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

Good morning, everyone, and welcome to Ambea's second quarter 2023 report presentation. Speaking is Mark Jensen, CEO of Ambea and presenting with me today is Benno Eliasson, CFO. I will give you an introduction to the quarter and information on our work on quality and sustainability. Benno will then describe the development of the financials for the group and for the different business areas in Ambea. After that, I will summarize the quarter and compare to our financial targets before we open for questions. I would like to begin with a brief overview of Ambea. Ambea is the leading Scandinavian care provider. We have about 31,000 employees across Sweden, Norway and Denmark and revenues of more than SEK 13 billion. We offer a full range of services within elderly care, social care, staffing and competency solutions. We have more than 450 municipalities as our clients, and we are an important partner in solving challenges in the welfare system. Let's have a brief look at some of the reasons to invest in Ambea. Ambea delivers value to society and we aspire to be the most attractive investment in the care sector. From a distance care, providers can look somewhat similar, but at a closer look there are distinct differences as you see on this slide. Today, I would like to highlight our growth potential. Due to an increased and aging population, all Scandinavian countries will see a steep rise in care needs towards 2030. The rise will materialize gradually over the coming years and therefore society has an urgent need to expand the number of modern care facilities. New municipal construction is far from meeting the total need and as the only market player of size, Ambea has a significant pipeline of new care facilities to contribute to future needs. Growth can come from price, but normally price increases will only cover cost inflation. It can come from mix which depends on segments you prioritize and services you provide. Here everyone can improve. It can come from acquisitions or new services, which tends to be more challenging. And lastly, it can come from organic growth, where an active and sizable pipeline is currently a strength only Ambea hold. We will now turn to care quality. Quality ultimately arises in the interaction between care receivers and our employees. We always want to make it easy for employees to do the right thing in any given situation so that they can spend their time on the right things, care that creates quality and value. New for this quarterly report is that we will more clearly report the activities that were carried out during the quarter and highlight relevant key figures for the quarter upon which you can find more information in the report. Through internal control, we perform a detailed and holistic internal care control process across all business units twice per year. This ensures compliance with laws, regulations and our quality model as well as identifying areas which can be improved with structured follow-up. The results from May survey gave an index of 1.85 out of 2, a result slightly above the target. And for external inspections, the authorities in all countries regularly conduct inspections of our units, which is standard procedure. We welcome inspections and follow-ups by the authorities and our clients and see this as an opportunity to develop and improve our services. Ambea has more than 50 inspections by various authorities every quarter. We transparently report all inspections in the quarterly report. Over to sustainability. Our focus on sustainability has been reinforced during Q2 with several key achievements. Ambea has retained its place on Allbright's Foundation green list of companies in relation to gender equality in our group management team. Across the group, women represent approximately 70% of our workforce as well as approximately 70% of all senior and leading positions. Building on our work diversity and inclusion, Nytida became an official sponsor to Stockholm Pride this year. Stockholm is the largest Pride festival in the Nordic countries, and this sponsorship highlights our contribution to a more open labor market as well as our commitment to making Ambea inclusive for all employees. A further emphasis on sustainable care has led us to entering into agreement to add a sustainability linkage to our existing revolving credit facility of SEK 4 billion. The key performance indicators have been carefully selected and cover greenhouse gas emissions, employee engagement and care receiver satisfaction. Performance against these key sustainability targets impacts the financial terms of the credit facility. You can read more about our quality and sustainability work in the quality report as well as in