Clariane SE (CLARI) Earnings Call Transcript

Good day, and welcome to Clariane Third Quarter and 9-Month Revenue 2023 Conference Call. Today's call is being recorded. At this time, I will now turn the call over to Philippe Garin, CFO. Please go ahead, sir.

Yes. Thank you. Good morning, ladies and gentlemen, and thank you for attending today's conference call on Clariane Third Quarter '23 revenue. I am Philippe Garin, CFO of the group, and I am with Stéphane Bisseuil, Head of Investor Relations; and with [indiscernible], whom many of you know already. Let's move to Slide 2, where you can read our disclaimer regarding the forward-looking statements that this presentation may contain. Let me begin on Slide 3 with a 3 main topic, I'd like you to remember about this quarter. Firstly, our growth is very strong. Clariane 9 months revenue figure came at EUR 3.7 billion, up 11.6% on a reported basis on the back of marked increase in volume, pricing and consolidation of previous acquisition. Revenue was up 9% on an organic basis, with all regions and business lines contributing to this growth. Secondly, an important milestone was also reached this quarter, Sustainable Fitch awarded Clariane [indiscernible] rating of 2, defined as a good ESG profile. We are delighted with Clariane work over the past 5 years has been a range by the rating agency, and we intend to further our effort in this domain. Finally, we confirm our operational guidance for the full year. This means organic review growth of more than 8% and a stable EBITDA in value, but we are now expecting our leverage to be around 3.8%, which includes the impact of the new real estate market environment. On Slide 4, you have here the revenue bridge for the 9 first months of this year. You can clearly see the 3 drivers with volume growth at 5%, pricing increased at 5.2 and the impact of [indiscernible] growth with mainly Grupo Cinco contributing on an additional 3.9% to our revenue. Personally, I'm quite happy to see these 3 motors of growth working in such a balanced way. On Slide 5, now you can see that the main driver in our revenue expansion in Long-Term Care has been the continued and marked improvement in occupancy rate over the past year, as sector return to normal. The rate was 89% in Q3 of this year and 160 basis point progression 1 year ago. On Slide 6, focused on healthcare, which represents slightly more than 1/4 of our revenue. In this activity, the story this year has been the acquisition of the Spanish platform, Grupo [indiscernible]. It's a great company that is largely outperforming its market and considerably strengthening the group Mental Health business. We expect this business in France, Spain, Italy, to generate at least EUR 330 million of revenue in '23. Moving now to Slide 7 to our performance by geographies. All the regions grew well as organic growth range from 6% to 14%, depending on the region. The volume impact on growth was well spread throughout all the regions, while the price component was more important in Germany and Benelux. Let's move to France on Slide 8. In our latest country, business level remained firm with revenue up to 6%, 6.1% on an organic basis over the first 9 months with an acceleration to 6.4% in Q3. Revenue in Long-Term Care was mainly supported by higher pricing and by a slight increase in occupancy rate to 80 to 87.4. This slight increase is mainly related to a high level of Short-stay last year during the summer. Today, occupancy rates stand at 88.6%, up to 110 basis points on last year's comparable figure. Our current occupancy rates include a larger share of long sales, which is a solid foundation for the coming months. Organic growth in Healthcare was 6% with each of the subsegment of activity growing well. Finally, Community Care grew strongly in the first 9 months of the year on the back of a strong performance of [indiscernible]. Let's move to Germany in Slide 9. With a significant price increase negotiated in '22, revenue rose sharply in the first 9 months of '23. Despite a context of staff scarcity, we increased our occupancy rate by 1 percentage point to 87%. '23 negotiation has been underway since the spring with the various pricing authority to [indiscernible] the fair applicable for the network. To date, the results of this negotiation represents an average increase of 10% of an annual basis. On Slide 10, you have our performance in the Benelux region that rose to 14% to an organic -- on an economic basis since the beginning of the year. Activity was strong in both markets as occupancy rate increased significantly in Belgium and through the ramp-up of greenfield in the Netherlands that were also complemented by steady price increase. Moving to our last geographic region on Slide 11. In Italy, growth from a robust with revenue rising by 7% on organic basis, driven by an impressive increase in occupancy rate, adding an acquisition made in '22, reported growth was 11%. In Spain and U.K., revenue growth was fueled by increase in occupancy rate, price in the U.K. and the dynamism of Mental Health in Spain. On Slide 12, you have detail on our inaugural sustainable future valuation. Fitch analysis reflects our Clariane integrate ESG consideration into its business, strategy and management. The assessment recognized our effort over the past year. On Slide 13, we have outlined the credit financing milestone achieved since the beginning of the year. All in all, this operation reflects the confidence of our financial partner place in Clariane and its financial and ESG strategy. Looking ahead, we are confident in our ability to realize 2 more real estate monetization operation by the end of the year. And on the right, you have the breakdown of our debt and can see our maturity profile following this recent operation. Since the beginning of the year, we have extended EUR 650 million in debt maturity beyond to next year. And the average maturity in our debt after this refinancing have moved from 4.1 to 4.5 years. On Slide 14, we have mapped out the evolution in leverage over the past 15 months. You can see that our expectations for year-end now stands at 3.8, down from 4.1 end of June, but above our previous guidance of 3.5. Today, in light of the appraisal of the new context in the healthcare real estate market, the main change is related to a more cautious appraisal of healthcare real estate market condition with 2 significant impact. The cap rate increase comparable to H1 to circa 5.8%, reduced financing appetite from investors and lenders with LTV estimated at 55%. Finally, on Slide 15. After this element and our updated leverage, you can see the confirmation of our operational guidance for the full year. This means organic revenue growth and more than 8% and stable EBITDA in a month. Thank you all. Now let's turn to the Q&A session.

