Attendo AB (publ) (ATT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this conference call. We will present Attendo's results for the fourth quarter of 2019. My name is Andreas Koch. I'm Communications and IR Director at Attendo. The presentation today is hosted by Attendo's CEO, Martin Tiveus; and Attendo's CFO, Fredrik Lagercrantz. And after the presentation, we will open up for questions. By that, over to you, Martin.

Thank you, Andreas. Earlier this morning, we released the year-end report for Attendo, focus in this call will be on the development during the fourth quarter. We'll also comment on the past year and our focus areas in 2020. I'll now turn to the presentation, then Fredrik Lagercrantz CFO, will take you through the numbers more in detail. Next slide please. To sum out the key messages in this report, we present a stable result in Scandinavia, and we are making progress with the turnaround program in Finland, even though the financial recovery is yet to come. During Q4, we also finalized new long-term credit facility for the group, that will allow us to maintain a higher flexibility during the transition period. Having said that, due to the situation in Finland, we are continuing to deliver a result far below what long-term should be expected from a company like Attendo. The profit recovery in Attendo Finland will take time and is primarily dependent on our ability in the coming years to reduce number of empty beds and achieve compensation for sharpened staffing requirements and price negotiations. Our Scandinavian operations displayed underlying stable result. We see continued high interest for our own care home projects, and we have several new projects in pipeline through 2020 and '21. Our outsourcing operations has been very challenging in 2019, but it's now stabilizing, while home care is continuing to develop in a positive way. In Finland, we reported a significant drop in profit for the last year. This is mainly an effect of the high opening pace of new units, in combination with the cost increase from shop and staffing requirements. Key quality parameters have been stable in Q4, and we have carried out a number of projects to improve quality and customer satisfaction. Next slide please. We reported a top line growth in the quarter of 7% year-on-year, excluding currency, mainly as a result of the high number of openings in the past 12 months and selected M&A activity. Growth was 12% in Finland and 2% in Scandinavia. Reported EBITDA amounted to SEK 139 million, corresponding to a margin of 4.6%. In old GAAP, without IFRS 16, this translated to an EBITDA of SEK 35 million. Profit in Scandinavia was slightly higher versus previous year, while Finland reported a significant drop versus last year, for reasons explained earlier. After Q4, we now have more than 16,600 beds in own operations. During the quarter, we opened additional 479 beds. However, the number of beds only increased with roughly 150 beds versus Q3 as we closed down the number of units with limited prospects. [ Homes ] have able to keep occupancy at 80% level, same as in Q3 in spite the high opening pace. Next slide, please. As we have communicated throughout 2019, our turnaround program to restore trust and profitability in our Finnish operations is ongoing. During Q4, we further strengthened governance and management team in Finland, and the new operational organization is now fully implemented. Apart from the new local management team, we have installed 24 new area managers that are supporting our regional directors, such as doctor operation control. On a unit level, 140 newly appointed team leaders will reduce workload for local managers and assist with local operational development. With these changes, I'm confident that we are better equipped to implement the needed changes to improve quality and performance over the coming years. In the aftermath of the new shop and staffing requirements in 2019, the entire Finnish care sector has been under severe financial pressure. It's now critical for all private providers to get further compensation for a substantial cost increase. As of today, we have, to a large extent, completed the negotiations for framework agreements for 2020. These negotiations cover approximately 1/4 of the total number of framework agreements, covering around 15% of total net sales. The price of this new framework work agreements is an average about 9% higher. Most revenue streams in Finland will, however, only be index adjusted in 2020. In total, we estimate positive price effect of around 3% for total net sales during 2020. Still, our prices in Finland are significantly lower than public providers cost from care homes. As we've already communicated, we are restricted with new products in Finland, we are selectively terminating contracts in core prospects. In Finland, there is now a national law proposal to increase the staff ratio in 24-hour care at nursing homes from current 0.5 to 0.7 care workers per resident. The proposed law should take full effect by April 1, 2023 and be gradually implemented starting in August 2020. During this transition period, we will have to motivate current staff ratios by individual client assessments according to a set standard. Our view is that this is generally positive, but the Finnish state aims to raise the ambition for elderly care. At the same time, it is problematic to only look at staffing ratio as a proxy for quality, that this might hinder investment in digitalization and other innovations to increase quality of care while improving efficiency. It's also important that the reform is fully financed during the transition period and to create more clarity regarding the transition period. Something that we will follow closely going forward. Now turning to quality and employees. Next slide, please. Throughout 2019, we have initiated a number of projects to improve the operating model of Attendo to enhance customer satisfaction and internal efficiency. Our mobile tool for planning and documenting carry instances is an example of our digital agenda that aims to improve safety for customers, saving time for employees and provide better traceability to local authorities. During the latter part of 2019, we introduced a new good food culinary concept at all of Attendo nursing homes in Sweden. The concept involves more locally prepared food and reduce usage of readymade dishes. We also strengthened the central dementia competence team in the fourth quarter. We were gathering key individuals for our specialist knowledge in the field of dementia, and I want to take a more active role in spreading knowledge about dementia to other employees and the families of people with dementia. Next slide, please. As I mentioned earlier, we now have around 16,600 owned beds in operation, an increase of 9% from the corresponding period last year. In Q4, we started construction of 7 new units that will add roughly 300 new beds. In Attendo Finland, a large part of these are related to social psychiatry and disabled care. In total, we have slightly less than 2,000 beds under construction by the end of Q4. And as you can see in the chart, we are in the process of decreasing our pipeline in Finland, which is now only about half the size a year ago. At the same time, we continue to identify attractive opportunities in Scandinavia. Next slide, please. We're taking several actions to improve the occupancy situation. We have sharply reduced number of new establishments in Finland, and we are working to exit some contract scenarios for prospects. This chart shows the rolling 12-month opening pace and openings per quarter. As you can see, we opened 57 homes with 1,950 beds in 2019. In 2020, we expect to open close to 1,600 beds. Most of the Finnish openings will be in the first half of the year, while openings in Scandinavia are more even spread over the year. In terms of '21, this number will be down even further as we're adding only a few new projects in Finland. Next slide, please. This chart explains group margins in mature and start-up units and sales. Top chart is key to understand the drop in margin, but also the potential of our start-ups. The chart is based the profit margin rolling 12 months stated in all GAAP for the group in total and for mature units. The downward trend in 2019 relates primarily to the higher cost level more [ attributed ] in Finland and to some extent, to lower contribution from outsourcing in Scandinavia. In order to turn this trend going forward, we need higher prices and higher occupancy. Prices in Finland will start to increase from Q1 2020 onwards, but we will continue to add more beds until the second half this year. Next slide, please. Now turning to occupancy per vintage. As you can see on the top green line, the occupancy is clearly above 90% level for units start in 2016 and earlier. Now as you can see, in the large 2017 and '18 vintages, we are steadily but slowly increasing occupancy quarter-by-quarter. The occupancy in the 2019 vintage, predominantly units in Finland, has had a slower start than previous vintages, partly driven by lack of staff for newly opened units as a consequence of the categorizing. The main reason for total occupancy, not lifting, is that we are still opening more beds than we feel and the high opening pace will continue until mid this year. With that, we move into the financials for the quarter. And please go ahead, Fredrik.

