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

Good morning, everyone, and welcome to this conference call, where we'll present Attendo's results for the third 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 opt for questions from investors and analysts, and we'll take media requests individually after the call. By that, over to you, Martin.

Thank you, Andreas. Good morning, everyone. It's pleasing to say that we seem to have entered the recovery phase of the pandemic. We have seen very few new COVID cases in operations in recent quarters and the societies in the Nordics had started to open up. Of course, we're still prepared for potential backlash and keep most of our preventive measures from the acute pandemic period in our daily 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. In the beginning of the year, we presented new financial targets for 2023. I'd like to start with a quick update on the key initiatives needed to take it there. The first area of improvement is a turnaround program in Finland. With the return to balanced opening beds, fair price adjustments and increased focus on sales and quality, we expect both occupancy and margins in Finland to increase over the coming years. Apart from the summer months, we have gradually been able to increase occupancy in Finland during 2021. While we receive the price increases we aim for going into the year, prices are still structurally too low, given new regulation, and we are currently in the process of renegotiating prices for 2022, the result of which we will be able to disclose in the year-end report. The second area of improvement is to recover from the pandemic period in Scandinavia, where we have experienced subdued demand for over a year, while having had a high number of openings. The result has been a steep decline in occupancy from over 90% to now 78%, especially in our own operated nursing homes. During the third quarter, I'm happy to see that we now see a normalization of customer inflow to nursing homes in Scandinavia. All in all, we delivered an increase in both net sales and margins during the quarter. Still, we need to see significant continuous improvement from both business areas in the coming quarters with an emphasis on Attendo Finland. 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 onwards with the coming elderly boom. Last quarter, I mentioned some of the activities we're doing with Attendo Way, our common operational care model to ensure high-quality care based on common principles. We see good opportunities to further improve quality and customer satisfaction, and at the same time, increase efficiency. Now let's take a closer look at the financials for the third quarter. Slide 3, please. We are reporting improved sales year-over-year due to strong organic growth in both business areas as well from acquisitions. Profit increased 28% year-over-year, mainly derived from the Scandinavian business area. Main drivers behind the improvement is that we're continuing to see sales momentum, gradually recover from COVID related occupancy pressure, and we expect continued normalization of demand during the fourth quarter. We continue to deliver on the turnaround program in Finland. Demand is healthy, but this summer, the supply of staff in Finnish elderly care has been particularly strained due to society's demand for staff for COVID testing, vaccinations and now they [ correctly ] linked to the pandemic. As a consequence, it's been more difficult to find substitutes this summer, and we have in part been forced to replace employees on vacation with care staffs from staffing companies. This has led to increased personnel costs during the quarter and also slowed down our ability to take on new customers. We expect the normalization of staffing supply during the fourth quarter. Our focus in Finland is to continue our sales momentum while continuing to renegotiate our framework agreements to get compensation, both for past and upcoming higher staffing requirements. Next slide, please. We reported a top line growth in the quarter of 10% year-on-year. Organic growth amounted to 6% due to improved COVID situation and hard sales work, which has resulted in more sold beds in both Finland and Scandinavia. Lease adjusted EBITDA amounted to SEK 208 million, corresponding to a margin of 6.4%. Occupancy remained flat versus last quarter in spite that we have opened 243 beds in the quarter. Slide 5, please. This chart shows the opening per quarter and rolling 12-month opening beds. Prior to 2020, we had a strong pipeline on new projects to meet the expected demand for new nursing launch in Scandinavia. Since the start of the pandemic in Q2 2020, we have opened around 800 new beds. We do expect this to be successful over time, even though the hampered demand for elderly care during the pandemic has had a clear impact on the fill-up pace. In the initial phase of the pandemic, we adjusted our expansion plans in Scandinavia, and will open only about 200 additional beds in the next year. For Finland, we expect to open less than 150 beds in 2022. In line with our strategy, our current focus up until 2023 is to improve occupancy and customer experience in our current footprint rather than seeking expansion. Beyond 2023, we expect to return to a phase of higher number of openings on the back of the upcoming elderly boom. Next slide, please. In the upper chart, we present the number of beds in operation. We increased the number of beds in operation by 4% from the corresponding period last year. Due in Q3, number of beds in operation was up with around 80 beds versus Q2 in spite of opening 240, as we have 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 Q3, we had 450 own beds under construction, majority in Scandinavia. Our main focus is to fill the units we have established during the rapid expansion of recent years and continue to deliver improved occupancy and margins in the coming quarters. Slide 7. Turning to occupancy development. After a tough year for Scandinavia marked by the pandemic, we now see a turning point. While it will take some time before we gain occupancy to pre-pandemic levels, we managed to lift total occupancy with more than 1 percentage point during the quarter. We see customer inflow increasing, while opening pace is slightly decreasing the coming period. Positive sales trend is expected to continue into Q4, and we expect occupancy to continue to increase going forward. Demand for nursing on beds in Finland remains in a healthy level. However, we've not been able to translate