Edited Transcript of MVF.AX earnings conference call or presentation 20-Feb-20 11:30pm GMT – Yahoo Finance

RICHMOND Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Monash IVF Group Ltd earnings conference call or presentation Thursday, February 20, 2020 at 11:30:00pm GMT

* Michael D. Knaap

* Megan J. Kirby-Lewis

Thank you for standing by, and welcome to the Monash IVF Group Half Year Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to the conference leaders, Mr. Michael Knaap, CEO; and Mr. Malik Jainudeen, CFO. Please go ahead.

Michael D. Knaap, Monash IVF Group Limited - CEO, MD & Director [2]

Thank you, Rachel, and good morning all, and thank you for joining us today for Monash IVF Group's first half results presentation for the financial year 2020. Our CFO, Malik Jainudeen, also joins me and will be later stepping us through some of the details of the financials.

A way of background, Monash IVF is a market leader in providing fertility solutions for all, in our core assisted reproductive services, diagnostics, genetics and pathology services with a network of 45 IVF and women's ultrasound clinics and service centers across Australia and Malaysia.

Today, we continue to break new ground with improvements in our best-in-class science, patient care and services, building on our pioneering heritage since achieving the world's first pregnancy in 1973. Our experienced and capable team includes 119 doctors and in excess of 550 scientific, nursing and support staff.

I'd now like to touch on the key points for the first half in this financial year, represented on Page 3 of the presentation. We delivered an adjusted or operating NPAT of $9.1 million, which was marginally above the top end of the guidance we provided in November. Our fundamentals remain strong. And in the last 12 months, we have set the foundations of the business for the future. We have built a strong pipeline of new fertility specialists and are investing in exciting projects to guide growth. I will touch on some of these through the presentation.

Our first half revenue was maintained as we absorbed the departure of 5 fertility specialists in Victoria. This demonstrates our efforts to ensure we diversify our revenue stream. We delivered volume growth in our South Australian and Queensland businesses, whilst investment to expand in New South Wales will drive future growth. Our Victorian business stabilized as all Victorian specialists are now contracted and aligned to deliver future growth. We also broadened our domestic footprint through the Fertility Solutions acquisition, a new full-service clinic in Penrith and taking a majority holding on Fertility Tasmania. These initiatives all contributed to reducing the impact of the decline in patient treatments in Victoria.

Transformation of our Sydney Ultrasound for Women business is progressing well as our total ultrasound scans across the group grew by 2.3%. Our scientific best-in-class capability and commercialization of innovative technology was further demonstrated with a strong take-up of our world's first noninvasive preimplantation genetic testing across our clinic network.

Our capital metrics remain solid and will support our planned growth initiatives, whilst we also declared a $0.021 fully franked interim dividend.

As we move to the financial summary for the first half on Slide 4. Our revenue was stable at $77 million, which was a solid result particularly when considering the ARS industry growth rate in our key markets was flat for the half. And we were also impacted by the sudden departure of 5 fertility specialists.

Our underlying business remains solid, delivering $9.1 million adjusted or underlying NPAT, an adjusted EBITDA of $16.8 million and an $18.2 million reported EBITDA. I would just like to clarify the term adjusted used in our financial metrics. Adjusted financial metrics are presented for comparative purposes due to the adoption of the new lease standard, which took effect in this year and was not retrospectively applied to previous periods. It also includes other certain nonregular items. Malik will take you through the detail of this a little bit later.

As we now look at Slide 5 as we start to work through some of the details of our Australian ARS operational performance commencing with scientific leadership. We have an unrelenting focus on investing and building scientific capability to ensure we are giving our patients the best possible outcomes. Our noninvasive preimplantation genetic screening technology has increased genetic screening penetration rates to 28% of our cycles.

We are also partnering innovative organizations to advance new technologies such as the safer and softer method of ICSI that is demonstrating improved fertility rates, creating more embryos for our patients. Furthermore, we are also trialing a better sperm selection device, which is also targeted to further improve fertility rates.

