OREANDA-NEWS. September 7, 2011. The Medsi Group of Companies and its subsidiaries (“Medsi” or “the Group”), a leading national provider of medical and healthcare services in Moscow and other regions, has today published its unaudited consolidated US GAAP financial results for the six months to 30 June 2011.

MAIN FINANCIAL RESULTS
Revenues totaled USD 100.4 million, up 28.3% year-on-year
OIBDA equaled USD 13.3 million, up 16.2% year-on-year
The OIBDA margin was 13.2%, down 1.4 percentage points year-on-year
Net income came to USD 4.5 million, up 407.9% compared with the USD 0.9 million in 1H10
MAIN OPERATING RESULTS
The number of visits totaled 2,075,400, up 24.7% year-on-year
The number of services provided came to 3,824,100, up 30.5% year-on-year
The average check was USD 48.4, up 2.9% year-on-year
The overall clinic area equaled 50,210 square meters, up 13.1% year-on-year
Commenting on the results, Medsi President Galina Talanova said:
 
In the first six months of 2011, Medsi increased its main financial and operating indicators significantly. Revenues increased by 28.3%, driven by a rise of 24.7% in visits and 30.5% in services provided. We also succeeded in attracting clients to the clinics opened in 2010 and expanded our client base substantially during the marketing campaign last autumn. At the same time, the 16.2% rise in OIBDA was slower than the revenue growth mostly due to an increase in insurance taxes, following the introduction of a new payment scale at the beginning of the year.
 
The launch of new facilities remains one of the most important drivers for the Group’s business. In the first six months of 2011, we increased the overall space in our regional clinics substantially, by almost 50%, opening 32 new medical posts beyond Moscow Region, primarily in Khanty-Mansiisk Region and Bashkortostan. In Moscow and the surrounding region, we focused our efforts on improving the profitability of existing clinics.
 
Behind these achievements there is a key non-financial factor: the high level of professionalism and dedication of our employees, which has enabled us to achieve such impressive results. In the reporting period, we continued our work to help medical personnel to increase their qualifications throughout the Group, as this is ultimately the main factor that makes our business competitive. In the first half of 2011, we organized numerous seminars and lectures for our medical personnel, 154 of which gained further qualifications. In the future, we will continue to invest in enhancing our employees’ professional potential.
 
To retain our leading positions, I am convinced that we need to set the standards for quality and efficiency on the private healthcare market. One of the most important elements of our work to improve service quality is introducing the worldwide Joint Commission International (JCI) standards. Throughout the first half of 2011, we continued with the drive to certify our clinics in line with the approved schedule.
 
FINANCIAL RESULTS
 
Revenues
 
Group revenues for 1H11 came to USD 100.4 million, up 28.3% year-on-year. The growth was mainly due to a rise of 30.5% in services provided and 24.7% in visits, the main contributor to which was the operating results of the clinical and diagnostic center at Belorusskaya. The positive trend stemmed from an increase in the client base following the successful marketing campaign in the autumn and winter of 2010.
 
Cost of sales[1]
 
In 1H11, the cost of services provided totaled USD 69.5 million, up 39.0% year-on-year, faster than the top-line growth. This was primarily caused by an increase in insurance taxes to non-budgetary funds, following a change in the rate from 26.2% to 34.2% as of  January 1, 2011.
 
Sales, general and administrative expenses
 
In 1H11, sales, general and administrative expenses (SG&A) totaled USD 14.7 million, up 5.4% year-on-year. Most of the increase was due to consultancy expenses relating to market research and efficiency improvements. In 2H11, the Group expects SG&A to rise more significantly, as the bulk of marketing expenses planned for the year have been moved to the third and fourth quarters, when an advertising campaign will be conducted.
The SG&A/revenues ratio was 14.6%, 3.2 percentage points lower than in 1H10. For the full year, Medsi forecasts a ratio similar to that for 2010.
 
OIBDA
 
In 1H11, OIBDA (operating income before the amortization of main and non-material assets) came to USD 13.3 million, up 16.2% year-on-year.
The OIBDA margin (OIBDA/revenues) was 13.2%, 1.4 percentage points lower than in 1H10, due to the rise in the cost of sales.
 
Net interest expenses[2]
 
Net interest expenses (the difference between the interest on funds borrowed and placed) came to USD 4.6 million, up 19.8% from the USD 3.8 million in 1H10. The rise was due to the end of capitalizing, as of 2H10, the interest expenses on the funds borrowed to launch the second section of the center at Belorusskaya.
 
Income tax
 
The Group’s income tax came to USD 0.6 million, compared with USD 0.5 million in 1H10.
 
Net income
 
Medsi generated net income of USD 4.5 million in 1H11, 407.9% higher than the USD 0.9 million in the same period of 2010. Such an impressive increase stemmed from a rise in the operating income and a favorable FX difference resulting from the re-appraisal of gross debt. In addition, the asset restructuring in 2H10 reduced the effective income tax rate to 9.6%, down by a factor of 1.4.
 
CAPEX2
 
In 1H11, CAPEX totaled USD 1.8 million, most of which went on maintaining operating capacity and partly replacing equipment at facilities. The figure was almost half that of 1H10 due to the large-scale investment projects to build and equip clinics throughout last year. In 2H11, Medsi intends to increase CAPEX compared with the first half of the year.
 