Alan, can we move to questions, please?

[Operator Instructions] I will now hand over back to the floor for written questions.

Okay. We do have some questions on the chat. First one, what is your confidence regarding real estate transaction closings in the coming months?

I will say it's always difficult to speak about a deal, which is not completed because if we have been -- if it would have been completed, we will have announced it. We are clearly confident to complete those. As you know, one is expected in the weeks to come. And the other one, probably end of November or beginning December and I would say we are exactly in the same trend that what has been shared with you in July.

Okay. Another question on ongoing disposal of assisted living facilities. Can you comment on the status of the [indiscernible].

Same comment. The deal is not achieved until it is not fully completed and the cash is not in. But clearly, we are totally confident to complete it before year-end. And we have other -- no big deals this year, as you know, but a bit less in number and value than last year, but still some deal which are most of them to be completed before the year-end, in November or December.

Okay. And another question on disposals. You mentioned some disposals to come. Can you comment on this -- on site in particular?

Yes. As you know, we want our leverage to decrease. One of the way to do it is to increase the number of disposal. We are used to do it. But as you -- I just shared with you the number of disposal and the value of disposal in '22 was higher than in '23. We need to at least be back to '22, and we want to increase the amount of disposal. We have -- we are reviewing all the assets of the group. Some of them are not fully necessary for the strategy. So in light with the strategy of the group and the detailed review of our network, we are going to increase the number of disposal in the year to come.

Okay. We do have a few questions as well on financing and in particular, next maturities coming the question being what are the next short-term maturities and how will you address it?

As you know, our main -- we have 2 maturities beforehand -- we have some -- like each quarter, some maturity in real estate and we have a significant maturity in [indiscernible]. We have -- we will -- we have no issue in the reimbursement of both maturity and we are working in -- even though we have said and shared with you that we -- it's much more difficult to achieve real estate based on -- debt on real estate, we are still making some. We are not moving from -- to 0. It is less easy than before, but we are still working on the subject. And we don't see a big issue in achieving our level of real estate debt and the monetization in vehicles.

Okay. If we continue to go through questions on the chart, we have a question on CapEx reduction plan. Are you on track with your ambition? And which kind of CapEx do you plan to reduce in full year '24?

We are -- our goal that we shared with you in July is still the same. We should be for the second half of this year, including the small disposal we have planned, we should have free cash flow above CapEx and it will be clearly the case next year in '24 that our free cash flow will be above our CapEx, which are in an envelope of EUR 250 million. Excluding maintenance, as you know that we are always speaking about CapEx after maintenance. The 2.5% of maintenance CapEx will be achieved anyways. So when we are speaking about reduction of CapEx is development CapEx, M&A and real estate, these 3 families of CapEx should be decreased to EUR 250 million. It's difficult for me because as we are planning CapEx and to say where we will be exactly end of this year. But overall, our target of both target will be achieved.

