CML Healthcare’s much-anticipated strategic review is officially over, and the company has settled on a very specific vision for the future: more laboratory tests, less diagnostic imaging.
As one of Canada’s few publicly traded health care companies, CML operates clinics that patients visit for things like blood work and ultrasounds. While that may seem like a solid business as the baby boomers age, the company is going through some upheaval. A new chief executive officer was named this year, followed by a strategic review to right the drifting ship.
There have been questions about CML’s vision. It is dependent on provincial governments for more than 90 per cent of its revenues, and we are well into the age of austerity. There are also worries on Bay Street that the company’s cash flows can’t sustain its dividend. Tom Wellner, the new CEO, addressed these issues on a conference call to announce the review’s results.
“Our focus going forward is really on the laboratory business,” he said, adding that the firm is “going back to our core, where we’re strong, where we built the business originally.”
The plan is a dramatic shift after CML spent the last five years focused on imaging, and Mr. Wellner didn’t shy away from this fact. But he said the growth in imaging just isn’t expected to materialize over the next few years, whereas the lab division, which currently makes up about 65 per cent of revenues, has the potential to pick up some tests that hospitals currently administer.
The lab unit also has the greatest chance of pulling in private money, which could be a crucial offset to any government cuts. For instance, CML hopes to roll out some types of genetic testing that for which it hopes people will pay out of pocket. There are also plans to make the lab division more efficient, and CML hired consulting firm Carpediato help it save some money. An example of coming initiatives include getting the courier trucks that carry lab samples to CML’s central testing site two hours earlier every day, allowing the firm to process more results.
Overall, there weren’t many specifics provided on the call. Much of it was a broad vision, with a “trust us” plea tacked onto it. For instance, Mr. Wellner said there are changes coming to its 220 testing sites. Some will be cut and some will grow. Not much for the analysts to work with.
Because the plan still leaves many questions unanswered, it may not do much to calm the worries about CML’s dividend payout ratio, which currently hovers near 100 per cent. Some expected a cut to come out of the review, but management opted against that, announcing that they expect the dividend to get paid through free cash flows.
Should the cash flows drop, the company still has $125-million to draw from its credit line, but doing so would make things tricky. Net debt is already 2.3 times earnings before interest, taxes, depreciation and amortization, much higher than the company’s historical average. Although its covenants aren’t triggered until the firm hits 3.25 times, any more debt would surely alarm investors.
But the bright side is that the company now has a blueprint. The next task: execution.