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 fourth quarter of 2021. My name is Andreas Koch, I'm Communication IR Director at Attendo. Today's presentation is hosted by Attendo's CEO, Martin Tiveus, and our CFO, Fredrik Lagercrantz. After the presentation, we will open up for questions from investors and analysts. And if there are media request, we'll take them separately after the call. By that, over to you, Martin.

Thank you, Andreas, and good morning, everyone. Before we start the presentation, I'd like to give you a short update on the COVID situation. During the past year, competitive vaccination programs among [indiscernible] in combination with the normal protective measurements in our operations, has proven effective to protect our elderly from the pandemic. So last spring, we had only a limited number of cases of infection and very few clients have experienced the variant. The first transmission of Omicron since mid-December helping up the high-ticket numbers among our staff with the strict quarantine regulations in our market, but in terms of sickness among our caretakers, things have still been fairly calm, since very few cases were in us. I'll now turn to the presentation, and then Fredrik will take you through numbers in more detail. Next slide, please. Adjusted for currency, we reported 10% top line growth year-over-year, driven by strong organic growth in both business areas as well as from acquisitions. During the quarter, we finalized renegotiations on selected framework agreement in Finland for 2022. We achieved around 12% average price adjustments translating to around 5% increase in total net sales in Finland. Our focus in Finland is to further increase occupancy while continuing to renegotiate our payer agreements to get compensation both for past and upcoming higher staffing requirements. In Scandinavia, sales were stable throughout the quarter, and we have started the long journey back towards healthy occupancy levels. The first transmission of Omicron since mid Q4 has led to record high sickening numbers in all our markets. is let higher personnel costs during the quarter, especially in Finland, where there is no state reimbursement for sick leave costs, particularly replacing is costly. At current levels, we expect a negative effect on profits of approximately SEK 15 million to SEK 20 million per month in Attendo Finland. We expect to remain at this level until end of February, and we expect Omicron transmission to gradually subside. Next slide, please. We reported top line growth in the quarter of 10% year-on-year. Organic growth amounted to 5% mainly due to price in Finland more or so [indiscernible] in both Finland and Scandinavia. Lease adjusted EBITDA amounted to SEK 65 million, corresponding to 2%. Overall occupancy improved slightly during the quarter, in spite that we have opened around 100 beds in the quarter, bringing total capacity up to over 21,000 beds. This chart shows the opening per quarter and rolling 12 months opening base. Prior to 2020, we had a strong pipeline of new projects to meet expected demand for new nursing homes in Scandinavia. So the start of the pandemic in Q2 2020, we have opened around 1,000 new beds. We do expect this to be successful over time, even though the hamper demand elderly care during the fanatic has had a clear impact on the fill up pace. In the initial phase of the COVID pandemic we adjusted our expansion plans. We now plan to open around 400 beds in 2022, equally split between Scandinavia and Finland. In line with our strategy, our current focus up to 2023 is to improve occupancy and margins and 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 [indiscernible]. Next slide, please. In the upper chart, we present a number of beds from operations. We increased number of beds in operation by 4% from the corresponding period last year. During Q4, number of beds from operation was up at around 460 beds versus Q3. In line with our strategy, we continue to reduce number of new projects. And by the end of Q4, we had around 400 owned beds under construction, a reduction of close to 60% from 2020. Slide 16. Current occupancy development. In spite of new openings, we managed to lift total occupancy with more than 1 percentage point during the quarter. In Scandinavia, we have lost more than 10 percentage points in total occupancy since the start of pandemic. In the past two quarters, we have seen a demand and sales in nursing operations increasing again, and we expect positive sales in occupancy trends to continue in 2022. In Finland, demand for nursing home beds remains on a healthy level. During the quarter, we have struggled to translate this into higher occupancy as we have had challenges to find substitutes for staff on sick leave. As Omicron subsides, we expect to see the situation gradually normalize. Next slide, please. This chart presents the occupancy development of an opening for the opening year. We see a slight positive development versus last quarter in mature units, while occupancy in the more recent vintages are clearly continuously improving. Over time, we target a mature occupancy of at least 90% in all vintages. Slide 18. This chart presents on a group level, net sales and margins divided into mature units and start-up units. Please note that the development of net sales in the lower chart, which was -- we continue to grow our top line on a rolling 12-month basis. As you can see from the upper chart, the margin decreased slightly in the fourth quarter. This is mainly a consequence of ended government reimbursement for support related to corona, while corona related costs in Q4 still being high. 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 9. 