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 2020 and also our Financial Targets. My name is Andreas Koch, Communication and IR Director at Attendo. Today's presentation is hosted by our CEO, Martin Tiveus; and our CFO, Fred Lagercrantz. And after the presentation, we will open up for questions. By that, over to you, Martin.

Thank you, Andreas. Good morning, everyone. We will start the presentation with commenting on the full year and quarterly numbers, as usual. After that, I'll present Attendo's strategic direction and new financial targets that were just published in connection with the quarterly report. Before jumping into the presentation, I'd like to share a few comments on the corona pandemic and the stages right now. We've seen increasing levels of transmission in society in the entire Nordic region during the second wave of the pandemic. While number of infected have been increasing also in Denmark and somewhat in Finland. The general level of transmission in society has been the highest in Sweden, comparable to or even surpassing the first wave. In Attendo, we've had very few cases of infection in Denmark and Finland, while the situation in Sweden has been more challenging. At this time, we have almost concluded the vaccination program for nursing on clients in Sweden and the result is a 75% reduction of infected clients in only 2 weeks. We hope that this marks a start of a gradual normalization for both customers and our operations. I will now turn to the presentation, and then Fredrik will take you through the numbers in more detail. Next slide, please. On group level, we delivered progress in both sales and results, with more sold beds and higher prices in all markets, we achieved a healthy organic growth of 5% on group level. Executing on our turnaround in Finland is dependent on succeeding with both increasing occupancy to healthy levels and to regroup the cost of change regulation over the next few years. During the quarter, we nearly finalized negotiation of prices for 2021 in Finland. For framework contracts, we achieved an average above 10% increase. This translates to slightly more than a 3% increase on total revenues in Finland. Bear in mind that for 2021, cost inflation and cost for the new law is likely to largely offset the margin expansion from the price side. Prices in Finland are still structurally too low, and we will continue to push for higher prices. As we enter the quarter, the new elderly care law in Finland became valid. While the first increase in staffing density requirements to 0.55 is valued from January 1 this year, other changes in staff and regulation led to increased costs of around SEK 10 million in the quarter. Apart from that, we're largely in line with our turnaround plan. Our Scandinavian operations stabilized somewhat during the quarter after a very challenging period with hampered demand due to the pandemic adjusted for corona impact, the result was in line with Q4 last year. Net customer inflow was positive in the quarter, while still lower than normal. Because of the pandemic we'll enter 2021 with a lower average occupancy compared to a year ago. During 2020, employee engagement have increased sharply in all markets. The result of our annual d the Net Promoter Score survey is all-time high, indicating a dramatic improvement of staff engagement. We've also seen people attrition has been steadily decreasing during 2020. We believe that our forceful response to the pandemic in combination with our efforts in digitalization, values and internal communications has been seen very positively. The net financial impact on the COVID situation was very low in the quarter and significantly lower versus what we earlier indicated as we've been granted government reimbursement in Q4 derived from costs that occur throughout 2020. Next slide. Overall, the effects of our turnaround plan starts to become visible in the numbers. Occupancy is increasing. Profits and margins are improving, and we are moving towards a more balanced expansion base with lower open beds and a more balanced pipeline of new projects. We reported a top line growth in the quarter of 2% year-on-year in local currency, translating to an organic growth of 5% related to the progress we see in Finland. Reported EBITA amounted to. [Technical Difficulty]

Apologies. Ladies and gentlemen, we seem to have lost the speaker line. I just want to put the call on hold [indiscernible] perhaps in a moment.

