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

Welcome to Attendo Q4 Report 2022. [Operator Instructions] Now I will hand the conference over to CEO, Martin Tiveus; and CFO, Fredrik Lagercrantz.

Thank you, and good morning, everyone. In line with the previous quarter, we'll pay most attention to Finland due to the fact that this is the market where we have the largest swing factor for profitability going forward. We'll also highlight the cost inflation and other factors that are influencing our short-term performance. Also, I will give you an update of the overall development and direction of Attendo in the quarter, and then Fredrik will take you through the numbers in more detail. Page 2, please. Operationally as well as financially, we've had a tough second half and end of 2022. It's clear that the complexity and cost of the new elderly care law in Finland has been even more challenging than we anticipated entering 2022, especially given the increasing shortage of qualified labor and the dynamic effect it has had on salary inflation and staff turnover. This autumn and winter, we've seen sick leave rising to similar levels of last year's Omicron peak. But unlike last year, this peak seems more condensed, and we can see sick leave numbers already falling back somewhat in January. The resulting operational staffing challenges have been costly and have together with the high inflation and challenges in Swedish home care had a clear impact on our Q4 results. From a profitability point of view, the fourth quarter was a disappointment. The underlying factors explaining the weak results are the same as we outlined in the Q3 report, but the magnitude has been a bit higher than expected. In both business areas, we suffered from high personnel costs, where high sick leave numbers were a key explanation. Also, the cost inflation continues to impact year over year heavily. While last year's result was a disappointment, we have achieved good progress in a number of areas that makes me much more positive about 2023 and beyond. In Finland, the most important progress is, of course, the pricing of 24/7 elderly care from this year and onwards, but also our huge efforts in managing the staffing situation. We have not only integrated [indiscernible] as part of our recruitment toolbox, but overall, we managed to recruit and onboard several thousands of employees in Finland during the last year, hence managed to deliver on the new staffing requirements and prepare ourselves for the next step of the reform in April 2023. In Scandinavia, the most important achievement is our strong sales momentum in nursing homes, improving occupancy in own operated nursing homes from 72% to 83%, which will help counter the cost/price deficit in Scandinavia in the coming year as we expect to be undercompensated by municipalities for inflation and salary cost this year. In the beginning of 2021, we set the midterm financial target to achieve an adjusted EPS of at least SEK 4 per share for the full year 2023. As we previously mentioned, the challenging staffing situation in Finland affects our estimated timing for when the profit targets will be met. We're also entering 2023 with high inflation-related costs in both business areas. On the positive side, we see good progress in price negotiations in Finland and a favorable occupancy trend in Scandinavia. All in all, we expect to be able to reach our SEK 4 per share with a delay of a few quarters from our original plan. Given last year's weak results, Board proposes no dividend for 2022. Slide 3 please. Turning to the fourth quarter, again. We achieved organic growth of 6% in the quarter, mainly due to more sold beds in Scandinavia and higher prices in Finland from past pricing adjustments. Lease-adjusted EBITA amounted to SEK 8 million, SEK 57 million lower versus the corresponding period last year. And overall occupancy remained at 85% versus last quarter, in spite of positive customer inflow in Scandinavia. Slide 4, please. In 2022, Attendo has continued to work on quality development with the aim to lead our industry to the next level of quality work. The starting point for this has been a reworked and more holistic quality framework that brings in new aspects of quality to guide our daily working routines. Traditionally, quality work in our industry has focused on process quality. This measure puts focus on the existence of routines and guidelines in the day-to-day operation like the KPIs repported in the Swedish [ Unit Survey ] from the National Board of Health and Welfare where Attendo scores higher than the national average in these surveys. More than a decade ago, we started focusing on [ subjective ] measures of customer satisfaction and relative satisfaction such as those measured in the yearly user survey from the National Board of Health and Welfare. Last year, we have moved this work forward by measuring NPS, Net Promoter Score, among customers and relatives on a regular basis. We also set an operational target to have the highest customer satisfaction in all cities where we operate. The new framework also brings a completely new element to our quality work, health outcomes and quality of life. This adds new focus on the actual outcomes and effects of our care efforts for each individual. In Finland, we used the Resident Assessment Instrument, RAI, where we evaluate the resident's individual strengths and support needs