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

Welcome to the conference call. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Thank you, and good morning, everyone. This is Martin Tiveus at Attendo. Last year represented a significant turning point for Attendo both financially and operationally. Today, we will present the development in Q4, but also summarize the milestones of 2023 and give a recap of the recent announcement of the acquisition of Team Olivia's Care business. I'll start by giving you an update of the overall development, our CFO, Mikael Malmgren, will then take you through the numbers in more detail. Slide 2, please. At the start of last year, we had an ambitious plan to achieve sustainable terms and turn around our operations in Finland and to improve performance in Scandinavia through increased occupancy. The improvement in Finland has followed the plan that we set forth entering the year, and we managed to secure sustainable conditions in our agreements with welfare regions while maintaining occupancy despite new staffing requirements, a great achievement by our local team. In Scandinavia, we managed to increase occupancy by 2 percentage points year-over-year. We also had significant headwind as we were under-compensated for inflation in several municipalities. For Attendo as a whole, we increased EBITDA by around SEK 550 million, almost tripling the earnings from 2022. With the earnings improvement, we have significantly improved our financial position. When we started the year, the net debt-to-EBITDA ratio amounted to 4.4%. Now we're down to 1.2%, a situation that opens up for both dividends, share buybacks, M&A and additional investments into developing the quality of care. Our most important task is to provide high-quality care for individuals while solving complex care needs for local authorities. Therefore, we're actively working with strengthening our employees' engagement and improving customer satisfaction. In 2023, we made good progress on key performance indicators in these areas, especially in employee satisfaction. I'll come back to this later in this presentation. Slide 3, please. In mid-January, we announced our intention to acquire Team Olivia Care in Sweden. Team Olivia operates 120 care units within disabled care, individual and family care and home care and has developed specialized expertise for individuals with complex candidates. This acquisition provides a unique opportunity to further strengthen our position in the attractive disabled care and I&F segments, achieve a better balance in our service offering and establish a stronger platform for further growth. The acquisition is expected to be EPS accretive already in 2024. With this acquisition, we will increase the average margin in Scandinavia and provide synergies in the coming year. Once fully integrated, we anticipate an EPS contribution of at least SEK 0.5 in 2025. Next slide, please. So let's turn to the development in Q4. Starting with the financial development, we achieved a growth rate of 17% in the fourth quarter, driven mainly by improved prices in Finland. We reported a lease adjusted operating profit of SEK 151 million, adjusted for the SEK 15 million in one-offs compared to nearly 0 results last year. The result improvement is primarily driven by Finland following the execution of our turnaround plan, where we have improved contractual terms while we managed to maintain occupancy levels in spite of going through the last step in the staffing density reform. The decrease in personnel turnover in the latter part of the year has supported operational efficiency. And as we enter a new year, our focus for 2024 will shift from focusing on healthy contractual terms into improving occupancy and operational efficiency. In Scandinavia, the reported result is slightly down compared to previous year. On a positive note, we're reporting higher results year-on-year in own homes in own operations. We started the year with considerable financial headwind as we were under-compensated for cost inflation in most municipalities where we lack index clauses. We also experienced higher losses in Denmark in Q4 due to occupancy issues. We expect to gradually reduce losses in Denmark and reach breakeven during Q3 2024, which is a delay compared to previous estimates. On a positive note, we report higher result year-on-year from nursing homes in own operations. For 2024, we expect to be able to offset inflation with price adjustments in both business areas. We report strong cash flow generation in Q4 as a consequence of working capital improvements and better result. And this positive outcome significantly strengthens our financial situation. Next slide, please. We report quarterly on progress regarding various KPIs in the dimension of environment, social and governance in our quarterly report. The KPIs we report on are not merely static. They also provide essential data that helps us improve how we work in our daily care operations. In my introduction, I mentioned progress on key parameters related to employee engagement and customer relative satisfaction. These metrics are particularly important as they measure the core of what we deliver. Throughout 2023, we have placed a strong focus on leadership, employee engagement and culture. And the result from our service clearly indicates that we are on the right path. Recently, Attendo entered into new long-term financing agreement and the terms in this financing agreement are linked to customer satisfaction and employee satisfaction targets to further strengthen our focus on socially sustainable value creation. So let's turn to occupancy development. Total occupancy for the group was 86% by the end of the quarter, essentially unchanged from Q3 and 1 percentage point higher than in Q4 last year. In Finland, our target for 2023 was to maintain occupancy compared to 2022 with increasing staffing requirements and a strained labor market, we still managed to attract and retain enough staff to maintain occupancy levels during the year. Now having passed the last step of the staffing reform, we aim to start increasing occupancy again in 2024. In Scandinavia, we saw an improvement in occupancy year-over-year, while experiencing a slight drop in Q4 compared to Q3 as we exited a few contracted nursing homes with high occupancy. While we recognize that some of our payers are financial constraints, foremost in the Gothenburg region, we believe that we will continue to increase occupancy during 2024 due to growing underlying need in society. Next slide, please. The top chart presents sales on a rolling 12-month basis, both at the group level and for the individual business areas. The most significant factor in this development has been the improved terms in Finland. The lower chart displays rolling 12-month lease adjusted EBITA margin. The group margin continues to increase, mainly driven by improved terms in elderly care segment in Finland. Key drivers in 2024 for Finland will be the full year effect on the improved terms established in 2023, expected overall higher occupancy and continued operational improvements. We expect to at least compensate general cost inflation with price adjustments. In Scandinavia, we've had a margin pressure over the past years, initially due to drastic occupancy drop during the pandemic and later due to issues in Denmark and cost inflation that has not been fully compensated by price adjustments. For 2024, we expect to at least cover cost inflation with price adjustments and key drivers in 2024 for increasing margins will be occupancy improvements as well as turning around our small operation in Denmark. We expect the rolling 12-month margin in Scandinavia to start improving from Q2 this year. Now let's take a closer look at the financials for the quarter, and please go ahead, Mikael.