Sorry for this, we were unexpectedly kicked out of the conference call. I hope you're still there, everyone. I was commenting on Finland. We returned a loss of minus SEK 20 million last year into a profit of SEK 48 million in Q4 this year. Scandinavia had a result in line with previous year adjusted for corona-related costs. Quality remains at the high level according to our quality index, and we're currently putting a lot of effort into developing the next-generation of quality system and quality work methods. The ambition is to monitor and work more proactively with health, quality of life and preventive care compared to how the industry has been working in the past. Next slide, please. This chart shows the rolling 12 months opening pace and openings per quarter. We're now seeing clear effects of the strategic shift we decided on 2 years ago to decrease establishment of new units in Finland and return to a more balanced expansion base. In Q1, we plan to open 200 beds in Scandinavia and 140 in Finland. For 2021, we expect gross opening pace to roughly 800 beds with the majorities in the Scandinavian business. We increased the number of owned beds in operation by 6% from the corresponding period last year. During Q4, we opened 198 beds, and at the same time, we closed down 20. In Q4, we only started construction of 1 new Group Home with 6 beds. As you can see, we have reduced the total number of beds under construction by 48% since the same period last year. By the end of Q4 we had roughly 1,000 beds under construction, the majority in Scandinavia. In Finland, our focus is to fill the units that we have established in recent years and continue to deliver improved occupancy in coming quarters. Turning to occupancy per vintage. We continue to increase total occupancy for the second consecutive quarter, although the effects of the pandemic is still visible in the mature units. We will continue to see a slight downward trend in the fourth quarter. This chart explains group margins in mature and start-up units and sales. We can finally observe an uptick in mature margins driven by the turnaround program in Finland. The key drivers for continued margin recovery in Finland or higher occupancy and higher prices, reflecting our new cost base. We expect to continue gradual increase in occupancy during 2021. In Scandinavia, we gradually expect to normalize inflow on new clients going forward as the effects of the pandemic bears off. However, as we enter 2021 with lower occupancy, combined with a higher number of new openings, we will continue to see pressure on margins in the short term. With that, we move into the financials for the quarter, and please go-ahead Fredrik. Next slide, please.

