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. My name is Andreas Koch. I'm Communication and IR Director at Attendo. Today's presentation is hosted by our CEO, Martin Tiveus and our CFO, Fredrik Lagercrantz. After the presentation, we will open up for question from investors and analysts, and we'll take media requests separately after the call. By that, over to you, Martin.

Thank you, Andreas, and good morning, everyone. It's been to say the least a very challenging year, both for Attendo, for the care sector and for the society as a whole. Hence, it's a great relief that we now have been through a quarter with almost no new infected clients in our operations. With this, let me now turn to the presentation, and then Fredrik will take you through the numbers in more detail. Next slide, please. Overall, we're reporting improved profit year-on-year. The main drivers of that improvement is that we continue to deliver on the turnaround program in Finland. Net new sales pace is at a good level and, with a few new openings, we're certainly improving occupancy and margins, however, from a low level. Our focus in Finland is to continue our sales momentum while continuing to negotiate our framework agreements to get compensation, both for past and upcoming higher staffing requirements. Prices in Finland are still structurally too low, and we will continue to push for higher prices over the next few years. Scandinavia has been more severely impacted by the pandemic. This is clearly visible in the Q2 numbers, as occupancy is still significantly below the pre-pandemic period. On a positive note, we have a positive sales trend in Q2 versus Q1 and expect to see a gradual normalization of customer inflow in the second half of this year. Occupancy is flat versus last quarter in spite that we've added around 200 beds in the quarter. Corona effects had an estimated negative impact of approximately SEK 40 million in the quarter for the group. And we received public reimbursement of around SEK 25 million for costs that incurred in 2020. We do, however, expect significantly lower public compensation in the next quarters. Furthermore, in relation to the comparison quarter, Attendo's Q2 results includes a onetime cost of SEK 15 million for extra recovery days for employees in Scandinavia to acknowledge the hard work of our employees during the pandemic. Slide 3, please. Our overall purpose is to empower individuals and provide good care that leads to higher satisfaction and better health for our customers with the long-term ambition to have the most satisfied customers in every location where we operate. During the past year, we have developed Attendo Way, our common operational care model, to ensure high-quality care based on common principles, while encouraging entrepreneurship and local engagement. During the course of this year, we continued to develop Attendo Way with focus on further improving digital tools, culture and transparency and employee engagement. We're also putting focus on taking the next step in quality with the ambition to improve our performance in terms of quality of life and preventive health. Ultimately, we believe that this creates value for both customers and relatives as well as society as a whole. Next slide, please. As Nordic region's leading care provider, it's important for us to evaluate our own efforts during the pandemic to be even better prepared for the future. During the spring, we've had a lot of media attention, stemming from the documentary on one of our units in Stockholm during the first wave of the pandemic. To get a more holistic picture of our total work during the pandemic, we initiated an extensive internal work that includes all our employees, discussing and documenting experiences and learnings during the past year. We've also taken help of external expertise. Sirona Health Solutions has analyzed excess mortality during the entire pandemic at all nursing homes in municipalities where we operate, covering 1/3 of Sweden's nursing homes. The results of the analysis show that Attendo had a clearly lower excess mortality rate during the pandemic versus other elderly care operators in Sweden. As an example, Attendo's excess mortality rate in the Stockholm region was 24% versus 42% for other providers. Across all regions where Attendo operates, our excess mortality rate was 19 percentage points lower than other providers and 25 percentage points lower than public sector. The past year has been extremely challenging for both employees, residents and relatives. And there are many lessons to be learned for the future. At the same time, the evaluation showed that Attendo's measures to protect residents during the pandemic have generally worked well. Next slide, please. We reported a top line growth in the quarter of 6% year-on-year. The organic growth amounted to 5% despite negative effects of the corona pandemic. The organic growth relates mainly to more sold beds in Finland. Lease adjusted EBITA amounted to SEK 53 million, corresponding to a margin of 1.7%. Occupancy has improved as a result of more sold beds in Finland, and quality remains at a good level. Fredrik will provide more details on the financial development shortly. Slide 6, please. This chart shows the openings per quarter and rolling 12-month opening pace. The development is a result 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 pace by mid-2020. During the first 6 months this year, we've opened close to 500 beds. In the second half of this year, we plan to open additional 400 beds, equally divided between Sweden and Finland. We do expect this project to be successful over time, even though the low overall occupancy situation in Sweden after the pandemic will likely impact the fill-up pace in Swedish openings during the start-up period. Slide 7, please. In the upper chart, we present a number of beds in operation. As for Q1 this year, we've been presenting the number of beds in all Attendo's homes, including own operations as well as outsourcing. We increased the number of beds in operation by 1% from the corresponding period last year. The comparison includes 400 divested beds in Norway, as we exited Norway last year. During Q2, number of beds in operation was flat versus Q1 in spite of opening 240 new beds, as we've been exiting some units as part of reviewing and refining our footprint. In line with our strategy, we continue to reduce number of new projects. And by the end of Q2, we had 600 own beds under construction, majority in Scandinavia. In Finland, our focus is to fill the units that we have established during the rapid expansion of recent years and continue to deliver improved occupancy and margins coming quarters. Next slide, please. Now turning to occupancy development. After Q1, we are presenting occupancy for all Attendo's homes across all segments. We've been able to increase the overall occupancy in Finland in care for older people, bringing up the average to the highest level for several years. The positive trend is expected to continue, as we have good sales pace and low number of openings coming period. In Scandinavia, we see the opposite situation with a historically low occupancy. This is as a consequence of the lower number of new customers in 2020 and due to the increased number of openings recent year. These 2 factors have had an equal impact on occupancy development. We have seen an improvement in sales pace in Q2, and we expect the inflow of new customers to gradually normalize during the second half of the year. Slide 9, please. This chart presents the occupancy development of own operated units by opening year. We have excluded the large acquisitions, Mikeva and the recent UMSK in Finland, so we can isolate the development of our own initiative projects over time and present how fill-up in openings are proceeding. We have a slight improvement versus last quarter in mature units and occupancy in the more recent vintages are continuously improving. Slide 10, please. This chart presents, on the group level, net sales and margins divided into mature units and start-up units. We have historically presented a mature margin including all administration costs. To give you a better view on the mature margin, we have since Q1 calculated margin for the mature units with a proportionate share of administration costs in relation to net sales. As you can see from the yellow line, the mature margin is increasing. Lower margin in nursing homes in Scandinavia has been compensated by higher margin in Finland. Let's take a closer look into the financials for the quarter, and please go ahead, Fredrik.

