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

Good morning, everyone, and welcome to this conference call. We will present Attendo's Result for the Third Quarter. My name is Andreas Koch, I'm Communication and Investor Relations Officer at Attendo. Today's presentation is hosted by our CEO, Martin Tiveus; and our CFO, Fred Lagercrantz. After the presentation, we will open up for questions from investors and analysts, and we'll take media requests separately. So by that, over to you, Martin.

Thank you, Andreas, and good morning, everyone. In line with last quarter, we'll put most attention on Finland due to the [ fact of business ] market where we have the largest [ screen factor ] for profitability in the coming year. We'll also highlight the cost inflation and other factors that are influencing our performance short term. I'll start by giving you an update of the overall development and direction of Attendo in the quarter, and Fredrik will then take you through the numbers in more detail. Page 2, please. We had a strong moving rate to nursing homes in Sweden and towards the end of the quarter, also in Finland. Sales in Scandinavia continued to be strong in Q3, and we've been able to increase occupancy with 3 percentage points to 85% in total. At current pace, we are on track to get back to prepandemic occupancy levels during 2023. Reported profits in Scandinavia are slightly lower versus same period last year. Improvement in own operated nursing homes were offset by high personnel-related costs as well as overall cost inflation. We are working actively to manage the impact of inflation through efficiency and through negotiations with local authorities and compensations. Profits in Finland declined SEK 29 million year-over-year due to higher personnel-related costs, such as cost to overtime, recruitments and sick leave. Also the overall inflation had a significant impact. Short-term, we expect the challenges in Finland to remain. The main factor to regain profitability is to renegotiate all care agreements effective from April 2023 and onwards. And the next step in the staffing reform will do. Negotiations came to a whole during the third quarter as the Finnish government announced that they were planning an amendment to the law due to the extensive imbalances of the labor market in Finland. The proposed amendment implies that the shift from 0.6 to 0.7 would instead happen in 2 steps to 0.65 from April 1 and to 0.7 from December 1, hence, allowing for a smoother transition. Now that the revised proposal has been announced, the work to renegotiate the remaining part of the agreement has resumed with target prices were also 0.65. In the end of September, we terminated most of the [ non-yet ] renegotiated care contracts to ensure that all nursing home contracts in Finland will be renegotiated prior to April 1 next year. Our assessment is that there now is an understanding among local authorities for how the regulation has impacted the cost level, both historically and with what is ahead of us. So far, negotiated contracts for the new staffing law mean an average price adjustment of around 30% to be compared with an estimated cost increase of around 20%. We have not changed our outlook for the negotiations from last quarter, and we assess that the majority of contracts will be renegotiated by the turn of the year and will apply from maybe first next year. Next slide, please. We achieved organic growth of 7% in the quarter, mainly due to more sold beds in Scandinavia and the higher prices in Finland going into the year. Lease adjusted EBITDA amounted to SEK 171 million, SEK 37 million lower versus the corresponding period last year. And overall occupancy, as I commented just recently increased 1 percentage point to 85%, driven wholly by an increase in Scandinavia, while occupancy in Finland remained unchanged versus Q2. Next slide, please. One important aspect of our quality improvement work is to get external benchmarks. During the quarter, we received the data from an extensive survey collected by the National Board of Health and Welfare in Sweden. This survey is aimed at stimulating knowledge and operational development, primarily at the local level. Precise routines are the foundation of systematic care work. This year's unit survey shows at Attendo an average has a clearly higher percentage of existing routines in our nursing homes, service housing and home care compared to national average. The survey also shows that Attendo's nursing homes provide better opportunities for activities, outdoor visits, housing adoptions, et cetera, compared to the national average. Next slide, please. This chart shows the openings per quarter and rolling 12-month opening [ base ]. Prior to 2020, we had a strong pipeline of new projects to meet expected demand for new nursing homes in Scandinavia. The plan has started the pandemic in 2020, we opened more than 1,000 new beds in Scandinavia. In the initial phase of the pandemic, we adjusted and lowered our expansion plans with effects from 2022, which is clearly visible in the chart. During the first 9 months of this year, we have opened around 300 beds. For the remaining part, we plan only to open a few expansions to existing units. In line with our strategy, our current focus is to improve occupancy and margins and current footprint rather than seeking new expansion. In terms of new projects, we had 224 owned beds under construction by end of Q3. Beyond 2024, we expect to return to a phase of higher number of openings on the back of the upcoming [indiscernible]. Slide 6, please. The top chart presents sales on a trailing 12-month basis on group level as well as for the business area. And consider the trend is positive. We still have ample opportunity to grow through occupying empty beds in current operations. The lower chart displays a trailing 12-month lease adjusted EBITDA margin. The past 2 years, the reported development is heavily impacted by the corona pandemic. Finland is mainly impacted by the higher staffing demand and margins return as we negotiate the contracts are coming into effect from April next year. Scandinavia has improved in the segment of own operations nursing homes recent quarter, but the improvement has been more than offset by high staff-related costs, overall cost inflation and lower contribution from home care. We expect a gradual improvement in coming quarters with higher occupancy, efficiency measures and cost compensation. Slide 7, please. So let's turn to occupancy development. In Scandinavia, we managed to increase total occupancy to 85%. Solid demand, [ incremental ] sales momentum has remained strong during the past quarters. And in our own operated nursing homes, we lifted occupancy from 71% to 82% since year-end. With this pace, we will be back at prepandemic occupancy levels in next year. In Finland, demand for nursing home beds have been on a healthy level, but previous quarters, we haven't been able to translate this into higher occupancy due to lack of stuff. Towards the end of the quarter, the situation has somewhat improved, and we have had a positive inflow to nursing homes in September. Let's take a closer look into the financials for the quarter. Please go ahead, Fredrik.

