Monash IVF Group Limited (MIS.F) Earnings Call Transcript

Ladies and gentlemen, good morning, and thank you for standing by. Welcome to the Monash IVF Group Full Year Results 2022 Call. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Knaap, CEO. Please go ahead, sir.

Thank you, Ryan, and good morning to all of you. Thank you for joining us today for Monash IVF Group's results presentation for FY '22. With me today, I have our CFO, Malik Jainudeen, who will be later stepping through some of the financials. By way of background, Monash IVF is a market leader in providing reproductive care in our core assisted reproductive services, diagnostics, genetics and pathology services with an expanding, growing network of 49 IVF and women's ultrasound clinics and service centers across Australia and Southeast Asia. Our experienced and capable team now includes 146 doctors in excess of 700 scientific nursing counseling and support staff. I would like to take this opportunity to thank everyone of our team for their unrelenting patient-first mindset and continued agility throughout the pandemic and indeed more recently through a highly COVID infectious period. This focus and effort of our people is the reason we have such an optimistic outlook for the future. I would now like to touch on the key points in the executive summary on Slide 3 of the presentation. Our underlying profits were ahead of our guidance, delivering an underlying NPAT of $22.2 million and a revenue increase of 4.7% versus the prior year, achieving $192.3 million in total revenue for the financial year. With the financial results for FY '22, our balance sheet strength and an optimistic outlook, we were able to declare a fully franked final dividend of $0.022 per share. In Australia, we had a strong ARS or IVF performance with EBITDA growth of 6.9% versus the prior year, whilst also delivering growth in our market share of 0.2% versus the prior year, highlighting the sustainability of the all-time high industry volumes achieved in FY '21. In our Women's Ultrasound business, our scan volumes declined by 8% versus PCP, being heavily impacted by COVID-19 infection and influenza disruptions. Pleasing, we see this as a tailwind in FY '23 as the environment normalization occurs. We continue to see the benefits of the strength of our doctor partnerships and being a destination of choice for specialists, increasing our doctor numbers by 24, both through business acquisition and recruitment. We have expectations to continue to build our fertility specialist teams in the next financial year. Our clinical infrastructure and expansion projects continue in FY '23 with the delivery of new IVF clinic and day hospital in both Melbourne and Gold Coast and Brisbane in calendar year '23, complementing the recently completed Darwin, Penrith and Sydney CBD IVF clinics. Internationally and specifically in Southeast Asia, our stimulated cycles decreased by 6.5% versus the prior year in a challenging environment. However, the momentum improvement occurred in the latter months of the financial year in all of our clinics as borders reopened and restrictions ceased was quite strong. We now have 5 IVF clinics covered throughout Southeast Asia with a recent opening in Singapore, and Bali opening in September. We continue to be focused on executing on the pipeline of opportunities in Southeast Asia. I just wanted to touch on the compelling underlying demand drivers in our industry to support volume growth into the future as we look at Slide 4. There continues to be an advancement in maternal age as a long-term trend as people have delayed starting a family, which continues to increase in fertility rates. Although there has been a significant increase in IVF demand, our average maternal age of 37 has remained constant since the start of the pandemic, which underlines continued growth in the industry during and