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

This call is being recorded. Welcome to the Attendo Q1 Report 2023. [Operator Instructions] Now I will hand the conference over to [Audio Gap] and CFO, Fredrik Lagercrantz. Please go ahead.

Good morning, everyone, and welcome to this conference call. We will present our results for the first quarter. My name is Andreas Koch, I'm Commutation and IR Director at Attendo. And the presentation is hosted by our CEO, Martin Tiveus; and our CFO, Fredrik Lagercrantz. And we'd open up for questions after the presentation. And if there are any media requests, we take them separately. By that, over to you, Martin.

Thank you, Andreas, and good morning, everyone. Today, we'll present the report that shows significant progress both on top and bottom line from our turnaround program. We put most attention in the presentation to Finland, we will continue to have the largest improvement potential in 2023. As usual, we will also highlight the current situation related to occupancy, cost inflation, quality and other factors that are influencing our performance. I'll start by giving you an update on the overall development and direction of Attendo in the quarter. Fredrik will then take you through the numbers in more detail. Slide 2, please. Starting with the top line development in Q1. As you see, we display a growth rate of 16% year-over-year, driven by prices, growth in occupancy, M&A as well as currency effects. Growth is highest in Finland, where we managed to achieve price adjustments of around 12% of sales versus last year. Jumping to operating profit, we reported an adjusted EBITDA of SEK 116 million, almost 4x profit a year ago. This is mainly driven by the price adjustments in Finland from year-end. The key focus in Q1 operationally as well as financially, has been to prepare the company for the transition to the next up in the new staffing reform in Finland from April 1 and staff intensity requirements and elderly care increases from 0.6 to 0.65 care personnel per customer. Operationally, the transition has so far been successful and caused less of a turmoil than previous steps in the staffing reform, resulting in slightly lower transition costs in Q1 than we had anticipated. Financially, the new price agreements for elderly care valued from April 1 provide a necessary basis for recovery after several years of unsustainable conditions in Finland. The outcome of the negotiation is in line with what we have communicated earlier, approximately 30% higher versus 2022. The price adjustment came in 2 steps. We did receive price adjustments equivalent to around 12% of total net sales in Finland already from January 1, slightly higher than we had expected. From Q2, we expect an additional 6% to 7% higher net sales in the Finnish business area. We estimate the cost increase in Q2 to be approximately 1 to 2 percentage points lower than the expected price increase. The price increase should be seen in the perspective that the cost of running Finnish care for all the people have increased drastically, seen over a 5-year period, cost per care day has increased more than 50% due to regulatory changes. In Scandinavia, we report roughly unchanged profit versus last year adjusted for one-offs. Positive contribution from higher occupancy has been offset by higher cost versus price adjustments from local authorities. Total occupancy amounted to 86% by the end of the quarter, a slight increase versus Q4 and 2 percentage points higher versus last year. Looking at EPS rolling 12 months, we see a clear improvement in Q1. Later in the presentation, I'll give an update on the path to reach our midterm financial target of SEK 4 per share. Slide 3, please. As a large care company, our focus areas for sustainability lies primarily within the social dimension with a focus on our customers' well-being, quality, accessibility and our employees' work environment. In the past, we have reported sustainability data annually, but starting this year, we will gradually increase reporting quarterly as well. Some metrics such as CO2 emissions will still be measured annually, while other areas will be updated more regularly as new data comes in. The full selection of updated data points can be found in the report. But among the highlights for this quarter is that we can see increased customer satisfaction and employee recommendation in both Sweden and Finland. From now, we will also report some measurements of progress we make in the area of quality of life for our customers. We start with Finland, where we use a care assessment methodology called RAI to measure residents' quality of life. During 2023, we will gradually implement a similar methodology also in Scandinavia, according to the so-called ASCOT methodology. Continuously measuring quality of life is key to seeing individual needs and preferences in order to provide person-centered care. Slide 4, please. So let's turn to occupancy development. We had a slight positive occupancy development in both business areas during the quarter. However, we do not expect any further improvement in occupancy in Finland this year as we expect the labor market to remain strained for some time following the latest increase in staffing density requirements. In Scandinavia, we see continued high demand for nursing home placements, and our ambition is to continue to improve occupancy during the year. The high inflation has been problematic for many local authorities and reduced funds available. We do see signs that in [indiscernible], this leads to tighter needs assessment for citizens with care needs and slightly longer times between assessment and placement. This could temporarily lead to lower number of placements of all the people to nursing homes in some areas. Next slide, please. The top chart presents sales on a trailing 12-month basis on Group level as well as for the business areas. The turn is positive. And with the new higher prices in Finland, we will continue to show good organic growth during the coming year. The lower chart is based trailing 12-month lease adjusted EBITDA margin. Our margins in Finland have during a long period been negative, and we've now finally seen an uptick. We will continue to show positive margin development in 2023. In Scandinavia, we aim to compensate higher net cost with higher occupancy during the year. So let's take a closer look into the financials for the quarter. And please go ahead, Fredrik.

