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

Good morning, everyone, and welcome to this conference call where we will present Attendo's results for the second quarter for 2020. My name is Andreas Koch, I'm Communication and IR Director at Attendo. Today's presentation is hosted by our CEO, Martin Tivéus; and our CFO, Fredrik Lagercrantz. And after the presentation, we will open up for questions. Over to you, Martin.

Thank you, Andreas, and good morning, everyone. We've been through one of the toughest periods in the history of Attendo. The period with the corona pandemic and the COVID-19 illness has threatened life and health of both our clients and employees in all our markets. The situation in Sweden and especially Stockholm was very challenging from March until May. Today, we're in a much better situation with lots of learnings and very few cases. We now have 0 infected regular residents, besides the customers we have admitted from hospital. I'm sincerely grateful for all the hard work by our amazing staff since the start of the pandemic. I'll start with an update about the corona situation, followed by the ordinary operational and financial updates. Next slide, please. The corona pandemic has had an impact on all of us working in the care industry. Our main focus has been to prevent the virus from entering our units and to protect customers and employees. In early March, we took strong actions, including visitor ban for all units and introduction of health checks before the start of every shift to all care employees. Even with these strong measures, number of infected clients continued to increase in several nursing homes in Sweden, indicating that the virus could spread asymptotic. Later on, this has been verified in both internal and external studies. Based on these experiences, we decided to introduce the use of protective equipment in all care-related instances for all care staff regardless of symptoms to further strengthen the barrier to the infection. In mid-May, mask protection was fully introduced at every unit. And since then, number of infected clients in nursing homes has declined drastically. Except for a handful of clients that have been admitted from hospitals with COVID-19, we have 0 infected regular residents in our nursing homes across the Nordics. We estimate that the financial impact of the pandemic in Q2 was SEK 60 million, a combination of higher costs and profit impact from lower occupancy. The corona-specific costs relates primarily to PPE and sick leaves, while the impact on occupancy is an effect of the general anxiety about the pandemic in combination with visiting restrictions, making most clients and the relatives reluctant to move into a nursing home. For the remaining part of the year, we do not expect any further cost impact, as we assume that known state support will fully offset further higher costs related to the pandemic. In terms of revenue impact, we expect the impact of lower net sold beds from Q2 to remain in the second half of 2020, as we are entering the third quarter with lower occupancy, especially in Scandinavia. We estimate a negative run rate profit effect from lower occupancy going into Q3 to around SEK 10 million per month, or SEK 60 million in Q3 and Q4 combined. This assumes a normalized demand for new beds in the coming periods as restrictions are being lifted, but we don't assume a catch-up effect in this estimate. Our Scandinavian operations listed an underlying stable result, where we see a clear negative impact on occupancy. We have managed to improve performance in outsourcing operations and home care but negatively impacted by start-up costs for new units and impact from the corona pandemic. In Finland, we reported a small drop in profit versus last year. The positive impact from higher prices and more occupied beds were offset by the corona effect, continued high number of openings and higher overhead costs. The turnaround plan in Finland moves forward, and we are happy to see some more clarity from the 2 of the external factors during the quarter, the new staffing requirements and the salary negotiations. The transition steps in the staffing reform has been clarified, which is expected to simplify the process to renegotiate new contracts with local authorities. Slide 3, please. We reported a top line growth in the quarter