Thank you, Martin. So let's turn to Page 8. Net sales increased to SEK 3.7 billion, up by 13% compared to the corresponding quarter last year. The organic growth for the quarter was 6.8%. Organic growth was close to 8% for Attendo Scandinavia, driven primarily by more customers in nursing homes. In Attendo Finland, the organic growth was 6%, driven by higher prices. Lease adjusted EBITDA amounted to SEK 171 million, down from SEK 208 million last year. The IFRS 16 effect on reported EBITDA increased somewhat mainly due to onetime effects. Financial net was negative SEK 160 million compared to negative SEK 171 million in the third quarter of 2021. IFRS 16-related interest expenses increased by SEK 4 million, while interest expenses for our borrowing from banks increased by SEK 3 million. Other fees and currency effects had a small positive impact on the financial net compared to negative impact last year. Income tax for the quarter was negative SEK 26 million, corresponding to a tax rate of 21.5%. The adjusted earnings per share for the quarter was SEK 0.80, down somewhat from SEK 0.83 last year. Slide 9, please. The Scandinavian business area continues to attract new customers, resulting in an improved occupancy rate. Net sales for the business area increased by 10%. The strong growth is to a large extent driven by more customers in nursing homes for [ little people ]. Our new units opened over the last 2 years have successfully attracted customers. In the quarter, occupancy increased by 3 percentage points to 85%. Average occupancy is, however, still below historic levels due to many openings over the last 2 years and the pandemic. The positive development during the quarter was partly supported by one empty nursing homes being open for Ukrainian refugees on a short-term contract. Further, during the last quarter of 2021, we did take over responsibility for 4 new outsourcing contracts. Acquisitions has also contributed to growth. These adjusted EBITDA decreased from SEK 158 million to SEK 150 million. There is an improvement from more customers and better occupancy in nursing homes, offset by cost inflation estimated at $10 million and some efficiency issues, especially in home care. IFRS 16 impact on EBIT in the quarter was higher than normal as we have ended some rental contracts. Looking ahead, units started during the last 2 years will continue to have a negative impact on profitability, while we expect a continued positive customer inflow. The balance between startup cost and positive fill-up effects will continue to gradually improve. General cost inflation is estimated to continue to burden the results with at least SEK 10 million next quarter. From January 2023, there will also be a larger rent increase corresponding to roughly SEK 20 million quarterly as most rental contracts are linked to consumer price index. Our current salary agreement is valid until June 2023. The index clause we have in many, but not all contracts with local authorities is balanced over time, but not designed for the [ countrapid ] increase in cost inflation. We are currently in active discussions with municipalities about price advancements -- about price adjustments. We will have more clarity by the end of the year, the municipalities have decided on next year [ start yet ]. Slide 10, please. Growth for Attendo, Finland amounts to 15% reported and 11% in local currency. Acquisitions contributed to 4% growth and organic growth of 6%. Lease adjusted EBITDA decreased from SEK 66 million to SEK 37 million. The negative development is primarily driven by higher personnel costs, other cost inflation as well as somewhat fewer customers, only partially offset by higher prices. Customer inflow was again positive towards the end of the quarter after several weak months. The abnormal cost inflation is estimated to have impacted the quarter with around SEK 50 million. The June acquisition of the Rehab Hospital, [indiscernible] contributed positively to profit development. The significant increase in personnel cost comes from both increased staffing due to new regulations and higher hourly cost due to labor market shortage. As mentioned earlier this year, we have also lost some efficiency in scheduling due to new regulation being more rigid and then flexible. We are working hard to handle the situation with increasing staff costs, but we do not foresee any major improvements in the short term. Instead, the new cost level needs to be absorbed by higher prices in 2023. When discussing and negotiating new prices, we also take into account the high cost inflation impacting both food, consumables, rents and salaries. Some price adjustments will be seen from January 2023, mainly adjusting for last year's inflation, the full price effect will however come in April [ 2023 ]. Please also note that salaries were revised 1st of September, which will show a full effect in the fourth quarter. Slide 11, please. This table shows our cash flow development. The third quarter is due to seasonality effects on working capital, the weakest cash flow quarter for Attendo. Free cash flow was negative by SEK 273 million in the quarter, but positive by SEK 70 million for the last 12 months. Adjusted net debt amounted to SEK 1.9 billion, which equals an adjusted net debt to adjusted EBITDA ratio of [ 4.1% ]. Both our net debt and our leverage ratio is impacted negatively by the Swedish currency decreasing in value. The leverage is temporarily somewhat above our long-term financial target, but in line with our financing agreement. We don't expect leverage to increase further and start to decline from the second quarter of 2023. With that, I hand back over to you, Martin.

