Integrated Diagnostics Holdings Plc

Final Results

Thursday, 21 March 2019

Integrated Diagnostics Holdings Plc records strong organic growth, record revenues and profitability in 2018 final results

(London) Integrated Diagnostics Holdings ("IDH," "the Group," or "the Company"), a leading consumer healthcare company with operations in Egypt, Jordan, Sudan and Nigeria, announces its results for the year ended 31 December 2018, reporting a net profit of EGP 497 million on total revenues of EGP 1,921 million.

Results

*EBITDA is calculated as operating profit plus depreciation and amortization.

Commenting on the year's performance and the Company's outlook, IDH Chairman Lord St John of Bletso said:

"Against the backdrop of greater currency stability, a growing economy and political stability in Egypt, our largest market, IDH's performance this year has been most impressive, delivering strong, consistent growth, whilst maintaining a conservative policy on gearing. We believe that IDH is well-hedged and well-positioned to maintain solid, consistent growth and profitability in a healthcare sector in which prevention is better than cure."

IDH Chief Executive Officer Dr. Hend El-Sherbini added:

"IDH closed 2018 having delivered on several strategic goals. We strengthened and grew our core pathology business; expanded regionally with our acquisition of Echo-Scan in Nigeria; diversified into the radiology market in Egypt with the launch of Al Borg Scan; and, most importantly, executed these growth strategies in a manner that yielded strong financial results and created value for our shareholders. These achievements bolstered our Group's ability to deliver sustained, double-digit growth with strong margins. IDH's revenues were up 27% to EGP 1.9 billion in 2018, while management's emphasis on operational efficiency and cost-reduction initiatives led to stronger profitability with a gross profit margin of 49% and an EBITDA margin of 40%."

"Our ability to maintain our growth momentum is directly related to our strong brands, our scalable asset-light business model and our strong supplier relationships that have allowed us to deliver exceptional value even under the challenging operating environment that characterised the last three years. We are heading into 2019 with the same clearly-defined and prudently-executed growth strategies that will continue to unlock significant growth potential for years to come."

Financial Highlights

·    Revenues recorded EGP 1,921 million in 2018 or 27% higher than 2017 driven by improved pricing and test mix as well as higher patient and test volumes. Additionally, while inflationary pressures in Egypt have relatively subsided, they continued to support the passing of price increases to consumers during the year.

·     Cost of sales reached EGP 973 million in FY2018, increasing 24% year-on-year or at a slower rate than revenues due to management's cost reduction initiatives. This is particularly evident in the raw materials costs as a percentage of sales ratio, which declined to 19% from 21% in FY2017.

·   Gross profit increased 30% to EGP 948 million in FY2018 with gross profit margin expanding one percentage point to 49% compared to 48% in FY2017. Improved profitability is due to increased contribution from the higher-margin walk-in segment alongside cost reduction initiatives.

·     Operating profit recorded a 27% increase to EGP 685 million in FY2018, with growth outpacing increased SG&A expenses including higher salaries, increased marketing spend to support revenue growth and pre-operating expenses related to Al-Borg Scan.

·    EBITDA was EGP 762 million in FY2018, up 27% compared to FY2017 figure of EGP 602 million. EBITDA margin recorded 40% in FY2018, remaining stable compared to the previous year despite downward pressure by currency devaluation in Sudan, a negative contribution from the newly launched Nigerian operation that is still in the value-building phase, as well as increased marketing spend (excluding results from Nigeria, IDH's EBITDA would have reached EGP 787 million in FY2018 while EBITDA margin would stand at 42%).

·    Net interest income reached EGP 44 million in FY2018 compared to EGP 38 recorded last year as the Group earned higher rates on its accumulated deposits and treasury bills balances, particularly during the first quarter of 2018.

·    Net foreign exchange loss of EGP 16 million in FY2018 compared to EGP 20 million last year. FX losses were primarily a result of the devaluation of the Sudanese pound and FX transactions related to dividend distributions.

·     Net profit recorded EGP 497 million in FY2018, up 31% versus last year due to strong top-line growth, improved gross margin and higher interest income.

·     Earnings per share of EGP 3.35 compared to EGP 2.49 in FY2017.

·    Net cash flow from operating activities of EGP 601 million in FY2018, indicating a strong cash-generating ability.

·    Recommended Final Dividend of US$ 0.176 per share, equivalent to US$ 26.4 million in total, compared with US$ 0.16 per share, equivalent to US$ 24 million in total in 2017.

*EBITDA is calculated as operating profit plus depreciation and amortization.

Operational Highlights

·     A growing network of 423 branches as of 31 December 2018 compared to 383 branches in FY2017.

·     Total tests performed during FY2018 recorded 28.8 million, up 12% year-on-year. Total patients served climbed 11% year-on-year to reach 7.0 million during the year, reflecting the continued success of IDH's marketing campaigns.

·     Contract test volumes were buoyed by the nation-wide 100 million Healthy Lives awareness campaign in Egypt during the fourth quarter of the year.

·     IDH's key metrics of average revenue per test increased 13% in FY2018 while average revenue per patient climbed 15% during the year, demonstrating IDH's ability to pass on inflationary pressures thanks to patients' loyalty, a growing portfolio of services and its strong brand equity.