post-pandemic. There has been a sustainable change in mindset of the community with greater focus on family, health and well-being during the pandemic. To support that, we had 2.2% increase in new patients having stimulated cycles during the last financial year and a growth of 3.9% in new patient registrations on the back of an extremely high growth rates in the previous year. Growth in our service offerings and advances in technology are driving improved outcomes and appeal to the fertility value proposition. There is good growth potential in donor, social patient treatments and genetic services into the future. Our significant recent improvement of 4.4% in the clinical pregnancy rates over the last 3 years is a testament to the improved value proposition for patients. There was an increase in government support from 1st of November in 2021 for patients who are carriers of known genetic disorders and further funding of broader genetic testing services will be occurring from November 2023. Furthermore, New South Wales announced an additional $2,000 cash rebate for patients undergoing IVF treatments from the 1st of October 2022. This is expected to boost demand in New South Wales. These new government funding initiatives, along with the current stable government funding regime for both IVF and ultrasound services will support volume growth and patient affordability into the future. As we now look at Slide 5 to focus on the broader ARS Australian market, where demand for services in Australia continues at close to record highs and significantly above pre-pandemic levels. The left-hand graph shows quarterly growth in stimulated cycles. During the financial year of '22, our key market stimulated cycles decreased by 1.1% compared to the previous year, which follows record stimulated cycle growth of 32.6% in the previous financial year. Short-term factors negatively impacting the IVF industry during the second half of '22 included widespread COVID and influencing infections, forcing patients to delay treatments, government intervention temporarily ceasing IVF services in Victoria and staff shortages due to increased sick leave. The right-hand graph shows the number of Australian cycles per year, noting the step change in volume in FY '21 and maintaining volumes in FY '22 despite the short-term challenges previously outlined. Given the industry dynamics, our view is that the new industry baseline for stimulated cycles has been set and growth can continue into the future at 2% to 3%. Having a clear picture of the Australian IVF volumes, I would just like to cover off for more details around our growth rates and the market shares on Slide 6. In our key markets, our stimulated cycles were in line with FY '21 despite IVF industry volumes declining by 1.1%. This lead to market share gains of 0.2%, achieving 21.2% market share with gains in South Australia, Queensland and New South Wales. The key factors to our market share gains include the contribution from our new fertility specialists in the previous 12 months that continue to develop their referral and patient base and also the creative marketing campaigns and substantial market investment to benefit future years. These gains were partly offset through some market share declines in Victoria and the temporary ceasing in treatment in Darwin as we relocated to a new state-of-the-art clinic. Furthermore, our frozen embryo transfer market share increased by 0.6% versus the prior year with 19.6% market share, demonstrating the strong returning patient pipeline. Recent business acquisitions are taking us to new regions in Perth and Cairns and building our strength in the Brisbane market, coupled with the high number of doctor acquisitions, provides us with confidence that we will further build market share in Australia during FY '23. I'd now like to welcome our CFO, Malik Jainudeen to take us through some of the financials.