this into higher occupancy during this summer as we had challenges to find substitutes for staff on vacation. Next slide, please. This chart presents the occupancy development of own openings by opening year. We see a flat development versus last quarter in mature units, while occupancy in the more recent vintages are continuously improving. The slightly lower improvement rate in the third quarter is explained by the summer effect in Finland this year. Slide 9, please. This chart presents in the group level, net sales and margins divided into mature units and start-up units. As we can see from the upper chart, the margin increased for the second consecutive quarter. This is a consequence of the gradual improvement in Finland and due to the fact that the Scandinavian business area improved margins during the third quarter. Please also note that the development of sales in the lower chart. We're now growing top line again on a rolling 12-month basis. The LTM figures in the past quarters were impacted by the divestment of the Norwegian operation as well as the lower customer inflow during the pandemic. 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 Page 10. Net sales increased to SEK 3.3 billion, up by 9% compared to the corresponding quarter last year. The organic growth for the quarter was 5.6%. In Finland, we continue to see growth across all service offerings. Also Scandinavia now shows organic growth, primarily driven by improved lower rates in our elderly care homes following the pandemic. Lease adjusted EBITDA amounted to SEK 208 million, up from SEK 162 million last year. The negative net effect from corona are estimated around SEK 25 million this quarter compared to negative SEK 40 million last year. The improvement comes from both Scandinavia and Finland. The IFRS 16 effect on reported EBITDA increased somewhat driven by new openings. Financial net was negative SEK 171 million compared to negative SEK 166 million in the third quarter of 2020. IFRS 16 related interest expenses increased by SEK 8 million, while interest expenses for our borrowing from banks decreased by SEK 5 million. Income tax for the quarter was SEK 40 million in the quarter. The adjusted earnings per share for the quarter was SEK 0.83, up from SEK 0.64 last year. Next slide, please. The Scandinavian business area continues to be clearly impacted by corona, although with a positive development. Net sales for the business area increased by 8%, the strongest quarter growth in Scandinavia for a long time. The divested Norwegian operations are no longer in the comparison on quarter. Further, [ we have ] during the year put a lot of focus on our processes to attract new customers, for example, by more online marketing. This, together with an overall increase in market demand has resulted in improved customer inflow. During the quarter, occupancy increased by more than 1 percentage point to 78%, a positive development, although still on a historically low level. Acquisitions has also contributed to growth. Lease adjusted EBITDA increased from SEK 118 million to SEK 158 million. The smaller negative corona effect this year, more customers in our nursing homes and improved results in our home care price overall improvement, somewhat offset by [ cost per ] units started in 2020 and 2021. In operations, we have continued to discuss and share experience from the pandemic in order to improve our routines and our own ways of working. Looking ahead, well, I should note that we do not expect any more state reimbursements related to extra corona related costs in 2020. And also that the general subsidies were increased, cost for sick leave directed to all employers in Sweden was ended last of September. We still have a higher than normal sick leave rate, at least partly driven by the recommendation to stay at home also to very mild symptoms, and we expect this to drive some extra cost in the fourth quarter. We also have 3 new outsourcing contracts starting in the fourth quarter. Please also note that in the fourth quarter last year, we received SEK 40 million in extra reimbursements for costs that have incurred earnings in last year. Next slide, please. Growth continues to be higher for Attendo Finland and amounts to 11% reported and 13% in local currency. The growth primarily comes from more occupied beds, acquisitions and price increases. Price increases amount to more than 3%. Lease adjusted EBITDA improved from SEK 59 million to SEK 66 million. Price increases and improved occupancy was partially offset by high cost in operations, largely due to the implementation of the new staffing laws. This increase is in line with the collective agreements to date in July and September. And during the summer, we also experienced more challenges than normal to recruit summer camps. As a consequence of overall shortage in the labor market, in combination with that, many nurses are working with COVID testing and vaccinations. This resulted in a lower than normal positive sum effect as cost for overtime and rentals have increased with about SEK 20 million. It also had the limiting effect on customer inflow due to the fact that we need to uphold the mandatory staff index. From January next year, the care staffing index in the law for elderly care will increase from 0.55 to 0.60. Most of our units are already at 0.6 or higher, but for material share of our units, the law change means more personnel. As the new law is valid already from January 1, we expect cost to stop increase already in the coming quarter, while new prices are valid only from January. We estimate the extra cost in the coming quarter to be up to SEK 10 million. Price negotiations are not finalized and will continue in the fall. Overall, pipe levels are structurally too low, although the [ before the ] increase of the care staff index. Please also note that in the fourth quarter last year, the net effect of corona was positive by SEK 20 million [indiscernible] Attendo Finland due to received public compensation for earlier periods during the year. Next slide, please. Free cash flow was negative with around SEK 114 million, driven by seasonal effects, although somewhat less negative compared to the same quarter last year. During the quarter, we also reduced our gross debt by about SEK 300 million in order to improve our financing costs. Adjusted net debt amounted to SEK 1.8 billion, which includes an adjusted net debt to adjusted EBITDA ratio of 3.8, a clear improvement to last year and well below our maximum target. With that, I hand back over to you, Martin.