our annual report. In Q2, the organic -- sorry, in Q2, the own management pipeline remains strong, and we have 1,119 new beds and placements in pipeline, most of them in Sweden. In Norway and the Denmark, we continue to build our pipeline in segments with good potential and fair commercial terms in line with the updated strategy. The pipeline decreased compared to previous quarters as we opened new beds placements in Q2 and as Vardaga reduced this pipeline, handing back contracts from care homes never opened. We have an active pipeline in all 3 markets and will be pleased to see more municipalities welcome private operators to support the needed capacity expansion. With several years' timing for planning, building permits and construction, the pace in establishing new care homes must increase to avoid a care crisis approaching 2030. We remain positive that the urgent need for increased supply will lead to more opportunities going forward. Now let's have a look at public tendering as a lever for growth. Municipalities can tend operation of its care homes according to the Swedish Public Procurement Act or similar legislation in Norway and Denmark. Contract duration is most often 3 to 5 years with an opportunity of extension. For municipalities, the benefit of tendering is achieving the best quality at the lowest possible price and establishing benchmarks and learning opportunities for the public managed care homes. For the private operator, the contracts provide a solid base for operation, scale, stable cash flows and a benchmark versus competition. Most of managed contracts deliver slightly lower profitability compared to own management as financial risks are also lower. This quarter 21% of our total sales -- net sales came from managed contracts through public tendering. Ambea has several specialists working only with public tendering and we have organized operation in a way that takes the specifics of this type of operation into account. We analyze tenders won/lost and look at our actual performance versus our bids to secure quality and profitability are delivered as promised and to continuously learn for coming tenders. This quarter we would like to highlight the extraordinary strong achievement of our public tender team, as both Nytida, Vardaga and Altiden won and defended several tenders in the quarter. We choose to present the figures as net balance contract value end of quarter, i.e. upcoming annual net revenue, which contributes to future revenue growth. At the end of Q2, Nytida has a net of SEK 30 million, Vardaga a net of SEK 211 million and Altiden a net of SEK 38 million in upcoming annual revenue. This gives us a total net of SEK 279 million in upcoming annual revenue from public tenders. As previously communicated, we will hand back our last contract within elderly care in Norway in March 2024, leading to an annual revenue north of SEK 112 million, not included here. Together with the industry organizations in all our markets, we provide guidelines and insights on public tendering, also to support smaller municipalities with less procurement resources on how to tailor and launch successful tenders. We know fewer people at working age will have to support a growing number of retired people. Therefore, cost optimization through tendering is an important lever for the municipalities to secure equal and qualitative care for everyone in need. On the next slide, we will look more specifically into the revenue growth delivered. The organic growth, showed in the purple bars, has been stable on a good level for several quarters now. The total growth has slowed down somewhat. In previous quarters, it has been helped by a stronger Norwegian currency, but in the last couple of quarters, the currency impact from Norway has been negative. In total, the currency effect on top line was negative this quarter. The effect from the disposal of the doctor staffing business in Klara late 2022 is more than netting out the effect from previous made acquisitions. Altogether, the FX neutral organic growth came in at 6% this quarter versus same quarter last year. We remain positive about our overall growth potential in the coming quarters where both price, price mix and volume is expected to contribute. Due to focused efforts across the organization, adjusted EBITA amounted to SEK 191 million in the quarter. Underlying EBITA increased by more than 30% versus last year. We continue to grow through more placements and tender wins, price increases and mixed improvements. Good organic growth drives the revenue. Our commitment to quality and sustainability remains high. We delivered our planned activities and achieved positive results in the quarter. And now over to you Benno for a presentation of the financial summary.