Thank you, Martin. Let's turn to Page 6. Net sales increased to SEK 4 billion, up by 16% compared to the corresponding quarter last year. The organic growth for the quarter was 8.9%. Organic growth was SEK 61 million or 4% for Attendo Scandinavia, driven primarily by prices and more customers in nursing homes. In Attendo Finland, organic growth was SEK 247 million or 13%, driven primarily by higher prices. Acquisitions contributed with SEK 100 million in growth with the largest contribution from the Rehab Hospital Kauniala that was acquired in June last year. And currency effects had a positive effect on sales with SEK 153 million. Next slide, please. Reported EBITDA increased by 70% to SEK 241 million, and lease adjusted EBITDA increased from SEK 31 million to SEK 116 million. Lease adjusted EBITDA in Scandinavia decreased a few millions, while EBITDA grew significantly in Finland, mainly from adjusted price levels. The positive IFRS 16 effect on EBITDA increased as a consequence of around 10% indexation of [indiscernible]. Also currency contributed to a stronger reported EBITDA this quarter. Next slide, please. Net sales for Attendo Scandinavia increased by 5%. The growth is to a large extent driven by price adjustments and more customers in nursing homes for older people, partly offset by lower revenue within Home Care. Lease adjusted EBITDA decreased from SEK 66 million to SEK 61 million. We estimate the total price adjustment for Attendo Scandinavia to be 3% to 4%, while total cost inflation is estimated to be more than 5%. Despite the negative price cost development, elderly care nursing homes increased in profits as a consequence of higher occupancy, while the other service offerings developed negatively. Adjusting for last year's public sick leave reimbursement and abnormally high sick leave, the lease adjusted result is in line with last year and it was only during the first quarter of 2022 that the public sick leave support was in place. During the last few quarters, our win rate of new outsourcing contract has been lower. And for some contracts, the local authorities decided to in-source. This has resulted in us now having a net of SEK 250 million in annual turnover and currently ongoing contracts that we know will be terminated. It will only have a marginal effect on sales in 2023, but will have a full effect in 2024. Slide 9, please. Growth for Attendo Finland amounts to 25% reported and 17% in local currency. Acquisitions contributed with around 4%. The high organic growth is mainly due to price adjustments of around 12%. Lease adjusted EBITDA increased from negative SEK 18 million to positive SEK 73 million. The positive development is mainly an effect of price adjustments now partly catching up to historic cost development. We have also been able to prepare for the staff index increase that took place 1st of April in a controlled way and sick leave was significantly lower than last year. Despite the challenging staffing situation, we have been able to attract additional customers and the quarter shows a positive net flow of customers. The June 2022 acquisition of the Rehab Hospital Kauniala also contributed positively to profit development. As Martin mentioned earlier, we estimate the additional price and cost increase from Q2 going forward to strengthen the EBITDA margin somewhat. Slide 10, please. This table shows our cash flow development. Free cash flow was low despite stronger operating profit and lower than last year due to negative working capital effects. Working capital was negatively affected by new administrative routines within the recently formed welfare areas in Finland. Our best judgment is that some part of the negative working capital effect is temporary and will reverse, but partly, it will remain. Next slide, please. This is a new chart showing the development for some financial items. Both the reported financial net and the finance net, excluding effects from IFRS 16 increased compared to the first quarter last year. Interest costs from borrowing from banks increased by SEK 21 million, which was partly offset by positive currency effects. We expect interest costs to continue to increase somewhat due to increasing market rates. The tax rate for the quarter was 22.3% on a reported basis and 21% on an adjusted basis. Tax rates are now normalizing as we start making tax profits also in Finland. Adjusted earnings per share increased driven by the large improvement in lease adjusted EBITDA, somewhat offset by taxes and financial items. With the improvement in operating profit, we can now also see how the lease adjusted leverage has decreased to 3.6% in line with our financial target. We expect leverage to continue to decline during 2023. Next slide, please. The first part of the turnaround is now visible in 12-month trends for adjusted EBITDA and adjusted earnings per share, but yet not for cash flow. Cash flow will also turn positive as the turnaround continues and some temporary cash flow items reverse. With that, I hand back over to you, Martin.