·     Nigeria expansion through a US$ 5.7 million acquisition of Echo-Lab (previously Echo-Scan)  through a strategic alliance with Man Capital LLP.

·     Radiology expansion with the inauguration of IDH's first full-fledged radiology branch in Egypt, Al-Borg Scan.

Outlook 

Management remains confident in the attractive underlying trends in the healthcare industries across the Group's footprint, and in IDH's continued ability to expand its reach and increase the numbers of test per patient. A key growth driver is the continued optimisation of IDH's test mix to extract higher value from operations, as well as growing the Group's service offering through the introduction of new medical services that leverage the Group's network and reputable brand position. Accordingly, management's guidance is for annual revenue growth of more than 20% and an EBITDA margin of c. 40% at our established businesses. IDH also continues to explore opportunities to expand into new geographies through selective, value-accretive acquisitions, and targets fragmented and underpenetrated diagnostic services markets where its business model is well-suited to capitalise on similar healthcare and consumer trends.

About Integrated Diagnostics Holdings (IDH)

IDH is a leading consumer healthcare company in the Middle East and Africa with operations in Egypt, Jordan, Sudan and Nigeria. The Group's core brands include Al Borg and Al Mokhtabar in Egypt, as well as Biolab (Jordan), Ultralab and Al Mokhtabar Sudan (both in Sudan) and Echo-Scan (Nigeria). A long track record for quality and safety has earned the Company a trusted reputation, as well as internationally recognised accreditations for its portfolio of over 1,400 diagnostics tests. From its base of 423 branches as of 31 December 2018, IDH will continue to add laboratories through a Hub, Spoke and Spike business model that provides a scalable platform for efficient expansion. Beyond organic growth, the Group's expansion plans include acquisitions in new Middle Eastern and African markets where its model is well-suited to capitalise on similar healthcare and consumer trends and capture a significant share of fragmented markets. IDH has been a Jersey-registered entity with a Standard Listing on the Main Market of the London Stock Exchange (ticker: IDHC) since May 2015. 

IDH's forward-looking strategy rests on leveraging its established business model to achieve four key strategic goals, namely: (1) continue to expand customer reach; (2) increase the number of tests per patient; (3) expand into new geographic markets through selective, value-accretive acquisitions; and (4) introduce new medical services by leveraging the Group's network and reputable brand position. Learn more at idhcorp.com.

Shareholder Information

LSE: IDHC.L

Bloomberg: IDHC:LN

Listed: May 2015

Shares Outstanding: 150 million

Contact

Mr. Sherif El-Ghamrawi

Investor Relations Director

T: +20 (0)2 3345 5530 | M: +20 (0)10 0447 8699 | sherif.elghamrawi@idhcorp.com

Hudson Sandler (International media relations)

Dan de Belder

Bertie Berger

T: +44 (0) 207 7964133 | idh@hudsonsandler.com 

Analyst and Investor Presentation

IDH will present an analyst and investor presentation on the full-year 2018 results on Thursday 21 March 2019 at 2pm GMT. A live audio webcast can be accessed at this link, and you may dial in using the conference call details below:

Please email idh@hudsonsandler.com if you would like to attend the presentation.

Forward-Looking Statements

These Year-End Results have been prepared solely to provide additional information to shareholders to assess the group's performance in relation to its operations and growth potential. These Year-End Results should not be relied upon by any other party or for any other reason. This communication contains certain forward-looking statements. A forward-looking statement is any statement that does not relate to historical facts and events, and can be identified by the use of such words and phrases as "according to estimates", "aims", "anticipates", "assumes", "believes", "could", "estimates", "expects", "forecasts", "intends", "is of the opinion", "may", "plans", "potential", "predicts", "projects", "should", "to the knowledge of", "will", "would" or, in each case their negatives or other similar expressions, which are intended to identify a statement as forward-looking. This applies, in particular, to statements containing information on future financial results, plans, or expectations regarding business and management, future growth or profitability and general economic and regulatory conditions and other matters affecting the Group. 

Forward-looking statements reflect the current views of the Group's management ("Management") on future events, which are based on the assumptions of the Management and involve known and unknown risks, uncertainties and other factors that may cause the Group's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The occurrence or non-occurrence of an assumption could cause the Group's actual financial condition and results of operations to differ materially from, or fail to meet expectations expressed or implied by, such forward-looking statements. 

The Group's business is subject to a number of risks and uncertainties that could also cause a forward-looking statement, estimate or prediction to differ materially from those expressed or implied by the forward-looking statements contained in this communication. The information, opinions and forward-looking statements contained in this communication speak only as at its date and are subject to change without notice. The Group does not undertake any obligation to review, update, confirm or to release publicly any revisions to any forward-looking statements to reflect events that occur or circumstances that arise in relation to the content of this communication.
 

Chairman's Statement

I am pleased to present an extremely encouraging full year results statement for 2018. Against the backdrop of greater currency stability, a growing economy and political stability in Egypt, our largest market, our performance this year has been most impressive.

IDH has again achieved 27% growth year-on-year in revenues and delivered consistent results, whilst maintaining a conservative policy on gearing.

We are delighted to be moving to our new headquarters in Smart Village on the West side of Cairo, which will bring together all divisions of the IDH family.