Thank you, Martin. So let's turn to Page 8. Net sales increased somewhat to SEK 3.1 billion, up by less than 1% compared to the corresponding quarter last year. The exit from Norway impacted the comparison with about SEK 100 million, and currency also had a negative impact of 1.9%. Organic growth was 5% despite the negative impact on growth from lost revenue due to the corona situation. In Finland, we see growth across all service offerings, while growth in Scandinavia is still negative, driven by exited Home Care areas. Organic growth for Elderly Care Nursing Homes are, however, positive again. Reported EBITDA amounted to SEK 193 million in the quarter. I will come back with details on the underlying EBITDA development. The positive SEK 6 million reported as items affecting comparability is only currency effects on the write-down we did in the second quarter this year. Financial net was negative SEK 164 million compared to negative SEK 156 million in the fourth quarter of 2019. IFRS 16 related interest expenses increased by SEK 14 million while interest expenses for our borrowing from banks were flat. Last year, we had a onetime charge of SEK 8 million related to the new financing agreement. Income tax for the quarter was SEK 0 million, which corresponds to a tax rate of 21% for the full year adjusted for the goodwill write-down. Profit for the period amounted to SEK 4 million in the quarter, which equals an earnings per share after dilution of SEK 0.02. From this year, we also report adjusted EPS, this is earnings per share adjusted for effects from IFRS 16, acquisition-related amortizations, items affecting comparability and the corresponding tax effects. The full table on the calculation for adjusted EPS is available on Page 28 of the interim report. The adjusted EPS for the quarter was SEK 0.31, up from SEK 0.04 last year. Next slide, please. The Scandinavia business area is clearly impacted by corona. Net sales for the business area decreased as we have exited Norway and corona's impacted sales. EBITDA decreased from SEK 172 million to SEK 155 million. Corona impacted negatively with SEK 20 million, lower-than-expected as some compensation of costs early in the year was received during the quarter. Own care homes opened in 2019 and 2020 had a large negative impact on operating profit for start-up costs as expected, while underlying profits increased for home care and outsourcing. During the quarter, we have tendering processes won but yet not started contracts with an annualized revenue of SEK 84 million. For all of 2020, tendering processes have resulted in a positive net of estimated SEK 42 million in annualized revenue. Next slide, please. Growth continues to be high for Attendo Finland and amounts to 9% reported and 13% in local currency. The growth primarily comes from more occupied beds and units opened in 2019 and 2020, price increases and acquisitions. Price increases amounted to around 3%. EBITDA improved from negative SEK 20 million to positive SEK 48 million. Price increases and improved occupancy among mature units was only partially offset by start-up costs from units opened in 2019 and 2020 and higher costs in operations, largely due to the implementation of the new law. By the end of the quarter, the number of empty beds was lower than 1 year ago. Attendo received the reimbursement for some corona related costs that have occurred early in 2020, which resulted in the corona-related supportive measures more than offset the cost for the isolated quarter with a positive net of about SEK 20 million. Compared to the fourth quarter in 2019, calendar effects were positive with about SEK 10 million. Before we turn the slide, 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, although the magnitude is still somewhat uncertain. Revenue in Scandinavia will continue to be impacted negatively as we enter 2021 with a lower occupancy. We have in Sweden applied for government reimbursement to cover for corona-related extra costs. Those applications are sent to every municipality individually who takes them forward to the national government. Also in Finland, we have applied for cost coverage of some of the increased costs. As mentioned, we have received some reimbursements in 2020, but by year-end, we still had about SEK 70 million pending. Now in January 2021, we have received around SEK 30 million. Timing and to what extent the rest of our applications will be covered is still unclear. When comparing year-on-year, one should also remember that the impact of corona was limited in the first quarter of 2021. Besides Corona, I also want to mention that although we should see positive price effects on revenue in Finland in the new year. Not all prices are valid from January 1. As Martin mentioned earlier, the margin impact will be limited. Compared to previous year, calendar effects in the first quarter are estimated to be negative with about SEK 20 million as we had a leap year in 2020. Next slide, please. Free cash flow was positive with SEK 132 million in the quarter, somewhat lower than last year. The positive working capital development we have seen during the year is partly due to timing effects. Adjusted net debt amounted to SEK 1.6 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 2.6%, a clear improvement to previous quarter. During the quarter, Attendo divested a company with 11 properties and related bank loss amounting to SEK 297 million. Attendo will continue to run the care operations in the facilities, and you can read more about the transaction in the report. With that, I hand back over to you, Martin.