of 4% year-on-year, excluding currency, mainly a result of the high number of openings past 12 months in Finland. We have no help from acquisitions this quarter, and number of sold beds has been clearly impacted by the corona situation. Reported EBITA amounted to SEK 153 million, corresponding to a margin of 4.9%. In old GAAP, without IFRS 16, this translates to an EBIT of SEK 42 million. This number includes a capital gain of SEK 41 million and a negative impact from the pandemic of SEK 60 million. Net of this effect, we delivered an EBITA in old GAAP of SEK 61 million. Profits in Scandinavia was higher versus previous year, excluding corona and capital gains, while Finland reported a small drop versus last year for reasons explained earlier. In the context of the pandemic, Attendo carried out an updated impairment test of goodwill. This resulted in a write-down of goodwill related to the Finnish operations in the amount of SEK 834 million. In addition, we made an impairment of right-of-use assets by SEK 137 million, also related to the Finnish operations. Fredrik will describe this in more detail later. During Q2, we opened additional 481 beds, bringing us up to 17,650 beds in own operations. Occupancy declined 1 percentage point versus last year overall and 2 percentage points versus last quarter in mature units, to large extent as an effect of the pandemic. Next slide, please. This chart shows the rolling 12-month opening pace and openings per quarter. We still had a very high number of openings in Q2. But from next quarter onwards, the opening pace will be sharply reduced. Towards the end of the year, we will return to an opening pace similar to what we had in 2016. Number of openings in Finland will decrease drastically, while we maintain a relatively high opening pace in Scandinavia into 2021. In the second half of 2020, we expect to open around 200 new beds. Next year, we expect to open around 1,000 beds where the majority will be in Scandinavia. Slide 5, please. As I just mentioned, we now have around 17,615 own beds in operation, an increase by 9% from the corresponding period last year. We added 480 beds this quarter, but the net increase was around 400 beds, as we are selectively working to exit some contracts in areas with poor prospects, mainly in Finland. In the second quarter, we started construction of 2 new nursing homes in Scandinavia that will add roughly 120 new beds. No new products in Finland, and as you can see, the number of beds under construction has been reduced by more than 50% the same period last year. This is in effect to our decision to sharply reduce new projects in Finland as part of our turnaround plan for Attendo Finland, and we now have 1,100 beds under construction, the majority in Scandinavia. Our pipeline in Finland is now only around 200 beds, the lowest number for many years and a reduction with almost 90% in 2 years. The focus from now on is to fill the units that have been established in the recent years and have shown improved occupancy in Finland coming quarters. Next slide, please. This chart explains group margins in mature and start-up units and sales. The downward trend in 2019 relates primarily to the higher cost level and more empty beds in Finland. In Q2, we also see the impact of the corona pandemic. We are now in an inflection point. We received stabilization. And from this point, we should see a gradual improvement. The key drivers to turn to margin are higher prices and higher occupancy. Prices started to increase from Q1 this year. And as I mentioned, the number of open beds will now decline, and we could focus our resources on filling empty beds. Slide 7, please. Turning to occupancy per vintage. As you can see on the top green line, the occupancy in mature units has dropped this quarter. This is something very unusual and related to lower sales of beds and in some regions higher mortality in the context of the pandemic. The inflow has been slow also in regions where there has been very few affected by the virus. In July, we have seen a more normalized inflow of new residents in all markets, especially in Finland and Denmark, where the visitor ban has been canceled. Having said that, it's hard to estimate and will be back on the Q1 occupancy levels. And with that, we move into the financials for the quarter. Please go ahead, Fredrik.