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 5.4%. In Finland, we continue to see growth across all service offerings. Also Scandinavia shows organic growth, primarily driven by improved new win rates in our elderly care homes following the pandemic. Lease adjusted EBITDA amounted to DKK 65 million, down from SEK 87 million last year. The negative net effect from corona estimated to around SEK 40 million this quarter compared to net 0 in the comparison quarter. In the comparison quarter, the negative corona effects were offset by public retroactive subsidies of more than SEK 50 million. Underlying operating profit increased in both Finland and Scandinavia. The IFRS 16 effect on reported EBITDA increased somewhat driven by new openings. Financial net was negative SEK 159 million compared to negative SEK 164 million in the fourth quarter of 2020. IFRS 16 related interest expenses increased by SEK 4 million when the interest expenses for our borrowing from banks decreased by SEK 7 million. Income tax for the quarter was negative SEK 8 million. The adjusted earnings per share for the quarter was SEK 0.1, down from SEK 0.31 last year. Next slide, please. The Scandinavia business here continues to attract more and more customers, although average occupancy is still below historic levels. Net sales for the business area increased by 7%, the strong growth is to a large extent driven by more customers in nursing homes for elderly people. As Martin mentioned, our new units opened over the last 2 years have successfully attracted customers. We have also seen an overall increase in market demand. Further, during the quarter, taking our responsibility for 4 new outsourcing contracts. In the quarter, occupancy increased by more than 1 percentage point to 80%. Acquisitions have also contributed to growth. Lease adjusted EBITDA decreased from SEK 112 million to SEK 105 million. Adjusted for differences between the years in corona support, profits are up despite the pressure from units opened in 2020 and 2021. By the end of the quarter, sick leave numbers rose sharply with Omicron wave. The related direct costs are well covered by state subsidies in Sweden. Replacement staff is however more expensive as is to pay overtime rates for utilized rental staff, hence, cost levels increased somewhat. In pending processes during the quarter, Attendo won one contract and lost two contracts with the future annual net impact on sales of negative SEK 86 million. Looking ahead, I want to note that in the first quarter of 2021, which is the retroactive corona subsidies of SEK 36 million, as we also reported a cost of SEK 20 million related to court case. Although direct costs for sick leaves are covered by the [ Finnish ] state, we expect some additional indirect costs and lost revenues as long as the normal high percentage of absent staff remains. Unit started during 2021 with close to 600 beds and then another 150 beds in the beginning of 2022 will have a negative impact on the results, while we expect the continued positive customer inflow. Next slide, please. Growth continues to be high for Attendo Finland and amounts to 10% reported and 12% in local currency. The growth primarily accounts for more occupied beds, acquisitions and price increases. Price increases have been valid since the beginning of 2021 and amount to more than 3%. Occupancy increased from 85% in the third quarter of 2021 to 86% as Attendo unable to exit some empty capacity. Our ability to welcome new customers is constrained due to shortage of staff. Lease adjusted EBITDA decreased from negative SEK 50 million to negative SEK 24 million. Negative corona effects, in particular, high sick leave costs, impacted operating profit in the quarter negatively with an estimated SEK 10 million. In comparison, the net effect in the fourth quarter of 2020 from corona was positive by SEK 20 million due to retroactive public support. Adjusted for differences in corona effects, lease adjusted EBITDA increase. Price increases and improved occupancy was partially offset by higher cost of operations from higher staffing costs. Staffing cost increased due to several reasons. Overall, the Finnish labor market for nurses is constrained. New staffing requirements were put in place from 2021, and they have also stepped up to some extent, ahead of the second increase in staff index that took place now in January 2022. Lastly sick leave numbers rose sharply by the end of the quarter. In Finland, there's no public support to cover for the cost increases related to high sick leave. The currency levels, we estimate the cost impact of SEK 15 million to SEK 20 million per month. From January 2022, the care staff index in the Nordics for elderly care increased from [ 0.55 to 0.60 ]. Most of our units are already at 0.6 or higher, but for a material share of our units, the law change means more personnel. We estimate that the combination of new staff index, salary increases and other cost increases will lead to an overall cost level increase of more than 4% in 2022. In comparison, we estimate the total pricing effect of ad revenue for the business layer to be around 5%. For majority of contracts, price adjustments follow an index logic, while for [indiscernible] contracts, appropriate tender was conducted. On the [ renegotiated ] contracts do have a 12% price increase. We decided the increase of staff index from 0.6 to 0.7 planned for April 2023 will impact virtually all elderly care homes, which means that almost all prices need to be renegotiated. Next slide, please. Free cash flow was positive by SEK 153 million in the quarter and SEK 249 million for the full year 2021. Adjusted net debt amounted to SEK 1.6 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 2.6%. Looking strictly to our financial situation, there would be room for dividend for 2021. However, given the fact that 2021 was a challenging year for Attendo and characterized by COVID pandemic, the Board of Directors has proposed to the annual Annual Meeting that no dividend should be distributed for the 2021 fiscal year. With that, I hand back over to you Martin.