Thank you, Mark. The solid organic growth we have seen in the last quarter continues, and almost all business areas contribute to the growth in local currency. This quarter net sales grew by 5% total versus last year. Net effect of acquisitions, divestment and currency was minus 1, which means that the organic growth was 6% year-over-year. Looking into the different business areas, we see that Vardaga accounted for more than half the growth and increased 9% versus last year. Like in the previous quarters, there is an increased occupancy trend throughout this quarter, which has continued also into the third quarter. There were no new openings in Vardaga this quarter, but the 5 openings we made last year contributed well to the growth. Stendi increased revenue by 1% in SEK, but showed growth in local currency by 7% versus last year. Klara decreased by 4% due to the divestment of the staffing business for doctors. All other subsegments showed growth in the quarter. EBITA. This slide shows how the different business areas have affected the group -- the EBITA of the group. In Nytida, the EBITA was higher than last year. We have a stable profitable business in Nytida, which performs very well. Higher prices and operational improvements compensated for external cost pressure. In Vardaga, we saw improved occupancy, primarily in the units started last year, which affected EBITA positively. Higher cost affected EBITA negatively. All in all, the EBITA was slightly lower than last year. That said, EBITA in Q2 last year was positively impacted by pension reimbursement of SEK 23 million. In Stendi, the positive effects of improvements made in the first half of last year continue to give effect in the EBITA. Higher occupancy, higher prices and other operational improvements resulted in a 2 percentage point lift in the EBITA margin versus last year. Altiden is on the same level as last year, as we saw higher operating cost and higher cost linked to the reorganization. The result is unsatisfactory and we will come back to that later in the presentation. A strong demand within all Klara subsegments continued and Klara generated a higher EBITA than last year, up 3.7 percentage points. The strategic repositioning of Klara continued to deliver higher margins than in previous quarters. Outside the business areas in other, we include some items in order not to affect the comparability of the business areas. This quarter, the effects amount to the minus SEK 16 million, which is SEK 85 million lower than last year, where we had a positive effect of SEK 70 million. The effect this quarter was a write-down of right of issue assets for leasing contracts in Vardaga that we handed back of minus SEK 36 million. A reevaluation of purchase price for the SkolPool acquisition in Klara had a positive effect of SEK 20 million. All in all, the net was minus SEK 16 million. And as last year, the effects are reported at group level under other. So if we exclude these effects both years, the underlying EBITA increased by SEK 48 million, or 1.2 margin points. The total reported EBITA was 5.8%, down from 7.3% last year. Cash flow. Operating cash flow decreased compared to the same quarter last year. Last year, we sold real estate, which amount to SEK 160 million. In this quarter, we saw a slightly negative effect on working capital due to non-favorable cut-off in the end of the quarter. The rolling 12 operating cash flow is at 85% of EBTIDA. Next slide shows the way from the rolling 12 reported EBITA of SEK 937 million to the SEK 825 million in EBITDA excluding IFRS 16, down the way to the free cash flow post tax. We can see that we have invested around SEK 100 million in fixed assets, have paid SEK 122 million in interest and paid around SEK 100 million in taxes. We can also see effects from other non-cash items which changes in provisions from its litigations in Norway, and also a negative effect on working capital of SEK 140 million. We expect these 2 items to be rather neutral over time, which means that the normalized cash flow, substantially higher than the SEK 304 million that we have now in rolling 12 is more likely going forward. On this slide, we can see how I use the generated SEK 304 million in free cash flow, SEK 112 million was distributed to our shareholders as dividend, SEK 19 million was spent on acquisition and SEK 226 million was spent on a shared buyback program. Based on our strong free cash flow, we will continue an active and balanced capital allocation that includes future acquisitions. At the end of the second quarter, we had a net debt ratio of 3.3x EBITDA, excluding IFRS 16, which is slightly higher ratio compared to the last 4 quarters and slightly higher than our financial target of 3.25x. A lower adjusted EBITDA affect the leverage ratio negatively compared to last year. And now over to the different business areas. We're starting with Nytida. Nytida sales increased by 4%, mainly driven by growth in both contract management portfolios, new operations in both contract management and owned management and higher prices. Owned management homes show slightly lower occupancy compared to last year. Nytida won several tenders and has at the end of the quarter a net contract balance of SEK 30 million in annual sales that will commence operations during coming 12 months, which will contribute to future revenue growth. EBITA was higher than last year and increased by 39% (sic) [29%] to SEK 134 million. This is a strong performance given external cost pressure. Cost increases have so far been met with operational improvements and higher prices. EBITA margin in the quarter landed at 13.2% and the rolling 12 EBITA now trend upwards to 13.5%. In Vardaga, net sales increased by 9% year-on-year, driven by high occupancy mainly due to new nursing homes that opened last year. Occupancy in material units were also slightly higher in the second quarter compared to last year. The own management portfolio totally increased by 13%, while the contract management portfolio increased by 3%. Vardaga is also successful within public tendering, and at the end of Q2, balanced contracts net of SEK 211 million in upcoming annual net revenue, which will contribute to future revenue growth. EBITA