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

Welcome to Attendo Q2 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. Today, we present Attendo's Q2 results showing clear improvements, both financially and operationally. To start with, I'm very pleased that Attendo's Olivia Care business is now part of Attendo. Together, we integrate a leading private provider in disabled care and individual and family care in Sweden. The first part of the integration has been successful. And financially, Team Olivia is delivering well in line with our expectations. In May this year, we presented a new medium-term target of achieving an EPS of at least SEK 5.50 per share in 2026. I'd say this quarter as a milestone on the way to deliver on this target and as an indication of our ability to create significant shareholder value in the years to come. I'm also pleased to see that our most recent measurements in employee engagement and customer satisfaction continues to show strong progress. I'll now start with giving you an update on the development during the quarter, followed by a more detailed financial analysis from our CFO, Mikael Malmgren. Slide 2, please. In the second quarter, we managed to grow sales with 12%, mainly driven by M&A, foremost Team Olivia Care. Underlying adjusted EBITDA improved by SEK 40 million to SEK 187 million and affected Team Olivia acquisition in combination with underlying operational improvements in Scandinavia. In Finland, we managed to maintain profit year-over-year in spite of a negative cost price effect in the quarter due to the high wage increase in 2023. For the full year, we expect the cost to be fully offset by price adjustments and further lower result in nursing homes was compensated by higher results in disabled care and social psychiatry. According to the new elderly care law in Finland, we need to step up beforehand in order to welcome new customers. Since customer inflow was initially lower than expected, we have had more staff than necessary during most of the quarter. However, I'm pleased to see that we have had better inflow in June, which in turn allowed for better staff efficiency. In Scandinavia, we almost doubled our profit year-on-year adjusted for one-offs. Team Olivia was the biggest contributor to the improvement, but we also improved performance from our own nursing homes. Customer inflow has been strong, and we have increased occupancy by 1 percentage point since last quarter and last year. Finally, we report strong cash flow during the quarter as a result of the profit improvement and positive working capital and we maintained a strong balance sheet in spite of the acquisition. Post the acquisition of Team Olivia, were at 2.2 in net debt to EBITDA, this means that we still have headroom to continue with our active capital allocation with buybacks, investments in own operations as well as selective acquisitions. Next slide, please. Now a few comments on the progress of our sustainability work among financial KPIs. In my introduction, I mentioned progress on key metrics related to employee engagement and customer and relative satisfaction. These metrics are particularly important because they go to the heart of what we do. In recent years, we have placed a strong focus on leadership, employee engagement and culture. During the second quarter, we hosted leadership events with all our managers in each business area. And in this, we share experiences, listen to inspiring talks and award good performance. Having the ambition to be seen as a preferred employer with the best leaders in the care industry, the results of our employee service shows that we are on the right track. Net Promoter Score of employee recommendation is now at an all-time high at 26, an increase of 15 points since last year, well above the industry average. When it comes to customer satisfaction, results of our service shows a similar trend. Customer NPS was 45 in Q2, up from 40 last year. Engaged employees are the basis for customer satisfaction, and we see a strong connection between these measures. Next slide, please. So let's turn to the development of occupancy, which is a key factor for our long-term profitability. Group occupancy at the end of the second quarter was unchanged at 86%. Underlying, however, we can report an increase in occupancy in Scandinavia during the quarter with 1 percentage point from 86% to 87%, mainly as an effect of internal efforts to increase sales and slightly better market conditions locally. In Finland, the market was slow in the beginning of 2024, reflecting the challenging financial situation in the welfare regions. We also added net 100 beds in the quarter. Still, the underlying demand is strong, and we expect customer inflow to start increasing again as well for regions over time needs to fulfill their commitments to their citizens. Overall, we see growing underlying needs in society in all our markets. We continue to see an increasing number of customers, which is to live in our nursing homes. Next slide, please. The left graph 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 has been improved business terms in Finland. With the acquisition of Team Olivia and in combination with underlying operational improvements, we're starting to see an upturn also in Scandinavia. The chart to the right shows rolling 12 months lease adjusted EBITDA margin. Group margin improvement has over the past 18 months been driven by the performance in the Finnish elderly care segment, but now we start to see margin improvements in Scandinavia as well. We expect the financial improvement in Scandinavia to continue as a result of higher occupancy and further operational improvements. The acquired parts of Team Olivia will also improve the business area performance year-on-year from now on. 