Debt
 
As of June 30, 2011, Medsi’s overall debt stood at USD 83.7 million, compared with USD 81.2 million a year earlier. The debt remained unchanged in ruble terms: the increase in dollars was due to exchange rate movements. Net debt (the sum of short-term and long-term loans, excluding cash and equivalents) stood at USD 71.9 million, up 6.5% year-on-year. The net debt/OIBDA ratio was 3.8, compared with 4.8 a year earlier, and this is a comfortable level for Medsi.
 
FINANCIAL RESULTS BY BUSINESS DIVISION[3]
 
Moscow and Moscow Region Clinics division
 
In 1H11, the division’s revenues totaled USD 79.5 million, up 32.7% year-on-year. This was mainly due to a rise of 31.2% in services provided and 27.1% in visits. The increase in these indicators was driven by rapid growth in the operating results of the clinical and diagnostic center at Belorusskaya, as well as new clients attracted in the marketing campaign in autumn of 2010.
 
Meanwhile, the cost of sales climbed by 45.8%, fueled by a rise in operating expenses and an increase in required insurance payments from 26.2% to 34.2%. Excluding this, the cost of sales grew in proportion to the division’s revenues.
 
The fall in SG&A of 53.4% was caused by the completion in 4Q10 of the process to centralize the administrative and managerial functions in Moscow Region and the optimization of personnel, the effects of which were seen in 1H11.
 
The rise in the division’s OIBDA of 38.8% year-on-year was due to the Group’s work to control costs, to greater profitability, and to previously opened clinics turning a profit. The OIBDA margin equaled 25.5%, up 1.1 percentage points.
 
As of June 30, 2011, the division consisted of 19 clinics (including one in-patient department) and one medical post, with a total area of 34,486.9 square meters. The medical post, in the Kosmos hotel, has been reclassified as a first-aid clinic, in accordance with the equipment standards and services provided.
 
Clinics in the Regions division
 
In 1H11, the division’s revenues came to USD 13.4 million, up 30.8% year-on-year. This was mainly due to a rise of 45.5% in services provided and 26.5% in visits. The increase in these indicators was thanks to the launch of new medical posts and stronger operating results from the clinics.
 
The division’s cost of sales climbed by 32.3% and SG&A by 1.5% to USD 2.1 million. Thanks to control of operating expenses in the regional clinics, the division ended the period with OIBDA of USD 0.9 million, up 51.9% compared with the USD 0.6 million in 1H10.
 
As of June 30, 2011, the division consisted of 12 clinics and 79 medical posts, with a total area of 15,723.5 square meters. This represented an increase in area of 48.1% compared with 1H10, which was driven by a program to expand the network of medical posts in the regions. Most of the new medical posts were opened in partnership with oil companies at deposits in Khanty-Mansiisk Region and Bashkortostan.
 
The Group is now present in numerous Russian cities, including Volgograd, Barnaul, Pyatigorsk, Nizhnevartovsk, Nizhny Novgorod, Bryansk, Yuzhno-Sakhalinsk, Ryzan, Perm, Kazan, Nyagyn, and Raduzhny.
 
Fitness Clubs division
 
The division’s revenues totaled USD 7.5 million, down 7.7% year-on-year. The number of visits climbed by 0.1% to 144,000, while services provided dropped by 59.5%. In 2H11, the Group intends to implement a range of managerial and marketing measures to improve the division’s results.
 
As of June 30, 2011, the division consisted of four fitness clubs in Moscow, with a total area of 23,153 square meters.
 
EVENTS IN THE REPORTING PERIOD
 
On January 13, 2011, Galina Talanova became Group President. Ms Talanova previously worked in insurance company Rosno, where she progressed from Chief Specialist to Deputy General Director and Member of the Management Board. She is a graduate of the Moscow Institute of Electro-technical Communications and holds an MBA.
 
In February, Medsi approved an IT development strategy, which aims to enhance operating efficiency and the quality of client service, as well as develop the range of medical services.
 
In April, Medsi approved a marketing strategy, which details how the brand will be developed and the main marketing activities that are expected to increase Group revenues.
 
In 1H11, 32 new medical posts were opened beyond Moscow Region, primarily in Khanty-Mansiisk Region and Bashkortostan. This increased the overall area of regional clinics by almost 50%.
 
Meanwhile, Medsi launched a new range of annual programs of medical services, called Health Builder, which are aimed at individuals and small businesses. They are based on a standard package of medical services that can be expanded by choosing additional options. This “builder” allows clients to adapt the choice of services to their individual needs and budget. In addition, a system of direct sales through the telemarketing division was launched, which aims to boost sales of the annual medical services programs.
 
In 2011, Medsi has continued the drive to introduce JCI standards to its network.
 
OUTLOOK FOR 2011
 
Medsi views the outlook for the private healthcare market in 2011 as positive. The main drivers will be higher real personal incomes and the ongoing increase in consumer demand and the cost of medical services. The Group expects to expand more rapidly than the market and strengthen its leading positions by exploiting its key competitive advantages: high-quality medical and client service, a developed range of medical services and a vast network of regional clinics.
 
In autumn 2011, Medsi plans to conduct a marketing campaign aimed at attracting new clients and promoting its updated product range. In addition, the Group is considering entering the market for mandatory medical insurance in some regions where it is present. Alongside this, it intends to optimize the location of some clinics in Moscow and the surrounding region, as well as continue developing its network of medical posts in the rest of Russia.
 
By the year-end, Medsi plans to select a strategic partner to introduce unified a medical IT platform for all facilities in its network. In the long term, this will facilitate the work of its doctors and be a competitive advantage. The Group also intends to complete the implementation of a CRM system, which will enhance the quality of patient service.