We have expanded our product offering with the opening of our first state-of-the-art radiology unit and are considering other value-added revenue streams.

We continue to actively consider expanding our footprint in other geographical markets. With our recent acquisition in Nigeria, we are looking to replicate our business model and offering to meet the growing needs in the country.

We have seen continued strong growth in demand of our services, both in Jordan and Sudan, however, our Sudanese business has unfortunately been adversely impacted by the devaluation of the currency.

In line with the advances in innovation and medical technology, we continue to invest and expand our laboratories to incorporate the most up to date infrastructure. This enhances our ability to provide consistent, high-quality results matched by good value to our patients.

We remain committed to enhancing our management capabilities, ensuring the highest levels of corporate governance, transparency and accountability.

We are also constantly considering expanding our service offering to ensure sustainable growth and profitability. To this end we are seeking to expand our marketing strategy and visibility.

We remain committed to maintaining our existing dividend policy. 

At a time of global political and economic uncertainty, we believe that the Company is well-hedged and well-positioned to maintain solid, consistent growth and profitability in a healthcare sector in which prevention is better than cure.

Lord St John of Bletso

Chairman

Chief Executive's Review  

IDH's performance in 2018 demonstrates the Group's ability to deliver sustained, double-digit growth with strong margins. This was true at the height of economic reforms and uncertainty in 2017 - during which we delivered growth in excess of currency devaluation in our primary market of Egypt - and is true today as our strategic initiatives have ushered in a period of strong organic growth with significant upside potential.  

IDH closed 2018 having delivered on several strategic goals. We strengthened and grew our core pathology business; expanded regionally with our acquisition of Echo-Scan in Nigeria; diversified into the radiology market in Egypt with the launch of Al Borg Scan; and, most importantly, executed these growth strategies in a manner that yielded strong financial results and created value for our shareholders. 

Our position as a leading consumer healthcare company with a footprint now spanning Egypt, Jordan, Sudan and Nigeria, and a comprehensive suite of pathology and radiology diagnostic services, saw us deliver 27% growth in revenues in 2018. In US dollar terms, our Group today is in just as a robust financial shape as it was prior to the late 2016 float of the Egyptian pound. Since our IPO in 2015 on the London Stock Exchange, Group revenue has recorded a compounded annual growth rate (CAGR) of 24%, while our bottom-line grew at an impressive 47% CAGR. This is a testament to our proven business model and to the talented team of professionals that continue to deliver growth across all of our markets. 

STRONG ORGANIC GROWTH AND FINANCIAL PERFORMANCE

IDH's revenue growth was dual-driven in 2018 by a combination of better pricing and test mix, as well as higher patient and test volumes. We closed the year with revenues of EGP 1.9 billion, up 27% year-on-year. Fully 16 percentage points of this growth was driven by pricing - in part supported by the prevailing inflationary environment - and 12 percentage points was the result of higher volumes. One percentage point was lost to the translation of our Sudanese pound revenues in Sudan into Egyptian pounds, the currency of our financial statements, on the back of significant devaluation in Sudan. In local-currency terms, our Sudanese operation grew 43%. 

On a segmental basis, we maintained a strong focus on tactical marketing campaigns that primarily targeted walk-in patients. This helped increase patient volumes in this high-margin segment (+17%) and in turn supported our Group's profitability. Nationwide campaigns to increase healthcare awareness such as Egypt's late-year 100 Million Health Lives campaign, helped deliver higher contract patient volumes (+8%) and a balanced contribution to growth between IDH's two primary segments. In 2018, our walk-in segment contributed 46% to total consolidated growth (2017: 39%), while the contract segment made a 54% contribution (2017: 61%).

Strong organic revenue growth in 2018 was underlined by a continued expansion of our geographic footprint with 40 new branches added during the year, bringing our network to 423 laboratories or 10% higher than the previous year. We added 10 new branches in Nigeria through a strategic acquisition; 31 new locations in Egypt; and one new branch in Jordan, where we're seeing an encouraging growth momentum. Our expansion drive is made possible in large part through IDH's state-of-the-art Mega Lab, which in February 2018 was awarded accreditation from the College of American Pathologists (CAP) to become the only CAP-accredited facility in Egypt. 

In parallel with our revenue growth, management focused on operational efficiency and cost-reduction initiatives throughout the year. By leveraging IDH's key supplier relationships and its strong bargaining power, our cost of sales rose at a rate slower than revenue growth in 2018; this is particularly evident in our average raw material cost per test, which increased only 2% in 2018 despite the prevailing double-digit inflation. The result was stronger gross and bottom-line profitability. Gross profit was up 30% year-on-year to EGP 948 million in 2018, while our gross profit margin expanded one percentage point to 49%.

We also posted EBITDA growth of 27% in 2018 to EGP 762 million, with EBITDA margin stable at 40%. This result includes the negative EBITDA contribution from operations in Nigeria - still in the value-building phase - and pre-operating expenses related to the launch of Al Borg Scan in Egypt. Excluding the negative impact from Nigeria, our EBITDA margin would have stood at 42% in 2018, ahead of management's previously stated guidance of a 41% margin at established operations in Egypt, Jordan and Sudan. Our bottom-line for the year was up 29% to EGP 497 million in 2018, and with a net profit margin of 26% versus 25% in the previous year.

