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

Welcome to Attendo Q1 Report 2024. [Operator Instructions] Now I will hand the conference over to CEO, Martin Tiveus; and CFO, Mikael Malmgren. Please go ahead.

Thank you, and good morning, everyone. Today, we're presenting the Q1 results. We'll also present updated financial targets, as we are approaching the end of the turnaround program we initiated in the beginning of 2021. With the acquisition of Team Olivia's care business in Sweden, sustainable terms in Finland and a stronger financial position, Attendo is well positioned to create value for customers, payers and shareholders in the years to come. I'll start by giving you an update on the development in the first quarter together with our CFO, Mikael Malmgren. In the second part of this presentation, we'll move into the updated financial targets. Slide 2, please. Attendo has had a positive momentum during the past year, reflecting the outcome of the turnaround program that we launched in 2021. In the first quarter, organic growth was 8%, and EBITDA increased with 39% year-over-year. Both sales and EBITDA improvements are entirely attributable to the improvements in our operations in Finland. Improvement in Finland is mainly driven by the contractual changes we achieved last year, primarily within elderly care. Still, I'm not entirely happy about the results. Sales in Q1 was somewhat lower than we had anticipated. As we recruited for slightly higher occupancy entering the quarter, this also had a negative impact on staffing efficiency and personnel costs. In Scandinavia, our own operations in Sweden continued to improve year-on-year, while the overall result was negatively affected by losses in Denmark and the outsourcing contracts. We've taken a number of actions to turn situation in Denmark, so it should have a positive impact from the second half of the year. The key factor to strengthen Attendo Scandinavia is the acquisition of Team Olivia care, which should be consolidated now from the second quarter. This will give us a leading position in the attractive segments of disabled care as well as individual and family care. With this acquisition, we also further strengthen our home care operations. Overall, we're achieving a better balance between our service offerings in Sweden in creating a stronger platform for further growth. As a result of the overall improvement in earnings as a group, we have significantly strengthened our financial position and, as a result, lower than net debt to EBITDA. This allows for active capital allocation and selective M&A, and as an important part of our revised equity story that we will come back to shortly. Slide 3, please. So now some comments on the progress of our sustainability work and nonfinancial KPIs. Over the past few years, we have gradually been implementing new evidence-based methods to measure quality of life of individual nursing home residents. While we have been piloting these methods since 2021, we have now implemented them in the majority of our nursing homes. In Sweden, we have introduced a method called ASCOT, while we use a method called RAI in Finland. The purpose is to measure and improve the health and well-being of our nursing home residents. The result of the ASCOT and RAI assessments helps our staff to better understand what to focus on to impact quality of life for each individual residents. It also provides the data to understand if the resident experiences a positive impact from the care, food and services that we provide. The first quarter results indicate that this way of working with improving quality of life is having a positive impact on our customers. While it's too early to draw more detailed conclusions on the measurement, we will, as we get more data, be able to compare development over time. This will also help us to build more knowledge about what actions that have the most impact on customer health and well-being to further develop our care operations for the future. Next slide, please. Let's now turn to the development of occupancy, a key factor for our long-term profitability. Group occupancy at the end of the first quarter was 86%, essentially unchanged from the fourth quarter. In Finland, we succeeded with our 2023 target to maintain occupancy, despite increasing staffing density requirements and a strained labor market. For the first quarter of this year, occupancy remained essentially unchanged. Our sales were slightly slower than we had anticipated. For 2024, however, our target is to increase occupancy again with 2 to 3 percentage points, as the labor market stabilizes. In Scandinavia, occupancy has developed flat to slight positive over the past quarters. And while we recognize that some of our payers have financial constraints or have limited access to private providers for political reasons, like in Gothenburg, we believe that we will continue to increase occupancy in 2024. We see a growing underlying need in society, and we continue to see increased number of customers that would like to get an apartment in one of our nursing homes. Next slide, please. The top chart shows sales on a rolling 12-month basis, both for the group and for each business area. The most significant factor for sales development over the past 12 months is improved conditions in Finland. The bottom chart shows the rolling 12-month lease adjusted EBITA margin, with the group margin continues to increase driven by the performance in the Finnish elderly care segment. In Finland, we see the full year effect in Q1 of the improved terms established last year. We expect normal seasonal effects during the year, with Q2 generally being our weakest quarter. In Scandinavia, we've had a margin pressure over the last couple of years, initially, due to a sharp drop in occupancy during the pandemic and later due to issues in Denmark, less than [ prior ] compensation for inflation and ended outsourcing contracts. From this point, we expect margins to start improving, mainly driven by the Team Olivia acquisition, improvements in Denmark and occupancy. Let's take a closer look for -- at the financials for the quarter. And please go ahead, Mikael.