Most importantly, our scientific team collaborate across the group on the Monash Way, which continues to unify scientific practices through our Group Scientific Advisory Committee. This ensures we optimize patient outcomes, utilizing scalable and transferable scientific protocols, supported by lab benchmarking across our clinic network and learning and development programs to continually build capability.

As we turn to Slide 6, I'm very pleased to say that all of our Victorian fertility specialists are now contracted with more than 96% of specialists across our group being contracted. Our foundation for the future are strong with 13 doctors currently in our fertility specialist traineeship programs across Australia, providing a strong pipeline for growth and succession planning. We have contracted an established and well-credentialed fertility specialist in Sydney that has commenced patient treatments and will support our new CBD clinic. We are continuing to explore building our specialist strength in this very, very, very important strategic market.

We are really pleased with the progress of the 6 fertility specialists at our recently acquired Fertility Solutions clinic as they are engaged and focused on growing volumes.

The Monash IVF clinician conference weekend was held in November 2019, which brought together over 60 of our clinicians and another 80 of our scientists and key staff to collaborate and share the latest research and innovation in medicine and science. Programs such as this enable -- ensure we are building our knowledge and networks across the group, enabling continued improvement in our quality of patient care and delivering the best possible patient outcome. We're working very hard to ensure we are a destination of choice for new developing and experienced specialists, and we are seeing the benefits.

If we take a look at Slide 7, we are interested in expanding our clinic and consulting network whilst enhancing our value proposition to all our patients and specialists. Our new Sydney CBD flagship clinic is on track to open in late June, representing best practice patient experience. This best-in-class clinic is a key initiative to attract new fertility specialists into the Monash IVF family.

As you can see by the slide, I've provided a sneak peak of the concept design, which represents the look and feel and direction we are taking in regards to our clinics and in particular, the new Sydney CBD clinic. Furthermore, in Sydney, we have opened a new full-service clinic in Penrith, which commenced in October and is contributing in line with plan. This provides great access to the greater western region of Sydney, in tandem with our clinic in Parramatta.

In addition, we are planning for the transformation of our Melbourne footprint and patient experience to ensure our infrastructure and service offerings is best-in-class in our largest state market. We have improved our donor sperm supply nationally, which is a key driver in ensuring we grow our very important donor market, which now represents in excess of 15% of our IVF patient treatments.

We take a look at Slide 8. The patient experience principles remain focused on care, empathy, support and consistency, which is validated through our Net Promoter Score measuring tool. A patient center design methodology is being adopted to continuously optimize the patient experience at the times that matter most to our patients. We are evolving our brand to address the rapidly changing community needs for broader fertility solutions and education. And we are adopting a strategic shift and focus on communicating with prospective patients across multiple segments earlier in their fertility journey. We are also working hard to optimize the effectiveness of our marketing and media through long-term planning, channel integration and creative alignment to drive short- and long-term business benefits.

In regard to our systems, our cybersecurity defense has been improved, which withstood a targeted and sophisticated cyber attack, reflecting our confidential patient database. We continue enhancing our patient management systems, streamlining our user and patient experience and reporting compliance requirements. In addition, we are upgrading our infrastructure, enabling the use of technology to improve patient and doctor interaction, including the development of a mobile patient platform.

People engagement remains a key priority as we recognize our people through reward programs for demonstrating our principles. Furthermore, we are building our specialized capability and knowledge through our dedicated learning and development framework.

As we take a look at our stimulated cycle volumes across our states on Slide 9. Although our overall stimulated cycles of 3,872 decreased by 1.5%, on a like-for-like basis, stimulated cycles, excluding specialist departures, grew by 0.5% compared to the previous period, which was above the industry growth in our key markets.

In South Australia, we achieved 6.1% stimulated cycle growth and further grew our market share on the back of achieving 18.5% growth in the previous year. On a like-for-like basis in Queensland, our full-service stimulated cycles grew by 3% and maintained its market share after delivering 8% growth in the previous year.

In addition, the Fertility Solutions acquisition on the Sunshine Coast is performing in line with expectations. Our New South Wales stimulated cycles were stable as we maintained our market share. The Victoria stimulated cycles were flat on the previous period, excluding the departing specialist lost volume.