according to the defined protocol. This includes KPIs of the quality of life and physical function of our customers. In Sweden, we have introduced a similar method called ASCOT, Adult Social Care Outcomes Toolkit, which measures the improvement provided by our care in 8 different aspects, including social interaction, hygiene, nutrition, and well-being. This way of working is currently piloted in several units and will be broadly introduced starting 2023. For both RAI and ASCOT, these results serve as a basis for individual care plans for our customers, with focus on how to improve their mental and physical health. We believe that the combination of process quality, customer satisfaction, and quality of life will provide us with the most comprehensive way of working with quality and care and will become a part of our care model at Attendo Way. The new framework represents our ambition to provide better care for more people. Slide 5, please. Turning to Finland and the progress of price negotiations. Since the so-called care crisis in Finland in 2019, staffing requirements in the Finnish care system have been increasing. In 2020, a new elderly care law was announced, increasing staffing density requirements gradually from 2021 to 2023, something that has dramatically increased production costs for all providers. Since 2019, private care providers have not been compensated in accordance with the [ sharper ] requirements. This has led to a situation in which compensation from municipalities to private providers is today significantly lower than the municipality's own production cost. The industry organization HALI has collected data from larger municipalities and welfare areas and compared their own production costs with what they pay to private providers. Data available from 2021, as you can see on this slide, shows a huge differences, up to 50%, and on average, around 30%, and this difference is even greater today. Our assessment is that there today is a better understanding among the new welfare areas for how the regulation has impacted the cost level, both historically and with what is ahead of us. Next slide, please. The re-tender and renegotiation processes of contracts for our nursing homes in Finland is ongoing. The staffing requirements for 24/7 nursing home care will increase from 0.6 to 0.65 care workers per resident from April 1. Today, about 1/3 of our contracts have been finalized ahead of the change and according to the 0.65 level. As the amendment to the original staffing law passed parliament on January 25, only a few weeks ago, we expect the remaining volumes to be subject to the tendering process starting in the next few weeks in order to conclude by end of March. The contracts negotiated so far based on the new staffing law entail an average price adjustment of close to 30% compared to the 2022 price level. Please note that the negotiations relate to 24-hour care in nursing homes in care for older people, and this constitutes approximately 50% of the total turnover in Finland. To cover general cost inflation, we have already, from January 1, secured inflation-related price adjustment of close to 10% on total sales in Attendo Finland. Even with these price hikes, private operators will still be given substantially lower compensation compared to the public operations' own production costs. Slide 7, please. This chart shows the openings per quarter and rolling 12-month opening pace. Prior to 2020, we had a strong pipeline of new projects to meet the expected demand for new nursing homes in Scandinavia. During the pandemic, we adjusted and lowered our expansion plans, and during 2022, we opened less than 300 beds. In Q1 this year, we expect to open 170 new nursing home apartments. In terms of new projects, we had 325 own beds under construction by end of Q4. We still have opportunity to grow through occupying empty beds in current operations. Beyond 2024, we expect to return to a phase of higher number of openings again. Slide 8, please. Top chart presents sales on a trailing 12-month basis on a group level as well as for the business areas. Trend is positive, and we expect higher prices to accelerate this trend during the coming year. The lower chart displays trailing 12-month lease adjusted EBITA margin. In the past year, reported development is heavily impacted by the high personnel costs related to high sick leaves that is no longer compensated by state support and inflation. In addition to the above-mentioned factors, Finland has been impacted by higher staffing demand since 2019. We expect margin turnaround in Finland from Q1 this year and onwards as we will receive the first price adjustments. Slide 9, please. Turning to occupancy development in Scandinavia. We have increased net sold beds in Q4. Occupancy did increase but was partly hampered as a short-term contract with the Swedish Migration Office regarding Ukrainian refugees was ended during the quarter. During 2022, we have had solid sales momentum in Scandinavia and attracted around 700 net new customers throughout the year. In our own operated nursing homes, we have lifted occupancy from 72% to 83%. In Finland, we haven't been able to increase occupancy last year due to lack of staff, but towards the end of the year, the situation improved somewhat, and we have had a small positive inflow to nursing homes again. Occupancy remained at 35%. So 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 