Thank you, Martin. So let's turn to Page 10. Net sales continue to be strong and amounted to SEK 3.1 billion, up by 8% compared to the corresponding quarter last year. Adjusted to currency, net sales increased by 6.8%. Acquisitions contributed with 3.2%, and organic growth amounted to 3.6% in the quarter, up sequentially from previous quarters. We see continued strong organic growth for our own nursing homes, and this was only partly offset by negative effects in other areas. The negative effect from ended outsourcing contracts enclosed individual and family units is much smaller than in previous quarters. We also still have a negative effect on some exited home care district. Reported EBITDA amounted to SEK 139 million [ on ] in the quarter, and I will come back with this is on the underlying EBITDA development. Commercial net was negative SEK 156 million compared to negative SEK 144 million in the fourth quarter of 2018. IFRS 16 related interest expenses increased by SEK 31 million, while interest expenses for our borrowing from bank decreased by SEK 18 million. The lower bank-related interest expenses are explained mainly by lower debt following the repayment we did in January, 2019. In the quarter, now the one-off cost of SEK 8 million related to the refinancing of our bank debt. Income tax for the quarter was positive SEK 12 million, which equals a tax rate of 24% for the full year of 2019. Net profit amounted to a loss of SEK 40 million in the quarter, which equals an earnings per share after dilution of negative SEK 0.75. Next slide, please. Overall, our Scandinavian business area is stable, which is largely the same development, as I've seen early in 2019. Strong development for home care, fund more demanding for outsourcing. Net sales for the business area increased somewhat our small sold beds in own homes and acquisitions was partly offset by exited geographical areas in home care and ended units within outsourcing and individual and family care. Please note that profit in the fourth quarter of 2018 was negatively affected by SEK 60 million in termination and loss provisions. For the largest service offering. Own care homes, operating profit was stable as increased profits in homes opened in 2017 was offset by start-up losses in homes opened in 2018 and 2019. We continue to have a positive development for home care based on increased customer concentration and improved planning and routing. We are actively acquiring smaller companies and exiting areas without the right prerequisite. Denmark continues to be loss-making and in the fourth quarter -- continues to be loss-making in the fourth quarter, but the largest loss-making home care contract in Denmark ended now in the fourth quarter. The improved profits in home care were partly offset by lower profits from our outsourcing costs. The lower profits are still primarily a consequence of the contract that has ended since last year, although this effect is smaller this quarter compared to earlier in 2019. During the quarter, having tendering processes lost but yet not ended contracts with an annualized estimated revenue of SEK 44 million. This means, we will end the year with a small positive balance between won and loss contracts. In the quarter, we had a number of small and positive items of a more temporary nature, which supported resulted about SEK 20 million, about half related to other income according to IFRS 16 and [ other ] impacting costs. Next slide, please. Growth continues to be high for Attendo Finland and amounts to 16% reported and 12% in local currency. The growth primarily comes from more occupied vesting units opened in 2018 and 2019 as well as acquisitions. The new situation with sharper requirement has affected the quarter with about SEK 70 million in additional costs, primarily related to increased staffing. In addition, the Christmas and New Year holiday effect was about SEK 10 million more negative this year as we are a larger company and staffing requirements have increased. Start-up losses from units opened in 2018 and 2019 and more empty beds, in general, are also impacting negatively, together with increased overhead costs following the health care divestment. We also see the price development during the year has not been able to compensate the cost increases with an impact of about SEK 10 million. The negative development is partly offset by more occupant beds. Before we turn slide, I also want to give a few comments on the coming quarter for both Finland and Scandinavia. First, we should remember that although the high number of inspections in Finland started in the first quarter 2019, we did not see the full financial effect on the shopping [ requirements ]. Further, more empty beds in Finland, will continue to have negative year-on-year effect as the high opening pace continues. In addition, to build a stronger organization, we are increasing the cost base somewhat also in administrative costs. On the other hand, we will have a positive price effects, although not fully the 3% now in the first quarter. The seller negotiation has started, and we expect financial impact in the second quarter, but the outcome is still unclear. In Scandinavia, we opened many beds year-end 2019 and in the first quarter of 2020, which really impacts start-up costs. Next slide, please. On this slide, you can see the complete cash flow statement. Bear in mind that 2018 cash flow includes the health care operations in Finland. Free cash flow was stronger this quarter despite operating profit being down. Cash flow from taxes was positive, since preliminary tax payments are returners and had a positive development in working capital. Adjusted net debt amounted to SEK 2.4 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 3.6%. During the quarter, we finalized a new credit facility with 3 Nordic banks, as earlier I communicated. The new facility is Attendo more headroom regarding leverage covenants for the next 2 years, which gives us ability to focus on the turnaround program. With that, I hand back over to you, Martin.