Thank you, Martin. So let's turn to Page 6. Net sales in the quarter increased to SEK 4.4 billion, which is up 8% compared to the quarter last year. The organic growth for the quarter was also 8%, excluding foreign exchange. Organic growth was flat in Attendo Scandinavia, where we saw continued organic growth in own operating units. This was offset by ended outsourcing contracts. In Finland, the organic growth was SEK 343 million or 15% and primarily driven by improved terms. Currency effects had a minor effect on sales with SEK 20 million. Slide 7, please. Reported EBITA increased by SEK 51 million to SEK 292 million, and lease adjusted EBITA increased from SEK 116 million to SEK 161 million. Lease adjusted EBITA in Scandinavia decreased year-over-year, while in Finland, the lease adjusted EBITA grew with SEK 64 million. IFRS-related effects was SEK 5 million, and foreign exchange effects contributed slightly positive to EBITA this quarter as well. Next slide, please. As mentioned, growth for Attendo Finland amounts to 15% reported and in local currency. Lease adjusted EBITA increased from SEK 73 million to SEK 138 million. The positive development is mainly an effect of price adjustments that are now catching up to historical cost development. Occupancy remained unchanged in the quarter and was also impacted by higher-than-expected customer outflow around Easter. We target to improve occupancy in the following quarters. To note, the Finnish government announced that staffing requirements and care for older people will be reduced from 0.65 to 0.60 care staff per resident from 2025. Our ingoing view is that this will not have a material effect on profitability. And please note that Q2 and Q3 will be impacted by higher salary increases compared to last year. Slide 9, please. Turning to Attendo Scandinavia, the net sales was flat. Underlying growth in own homes driven by price and net new sold beds was offset by lower revenues in ended outsourcing contracts. We report lower profit year-over-year in Scandinavia. On a segment level, Denmark and outsourcing showed lower results year-over-year, while we report higher results from own operations in both elderly care and disabled care. As part of our turnaround program in Denmark, we exited loss-making home care operations in Copenhagen in April. In addition, we have changed the local leadership. We've improved the staff turnover and quality measures. Slide 10, please. Cash flow on a rolling 12-month basis, our free cash flow remains strong at SEK 736 million, and the free cash flow in the quarter was slightly better than previous year driven by our profit improvement. However, in the quarter, working capital was impacted by end-of-month Easter close and a onetime payment of historical accrued vacation days. CapEx was also slightly higher and is expected to be higher than last year from a historical perspective low level. During the quarter, we also repurchased shares as announced to a value of SEK 45 million. And in April, we have continued to repurchase additional SEK 40 million so far. Next slide, please. So let's start at the top left. The adjusted earnings per share improved to -- and due to improved lease adjusted EBITA and was expected slightly offset by increasing financing costs and increased income tax. On the top right, we note that the lease adjusted EBITA margin continued to improve during the quarter and is now at 4.5% on a rolling 12-month basis. On the bottom left, lease adjusted net debt to EBITA remained at historically low 1.2 and down 3.6 last year. In Q2, and due to primarily the acquisitions concluded in April, the ratio is expected to increase to approximately 2. The net interest expense in the quarter was similar levels compared to last quarter's. And on a rolling 12-month basis, the net interest expense also remains relatively stable compared to last quarter's, but higher compared to 1 year ago. The increase compared to last year is due to the interest rate increases in '22 and '23. Going forward, the net interest expense will increase. This is primarily driven by the now finalized Team Olivia care acquisition, which was acquired beginning of April at a purchase price of SEK 950 million on a debt and cash-free basis. With that, I hand over to you, Martin.