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 next page. So net sales in the quarter increased to SEK 4.8 billion, which is up 12% compared to the quarter last year. The organic growth for the quarter was 3%. Organic growth was flat in Attendo Scandinavia, where we saw continued organic growth in owned nursing homes. However, growth was offset by outsourcing contracts that ended end of last year. Including acquisitions, Scandinavia grew 21%. In Attendo Finland, the organic growth was 6% and primarily driven by improved terms. Currency effects had a minor effect on sales. Slide 7, please. Excluding Attendo Scandinavia's one-offs, the reported result improved to SEK 323 million, and correspondingly, the lease adjusted EBITDA increased from SEK 147 million to SEK 187 million. Lease adjusted EBITDA in Scandinavia improved excluding one-offs by SEK 39 million year-over-year, while Finland lease adjusted EBITDA was in line with previous year. Next slide, please. Growth for Attendo Finland amounts to 6% reported and in local currency. Lease adjusted EBITDA was in line with last year at SEK 131 million. The quarter was impacted by high personnel costs and negative cost versus price effect in owned nursing homes and which will also impact the results in Q3 before improving again in Q4. The negative development in nursing homes was offset by improved terms in social psychiatry and disabled care as well as improved operational KPIs, including reduced staff turnover, recruitment and sick leave cost. Occupancy rate remained unchanged. However, sold beds increased at the end of the quarter, and we added 100 net new beds. And as mentioned earlier, the Finnish government announced in April that staffing requirements and care for older people will be reduced from 0.65 to 0.6 care staff per resident from January '25. We maintain a positive view of the change requirements. And although still early days, our assumption is that this will have a neutral effect on profitability in absolute terms. Slide 9, please. In Attendo Scandinavia, the organic growth was flat. We saw continued underlying growth in owned nursing homes driven by price and net new sold beds. However, growth was offset by lower revenue from the outsourcing contracts that ended end of last year. And acquisitions had a considerable effect on sales. And in total, Scandinavia grew by 21%. Lease adjusted EBITDA, excluding one-offs, more than doubled to SEK 75 million. The improvement was driven by Team Olivia acquisition as well as improved results from our own nursing homes and lower losses in Denmark. The positive development was partly offset by the ended outsourcing contracts, which had a negative SEK 50 million impact versus Q2 last year. Ended outsourcing contracts will continue to impact the result while gradually less throughout the remaining part of the year. As part of our turnaround plan in Denmark, we exited our home care operations in Q2 and this will have a positive SEK 10 million EBITDA effect going forward on an annualized basis. In addition, and in line with our strategic plan to focus on own nursing homes, we signed an agreement to divest our outsourced nursing home at the beginning of July, and we expect closing beginning of August. Please note though that the -- we expect Q3 to be impacted by additional nonrecurring integration and divestment costs for Denmark of around SEK 20 million. Slide 10, please. Our cash flow on a rolling 12-month basis remained strong at SEK 820 million and continues to improve. And please note that in the quarter, working capital was impacted by end of quarter timing effects and a nonrecurring lump sum collective agreement salary payment in Finland. CapEx was also slightly higher, and will, as previously communicated, continue to normalize at more normal historical levels compared to last year's low level. Also note that during the quarter, we repurchased shares to a value of SEK 110 million, and we will continue our repurchases in Q3 under a new program. The program, which is decided quarterly by the Board aims to repurchase up to SEK 150 million up until next quarterly report and will be, as before, executed under the safe harbor regulation. Next slide, please. Let's start at the top left. The adjusted earnings per share improved due to the improved lease adjusted EBITDA and was as expected, slightly offset by increased financing costs and increased income tax. On the top right, we note that the lease adjusted EBITDA margin, excluding the Q2 one-offs in Scandinavia continued to improve to 4.6% on a rolling 12-month basis. On the bottom left, lease adjusted net debt-to-EBITDA ratio increased and the increase is primarily due to acquisitions concluded in April. Net interest expense in the quarter was SEK 40 million and driven by increased financing costs due to the recent acquisition. On a rolling 12-month basis, the net interest expense increased and will, going forward, continue to increase due to the reasons mentioned. Next slide, please. I'd just like to briefly recap on our new financial targets that we introduced in May. Our new EPS target is to reach at least SEK 5.50 per share by '26. This target is not a best case and it represents what we target to at least and are committed to deliver as a minimum. The target is made up of 3 building blocks, the first block being Team Olivia, where we expect a positive contribution of at least SEK 0.5 per share from 2025 when fully integrated. Second building block is EBITDA improvement. We expect underlying EBITDA growth of at least 10% per year, driven by increased occupancy, operational efficiency, price adjustments, new units and continued add-on acquisitions in existing segments. Thirdly, we see good opportunities to increase shareholder value through active capital allocation. We will continue and when favorable to seek Board approval for quarterly continuous buybacks, as well as annually segmented from the Annual General Meeting. So far to date this year, we have repurchased shares to about SEK 180 million, which corresponds to about 5% to 6% of outstanding shares on an annualized basis. And as mentioned, a new program will start on Monday and which will run up until our next quarterly report. The program has a mandate to repurchase up to SEK 150 million and will be executed under safe harbor. These 3 building blocks add up to at least SEK 5.50 EPS in '26. So let me now turn to the debt target. The adjusted net debt to adjusted EBITDA should be in the range of 1.5 to 2.5. We could temporarily exceed 2.5, for example, in connection with a major acquisition. In regard to the dividend, we maintain our previous target of paying out 30% of adjusted net profit. With that, I hand over to you, Martin.