Thank you, Fredrik. Slide 13 please. I'd like to say a few words about the strategic direction and the progress of our midterm financial target. In 2021, we outlined a new strategic direction in 3 main steps and with the ambition to reach at least SEK 4 per share in 2023. The first cornerstone was a financial turnaround related to the situation with unsustainable conditions in Finland and with overall low occupancy in the own operated nursing home segment in the aftermath of the pandemic. As of Q2, prices have been reset in Finland. We have also had good progress in occupancy development in own operations since Q1 last year and expect this trend to continue in Scandinavia during 2023. In parallel with the turnaround program, we have put a lot of effort to improve our operational model Attendo Way and strengthen our competitive advantage for the future. And we are now better prepared to capitalize from higher demand and a stronger financial position from 2024 and onwards. Next slide, please. This slide shows the path to reach our midterm financial target of SEK 4 per share. The main lever is the improved conditions in Finland. Given that we now have concluded the vast majority of our contracts for 2023, we have higher confidence in our ability to reach the targeted improvement level. From Scandinavia, we need support of higher occupancy to reach a target, higher cost that has not been fully compensated in price adjustments has taken down the assumed improvement for Scandinavia [indiscernible]. Higher interest costs will have a clearly negative impact on profit this year, only partly offset by lower normalized tax. Improved profitability will lower our leverage and will allow for improved capital allocation and/or accreditive M&A. In the original plan, we had not anticipated the high inflation and sharp increase in interest costs. But altogether, we see good opportunities to reach SEK 4 per share with a delay of 1 or a few quarters from our original plan and in 2024. Next slide, please. To summarize report, it present record high growth and strong bottom line recovery, driven mainly by the improved conditions in care for older people in Finland. We foresee that the negative price cost gap in Scandinavia for 2023 can be offset by positive occupancy development and foresee no further occupancy improvement in Finland for the remainder of 2023. Improvements in Q2 in Finland, around 6% to 7% additional net sales growth and 1% to 2% lower cost increase in growth. At this point, we have more clarity for the remainder of the year and expect to reach our midterm EPS target of SEK 4 per share with 1 or a few quarters delay from original plan. Thank you for listening, and over to you, Andreas.

Thank you, Martin. Well, then it's time to go to the Q&A session. And operator, please go ahead.

[Operator Instructions] The next question comes from Jakob Lembke from SEB.

Few questions from my end. I start with Finland. Can you comment on sort of what proportion of the volume is not on the contract right now? And if you expect sort of the sole beds to continue on this level throughout in 2023?

So to repeat Jakob, so what portion is renegotiated? That was the first question, right?

Yes or rather, I mean, how much is under sort of spot prices? And if you expect to lose any volumes during the year?

Okay. Yes. So in the care for older people segment, if you look at the nursing home segment, which is close to 50% of the total volume of total sales in Finland, we are basically ready with the negotiations. So not fully 100% because we still have one contract open that will not be closed as of now at least. So where we have spot prices, but that is just a few percentage points. And the next question was, Jakob, could you please repeat that?

