Operational & Financial Review

IDH delivered a strong operational and financial performance in 1H2018, recording a 26% year-on-year increase in revenues on the back of both better pricing (supported by increased contribution from the walk-in segment) as well as higher patient and test volumes. With consumer spending eroded by high inflation, management successfully rolled out tactical marketing campaigns, particularly in Egypt, allowing the Group to pass-on price increases while simultaneously drive volume growth across contract and walk-in clients. The success of this drive in a challenging operating environment underscores the strong market position of our portfolio of brands.

It is also worth noting that robust revenue growth came despite the holy month of Ramadan falling in the second quarter: The month sees substantial changes in consumer behaviour in most of the countries in which the Company operates. Moreover, the Group saw a lower top-line contribution from operations in Sudan, where the devaluation of the Sudanese pound saw local-currency revenue gains lost to currency translation in IDH's consolidated financials.

Top-line growth for the period reflects positively as we move down the income statement thanks to management's ability to rein in costs despite operating in a high-inflation environment. IDH delivered a 32% y-o-y increase in gross profit for 1H2018 and a 29% y-o-y growth in EBITDA for the same period, with both metrics showing margin expansion over 1H2017. Meanwhile, prudent cash management saw the company record net interest income of EGP 22 million, further bolstering IDH's bottom line. Net profit for the six-month period recorded a solid 34% y-o-y increase to EGP 214 million.

IDH continued to expand its geographic footprint in 1H2018, adding 22 new branches during the six-month period to reach a total 405 branches, up c. 6% compared to year-end 2017. Branch additions included 10 in Nigeria through acquisition, IDH's newest market, 11 in Egypt and one new branch in Jordan. The Group's expansion drive is supported by its state-of-the-art Mega Lab which allows IDH to deploy its Hub, Spoke and Spike business model in Egypt to roll out capital-efficient "C" labs more rapidly. In February 2018, the Mega Lab was awarded accreditation from the College of American Pathologists (CAP), widely considered the leader in laboratory quality assurance globally.

Branches by Country

Our Customers

IDH serves two principal types of clients: contract (corporate) and walk-in (individuals). Within each of these categories, the Group also offers a house call service, and within the contract segment, a lab-to-lab service.

Contract Clients

IDH's contract clients, who in 1H2018 represented 58% of total revenues, include institutions such as unions, private insurance companies and corporations who enter into one-year renewable contracts at agreed rates per-test and on a per-client basis. During 1H2018, the Company served 2.3 million patients under these contracts and performed a total of 9.5 million tests, with no single contract client accounting for more than 1.5% of revenues.

Walk-in Clients

The Group derived 42% of its revenues in 1H2018 from walk-in clients. The segment regained its growth momentum where total walk-in clients numbered 0.9 million in 1H2018, up a strong 24% y-o-y, and received 3.1 million tests.

The ratio of contract to walk-in patients during 1H2018 was 71:29 compared with 74:26 in 1H2017, reflecting IDH's sustained marketing effort to target walk-in patients. That said, we expect the ratio to remain skewed in favour of contract patients; this is in step with the general market-wide shift in patient mix in recent years and is a natural outgrowth of market dynamics in Egypt, as companies are extending additional benefits to their staffs. The trend has been encouraged by continued high inflation, which is eroding consumer spending power and thus putting incremental pressure on corporations to provide either health insurance or corporate plans.

Key Performance Indicators

Revenue Analysis: Contribution by Patient Segment

Consolidated revenues increased 26% y-o-y in 1H2018 to EGP 866 million, driven by both the corporate and walk-in segments. Total patients served rose 10% and total tests performed grew 5% during our reporting period. Selective price increases and better sales mix also made important contributions to revenue growth. This is clearly reflected in IDH's two key revenue metrics of average revenue per patient (up 15% in 1H2018) and average revenue per test (up 21%).

Revenues from contract clients grew 21% to EGP 506 million in 1H2018, supported by an overall trend toward corporate health insurance coverage, especially in IDH's home market of Egypt. Better pricing mix saw the contract segment record a 15% increase in average revenue per contract patient and an 18% increase in average revenue per contract test; surpassing volume growth of 5% in number of contract patients and a 2% increase in associated tests.

Meanwhile, the walk-in segment recorded strong gains in 1H2018 with revenues growing 35% y-o-y to EGP 360 million. Segment growth was driven by both improved pricing and a continued turnaround in walk-in patient trends. In Egypt, inflationary pressure is gradually easing (coming off a high base) and consumers are increasingly adapting to new price levels following the late 2016 devaluation of the Egyptian pound. Additionally, IDH's successful efforts to target walk-in patients with tactical marketing campaigns - including attractive features such as discounts on chronic disease tests and partnerships with banks for affordable payment programs - helped drive patient and test volumes in the segment, which increased 24% and 13%, respectively, in 1H2018. In parallel, the company was also able to extract higher value from the segment, with average revenue per walk-in patient recording a 10% increase and average revenue per walk-in test increasing 20% in 1H2018. Whilst the segment contributes the smaller share to total revenues (1H2018: 42%), the dual effect of strong volume growth and better pricing saw walk-in patients contribute 52% to total revenue growth for the period.

