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

Welcome to Attendo Q2 Report 2023. [Operator Instructions] Now, I will hand the conference over to CEO, Martin Tiveus; and CFO, Mikael Malmgren. Please go ahead.

Thank you. Good morning, everyone. Today, we will present a report that shows strong bottom line improvement from our turnaround program in Finland. As usual, we'll also highlight the current situation related to occupancy, cost inflation, sustainability and other factors that are influencing our total group performance. I'm happy to welcome our new CFO, Mikael Malmgren, into our team. Mikael has a solid background, great analytical capabilities and experience from operating distributed service businesses. I'm confident that Mikael will make a significant contribution to Attendo in the coming years. I'll start by giving you an update of the overall development and direction of Attendo in the quarter, and Mikael will then take you through the numbers in more detail. Starting with the top line development in Q2, we displayed a growth rate of 22% year-on-year, driven by adjusted prices, occupancy improvement and M&A as well as currency effects. Looking to operating profit, we report an adjusted EBITA of SEK 147 million to be compared to a loss of SEK 11 million corresponding period last year. The significant bottom line improvement is driven by Finland. We will now see the effect to our turnaround program. Just before the start of Q2, we concluded the renegotiation of our payor contracts within the elderly care segment as staffing density requirements increased from 0.6 to 0.65 care personnel per customer from April 1. The transition to the new staffing levels has been well executed, and we have managed to attract enough qualified nursing staff to maintain our customer base. After intense lobbying efforts from the industry as well as the new welfare areas, the government is now expected to postpone the last step of the reform to 0.7, and this will ease the strain in the Finnish labor markets for qualified care staff and would enable us to improve occupancy again in 2024. In Scandinavia, we're somewhat disappointed about the development in the quarter. On the positive side, we have continued to attract customers in own operated nursing homes and we report higher profit year-over-year. On the negative side, we have had continued challenges within home care in Sweden and report losses in Denmark. We also see signs of municipalities holding back on welfare spend as a way to counter inflation and poor economy. The challenges in Swedish home care are mainly linked to tougher contract terms into welfare areas, following change of local political leadership as well as termination costs, altogether impacting our profitability and efficiency. We have initiated both local action programs and an overall program around best practice. We've also had losses in our Danish operations in Q2, linked to higher operating costs. We have taken actions to improve the situation, including change of leadership and governance of our Danish operations, and we expect some quarters lag until we see impact in the financials. Overall, however, the strong earnings improvement strengthens our financial position and the guidance from last quarter regarding our ability to reach our mid-term target of SEK 4 per share is unchanged. Next slide, please. In Q1, we started to report sustainability metrics on a quarterly basis in order to show progress throughout the year. For us at Attendo, the focus areas for sustainability lies primarily within the social dimensions, with a focus on our customers' well-being, quality, accessibility and our employees work environment. I'd like to mention a few highlights during Q2. The full selection of data points is found in the report. One of our most important measures of how well we succeed in engaging and developing our almost 30,000 employees is the willingness to recommend Attendo as an employer. Outcome in the second quarter shows an increased degree of recommendation in both Scandinavia and Finland, and group aggregated eNPS has increased from 6 to 11 in Q2. While we have higher ambitions, this is a signal that we are on a positive trend. I believe the key drivers for the positive result is our structured work with onboarding, education and leadership development, together with new ways of working to increase employee participation and accountability in each local unit. In the context of sustainability, I'd also like to mention two recent studies that show that privately operated care is more cost efficient versus public sector operated. These are important proof points that private operators could give more care for tax money spent and still provide care at a similar or higher quality compared to public operations. Finally, I'd like to mention that Attendo was ranked #7 in an evaluation of 361 listed companies in Sweden with regard to equality in leadership teams. Gender equality is critical, not at least in the care sector, where the vast majority of employees and first-line managers are women. We need female leaders for the role models and show that there are no limits for managerial positions in our company or in private business in general. Next slide, please. So let's turn to occupancy development. Total occupancy for the group amounted to 86% by the end of the quarter, in line with Q1 and 2 percentage points higher versus last year. We've had a positive occupancy development in Sweden compared to Q1, but also a slight decline in Finland, mainly related to the increase in mandatory staffing density from April 1. I'd like now to introduce the sales numbers in recent quarter more in detail. This slide displays the net sold beds recent months, meaning the net of new customers moving into nursing homes and residents that have moved out or passed away. In Scandinavia, statistics from the National Board of Health and Welfare showed that several municipalities have mitigated increased inflation and strained finances by reducing access to care services. While we have been able to increase our market shares in several geographies, it's clear that fewer citizens have been granted a placing at the nursing home during the first few months of the year. For Attendo, the first half of the year started slow, but in June, number of placements increased again, and we totaled 107 net sold beds for the quarter. Beginning of Q3 has also been positive. In Finland, we expect a pronounced occupancy drop initially in Q2, given the increased staffing requirements from April 1. It's a positive sign that we already in June could stabilize occupancy again, which is a result of a successful transition where we managed to attract qualified nursing staff in a very difficult labor market. We have assumed flat occupancy for the remaining part of 2023 in Finland to start increasing occupancy again in 2024. Next slide, please. The top chart presents sales on a trailing 12-month basis on a group level, as well as for the business areas. With new agreements and improved terms in Finland, we will continue to show good organic growth during the coming quarters. The lower chart displays the trailing 12-month lease adjusted EBITA margin. As you can see on the chart, we now finally see the beginning of the recovery and normalization of margins in Finland that has been heavily under pressure since the overexpansion prior to towards 2018 and the changed staffing requirements. In Scandinavia, we had a continued margin decline after the pandemic, initially due to occupancy drop during the pandemic and later due to inflation that have not been fully compensated by price adjustments. Our ambition going into 2023 was to compensate higher cost with occupancy improvement, hence maintaining 2022 profit level. In light of the recent challenges in Swedish home care operations and losses in Denmark, this seems more challenging today. On a group level, however, the significant improvement in Finland will prevail. So let's take a closer look for the financials for the quarter. And please go ahead, Mikael.