Our performance in 2018 and ability to maintain our growth momentum is a direct consequence of our strong brands, reputation for quality and of patient loyalty. All of this has allowed us to deliver growing patient volumes year after year while simultaneously passing on price increases in step with inflationary pressures. Our success in fast-growing consumer markets is also supported by our asset-light business and ability to rapidly expand our reach in a fragmented diagnostic industry. IDH's Hub, Spoke and Spike platform awards us significant cost advantages in a business that is fundamentally about COGS and economies of scale, with the result being strong margins that we can protect whilst at the same time upholding our high quality standards.

NIGERIA EXPANSION

Seeking value-accretive acquisitions in African and Middle Eastern markets has always been a key pillar of our growth strategy. The large, fragmented and underpenetrated diagnostic services market in Nigeria made the country a compelling target with similar characteristics of the Egyptian market a generation ago where we have shown exceptional growth.  

Since the acquisition of Echo-Scan in February 2018, we have kept true to our commitment with our strategic alliance partners - Man Capital LLC and the International Finance Corporation - to invest significant capital over the next four years to expand Echo-Scan's diagnostics network, service offerings, and quality standards.  

In the year just ended, we rolled out our value-building program, including the refurbishment of existing branches; expansion of the operation's national reach with new branches; and the roll-out of Group quality standards and procedures. We have built out IT infrastructure that fully connects and controls all branches, including deployment of our Laboratory Information Systems (LIS). We are also in the process of deploying our System Application and Product (SAP) platform. This is in parallel with a network-wide equipment upgrade and a rebranding of the company to Echo-Lab to reflect the operation's new image and value proposition.

Our people will be key to our success in Nigeria, as they have been in all our markets. We are focused on training and development and are recruiting new talent and leadership that can deliver on our growth strategy. I am pleased to report that we are hiring a strong local management team, including our newly engaged chief operations officer. 

All of the senior management team in Nigeria have spent time in Egypt, where they have received training on IDH's policies and procedures. Moreover, senior headquarters staff from across all disciplines are in Nigeria every 4-6 weeks to ensure a smooth and efficient integration process. The team is already delivering on-the-ground results including the signing of new accretive supplier relationships akin to those in our established markets.

LAUNCH OF AL BORG SCAN

I am also pleased to report that the Group's first full-fledged radiology branch in Egypt began operations in October 2018 under the Al Borg Scan brand. Our decision to diversify into this adjacent, high-value segment of our industry is a natural consequence of our strategy and aims to capitalise on a growing and under-served market.  

Third-party research providers indicate that more than 75% of customers surveyed prefer to receive a consolidated offering that includes both pathology and radiology services under one roof. IDH's expansion into the fragmented radiology market is powered by our brand equity, geographic reach and the strong relationship with our millions of customers as well as the physicians who trust us to be part of diagnostic and treatment plans.

Total CAPEX earmarked for the expansion is approximately EGP 186 million, 70% of which is debt financed through an eight-year facility from the Ahli United Bank of Egypt. The facility is ring-fenced to Al Borg with no guarantees from, or recourse on, IDH or any of its other subsidiaries. The balance of the investment is to be financed from the operating cash flows of Al Borg. So far, we have deployed approximately EGP 55 million in investments to our first branch in the Cairo district of Mohandessin. Al Borg Scan launched with a comprehensive offering that covers the full-suite of radiology diagnostics services, including magnetic resonance imaging (MRI) and computed tomography (CT). 

Our high-quality offering is delivered by state-of-the-art technology supplied by global brand names including Siemens, Hitachi and GE Healthcare, and a highly trained staff of radiologists, technicians and front office personnel.  

And just as our Mega Lab on the pathology side of the house is CAP-certified, Al Borg Scan is working to accredit its first facility through the International Organisation for Standardisation (ISO). Our end goal is to build on Al Borg's brand equity, delivering the premium, safe and market-leading service that our customers have come to expect.
 

PROPOSED DIVIDEND AND DIVIDEND POLICY

IDH is pleased to recommend a final dividend of US$ 0.176 per share, or US$ 26.4 million in aggregate, to shareholders in respect of the financial year ended 31 December 2018. This represents an increase of 10% compared to a final dividend of US$ 0.16 per share, or US$ 24 million in aggregate in the previous financial year.  

In view of the strong cash-generative nature of our business and its asset-light strategy, our dividend policy is to return to shareholders the maximum amount of excess cash after taking careful account of the cash needed to support operations, capital expenditure plans, organic expansion opportunities, and potential acquisitions.

2019 OUTLOOK AND GUIDANCE

I remain confident about the prospects and potential of the healthcare industry in the countries we operate in which are underpinned by key fundamentals and structural growth drivers. Large and rapidly growing populations; a high prevalence of lifestyle-related medical conditions; a growing health awareness and a fragmented service offering are all characteristics in our emerging markets and ones that IDH is ideally positioned to capitalise on.

