LifeHealthcare Group (ASX:LHC) Managing Director and CEO Matt Muscio, discusses FY17 results, acquisitions and outlook.
Jessica Amir: Hello I’m Jessica Amir for the Finance News Network. Joining me from healthcare distributor LifeHealthcare Group (ASX:LHC) is CEO and Managing Director, Matt Muscio. Matt, welcome back.
Matt Muscio: Nice to be here.
Jessica Amir: First up, you just announced some stellar FY17 results. What drove them?
Matt Muscio: Jess, we were pleased with the result being in line with guidance. We had revenue growth of 10.4 per cent, 9.1 per cent of that was organic growth. Within that, we had double-digit growth in both our implants and our capital equipment segments. So strong penetration in spine surgery, in orthopaedic surgery and we expanded on our footprint in spinal robotics and in mobile CT.
Our underlying EBITDA growth of 4.6 per cent was impacted by a contracting gross margin, largely related to foreign exchange, particularly as our US dollar average for currency bottomed out to 72 cents. And this was partially offset by improved operating expenses to sales ratios. We also made positive gains on the balance sheet; we had strong cash flow compared to the previous period. We also had a reduction in our net debt leverage from what was 1.7 at the closing FY16, down to 1.4. And we also reduced our networking capital to last 12 months sales ratio, down by 120 basis points.
Jessica Amir: Tell us about some other highlights?
Matt Muscio: A number of key highlights for us. We continue to focus on expanding our customer base of active surgeons. We grew the active surgeon group by 11 per cent, or 14 new surgeons in the period. Within our 3D printed implant portfolio, we continue to have very strong growth. We grew 3D printed spinal interbody devices at 200 per cent, continuing to extend our leadership position in that area. And we helped Australian surgeons do 21 patient specific customised 3D printed devices, for limb salvage procedures.
Outside of that, two acquisitions that we did in 2015 across point of care ultrasound and interventional cardiology. Both performed well with double-digit growth. We also, with our focus on biologics, had strong penetration in synthetic biologics across spine orthopaedics in general surgery. And we launched our allograft and our amniotic biologics in New Zealand, where there is a different regulatory system to here in Australia. And lastly, our final dividend of 7.5 cents fully franked, brings the full year dividend to 13.75 cents for the year.
Jessica Amir: Can you give us an update on the operating environment, and what’s your position on the Prostheses List review?
Matt Muscio: So the demand drivers in healthcare remain strong, underpinned by an aging demographic and chronic disease rates. We see that as some of the conversation shifts towards the need for efficacious technologies and sustainable healthcare solutions, that LifeHealthcare is well positioned with our business model, in order to lead in that space. As we look at the Prostheses List, there’re a number of reforms that are being announced and remain in progress, including the Private Health Insurance review.
The cuts that were announced that occurred in February of this year, whilst they weren’t materially – had a material impact on LifeHealthcare, there will be further cuts in February of 2018. And it’s likely that they will include areas that LifeHealthcare operates in. One output of that reform process as we understand it, will be price certainty for the medium term thereafter.
Jessica Amir: Moving on to your acquisition of Oceania Orthopaedics, can you tell us what was your rationale behind that move?
Matt Muscio: The acquisition of Oceania is really our scale up in orthopaedics. It takes our market share position in complex lower limb orthopaedics, to an estimated number two. It also gives us an additional 22 active surgeons in orthopaedics, giving us an immediate cross-sell opportunity. As we announced the acquisition, related to it was the announcement of a 10-year supply partnership with implantcast GmbH. They are an innovative German orthopaedic manufacturer with portfolios across primary, revision and tumour arthroplasty applications. Within it is also the only TGA approved silver coated implant system. So this gives LifeHealthcare an attractive first-to-market opportunity in that space. But importantly for Australian patients, it’ll give them access to this antimicrobial technology for patients who are at risk of infection.
Jessica Amir: How’s that acquisition reflected on the balance sheet, and what does it mean for earnings?
Matt Muscio: The acquisition of Oceania will incorporate $8 million in revenue and $1.7 million in EBITDA. This is offset by a $400,000 gross margin loss, related to a legacy orthopaedic agreement that won’t continue moving forward. When you look at that in combination with the realisation of synergies, related to the integration of the business up until December of this year, it makes the deal marginally accretive in FY18. And then we see mid to high single digit accretion for the two years thereafter.
In terms of the net debt leverage position, it takes us from where we were at 1.4 on the 30th June 2017 and incorporating that, taking us to 1.7.
Jessica Amir: Just for that gearing position Matt, how does that position you for further acquisition opportunities?
Matt Muscio: We’ve continued to work on the acquisition pipeline and with that leveraged position, we believe it’s more likely in the next 12 months that we would do bolt-on acquisitions, within our existing channels. As opposed to diversifying into other therapeutic channels that we don’t currently play in.
Jessica Amir: Last question now Matt, what’s your outlook for FY18?
Matt Muscio: LifeHealthcare continues to be well positioned for growth. Through the expansion of our active surgeon group, with the introduction of new products, penetration with some of our high-end capital and particularly, growth in orthopaedics with the acquisition of Oceania. So for FY18, we’ve given guidance for revenue, underlying EBITDA and underlying NPATA earnings per share to grow at high single, to low double-digit. With improving gross margin year-on-year. This guidance is without the inclusion of any Prostheses List impact, in February of next year.
Jessica Amir: Matt Muscio, thank you so much for the update.
Matt Muscio: Thanks Jessica.
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