Thank you, Martin. Now before going through the numbers, I'd like to make a quick introduction of myself. I joined beginning of June, and I'm looking forward to working with the team and Martin. I most recently joined from McKinsey, where I focused on longer change management engagement and before that, as a CFO background from operating distributed services business. So let's turn to the next page. Net sales in the quarter increased to SEK 4.3 billion, up almost 22% when compared to the quarter last year. The organic growth for the quarter was 13.9%, excluding FX and acquisitions. Organic growth was SEK 58 million or 3.5% for Attendo Scandinavia, driven primarily by prices in more customers in nursing homes. In Attendo Finland, the organic growth was SEK 435 million or 22.7%, and primarily driven by higher prices. Acquisitions also contributed positively with SEK 69 million in growth, with the largest contribution from the rehab hospital, Kaunialan, that was acquired in June last year. Currency effects had a positive effect on sales as well with SEK 227 million. Next slide, please. EBITA development. Reported EBITA increased by SEK 177 million to SEK 283 million, and lease adjusted EBITA increased from a negative SEK 11 million to SEK 147 million positive. Lease adjusted EBITA in Scandinavia decreased SEK 46 million and down SEK 16 million year-over-year, adjusting for last year's non-recurring items, while EBITA grew significantly in Finland, mainly due to the mentioned adjusted price levels. The positive FX adjusted IFRS 16 effect of SEK 11 million increased mainly as a consequence of capital gains on terminated contracts. Currency also contributed to a stronger reported EBITA this quarter. Next slide, please. Attendo Scandinavia. Net sales for Attendo Scandinavia increased by 4%. The growth is driven by more customers and own nursing homes for older people and by price adjustments, partly offset by lower revenues within home care and outsourcing. Lease adjusted EBITA decreased from SEK 84 million to SEK 36 million. Adjusting for last year's communicated SEK 30 million non-recurring items, which were mainly pension related, lease adjusted EBITA was still lower than previous year. We continue to be negatively and as previously communicated, affected by the price cost development. Despite the negative price cost development, elderly care nursing homes in Sweden increased the results due to higher occupancy. However, home care and Denmark developed negatively, while rest of business developed in line with previous year. Denmark negative result is driven by challenging and manning situation with high external services purchases, and we've changed management and appointed dedicated resources now to resolve the situation. During the last few quarters, we have lost a number of outsourcing contracts. And for some contracts, the local authority has decided to in-source. This has resulted in us now having a net of SEK 300 million -- SEK 350 million in annual turnover with higher-than-average profitability and currently ongoing contracts that we know will be terminated. It will only have a marginal effect in '23, but will have a full effect in 2024. Also to note that the annual agreed salary increase took effect 1st of June, with full effect in Q3 and will be gradually reflected in price level agreements in 2024. Next slide, please. For Attendo Finland, the growth was 37% reported and 26% in local currency. Acquisitions contributed with around 3%. The higher organic growth of 23% is mainly due to price adjustments of around 19%. So lease adjusted EBITA increased from negative SEK 75 million to positive SEK 131 million. The positive development is mainly an effect of price adjustments now catching up to the historic cost development and the increased staff ratio. We have been also able to execute transition in a controlled way for the staff index increase effective April 1. Despite the additional staffing requirements, we incurred marginal customer net flow during the first 2 months of the quarter and noted a stabilization in June. The June '22 acquisition of the rehab hospital, Kaunialan, also contributed positively to profit development. Also to note that the annual agreed salary increase will take effect the 1st of September and will gradually be reflecting price level agreements in 2024. This is the table that shows our cash flow development. Free cash flow was lower than expected despite stronger operating profit and lower than last year, due to both increased interest rates paid as well as negative working capital effects. Working capital is still somewhat negatively affected by the administrative routines, also harmonized terms and finalizing late some contract negotiations in the recently formed welfare areas in Finland. Our judgment is that some part of that negative working capital effect is temporary and will reverse. And the result as it improves and working capital normalizes, we expect the cash flow to also improve. Next slide, please. This is an updated chart showing the development for some financial items. As you can see, the adjusted earnings per share improved due to the improved lease adjusted EBITA, but was slightly offset by increased financing costs and normalized tax rates versus previous year. The tax rate for the quarter was 23% on a reported basis and 21% on an adjusted basis. While slightly inflated in the quarter due to losses in Denmark, tax rates are now normalizing as we are making tax profits in Finland. If we shift to the second slide on the upper right to the lease adjusted EBITA, we see a clear and positive trend during the last quarter and now at 2.8% on a rolling 12-month basis. As a result of that, we continue to improve our leverage. It's now down from 4.4% end of year to 2.7%, and which is below our financial target, a trend all else equal, we expect to continue during the rest of the year. Both the reported financial net and the finance net, excluding effects from IFRS, increased compared to the second quarter last year. Interest costs from borrowing from banks increased by SEK 24 million, which was partly offset by positive currency effects. We expect interest risk to continue to increase somewhat due to increasing market rates. Now with that, I hand over to you, Martin.