Thank you, Mikael. Before turning to the financial targets and the Q&A session, let me just briefly summarize the latest development. The turnaround in Finland was a driving factor beyond the group's sales and profitability improvement in the first quarter. The trend in Scandinavia has been slightly downward for some time, but we believe that we are now past the turning point, and that we'll see an improvement going forward. In addition, we'll get a positive contribution from the acquisition of Team Olivia from Q2 and onwards. Our focus for this year is to increase occupancy, work with operational efficiency, complete the turnaround in Denmark and integrate Team Olivia in the Swedish operations. Financially, we expect to achieve our previously communicated financial target of SEK 4 per share in 2024. This concludes the Q1 presentation. Let me now continue to present the next stage for Attendo and our new financial targets. Next slide, please. Over the past 3 years, we have achieved a turnaround in Finland, recovering much of the occupancy loss, too, in the pandemic in Scandinavia, while strengthening employee engagement and our operating model. During this period, we have implemented a care model with stronger focus on quality of life, strengthened operational leadership through new leadership training for local managers, introduction for group managers in nursing homes, both in Finland and in Sweden. We've also taken several steps forward in our digitalization journey. The result is a more robust daily operation with higher satisfaction among customer relatives, employees and payers. Also financially, we're now in a much stronger position that gives us better options for the future development of Attendo. Now moving into our focus for the next 3 years. First and foremost, we still have plenty of opportunities to grow and improve our elderly care operations. We still have around 3,000 empty nursing home beds in both business areas and, hence, operating on a significantly lower occupancy level than historically. The shortage in nursing homes is already evident in many geographies and give the current low level of new establishments and constraints in public finances. This opens up growth opportunities for private operators in both existing and new geographies. In addition, as overall demand increases and people are getting healthier for longer, demand for home care services is likely to increase faster over the years to come. Secondly, we see great opportunities for further growth in disabled care and individual and family care, both organically and through M&A. The acquisition of Team Olivia will strengthen our capabilities in complex care needs in Sweden. Together, we will form a wider and stronger platform within disabled care and individual and family care. Combined, we'll provide an expertise in these segments that no local authority can build on their own, and we will become a better partner and care provider for both society and individuals. Thirdly, we still have room to improve efficiency, as we increase occupancy and continue our digitalization journey. Overall, we intercede adjusted earnings per share of at least SEK 5.50 in 2026. Mikael will now walk you through how we build up this target. Mikael, please go ahead.

Yes. Thank you. So as Martin mentioned, we target to achieve at least SEK 5.50 per share in '26. And as you can see in the chart, we had an earnings per share of SEK 0.70 in 2022. And during '23, we achieved an earnings per share of SEK 3, which was mainly related to the turnaround program. From this level, we have several factors that can enable us to reach the target of at least SEK 5.5. The first building block is Team Olivia, which we mentioned and where we expect a positive contribution of at least SEK 0.50 from 2025 onwards when fully integrated. The mid bar shows improvement in EBITA. And on the next slide, I'll give you some more details on the underlying factors that add up to this improvement. Thirdly, we see good opportunities to increase shareholder value through active capital allocation. We will continue to seek a mandate from the AGM for annual buyback programs. Next slide, please. So let's look at the EBITA growth opportunities that we have identified. Starting with organic growth through green fields, there are plenty of opportunities across geographies and segments. And we expect to be able to add around 2% on average of new capacity per year, with less capacity in the beginning, more at the end of 2026 and a corresponding addition to EBITA growth. The second component is same to higher price compensation versus cost development. We have been under compensated during the past years of higher-than-usual cost inflation, and we expect to recover some of that over the next 2 years. As Martin points out, occupancy is a key driver to improved profitability. The assumption is that we will be able to increase occupancy by, on average, at least 1 percentage point per year in the coming years, which will contribute to EBITA growth by at least the same amount. With higher occupancy, we also have better process and planning capabilities. This, together with improvements from new tools and common ways of working, will contribute to growth. Growth also means scaling in many overhead functions, something that will be EBITA accretive. And excluding Team Olivia, we estimate that we'll continue to do additional acquisitions, and this should contribute to EBITA growth of 2 percentage points per year. All of this adds up to EBITA growth of at least 10% annually. Next slide, please. So we've now taken you through the path of which at least SEK 5.50 in 2026. I would like to now also comment a little bit on the other financial targets. The net debt target measured as adjusted net debt to adjusted EBITDA is between 1.5 and 2.5. We could temporarily exceed 2.5x, for example, in connection with the larger acquisition. The old target was 3.75. The reason for the lower target is to signal final -- financial prudence, but also our ambition to deliver on a sustainable profitable growth over time. And it also reflects the fact that the old target was set in a 0 interest rate environment. This range allows us to maintain a more active capital allocation. We maintain our current dividend target of 30% of adjusted net profit. Our intention is to combine the dividend program with a recurring share buyback program. Overall, our customer focus, combined with our ability to provide local authorities with cost-effective care and solve more complex care needs, means that we are well positioned for the future. With that, we now turn to the Q&A.

Thank you, Mikael. We're now turning to Q&A and start with the conference call and, of course, to take questions on the chat. So operator, please go ahead.