3.8 billion, up by 14% compared to the corresponding quarter last year. The organic growth for the quarter was 5.7%. Organic growth was 5% for Attendo Scandinavia, driven primarily by more customers in nursing homes. In Attendo Finland, the organic growth was about 6% driven by higher prices. Lease-adjusted EBITA amounted to SEK 8 million, down from SEK 65 million last year. The IFRS 16 effect on reported EBITA increased somewhat partly due to onetime items and currency effects. Financial net was negative SEK 170 million compared to negative SEK 159 million in the fourth quarter of 2021. IFRS 16-related interest expenses increased by SEK 4 million, while interest expenses for our borrowing from banks increased by [ SEK 13 million ]. Other financial fees and currency effects had a positive impact on the comparison. The increased interest expenses on bank loans is mainly a consequence of higher market rates. During the fourth quarter, the average interest cost was close to 4% compared to less than 2% one year ago. Income tax for the quarter was positive SEK 9 million. The adjusted earnings per share for the quarter was negative NOK0.07, down from positive EUR 0.21 last year. Slide 11, please. Net sales for the Attendo Scandinavia business area increased by 7%. The growth is to a large extent driven by more customers in nursing homes for elderly people, partly offset by lower revenue within home care. Lease-adjusted EBITA decreased from SEK 105 million to SEK 80 million. The development is similar to last quarter, with an improvement from more customers and better occupancy in nursing homes, offset by cost inflation, estimated at close to SEK 15 million and efficiency issues, especially in home care. As Martin mentioned, high sick leave is at least partly behind the efficiency problems. Looking ahead, recently started units continued to have a negative impact on profitability in the beginning of 2023, but expected to turn positive later in the year. 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. The current salary agreement is valid until June 2023. We expect the outcome to be close to the industrial benchmark set during the spring. General cost inflation will continue to drive cost, although expected at a diminishing pace. The index clause for revenue-pricing we have in many, but not all contracts, is balanced over time but not designed for the current rapid increase in cost inflation. In the majority of contracts where we do not have index losses, it's clear that municipalities will not adjust prices at the level needed to offset cost inflation. All in all, the consequence is that cost inflation is estimated to be 2 to 3 percentage points higher than price increases. Slide 12, please. Growth for Attendo Finland amounts to 20% reported and then 11% in local currency. Acquisitions contributed with close to 5% growth and organic growth was 6%. Lease-adjusted EBITA decreased from negative SEK 24 million to negative SEK 55 million. The negative development is primarily driven by higher personnel cost, other cost inflation, as well as somewhat fewer customers, only partly offset by higher prices. Net customer inflow was neutral during the quarter. The abnormal cost inflation is estimated to impact the quarter with around SEK 50 million. The June acquisition of the rehab hospital [indiscernible] contributed positively to profit development. Significant increase in personnel costs come from both increased staffing due to new regulations and higher outlay cost due to labor market shortage. As mentioned earlier this year, we have also lost some efficiency in scheduling due to the new regulation being more rigid and inflexible. The new cost level needs to be absorbed by higher prices in 2023. When discussing and negotiating new prices, we also consider the high cost inflation impacting both food, consumables, rents, and salaries. Some more inflation-related price adjustments will be seen from January 2023 in the range of 10%. The additional price effect for elderly care will, however, come in April 2023 in connection to the next step in the staffing law. Slide 13, please. This table shows our cash flow development. Free cash flow was positive by SEK 106 million in the quarter and by SEK 24 million for the last 12 months. Adjusted net debt amounted to SEK 1.9 billion, which equals to an adjusted net debt to adjusted EBITDA ratio of 4.4%. 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 expect leverage to decrease during 2023 as profitability improves. 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're delivering solid growth, but a rather weak result. Both business areas are impacted by high inflation and high personnel costs. The coming quarters will be the most important for our turnaround. To succeed, we must conclude the price adjustments in Finland and continue to drive positive occupancy development in own operated nursing homes in Scandinavia. I'm confident that we have the prerequisites to turn to profitability this year and to achieve our financial targets, although with some delay from the original time plan. In contrast to many industries, we look forward to many years with increasing demand, and we have the capabilities to deliver better care to more people, thereby becoming a preferred partner to local authorities and a highly appreciated provider to the customers. Thank you for listening, and over to you, Andreas.

