Ambea AB (publ) (AMBEA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Ambea Interim Report Third Quarter 2021 Conference Call. [Operator Instructions] And I would now like to hand the conference over to your first speaker today, Mr. Mark Jensen. Thank you. Please go ahead.

Thank you so much. Good morning, everyone, and welcome to Ambea's Third Quarter 2021 Report Presentation. Speaking is Mark Jensen, CEO of Ambea, and presenting with me today is Benno Eliasson, CFO. I will start today's presentation by introducing our Swedish social care segment, Nytida. Then I will give you an overview of the quarter and an update on our sustainability work. I will also cover the status of our growth drivers. Benno will then describe the development of the financials for the group and for the different segments in Ambea. After that, I will summarize the quarter and compare to our financial targets before we open up for questions. So starting off with a brief overview of Ambien. As you probably know already, Ambea is the leading Scandinavian care provider. We have about 26,000 employees across Sweden, Norway and Denmark and revenues of about SEK 11 billion. We have a complete service offering within elderly care, disability care, psychosocial support and staffing solutions. We have more than 350 municipalities as our clients and are an important partner in the solution of the welfare challenge. Nytida, Vardaga and Klara all operate in Sweden, where Nytida offers social care, Vardaga offers elderly care, and finally, Klara offers staffing solutions. Stendi in Norway, and Altiden in Denmark, both have elderly care and social care. And now over to a short introduction of Nytida. As relatively new to Ambea, it has struck me that we often start our presentations and almost only get questions and interest around our elderly care segments when, in fact, Nytida is the largest business area within Ambea. We realized these calls for a better and more thorough explanation of our social care segments, and in particular, Nytida being the largest. As the support we provide within our social care segments is much more diversified than within elderly care, this part is also a little more complex to describe and understand. In fact, within Nytida, we have 18 main areas of support, all tailored to provide the best possible support that strengthens the individuals we provide care to. High level, Nytida is divided into 2 main segments: disability care, which amounts for about 2/3 of the turnover; and Individual and family, spanning for 1/3 of the turnover. Nytida's mainly focused on own management units, especially within Individual and family. As within elderly care, the municipalities' our customers also here. The various services and offerings that exist within Nytida's operation are based on different laws. For example, the Social Service Act or the Swedish Act Concerning Support and Service for persons with certain functional impairments. In Swedish, [indiscernible] LSS. Due to Nytida's broad range of services, we can offer a complete spectrum of care with personalized support throughout all stages of life. One tool for personalizing support is Nytida's pedagogical framework. It has a unique approach and guidance that give employees adequate methods and tools to respond to the care receivers needs. Nytida also supports and have cooperation with KIND Center of Neurodevelopmental Disorders at Karolinska Institutet in Stockholm. This to be updated on the latest research findings to be able to further develop the support. Before we turn to the summary of the quarter, let's take a look at Nytida's pedagogical framework as it is paramount for the support and quality we provide to each individual care receiver. The framework is based on Ambea's set of values, evidence-based practice, the low arousal approach and person-centered care. With the help of the framework, we support the individual to use their strengths, be independent and experience quality of life. Overall, the framework consists of 5 areas: accessibility means simplifying and removing obstacles, both physical and mental; treatment means that we believe in the equal value of all people and in the daily work, always adapting to the needs of the care receiver; motivation means that we work together to find motivation, strength and interest; cooperate, focus on how we can create trustful relations and always with a comprehensive view over the entire life situation. Altogether, this gives us tools to develop personalized care, which is illustrated by the fingerprint in the center of the circle. The framework is a benefit for Nytida because it means that it works similarly in all units, while we, at the same time, deliver personal care. The framework is also central for developing quality and helping our clients with their assignments. I hope this gave you a better perspective on Nytida and what we offer within social care in Sweden. You can find more information in Swedish on nytida.se. And we're, of course, happy to take questions regarding Nytida when we come to the Q&A. Now let's turn to the summary of the quarter. All segments, apart from Stendi, delivered net revenue growth in the quarter versus last year. In total, sales grew 7% compared to Q3 last year, primarily driven by our active M&A agenda, but also returned to organic growth in the quarter. Adjusted EBITA came in at SEK 344 million, an increase of 8% versus last year. The increase was mainly explained by Vardaga's positive occupancy trend but counteracted by slightly weaker demand and increased costs in spending. As we will see later in the presentation, Vardaga showed positive occupancy development, and we are happy to report that, once again, this has continued after the quarter ended. We continue to see positive development in Altiden in Denmark and our strategic