Thank you, Martin. So let's turn to Slide 11. Net sales increased to SEK 3.2 billion, up by 3% compared to the corresponding quarter last year. The exit from Norway impacted the comparison with about SEK 90 million, and currency had a negative impact by 2.9%. Organic growth for the quarter was 4.8%. In Finland, we continue to see growth across all service offerings, while organic growth in Scandinavia is still negative, affected by exited home care areas and closed units in supporting housing within the individual and family care. The growth from new nursing homes in Scandinavia has been offset by lost occupancy due to corona in existing homes. Lease adjusted EBITA amounted to SEK 53 million, up from SEK 42 million last year. The negative effects from corona are estimated around SEK 40 million, which has been partly offset by received government reimbursement of in total SEK 23 million, but relating to additional costs in 2020. The comparison between the years are further impacted by the capital gain of SEK 41 million last year and that we've also had a negative onetime cost of SEK 50 million this quarter related to recovery days for Swedish employees. The IFRS 16 effect on reported EBITA was smaller than last year due to onetime items last year. Financial net was negative SEK 158 million compared to a negative SEK 168 million in the second quarter of 2020. IFRS 16-related interest expenses increased by SEK 2 million, while interest expenses for our borrowing from banks decreased by SEK 6 million. Currency effects also impacted the comparison positively. Income tax for the quarter was positive SEK 3 million. The adjusted earnings per share for the quarter was SEK 0.19, up from SEK 0.11 last year. Next slide, please. The Scandinavia business area continues to be impacted by corona. Net sales for the business area decreased, as we have exited Norway and corona's impacted sales. We put a lot of focus on our processes to attract new customers, for example, by more online marketing. During the quarter, occupancy was stable despite the pressure from new openings. Lease adjusted EBITA decreased from SEK 126 million to SEK 74 million. Adjusted for last year's capital gain, the extra cost for personnel recovery this year and both periods' corona effects result is down somewhat underlying. The lower underlying result is caused by start-up costs related to units opening during the last 18 months. We're also working on improved processes for tendering with good results in the quarter. During the quarter, our tendering processes net won [indiscernible] started contracts with an annualized revenue of SEK 70 million. Next slide, please. Growth continues to be high for Attendo Finland and amounts to 10% reported and 15% in local currency. The growth primarily accounts for more occupied beds in units opened since 2019, price increases as well as acquisitions. Price increases amount to more than 3%. Lease adjusted EBITA improved from negative SEK 67 million to 0. Price increases and improved occupancy was partially offset by higher costs in operations, largely due to the implementation of the new law. Price negotiations will continue in the fall ahead of next year's adjustments, and the price level is still overall structurally too low. By the end of the quarter, the number of empty beds in Attendo Finland was lower than 1 year ago. Attendo received reimbursement for some corona-related cost that occurred in 2020, which resulted in the corona-related supporting measures, more than offset the cost for the isolated quarter. The acquisition of UMSK had a small positive effect on the profit. During the quarter, the Finnish parliament voted yes to the revised proposal for SOTE reform. This means that the responsibility for health care and social services will be transferred from municipalities to 22 regions in 2023. Although mandate is still remain to be clarified, Attendo is in general positive to the planned reform. This will mean that there will be a more clear separation between the role as a payer versus an operator of social services. Before we turn slide, I just want to give a few comments on the coming quarters for both Finland and Scandinavia. The effects from corona will continue to impact the coming quarters mainly in Scandinavia. Net sales in Scandinavia will be impacted negatively, as we're operating with a significantly lower average occupancy than normally. At the same time, the cost level of Scandinavia will continue to be higher than normal due to absorption issues. We expect lower corona reimbursements going forward and in the year-on-year comparison, you should remember that we got relatively more public reimbursement in the second half of last year for both Finland and Scandinavia. Also, there is some additional cost pressure in Finland due to a new seller agreement valid from July 1. We do, however, expect a normal positive seasonality effect for the third quarter. Next slide, please. Free cash flow was positive SEK 72 million, lower than last year, as last year had a large positive impact from working capital. Adjusted net debt amounted to SEK 1.6 billion, which equals to an adjusted net debt to adjusted EBITDA ratio of 2.7, a clear improvement to last year and well below our maximum target. With that, I hand back over to you, Martin.