Thank you, Mikael. Before we move on to the Q&A, let me briefly summarize the quarterly development. So once again, we delivered a quarter-on-quarter improvement. Improvement was driven by the acquisition of Team Olivia in combination with underlying operational improvements in Scandinavia. As a result, we doubled the profit in Scandinavia compared to last year, adjusted for one-offs. In Finland, we managed to maintain profit year-over-year in spite of negative cost price effect in the quarter due to the high wage increase in 2023. It's also encouraging to see that our investments in leadership and employee engagement are paying off with record high NPS figures during the quarter. We also delivered a solid cash flow in the quarter. And despite the recent acquisition, our debt level is well within our target range. Hence, we're well positioned to continue to create value through capital allocation and selective investments. All in all, I see good progress both operationally and financially. We have many opportunities in the years ahead and both well equipped and committed to solving societies' complex candidates while empowering even more individuals. Now let's turn to the Q&A session.

[Operator Instructions] The next question comes from David Johansson from Nordea Markets.

First one, if you could quantify the earnings impact from Team Olivia? That was one question I had. And then I wanted to follow up on Finland. I think you have been pretty clear on improving occupancy head, which I guess now are expected for the second half of the year. But if you could remind us of the drivers here and what your expectations are from the new staffing regulation?

Yes. Thank you, David. Let me first comment on Olivia, and then I'll hand over to Martin regarding the occupancy in Finland. So Team Olivia delivered close to SEK 30 million, which was in line to slightly better than our expectations. We see that the seasonality for Team Olivia is fairly similar to us, with a little bit less impact in Q3 and Q4 versus Attendo's normal seasonality, but fairly similar.

Yes. And going over to Finland. So this is Martin again. On occupancy, we have experienced a slower development than anticipated in H1 due to the financial constraints in the wealth regions. We expect that to -- the financial situation will still be tough during H2, even though we've seen some positive signs in the end of this quarter. But we hope for a slight improvement in occupancy during H2. Having said that, there is also a lot of work to be done still on efficiency in Finland, which is something that we will continue to work with during the second half also to counter the lower occupancy development that we expect. We think that the financial pressure on the welfare regions, they will -- it will get better from next year on. Given the new staff and regulations of 0.6, we think that is positive for the welfare regions. It would be easier to find stuff. It will release some of the expected cost increase going into next year. And also the next year, it's also time for the welfare regions to reset their budgets going forward. So we believe that we see the regulation being positive for occupancy outlook in Finland from 2025 and onwards.

Then I wanted to ask on the development in social psychiatry and disabled care in Finland. Is this mainly related to price adjustments that you, I guess, did not expect before? And do you think this will be enough to maybe improve earnings now for Q3?

Yes. So let me answer on that. I think we saw both the improved terms that we had anticipated coming through, but we also saw a growth in occupancy in our disabled care segment, which further improved the results. We don't foresee an improvement in EBITDA in Q3, but expect similar pattern to Q2.

Okay. That's great. And then lastly, if I could follow up on Denmark. Could you comment on the improvements that you're expecting now in terms of profitability? I guess you expect Denmark to show black numbers adjusted for the one-offs you talked about for Q3, but any indications for Q4, I think, would be helpful.

Yes. I mean we have -- the actions that we wanted to implement in terms of improving operations has been successful, and we see a continued increase in occupancy. We maintain our previous communicated that we will target the breakeven in Q4. Yes.

On a rolling basis or a run rate going into '25?

That will be the run rate going into '25.

The next question comes from Kristofer Liljeberg from Carnegie.

Four questions. First, if you could comment on the net win some new outsourcing contracts in Sweden that was quite a while ago. So if you have any changed strategy there or any reason for that happening now? Second question, EPS target for this year, is that with or without Olivia acquisition? My third question relates to price -- pricing in -- or prices in Finland next year. Do you expect them to be net up? Or could we actually see downward adjustments with the new staffing regulation? And finally, if you could quantify the loss you had in Denmark in the second quarter.

Okay. I'll start and then Mikael continue with the last question on Denmark later. So on outsourcing, yes, we have to gladly notice that we started to win in outsourcing again. We have done quite some job in reorganizing the way we work with outsourcing, focus on quality tenders, not price. We still think that winning prices on price tenders are too low in the business. But on the quality tenders, it's possible to win. And make both a good quality work and a good operation in terms of financials. So we have done work on revamping our tendering department and the way we work with tender. So that is started to pay off, and hopefully, that will continue as well, which we're happy about. On the SEK 4, that's including Team Olivia. And on pricing next year in Finland, there are a number of moving parts. We have the regulation, of course, I mean that the staffing requirements going from 0.65 to 0.6, which will lower cost of more care somewhat, then we have inflation on top of that going up. We have the change in VAT, which has also increased cost a bit. And then we have the salary movement next year. So if you look at that all in all, we don't expect any major moves in price for next year. But if we look at the cost of operations, it would be quite similar to this year all in all. So this year, we don't expect any large movements in price effects, and we also expect profitability to remain similar to this year. But on the other hand, we expect positive -- have a positive view on our ability to improve occupancy next year, given this.

And your comment about similar profitability that's on a like-for-like basis then?