Thanks, Michael, and thank you, everyone, for joining us today. So turning on to Slide 8, which illustrates the revenue growth we achieved during the year. Considering the choppy environment we've experienced in the last 6 months, we are overall pleased with the revenue growth of $8.7 million or 4.7% compared to last year. What was most pleasing is the strength of the domestic IVF business whilst faced with challenges during Q3 and in light of the temporary suspension of services in Victoria in January. You will see that we've achieved growth in revenue from price increases during the year of between 2% and 3% across all markets, which contributed additional revenue of $4.8 million. And in reference to FY 2023, we've already executed on 3% to 4% price increases across all markets. Market share gains added $600,000 of revenue. And as Michael illustrated on the previous slide, we expect this to continue to grow going into FY 2023. The international business in KL had a challenging time, particularly in the first half, whereby revenue declined by 9% in the first half, but we have experienced improvements in the second half, where revenue declined by 3%. The pipeline is showing good signs, which suggests we should start seeing better performance in the first half of '23. The ultrasound business was impacted by a number of uncontrollable events, including the Sydney COVID environment in Q1 and the Omicron impact between -- in Melbourne and Sydney businesses in Q3. Sonographer illness has a substantial impact on capacity and efficiency as rooms are closed if the sonographer is not available. Ultrasounds revenue declined by $1.4 million, but we do expect gradual improvement to ultrasound performance during '23. Other income grew by $5 million compared to last year as a result of increased revenue in our day hospitals, increased revenue in genetics and insurance income we received during the year. Turning over to Slide 9. I'll illustrate an EBITDA bridge that gives you a story about our EBITDA growth during the year compared to last year. The key point to take away is earnings growth we've achieved in our core domestic IVF business, which grew its EBITDA from $47.7 million to $51 million. The domestic business grew its EBITDA up 12% before increases of $2 million in additional insurance costs and inefficiencies experienced due to COVID-related factors. This includes higher sick leave, higher annual leave expense, higher nursing and admin costs as a result of IVF cycles that have been canceled and just about works up entirely to go to theater. Regarding the international and ultrasound businesses, EBITDA declines have been greater than revenue declines, as I've noted before, the inefficiencies in the ultrasound business impacting earnings whilst the international business included ramp-up costs for our new Singapore clinic. Turning over to Slide 10, which illustrates a high-level group profit and loss. As noted on the previous slides, revenue grew by 4.7%, whilst underlying EBITDA grew by 0.8%, which reflects the additional insurance costs and inefficiencies as noted before. The sick leave and annual leave expense had a $900,000 impact on earnings. Reported depreciation and amortization increased by $2.2 million, which includes rental payments and yet to be commissioned clinics and noncash AASB16-related lease accounting adjustments. Underlying NPAT declined by 4.7%, reflecting movements in revenue and EBITDA and increases in depreciation, as previously noted. Turning over to Slide 11. As you can see, the cash flow statement is illustrated. Cash flow generation during the year was reasonable with EBITDA converting to pretax cash flows at 97%. CapEx for the year was close to $12 million, which reflects the completion of a number of clinics, including Penrith in New South Wales, Darwin up North and the new Singapore Clinic. Works have commenced for the flagship clinics that we've talked about previously in Melbourne and the Gold Coast with both clinics to have Monash IVF own day hospitals to complement the IVF businesses and ultimately improve patient outcomes. Given our new clinic plans, we expect substantial increases in CapEx in FY '23. You'll see that we've outlaid $3.4 million of acquisition costs during the year. This includes $2.1 million of acquisition costs for the 2 acquisitions that were announced in May and in July. And that cost also includes a number of targets that were not pursued. Turning over to Slide 12. I've just illustrated the balance sheet. That shows that we're still in a strong position, particularly in light of our plans for FY '23. Net debt is $2.1 million at 30 June, which provides capacity for all the growth initiatives that we have in the pipeline. We're expecting more than $45 million of expenditure of cash outflows during FY '23 related to CapEx and acquisition payments. If I give you a bit of color on the CapEx, we're looking at around $30 million in FY '23 relating to new clinics, including Melbourne, Gold Coast, Brisbane and Bali, whilst we expect around $16 million of acquisition payments relating to the PIVET acquisition and the ART Associates acquisition. The debt facility was extended during the year for a further 3 years to December 2024. Also of note is, we have a further $40 million available on the accordion facility that allows for CapEx and acquisitions. And accordingly, we have appropriate facilities in place to cater for our growth plans, as noted previously. I'll hand you back to Michael.