Thank you, Fredrik. Slide 14, please. A few closing words before the Q&A session. Financially, we see an underlying improvement versus last year, driven by the progress we see in Scandinavia. Finland had a relatively smaller improvement versus recent quarter and effects of the situation this summer with competition for staff, from pandemic related health care and salary increases. Although the effects of the pandemic have lasted longer than expected, we are on the right track with key initiatives to reach our financial targets for 2023. We see many exciting solutions for the future that can increase quality and well-being for the customers, provide access to care for more people and help local authorities to deliver on their obligations to their citizens. At Attendo, we've been pioneers in developing the care industry for over 35 years, and we look forward to continuing to develop new innovative care solutions. Thank you for listening in, and over to you, Andreas.

Thank you. We'll now open up for questions, and please state one question at a time. Operator, please go ahead.

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

First, yes, I'm going to make sure I have the COVID impact last Q4 correct. So was it minus SEK 20 million in Scandinavian, plus SEK 20 million in Finland, the net effect in both regions?

That's correct.

Okay. Great. And then could you repeat what you say about openings, not in 2022, but in 2023, sounds they will remain rather limited in 2023 as well. Is that correct?

That's correct.

Okay. And the figure you gave for 2022, was it 200 beds in Scandinavia and 150 in Finland or was it 200 in total?

Yes.

Okay.

No. 200 in Scandinavia and about 150 in Finland.

That's correct.

Our next question comes from the line of Hans Bostrom from Trinity Delta.