In our home market of Egypt, which represented 84% of our revenues in 2018, difficult but necessary economic reforms are bearing fruit on the macro level. Key indicators show a strengthening economy with an improving fiscal position: Egypt's economy grew 5.3% in FY2018, while the budget deficit as a percentage of GDP is starting to narrow. Critically, inflation is also on the downtrend, falling from a high of more than 30% in 2017 to 12% in December 2018. The Central Bank of Egypt is now forecasting inflation falling below 10% this year.

We expect these developments to give the Government of Egypt more leeway in the reallocation of resources to strengthen the social safety net. As the country phases out energy subsidies, 2019 marks the first in the multi-year rollout of a new national health insurance program funded by a levy of 0.25% on the revenues of all companies doing business in Egypt. This will further support the state's constitutionally mandated minimum spending on healthcare. 

We are already seeing on-the-ground initiatives such as the state-sponsored 100 Million Healthy Lives campaign. Launched in November 2018, the campaign aims to eradicate Hepatitis C in Egypt through testing of asymptomatic people. I am very pleased that IDH's subsidiaries in Egypt are active participants in this program. In an under-served market with a relatively low test per patient ratio, government initiatives like this will increase awareness and directly benefit our business as people become more proactive and adopt a preventative approach to healthcare with regular testing.  

We are also particularly excited about our newest market in Nigeria and we are confident in our ability to capture the opportunity offered by Africa's most populous country. We believe we are in a unique position to replicate our success in Egypt by applying our extensive knowledge and experience to unlock the same potential in Nigeria. IDH will continue pushing forward its value-building program in 2019, expanding our reach and growing patient and test volumes while building a reputation for quality and a market-leading brand name. Our target is for Nigeria to begin delivering accretive value to the Group within 2019.  

Meanwhile, our expansion into the high-value radiology segment in Egypt is a milestone on par with our expansion into Nigeria. We will add new branches this year and beyond and grow our service portfolio to build a convenient one-stop-shop for our customers. Our existing pathology business is a key volume driver and is already delivering new patients to our radiology business, and we expect that having both services under one roof will also drive growth in our pathology test volumes. 

The strength of our brands, our scalable asset-light business model and our strong supplier relationships have allowed us to deliver exceptional value even under the challenging operating environment that characterised the last three years. We are heading into 2019 with a consistent, clearly-defined strategy that will continue to unlock significant growth potential for years to come. Accordingly, we are again targeting annual revenue growth of more than 20% and an EBITDA margin of c. 40% at our established businesses.  

I look forward to reporting to you on the next chapter of our growth story as one of a leading consumer healthcare company in the Middle East and Africa.

Dr. Hend El-Sherbini 

Chief Executive Officer

Operational & Financial Review

IDH delivered a strong financial performance in FY2018 with revenues increasing 27% year-on-year and net profit climbing 27% despite operational challenges in its markets. Revenue growth came as a result of improved pricing and test mix as well as higher patient and test volumes during the year. IDH was particularly successful in passing on price increases following a period of high inflation and eroded consumer spending, with improved pricing and mix accounting for c.60% of total growth in FY2018. Meanwhile, the company's tactical marketing campaigns throughout the year were successful in driving volume growth across both the contract and walk-in segments. Volumes were also supported by the state-sponsored 100 million Healthy Lives awareness campaign in Egypt launched in November 2018 and contributed 7% of total consolidated tests (2.0 million test). Overall, higher volumes accounted for c.40% of revenue growth in FY2018.

Revenue growth in FY2018 was also largely organic compared to growth in FY2017, at which time IDH had benefitted from foreign currency translations of its results in Jordan and Sudan. In contrast, currency translation contributed negatively to FY2018 growth as the Sudanese pound was devalued by c.85% during the year, leading to local-currency revenue gains in Sudan being lost to currency translation in IDH's consolidated financials.

Revenue Growth Drivers

In parallel to driving top-line growth, management was also successful in improving profitability by increasingly targeting the higher-margin walk-in segment while at the same time pushing through increased operational efficiency and cost-reduction initiatives. This is clearly reflected in IDH's gross profit which increased 30% year-on-year to EGP 948 million in FY2018, yielding a one percentage-point expansion in gross profit margin to 49%. The Group also recorded a strong 27% year-on-year increase in EBITDA to EGP 762 million in FY2018, with EBITDA margin remaining stable at 40% despite a negative contribution of c.EGP 25 million from IDH's newly acquired operation in Nigeria which is still in the value-building phase. Excluding Nigeria, Group EBITDA margin would record 41%, ahead of management's previously stated guidance of a targeted 40% EBITDA margin from its established operations in Egypt, Jordan and Sudan for FY2018. The Groups' strong revenue growth, improved profitability and higher interest income allowed it to deliver a 29% year-on-year increase in net profit to EGP 497 million in FY2018, with a one percentage-point expansion in net profit margin to 26%.