Thank you, Malik. Now I can move to Slide 14, as we start to work through some of the details of our Australian ARS operational performance, commencing with a very critical pillar of our strategy, doctor partnerships. Our success in recruiting new doctors reflects the compelling doctor value proposition and the attraction of joining a group of highly engaged doctors across fertility and ultrasound. Our doctor value proposition is heavily geared towards our doctors' expectations on scientific leadership through excellent success rates, the patient and doctor experience, our business development initiatives for them, our leadership in marketing to drive patient acquisition and high-quality clinical infrastructure. We continue to gather momentum in our doctor recruitment through acquisition and direct recruitment, having welcomed 53 new clinicians over the last 4 years with 24 being added in the most recent year. These results can only be achieved when you have a highly engaged doctor group being advocates for Monash IVF as a result of the experience and service quality they and their patients are recipients of. Our focus remains on attracting and onboarding new and experienced facility specialists with a suitable cultural fit, outstanding clinical competencies and industry reputation. Let me take a deep dive on the business acquisitions that have been executed in recent months on Slide 15. The recent acquisition of PIVET Medical Center in Perth and Cairns and ART Associates, Queensland in Brisbane will result in 15 additional fertility specialists and Monash IVF having the broadest IVF clinic footprint across Australia. These acquisitions also position us well to further recruit fertility specialists in these regions. PIVET Medical Center provides us with the entry into the WA market that has seen stimulated cycle growth of 9% per annum over the last 5 years, whereby we plan to build on the existing 8% market share held currently. Furthermore, we have extended our footprint in Northern Queensland with the Cairns clinic complementing our existing clinics in Northern Queensland at Rockhampton and Townsville. We expect to complete in September with EPS accretion of 4% to 5% in the first full year of trading. ART Associates Queensland broadens and complements our existing presence in Brisbane, where we have been underrepresented market share historically. This provides us with the opportunity to build a state-of-the-art clinic with much needed scale to best service patients in the Brisbane region. Completion is expected to be in the next month or so and we have anticipated EPS accretion in the FY '24 year to be in the range of 5% to 10%, which will be subject to successful integration into Monash IVF. As we take a look at our clinical infrastructure progress and plans outlined on Slide 16, the strategic priority of clinical infrastructure continues to be a focus in the medium-term horizon as our clinics of paramount to execution of our strategic growth objectives. Our new and updated clinics will drive revenue growth through increased capacity and new base surgery revenue whilst ensuring we maintain an amazing experience for our patients, our people and our doctors. The transformation of our Melbourne footprint is well advanced with a new large-scale fertility clinic and day hospital expected to be opened in Cremorne located in the east of Melbourne. The opening is planned to be early in 2023, which will consolidate 4 existing locations, introduce a new day hospital revenue stream and provide an exceptional patient, doctor and team experience. We're also undertaking clinic relocations and significant upgrades in the Gold Coast, including a day surgery, Brisbane, [indiscernible] New South Wales and Sunshine in the west of Melbourne. More recently, we have now completed our Darwin and Penrith, New South Wales clinics. And you can see the warm welcoming entrances of those clinics on this slide. Let me now take a look at Slide 17 to focus on our scientific leadership. We have a continued unrelenting focus on investing and building scientific capability to ensure we are giving our patients the best possible outcomes and differentiating our value proposition to patients and doctors. Chart at the bottom of this slide represents the continuous improvement in our clinical pregnancy rates across our group, with clinical pregnancies in calendar year 2021 increasing by a very significant 4.4% as compared to calendar year 2018. We have been on this journey of continuous improvement throughout our long heritage. The Monash Way as developed by our group's Scientific Advisory Committee is well embedded across our group and has been a critical driver of improved success rates. It is worthwhile calling out some of the initiatives that will drive further improvements to our success rates into the future. We will continue to partner innovative organizations to advance new technologies such as the safer and softer method of ICSI and a more effective sperm selection device. Furthermore, we continue to roll out time lapse technology across our clinic, resulting in less embryo touch points during the development stage of the embryo, which will also facilitate artificial intelligence embryo selection capability. Our research and translation executive committee has been established to develop and operate a framework for future research and innovation, governance and funding. This will drive new technology and clinical developments into the future to ensure we are at the forefront of innovation and research. Partnership and technologies backed up by our ongoing research focus through our various research bodies will ensure we continue to evolve and improve our success rates and the patient experience. As we move to Slide 18. Our substantial strategic marketing investment is a key driver of our market share gains and driving growth in our future patient pipeline and indeed improving our doctor value proposition. We achieved strong strategic brand improvements with 3 out of 4 of our key states now holding the highest brand preference and consideration amongst our competitors. Our people's positive