Thank you, Fredrik. Slide 14, please. In the beginning of last year, we presented new financial targets for 2023. I'd like to start with a quick update given that we're now 1 year in. Our mid-term profit target is adjusted EPS of at least SEK 4 by 2023, calculated according to IFRS 17 accounting standard. Our dividend policy is to distribute 30% of the company's adjusted net profit, and our capital structure target is based on financial stability and the capacity to execute long-term decisions and our target is to be below [ SEK 3.75 ], measured as adjusted net debt in relation to EBITDA. As many of you have commented, if we achieved EPS target, the leverage will go down rapidly. And this could open up for further M&A opportunities as well as higher capital distribution to shareholders as we start to see more progress in the term loan. Next slide, please. To deliver on our financial targets for 2023, we needed improvement in a number of areas, the first area of improvement is a turnaround program in Finland. With the return to a balanced opening phase, several price adjustments and increased focus on sales and quality, we expect both occupancy and margins in Finland to increase over the coming years. During 2021, we have gradually been able to increase occupancy in Finland. And during the fourth quarter, we closed the price negotiations for the coming year. We make good progress going into 2022. The prices are still structurally to grow in many regions, given the new regulations. Hence, price negotiations in the second half of this year will be critical for us and the whole industry to get compensated for the last step of the SOTE reform taking place in 2023. The second area of improvement, which we recover from the pandemic period in Scandinavia, but we have experienced a due demand while having had a record high number of openings. The result is a historically low occupancy level in emerging on business in Sweden. So last summer, we've seen a normalization of customer inflows on nursing homes and expect positive occupancy trend to continue. 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 on 2024 onwards with the coming elderly [indiscernible]. Next slide, please. Adjusted earnings per share increased from SEK 1.43 in 2020 to SEK 1.48 in 2021, a slight improvement, driven by the initial turnaround in Attendo Finland. Attendo Scandinavia's profits continue to be pressured by low occupancy following the pandemic. During both 2020 and '21, our result has been heavily pressured by the pandemic. Looking ahead, we're still on a road to reach a SEK 4 per share target for '23. While '21 was more impacted by the corona situation than we anticipated when the target was set. The profitability improvement will come from several factors. Firstly, we will continue to grow within existing capacity. There are more than 3,000 beds to sell, and we also expect to grow in Home Care, both organically and through smaller acquisitions. Secondly, prices for elderly care in Norsemont, Finland not come up. Overall, current average prices in the sector does not reflect the cost development over the last years. It's also clear from official data that prices to private providers are 20% to 30% below the production cost of public sector. On average, prices for Attendo will increase by more than 5% for 2022. An important step for 2023 with the new staff index increasing to 0.7, impacting all nursing as prices need to be revised substantially through our contracts. Thirdly, with corona, hopefully behind us and a lower opening pace going forward, we believe average occupancy in Sweden can increase materially, as costs -- for examples are fixed or semi-fixed, like property costs for night staff, this relate to improved efficiency and margins. All things equal, our leverage situation would improve the expected improvements in profitability. This additional capacity will be used either for increased M&A activity or adjustments to the capital structure. So with the worst of corona hopefully behind us, we believe that we are on track to reach the SEK 4 per share target for 2022. A few closing words before the Q&A session. Financially, we've been through a tough quarter, mainly due to the impact of Omicron with the following record high sick leave numbers. This is something that also will have a clear negative impact in Q1. On a positive note, we have achieved anticipated price increases in Finland for 2022. We have a positive move in phase to nursing homes, and we expect this trend to continue. This, in combination with the lower number of openings, will result in continued positive occupancy development in 2022. Although the effects of the pandemic have lasted longer than we expected, we believe we are on track to reach our financial targets for 2023. Thank you for listening, and over to you, Andreas.