On the operational front, 2018 was a milestone year for the Group during which IDH delivered on several of its strategic and operational targets. In February 2018, the Group's state-of-the-art Mega Lab in Egypt was awarded accreditation from the College of American Pathologists (CAP), widely considered the leader in laboratory quality assurance globally. Early 2018 also witnessed IDH's expansion into Nigeria through the acquisition of Echo-Lab (previously Echo-Scan) via capital increase with a total value of US$ 5.7 million   through a strategic alliance with Man Capital LLP. 2018 also marked the Group's expansion into the adjacent radiology market in Egypt with the fourth quarter inauguration of its first full-fledged radiology branch under the Al-Borg Scan brand. The branch offers a comprehensive suite of radiology services, including MRI and CT Scan and kicks off the Group's expansion drive in the segment which will see it open a further three branches during 2019. Finally, the Group's Jordan-based subsidiary Biolab has entered into an agreement with Georgia Healthcare Group to establish a Mega Lab in the Georgian capital of Tbilisi, poised to be the largest facility of its kind in the region. The agreement serves as testament to IDH's know-how and technical experience as the operators of the sole JCI-accredited Mega Labs in Egypt and Jordan.

Meanwhile, IDH continued to expand its geographic footprint in FY2018, adding 40 new branches during the year to reach a total 423 branches, up more than 10% compared to year-end 2017. Branch additions included 10 through acquisition in Nigeria, IDH's newest market, 31 in Egypt and one new branch in Jordan while Sudan saw the closure of two non-performing branches. 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.

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 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. In FY2018, contract clients represented 59% of IDH's total revenues, with 5.1 million patients served under these contracts (+8%) and over 22.2 million tests performed (+12%), with no single contract client accounting for more than 1% of revenues.

Walk-in Clients

Walk-in clients contributed 41% to the Group's total revenues in FY2018, up from 39% in the same period last year. Management's efforts to drive volume growth from the segment saw it record a 17% increase in total number of walk-in patients served to 2.0 million in FY2018, while total tests performed were up 11% to 6.6 million.

The ratio of contract to walk-in patients during FY2018 was 72:28 compared with 74:26 in FY2017, 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 consequence 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

*During the year, IDH reclassified 249 thousand tests from contract to walk-ins with a total value of EGP 31.4 million. Without the reclassification, walk-in tests would have recorded a 7% y-on-y growth in FY2018 while contracts test would be 14% higher than last year.

Revenue Analysis: Contribution by Patient Segment

IDH's consolidated revenues recorded EGP 1,921 million in FY2018, up 27% year-on-year with growth being driven by both the contract and walk-in segments. In FY2018, the contract segment contributed 59% of total revenues and 54% to total revenue growth, while the walk-in segment contributed a 41% share of revenue and a made a 46% contribution to revenue growth. The Group served a total of 7.0 million patients across both segments in FY2018, up 11% year-on-year, while total tests performed increased 12% year-on-year to 28.8 million. Parallel to volume growth, 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 FY2018) and average revenue per test (up 13%).

The contract segment recorded a 24% year-on-year increase in revenues in FY2018 to EGP 1,141 million, supported by an overall market shift toward corporate health insurance coverage, especially in IDH's home market of Egypt. Total number of contract patients was up 8% year-on-year, while contract tests recorded a 12% year-on-year increase in FY2018. Better pricing contributed strongly to the contract segment's growth during the year, which saw it record a 14% increase in average revenue per contract patient and a 10% increase in average revenue per contract test. It is also worth noting that the segment's volume growth accelerated during the fourth quarter of 2018 on the back of the 100 million Healthy Lives campaign. The state-sponsored campaign was launched by the Egyptian President with the goal of eliminating Hepatitis C in Egypt by the end of 2019. The campaign kicked off in November 2018 and is expected to run through to May 2019, and has contributed c.2% of consolidated revenues and 7% of total tests in FY2018.

IDH's walk-in segment delivered a faster year-on-year revenue growth rate of 32% in FY2018 to EGP 780 million. Segment growth was almost equally driven by improved pricing and a continued turnaround in walk-in patient trends. The Group's efforts to target the segment with tactical marketing campaigns - including attractive features such as discounts on chronic disease tests and partnerships with banks for affordable payment programs - saw total number of walk-in patients increase 17% year-on-year in FY2018, while total tests were up 11%. Meanwhile the Group was also successful in passing-on price increases to consumers who have increasingly adapted to new price levels following the late 2016 devaluation of the Egyptian pound. This is clearly reflected in Egypt's average revenue per walk-in patient recording a 19% increase and average revenue per walk-in test increasing 16% in FY2018.

Revenue Analysis: Contribution by Geography

On a geographic basis, Egypt contributed 84% of total revenues in FY2018 (FY2017: 83%), followed by Jordan at 13% (FY2017: 14%) and Sudan and Nigeria each contributing 2% to total revenues (Sudan FY2017: 3%).

Revenues by Country

IDH's home market of Egypt recorded the fastest revenue growth in FY2018 at 29% year-on-year to EGP 1,613 million. Strong growth coupled with the geography's largest share of total revenue saw operations in Egypt contribute 89% to the Group's total revenue growth for the year. IDH served a total of 6.5 million patients in Egypt, up 10% year-on-year, whilst total tests performed increased 13% to 26.4 million during the year. On a segment basis, walk-in patient volumes recorded strong growth of 16% in FY2018 while volumes in the contract business recorded a 12% increase.

To drive both the acquisition of new patients and expanded test volumes, the Group offered discounted prices for selected tests related to certain diseases; 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. Additionally, volumes in Egypt were supported by the launch of the state-sponsored 100 million Healthy Lives campaign in the fourth quarter of the year.