Our Fertility Tasmania clinic, which has 22% market share in Tasmania, is now consolidated into the group volumes. Furthermore, our Australian frozen embryo transfers were flat on the previous period with growth achieved in all markets, except Victoria and the Northern Territory.

Let me now look at Slide 10 to focus on the broader ARS Australian market. In our key markets during calendar year 2019, stimulated cycles grew 2.6%, which is in line with long-term growth rates of approximately 2%.

In our key markets during the first half of this financial year, the cycles were flat versus the previous period with New South Wales and South Australia declining on the previous period and Victoria up by only 0.5%. For the calendar year 2019, the national stimulated cycles grew by 4.1% after a 0.4% decline in the prior calendar year. It's worthwhile noting that industry growth rates can be variable from quarter-to-quarter and half-to-half.

If we take a look at Slide 11 on our Australian market share. In our key markets, our stimulated cycle market share was relatively stable at 19.6%. When excluding the impact of specialist departure, we achieved stimulated cycle market growth of 0.5%. When you put this into the context of a flat overall market growth, this was a really good result.

As we go around the states, in South Australia, our stimulated cycles grew by 6.1% compared to 4% market decline, significantly increasing our market share. In Queensland, stimulated cycles grew by 13.4% compared to 3.6% market growth, again, significantly increasing our market share. The New South Wales stimulated cycles were flat compared to 1.1% market decline as we maintained and slightly improved our market share. And in Victoria, our current Victorian specialist volumes were maintained compared to 0.5% market growth. Furthermore, we were very successful in Tasmania with our stimulated cycles growing by 26.6% compared to a 5.8% market decline, significantly growing our market share in Tasmania.

If you take a look at Slide 12 on our diagnostics performance. Our ultrasound business has stabilized, and there has been rapid take-up of our world's first noninvasive preimplantation genetic screening technology across our clinic network. The Sydney Ultrasound for Women transformation has progressed as total scans across the group grew by 2.3%, arresting the declines in the previous period, whilst our new Sydney CBD flagship women's imaging clinic opened in March 2019 is delivering to expectation.

Transition of our genetic screening services to our noninvasive technology has gone exceptionally well, resulting in an increase in PGS penetration from 19% to 27% as I've previously stated. Of the total tests performed, 58% of the total embryos screened have been tested by the noninvasive method, demonstrating the strong clinician support and patient appeal for this new technology. Furthermore, our noninvasive -- our NIPT service continues to grow as volumes increased by 3%, up to 6,726 tests.

In addition, our recently launched reproductive carrier screening service grew in the last half, following establishment in the previous year. This is an important service that can ultimately lead to increased IVF treatments.

As we move on to our Kuala Lumpur clinic in Malaysia on Slide 13. The Malaysian stimulated cycles declined by 16 or 3.1%. This was a result of macroeconomic conditions and potential deferment of treatments due to the pending introduction of superannuation funding and tax rebates for IVF treatments that was anticipated in 2020.

Our revenue increased by 3.6% to $5.7 million due to ancillary services income, which offset the decline in stimulated cycles. Our adjusted EBIT for the half was in line with the previous period. However, we delivered EBIT growth of 3% in the second quarter of the financial year 2020, demonstrating some improvement.

In order to support and facilitate growth in the Asia Pacific region, 10% of the KL fertility business has been sold to 2 of our leading fertility specialists. We continue to be excited by growth in the APAC region, and further acquisition and partnership opportunities continue to evolve.

Malik will now take us through the financials.

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Malik Jainudeen, Monash IVF Group Limited - CFO & Company Secretary [3]

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Thanks, Michael. Now turning over to Slide 15, which provides some analysis of our revenue. You will see that our revenue has been resilient through the disruption experienced in the first half following the exit of doctors in Victoria. Revenue has largely been flat compared to last year as volume declines in Victoria and our low-cost clinic was largely offset by revenue growth in all other jurisdictions.