Thank you, Fredrik. Next slide, please. A few words before the Q&A session. Financially, we see an underlying improvement versus last year, driven by the progress of our turnaround program in Finland. Scandinavia still suffers from low occupancy after the pandemic, but we do see signs of improvement in the sales pace in Q2. During the quarter, we made a thorough evaluation of our work during the pandemic. It shows areas of improvement for us and the sector in general. At the same time, the external analysis indicates that measures to protect residents during the pandemic have generally worked better than for other providers. We are committed to continue to deliver high-quality care for our customers and local authorities. And the learnings in the past year will help us in our ambition to become the leading provider of care in every municipality where we operate. Thank you for listening, and over to you, Andreas.

Thank you, Martin. We'll now open up for questions from investors and analysts. And please take one question at a time. Maybe operator, you can give the instructions, please.

[Operator Instructions] Our first question comes from Karl Norén, Danske Bank.

So if we start off with a question on Finland on the sales side. I think your sales in Finland increased by around SEK 100 million sequentially from Q1, which is an increase of around 6%. But when I do my math there, and I see that the number of occupied beds seem to increase by around 2%. So I have a question regarding what is driving the strong sales in Finland? Is it price? Or is it something with the acquisition you announced? Because I guess that is something that is also impacting this. So it would be interesting just to hear what is driving this strong growth other than the net inflow of new customers because we can see that, I think there seems to be something else than just the inflow. It would be interesting to hear.

Thank you. This is Fredrik. Yes, you're right. It's a combination of more occupied bed, but it's also price increases, which is a bit more than 3%. And then it is the acquisition of UMSK, which was consolidated from March 1 only. So it's only had a partial effect in the first quarter, and now we have a full quarterly effect in the second quarter. So that clearly impacts the sequential comparison.