Revenues from the Group's operations in Jordan were up 11% year-on-year to EGP 243 million in FY2018, contributing c.6% to Group's consolidated revenue growth. Despite the economic challenges in Jordan, the Group's subsidiary Biolab delivered a strong operational performance with number of patients served up 14% to 277 thousand, and number of tests performed up 11% to 1.6 million.

In Sudan, the Group delivered on-the-ground revenue growth in SDG terms of 44% in FY2018, however, the devaluation of Sudanese pound by c.85% during the year saw top-line gains muted when translated into EGP on the Group's consolidated financial statements. The average SDG:EGP exchange rate was 0.57 in FY2018 versus 1.04 in FY2017, leading to a 23% year-on-year decline in revenues in EGP terms to EGP 35 million and a negative 3% contribution to total growth in absolute terms.

Nigeria, IDH's newest market, recorded revenues of EGP 30 million in FY2018 and made a c.7% contribution to total consolidated growth. Nigeria's value-adding phase is progressing, with existing branches being refurbished and renovated as well as rolling out new branches and procuring new state-of-art pathology and radiology equipment.

Contribution to Growth by Country

Cost of Sales

IDH's cost of sales recorded EGP 973 million in FY2018, up 24% year-on-year or three percentage points slower than the 27% growth in revenues thanks to increased operational efficiency and several cost-reduction initiatives. Consequently, the Group delivered a 30% year-on-year increase in gross profit to EGP 948 million in FY2018, with a one percentage-point expansion in gross profit margin to 49%. Gross margin expansion is also more pronounced in IDH's home market of Egypt where cost-reduction efforts have seen gross profit margin expand significantly from 51.7% in FY2017 to 54.1% in FY2018.

COGS Breakdown as a Percentage of Revenue

Management's cost-reduction efforts are clearly reflected on the Group's raw material costs - the largest contributor to COGS at 38% - which increased only 14% year-on-year to EGP 370 million in FY2018, including the cost of tests sent abroad. This translates to an average raw material cost per test of EGP 12.9 in FY2018, up only 2% versus FY2017 despite the prevailing double-digit inflation. It is also worth noting that management's efforts in improving patient and test mix and negotiating more favourable raw material prices have led to an overall decline in raw material costs as a percentage of sales to 19% in FY2018 from 21% in FY2017.

Constituting the second-largest share of COGS, direct salaries and wages increased 32% year-on-year to EGP 313 million in FY2018, however, as a percentage of sales remained stable at 16%. The year-on-year increase was driven by the staffing of new branches, higher incentive compensation tied to strong revenue growth and the consolidation of IDH's new Nigerian operation.

Other expenses, including branch utilities and rent, recorded EGP 218 million in FY2018 or 31% higher than the previous year. Growth in the expense item was driven by the utilities price hikes passed in July 2017, the increases in branches' rental contracts in early 2018 along with the increase in the number of branches, as well as fuel and energy price hikes in July 2018. It is worth noting, however, that utilities and rent costs as a percentage of revenue remained stable at 11% in FY2018.

EBITDA

The Group recorded a consolidated EBITDA of EGP 762 million in FY2018, up 27% compared to the EGP 602 million recorded in the previous year. EBITDA margin was stable at 40% despite the inclusion of a negative EBITDA of c.EGP 25 million from IDH's new Nigerian operations - currently in the value-building phase. Group EBITDA was also weighed down by the devaluation of the Sudanese pound which offset the country's top-line gains. Excluding the Nigerian operation, EBITDA growth would have recorded 31% year-on-year with a margin of 41%.

IDH's operations in Egypt contributed the lion's share of FY2018 EBITDA at 97%, up from 91% in FY2017 due to strong business in the market, a stable contribution from Jordan, and negative contributions from Sudan and Nigeria during the year. Egypt's EBITDA margin also expanded by two percentage points to 46% in FY2018 on the back of lower raw material costs and favourable operating leverage on strong revenues. EBITDA from Jordan's Biolab contributed 7% to consolidated EBITDA (EGP 52 million) with EBITDA margin improving to 21% compared to 19% in FY2017. Meanwhile currency devaluation in Sudan saw operations there record a negative 7% EBITDA margin in FY2018 versus a positive 31% in FY2017. The decrease was primarily driven by higher salaries paid in US$ to expatriates, and lower patient volumes. IDH is working to limit expatriate salaries by increasing dependence on local hires and has already transferred several employees back to Egypt which should help limit the negative effect on Sudan's EBITDA margin.

EBITDA Contribution by Country

Interest Income / Expense

Prudent cash management saw the Group maximise return on its accumulated time deposits and treasury bills balances, with interest income up 16% year-on-year to EGP 59 million in FY2018 compared to EGP 51 million in the previous year.

Interest expense, which is primarily related to the Company's finance lease contracts, increased 17% or EGP 2.2 million to reach EGP 15.3 million for FY2018.

Interest Expense Breakdown

Foreign Exchange

IDH recorded a net foreign exchange loss of EGP 16 million in FY2018 compared to EGP 20 million in FY2017. The figure is primarily a result of the devaluation of the Sudanese pound and FX transactions related to dividend distributions and salary expenditures.