Thank you, Fredrik. Next slide, please. I'd like to make a quick round up of the quarter development before we're entering the next part with our updated financial targets. Turnover and profits developed positive year-over-year with a clear improvement in Finland and a stable development in Scandinavia. We will continue to execute on our turnaround program in Finland in 2021, whilst Scandinavia will start here with a tough comparable quarter as Q1 2020 had very limited impact from the COVID situation. Finally, I'm satisfied with the progress of vaccination in all countries, I sincerely hope that we now see the beginning of a normalization where our customers in the near future can again meet and socialize. This concludes the first part of our presentation today. And now turning to the Attendo strategic direction and our updated financial targets. Please turn to Page 14, please. I'd like to start this part of the presentation with a short review of the company's history. For more than 35 years, Attendo have been developing care services based on the needs and preferences of the individual. Through the years, Attendo has been pioneers in many areas, such as measuring and reporting quality and developing methods and processes to assure health and well-being. Attendo is also the private provider that has established the highest number of new nursing homes in the last 15 years, helping local authorities to cut queues and save money. Today, we operate more than 700 care units across the Nordics. Next slide, please. As a private provider of welfare services, our purpose is to provide quality care with higher customer satisfaction as equal or lower cost for society. Quality, health and satisfaction goes hand-in-hand. We're currently developing the next-generation of quality system to better monitor and work more proactively with health, quality of life and preventive care. Our players, mostly municipalities must obtain the best care possible for the tax money to spend. We have a long history of successfully delivering quality of care equal to or better than the public sector at lower cost. In essence, this is how we provide value for customers and society. Next slide, please. Since 2008, our core strategy for growth has been to build and establish new own operated nursing homes for elderly and disabled people. There are several advantages in own operations compared to our outsourcing business. Firstly, we build modern customized care homes with the best possible conditions for providing good, safe care while ensuring resource efficient operations. Secondly, these units are free from heritage, and we can recruit and train all staff from start according to our values and we are working and finally, our own operated units creates more value over time as we are not limited to a fixed-term outsourcing contract. Over time, Attendo's own operation business has generated the bulk of growth and profitability and now stands for over 80% of revenues. Another tangible contributor to growth is acquisitions. Except for the large mix of acquisition in Finland in 2017, the majority of acquisitions in the past has been smaller, value-creating bolt-on acquisitions. Our view is that there is still significant in market M&A opportunities to acquire small and medium-sized companies in existing segments and geographies. Longer term, acquisitions are also potential root to establishing Attendo in new markets. While outsourcing is a smaller part of our business today with limited growth potential, there are attractive pockets in this market. Next slide, please. Our value creation model is built on 3 fundamental principles: a scalable platform with common tools, a common operational model, call it underway; and finally, a customer-centric and value-based culture. In terms of a share and scalable platform, we took additional steps in 2020 with the launch of apps for employee communication, information and e-learning and the app for relative communication as well as the rollout of a mobile planning scheduling and documentation system in all care for all the people. We see good opportunities to further increase customer satisfaction and quality, thus strengthening the conditions for higher occupancy going forward. To this aim, we further developed our operational model in 2020, which provides wider support to local operations in their work to ensure high-quality care, while encouraging local commitment. By constantly refining the Attendo Care model, we have consistently been able to deliver strong and stable margins in mature units over time. While our overall margins have been heavily challenged the past years with over expansion, regulation and corona, our consistent performance within mature units in Sweden shows the long-term potential in our business. Please turn to Slide 18, please. Historically, Attendo has been able to combine high-growth with stable margins. During more than 10 years, Attendo's group EBITDA margin, no GAAP, was around 9%. The main factor band is consistency and performance, was a balanced expansion pace, openings of new beds matched growth in market demand. Reaching full occupancy and mature margins within 12 months in opening. In 2017, this trend was broken. There are mainly 3 factors behind the margin erosion past 4 years. Rapid over expansion in Finland, 2017/'18, change to regulatory landscape in Finland in 2019 and corona in 2020. In 2017 and 2018, Attendo tripled opening patients in Finland, based on the demographic outlook, anticipated replacement and the upcoming sorter reform. This was followed by increased opening pace also from competitors, while the closure of old care homes took longer time than expected. As a result, overall occupancy in the market fell from over 90% to below 80%, diluting profitability. In 2017, Attendo also acquired the Finnish competitor, Mikeva, the company with low profitability. In hindsight, the timing of this acquisition was very poor, adding to the occupancy dilution, and this acquisition have not been able to meet our expectations regarding long-term profitability. In early 2019, there was a national political debate in Finland, focused mainly on quality and staffing density in the care sector. The implication was shortened staffing requirements for all providers, with private providers risking to get permits revoked, if not fulfilled. Despite high running costs for staff effective immediately, private providers were not automatically compensated. Instead, we have to seek compensation in the multiyear process as public contracts runs out for renegotiations. In 2020, the pandemic had a significant impact on Attendo's operations, particularly in Sweden, resulting in lower inflow of new customers, in combination with higher running costs. For 2020, we have estimated SEK 120 million in corona-related costs that has not been compensated by sales support so far. Next slide, please. During the coming 3 years, our aim is to execute on our turnaround program to increase profitability while strengthening the Attendo platform and value proposition. In the first half of 2019, following the Finnish care crisis, we initiated a multiyear turnaround program to reverse the profitability trend in Finland by investing more in quality, reduced rate of new openings, renegotiation of old contracts and optimizing the structure of existing homes. As of today, we have renegotiated approximately 50% of our framework contract in Finland, now at least 2 more years of negotiations ahead of us before all contracts are renegotiated. With a more balanced opening pace, fair price and increased focus on sales and quality we expect both occupancy and margins in Finland to increase over the coming years. In Sweden, we expect to see a gradual normalization of customer inflow during the second half of 2021 as the effect from the pandemic is expected to decline. It's important to remember that the pandemic has not changed the fundamental need for care, but short term, lower occupancy also in public sector units will hamper demand. While restoring profitability, we will also continue to refine our operational model and strengthen our competitive advantage to be ready for a new period of higher growth from 2024 with the coming elderly boom. Now let's turn to our revised financial targets. Our previous financial targets were set in connection to the IPO in late 2015. Since then, market conditions have changed, and Attendo's expansion strategy laid out in 2016 and has led to significant occupancy and profitability problems. The past 2 years, we have done significant changes in Attendo. We have launched a comprehensive turnaround program in Finland, recruited a new management team, both on group and business area level and revised our strategy. With the early progress of the Finnish turnaround now visible and COVID vaccination programs ongoing, this is a proper time to launch updated financial targets. Please turn to Page 20, please. Our new financial target is achieving adjusted EPS of at least SEK 4 by 2023, calculating according to the earlier accounting standard IFRS 17 and excluding amortization of acquisition-related intangible assets and items affecting comparability. This measurement replaces the previous growth and margin targets. As we have described, Attendo is in the phase of a turnaround in which we expect gradual profit recovery over the coming years. To emphasize and give guidance on what we expect of the turnaround, we have chosen a midterm financial target for the 3-year horizon. In terms of dividend policy, the previous target has not changed and remains a distribution of 30% of the company's net profit, like the profit target, this measurement is based on the earlier accounting standard. Our capital structure target is based on financial stability and the capacity to execute long-term decisions. We maintained the old target to maintain a net debt in relation to EBITDA below 3.75 over the long term. Fredrik will now walk you through the difference between reported and adjusted EPS. Next slide, please.