ended at SEK 68 million, slightly lower than last year, mainly driven by higher external costs, which was compensated by positive occupancy development in the unit opening of the beginning of last year. Mature units showed a margin of 8.6% down from 10.3% in Q2 last year. Last year EBITA was however positively affected by SEK 23 million from retroactive repayment or pension payments. Vardaga will continue to compensate underlying cost pressure by higher occupancy, operational improvement, better price mix and by price increases going forward. Stendi. Net sales were flat in SEK or 1% up, and increased by 7% in local currency due to higher occupancy and higher prices. We saw a stronger demand in our own management portfolio increased net sales by 9% in local currency with growth in all subsegments. Contract management was down because we are leaving the elderly care segment with the last remaining contract ending in March 2024. Elderly care now represented 4% of the total revenue in the second quarter. EBITA increased by SEK 15 million to SEK 19 million. This is mainly an effect of the actions we took in the first half of 2022, which gained full effects from Q3 last year and have continued to deliver since then. The EBITA margin is in the quarter -- was in the quarter 2.5%. We can note that the EBITA margin is always impacted by a lot of bank holidays in the second quarter. Rolling 12 margin increased to 5.1% from 3.6% 1 year ago and up from 3.8% at the start of the year. New sales grew -- sorry Altiden. Altiden net sales grew by 15% in SEK and 6% in local currency, most due to higher occupancy in nursing homes and last year's acquisitions of Reflekt. Altiden won 2 and ended 1 contract within public tendering and as at the end of the Q2 contract net of SEK 38 million in upcoming annual net revenue. We see more opportunities to expand public tendering within elderly care and social care in Denmark, while local municipalities in this area are lagging neighboring Nordic countries. In Q2, the EBITA was minus SEK 18 million, which is in line with last year and slightly better in local currency. As in Norway, the second quarter has a lot of bank holidays, which affects the profitability negatively. That said, the underlying profitability is still at an unsatisfying level. In Altiden, we have now implemented several improvement measures to turn around the financial performance, but it takes time as we are integrating all units and companies acquired the last years into a new business platform and a new management structure. We expect clear improvements in financial performance year to go and also in 2024. Klara. In Klara, net sales decreased by 3%, which was expected as we have divested the staffing solution for doctors last year. Apart from that, there is a solid underlying growth in all other business segments. The underlying growth come from increased sales in the external market as well as through service delivered to Vardaga and Nytida. We are also from 2023 now reporting our training organization Lara together with Klara. EBITA increased from SEK 9 million to SEK 13 million. The EBITA margin reached 11.2% and are rolling 12.6%. Our strategic repositioning of Klara with acquisition of SkolPool and divestment of staffing business for doctors has continued to be successful in terms of growth, growth potential and in terms of earnings and better margins. 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 organic and acquired growth. We are close to our target in the second quarter with 7% growth, rolling 12, driven by organic growth. We remain active and are in several dialogues when it comes to acquisitions. Over time, the growth can still be reached as a combination of organic and acquired growth. The coming quarters we aim to prioritize acquisitions as the market is now more active and we see good potential for bolt-on acquisitions within the Nytida segment. Looking at the profitability target, we have a mid-term adjusted to be the target of 9.5% which we have not reached. The rapid increase in inflation have made the targets tougher to meet short-term, but is still reachable mid-term with high occupancy, fair price compensation and overall operation improvements. In all 3 Scandinavian markets, we strive to operate in business segments with good margins. The leverage level is 3.3x EBITDA in Q2 which is slightly above our financial target. We expect our solid cash conversion to continue, which gives us the potential to grow and lead to financial flexibility. Free cash flow will be used for dividends, according to our policy, bolt-on acquisitions and if possible, share buybacks. Lastly, we will look beyond the second quarter before we open for questions. We now have the visibility to foresee cost increases this year will be mitigated by higher occupancy, operational improvement, solid cost control and price adjustments. Since last year, we have worked with several efficiency initiatives to dampen the effects of the cost inflation. Building the right platform and improving profitability in Altiden will continue. Further improvement in Stendi is expected, although at a lower level as well for comparable quarters. Ambea continues to show good organic growth. We see higher occupation in Vardaga, Stendi and in Altiden and we were able to reach higher prices particularly, in Nytida and Stendi. Going forward, we plan new own management openings and will enter more contract management as we have shown strong performance within public tendering. In parallel, we continue to work on price adjustments and mix improvements. In terms of acquisitions, we prioritize the Nytida segment where we have a strong track record of successfully integrating qualitative bolt-on acquisitions. We have come a long way already this year, executing on our updated strategy. And I would like to deliver a special thanks to our dedicated management teams and operational staff in all business areas. In an environment of high inflation and with delay in price compensation, they have found innovative ways to mitigate while still providing a qualitative, secure and sustainable care to a growing number of care receivers. And with that I conclude our presentation and open for questions.