Thank you, Fredrik. To make a short summary of the full year 2019. First, if we look at financials, net sales in 2019 amounted to SEK 11.9 billion and a growth of 8.6%. Operating profit amounted to SEK 812 million, corresponding to an EBITDA margin of 6.8%. The lower margin versus 2018 is mainly due to 3 factors. The high opening pace in Finland versus '18 and '19 and slow occupancy progress in '19 due to the care crisis, higher cost for staff in Finland and lower contribution from outsourcing in Scandinavia. The Board of Directors proposes no dividend for 2019. This is an exception from the current policy, which is to distribute 30% of net profit. The reason behind the decision is primarily the challenging year in Finland and weak results. As a consequence, our financial ratio, measured as net debt in relation to EBITDA, is higher than it has been historically. Furthermore, consideration has been taken to the fact that we made a refinancing in Q4 2019. To sum it up, we've been through a very challenging year in Finland, and we still see the financial consequences in Q4. At the same time, we have had a stable situation in the Scandinavian business area in 2019. Finally, I want to say a few words regarding 2020. First of all, our top priority is to manage the turnaround program in Finland, to rebuild trust and confidence of our services and to ensure that we get fair conditions to operate. With the price negotiations for 2020 concluded, we need to ensure a better balance between growth and demand to improve occupancy. We also need to strengthen our efforts in recruitment and ability to develop and keep employees as well as raise the quality bar in our units. These initiatives will be key to regain reputation and profitability in our Finnish operations in the coming years. Further, it's important that we develop and strengthen the long-term competitiveness of Attendo. Consequently, we're now updating the Attendo model to ensure that we faster share and spread best practices and implement our digitalization agenda to further improve operational excellence, efficiency, quality and customer experience. When we look ahead, I'm confident that we are taking the right steps to strengthen Attendo and to build the platform for future value creation. Many of the actions and initiatives are already up and running and supporting us in our daily operations. Still, we need some more time before we will see the financial effects of these efforts. Thank you for your attention, and over to you, Andreas.