engagement remains a key priority, and we are focused on continuing to achieve a culture success throughout the Monash IVF Group for our doctor and employee teams. Pleasingly, we achieved a culture of success again in the most recent survey that was performed in recent months. We continue to make positive progress in building a diverse and inclusive workplace. This was recognized in 2022 by gaining the Employer of Choice for Gender Equity accreditation. Also, our learning and development framework and focus on personal and professional development will enable us to support growth opportunities and build capability, continuity and retention, particularly during the changing employment landscape that currently exists. As we turn to our diagnostic ultrasound performance on Slide 19, which has been impacted by COVID-19 and influenza in Sydney and Melbourne. Our volume movement was consistent with the decline across the broader industry as we all faced into these challenges. Our ultrasound scan volumes declined by 8% versus PCP, and noninvasive prenatal testing declined by 6.9% versus the prior year. Furthermore, the implications of the lockdown and penetration of COVID cases have impacted efficiencies, workforce flexibility and patient willingness to enter a clinical setting. These factors reduce patient demand and indeed, our margins. We anticipate that as we now come into a more stable COVID normal environment, the demand will stabilize and the efficient work practices will and are returning providing a tailwind into FY '23. In Sydney, we saw improving scan volumes in the fourth quarter. However, in Melbourne, we continue to battle capacity constraints that will correct during FY '23. Following significant increases in demand for reproductive Carrier Screening services, we launched Monash IVF branded Reproductive Carrier Screening test in November '21, allowing couples to identify potential genetic conditions in a child prior to conception. We've had a positive uptake of the test, which is available online on our website and in our clinics. This will be a new channel for stimulated cycle growth that is unrelated to fertility. And pleasingly, from November 2023, a Medicare rebate will be applied to the test, improving affordability and therefore, penetration of the test. As we move abroad to our IRS international operation performance on Slide 20. Our Southeast Asian expansion strategy is gaining momentum despite COVID-19 challenges, which are gradually subsiding. We will have 5 clinics in Southeast Asia. And strategically, we are targeting Southeast Asia to contribute more than 25% of the total group stimulated cycles by FY 2026. Our international underlying FY '22 EBIT decreased by 22% or $0.8 million to $2.8 million as the Kuala Lumpur EBIT declined by $0.7 million. However, to support growth into FY '23, we have a new fertility specialists commencing a KL this quarter, and we are pleased that new patient consults for the second half of FY '22 were 23% up on the prior year, providing positive momentum as we enter into FY '23. In reference to our other clinics in Southeast Asia, we have recently commenced trading in Singapore, having recruited 4 experienced facility specialists, and we anticipate to deliver up to 200 stimulated cycles in the first year. We are adding to our clinic portfolio in September with the clinic opening in Bali whilst our clinics in Johor Bahur, Malaysia and Jakarta, Indonesia are both anticipated to deliver profits as the border restrictions have eased and COVID impact is moderating. We are absolutely committed to the Southeast Asian region and to further build our clinic footprint through a pipeline of partnership opportunities. If I take you to Slide 22 for our Vision 2026 strategic road map. Vision 2026 continues to remain consistent in regard to our objectives and aspirations. We have made significant progress on our strategic pillars over the previous years, as outlined in previous slides. And with this platform established, we will continually evolve and improve in order to deliver our Vision 2026 objectives. Our Vision 2026 strategic road map will continue to enable everyone to understand the priorities, actions and decisions required to achieve success and deliver profitable growth in the oncoming years. As demonstrated through the previous year's progress, we have strong momentum on our strategic growth initiatives, and these have become more transparent in the previous 12 months. However, there is still more to achieve, and this will become more transparent later on. As we move to the all-important outlook for FY '23, which is on Slide 23. Whilst the ongoing COVID-19 pandemic and macro uncertainty created volatility in the Australian IVF market in the second half of FY '22, the favorable underlying demand dynamics are unchanged. Advanced maternal age and access to broader service offerings, including donor egg freezing and genetics are expected to underpin long-term industry growth. But the recent short-term weakness in the market is largely attributable to patients being forced to delay treatment post infection of COVID-19 or influenza, hesitancy to access healthcare services and the macroeconomic uncertainty. However, there is some uncertainty around how long this market disruption will continue for. In financial year '22, we made significant investments in future growth, including recent acquisitions, attraction of new fertility specialists and further expansion into Southeast Asia. In addition, a further $45 million of capital expenditure investment and acquisition payments are anticipated to be made during FY '23 that will continue to drive future growth and improve service delivery. The recent acquisitions of PIVET Medical Center and ART Associates Queensland are expected to complete by end of September 2022 and will contribute to earnings growth in FY '23. Accordingly, it is subject to further adverse impact from the ongoing pandemic, we anticipate FY 2023 underlying net profit after tax to grow in excess of 10% as compared to FY '22. That ends the formal part of the presentation, Ryan, and we're happy to move to questions.