focus on social care and all managed elderly care homes delivered solid net revenue growth in the quarter. In Stendi, we will increase our focus within social care and divest the elderly care division, more about that later in the presentation. Now to sustainability. For Ambea, sustainability is a natural part of our value-driven care business. Entering 2021, a major approach was taken within the area of sustainability with a strong focus on the social and ecological areas. Last quarter, we explained our efforts within ecological sustainability, and this quarter, we turned to social sustainability. Within also sustainability, very much at the heart of everything we do, during the last quarter, we have, among other things, launched a new training program for suicide prevention and natural focus area for all our care activities that face these risks in everyday work, but also, unfortunately, a growing problem in society. We also launched a pilot in Vardaga to support our employees with another mother tongue to develop their language and accessibility in the care work. An important statement for us as well for society's ability to integrate and secure the supply of skilled staff in the welfare sector. This was also one of the improvement initiatives we identified in our internal post-pandemic analysis, an initiative that we are now executing. During the quarter, we also implemented a new digital tool to support our managers in detecting, preventing and correcting ill health among our employees, an important and ongoing work to take care of our most important resources, our employees. I also want to take the opportunity to highlight this year's addition of Glada-midnattsloppet, which had a record number of participants and where the business area Nytida are proud and recurring partners. Glada-midnattsloppet is an important event that enlighten our care receivers and encourages opportunities and joy of movement for people with cognitive impairments in general. Now let's look at the organic growth. We are glad to say that in the last 2 years, we have opened almost 1,000 new bed/placements. As the municipalities in Sweden continue to fill the beds at their own nursing homes, we see an improving occupancy in most of our Vardaga units. In Q3, Vardaga signed 1 new nursing home with 60 beds that is planned to open in 2024. Nytida opened 5 new units with a total of 30 beds in Q3. As the demographic development calls for construction of more nursing homes and care facilities, we continue to actively explore opportunities for organic growth within elderly care in Sweden and Denmark, and within social care in all 3 markets. In Sweden alone, a recently updated report from the think tank Timbro highlights the need of more than 400 new nursing homes by 2030. This analysis is based on data originating from the Swedish Ministry of Finance. As partners to the municipalities, we will work to support society in overcoming this challenge and aim to maintain and further develop a healthy pipeline of new care facilities. Let's turn to acquisitions. No new acquisitions were added in the quarter. This year, we have closed the acquisition of LSS Omsorgen in Sweden in Q1, adding about SEK 57 million in annual sales. And in Q2, we closed the acquisition of EKKOfondens care operations in Denmark. This acquisition added about SEK 330 million in annual sales. I'm happy to report that both acquisitions are performing well and in line with our expectations. Strong cash generation gives us the opportunity to seek for bolt-on acquisitions, which we see as an essential part of our strategy. We are active in all our markets, evaluating potential opportunities for future value creation and continue to see M&A as a key driver of growth. So summarizing the growth potential for Ambea. We look positively at the future in our existing markets. First, there is still an opportunity to further improve occupancy in our existing care facilities. In certain segments, we have faced a challenging time during the last quarters, but our view is we have passed the most critical phase. Over the last months, we have experienced an increase in market share within the Swedish elderly care, which indicates our communication and commercial activities are having a positive effect in a market which is again growing but not fully back to pre-pandemic levels. Outside elderly care, it has been more difficult to see consistency in trends post the pandemic, but we know many care receivers are waiting to get the right placement, and we hope to see municipalities execute more of the already taken decisions faster when things are now normalizing. This in order to avoid society building up a care debt on the backside of the pandemic. As explained previously, there's also a strong underlying demographic trend showing the need for construction of more care facilities in all our markets that can contribute to solving the welfare challenge and that way also contribute to organic growth. Secondly, the market for social care continues to be fragmented and their bolt-on acquisitions to be made in all markets. Ambea has a proven track record of acquiring small and midsized companies and integrate them swiftly. We will continue that journey in years to come. And last but not least, we are currently in a very exciting process where the extended management team is co-creating a new strategy for Ambea. We're not aiming for a revolution, but will build on the strength we already have and identify strategic areas of improvements and new opportunities. This will support of detailed market analysis and also external perspective. The work is about to conclude in quarter 1, and we look forward to present our strategy for the future Ambea during the first half of 2022. Now to the financial development in the quarter. Benno, over to you.