I'd just like to understand what is with the lower bed opening rate, particularly in Scandinavia. I mean what were your original plans? And what actually is happening to the sites that you have been developing, I suppose, for quite some time? That will be quite interesting to understand. And are you sort of keeping these waiting until 2024? Or simply have you just not gone ahead with certain of the sites? And secondly, in terms of vaccination of staff, you make a comment about additional measures being considered to get staff vaccinated. What are those? And what are your rights to demand staff be vaccinated?

Yes. Thank you, Hans. Martin here. So your forecast on regarding opening pace in Scandinavia and Finland. We've had a strategy to return to a more balanced opening pace, mainly in Finland, as we've been opening quite aggressively in Finland between 2016 and '18. So that is something that we started until late '18, while we will start to continue expanding in Scandinavia. And in the start of the pandemic, we reviewed those plans, some of the projects that we have just laid on eyes and postponement and some projects in early phase were canceled. Also the -- and what we see now is that we have had about 800 openings so far during the pandemic anyway. So we have quite a lot to sell. So we are focusing over the next 2 years on regaining occupancy and margins while returning to a more -- so normal opening pace can return to a higher opening pace after 2024 and onwards. And that's the plan. Regarding vaccinations, if you look at our staff, vaccination rates are around in line with society at large, which is something that, of course, we are not satisfied with. So we've been running quite a lot of initiatives over the past couple of quarters intensified during the autumn with information campaigns, possibility to get vaccination during working hours, collaboration with local vaccination centrals and vaccination buses and so forth to try utmost to get all of our staff vaccinated. And that is the work that we continue doing a lot on.

Those are not constraining measures that are possible for you to implement in any way. This is simply an encouragement.

Yes. Legally, we cannot force employees to get vaccinated. What we can do is we can take people out of shifts if they're not vaccinated. But we cannot register to GDPR, and we cannot force vaccinations.

And does the same apply to your home care business? I mean I listened to a program on Swedish radio a couple of weeks ago that talked about, one of the operators, a competitor of yours that effectively had no unvaccinated staff facing clients. I mean is that realistic for you to -- with the size of your operation to do that?

That is, of course, what we strive for. So it's an ongoing work with sharing information and knowledge to our staff. We have a higher vaccination rating on home care staff, but we cannot be satisfied until it's 100%.

[Operator Instructions] And the next question comes from the line of Jakob Lembke from ABG Sundal Collier.

We start off with the margin in Scandinavia. I believe the increase is quite impressive given that the occupancy is down year-over-year. What's the driving force behind that?

Thank you, Jakob. Now but over the -- overall, it's some mix effects also. It's not only -- you cannot only look at occupants. And especially Scandinavia has quite a significant home care business, for example, which is not measured in the occupancy number, how that one is doing. And that has -- while the nursing homes has had a tougher year and then quite a bit of openings, temporarily, the home care then has become more significant in our overall shift on mix on our different business segments within Scandinavia. But then it's more of the same reasons as we discussed for profit improvement, but we have a better customer inflow and so forth.

Okay. And then on the bed closures you mentioned in the quarter, will you continue to close beds? And I presume the beds you're closing are more low-margin units? And do you expect this to drive margin to add?

Yes. Absolutely. And yes, let me just add on the previous question on the margin development. We also have lower the cost, the more of the direct cost for buying protective equipment, although we use a lot of mask and so forth still. The prices on the global market has come down quite a bit. And there's also other more kind of direct cost. We have had -- during the more intense periods, we had a lot of extra personnel to handle the situations in the nursing homes. So that's also improved the margin situation. Then to your other cost about closing beds, but you're definitely correct that when we're reviewing our footprint, the units we want to exit are the ones or has lower margin or even we have some situations where we don't have a good bio mechanism with the public side. So they're actually units are fully empty that we're trying to find other usage of or find to see if there's another external company that can use the facility or other solutions. So we are constantly working with other footprints and look at different internal or external solutions. And then it's a matter of what happens in that local market, what kind of solutions can we agree with in different types of negotiations. It's also very hard to estimate the number of how much closures or exit we will do for certain quarters going forward. But it's a constant work to refine our footprint.