Revenue Analysis: Contribution by Geography

On a geographic basis, Egypt contributed 83% of total revenues in 1H2018 (1H2017: 82%), followed by Jordan at 13% (1H2017: 15%) and Sudan and Nigeria each contributing 2% to total revenues (Sudan 1H2017: 3%).

Revenues by Country

In IDH's home market of Egypt, revenues recorded the fastest growth at 28% y-o-y to EGP 715 million in 1H2018. This saw it contribute the lion's share to the Group's total revenue growth at 86% in absolute terms. Patient volumes were up 8% in Egypt, whilst tests performed rose 4%. On a segment basis, patient volumes were strong in both the contract business (+5%) and walk-in patients (+18%). Test volumes also increased across both segments in 1H2018, with total contract tests rising 1% and walk-in tests increasing 19%.

To drive both the acquisition of new patients and expanded test volumes, the Group offered payment plans and packages for selected tests; launched tactical advertising campaigns to raise awareness of chronic diseases; and implemented a new customer relationship management (CRM) program that reached out to patients with marketing messages via SMS.

Revenues from Jordan recorded EGP 114 million in 1H2018, up 12% compared to the same period last year and contributing c.7% to IDH's total revenue growth in absolute terms. IDH's Jordan-based subsidiary Biolab delivered a strong operational performance, with 19% increase in number of patients served and 15% gain in number of tests performed.

In Sudan, revenues rose 44% in SDG terms, but were negatively impacted by the devaluation of the Sudanese pound during the period when translated into EGP for the Group's consolidated financial statements. The average SDG:EGP exchange rate was 0.65 in 1H2018 versus 1.12 in 1H2017, with the result being a 17% decline in Sudan revenues in EGP terms to EGP 19 million. Had the SDG:EGP exchange rate remained stable at 1.12, revenues consolidated from Sudan would have grown 29% y-o-y

Nigeria, IDH's newest market, contributed revenues of EGP 17 million in 1H2018 with key metrics surpassing budgets despite the operation still being the value-building phase. The country's contribution to total consolidated growth stood at 2% during the period.

Cost of Sales

Cost of sales stood at EGP 447 million in 1H2018, up 22% y-o-y, increasing at a slower rate than revenue growth thanks to management's focus on cost-control initiatives. The Group consequently delivered a c. two percentage-point expansion in gross profit margin to 48% in 1H2018 versus 46% in 1H2017. Gross profit for the period recorded EGP 419 million or 32% higher than 1H2017.

Raw material costs, the largest contributor to COGS at 37%, grew 12% y-o-y to EGP 167 million in 1H2018, including the cost of tests sent abroad. However, raw materials costs as a percentage of sales declined to 19% in 1H2018 compared to 22% in the same period last year.

Salaries and wages, the second-largest component of COGS at 34%, recorded a sharp 32% y-o-y increase in 1H2018 to EGP 150 million, driven by both annual merit raises and higher incentive compensation. Still, management maintained salaries and wages at c.17% of revenues during the period.

Other expenses, which include branch utilities and rent, recorded a 29% y-o-y increase to EGP 97 million in 1H2018. Growth in the expense item was driven by a hike in utilities prices in Egypt implemented in July 2017, with a second round of increases passed in July 2018.

EBITDA

EBITDA grew 29% y-o-y in 1H2018 to EGP 329 million versus EGP 255 in the same period last year. The associated EBITDA margin expanded c.70 bps to 38.0% compared to 37.3% in 1H2017 on the back of higher revenues and a tight rein on raw materials, salaries and marketing costs. SG&A expenses as a percentage of revenues were effectively unchanged at c.14%.

Egypt contributed 96% of consolidated EBITDA in 1H2018, up from 90% in the same period last year supported by the local operation's own momentum as well as a stable contribution from Jordan and a decline in Sudan. Lower raw material costs as well as favourable operating leverage saw EBITDA margin in Egypt expand to 44% in 1H2018 compared to 41% in the same period last year. On the other hand, the devaluation of the Sudanese pound led to Sudan's EBITDA margin declining to 2.5% (1H2017: 31%) on account of substantially higher salaries paid in US$ to Egyptian expatriates. IDH has thus outlined a plan to replace the majority of expatriate employees in Sudan with local hires. EBITDA from Group's Jordanian operation contributed 6% to consolidated EBITDA and delivered a stable EBITDA margin of 17%.

