Article/Intelligence
EARNINGS CALL: Cerba Bonds, Loans Drop on About 9% Tariff Cuts From French Government; Company to Assess Full Impact, Work on Mitigation Plan; 2Q’24 Sees Return to Organic Sales Growth
Relevant Documents:
Presentation
French laboratory group Cerba Healthcare returned to organic sales growth for the first time in a while in the second quarter of 2024, which was “a significant milestone” for the company, its CEO Emmanuel Ligner said on an earnings call today, Sept. 4. However, further price cuts announced by the French government less than 12 hours before the call cast a cloud on the outlook for the second half of the year, with management saying that it is still doing its analysis on the expected impact on revenues. Cerba’s medical laboratories business in France is subject to regulation-linked structural pricing pressure to contain volume growth.
While the price cut was largely expected, the magnitude came as a surprise, triggering a drop in Cerba’s debt prices. The group’s senior secured 2028 bonds declined by about 3.5 points to mid-80s. The 2028 term loan dropped to 88.750/91.250 from 92.250/93.250, while the 2029 loans dropped to 90.125/91.625 from 93.50/95.50, according to sources.
Back in January, the French government had implemented a price cut of 3.8%. On Sept. 3, it announced another price cut of about 9% effective from seven days after the publication in the official journal, in order to bring total spending for the medical laboratories business in line with the 2024 budget plan and offset a larger volume growth at 6% versus 2.5% anticipated. On an annualized basis, the price cut totals about 7%. Cerba’s management outlined that while price reductions have been going on for some time, this one is “big and off schedule.”
The Q&A session which followed the earnings presentation mostly revolved around the regulatory pricing news, with management trying its best to allay concerns, saying that Cerba is gaining market share and volumes are up. It also noted that the specialty business is expected to be unaffected or little affected, so the overall impact should be lower, and added that further updates will be provided once it has concluded its analysis, given that the price reduction should not apply to all tests but only to some of them.
Cerba is working on a mitigation plan, including shorter hours or reduced services on weekends for some laboratories, as well as continuing to gain market shares from competitors.
Uncertainty remains over the duration of the newly announced measures. Management said that the about 9% price cut will apply until at least December and it is unclear at this stage if it will continue into 2025, but the company is working under the assumption that it is permanent and not temporary.
Unions are considering legal action to block the government’s measures, but whether this will be successful remains to be seen, sources noted.
The larger-than-expected price cut is a blow to Cerba as it tries to reduce leverage and bring its EBITDA margin back to pre-COVID levels of 25.9%. Its year-to-date 2024 EBITDA margin was 22.9%. The company is targeting a 22%-24% EBITDA margin for 2024 but will unlikely manage to achieve it now, according to sources.
As of June, Cerba had €53 million of cash on balance sheet and €104 million available under its €450 million RCF. Some €174 million was available under the RCF as of July 31, after the disposal of the veterinary business completed on July 1. The company plans to use €83 million of net proceeds from the sale to repay the RCF.
As a result of draws under the RCF and increased interest rates, interest expenses went up by €32 million on a YTD basis. Roughly 75% of Cerba’s debt is fixed/ hedged until December 2024 with the resulting weighted average cost of debt of roughly 5.5% all-in. Management said it started to implement hedging strategies for 2025 with two swap arrangements for a total notional amount of €0.9 billion.
Adjusted senior secured net leverage stood at 7.4x as of June, with adjusted total leverage at 8.3x. While its maturities remain some way off, sources noted that the company will need to get on to a deleveraging path soon to be able to refinance eventually, and that will unlikely be achieved only organically.
On a brighter note, Cerba is close to signing a contract with sales potential worth $120 million, and anticipates a €20 million revenue contribution for the last quarter of 2024.
06/30/2024
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EBITDA Multiple
|
|||
---|---|---|---|---|
(EUR in Millions)
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Amount
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Maturity
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Rate
|
Book
|
|
||||
€450M Revolving Credit Facility due 2027 1
|
276.0
|
Nov-2027
|
|
|
€1.875B Term Loan B due 2028 2
|
1,875.0
|
Jun-30-2028
|
EURIBOR + 3.750%
|
|
€600M Term Loan C due 2029
|
600.0
|
Feb-15-2029
|
EURIBOR + 4.000%
|
|
€220M Term Loan D due 2029
|
220.0
|
Feb-15-2029
|
EURIBOR + 5.500%
|
|
€720M Senior Secured Notes due 2028 3
|
720.0
|
May-31-2028
|
3.500%
|
|
Total Senior Secured Debt
|
3,691.0
|
6.5x
|
||
€525M Senior Unsecured Notes due 2029 4
|
525.0
|
May-31-2029
|
5.000%
|
|
Total Senior Unsecured Notes
|
525.0
|
7.4x
|
||
Bilateral Loans
|
253.4
|
|
|
|
Lease Liabilities
|
320.9
|
|
|
|
Bank Overdraft
|
5.4
|
|
|
|
Total Other Debt
|
579.7
|
8.4x
|
||
Total Debt
|
4,795.7
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8.4x
|
||
Less: Cash and Equivalents
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(58.7)
|
|||
Net Debt
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4,737.0
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8.3x
|
||
Operating Metrics
|
||||
LTM Revenue
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1,903.2
|
|||
LTM Reported EBITDA
|
570.2
|
|||
|
||||
Liquidity
|
||||
RCF Commitments
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450.0
|
|||
Less: Drawn
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(276.0)
|
|||
Plus: Cash and Equivalents
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58.7
|
|||
Total Liquidity
|
232.7
|
|||
Credit Metrics
|
||||
Gross Leverage
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8.4x
|
|||
Net Leverage
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8.3x
|
|||
Notes:
LTM reported EBITDA refers to LTM pro forma adjusted EBITDA as reported by the company. 1. There exists an ability for the RCF and certain hedging to be designated as super senior once term loans have been repaid. 2. Includes the incremental issue of €350M, giving a facility size of €1.875B. 3. Includes the incremental issue of €300M, giving a facility size of €720M. 4. Includes the incremental issue of €200M, giving a facility size of €525M. Pro Forma: the partial repayment of the RCF drawdowns in July with proceeds from sale of Vet business. |