Yes, sure. We're now answering the Q&A session. And please take one question at the time. Operator, please go ahead.

[Operator Instructions] Our first question is from Carolina Elvind from Danske Bank.

Just a few questions from me, starting with the price increases in Finland. So it's unclear on the cost side going into 2020, but do you think that the 3% price increase will cover eventual wage cost inflation there?

The ongoing seller negotiations in Finland, they are not yet decided. We know that the union has high demands, but we have to wait the final outcome, which is likely to come in Q2 this year. On the -- 9% increase on our renegotiated framework contract at 2020, we see this is a necessary first step. We have many years of price negotiations ahead of us. It's negotiating the entire portfolio

Okay. And on those 9% increase in certain contracts, are you -- due to that cover I think we have personnel cost logics during 2019 from increased staffing requirements? Are you happy about the level?

I think we must continue to work with price increases over the years. If you look at margin impact, that is dependent on, of course, cost increases and occupancy improvements going forward. I think you'd have to remember, this is just the first step in a 3- to 4-year period of renegotiating contracts.

Okay. And just one last question about the government proposal of 0.7% personnel ratio. If you could give some more perspective on that and perhaps so many more employees you would need to hire? And if you think that there is enough labor in the market?

Yes. We don't expect the 0.7% new law to have a substantial impact until -- lowest impact operational, which is in 2023. So we have a number of years ahead. Until then, we have to make individual assessment of client needs to motivate current staffing. I think, generally, if you look at the amount of cash that's needed to support 0.7% in 2023, it will be generally challenging for the entire sector. And we need to make sure that we are the most attractive employer at that point of time.

And our next question is from Kristofer Liljeberg from Carnegie.

I also have questions about prices in Finland. So did you say that you have new contracts now with 25% of your customers in Finland, was that correct?

It's 25% out of framework contracts, and a framework contract is about half of the revenue. So in total, it's about 15% of total revenue base. Is a bit more than 1/4 of the favorite contracts.

Okay. And when you don't have a framework contract, what do you have then?

They have client rents paid directly to us. In some municipalities, we have a service offer system.

Okay, okay, okay. But then you have -- so it's but it's 25% of the contracts, you could say, so 20% to 25% of the beds, more or less?

No, because I've also serviced voucher system.

Around 50% is framework agreements and around 20% is service lodgers, where we have to raise prices more gradually over a longer period instead of negotiating year by year.

Okay. But -- and then so, I guess, the 9% is an average. I believe, in some of those contracts, you have been more successful, and in some contracts, you might have not -- you maybe have not been able to increase prices at all. So could you give that range? And also, how much would you need to increase prices to fully compensate for the higher cost level or the higher staffing level versus a year ago?

The first question, we can -- yes, I'm sure, you're not going to give any sort of exact details on the range or negotiations. This is negotiations that we've continue for the next 3 years, gone off the entire portfolio. But of course, it's dependent on municipality by municipality and also previous 5 levels, but reaching average of 9%. Looking ahead, that's a very difficult question to answer because it's going to be very dependent on seller negotiations going forward [indiscernible] situation and so forth. So it's very -- it's quite a lot of things that's affecting margin recovery rate going forward. But we think that, that -- now this is concluded the first step because it was a necessary first step. And we have many years surprise negotiations otherwise.

And our next question is from Carina Elmgren from Handelsbanken.

I have 2 questions. One is on exits in Finland. Could you first remind me how many new beds you're going to open in 2020? And maybe an indication of how many you will exit as it looks like now?