Thank you, Martin. So let's turn to Page 8. Net sales increased to SEK 3.1 billion, up by 4% compared to the corresponding quarter last year. Adjusted for currency, net sales increased by 4.3%. Acquisitions contributed with 0.4%, and organic growth amounted to 3.9% in the quarter. The organic growth was negatively impacted by lost revenue due to the corona situation. In Finland, we still see growth across all service offerings, while growth in Scandinavia is clearly hampered in elderly care, nursing homes and home care. Reported EBITA amounted to SEK 153 million in the quarter, and I will come back with details on the underlying EBITA development. In the quarter, we reported negative items affecting comparability of SEK 971 million, all related to Finland. This is mainly attributable to a goodwill impairment and partly impairment of right-of-use assets. Given the corona situation, we concluded that the renewed goodwill impairment test was required. In the renewed test, we use the same long-term lease adjusted margin of 7% EBITA. But given the new situation with more uncertainty, a higher risk premium and weighted cost of capital was utilized. The new post-tax WACC utilized is 8.7% compared to 7.3% in the previous test. The renewed test resulted in a goodwill impairment of SEK 834 million. Also for Attendo Scandinavia, a renewed test was performed with a higher WACC but concluded that no impairment was needed. Further, we have also written down the carrying value of IFRS 16 related right-of-use assets. These are assets that are booked when we enter new lease agreements. As the corona situation has led to a lower inflow of customers and more empty beds, we concluded that the value in use for Attendo was lower than the carrying value. The assets were impaired by SEK 136 million. The running cost for the empty beds will, also going forward, be reported as part of the quarterly results. And just to be very clear, it is only the impairment of goodwill and right-of-use assets that has been reported as items affecting comparability. The real estate gain and corona effects are reported as part of regular EBITA. Financial net was negative SEK 168 million compared to negative SEK 137 million in 2019. IFRS 16-related interest expenses increased by SEK 26 million, while interest expenses for our borrowing from banks increased by SEK 2 million. The higher bank-related interest expenses are explained by somewhat higher interest margin. Income tax for the quarter was positive SEK 42 million, which corresponds to a tax rate of 23%, excluding the goodwill impairment. Profit for the period amounted to negative SEK 975 million in the quarter, which equals an earnings per share after dilution of negative SEK 6 -- SEK 6.06. From this year, we also report adjusted EPS. This is earnings per share adjusted for FX from IFRS 16, acquisitions related amortization, items affecting comparability and corresponding tax effects. The adjusted EPS for the quarter was SEK 0.11, down from SEK 0.13 last year. Next slide, please. Overall, our Scandinavian business area is stable with profit improvements in outsourcing and home care. Net sales for the business area decreased somewhat as more sold beds and start-up units and price increases could not offset corona effect and exited home care areas. Organic growth was negative. EBITDA increased from SEK 130 million to SEK 175 million. Capital gain on the sold real estate contributed positively with SEK 41 million, while corona impacted negatively with about SEK 40 million. Underlying profit increase from outsourcing, home care and own care homes opened 2017 and 2018. Our outsourcing units displayed better profitability this year compared to weak 2019. Own care homes had a large negative impact on operating profit from start-up losses in homes opened in late 2019 and 2020, as expected, but this was, to some extent, offset by increased profit from more mature homes. As from July 2020, our Norwegian operations have been divested. Trailing 12 months revenue has been around SEK 370 million but bottom line contribution only marginal. During the quarter, we have tendering processes lost but yet not exited contracts with an annualized estimated revenue of SEK 10 million. We still have a small positive balance between won and loss contracts for 2020 year-to-date. Next slide, please. Growth continues to be high for Attendo Finland and amounts to 12% reported and 11% in local currency. The growth primarily accounts for more occupied beds in units opened in 2019 and 2020, price increases and acquisitions. Price increases amounted to around 3%. EBITA decreased from SEK 7 million to negative SEK 5 million. Corona is estimated to have impacted the results negatively with about SEK 20 million. Excluding both corona effects and impact from IFRS 16, the result development is close to flat. Price increases and improved occupancy among mature units was offset by start-up costs from units opened in 2019 and 2020, higher overhead costs and higher costs in operations. The new law regarding staffing requirements in Finland was passed by the parliament in June. In the final valid version, the increase to 0.7 staff index will take place in 4 different steps until April 2023. Financing from the state towards the municipality is also supposed to increase gradually. Attendo thinks that those adjustments were a clear improvement. Before we [indiscernible], I just want to give a few comments on the coming quarters for both Finland and Scandinavia. The corona pandemic will impact the coming quarters. The development is uncertain and exact estimates are challenging. Our best estimate is that currently known support from the government will offset estimated additional increased costs. Revenue will, however, be impacted negatively as we entered the third quarter with a lower occupancy. As Martin mentioned, we expect a more normalized inflow of clients going forward, but no catch-up effect from the loss of occupancy in the second quarter. We forecast that the profit effects for lost revenue during the second half of the year will be around SEK 10 million per month. Besides corona, we can anticipate positive seasonality effects for the third quarter with about SEK 100 million in profit impact. Further, we now know that salaries in Finland will increase 1.3% from August 1. And as mentioned before, opening pace in Finland will decline sharply going forward. Please also remember that in the third quarter of 2019, reported capital gain from sold real estate amounting to SEK 31 million. Next slide, please. On this slide, you can see the complete cash flow statement. Cash flow is strong this quarter, supported by strong development of personnel-related liabilities, accounts payables and the same real estate in Sweden, which contributed with more than SEK 200 million. Adjusted net debt amounted to SEK 1.9 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 3.3. Both liquidity and leverage has improved sequentially from the first quarter. This is a result of more stable EBITDA development and strong cash flows. We have substantial unutilized credit lines and no maturities until early 2022. With that, I hand back over to you, Martin.