Thank you, Martin. We will now open up for questions. And please state one question at a time. Operator, please go ahead.

[Operator Instructions] The next question comes from Victor Forssell from Nordea.

A housekeeping question firstly on Scandinavia. If you could comment whether with this occupancy development in own nursing homes of now 83%, that led not only to increased earnings for that isolated subdivision, but also margin improvements here in 2022?

Sorry, I didn't hear the second half of the question. Has it led to improved earnings and...

And margins as well for that subdivision isolated.

Yes.

Yes.

Okay. Perfect. And then now the price/cost imbalance, of course, will be quite negative here in '23, and I appreciate your outlook there. How much, if at all, would you anticipate that the occupancy improvement in Scandinavia can offset parts of this imbalance? Any thoughts here or comments around that, how you see that proceeding?

Yes. If we can continue the occupancy development pace that we had in 2022, during 2023, we believe it's possible to compensate this price/cost deficit with occupancy development.

Is that isolated for own nursing homes or for the whole Scandinavian division?

For the entire Scandinavian division.

Okay.

For the entire Scandinavian division.

So that would mean like flattish margins if that succeeds well?

Yes.

Okay. And moving on to Finland. Just curious to hear your thoughts, obviously, new decisions here in the last couple of weeks. But what is your own certainty, or how do you view the remaining parts of the contracts here that you can get them at this favorable price uplift that you seek? Any data points or any things that happened here in the last week or 2 that strengthens your view in achieving that?

Yes. I think as we mentioned during the call, there was a proposed law amendment -- a law amendment to the staffing law that came last autumn to change the staffing density requirement increase from 0.7 in April 1 to 0.65. It took all the way to January 25 for the parliament to pass that through voting. So, of course, that has paused some of the new tenders coming out. But now the decision is out, and now the tenders are flowing out again to the market. I think to me and to us in our Finnish organization, as I said, about 1/3 of the contracts that we've already negotiated, we have hit around or close to 30% price increases. And we feel confident about that we will achieve the price increases that we need also for the remaining contracts so far. We have nothing that points against it currently.

Okay. Final one before I head back to the queue. That is on your target of SEK 4 in EPS. I understand the qualitative reasons and discussions around how to hit those. But I would guess it would be helpful to have a more also quantitative discussion here as well, especially with Scandinavia having a tougher year ahead and also heightened interest rates, et cetera. Any comments regarding perhaps EBITA margins, interest expectations, et cetera, for you to end at around SEK 4 in 2024?

Yes, I appreciate that you want that, but we're not disclosing any margin forecast, and I'm not going to start that now. But we're trying to guide you fairly well along the way but [indiscernible] that we are, we think it's fully possible for us to reach SEK 4 per share with a few quarters delay, meaning during 2024 given what we see ahead both in Scandinavia and Finland currently.

The next question comes from Albert Moller Broock from ABG Sundal Collier.

So just a clarification and a follow-up on Victor's last question there. In Q2, you formulated the EPS target that it will be somewhat delayed and how you've changed the wording to delayed a few quarters. Should we view this as like a downgrade or something on the guidance?

No. We don't see it as a downgrade. Q2 we just closed quite some time ago. I think we're just a bit more certain today. We're closer to the time period, and we have better visibility on 2023 now than we had in Q2 last year, obviously, because we came further on price negotiations in Finland. We've already secured first 10% from January 1. We have more visibility on Scandinavia. So I think we're just a bit more certain now than we were in Q2.

All right. And another clarification question regarding the price increases in Finland. Are the 10% price increases in addition to the 30% price increases?

No.

They would be included in the 30%.

Yes, they would be included. So the close to 30% that we have achieved so far, that relates to about half the turnover in Finland, which is a 24/7 elderly care. The 10% that we have secured already from January 1 is on the entire turnover in Finland, where, of course, 1/2 of that will be included in the 30% from April.

So when we say 30%, it's compared to 2022 price level.

Yes.

All right, perfect.