Yes. But the sequential increase in prices, is that what -- can you say anything about how much that is from Q1 to Q2?

That's very limited, but then there's also the seasonality.

We didn't have the full effect of the price increases in Q1 but the most part of it.

Okay. Understood. And then if we look on margins within Finland, can you say anything about how this acquisition you made impacted profitability? Did it impact profitability positively? Or how much of an effect did that have in Q2?

It had a small positive profit effect, but not that it's noticeable on the margin since it's also, of course, had some revenue. Just on the sequential comparison, it's a bit -- coming back to that, it's a bit tricky to compare because we have some seasonality effects. And also, you should remember that the first quarter had 89 days and the second quarter had 91 days and many of our revenues are day-based fees. So you need to adjust for that as well. And that's why we most often do year-on-year comparison, of course, then you don't have the same amount of seasonality effects impacting the comparison.

Yes, yes. Understood. I just meant more within how the acquisition impacted if it -- because I guess the acquisition that you did had positive margins and it would be just interesting to hear how much of this comparison year-over-year is driven by the consolidation of the acquisition and how much is underlying. If you can comment on that?

Yes, I would say on the -- it's limited impact. Yes, it has a limited positive impact, but it's smaller. It's a much smaller part than -- if you look at the SEK 67 million in improvement, it's mainly driven by other factors.

Yes. Understood. And then just a question on the Scandinavian business. I mean as you said, when doing all these adjustments looking year-over-year, I mean, it still seems that your margin is relatively flat or even somewhat increasing despite significantly lower occupancy year-over-year. Could you please just explain if there's -- what is driving the increased margins despite lower occupancy? Is it lower cost? Because that seems quite odd. So if you could comment on that? And also how much governmental subsidies did you receive in Q2 last year in Scandinavia?

Close to nothing last year.

Okay. So what -- is it -- can you say anything on the margin side? Because I guess, if we adjust for that, the margins may be relatively flat year-over-year despite lower occupancy. Is that correct or...

Last year in Q2, we had a pretty tough quarter in terms of corona impact. We took a lot of cost in Q2 while not receiving any governmental reimbursement to that cost. So of course, that impacted Q2 last year as well negatively.

Our next question comes from Kristofer Liljeberg, Carnegie.

I have a few questions around the topic of pandemic effects. First, I wonder, is it possible to give or just remind us what the net effect from the pandemic was on the EBITA in the third quarter and the fourth quarter last year as a starting point?

I don't have that exactly in front of me, but we can -- of course, we can give you that. We have that in our reports.

Yes, if you could come back to that, would be helpful. And also, if we look then at the expected impact from the pandemic now in the second half of the year and third quarter and fourth quarter, you had like, I think you said SEK 46 million negative for the group in the second quarter. If we take that as a starting point, how much lower do you expect that impact will be in the third and fourth quarter?

The corona effects, they are different this year if you look at next year. Last year, it was a lot of kind of additional cost with higher sick leave and personal protective gear. And the difference is that this year, the vast majority of the negative effects are -- is coming from a lower-than-normal occupancy in our kind of mature units. And that is, of course, a much more sticky effect. So the way to get those to diminish and decrease is to attract new customers. And that is a gradual work of us attracting the customers, but it's also a bit dependent on how the decision processes in different municipalities on how they view kind of -- some municipalities have prioritized their own units before Attendo units. But as stated, we are seeing gradually better and better inflow of customers. So we think that the negative effect of around SEK 40 million that we had this quarter will gradually decrease going forward. And also...

But at the same time, you will have less of the government grants related to 2020. So if you take the third quarter, do you think it's a fair assumption assuming the net effect being rather similar as in the second quarter and then hopefully even lower net effect in the fourth quarter?

Yes, something like that.

Yes. And if you could come back then with the impact last year, it would be helpful. And if I may, just one more thing, I'm a bit curious to hear your view on all the media attention or what we should call it during the spring, have -- how do you think that has impacted the moving rate? And what have you heard from potential customers? Have they chosen not to move into a tender because of everything that has been written in Swedish media?