Our organic revenue outside of Victoria grew by close to 4% as we experienced IVF volume growth in South Australia, Queensland and New South Wales. Our fertility business continues to benefit from price increases as we increased pricing by 2% to 3% in the first half. Revenue also increased due to the Fertility Solutions acquisition in Queensland, which is performing financially in line with expectations.

Prior to August, we held a minority stake in the Tasmanian clinic, which following taking control in August, we are now recording its full profit and loss in our consolidated numbers. Both the fertility Solutions acquisition and the Tasmanian clinic have added approximately 2% to our top line. As Michael noted, the KL business has been impacted by macroeconomic conditions. However, its revenue has been maintained, and we are seeing moderate recovery in Q2.

Turning over to Slide 16, which details a summary of our profit and loss. It should be noted that any reference to adjusted financial metrics has adjusted for the impact of AASB16 and certain nonregular items as detailed on Page 17. Pleasingly, our adjusted impact was marginally above the guidance provided in November as the impact from the departure of 5 Victorian doctors was in line with expectations as we transition activity to alternative specialists and rebuild our patient pipeline.

In conjunction with the comments on the previous slide, volume growth outside of Victoria grew by $1.2 million, whilst Fertility Solutions and Fertility Tasmania added a further $1.5 million to revenue. Adjusted EBITDA declined by $2.5 million. Whilst we were successfully mitigating the revenue impact from the departed doctors, the earnings increase outside of Victoria partly offset the marginal impact from Victorian volume declines.

As noted last year, we continue to invest in marketing, which increased by $600,000 to ensure we are focused on long-term sustainable growth, supporting our specialists through marketing and ensuring our patient inquiry conversion is solid. On funding costs, they declined by $200,000 given the low current risk-free rates available, and we expect this to continue into the second half.

Turning over to Slide 17, which provides a reconciliation of stat profit to adjusted profit. We have a number of nonregular items to call out, including transaction costs and stamp duty on the Fertility Solutions view. In addition, following the doctor departures, we have been implementing our cost-reduction program, which carries some costs in transition with an expectation that total annualized cost savings will be around $2.5 million. We expect to see some benefit come through in the second half, and the net benefit in FY '21 will be around $1.2 million. The cost-out program is expected to be completed by the end of the second half.

Our stat profit includes a nonregular patient claim provision, which relates to a disputed claim for an event that occurred in 2013 and prior to listing in 2014. I've also illustrated the impact from AASB16, which we have not adopted retrospectively. And as such, our reported EBITDA does not include $3.1 million of cash rental payments.

Turning over to Slide 18. As detailed, we continue to invest in future and sustainable growth, which has had a cash impact in the first half. These investments include the Fertility Solutions acquisition and growth CapEx in New South Wales as we opened the Penrith clinic, and we have commenced the flagship clinic project in the Sydney CBD. Growth CapEx will continue into the second half as we aim to commission the new Sydney clinic in late June and continue our regular equipment replacement, IT infrastructure and patient management system investments.

Our net operating cash, as expected, was impacted from the departure of doctors given timing of receiving cash receipts prior to treatment, whilst our supplies and clinician terms are 30-plus days in arrears. We expect to see some improvement in our operating cash flow conversion in the second half.

Turning over to Slide 19. Our balance sheet remains strong and is well positioned to support our investment growth plans in the second half and beyond. Net debt increased to $91.5 million, and our key covenant being a leverage ratio is 2.55x and well below our covenant requirements. It should be noted that our Board has declared a $0.021 fully franked interim dividend within our dividend policy range.

I'll hand you over to Michael to talk about our strategy and outlook.

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Michael D. Knaap, Monash IVF Group Limited - CEO, MD & Director [4]

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Thanks, Malik. I just wanted to take a close look at our strategy slide on Slide 21, which restates our comprehensive strategy. Our Vision 2022 strategic road map provides a clear pathway forward and enables everyone to understand the priorities, actions and decisions required to achieve success and deliver profitable growth in the oncoming years. We have made significant progress in our strategic pillars outlined in previous slides, and we'll continue to do so in order to deliver our Vision 2022.