[Operator Instructions] Our first question comes from the line of Jonathon Higgins from Shaw and Partners.

3 from me just to start, if that's okay. Firstly, just around just the guidance. Can you just maybe just pull back just a bit on that? Obviously, you're doing sort of a significant amount of investment in both new facilities, brownfields, greenfields alongside bringing on some acquisitions for a part year contribution. Could you tell us anything more about sort of the NPAT line around EBITDA or your expectations around upfront, please?

Jon, thanks for your question, and thanks for joining us. As you say, we've got all those growth initiatives coming on board. We've called out 10% earnings growth, and Michael noted that a lot of that will come through from the acquisitions. Do we think there's going to be organic growth? Absolutely. The current environment is a bit odd, but I think a lot of that will subside and play itself out in the next couple of months. But we do see the second half being a lot stronger than the first half, Jon. So I think come AGM will have an absolute clear picture of exactly what the year is going to look like, but we'll be pretty disappointed if we don't deliver 10% growth from last year.

And you would expect EBITDA growth to be a little bit stronger than NPS growth or NPAT growth, Jon given the structure of the investments.

Yes. No worries. Just sort of making that clear. Obviously, the top line is a bit uncertain at the moment. Just in that context, just what are your sort of observations on probably the domestic market and also the international markets look like they're starting to sort of turn a bit. Just interested just in terms of sort of the July, August and potentially when we see that recovery in Asia playing out?

Yes. We're seeing signs of recovery in Asia now and a completely different environment, high new patients coming through for consultations, particularly in our KL clinic. And with the restrictions released and board is opening, the pipeline is constantly building in Southeast Asia. So we'd expect some fairly significant improvement in our Asian clinics, particularly given a few of them are fairly new, and we're open during a COVID impacted period, so we expect them to get a momentum than they are in regards to patient interest. On the local front, it's probably to say that July was a little soft given it was a holiday period and so forth, and there was a lot of travel going on. But I can say that August is pretty strong. So the blend of July and August is a pretty reasonable start to the financial year.

No worries and last one for me, it's a bit out of the ordinary and a little bit abstract. So if you don't have this on you, I'll grab it from you later. But I was leafing through the annual report in regards to the LTIs of the business and some of the EPS hurdles between FY '21 and FY '24. Just wondering, I think it's a CAGR, correct me if I'm wrong, but it's -- I think to hit sort of LTI hurdles in FY '24, the EPS has to be sort of north of $0.085. Is that sort of the LTI on the EPS front? Or has there been a mistake there?

I'll clarify it with you, Jonathon, in the next couple of days, but the LTI is about a 10% to 12% EPS growth target as well as TSR targets. So I'm not sure exactly the nature of your question, but I think we can clarify that.

Yes, the EPS equation or CAGRs for LTI to hit or to be treated is 10% and you've got 100% of it if you hit a 12% CAGR over a 3-year time frame.

No worries. So sort of through the financial year, obviously, if things improve and the growth come off, and you have a good FY '24, then that sort of accrues through those financial years?

Yes. That's right.

Yes, that's right. So '24 is a pivotal year, Jon, if you're asking.

Our next question comes from the line of Rachael Harwood from Macquarie.

So status on doctor recruitment, really strong numbers in specialist recruitment. Just wondering what that means, I guess, the cost base going forward? And then more broadly, how are you seeing wage inflation?

Yes. So from the cost per, if you don't -- I mean, the fundamentals of clinician costs in our business are around that sort of 18% to 20%. So we don't see that vary from that particular number. So we expect that to be consistent throughout the, hopefully, growth in the next couple of years. In regards to wage inflation, we're just going through EBA negotiations at the moment and they're ranging that sort of 3% to 4% per annum and fairly similar to [ 90-day ] based staff as well. So that's the sort of range. That's our highest cost. That's our highest potential risk when it comes to inflation with people, but we expect it to land around about those levels in oncoming year, definitely.