbursement for cancer immunotherapies, recognized for the first time as of financial year 2019, which charged the same amount to cost of materials.

This brings me to the next slide, other income. In the first 9 months of 2019, provisions in connection with subsequent effects of the former Fresenius/Helios deal in the amount of EUR 30.3 million were released. The provision release was recognized within other income. Among other things, the increase in other income was also affected by sales of pharmaceuticals for multiple sclerosis and cytostatics as well as first-time refinanced personnel costs for health students.

Cost of materials. Cost of materials increased by EUR 21 million or 7.5% compared with the same period of the previous year. Accordingly, this increase was disproportionally higher than the growth of revenue. The materials ratio rose from 30.1% to 30.9%. However, the disproportionate increase can be explained as follows: the cost of materials position includes expenses for the drug treatment of multiple sclerosis. And for the first time, as of financial year 2019, expenses for cancer immunotherapies which are reimbursed at almost the same amount and reported under revenues or other income. Adjusted for this effect, the materials ratio increased only slightly from 28.3% to 29.1%, due to the application of cost-intensive services.

This brings me to our personnel costs. In addition to an increase in the number of employees, general wage increases and share-based payments to former management board members in the form of virtual shares, raised personnel expenses compared with the same period of the previous year. Also, the first 9 months of fiscal year 2019, for the first time, included personnel expense for students in the health care profession, which were offset as already named by reimbursement of the same amount within other income.

The next position is depreciation and amortization. Depreciation and amortization rose by 6.4%, EUR 1 million or 14.1% year-on-year to EUR 51.7 million. The main reason for this increase was the opening of the Bad Neustadt campus, as mentioned, at the turn of the year 2018, 2019. On top of that, the first-time application of IFRS 16 resulted in an increase of EUR 1.6 million.

Last but not least, our financial result. The negative financial result deteriorated by EUR 1.2 million to EUR 1.8 million in the first 9 months of fiscal year 2019. This was mainly due to financing expenses in connection with the registered bond issued in July 2019 and the promissory loan note issued in October 2018.

This ultimately brings you to the next slide, our balance sheet and related key figures. Nothing new, but solid figures to report here. We have an absolutely stable financial situation, with an equity ratio of 72% and a coordinated finance and strategy, which now also includes a registered bond or in German, Namensschuldverschreibung, of EUR 60 million, which we successfully issued in July 2019. By the end of Q3 2018, our net liquidity was at EUR 72 million. This leads to a net debt-to-EBITDA ratio which is smaller than 0.

Having mentioned these sustainable figures, I gladly give the floor back to Stephan, who goes on with our guidance and regulatory outlook for 2020.

--------------------------------------------------------------------------------

Stephan Holzinger, RHÖN-KLINIKUM Aktiengesellschaft - Chairman of Board of Management & CEO [5]

--------------------------------------------------------------------------------

Thank you so much. The situation of many hospitals in Germany remains tense. According to the 15th hospital rating report, 28% of all hospitals made loan loss, 12% were in increased danger of having to file for insolvency. In addition to tighter regulation and the increasing bureaucratization of the provision of services by the legislator, the worsening shortage of skilled personnel is one of the greatest challenges facing the industry. Market consolidation, which is likely to result in fewer clinics in Germany, will also be significantly accelerated by the current plans of the legislator, including the minimum staffing levels in nursing care, the nursing staff Strengthening Act and minimum quantity requirements. RHÖN-KLINIKUM proactively deals with these challenges facing the health care industry in general, but also with the special features of each individual location. Thanks to our large locations with highly specialized centers, we can react better to changes and increasing demands in the market as a whole.

Against this background, we confirm our annual forecast for 2019 and continue to expect sales of EUR 1.3 billion, in a range of plus/minus 5%, and an EBITDA between EUR 117.5 million and EUR 127.5 million. We'll continue to work with our utmost energy in the fourth quarter on the necessary restructuring of the health care system and on the implementation of the aforementioned goals. 2020 will mark a new peak of excessive government regulation with a stricter nursing care legislation, which is expected to place an additional burden on our company in the very low double-digit million euro range. The political leaders know that in Germany, we continue to have too many hospitals, too few specialists and too many patients who are being treated at the wrong place in the system. All of this was the chronic underfinancing of hospitals worth billions that has been deliberately accepted politically by the fed -- by the responsible federal states for many years. Politicians have decided in favor of an indirect [code] market consolidation with a Darwinian approach, which is carried out on the backs of a large number of patients, employees and shareholders, out of their concern for their elementary objective of reelection. But all these stakeholders are also voters; perhaps they should remember this more strongly and more often.