If you expect to sort of stay on this level of sold beds this year in Finland.

In Finland, yes. So our target is to maintain occupancy from this level going forward. We know from past years increase in staffing density requirement that it do create turmoil on the labor market and that we expect the same thing to happen this year, and it will take a few quarters to stabilize.

Okay. And then my second question on Finland is your latest assessment on sort of if we will go to 0.7 and maybe also now factoring in the election outcome in Finland.

Yes. Our current assessment is we will stay at 0.65 with the new government. Should 0.7 happen, we have a possibility to renegotiate prices again. So that is not what we believe.

Okay. Sounds good. And then moving on to Scandinavia. I think sold beds seems to be down a bit here from Q4. Could you maybe just comment on the, I guess, the trend here in April after the quarter and also if you believe you can reach above 90% occupancy for the year?

Number of sold beds, that is due to a contract that we have left. So we have not had a negative net new customer inflow. That's been positive, even though not also at a lower pace than we had last year, but mainly due to higher outflow than lower inflow. And so that is something that normally will normalize over time. So we still target increasing occupancy to be able to offset price cost gap in Scandinavia this year.

Okay. And then just sort of more housekeeping question on the outsourcing revenues in Finland. It's a big uptick in the quarter. This is the new run rate we should expect?

Yes, Jakob, it's not that big, but what we've done is that we are selling some food services on outsourcing contracts. We use our kitchen network to sell meals externally to other similar operations as ours. And we have been able to win some additional contracts on that. So that's why it's a bit of an uptick and it's on what we then classify as an outsourcing contract, and it's remaining now.

The next question comes from Stefan Knutsson from ABG.

Congrats on the good report. I have a question regarding Finland seasonality. And if you foresee any change in that after the pricing negotiations and new regulation? Or do you still expect that Q3 will be the strongest quarter as we have seen the last couple of years?

Yes. We see no reason why the seasonality would change. So we expect the third quarter to be the strongest.

Perfect. And then also, I mean, I think you flagged during the last conference call that you aim for occupancy rate in Finland to stay flat. Now you had a slight increase in Q1, but the new regulation is yet to kick in there. Are you having enough capacity to maintain the occupancy level at this rate? Or will you face additional pressure here when the new regulation starts?

No. This year, we were extremely well prepared for this update. I mean we have rehearsed twice. So now this is the third time around, and we are prepared properly also with the acquisition of [indiscernible] last year. So we have the staff that we need to maintain occupancy, and we target to keep maintaining occupancy over the course of the year.

Perfect. And my last question is regarding the lost contract there in Scandinavia and the impact of SEK 250 million that you said would have a full impact next year. Should we expect any one-off items connected to that? Or how do you see that it will affect profitability? Do you have, for example, a similar profitability level on that contract that you lost? Or is it lower?

No one-off items, but you can expect similar profitability on lost contracts overall, plus, of course, negative absorption effect.

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

I have 5 questions. I hope that's okay. I'll take them one by one. First, given what you said about Scandinavia, do you still expect margins to be flat year-over-year? Reason I'm asking is earnings down here in the quarter, and we knew that salary increases should be higher for the rest of the year.

We haven't said that margins will be flat with that result, to keep results flat, and that is still what we're targeting, yes.

Okay. And then on Finland, as you were preparing for the higher staffing level, does that mean that you have higher cost already in Q1? Or will they continue to go up further in the second...

Staff wise, we have prepared for it. But then, we actually have some of the less recruiting costs in Q1 than we had expected and the turmoil was less in the market as well. So it was a smoother transition overall than the past 2. We had expected this one to be a bit worse because as staffing density requirement increases, turmoil should increase as well, but we have managed well this quarter.

So what type of staffing level did you have on average for the first quarter, at 0.65 already in the first quarter since you had to prepare...

Yes, we were slightly above 0.6 in the beginning of the year, but we ended the quarter at 0.65. We have the stat that we needed.