Okay. Another question on the chat regarding leverage and notably the new figure provided for leverage end of '23. Could you provide details on why this has been changed from 3.5 to 3.8?

I don't know if you remember what we have shared with you in July regarding the situation in June. We had already a decrease in the value of real state by 20 basis points, an increase of cap rate of 20 basis points. We were believing that the increase of the second half should be significantly balanced by the index. What we are seeing today is in some countries, namely in Germany, the decrease of -- the increase of cap rate. And so as a consequence, the decrease of real estate value are stronger and quicker than expected. So we included in our valuation of real estate -- expected valuation of real estate end of this year this new cap rate, which, by definition, has an impact on our leverage. The second impact is our ability to achieve real estate debt at the level of 58% or 60%. You know that we have a cap on 65%, but it's quite sensible and our ability to be -- we were at 58% in June. I don't think we will be in a situation to have 58% of our real estate as a debt, 58% yes, the value, 58% of the value of real estate has debt. So we are seeing less appetite than before and a bit more difficult way to set up real estate debt. And as a consequence, our LTV should probably, I guess, decrease to what was our former usage at 55%. I just want to comment that it's clearly something which is cautious. We may probably -- maybe we are a bit cautious. By definition, it's forecast. It's what we are seeing currently on the market. And maybe we were a bit optimistic. It's very difficult. We know that we are in a trend of decrease of asset, and this trend is a mix of many countries in '22. We have been surprised by a quite significant decrease in the value in U.K. when most of the other countries didn't move a lot. In '23, we were expecting something stronger and it is still not too much except in Germany, where we have a significant impact on the market of the increase of cap rate. So it's a mix of -- the increase of cap rate -- as a consequence, the decrease of the value of real estate and our ability to generate debt among this real estate. Our new assumption is that we should be more at 3.8 than 3.5, mainly for this reason.

I think we have a question on the call, Alan?

We will take our next question from Patrick Jousseaume from Societe Generale.

My first question is on the comments made by Sophie Boissard in the press release. She says that regarding the last situation, you are considering various options, including the disposal of some assets. Could you comment on the other options, which are not the disposal of [indiscernible] for instance.

You may know that I'm not going to be extremely precise regarding this answer. We have ways to -- first, we are making savings clearly. We want to improve our cash flow. And one of the, I would say, we have not been -- I would say, we were quite cautious when we were preparing '23 and I have to say that the impact in Germany market with a new situation regarding working capital has been hurting us. The real estate market is decreasing clearly a big too quickly and our ability to improve our EBITDA and our cash is clearly not at the situation we were looking at -- so all the group is now only working on increasing generation of cash, which will be for '24 and back in '23. So increasing our generation of cash and any other kind of option, which are by definition when we are in a situation, I would say, everybody knows that we need to find solution between -- before '26, meaning it has to be implemented during the year '24. We are running in working on all the alternative, and we will see what is the best to be put in place.

Okay. Thank you for this answer. Regarding the targeted disposal, I'm not sure I have understood if you intend to make some targeted disposal of course before the end of this year?

No. Before the end of this year, we -- no, we -- before the end of this year, we have what has been announced, meaning mainly the situation regarding service flat, [indiscernible] little activity in France, which should be disposed before the end of this year. And it's not a surprise because it was already a book as held for sale in '22 and in June. And we have some other small units and some real estate, but I will say what we are expecting to do represent around EUR 50 million, before the end of this year. It's going to be a small year of disposal in '23. We really would like to be back to '22 where we were more than EUR 100 million of disposal and probably increasing more for the year '24 and '25, but nothing more than what was expected to come before year-end.

Okay. And my other question on slide 13, I'm not completely clear about the sub box in the slide, where you mentioned continued rollout of real estate financing during H1 2023 to more expect in Q4. The continued rollout of real estate, are you speaking about monetization there? Or are you speaking about financing of real estate?