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

Three questions. First one is on price increases, if you could give an indication how much that was here in Q1 year-over-year in Scandinavia and Finland separately.

The price increase was approximately 4% in both business areas.

Okay. Great. And then if -- two questions here on margin, if we start with Scandinavia first. So how much sequential underlying improvements could we expect in earnings in Scandinavia in Q2 versus Q1 before adding Team Olivia? Or do you expect it to be underlying rather flat here?

We expect it to be slightly better than Q1 underlying.

Okay. And I think you have said before that Team Olivia have a leased adjusted EBITA of SEK 130 million annually. How should we see that being split between quarters?

We think that, that split is fairly evenly between the quarters, with a slightly more positive in Q3 versus the other quarters.

Okay. But less seasonal effects than the current Scandinavian business.

Yes. Slightly less seasonal effect.

Okay. And in Finland, my first question relates to how you were able to improve margins sequentially, despite the unchanged occupancy. And I guess, there should be -- have been a negative impact here from the early Easter holiday also in Q1.

So there was a slight negative impact from the seasonality of the Easter, but also Easter was -- 1 day was in April. The sequential improvements in profitability is primarily related to the Q1 price increase that -- if we compare quarter versus quarter last year.

Okay. And then you talked about Q2 being the weakest quarter in Finland. Does that refer to Easter timing effects? Because that shouldn't be the case this year. Or are you referring to the salary increases? Because I thought salary increases in Finland will kick in from August.

Yes. So the new salary increases kick in as of August, but we have higher salary increases last year compared to the price increases year-over-year in Q2.

Okay. But does this mean that Q2 in Finland should have lower earnings than in Q1? .

Yes. Slightly lower.

The next question comes from Jakob Lembke from SEB.

I'll start with a question just on the impact of Easter and leap year here in the quarter. Can you quantify the effects in the 2 segments?

So I think, as we mentioned to Kristofer there, in the end, the effect was just slightly negative. So we don't really see that we need to comment on it.

Okay. And the leap year, nothing material. Or...

So the leap year was positive, but that was offset by the Easter holiday being in March versus normally all of it is in April.

Okay. And then my next question relates to the new targets. Firstly, on the operational side, is it possible to break down the sort of drivers between occupancy, new openings and price adjustments and so on, what you see?

So I mean, if we take the new capacity, 2% is generally equivalent to 400 beds on average. And we believe that we will have a slightly lower new openings in '24, and that will increase during the period. So we will have a slightly higher occupancy openings in 2026, but on average than the 400. And if we talk about occupancy, we do target to go at least the 2 percentage up in 2024, which will take us from SEK 86 million to SEK 88 million. And then another additional 1 percentage point would take us then to SEK 90 million by 2026, which is, on average, 1.3 and rounded then is 1%. And what was your final question?

And then also on the price adjustments you're seeing and if I can extend that question just -- do you expect to do any meaningful recovery from the sort of price cost gap you lost during this high inflation environment?

I mean, obviously, our ambition is to recover price versus cost, but we also need to be prudent in our approach. And so we have looked -- we have taken that from inflation to price in this scenario of 2%.

Okay. It is because the reason I'm asking is that, I guess, if you get back to above 90% occupancy here during this 3-year period, the -- if you were to have prices more similar to before, you should be able to make more than the sort of 5.5% that is implied by this target, right?

If we go back to historical occupancy, yes. When we put out the financial target, we want to set the financial targets that we are confident in reaching. So we said that -- we also said that we are going to do at least SEK 5.50. We're not saying that we're going to do exactly SEK 5.50, but at least SEK 5.50 in 2026.

The next question comes from Roni Peuranheimo from Inderes.

This is Roni Peuranheimo from Inderes. I follow health care companies in Finland, [Foreign Language]. I was wondering about the Finnish market. So about the price hikes, you have done quite significant price hikes in the last few years. So how large price hikes are you expecting in the future years? Are you able to elaborate that?

We have -- the price hikes we've done in Finnish elderly care, they are basically aligned with the change of regulation in Finland and the new staffing requirements. So that's just basically realigning price with the -- with requirements. We've been off for a number of years, and so we're happy to manage to do that last year. Then, of course, we see that we've still been a bit behind in disabled care and social psychiatry , which is 2 important segments for us. So there, we need to catch up with still a bit from the past year's inflation. On elderly care, having reached this level, we don't see that we are behind price anymore. There will be more inflation-based price changes over the years to come. So the main levers for driving profitability in Finland from this point and onwards will be occupancy and efficiency, not price.