We are convinced that further process improvements and our initiatives and our innovative campus concept, which is predestinated for rural areas, in particular, will enable us to emerge stronger from this difficult market base in the coming years.

This brings me to an end of my prepared notes. Thank you so much. We're happy to take a few questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question received from Oliver Metzger from Commerzbank AG.

--------------------------------------------------------------------------------

Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [2]

--------------------------------------------------------------------------------

My first one is about revenue growth in the third quarter, which was very high, while the patient growth was up only slightly. You already mentioned the stronger case severity mix. Would you regard this improvement in the general case mix as positive confirmation of your strategy towards more complex medicine, or are there any other components which have to be considered? That's my first question. And I will ask a further one afterwards.

--------------------------------------------------------------------------------

Stephan Holzinger, RHÖN-KLINIKUM Aktiengesellschaft - Chairman of Board of Management & CEO [3]

--------------------------------------------------------------------------------

Oliver, thank you. I think I can answer this question very briefly and quickly. The main improvement effect came, as mentioned in our prepared notes, they're from the improvement of the acuity mix in specific acute care areas. The reduction in the patient number in acute care units was impacted in Q1, with improvements in comparison to the prior year in Q2 and Q3.

--------------------------------------------------------------------------------

Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [4]

--------------------------------------------------------------------------------

Okay, great. My second question is about -- so first question on regulation. So could you provide more color about the effect of the new nursing regulation? Initially it was targeted that nursing will be cost neutral, now it seems it's pulling to higher cost. Is this -- how are the dynamics of that?

--------------------------------------------------------------------------------

Julian Schmitt, RHÖN-KLINIKUM Aktiengesellschaft - Head of IR & Treasury [5]

--------------------------------------------------------------------------------

Yes. Thanks, Oliver, for your question. This is Julian from IR. We would like to make it clear at this point, Oliver, that we have always said that the -- that we have to evaluate the impact of the new care regulation as soon as well as information is available. It took the legislator as well as the corresponding institutions, such as Imec, much longer than initially expected. By the way, further changes to the regulation passed the legislation just yesterday. So as you can see, we are currently shooting at a moving target. The exact details of the nursing care regulation will be subject to negotiations with health care insurers on the level of single hospitals. Currently, we expect the overall effect on EBITDA of the new regulation to be in the very low double-digit million euro range as said to our prepared notes. I hope that answers your question.

--------------------------------------------------------------------------------

Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [6]

--------------------------------------------------------------------------------

Yes, it does. And my last question is also from regulatory, but you -- could you elaborate about the minimum staffing levels for heart surgery and neurology, how that impacts your business. You have comparatively big units, it should experience only a small impact, shouldn't they? And others still some further negative effect from that?

--------------------------------------------------------------------------------

Julian Schmitt, RHÖN-KLINIKUM Aktiengesellschaft - Head of IR & Treasury [7]

--------------------------------------------------------------------------------

Yes, okay. Thanks for the question. Understood it. I mean, your basic assumption is generally correct. In comparison to smaller hospitals, we do have competitive advantages. Nevertheless, minimal staffing regulations focused on the number of patients treated, and therefore do require more qualified staff as previously. Thus, we need more nursing staff. Let me be clear. We do not have an overall shortage of skilled personnel, but we face a shortage of personnel in a few, but as I said, high performance-related areas of nursing, which were also impacted by the regulation. However, we are well on the way to filling these positions. We are on -- we are one of the most attractive employers in the vicinity of all our locations. As already mentioned, as an employer, we take numerous measures to ensure that we can recruit as many nurses as possible. This also includes soft factors such as support in finding accommodation, for example, or offering company kindergartens.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

If there are no further questions, I hand back to Julian Schmitt for some closing remarks.

--------------------------------------------------------------------------------

Julian Schmitt, RHÖN-KLINIKUM Aktiengesellschaft - Head of IR & Treasury [9]

--------------------------------------------------------------------------------

Thank you for joining our conference call today. The next IR call will take place on 21st February 2020 regarding our preliminary results for 2019. If you'd like to see us in the meantime, please feel free to join us on our equity conference in London in mid-October or in Frankfurt by mid-January. Please check the IR and financial calendar on our website for further details. We will be very happy to meet you in person soon. If you have any further questions, please do not hesitate to directly contact our IR department. We look forward to receiving your call. Thank you very much for your participation.

--------------------------------------------------------------------------------

Stephan Holzinger, RHÖN-KLINIKUM Aktiengesellschaft - Chairman of Board of Management & CEO [10]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Dear ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.