Thank you, Fredrik. Slide 12, please. A few closing words before the Q&A session. Financially, we are delivering solid growth, but a rather weak result. The Scandinavian business area shows a relatively stable development, while we are still struggling in Finland. Both business areas are impacted by the high inflation. In Scandinavia, underlying performance in nursing homes and own operations is improving, meaning that the higher sales rate will gradually translate into better performance. In Finland, we need to get better contractual terms to make a significant improvement. We look positively to our ability to achieve sustainable conditions in Finland from April next year and onwards. While the negotiation has been halted during the quarter, we now again see good progress in the negotiations and a better understanding from the local authorities of the need to compensate all providers for the gradually higher staff and demand. In contrast to many other industries, we could say with high probability that we look forward to many years with increasing structural demand. We're also confident that we have the capabilities to deliver better care to more people and be a preferred partner for local authorities and an appreciated provider for the customers. Thank you for listening, and over to you, Andreas.

Sure. Thank you. We'll now open up for question. But please remember to state 1 question at a time. Operator, please go ahead.

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

My question relates to Scandinavia price increases and the inflation. So just based on the current indication you have in the contracts, how much will prices go up in Scandinavia for 2023? And also, could you maybe give some more details about the negotiations you're having also with municipalities? Is this all of them? And can you say anything about the feedback and why they would agree to increase prices more than current contracts?

Kristofer, the index that we follow in the contracts where we have indexation, it's called [ OPI ], and that has not been set yet. It's based on -- to a smaller extent on consumer price index and that we know roughly where we'll end up. But the large extent is on salary development. There will be preliminary numbers set in December, but then the actual number will be set later on in 2023 when we know the outcome of the collective labor agreement negotiations. And that's for the part where we have that indexation clause in place. For the other parts, there are different mechanisms on how prices are updated. But I think there's generally a very good understanding about municipalities what's happening in the external world of how costs are increasing. And they also understand that if costs are increasing and they're not adjusting the prices they pay for us, that will have an impact on how we can perform the care operated. And it's in their interest to make there's good quality care performed in the nursing homes or other care operations that we do in their municipalities. And just the last comment on that topic is also that the municipalities are currently working with their own budgets, and they don't have all the condition -- they don't know yet what to expect from the state budget. So it is a multistep process that we're engaging very actively. And of course, we are targeting the municipalities where we have the largest operations and also those that there isn't a very clearly defined index clause.