Both.

Are you speaking about financing? Or are you speaking about disposal of real estate or monetization?

No, financing. In this slide, we are speaking about financing. We still -- what I was describing is we need a lot as we are amortizing our debt on real estate, we need to have a kind of rule to have new real estate debt each year. If we do not think our level of real estate debt is decreasing year after year, our ability to replace the debt is a bit slower than before. And -- but we still are generating debt. And clearly, there is -- it's more a question that we we are amortizing quite a lot, so we need to deliver quite a lot, but we are still going to deliver some new real estate debt.

Okay. So the EUR 150 million refers to rollout that were made in first half. And when you speak about 2 more expected in Q4?

No, no, no. The 2 more expected are related to amortization and the rollout of EUR 150 million will not represent EUR 150 million for this one half, but will [indiscernible].

Okay. But when I look at the EUR 207 million in the bar -- in the chart for 2023, which is what you have repaid for our real estate debt in the second part of 2023, so EUR 207 million. What is your visibility on your ability to refinance 100% of this EUR 207 million?

We will not refinance 100%, but we will refinance between 75% and 85%. And the discrepancy is hurting directly our leverage.

And maybe, I would say, final question on this -- on my side on this topic. What is the level of liquidity that we expect for the end of the year, bearing in mind that it was 875 at the end of H1 and while taking everything into account, what do we expect to be, including [indiscernible], the EUR [ 208 million ] of additional real estate monetization.

I will say that we should -- as we are currently achieving our vehicles and a reasonable level of financing on real estate. We don't see any issue regarding liquidity for the end of this year.

Okay. If we go back to the questions online. We have several questions on liquidity and in particular, have you drawn your RCF today?

No, we have not.

Okay. Also, several questions on operations in Germany. Do you see -- so what is the current trading in Germany? Do you see further price increase? And what is your view on working capital perspective?

I will try to be short. As you can see, when you read the slide about Germany, you see a very nice increase on the pricing. And you see a quite good increase too on the occupancy rate. We are not at a very high level, but not nowhere because we are around 87 level, which is reasonable. What are the issues in Germany? The main issue is, we are struggling to increase further our occupancy rate due to the lack of skilled staff, it's not a new story because it's the same topic since many years. But clearly, the COVID has not helped in improving the situation. The good news on this topic is a new law, which is called [indiscernible] at the federal level, which allow us -- which will allow us, which will come to allow us because, as you know, it has to be pushed on long by long to get some flexibility between skilled nurse and non-skilled nurse meaning for the same level of skilled nurse, we will be in a situation to welcome more residents or with some -- with our current level of resident, we will be in a situation to reduce the number of skilled nurse when they are too expensive, which is totally new, which were not expected now, but it's clearly in the situation. That's one of the first topic, which will help us to increase the situation against staff. It will take a bit of time. It is why we have shared with you in July that recovery in Germany will be a bit longer than expected. It's clearly the case. It will take a bit longer than expected. Regarding price, we were expecting a significant increase in price in '24, negotiated in '23, applicable in '24. Unfortunately, what we are going to obtain, which is nothing because we are in average, we are in the middle of the negotiation, not totally completed, but our expectation is to have something like 10% of increase. This 10% are going to help us for '24, but I'm not going to cover the discrepancy we had in '23. But same story. We have things to [indiscernible] and things to other ways to work on the tariff, some area in which we will be in a situation to improve margin. As an example, we can work with the authorities saying, okay, we would like to reduce the number of bed in the facility from 120 to 100 resident because we believe that it's too difficult for this facility to welcome 120 people. The advantage of such request is our fixed cost will be divided by 100 when they were divided by 120. So with the same occupancy rate, we will be in a situation to increase our margin. So the situation is Germany is moving the right way. It's not -- it's clearly not easy to see it in the result because we had such a difficult situation in '20 -- end of '22 and beginning of '23 when we have both a very difficult COVID exit and a huge increase of costs with a reduced increase of price. From the -- moving from that situation to the current one, we -- the light in the canal is clearly much stronger, but again, we are in Germany, everything has to be negotiated locally very detailed. It takes time. So it will be a slow recovery over '24 and '25.