Thank you, Mark. This quarter, we see an increased growth numbers from second quarter's 3% year-on-year to this quarter's 7% year-on-year, and the growth from last quarter was 2%. If we look into how the different business areas have affected the group numbers, we can see that Vardaga is up 9% versus last year. We have opened 5 new nursing homes since the beginning of Q3 last year and have had an increase in occupancy throughout this quarter. Nytida is up 1% versus last year, helped by a small acquisition. Stendi has had a negative growth of 1%. We have seen weaker demand and have reduced our capacity in our own managed portfolio. In local currency, the decline was 3%. Altiden is affected by the acquisition of EKKO on the positive side by SEK 96 million and on the negative side by exiting home care contracts by SEK 11 million. Klara is continuing to expand geographically and has won several new contracts in this first half of the year and is up SEK 7 million versus last year. EBITA. This shows how the different business areas have affected the EBITA of the group. In Vardaga, we see that the improved occupancy has generated a substantial higher profitability than previous quarters and last year's. We can also see that the weaker demand in combination with higher staff costs related to the Norwegian quarantine rules still hurts the profitability in Norway. In Altiden, the acquired EKKO contributed well, but the EBITA was negatively affected by the new and own managed nursing home in Holte. But all in all, the adjusted EBITA grew by 8%. Cash flow. Even if Q3 is the strongest quarter from a profitability point of view, it is often the weakest from a cash flow point of view. This is because the net working capital reaches its highest point of the year in late Q3. And last year, the Q3 and Q4 numbers were positive, affected by the different government measures related to the pandemic and this quarter's number is a bit lower than last year. This puts the rolling 12 operating cash flow slightly below 100% of EBITDA, but seen in a longer perspective, still very strong. Cash flow statement, including the new leasing standard, IFRS 16, are sometimes a bit tricky to follow. And this slide shows the way from the rolling 12 reported EBITA of SEK 843 million to the SEK 799 million in EBITDA, excluding IFRS 16, and down to the free cash flow post tax. And we can see that we have paid SEK 136 million in taxes, SEK 61 million in interest and have invested SEK 74 million in fixed assets. With a minor change in working capital, we have generated SEK 510 million in free cash flow post tax based on the old accounting standard. On this slide, we can see how we have used the generated SEK 510 million in free cash flow. SEK 109 million was distributed to our shareholders as dividend; SEK 189 million was spent on the 2 acquisitions we made in this first half of this year; and the rest was used to reduce our debt. Financing. The seasonal weaker cash flow in Q3 is, of course, also affecting the leverage ratio in the quarter. We managed to reduce the leverage from 3.7x to 3.6 in the quarter, and we are now at the same level as previous year. As you can see in the graph, we are financing around 2/3 of our debt by our own commercial paper program, where credit spreads now are back to the levels that were pre-pandemic in 2019. Then turning to the different business areas, starting with Nytida. Sales was up 1% versus last year, but down 1% versus last quarter. Own management show slightly lower occupancy than last year. In the later part of the quarter, we opened 5 new assisting living facilities that will help the growth going forward. Last year, we saw a positive EBITA effect in Nytida from the government program, especially in Q2 and Q4. In Q3 this year, we saw an EBITA just slightly below last year's numbers, SEK 174 million versus SEK 177 million last year. And the rolling 12 EBITA is slightly down from last quarter, but still at a high level of 15%. Vardaga. Net sales increased by 9%. We have opened up 5 new nursing homes since the beginning of Q3 last year and occupancy in mature units were in the quarter higher than last year and shows a month-on-month good trend throughout this quarter with high numbers entering Q4. Our own managed units under ramp-up as well as our units under contract management shows the same positive trend. We can also see in the National Statistics [ August ] that there is an increase in the total market since January this year, but still on a lower level than the pre-pandemic levels. EBITA increased with 78% to SEK 89 million. Compared to Q3 last year, we have, as said, an overall high occupancy and have now adjusted our cost base in units where decreased occupancy in a better way than we were able to do in Q3 last year. We have during the last 1.5 years been very cautious in opening up new units due to the weaker local demand. We have now around 10 nursing homes that we not yet have opened up for care receivers, and we evaluate the local market very carefully and currently plan to open 2 of these in the first half of 2022. To further improve occupancy, we continue to boost our communication and marketing activities based on local needs and opportunities. Stendi. Net sales decreased by 1% in SEK or 3% in local currency. We saw a slightly weaker demand and have also reduced the capacity in our own managed portfolio. EBITA was down 19% to SEK 64 million. We were still, to some extent, affected by the strict Norwegian quarantine rules, where our employees have not been able to go to work, but still are on our payroll. And for our operational staff working from home is, of course, not an option. In the quarter, this impact was lower than previous quarters as the vaccination program has been rolled out. We are now working on different measures, both to adapt our capacity to the demand in the market but also to improve the profitability, and effects of this will be shown in the P&L in 2022. We have, after the closure of the quarter, decided to divest our operation within elderly care in Norway. This business represents about 8% of standard turnover and have had low profitability. We have started a process now in Q4 and will finalize the divestment during 2022. Altiden. The repositioning of Altiden and is progressing according to the plan in the quarter. Net sales was affected positively by the acquisition of EKKO by SEK 96 million and then on the negative side of exiting the home care contracts by SEK 11 million, but we also saw underlying growth in both elderly care and disabled care segment. EBITA increased by SEK 4 million, driven by the acquisition of EKKO but were reduced by losses in our first own managed nursing homes that opened in late Q2. Normally, it takes 8 to 12 months until a newly opened nursing home reach breakeven. And last, Klara. Net sales increased by 9%. We're growing our business towards the external public and private operators as well as towards internal Ambea units. Compared to last year, we had expanded our nursing patrols geographically to 3 new cities in Sweden and expanded our business in several existing geographies as well. The business model of Klara, delivering nursing services on site in evenings and weekends only when needed, has proven to be very attractive for smaller Klara units. The EBITA margin was rather stable at 9% and rolling 12 now at 7.4%. And with that, back to you, Mark.