Just after the media that they started, we took contact with every municipality where we operate. And we had -- I'd say we had a good dialogue with our payers on local level. They also have a more thorough understanding of the challenges during the pandemic in the adult care sector. I recognize a lot of the challenges that we had in [indiscernible] in the specific unit, which was reported on. So how it has impacted? Nothing. We saw a clear impact in May because we had a pretty good April, so a clear impact in May and then there's nothing to coming back in June. So it's a pretty short impact. But it's also supported by the fact that during May, we discontinued marketing activities due to the media attention, which we restarted again in June. So it's a bit tricky to say what is what, was the lower net inflow in May, which came back in June was that -- how much of that was driven by the fact that we discontinued marketing initiatives and sales initiatives versus actual media impact. But we saw a clear impact for a number of weeks specifically in May and then coming back in June.

Kristofer, coming back to the corona effects in the third quarter of 2020 was negative SEK 40 million. And in the fourth quarter, it was net 0, but that was due to negative effects of around SEK 50 million and then that we started getting more reimbursements of the cost we've had of another positive SEK 50 million. So that was negative.

And the minus SEK 40 million, that was the net effect, just to be clear?

Right.

In the third quarter, yes.

Our next question comes from [ Mick ] Nordea.

Just starting off with the improved moving rates that you witnessed by the end of the quarter in Scandinavia. How far would you say that you are from what we can call a normal inflow also given that your occupancy development was quite flattish sequentially?

If you look at the net inflow in June, it was on par with our expectations. We still believe that we will have a continued gradual normalization of inflow during the second half of this year, as the capacity situation in the municipalities where we operate gradually normalizes post the pandemic. We still have a situation like in West Sweden or Gothenburg region where they decided to completely prioritize their own operations within public sector in the first half of this year. So they basically haven't given any clients to private sector during the first half of this year due to the corona impact. And that is something that is expected to be released starting the second half of this year. So we see signs of gradual normalization second half. I would say that June was pretty good in terms of net inflow.

Okay. That's interesting. And just moving on to Finland. I think that you changed your wording here slightly in terms of price increases. It was a bit up sequentially, but only now part -- I think that you offset your costs slightly better than you did in Q1. So is there anything on the cost side that we should be aware of in terms of cost increases that were perhaps not as high as you have expected?

I think the cost increase is about as expected. We did have new elderly care law that came into play in Q4 last year. That implies a sequential upgrade of staffing requirements to 2023. So it went up from 0.5 to 0.55 starting January. It will seem to continue up to 0.6 in January next year and then to 0.7 in 2023. And we will negotiate -- we are negotiating our prices accordingly.

But there was nothing sequentially that we should be aware of in terms of the costs in Finland?

Not really, no. Mind you that when we negotiate prices for 2021, for example, that we did last year, we have about 200 different municipality contracts in Finland that we are continuously renegotiating. And the starting date is not January 1 on all of those. So they gradually start between January 1 -- I think the last one starts in May 1. So we don't get the full impact -- even though most of the contract starts in the beginning of the year, we don't get the full impact.

Sure. Okay. And just finally, your current expectations heading into new negotiations for the second half of the year in Finland. And also perhaps if you could elaborate a bit on what you've learned from previous year's discussions. Are there any sort of industry organizations that will help you from here or all the private providers in Finland to get the compensation needed? Or how should we -- what's your expectations really into the second half here in terms of that?

It's a bit -- it's a sensitive topic because there are competition laws in Finland as here in Sweden. So we're not allowed according to competition laws to say before how -- what we're targeting in terms of price increases in Finland. That will be a bit of a flag for all the other players what we're targeting and then that could be assumed as sensitive to affect other operators. But what we have seen during the past few years of renegotiations is that the industry as such has been fairly disciplined. So we haven't seen any low balling in terms of prices so far from competitions to get volume. It's been pretty good discipline in the Finnish market because everyone is in the same place. And that's a good side of -- the new elderly care law in Finland is that it gives a clear playing field in terms of how requirements are moving up and what costs are related to those requirements. So we expect the market to continue to be disciplined. And that is basically as much as we can say about it.

And do you have industry support, yes, exactly?