Thank you, Martin. So let's turn to the Page 8. So net sales in the quarter increased to SEK 4.4 billion, which is up 17% when compared to the quarter last year. The organic growth for the quarter was 13%, excluding foreign exchange effects. Organic growth was flat in Scandinavia, where we saw continued organic growth in own operating units, partially offset by ended outsourcing contracts. In Attendo Finland, the organic growth was SEK 493 million or 23.5% and primarily driven by improved terms. Currency effects had a positive effect on sales with SEK 134 million but was also considerably lower compared to previous quarters as the SEK has strengthened versus the euro. A further strengthening of the SEK could have a negative effect, and we continue to monitor the situation. Slide 9, please. Reported EBITA increased by SEK 144 million to SEK 275 million and lease adjusted EBITA increased from SEK 8 million to SEK 136 million. Lease adjusted EBITA in Scandinavia decreased year-over-year while in Finland, the lease adjusted EBITA grew with SEK 150 million. IFRS-related effects was SEK 12 million, out of which SEK 11 million was due to an exiting of a leasing contract in Finland and is a nonrecurring impact on the reported EBITDA. Foreign exchange effects also contributed positively to EBITDA this quarter. Next slide, please. Growth for Attendo Finland amounts to 30% reported and 24% in local currency. Lease adjusted EBITA increased from negative SEK 55 million to positive SEK 98 million. The positive development is mainly an effect of price adjustments, now catching up the historic cost development and the increased staff requirements and which will continue to have a positive effect into Q1 2024. Lease adjusted EBITA was negatively impacted by about SEK 10 million due to a one-off cost relating to the exiting of a house leasing contract. Occupancy development developed sideways in the quarter, impacted by high sick leave and higher-than-normal customer outflow. We target to improve occupancy in the following quarters, although from a lower starting point than planned. The annual agreed salary [indiscernible] took effect from first of September and had a full effect now in Q4. We're also currently finalizing the terms in the nursing homes for 2024 and our expectation is that we will be able to compensate higher costs with price adjustments next year. And please remind that we will have a Q1 effect from 2023 price adjustments as they were effective from April 1st. Next slide, please. Net sales for Attendo Scandinavia was flat. Underlying growth in own home, driven by price adjustments and net new sold beds was offset by lower revenues in ended outsourcing contracts. We reported lower profit year-over-year in Scandinavia. The main factor is that we haven't been able to offset higher cost with higher prices in 2023. And on a segment level, Denmark and outsourcing showed lower results year-over-year. We report higher results from our own operations in both Elderly Care and Disabled Care. The pricing conditions in Scandinavia for next year are also almost set in all local authorities. Based on current, we foresee that we will be able to at least compensate higher costs with price adjustments in 2024. An estimated annual sales of outsourcing contracts not yet started or ended amounted to SEK 210 million negative. Slide 12, please. Cash flow development. Free cash flow was SEK 404 million, driven by the profit improvement and supported by positive working capital development. This includes further positive improvement of temporary welfare regions overdues in Finland as well as an improved cash collection in Scandinavia. We saw slightly lower CapEx investments in the quarter and also the full year and we expect this to increase upwards towards historical levels during 2024. In the quarter, we also repaid SEK 150 million in loans affecting total cash flow, which amounted to SEK 211 million. Next slide, please. We start off on the top left, the adjusted earnings per share improved due to improved lease adjusted EBITA and was as expected, slightly offset by increasing financing costs and normalizing tax rates in Finland. As we can see, the lease adjusted EBITDA margin shows a clear and positive trend during the last quarter and is now at 4.3% on a rolling 12-month basis. As a result of increased profits, we continue to improve our net debt-to-EBITDA ratio, which is down from 4.4x by the end of the year to 1.2x in Q4. Net interest expense was higher than comparison quarters but slightly better than Q1 to Q3. On a rolling 12-month basis, the net interest expense increased. And as earlier mentioned, with everything else equal, we expect to see slightly further negative impact in 2024 due to higher interest rates and financing costs. Next slide, please. The Board recommends to distribute SEK 1 per share dividend, in line with current dividend policy of 30%. In addition, the Board has agreed to buy back shares for a maximum amount of SEK 110 million ahead of the next AGM. The program will run under the safe harbor regulation and will start on February 9. With that, I hand back over to you, Martin.