Thank you. This slide shows the reported and adjusted EPS for 2020 and the adjustments in between. We have chosen to set the target on adjusted EPS as we think it correlates well with value creation and is less impacted by how different companies have implemented IFRS 16. In the table, you can see the adjustments for acquisition-related amortizations, IFRS 16 and items affecting comparability and their respective tax effects. As you can see, we reported an adjusted EBITDA of SEK 375 million, a financial net of SEK 85 million and the tax cost of about 20%. With 161 million shares, this translates to SEK 1.43 per share. Assuming no major changes to number of shares, the tax rate and the financial net, our targets for 2023 of at least SEK 4 per share will translate to roughly SEK 900 million in adjusted EBITDA, and that is without effects from IFRS 16. Next slide, please.

Finally, let me just say a few words on our long-term prospects for growth. Beyond 2024, we have a long period ahead of us, where the number of people above 80 years will increase and the demand for both home care and nursing home will follow. Bear in mind that the 1930s generation, that is our main customer group today is significantly smaller compared to the 1940s generation in most countries. In terms of demographics, there will be a more pronounced acceleration in the number of older people from 2024 and onwards. And this is a fundamental base for our market assessment long term. The Nordic remains a very attractive market in care, and Attendo has all prerequisites to create value to customers, municipalities and society and hence to bring long-term value creation for our shareholders for many years also beyond our 2023 targets. Thank you for your attention. Andreas please?

Yes, we'll now enter the Q&A session. And please state 1 question at the time. Operator, please go ahead.

[Operator Instructions] And our first question comes from the line of Victor Forssell of ABG.

I'll start with a question on Finland. And I think the net effect here from price increases and the overall wage inflation or cost inflation that you provided us with in Q2, I think, has anything changed there? And also weighing in all the different moving parts of costs that you -- Fredrik talked about earlier. Is there something that has changed over the last 6 months or so?