Yes. There is an industry association called [ HALE ]. They don't do actual negotiations. But of course, they argue and drive the public debate on what the law implies in cost impact, how -- there is also some -- a lot of details about the financing that goes from the state to the municipalities. Then there's still -- although the municipalities have the financing from the state, it is still for every operator to negotiate contract by contract the exact price adjustments you should have. So of course, [ HALE ] is working in the public debate to explain the situation and what's happening and what we can see is that prices are structurally too low. There's a clear difference between what the municipalities pay the private operators versus their own cost, and they're arguing in all these factors, but they're not involved in the specific price negotiations. That's the difference. That's not by industry. It's the municipalities and the operator by itself.

Just to give you additional comment on this. As on the SOTE reform that was actually finally passed the parliament during the quarter, which will be implemented in 2023 in Finland, which will lead to a separation between the payer role, which will be in the regions and the provider role, which is public and private sector in municipalities. And we think that this is a good thing long term for the Finnish market because then hopefully, payers will go for the right quality to the right price. And then it will be a more level playing field between private and public providers on municipality level, whereas the public providers and municipality level operates as of today at a clearly higher cost than private providers. So we think that, that will strengthen our competitiveness in Finland over the long run.

Our next question comes from Hans Bostrom, Trinity Delta.

I have a couple of questions for me. I'm just wondering how you would be looking to leverage the positive outcome of this Sirona survey to turn the tide in terms of the media opinion on Attendo. It seems a good opportunity. Or indeed if you have done any particular efforts in that regard? And secondly and a bit on the other side of this argument, you mentioned that your relationship with local authorities is very good. But then on the other hand, I understand you've lost a contract in Järfälla in Stockholm area. And I'm just wondering how big a risk there are for other adverse changes to contracts you have where the political, I should say, composition of local authorities is such that you could lose just simply because of the bad publicity you received in the last 3 or 4 months. I'd be interested to hear that.

Thank you, Hans. This is Martin here. So on your first question, Hans, [indiscernible] the analysis done by Sirona to improve reputation after the media, we have published a report on our website. We also published a pretty extensive evaluation of all our efforts on our side. Also, the city of Stockholm did an evaluation of the specific unit that was criticized in media. And that evaluation came up very good, which also Stockholm City published on their website. I think it's about -- we have to allow for some time because media that has been writing negatively to Attendo can't really directly afterwards put up a very positive article saying that actually we did lot better than everyone else. We believe that the facts are really good to have out there. Now they're published. They are, I think, aware of it, but we have to allow for some time to let it sink in. And since we published these reports, we haven't seen any more negative things. On your second question, I think -- this is part of the -- both the beauty and the complexity of working in this industry to have -- to manage hundreds of different municipality contracts and the municipality relationships on local level. And that complexity is something that we as a company are used to handle. We have a long history of managing all these relationships. That's I think part of our competitive edge. Part of that is also that sometimes the majority in a specific municipality will swing and that can be in a negative change of direction. But it's also part of a differentiation working in so many municipalities. So that gives us sort of a long-term stability. I think generally, we have the good relationship with our local authorities. I think it's clear for them that we add value. There is no municipality that would buy services from us, unless we have the quality that's on par. We're above standard while saving -- at the same time, saving tax money. So it's a part of both adding quality and efficiency. And then every now and then, we a see municipality swing on the negative side. On the other hand, we have other municipalities that will start trying out public players -- the private players. So yes, it's one of those cases.

But you wouldn't consider it a particular risk now, well, let's say, up until September 2022 that you would be losing contracts where there is yes, Green majority that might not have been the case when you won the contract, et cetera. And I mean I'm just curious as to whether you see this particular business risk after the bad publicity you received?

We don't see a particular business risk on that. We have a close contact with the municipalities. We have even closer contact after this event. But there's -- also mind you that there is quite a big difference between national politics and local politics. The local politics are much more pragmatic, where there is a challenge that needs to be solved, while the national politics is more ideology.

[Operator Instructions] We have not received further questions at this point. I will hand back to the speakers.

Okay. Thank you for participating. And we will now conclude the call, and please don't hesitate to contact us directly if you have any further questions. Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.