Thank you, Fredrik. Next slide, please. I'd like to make a quick round up before going into the Q&A session. We've been through an extreme period this spring, and we still have many challenges ahead of us. The situation has improved significantly in our operations lately, but we must be prepared this could change quickly. One lesson learned from the pandemic is that it's critical that all actors in society take their responsibility for suppressing the virus and reducing its negative impact. We have mainly positive experience of cooperation with authorities and the effects of government measures in Denmark, Finland and Norway. With regard to care of all the people in Sweden, we believe that the authorities and government measures have been inadequate. More specifically, they are called for more testing, more infection tracing and the higher level of usage of protective gear. We're currently sharing our Nordic experiences of the pandemic with public authorities and politicians in Sweden, so that we as a society will be better able to protect human life and health in the next phase. I'm incredibly proud of our care staff, of all our managers and colleagues and support functions for their outstanding efforts during the first month of the pandemic. Their efforts to combat this invisible enemy and limit the effects of the pandemic have made a real difference for our customers and the relatives, but also for society as a whole. Thank you for your attention, and over to you, Andreas.

Thank you, Martin. We are now entering Q&A session. [Operator Instructions] Operator, please go ahead.

[Operator Instructions] We have a question from Kristofer Liljeberg from Carnegie.

Do you hear me?

Yes, go ahead.

Question related to Finland and the sales increase. I did a quick calculation. It seems, on average, you have increased sales SEK 45 million per quarter or so in the past 12 months. You still have a lot of empty beds, but how much lower do you think that increase will be when sales will only come from empty bed in existing homes?

Kristofer, this is Fredrik. So of course, you're right that over time, a lower opening pace will impact also the rate of sales. But that will take some time before we see that. One thing is that we haven't had the price effects. Of course, that does not -- that is not impacted from the openings. And then we have so many empty beds now. So we foresee that we can have a good sales development also going forward. But we haven't externally quantified exactly how the lower opening pace will impact sales going forward. But the number of empty beds we have currently is a very good potential of continued sales growth for a long time without having to increase the opening pace again.

Okay. It's not so that the beds that you have in filling in Finland is in case just for new ones and the ones you're sitting with are more difficult to fill?

No, it's not that black and white. And in the presentation, you can see how occupancy have developed per vintage of openings. And until the corona pandemic, you can see that we have had a positive trend also in the openings, 2017 and 2018 also coming into this year. So that shows that we have a potential to continue increased occupancy also for units that has been open for a few years.

And the 200 beds or so you still have under construction in Finland, when are they plan to open?

Some of them are -- or the majority of them will open in the second half of 2020.

Okay. And the 1,000 bed next year, does that include any new products in Finland? Or will you be close to [indiscernible] some time?

It's clearly -- the clear majority is for Scandinavia, but it will be something in Finland as well.

The next question goes to Carolina Elvind from Danske Bank.

So just a clarification on the SEK 10 million negative impact that you estimate going forward. So the costs will be completely compensated by government support. And this SEK 10 million negative impact per month that is under the assumption that occupancy is what it was at the end of Q2? Or how should you view that?

Yes. So this assumes that inflow is coming back to normal levels, but there is no catch-up effect on lost occupancy due to the pandemic.