Thank you, Benno. So to sum up our financial development versus our targets. Our growth target is 8% to 10% through a combination of acquired and organic growth. 2021 shows the negative effects from the pandemic, but we have announced 2 acquisitions in the first half of the year, LSS Omsorgen in Sweden and EKKOfondens care homes in Denmark. Profitability wise, we have a mid-term adjusted EBITA target of 9.5%. In Q3 2021, we saw clear signs of improving occupancy, which in turn will support an increased margin going forward. Also, the improvement program in Norway is expected to positively contribute to the margin development during 2022. And finally, our leverage dropped slightly quarter-on-quarter and is still at the same level as Q3 last year. That said, our solid cash conversion will reduce leverage over time. So summarizing the third quarter of 2021, Ambea's back to organic growth in the quarter and see a continued positive occupancy trend in our elderly care segment in Sweden. We will focus Stendi in Norway on social care, where we have scale, high competence and growth opportunities. The strategic repositioning of Altiden in Denmark follows plan. Our new own managed nursing home, Fribo Holte, [ feels ] faster than anticipated. We have a new strategy being co-created by the extended management team to build on our strengths and capture new opportunities. The new strategy will be communicated during first half next year. We are still very focused on keeping our good routines and updated contingency plans, but to also see an increased need for care that we do outmost to help society solve. It requires long-term investments and focus on what each party can contribute, being public, not for profit or private. We all have an important role to play, avoiding a short-term care debt and delivering viable solutions to solve the mid- and long-term welfare challenge. 2030 is not far away and planning processes take time. While politicians must remove hindrance to deliver the care, we owe to our elderly and to people with social care needs. It is still possible, but focus on the task and speed is of essence. Lastly, I want to express my respect and gratitude to our staff in all 3 markets for lifting the business into a better position via constant focus on our day job, serving our clients and providing quality care to each individual care receiver. The last 6 quarters have deep and challenging times, but with joint efforts, we can now look more optimistic at the future and what it will bring. From the outside, it can be difficult to understand what our teams have gone through. But from my field visits, I have seen and discussed firsthand with colleagues in all 3 markets and will take this opportunity to share with you what an amazing job they have done. Their job makes me proud. So with that, I conclude our presentation and open up for questions. Operator, can we have the first question, please?

[Operator Instructions] And your first question comes from the line of Karl Norén from Danske Bank.

A couple of questions from my side. If we start with Vardaga, would it be possible if you could elaborate a bit on the margin there? I think now the margin is above Q3 2019 levels and how should one see these margins going forward? And is there any reason that we should not see the same trend continuing into the next coming quarters and years? That's my first question, please.

Yes. We have a good margin, as you said, in Q3. If you compare to Q3 2019, we were not fully exploring our potential because that was just closed after the acquisition of Aleris. So I think the potential is it should be higher than what was done. We see that the Q3, of course, is the seasonal best quarter in Vardaga -- in all the other segments. And we hope that we will still have the occupancy growth going forward into Q4 and that will continue. And that will, of course, help the margin. But we also know that we -- in Q4 and Q1 this year, as comparables have some extra money for the pandemic cost that we don't have going forward now.