The Group's new Nigerian operation, which is still in the value-building phase, contributed a negative EBITDA of EGP 6.7 million in 1H2018. Excluding the Nigerian operation, EBITDA growth would have been 32% in 1H2018 with an EBITDA margin of 40%.

Interest Income / Expense

IDH recorded interest income of EGP 29 million in 1H2018, up from EGP 18 million in the same period last year. Higher interest rates along with prudent cash management saw the Group maximise return on its accumulated time deposits and treasury bills balances.

Interest expense, which is primarily related to the Company's finance lease contracts, increased by approximately EGP 0.4 million to reach EGP 6.6 million in 1H2018. The increase was driven by a supplier's US$-denominated finance lease contract. 

Foreign Exchange

IDH recorded a net foreign exchange loss of EGP  12 million in 1H2018, up 47% compared to EGP 8 million in 1H2017, owing primarily to devaluation of the Sudanese pound as well as FX transactions related to dividend distributions.

Taxation

In 1H2018, IDH recorded a tax expense of EGP 86 million compared to EGP 51 million in 1H2017, with an effective tax rate of 28% versus 23% a year ago. There is no tax payable for IDH's two companies at the holding level. All tax is paid on profits generated by operating companies in Egypt, Jordan and Sudan.

The Group's dividend policy is to distribute any excess cash after taking into consideration all business cash requirements and potential acquisition considerations. As a result, a deferred tax liability is recognised for the 5% tax on dividends for the future expected distribution payable by Egyptian entities under Egyptian tax legislation. Deferred tax expense in 1H2018 was EGP 4.1 million versus an expense of EGP 15 million in the same period a year earlier.

Net Profit

Net profit recorded EGP 214 million in 1H2018, up 34% compared to EGP 160 million in 1H2017. Net profit margin expanded two percentage points to 25% for the period compared to 23% in 1H2017. Bottom-line improvement came as the company translated top-line gains into higher profitability and was also supported by increased interest income.

Balance Sheet

On the Assets side of the balance sheet, net property, plant and equipment (PPE) rose to EGP 540 million at 30 June 2018 from EGP 474 million at 31 December 2017, primarily due to the consolidation of Echo-Scan's fixed assets amounting to EGP 43.3 million. Other investments included CAPEX outlays for the Group's new corporate headquarters, slated for completion in 2018, as well as branch network expansion and renovations.

Accounts receivable stood at EGP 152 million at the end of 1H2018 compared with EGP 140 million at year-end 2017. IDH continued to benefit from its collection strategy with accounts receivables days-on-hand (DOH) decreasing to 113 days at 30 June 2018 from 123 days at 31 December 2017.

The Group's "days inventory outstanding" increased slightly increased to 86 days as at 30 June 2018 from 83 days at 31 December 2017.

On the liabilities side, accounts payable stood at EGP 118 million versus EGP 126 million at year end 2017. The Group's days payable outstanding (DPO) increased to 139 days at 30 June 2018 from 129 days at 31 December 2017. 

Principal Risks and Uncertainties

As in any corporation, IDH has exposure to risks and uncertainties that may adversely affect its performance. The Board and senior management agree that the principal risks and uncertainties facing the Group include political and economic risks in Egypt, the Middle East and Nigeria, foreign currency exchange rate variability and associated risks, changes in regulation and regulatory actions, damage to the Group's reputation, failure to maintain the Group's high quality standards and accreditations, failure to maintain good relationships with health care professionals and end-users, pricing pressures and business interruption of the Group's testing facilities, among others.

Going Concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, the directors continue to adopt the going concern basis in preparing the condensed financial statements. The Group's Financial Statements for the half year ended 30 June 2018 are available on the Group's website at www.idhcorp.com.

Statement of Directors' Responsibilities

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·     The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·     The interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board of Directors:

Dr. Hend El Sherbini

Executive Director

15 August 2018

Independent Review Report to Integrated Diagnostics Holdings plc

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises condensed consolidated interim statement of financial position, condensed consolidated interim income statements, condensed consolidated interim statement of profit or loss and other comprehensive income, condensed consolidated interim statement of changes in equity, condensed consolidated interim statement of cash flows, and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.   

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU.  The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA.  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

David Neale

for and on behalf of KPMG LLP 

Chartered Accountants 

15 Canada Square

London

E14 5GL

15 August 2018

Condensed Consolidated Interim Statement of Financial Position as of

Condensed Consolidated Interim Income Statement for the Six Months Ended

Condensed Consolidated Interim Statement of Profit and Loss and Other Comprehensive Income for the Six Months Ended