Okay. And that would translate then to SEK 30 million in Q3 negatively?

Yes. Correct.

Yes. Okay. And this fact that the elderly are waiting to move into homes and impacting new sales. Could you give some color on differences between regions there? How does Finland compare to Sweden, for example?

Yes. When it comes to the sort of queue of people waiting to move in, that's very hard to quantify exactly. What we have seen during the pandemic is that the absolute majority of loss of occupancy has been due to that people are anxious about moving in. The smaller part is mortality effect. So the major part is that people are not moving in, in the same pace as they used to because the rank is about the virus and because of the visiting restrictions. What we've seen in Finland and Denmark is that visiting -- when visiting restrictions are lifted, inflow is coming back. They are moving back in. And we expect the same thing to happen in Sweden as well. Whether or not there will be a catch-up effect or not, it's very hard to -- it's very, very hard to estimate what will happen with that queue. So we estimate no catch-up effect in the [indiscernible].

Okay. And then just broader question. So during the crisis, the cost has gone up for, for example, medical supplies. Do you have any reason to believe that the costs are structurally higher in long term? Or do you have any reflection on what the long-term effect of this pandemic might be on your business?

We don't believe that there will be a long-term effect on the pandemic. No -- of course, we have taken a lot of cost in Q2 for protective equipment and so forth and filled our stocks to maintain the current protection level for the autumn. During -- as this pandemic has been global, of course, prices for protective equipment has gone up somewhat. During this crisis, we expect that to normalize [indiscernible] pandemic results.

The next question is from Kristofer Liljeberg.

Just a follow-up on those, the SEK 10 million, I must say I wanted to understand. Is this an average figure you expect for the second half? Then, as Carolina asked, it should be more than SEK 40 million in the third quarter and less than that in the fourth quarter. So could you just clarify what you mean?

That's basically the run rate going into Q3. So it's very difficult to estimate any exact numbers because there are uncertainties regarding potential catch-up effect and so forth that will drive occupancy. So given exact estimate for the remaining part of the year, it's impossible. But we can see that the run rate effect currently is around SEK 10 million per month [indiscernible] for the second half. So that's sort of the best guesstimate we can give at the moment.

So it should be lower, I guess, than SEK 10 million per month in Q4 most likely if things continue to stabilize?

Depending on what happens with sort of catch-up effects and inflows, of course.

Yes. And you commented about the inflows improving in Denmark and Finland here in July. Have you seen any signs of improvement in Sweden?

There is a slight improvement we can see in Sweden, but we still have the visiting restrictions. We can see that's a clear improvement that we saw in Finland and Denmark happened when they lifted the visiting restrictions. That is not yet happening in Sweden, even though it's -- of course, it's on an improved level versus April and May.

And do you still have visiting restrictions all over Sweden? I read about some maybe public homes that had removed that now.

No. There are visitor restrictions imposed by the government for the entire elderly care in Sweden. However, we allow visits outside in sort of a controlled environment, where there are barriers, so you can't get too close to the clients and where the visitors are wearing mask protection. So there are some guidelines around how visits can be enabled in an outside and controlled environment. And that's what we're doing on a continuous basis.

And why do you think visitor restrictions are so important? Is it practicality that relatives are not able to see the room before moving in, help them moving in, et cetera? Or is this COVID...

Yes, what we have concluded through our both studies together with Karolinska [indiscernible] and their own experience is that the main risk for virus to spread inside nursing home is asymptotic barriers of the virus. And we conducted a research study with Karolinska during the summer, where we tested healthy or seemingly healthy employees that have passed our health checks that were in duty in 13 nursing homes in Stockholm and 7% of those were asymptotic spreaders of the virus. Now they were wearing protection gear. So they would -- they didn't spread the virus. But this is what we could expect. But during the summer, 7% of the staff, meaning that most likely at least 7% of visitors will carry the virus asymptotic. And that's the major risk. And that's also the major reason behind why visiting restrictions are important and to keep those visitors that we have in an outside environment in a controlled manner.