Thank you, Martin. We will now open up for questions. And operator, please go ahead.

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

I have two questions. First, I wonder about the negative effect of pandemic of SEK 40 million in the quarter. Is it possible to quantify how much of that was sick leave cost? I think you mentioned SEK 10 million in Finland about what the split is from sick leave costs and the lower occupancy in Scandinavia? And my second question is related to the EPS target in 2023. Of course, it will be fantastic if we were able to reach that. But how much of price increases would you need to do in Finland in 2023 to be able to reach that? Is that possible to say?

So if you take the corona effect of around SEK 40 million, and as you said, I mentioned the SEK 10 million for sick leave. It was only, Omicron hit us in December, then roughly half of the SEK 40 million is due to lower occupancy in Sweden. So it's negative absorption effect of running on a lower occupancy than we would like to see. And then there is roughly SEK 10 million left, which is the cost for extended uses of protective gear.

So you have no sick leave costs in Sweden or Scandinavia?

There is some. But as you know, there are some subsidies -- public subsidies in place that covers the direct costs. But I mentioned, getting a replacement, the person that needs to be there instead of the person sick is often more expensive. But for December, it's not -- it came late. It's not material for the quarter. It will have some effect in the first quarter probably because it also -- for example, in Home Care, impacts also our ability to do all the carrying care instances as we should do or as we could, according to schedule, and a peak in sick leave has some revenue effect and some cost effect. But for the fourth quarter, that's not material in Sweden.

Could I ask you about the quarantine rules in Finland? I guess in Sweden now all those regulations have been stopped, I guess, sick leave should come down quite rapidly. What's the situation in Finland?

We expect sick leave to subside in Finland as well during the course of the first quarter of transmission Omicron also subside. Going to your second question there, Kristofer, Martin here. On EPS target 2023 and what we expect or need to expect from Finland in terms of price increases for this year. That was the question, right?

Yes. What we need to do -- yes, for 2023.

Yes. Part of that is related to the increase in staffing-index regulation that comes in place in 2023 where staffing index requirement goes up from [ 0.6 to 0.7 ] on care staff which is not all of staff, but it's majority of that. Given that rate and the fact that staff cost is around 70% of all cost that could give you a fairly good idea on what is needed to cover to get the increasing requirements. Then, of course, we would like to get -- we are targeting a somewhat higher number given that we also believe that there is a catch to be made and the fact that public sector production costs is so much higher than the current prices in Finland.

And what's your impression about willingness among the payers to increase prices? You were more successful in -- now in 2022 than in 2021. So I guess that's a positive thing now. But do you feel that they are prepared to give you this?

Yes. The thing that you answered yourself, going into 2022 on the devotion that we had during the past 1 to 2 quarters, we are -- we have got in the pricing isn't that what we wanted to be for 2022. And I think the 12% increase shows that there is a willingness to pay up, Attendo's not alone in this process. That all the private players, all the non-profit players, they all need to get price increases based on both the increasing staffing requirements in Finland, but also just even the fact that prices have been structurally a bit too low. So I think with the 12% increases that we achieved, we're not an outlier. I think that shows that the recent understanding along in public sector, that prices are going to go up.

Okay. But for you to reach the EPS target, do you only need to increase prices to coup with a higher cost? Or do you need extra compensation above that?

We need some extra compensation above that.

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

I had a couple of questions, please. Would you mind repeating the net impact from your onshore business. So I think that was a figure of SEK 86 million, and I think it had negative. But then at the same time, you did mention about 4 units for [indiscernible] in the quarter, which sounded quite [ positive ] and the second question I had relates to just the negative impact from protective equipment. My understanding was that the cost of protective equipment was actually coming down quite considerably and there have been suggestions that actually costs are below what they were even in 2019. So I'm slightly confused by that.

So I mentioned two different things. One is that we, in the quarter, started or took over responsibility for four new outsourcing contracts. And those have, of course, been won earlier often. There's a 12- to 9-month lead time between the decision and actually take over. So that's the four contracts that we cannot go over this quarter. But then I also mentioned that during the quarter in tendering processes, we have lost two contracts and won another contract and the net annual impact of that combined is a future negative effect of SEK 86 million, SEK 86 million on revenue.