Thank you, Mikael. Before jumping into the Q&A session, let me briefly summarize the recent developments. Turnaround in Finland has been instrumental for the profitability improvement in the group and will continue to be the engine for improvement also in 2024. We will, at the same time, ensure to improve the underlying profitability trend in Scandinavia and we'll expect to see some progress from Q2 onwards. With the strong cash flow generation, we strengthened our financial position. This makes us better equipped to continue investing to the benefit of customers, payers and employees. It also allows for dividends and is very satisfactory that we're able to pay out dividends again after 4 years of no distribution. With our improved finances and cash flow, we're also in a situation where we now are able to use the mandate to start buying back shares, something that we see as a long-term commitment. I'm also very excited by the acquisition of Team Olivia Swedish Care operations. This clearly improves our position in the attractive Disabled Care and I&F segments and further strengthens our position in home care. An acquisition that will also be immediately value creative for shareholders. All in all, we reiterate our target to reach SEK 4 per share during 2024, excluding the contribution from the Team Olivia acquisition. We're planning to update our financial targets in connection with the Q1 report in April, and we're in the final year of the current ones. Thank you for listening, and over to Andreas.

Thank you, Martin. We will now start with the Q&A session. We'll start with questions from the conference call and following if there are any written comments in the chat. So operator, please go ahead.

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

Three questions for me. The first one is about turning around this negative margin or earnings trend in Scandinavia. And when you -- I think you said that you expect the rolling 12-month margin to improve from the second quarter, is this -- do you mean underlying trend here? Or does this include the Olivia acquisition?

No, it doesn't include the Team Olivia acquisition. It is underlying trend.

Okay. And do you expect earnings to start trending higher year-over-year order from the first quarter? Or is that also more towards the second quarter?

More towards the second quarter.

Okay. And in Finland, if we strip out the effects or the full year effect from price increases happened in April of 2023, do you expect it's possible to improve margins in Finland more?