Taxation

IDH recorded a tax expense of EGP 196 million for FY2018 compared to EGP 118 million for FY2017, with an effective tax rate of 27% versus 21% in the previous year. The increase in effective tax rate is mainly due to the following:

·     Integrated Medical Analysis Company (IMA) had accumulated tax losses generated from 2016 (related to FX losses following the devaluation of the EGP) and that were fully settled during 2017 (EGP 18 million of tax difference between 2017 and 2018);

·     The Egyptian Government imposed a new tax of 0.25% on total income (revenues and credit income) starting July 2018 in relation to the new Healthcare Act, which increased the tax on the Group by EGP 2.9 million.

There is no tax payable for IDH's two companies at the holding level. Tax was paid on profits generated by operating companies in Egypt and Jordan.

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 FY2018 was EGP 24 million versus an expense of EGP 57 million in FY2017. It should be noted that in 2017, IDH conducted a revaluation of the goodwill related to Sudan and Jordan, yielding a deferred tax amounting to EGP 19 million.

Net Profit

IDH recorded a net profit of EGP 497 million in FY2018, up 29% compared to the EGP 384 million posted in FY2017, and with a one percentage-point expansion in net profit margin to 26%. The improvement in bottom-line profitability was driven by strong revenue growth, an increase in EBITDA, and higher net interest income.

EBITDA to Net Profit Calculation

Balance Sheet

On the assets side of the balance sheet, IDH held gross property, plant and equipment (PPE) of EGP 983 million as at 31 December 2018, up from EGP 685 million at 31 December 2017. The increase is due to the consolidation of Echo-Scan's fixed assets amounting to EGP 43 million, CAPEX outlays of EGP 86 million related to the Group's new corporate headquarters as well as EGP 50 million related to new branches and EGP 48 million related to the renovations of existing branches.  Additionally, CAPEX outlays of EGP 55 million were related to the Al Borg Scan (radiology) expansion during 2018.

Accounts receivable recorded EGP 220 million as at 31 December 2018 compared to EGP 140 million at year-end 2017. Accounts receivable days-on-hand (DOH) increased to 138 days on account of EGP 36.7 million in receivables related the 100 million Healthy Lives campaign. Factoring out this amount, DOH would have remained stable at 123 days.

The Group's "days inventory outstanding" remained stable at 82 days.

IDH's cash balances decreased to EGP 664 million as at 31 December 2018 from EGP 708 million as at 31 December 2017 due to a dividends payment amounting to USD 24 million paid out in June 2018.

On the liabilities side, accounts payable stood at EGP 158 million at 31 December 2018 versus EGP 126 million at year end 2017. The Group's days payable outstanding (DPO) slightly decreased to 145 days from 148 days at 31 December 2017.

Dividend

Proposed dividends for ordinary shares are subject to the approval of the Annual General Meeting and are not recognised as a liability as at 31 December 2018. The Board of Directors has recommended that a final dividend of US$ 26.4 million, or US$ 0.176 per share, should be paid to shareholders who appear on the register as at 17 May 2019, with an ex-dividend date of 16 May 2019. The payment date for the dividend will be 7 June 2019.

Going Concern

The Directors have a reasonable expectation that the Group has adequate resources to meet its liabilities as they fall due for at least 12 months from the date of approval of these consolidated financial statements. Thus, they continue to adopt the going concern basis in preparing the financial information.

Principal Risks, Uncertainties and Their Mitigation

As in any corporation, IDH has exposure to risks and uncertainties that may adversely affect its performance. IDH Chairman Lord St John of Bletso has emphasised that ownership of the risk matrix is sufficiently important to the Group's long-term success that it must be equally shared by the Board and senior management.

While no system can mitigate every risk - and some risks, as at the country level, are largely without potential mitigants - the Group has in place processes, procedures and baseline assumptions that provide mitigation. The Board and senior management agree that the principal risks and uncertainties facing the Group include:

Statement of Directors' Responsibilities

The Directors are responsible for preparing the annual report and the financial statements in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS as adopted by the EU"), interpretations from the International Financial Reporting Interpretations Committee ("IFRIC") and Companies (Jersey) Law 1991 (as amended). Jersey Law requires the Directors to prepare financial statements for each financial year, which give a true and fair view of the state of affairs of the Group and of the assets, liabilities, financial position and profit or loss of the Group for that year.

In preparing the financial statements, the Directors are required to:

·     select suitable accounting policies and then apply them consistently;

·     make judgements and estimates that are reasonable, relevant and reliable;

·     ensure that the financial statements comply with IFRS as adopted by the EU;

·     assess the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

·     prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with Companies (Jersey) Law 1991. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors of the Group confirm that to the best of their knowledge that:

·     The Group is in compliance with the Jersey code in relation to all applicable corporate law and tax filing requirements;

·     The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards; and Interpretations adopted by the International Accounting Standards Board give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·     The sections of this Report, including the Chairman's Statement, Strategic Report, Performance Review and Principal Risks and Uncertainties, which constitute the management report, include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Dr. Hend El Sherbini

Executive Director
21 March 2019

Consolidated Statement of Financial Position as at

Consolidated Income Statement for the Year Ended

Consolidated Statement of Profit or Loss and Other Comprehensive Income for the Year Ended

Consolidated Statement of Cash Flows for the Year Ended