As we move to the outlook statement on Slide 22. We are confirming profit guidance as provided in November 2019, stating that we anticipate NPAT before nonregular items for the year ended 30th of June 2020 will be in the range of $18 million to $19 million. Just to clarify, nonregular items, they are expected to include transaction costs associated with acquisition activity, restructuring costs applicable to our cost-reduction program, a pre-IPO disputed patient claim that Malik touched on and start-up costs associated with opening of the new Sydney CBD fertility clinic that is expected towards the end of FY '20.

We remain well positioned to optimize future earnings through strategic and operational momentum gained during the 2019 calendar year. These initiatives include expansion of the Monash IVF domestic footprint demonstrated through the recent Fertility Solutions acquisition in Queensland, which joined the group in September 2019. Further expansion into Tasmania by taking a majority ownership in Fertility Tasmania based in Hobart is also working.

We are absolutely focused on recruiting new fertility specialists, including a new established fertility specialist attracted in Sydney recently and 13 specialists in our fertility specialist trainee program. We are focused on delivering the opening of our new Sydney CBD fertility clinic flagship offering in New South Wales to drive future growth.

We are continuing our cost-reduction program with annualized benefit anticipated of $2.5 million. We remain focused on growing our full-service business through enhancing the group's best-in-class patient experience and scientific leadership, whilst ensuring Monash IVF staff are engaged and share common principles. We will also progress our Asia Pacific expansion strategy through acquisition and partnerships.

So with that said, I'll bring to a close the formal part of the presentation. Malik and I are happy to move to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from David Stanton from Jefferies.

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

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Look, I'd like to talk about Australian volumes, please. And it looks to me, just based on what you put out, that all in, organic volume decline looks like it was about 250 to 260 basis points on the pcp. I mean is that correct? And then -- and for the second, how do you sort of tackle that going forward?

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Malik Jainudeen, Monash IVF Group Limited - CFO & Company Secretary [3]

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David, it's Malik here. That's correct in broad terms, those volumes you quoted. And we've illustrated in the present that clearly the doctor departures have had an impact but also illustrated that outside of Victoria, our volumes are growing. So much of the weakness is in the Victorian business due to those reasons.

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Michael D. Knaap, Monash IVF Group Limited - CEO, MD & Director [4]

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I think also to extend on how we tackle that, David, I think, hopefully, you picked up that we're putting a lot of focus in regards to fertility specialists and attracting these fertility specialists into our organization of all parts, new, experienced and developing, which includes 13 trainee doctors in our network now. We have recently attracted another fertility specialist in New South Wales, who has commenced treatment, who is a very well experienced specialist. And we are absolutely talking to many others to try and strengthen our doctor bench for the future, particularly in the markets where we have experienced some decline in specialists in Victoria, so one market in Victoria, but also to leverage the opportunity that we see in New South Wales given we're only about a 7% market share, and we are investing in a state-of-the-art clinic in the Sydney CBD.

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

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Understood. And then I guess a follow-up. One of the follow-ups to that question, that is your low intervention volume as a percentage of total.

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Michael D. Knaap, Monash IVF Group Limited - CEO, MD & Director [6]

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It's now less than 1.5%.

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David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [7]

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Okay. And I guess before I get back in the queue, we did see an increase in employee expense sort of a circa 10% on pcp while revenue was reasonably flat. Now is that -- should we think that's the new normal as a percentage of revenue for this business going forward?

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Malik Jainudeen, Monash IVF Group Limited - CFO & Company Secretary [8]

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Dave, the P&L now consolidates the [Tasi] clinic as well as we're capturing all of the Fertility Solutions acquisition labor as of September. So you get that instant hit to your salaries and wages. Whilst in the Victorian business, you know the business well. The revenue has come off. And it has a fairly substantial leverage impact initially, and the cost-out program will address that leverage impact in the Victorian business.

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Edited Transcript of MVF.AX earnings conference call or presentation 20-Feb-20 11:30pm GMT - Yahoo Finance

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