The new elderly care law in Finland was implemented in the start of Q4 this year. So while the new staffing density requirements, moving up to 0.55 from January and then gradually up to 0.7 to 2023 was well known. The law was more detailed in terms of how staffing mix and staffing time were regulated, which drove a bit more extra costs in Q4 and therefore, also in 2021 than we foresaw.

So it's -- I mean, based on the details you provide us now. Is it fair to assume that the improvements in Finland now for 2021 will only stem then from occupancy improvements and the levels you expect for the full year?

Mainly from occupancy improvement, yes.

Yes. Okay. And moving on to Scandinavia, how do you view the improvements in 2021? I would assume that your 2016 vintage and earlier is dampening the Stockholm region, but overall, just high level, what is your strategy to strengthen your position in municipalities overall with freedom of choice and mainly in Scandinavia now, let's say, from mid Q2 and onwards?

This is a work that is very long term, and that we're constantly working with our relationship to municipalities. I think during this pandemic, I think we've also shown the strength of our tender in terms of being earlier and more for so in do we handle the pandemic? And I think that's somewhat strengthen our reputation among municipalities as well. We will, of course, continue our work to opening aftermarket in the Stockholm area and the larger larger Freedom of Choice areas. We are dependent on that -- the normalization of the business. We believe that given the lower occupancy also in public sector, will mean that we will see a gradual normalization of inflow. We expect it to -- more or so second half this year.

And just a follow-up on that. Are you somewhat worried about the Stockholm market at the moment, given the lower occupancy from public providers as well? And just lastly also, what should we view as your ambition obviously, a lot of moving parts in the first half of the year, but is it fair to assume that with the openings you have, the opening rates and also what you expect for the second half. Is it fair to assume that you would defend these occupancy rates that you have now with you from Q4 at least?

That's our ambition. And we -- as I say, we have a lot of openings during 2021. We have around 700 openings -- in 700 beds opening in Sweden this year. And of course, that is a challenging number given the pandemic but we are somewhat optimistic around the vaccination program and the way that we believe that the market will normalize during the second half.

And then just finally, have you seen any change in behavior now just during the first month of 2021, please?

No.

Our next question comes from the line of Kristofer Liljeberg of Carnegie.

Yes. 2 questions. First, just a clarification. I think you stated in the report that on the group, there were no order effect from the pandemic or 0 in the quarter, while what you described Scandinavia, it was still a 20 -- or minus 20 million effect, while Finland was close to 0. So maybe I'm missing something there? And then when it comes to this financial target for 2023, do you see this being kind of back-end loaded or a gradual improvement from the 2020 level?

Thank you. So this is Fredrik. Let me start here. So you're correct that the total effect is neutral. But in Finland, it was actually a positive effect because we had more reimbursement related to cost early in the year than we had cost in the isolated quarter. So it was negative 20% in Scandinavia, positive 20% in Finland and for the group neutral. If you look at the isolated quarter, it's clear negative if you look at the full year effect. And then to your second question on the EPS develop -- or the profit growth profile, so to say, it is -- given where -- the starting point with the low occupancy situation going into 2021 in Scandinavia. And also what we mentioned that the margin effect from the price increases in Finland will be limited in 2021. We will not -- it will be more back heavy profit profile.

Okay. And the SEK 900 million you mentioned or the implicit EPS target, implicit meaning, did you say SEK 900 million EBITDA based on the same tax rate? What other assumptions were you making out?

It's -- exactly. It's in all GAAP, so excluding IFRS 16, I said it's roughly SEK 900 million, and that's assuming that there's no major changes to tax rate, no big variances to the financial net and also no major changes in number of shares.

Okay. And we currently have 1 further question in the queue. [Operator Instructions] The next question comes from the line of Karl Norén of Danske Bank.