Okay. But that means staffing costs will go up additionally in the second quarter on average versus what you have in the first quarter. Okay.

Yes.

My third question also relates to Finland. If you expect to continue to close down units for the remainder of the year?

Yes, we will continue to review our footprint, which is [indiscernible] regularly. But then, of course, with newer prices, we have less problem units as well.

Okay. And then on the working capital, you said part of the increase is temporary, part is not, would it be possible to give sort of indication how much working capital should increase for the full year and what the new normal level will be as a percentage of sales maybe?

But I think there's always seasonality and depends on closing. But if you look at the year-on-year comparison, in the first quarter of last year, we were positive SEK 70 million, and now we were negative SEK 100 million, so it's SEK 170 million in delta. it's to say that it is so far is a half-and-half permanent shift and half is a temporary just because the new welfare areas are not able to process all invoices on time.

Okay. That's fine. And then finally, there were a comment in the report that you expect earnings to improve further in the second quarter, just to make sure I understand that correctly. Do you mean sequentially then?

Yes. Exactly. Q2 versus Q1. Q2 on top of Q1.

The next question comes from Victor Forssell from Nordea.

First question on Scandinavia and your last comment here on the margins, somewhat looking at the commentary rather closer to what Kristofer said about the margin being flat this year, that, that was your ambition. So I must say to me, there's news that you expect the earnings to be flat. Has this anything to do with the start of the year because I'm quite certain that that's how you've been communicated before.

No. I mean we've had the same ambition that we had going into the year to maintain earnings level in Scandinavia in spite of the price cost disadvantage.

I think we have expressed it as we think it's possible to offset the negative price cost with positive occupancy development. And that's what we're working on. But of course, there's a lot of moving factors. And the collective labor agreement on the private side is not settled yet, and that's a really important factor for us. So still moving parts here. But our ambition is still, and then we've talked about profits that we still think it's possible to offset because we know we're going to have a negative price cost development, but it's possible to offset that with positive occupancy development.

Yes, that makes a lot of sense. Is there anything in regards to your home care business, for example, that has been a pronounced issue here in Q1 compared to previously? Or do you feel that you manage that as good as you can right now? Any comments regarding that?

No, I wouldn't say it's worse than Q4. And then, of course, we always hope that you will see an improvement faster rather than later. But I think if you look at the comps, it was in the second quarter of last year that we started to see a declining trend. So now when we're comparing to the first quarter of 2022, it's still pretty tough comps for our home care business.

All right. That's all good. Is there any way that you could provide us with the exact figure for occupancy within own nursing homes, please?

Let us come back on that.

And just on Finland, I guess you broke it down a bit here, but for the Group and for Finland separately, the phasing of the cost side here. If you could just reiterate how we should look upon it compared to, well, obviously, the steep price increases in Finland in Q2 and onwards. So any help here would obviously be good.

Yes, cost development in Finland. So if you take Q1 as a baseline, we expect from Q2 and onwards costs to increase due to increase in staffing density requirements for most with 5% to 6%. compared to Q1.

And just to add on that, is we're not pretty sure what the pricing cost, as Martin said, high 90% or high 90s are settled in new prices. So that side we're pretty certain about, but it's more uncertainty on the cost side because what we also learned last year and previously is that it's the potential labor shortage in the market that creates the real turmoil and how that plays out now in the spring going up to summer when you need summer temps. And on top of that, it's the same situation in Finland where the labor agreement is not settled yet on the private side. So we don't know exactly what salary revisions we will have in the summer. So as we write in the report, prices are expected to increase 6% to 7% further, and we estimate the cost increase to be 1 to 2 percentage points less, but I would say it's more uncertainty on the cost side than on the revenue side.

It was completely open though on the salary part side because the private agreements tend to learn very close to public agreements and the public salaries are set. But having said that, private agreement is not set yet.

Sure. And may I just sort of interpret this into your comments regarding your financial target of SEK 4 in EPS, since this is a cost sort of, the uncertainty lies within your cost and you still comment that you are confident to reach it by sometime in 2024. Is that due to the fact that you think you have headroom to the target? Or is it anything else?