[Operator Instructions] And the first question comes from the line of Kristofer Liljeberg from Carnegie Investment Bank.

Very impressive results considering inflation. But in Sweden, both elderly care and disabled social care were better than I expected. Could you explain how much it benefited from the final OPI adjustment and the fact that wage increases didn't kick in until June? And also related to that, given the strong first half of the Swedish elderly carrier, do you expect it will be possible to keep margin flat now for Vardaga for the full year?

Okay. I can take the first one there. We have, as you said, the final OPI number set in April or May. We had then a good retroactive invoice for some of our municipalities there. This effect is not very big. We have OPI in less than half the volume, and we had like 1.1 percentage point higher final OPI than the preliminary, so it was like a couple of millions in Vardaga and Nytida each that affected the P&L in the second quarter. And then the second question was around the annual salary revision of 1 of June. This is always 1 of June, so that is no news. So that is as previous years, and the labor agreement with the largest trade union Kommunal in Sweden is always 1 of June and some other is the 1 of July, but that is as previous years. And the third question was around on whether we foresee that we can keep the margins in Vardaga this year and now we have the visibility, a much better visibility than we had the last quarter. So we believe that we can mitigate the underlying cost pressure with high occupancy and operation improvements and the cost control and also price adjustments as we spoke about. So the answer is yes, we believe that we can keep the margin.

And are you surprised if we turn to Nytida, I guess there have been pretty extensive work on prices there. Are you surprised how easy it is to increase prices to compensate for inflation? And I think we have seen this for some of your local competitors or local peers as well in that segment?

I don't -- we are not surprised and I also don't think it has been easy, but the nature of the contracts in that particular segment are a little different because you have a higher ratio of care receivers in and out of the business, which gives you an opportunity to set new prices more frequently than you are able to in elderly care as an example. And then it's a lot of dialogues of course with the municipalities at local level, many meetings and discussions and also I mean a lot of the operational improvements in many areas that contribute to the improved results in Nytida. But we are not surprised. It has been a lot of hard work and it will continue to be so for a period of time until we see a more normalized inflation.

And the next question comes from the line of Jakob Lembke from SEB.

My first question is relating to this rental contract you're now left in Vardaga. Could you maybe give some more detail on the agreements you have reached and sort of why the property owner is agreeing to this now, et cetera?

Yes, I can take that. We are, as I said, leaving [indiscernible] and we are at that when we are still paying rent for a couple of months or for several months in some cases. So the reason for that this negotiation takes time is of course that the property owner is making sure that they can rent it out to someone else and someone else is in all these cases, of course, the municipality. So that makes -- it take time, but we have made deals with the property owners to hand over the contracts to get out of some costs that we see that in places where there is no possibility to open in many years.