Thank you, Mikael. So to summarize this quarter, we present strong growth and a continued bottom line recovery, driven by the significant improvements in our Finnish operations. In Scandinavia, all nursing homes delivered higher profitability year-over-year. However, this has not been enough to fully compensate for price cost gap and the recent development in home care and the Danish operations. All in all, we've been able to turn profitability after a long period of decline, and the improvement strengthens our financial positions and makes Attendo better equipped to continue investing through the benefits of customers, payors and employees. Before we go into Q&A, I'd like to go through our focus for the coming period. Next slide, please. In Finland, our top focus is still to ensure access to qualified staff, which is a prerequisite for us to improve occupancy in 2024. Long term, we target above 90% occupancy in all our business areas. In disabled care and social psychiatry in Finland, we are currently negotiating terms for 2024. These segments have not previously been compensated for inflation. We also see overall potential in Finland to improve the operational excellence into 2024 when the staffing situation has been stabilized. For Scandinavia, our top priority is to continue the journey towards 90% occupancy in nursing homes and influence local authorities to meet increasing care needs from citizens. We will also work intensively with local authorities to get compensation for inflation and hence, reach sustainable terms. The key focus coming period is also to conclude the actions necessary to start the losses in Denmark and to also improve and stabilize our home care operations in Sweden. Overall, our guidance from last quarter regarding our ability to reach our mid-term target of SEK 4 per share is unchanged. We will continue in both business areas to improve the quality of life for our residents and to ensure that we are a trusted partner for our payors. Thank you for listening, and over to you, Andreas.

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

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

Two things I would like to ask you about. First, when it comes to Finland, nice to see this sequential further improvement, of course, in the quarter. But how should we think about seasonality now going into the fourth quarter? Would it be the normal improvement? Or will the rather late in the year, salary increase in September have any meaningful impact on how we should think about seasonality? Maybe we could start there.

Sure. Happy to. So I mean, you're right about the salary increase not having an effect in Q2. So, we expect similar to slightly lower in absolute level improvement year-over-year. However, Q2 is slightly better due to salary increases postponed to September on a like-for-like basis.

Okay. So, you expect a sequential improvement but not to the same extent as historically? Before the follow-up.

Yes. Absolute terms, it will be improved in the same level as first half year.

I'm not sure I understand what you mean improvement from what?

From last year's -- from last year's results compared to first half year improvement in absolute terms.

Okay. Okay. Okay. And then -- and in Scandinavia, you had -- if you adjust for the non-recurring items last year, I think the decline in lease adjusted EBITA was almost SEK 20 million. How much of that is due to the weakness in home care Sweden and the problems in Denmark?

So it's Martin here. So home care Sweden and then losses in Denmark, they are about SEK 10 to SEK 15 million each.

Versus last year?

Versus last year.

Okay. So the nursing home segment in Sweden improved earnings year-over-year? Correct?

Yes.

Okay. And how easy it is to improve earnings in Denmark and the home care? And do you see a potential to restore margins in Scandinavia again in 2024?

Denmark is more of a shorter-term issue. We had a -- we started a new operation. Denmark is very small. We only have 5 units where one is a new startup, which is, of course, driving a lot of costs, which were planned. Apart from that, we've had higher-than-expected costs of staffing, especially entering the summer. I think those are more shorter-term problems, and we expect to turn the losses in Denmark around year-end within a few quarters. I think the home care might take a few more quarters to stabilize as it has to do with adapting the operations to new terms in a number of welfare areas.

The next question comes from Jakob Lembke from SEB.

I have 3 questions. I'll take them one by one. So if we start with Finland, just wondering a bit on sort of what proportion of contracts you expect to be able to offset salary inflation already in this year?

This year, we already negotiated the prices for this year, so there were no further changes to terms in 2023. So the negotiations that are currently ongoing for the other segments, which is social psychiatry and disabled care, that's for 2024. Same goes for the elderly care inpatient adjustments for 2024 for next year. So this year, prices are set.

Okay. Understood. And then on the cost base here in Finland in Q2. I'm wondering a bit if there are any like temporary costs relating to the upstaffing. Would you say that the cost base here in Q2 is sort of representative for the new level here going forward, of course, accounting for the higher salaries? Yes.