And would you be able to give an estimate of what the impact from these four gain contracts would be in the long term?

I don't have that in front of me. I need to come back on that. And then your second question was around...

Protective equipment.

Protective equipment. It's correct that prices have come down since the peak in our peak levels. But usage. So how much we use is still quite a bit higher or significantly higher than pre-pandemic times, especially now when Omicron started to come in with higher -- with more disease or transmission in the society. So it's much higher volume of consumption of protective gears still than what we used to see pre-pandemic times.

So would you agree with the suggestion that prices per unit are below what they were in 2019? Or is that not something that ties in with what you see?

No, not -- I wouldn't say it's below what it was pre-pandemic, but it has come down a lot since the peak levels during 2020.

Okay. And on a wider note, if I may, I'm sure you haven't had net escaped you what's happened to your big PR in France or PR regarding there. The reporting of abuse in units, et cetera, which is obviously an pandemic risk in the sector and I also have been reading about some disgruntlement with customers in Gotland and in [ Enköping ] in the last few months. I'm just wondering what type of additional measures Attendo might be putting in place in order to avert any type of, should we say, wider reputational risk for the business that obviously can have a very negative impact, overall. If you have any further thoughts on that?

Martin here. Yes, of course, I mean I think that illustrates the importance in this line of business to have a clear focus on quality, but also on building and fostering a culture of transparency and reporting internally. Now that is something that we have worked hard with the course of the past year to strengthen, and we're continuing to doing that to strengthen both in terms of internal audits about quarter reporting and constantly working with educating and training staff on transparency and reporting.

And have there been any changes to how the group is, should I say, monitored by the Board in this regard in terms of management monitoring? You said in some of the suggested savings in the [indiscernible] case, but I'm just curious what might have changed Attendo last year?

We are -- I mean, what changed over the past year Attendo is we are strengthening our work on culture and values. We are strengthening our quality -- work in terms of quality monitoring. And we're also monitoring units on a number of different quality-related KPIs more closely.

[Operator Instructions] The next question comes from the line of Jakob Lembke from ABG.

My first question is on Finland. And just to understand if I heard you correctly, do you expect a limited customer inflow in Finland during the year? And on that, the cost increase that you guided for, is that assuming a sort of muted customer inflow?

No, you did not hear us correctly. We do not expect a muted or limited customer inflow to Finland this year. We're expecting a somewhat more limited inflow. We had a more limited inflow in Q4, [ '19 ] in Q1 as well, given the demand of sick leave based on the back of Omicron in Finland as we need staff to accept new clients.

Just to clarify on the more than 4% cost level increase, that's kind of -- as mentioned, at the cost level, it's not taking account volume effects in terms of customers and new nursing homes is kind of on a comparable volume, the cost is going up a little bit more than 4%.

Okay. And then just on the sort of price renegotiations. You mentioned that you still think that prices are structurally too low. So these contracts that you have increased prices with 12% now in this round. How much more do you sort of -- how much more do you want to increase the next time around to reach a more fair price level?

Well I think as we stated just earlier on, for what we're doing now is preparing for the negotiations for new prices coming into 2023, where staff requirements will go up even further to 0.7. So of course, that will have mathematically an impact on the pricings that we expect. But looking overall in the market, that will raise cost of operation for everyone, both private and public sectors within about 12 month. And public sector production cost is still 20% to 30% higher from the prices that private player gets. So there is an imbalance in the market. So we believe that we should be able to start closing some of that gap over the next couple of years on top of sort of what's required to cover for the regulation change.

Okay. And my final question is just on the sort of Board not proposing a dividend and your capital structure, your leverage levels are decreasing. Are you open to buybacks ahead?

Yes, that's definitely in our discussions of-course as Martin mentioned here. When the profitability increases over time, leverage would go down and that capacity will be used in some way or another, either we find good investments in M&A opportunities or adjusted capital structure, for example, of dividends to make sure that they have a leverage that is value creating for the shareholders.

Or buybacks. Yes.

[Operator Instructions] There currently no further questions. I hand the conference back to you speakers.

Okay. Thank you. Well, we'll now conclude this conference call. And please don't hesitate to contact us directly if you have any further questions. Thank you for your participation.