Now based on what you know now, do you think you will get more or less full compensation for inflation next year in Scandinavia?

I think it's too early to say, to be quite honest. We will not get the results before late in Q4 due to the budget processes in the [ allace ].

Over time, it has been a good balance between cost development and how prices are adjusted. But neither the index clause or the other mechanisms have really been designed for the external environment we see right now with very, very high inflation rate and but it also increased rapidly during 2022. So there is a clear risk of a lag in terms of the 2023 year specifically.

The next question comes from the line of Jakob Lembke with SEB.

My first question is on the Scandinavia. And just looking into 2023, it looks like you're going to be in the high 80s in terms of occupancy and would you expecting to offset cost inflation, what are the factors that could lead to sort of lease adjusted EBITDA not being around the 8.5% that we have seen before?

Not going to comment exactly on the market development. So what drives margin, of course, is -- I mean, occupancy development is key. And we're coming from a pressured occupancy level after the pandemic and high opening pace during the pandemic as well. And we are currently very satisfied of the sales pace that we've had during the past year that we expect to continue. So of course, occupancy growth in own operated nursing loans, that will be the strongest driver for EBITDA development next year in combination with -- that we also will just gradually back on track on home care development as well and that we hope that sick leave numbers will also eventually subside to more normalized level. We still have sick leave numbers almost double what they were pre-pandemic, which is a big cost driver, both in terms of overtime and the shift extras for staff that comes in and people are sick, but also because of lower general efficiency, both in home care and in other segments due to the consequence of sick leave. So these are some of the main drivers of margin development in Scandinavia.

Okay. And my next question is a follow-up on the price adjustment in Scandinavia. Can you say what proportion of your contracts are covered by the OPI index adjustment class?

Slightly less than half of them have clearing the clauses.

Okay. And then on Finland, what proportion of the contracts have you been able to renegotiate at this stage. And with the delay in our -- of the full implementation, do you also foresee a delay of the full price increase in Finland?

Yes. During Q3, I mean we started off Q3 middle of the summer. So the negotiations were nationally halted during the summer when politicians and service [ sovereigns were also summerly ]. Then after the summer, when negotiations were assumed, the government in Finland announced based on the imbalance on the labor market and the effect of that, they are [ thin over ] the summer in Finland to announce a change of -- or potential change of the staffing loan. That meant also that negotiation came to halt under the main part of Q3, awaiting more clarity to really start negotiations. We got that clarity in the end of the quarter where negotiations were resumed again. And of course, that meant that, that I mean we have boxing around 20% of the volume for 0.7 prices. This meant that when we're resuming negotiations, we're, of course, continuing with the 0.7 and there's nothing has changed there, but we also need to add the 0.65 price to this matter. We have started the negotiations for the 0.65 price. What we did in the end of Q3 also to make sure that every contract will be negotiated is that for the contracts that have not yet -- where we have not yet started negotiations, we decided to terminate those contracts, which are 6 months' notice to ensure that we will renegotiate a new price at the latest April next year. Now we believe that we will have concluded majority of negotiations by the end of the year. And by the time of -- when we relate to Q4 report in February, we should have a fairly clear picture of the results of negotiations coming into 2023 in April. We expect a similar margin strengthening at the 0.65 level as we had -- as we did on the 0.7 level. And we have already started to negotiate 0.65, not -- [ have not reached ] 20% yet, but we are beginning to get results here. So we think that, that it looks promising. It's clear to us that municipalities in Finland, they have understood the cost implications of the staffing law. I tend to be acting accordingly. So we are positive about our ability to reach sustainable price levels next year.

Okay. That's very clear. [ It's a ] short follow-up on the -- that you terminated all of the contracts here, do you foresee any lost contracts or lost volumes into next year on the back of this?