Yes. We've been in a special situation over the past few years, where the main focus for our Finnish operations has been apart from negotiation sustainable terms has been to attract and retain staff, to be able to maintain occupancy while staffing requirements have been increasing in Austrian labor markets. So -- and just to give you an idea, we have been employing -- we're signing about 1,000 new employee contracts per month in Finland over the past 2 years. So it's been a massive recruitment operation as well, just to monitor increasing requirements. Now we're moving into a new phase in Finland. So moving from -- I mean we've seen all the staff indicators going in the right direction with staff engagement going up. Staff turnover decreasing substantially, much more stability. And now we're moving into a phase where we again put focus on operational efficiency and occupancy development. And those are the factors that will again start driving profitability growth in Finland after Q2 and onwards.

Okay. And my last question is the EPS target and your confidence in really being able to reach that in 2024, given somewhat lower occupancy here at the end of the year and Denmark turnaround seems to be at least 1 quarter later than previously expected.

Yes. I mean this is assuming that we also will continue to build up occupancy somewhat during the year, but that is something that we believe that we are able to do.

The next question comes from Jakob Lembke from SEB.

I have a few questions, and I will take them one by one. First off, it would be interesting to hear a bit more of your thoughts on occupancy improvements and sort of if it's fair to assume that it will be more tilted towards the second half of the year in 2024?

Thank you, Jakob. So you want to understand more about how we think about occupancy improvements and is it tilted towards the second half of the year. Well, we expect to start building up occupancy -- start increasing occupancy during the year. I think that in Finland, where we're now past the staff requirements increase, we can now start that quite immediately. We see the somewhat slower trend over the past few months, given more strained financial situation in public sector, both in Finland and Scandinavia. But we expect occupancy improvement to continue gradually basically from this point on during the course of the year.

Okay. Then on Scandinavia, if I understand you correctly, you said that you don't expect any meaningful margin improvement here in Q1, I was wondering a bit seeing as you get higher prices here in Q1, shouldn't that have a quite substantial positive effect on the margin already in Q1?

But yes, we are seeing that there is a price effect, but we are also, as we mentioned, a bit delayed in the Denmark turnaround, and we have also the effect of outsourcing ended contracts.

Okay. But there's not anything that is getting sequentially worse from Q4 other than the outsourcing contract.

No.

Okay. And then on Denmark, it would be interesting to hear a bit more about what sort of needs to happen in order for you to make breakeven in Q3.

I mean Denmark has been 2 things. One thing has been occupancy development, where we have one start-up and one more unit with low occupancy. Another part has been operational efficiency and more stability in the labor force in Denmark. The latter part of that improvement project is pretty much done. What is left is occupancy development, where we now need to start seeing improved occupancy in the Danish operations and start seeing the start-up unit filling up during the course of the year and if we look at the current trend, we expect us to reach breakeven around October.

Okay. And then finally, just on sort of capital allocation after the buyback program here and the acquisition, you still have a quite healthy balance sheet to sort of balancing acquisitions and capital distribution as well.

No, you're correct. And we are obviously evaluating all opportunities, and we will come back with more on that with our new financial targets.

Okay. But do you sort of plan or do you have a pipeline of more of these acquisitions similar to Team Olivia perhaps a bit smaller?

I mean, Team Olivia within this segment, this is probably the largest -- probably that was the largest one in the category. So we're very happy about that. Having said that, we keep growing within the disabled care and now we have segments that is a priority for us in Sweden. We think it's both value creative and gives us a stronger position overall. So we will continue to look for further M&A opportunities in that segment.

[Operator Instructions] The next question comes from Anton Lund from Kepler Cheuvreux.

I was just wondering, in Q3, you mentioned that you expect a SEK 40 million positive impact on EBITDA from Denmark. Does this figure still remain? Or is it impacted now?

I think it's slightly impacted as we are a quarter or so delayed.

Okay. Can you add any color on the size of the impact?

Approximately SEK 10 million.

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

Okay. I can't see there are any questions on the chat. So by that, we thank you all for listening in and participation for today. Please contact us directly if there are any further questions after the call as well. Thank you.