Okay. And my last question is just on the tax in the quarter. Yes, a quite high percentage of the quarterly pretax profit. How should we think about the tax going forward?

Yes, the tax rate becomes very strange when you have -- the taxable result as reported, it's including IFRS 16 and everything, and then we're doing actually negative results in Finland. And then if you have a large part of the group that's doing a negative taxable result, the percentage tax becomes quite -- it becomes quite strange numbers. And then as we stated, the -- that the amount -- the normal positive summer effects we see in both Scandinavia and Finland during the third quarter was lower-than-expected in Finland due to the shortage of staff, and then that the impact still -- our forecast on how the total group tax rate will end up in the end of the year. But if you think in longer term, then we through our turnaround period and we're doing profits in both Scandinavia and Finland also on the tax level, then the tax rate should be reflected of the normal tax rates in Scandinavia and Finland, which has been around 20% in Finland and 21% -- a bit more than 21% in Scandinavia or in Sweden, which is the largest part of Scandinavia.

Our next question is a follow-up question from Hans Bostrom from Trinity Delta.

A couple of questions following up. Regarding the government support in Sweden that you say is dropping off in Q4. And I think you did also talk about some change in the sick leave conversation. Would you mind giving a sense of what the net negative impact of this is on a quarter-on-quarter basis? And secondly, regarding your reduction of debt, do you expect a reduction in your average borrowing cost or average interest rate, I should say, in the coming quarters as a result of that? And given the slower rate of opening, should we also expect that the IFRS 16 impact might also tamper off in the coming quarters?

Yes, that's correct, Hans. We were referring to your last question. If you take your first question about public compensations in -- yes. So we've received public compensation as all companies had in Sweden with the pandemic. That's been around SEK 15 million per quarter in public compensation, reflecting the higher sick leave rate. We do expect sick leave rate to decrease somewhat as we go into a more normal pattern with the employee being sick and paying for the first day of sick leave. But we do expect the sick leave to continue at higher than normal over the winter as we still have the pandemic situation. So now in the third quarter, we had SEK 50 million in that sick leave compensation, as Martin referred to, and then we had an additional SEK 5 million that's related to extra specific corona costs in 2020 that was paid out now in the third quarter. So in total, in Sweden, they have SEK 20 million of public or state reimbursement. And then as Martin said, on the interest rate costs, we have been working with our cost of borrowing from banks, and that impacted both of the amount of debt we have. But then, of course, our leverage level impacts the interest margins we're paying. And as I referred to, to reduce the borrowing -- the cost for borrowing from banks this quarter by SEK 5 million. And as we pay down debt a bit additional during the quarter, we will continue to see positive impact on that part of our interest costs. And IFRS 16 related interest cost has been increasing sequentially since we started reporting that, driven then by the opening pace. With the lower opening pace, that will start to flatten out. So you're totally correct, Hans.

Okay. Great. Finally. And my final question relating to the catering contract that you mentioned, I think it was SEK 70 million on an annualized basis. Is this a business line that has further growth potential? And what are the margins associated with this business?

We haven't disclosed any margins on the food contract specifically. But yes, we expect this to be somewhat of the growth potential going forward as well. It has some synergies with our existing nursing home business in Finland. We do produce quite a lot of food for our care homes in Finland. And with also larger production kitchen, yes, we also get some synergies in the overall food production for home care operation. So that's only good as a stand-alone business.

Our next question is a follow-up from Kristofer Liljeberg from Carnegie.

Just another clarification. When you talk about the public compensation, SEK 20 million this quarter, then when you highlight the negative impact from COVID, I think it was minus SEK 25 million this quarter, just to make sure that's a net effect or they're having received that public compensation, right?

Correct.

Unless we have no more questions registered, I hand back to our speakers.

Okay. Thank you very much. We will now conclude this conference call. And if you have any further questions, please feel free to contact us directly afterwards. Thank you for your participation.