Okay. Yes. You mentioned about the price cost gap. Is that mainly related to Scandinavia? Or is it both in Finland and Scandinavia equally large?

In Finland, it is mainly related to disabled care and social psychiatry segments. And in Sweden, it's related to the elderly care segments.

Okay. Yes. And then one more question about the Finnish government decision to reduce staffing requirements, and you do not expect it to have a significant profit impact. Could you maybe elaborate this a little bit more since I would imagine it would have some impact?

Yes. But if you look at it, I mean, there's a change down now from 0.65 to 0.6. We think that, partly, I mean, it will be good for the market because it will take down the pressure on a strained labor market. It will hold back further salary inflation outside agreements, which is also good for stability and for the labor market as such. It can also be good for occupancy development because, then, it holds back cost development in Finnish elderly care. Having said that, the -- this change was part of a larger budget savings package in public finances in Finland, as you're probably aware, where the -- this change within elderly care was a smaller part of it. There was also a change in VAT, for example. So if you look at the items affecting cost per care in Finland for 2024, we have the staffing requirements for care staff, non-case staff unchanged, which has lowered a bit. But then we have cost drivers, which is higher VAT, which will take the price up. We have general inflation, and then we have the salary movement for next year. So of course, we expected that there was a number of items affecting cost per care day that will be reflected in the price discussions for next year. But we see that the margins in Finland in terms of viewers would be -- we expect them to be fairly intact.

The next question comes from Kristofer Liljeberg from Carnegie.

Two follow-up questions. First, on this discussion about Finland and staffing regulations. Given what you said, do you expect this to have any impact on price, all else equal in Finland 2025?

Yes, of course, it would. But if you look at these different cost items, we can see that it's basically sum -- for next year, they would basically sum up to a cost per care day. And the price per care day, that's quite similar to the one we have. On the other hand, if it wasn't for this regulation, the price would go up sort of with inflation and salary movement. So...

Okay. But do you think that you could argue for -- with your -- with the payers that cost per care day is similar, so this shouldn't impact price?

Yes.

Okay.

But it is early days, Kristofer. And we will, of course -- this was 1.5 weeks ago. So we will, of course, come back to commenting on the situation the following quarterly report.

Okay. But most like, as it looks now, you will continue to increase price in Scandinavia to get compensation for under compensation in previous year and then flat prices in Finland, I guess.

Yes, for elderly care. Then, of course, for social psychiatry and disabled care, it's a normal situation.

Yes. And then on future buybacks and how we should think about that, best guess here, is it similar size that you have been doing this year? Or do you want to increase that further?

Well, as of now, I mean, the Board will set the limit on a quarterly basis, and that's how it's going to work. But I mean, we're dedicated to continuously work with buybacks as one of our mechanism. And given there is a limit on how much you can buy each and every day, and I think that now we're basically buying our share, so to speak, per trading day, this is volume-wise. And obviously, if -- we will always compare with any attractive M&A during that period as well.

Okay. So we shouldn't expect you to increase maybe buying back 5% of the shares per year.

Well, we were pretty close to that in terms of what we've been buying back now up to the AGM. It's pretty close to that run rate.

The next question comes from Stefan Knutsson from ABG.

Just a follow-up on Team Olivia and what you see in terms of potential to grow that business in the coming years. I mean, supposedly, there is a pricing component. But do you also have a volume driver that is similar to what you see in your elderly care business?

Yes. We also see a volume component, and we are expecting to open 6 new houses this year in Team Olivia. So we could be on a slightly higher volume growth in that part.

And then also on the -- on your -- I mean, you did a pretty good breakdown on the EBITA growth target that you have. Just if you can comment anything about differences between Finland and Scandinavia there. With Finland now having the full pricing effects into the numbers, is it mainly Scandinavia that you see potential to drive profitability, yes, up until 2026? Or how do you view that?

We see good potential in both business areas. Also in Finland, there is strong potential for growth. We still have around 1,800 empty beds to sell in Finland, which is -- of course, that's a big growth asset, both in terms of growth and profitability. It's also the fact that over the past 3 years, we've been hunting the -- increasing staffing requirements. We've been on a hunt for staff. Now we're going into different rhythm, which is more work on occupancy and efficiency. So those 2 are strong levers for both top line and bottom line growth in Finland as well.

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any written questions or closing comments.

Okay. I can't see that we haven't -- have got any questions in the chat, so then we conclude this call. Thank you for listening in, and please don't hesitate to contact us directly if you have any further questions afterwards. Thank you for listening in. .

Thank you.

Thank you.