Even though there are some uncertainties on the cost level, visibility is much better now than previously because as we have, we know the rents went up in 1st of January, that we reset throughout the year. The seller agreements on the public side are set. So we expect that the private side to be very close to that. Of course, other inflation is still unknown, but we can have our guestimate on it. So given that and given that we have the prices set, we feel more confident, yes, we have better visibility. Further, if you go into next year, we will have the Q1 effect on the prices that the Q2 level plus indexation from 2024 in Q1. And then we have other segments that we will negotiate this year going into next. And then in Scandinavia, we will have a positive price effect as well with the OPI coming in on the Stockholm area. So given this, we see that hadn't it been for the high interest rates and the increasing financial costs, which has been quite substantial and inflation, we would have had a possibility to reach SEK 4 already in 2023. Now we think that with 1 or a few quarters delay, it's reasonable.

The next question comes from Hans Bostrom from Trinity Delta.

A couple of questions, please. You talked about the sick leave being still on a high level, but still down considerably year-on-year, I think both in Finland and Scandinavia. Could you give us a sense of what the sick leave level is compared to pre-pandemic in terms of number of days per employee per year, for instance, the way it was when it was at its peak. And second question is sort of touching on this question about your earnings dynamic and clear improving potential in Finland. But I'm slightly surprised at the relatively modest expectation for an improvement in Scandinavia. I suppose this reflects that sick leave, so you expect them to continue to be higher level that the costs are going to be higher. Just this is a reflection of the less flexibility on the pricing side in Scandinavia versus Finland? Or what are the factors explaining that?

If you look at the short-term sick leave, which is around 6.5% currently, as we stated in the report as well. That is inflated if you look at historical averages, it should be rather around 4.5%. So it is still while being lower than the past 2 years, it's still definitely inflated. And we think that should normalize over time. Even though we have said so for 2 years now. So it's going down slowly, but there is still room to go down further. That's for sure. Could you repeat the second question, Hans?

Yes. It's just related to why your expectations on earnings improvement are so modest in Scandinavia because I'm assuming you're actually saying to us that the structural margins certainly '24 would be much lower than what they used to be in the Scandinavian business and they're not being necessarily a very evident reason why because we haven't had the same issues as we have had in Finland and so forth. I'm just curious to understand if you see that there is an improvement potential beyond '24 beyond this SEK 4 per share EPS target or whether you think this is kind of the beat the run level? And why is that in that case? Because without making any detailed calculation, I'm assuming you're thinking the margin in...

It's an excellent question, Hans. Occupancy level at 86%, that is definitely below what it should be and what it has been historically. We come from a 92 plus level in occupancy. If you look at the own operations in nursing homes, we were rather at 94%, 95% level a couple of years back. So there's plenty of headroom still on occupancy, which is the key driver for profitability in Scandinavia. That plus that the current model in Scandinavia with index clauses only on around 50% of agreements. There is no index clauses currently in freedom of choice areas or some but in most freedom of choice areas, they set the price year-over-year, but without an index clause. That, of course, is something that is not made for this high inflation environment, and it will take us a few years to catch back. And then we have sick leave as well. So if you look at both occupancy, what you could call sort of operational efficiency and price cost gap, there is definitely more levers to work on in Scandinavia beyond 2023, which is something that, and that's the same goes for Finland. So if you look into 2024 and beyond in Finland, we still both have a price lever on other segments. And we also have an occupancy lever and an operational efficiency lever in Finland as well. Even after this year, we're not where we should be long term in terms of profitability. Then, of course, during the next 2 years, 2023 and '24, we are focusing on recouping both operational excellence and competitive advantage as well as margin development rather than building more capacity [indiscernible] that starts mainly in 2025 and onwards. That's the longer-term story.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you very much. We'll now conclude this conference call. Please don't hesitate to contact us directly. Of course, if you have any further questions. And so by that, thank you, and have a good day.