Okay. And then if we turn page to Norway and Stendi, would it be possible to say anything about how much is the elderly care business generated in profits or loss during the last 12 months? And do you expect what kind of payment? Or how much should we expect you to receive for selling this business?

We have had very low margin, and that means very low margin in the elderly care business going forward. And going forward, we don't know, of course, because we have already -- we have started just the process right now, and we are not foreseeing any one-offs connected to the divestment. But of course, we don't have any deal done yet.

Okay. And then just the last question on Norway again. After the divestments now in Stendi or when it's finished, how should one see your margin development in Norway going forward? And what is your kind of own assessment of when you can do a margin more in line with peers? And how should that trajectory look like in terms of the margin expansion in the Norwegian business?

So we are working on a program with our team in Norway to focus on social care, where we have already a very good market position and where we have high competence. And we believe with our improvement programs and also the increased focus on social care, we can definitely lift margins over the coming year. Yes, the program that we have already described in the quarter 2 announcement is aimed to give the first results next year in 2022, but we can, of course, also expect improvements beyond that. But still, that is early days. But we believe the increased focus and also the improvement program will show results in the P&L and also in the margin development next year.

And your next question comes from the line of Kristofer Liljeberg.

It's Kristofer Liljeberg from Carnegie. Two questions. The first one also rely on -- or relates to Norway. Is it possible to maybe describe a little bit more in detail what the next steps are now and timing for that considering the underperformance we have seen in Norway? And whether do you expect the improved margins already at the beginning of 2022 or if this would be towards the end of the year?

So if we look at the program that we have initiated in Norway, it is, of course, a program to adapt to the market situation now post the pandemic, which means that we are looking at our capacity in our various segments, especially within social care, if we put elderly care side for this question to simply adjust our capacity to the demand in the market. So that is one of the initiatives in the plan. There are other initiatives as well such as looking at, of course, operating cost when we're adjusting the demand. And we're also looking, of course, at initiatives that in terms of communication and also commercial initiatives can make us more visible, I would say, care provider in the Norwegian market. Those initiatives will give effect from next year. It will be spread across the year. So we will not see everything in one chunk. It will be a gradual improvement, but we should see some results from the beginning of the year.

Okay. And is it true that besides elderly care, also in the social care segment, that you have contracts that are unprofitable so that we won't see the full margin potential until you are out of those contracts?

I wouldn't say that we have contract that are unprofitable, but we have contracts with different margins. And we have in the children's side, contracts -- frame agreements with low margins that will still be there in 2022. So that makes that segment's margin maybe it's easier to adjust from 2023.

Okay. And the fact that you haven't been adjusting your capacity during the past 12 months, is that due to the pandemic and that you have to have higher staffing than normal, et cetera?

Yes. That is due to the pandemic. We have been fully focused simply on managing the pandemic in the best possible way, which we have done as we have also explained. I mean, there have been very strict quarantine rules in Norway for staff, which means that we have a lot of -- have had a lot of staff in quarantine, and we have had the need simply to use staff from other facilities to cover off from staff in quarantine. That effect is not completely gone, but almost gone. And with that, we also have then the opportunity to adjust capacity to the new market reality.

Okay. And then my second and last question relates to Denmark. It's a bit difficult to follow the underlying front here with integration of acquisitions, et cetera. Could you say something about the run rate now for margins? I guess there's a positive seasonal effect entering the third quarter. But given what you did in the third quarter and expect for the fourth quarter, what type of run rate for margin do you see maybe when you enter 2022?

It's very, as you said, very difficult to say because there are different aspects to that. We have the disability care segment where we have the newly bought EKKO that runs rather stable with a high margin. And of course, we have higher margin in Q3 than we have in the other quarters. And then we have the elderly care market where we just opened one new own managed unit and that is causing the losses in Q3, and we'll have a little bit lower losses in Q4 but still losses in that unit. But the underlying contract management and the other business is rather stable, but there is a rather big seasonality effect in both Norway and Denmark is maybe bigger than it is in Sweden. So the Q3 margins is not representative for the full year, of course. And there is a lot of extra costs related to bank holidays and these kinds of things in Q4 and Q2 in both Denmark and Norway.

[Operator Instructions] There are no further questions at this time. Please continue.

So with that, I will thank you all for listening in to this interim report of our third quarter 2021. Have a nice day and a good weekend when you come to it.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.