Okay. And I believe you have more of these units that you would like to hand back. Is there a possibility to reach a similar agreement for those?

We have like 7 units right now that we don't have ordinary operations. Some of them are temporarily rented out for other purposes to municipalities or others. And there is different solutions foreseeing in these. Some of them we think we can open within next year or year after, and some of the others we think that there is possibility to do other things with, but never say never. We don't know exactly what the plan is for all these 7 units. There could be maybe some that we will hand it back to the property owners as well.

Okay. And then on Altiden, I appreciate that you say that you expect a material earnings uplift here, but is it possible to give any guide on when you will start to break even again?

No, on rolling 12, that's not -- we think that we will have a profitable Q3, but that is of course the best quarter seasonally. On rolling 12 or at a specific quarter, that is not any forecast that we will make.

[Operator Instructions] And the next question comes from the line of Karl-Johan Bonnevier from DNB Markets.

Yes. Good morning, Mark and Benno. Congratulations to good results. I'm encouraged to see that the managed contract portfolio seems to be heading strongly in the right direction. Could you elaborate a little? Is it you that have increased your win rate or are municipalities opening up this opportunity much more than they have had historically or coming back to do it in the same way or what's happening there?

We don't see more municipalities opening public tendering, I mean to a large extent. We think we would see that in -- as the municipalities get more squeezed on their financials. One quite easy activity to put in place for municipalities is to tender more. And still today it's only around 20% of the market which is private. So there's a lot of opportunity for the municipalities actually to tender more. So it's not an increase in volume of tenders we have seen, but it's a better win rate simply that we have achieved and all business areas performing strong in this area. So we are really satisfied with the performance of the team and look forward to take over and manage more care homes on contract management.

And even if this, as you pointed out, is slightly lower margin as it's also lower risk kind of setup, it's something that you see supporting your 9.5% operating margin target?

Yes, yes, it is.

Good to know, good to know. Looking at the -- coming back to the walkaways you did in the quarter and looking at the remaining pipeline of about 1,100 beds and places, you elaborated that about half of it is still without any opening dates or leased out, but would you still, considering them to be what you could call in the future, being something that will come into your own operating pipeline, so to say, or managed pipeline, or is there a big risk that more of them are going to go the same way that you are handing it back to the property owners?

It's about 1/3 of the pipeline, you could say, that are still in these 7 Vardaga houses that Benno elaborated upon before. We definitely believe that some of them will be active Vardaga units in 1 or 2 years' time from now. We are working of course very intensively with all of these houses and maybe will be used for other purposes. We have 1 house where we have shifted a care unit from Nytida into one of the houses we have had previously, which has worked very well. We are looking into such solutions and we are looking into other solutions as well. So some of them might go the same way as we have seen with the 3 this quarter, we hand it back. Some of them we will definitely open. So the quality of the pipeline with the 3 contracts out now this quarter, I would say has [Technical Difficulty]. Did that answer your question?

I think I lost you slightly there to the left, but I was with you after you said that the quality of the pipeline became much better.

Okay. Then I think you heard it all.

Excellent, excellent. And one final question from me. I noticed in under your operational key figures that you have adjusted some of the historic numbers for a number of beds and places in operation under all management. What has happened there?

I think we'll have to come back to that.

I see you lost something like 250, 300 units underneath Nytida for example for quarter compared to -- how you reported historically.

Okay. I think that has to do with seasonal capacity that we have adjusted the retroactive, that there is some kind of service that we don't include in the numbers anymore, because that was also -- there were only open at different seasons. I can go back to that more specific.

Splendid. No, it's good to know how to adjust the historic time periods before the -- I see Q2 '22 is the first number you have there.

Yes.

[Operator Instructions] Dear speakers, there are no further questions. I would now like to hand the conference over to your speaker Mark Jensen for any closing remarks.

Thank you very much and thank you all for calling in. The Q3 report for 2023 will be published on November 2, so I wish you all a nice day. Stay safe and healthy. Thank you.