Humana AB (publ) (HUM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Humana Q4 Report 2019. Today, I'm pleased to present CEO, Rasmus Nerman. [Operator Instructions] Rasmus, please begin.

Thank you, and good morning, and welcome to this presentation of Humana's Fourth Quarter of 2019. And as always, I will start by giving you some financial and operational highlights, and then hand over to our CFO, Ulf Bonnevier, who will take us through the details of the quarter and the year. Moving on to the next slide, please, some financial highlights of the fourth quarter. In the fourth quarter we continued to see a healthy growth with operating revenues increasing 12% to just over... [Technical Difficulty]

Please bear with us for one moment as we try to reconnect the speakers.

So back on Slide #2, financial highlights. So in the fourth quarter, we continued to see a healthy organic growth, with operating revenues increasing 12% to just over SEK 1.9 billion. The organic growth in the quarter was 0.7%, down from last year primarily driven by a lower organic growth rate in the areas of Elderly Care and Norway. Our operating profit in the quarter was SEK 71 million, a clear disappointment and a decrease of 13% compared to last year. In the quarter, we incurred one-off costs affecting comparability of approximately SEK 10 million. The effects of IFRS 16 increased EBIT with SEK 16 million. And the resulting operating margin was 3.7%, a decrease compared to the corresponding quarter of last year. The quarter was strong in terms of cash flow with an operating cash flow of SEK 220 million, and our leverage was at 5.4x or 4.0x, excluding effects of IFRS 16. This is above last year and above our financial targets, but clearly moving in the right direction compared to Q2 and Q3. Next slide, please. As a result of our strategy work during the autumn and also considering the new IFRS 16 standard, the Board of Directors have revised our financial targets from 2020 onwards. We will come back to these targets later in the presentation. During the fourth quarter, we also finalized the technical integration of Coronaria Hoiva, and the acquired operations have now been fully separated from the previous owners and integrated it into Humana. Moreover, the Humana brand is being fully implemented. And from March onwards, Humana will be the common brand used for all of our operations in Finland. Finally, the Humana Quality Index remains on a very high 93% in the fourth quarter. Looking at the full year, we come in at a very strong 94%, which is an improvement versus the 92% we saw in 2018. Low sick leave numbers, educational efforts and increased customer satisfaction are the main drivers behind the improvement. Moving on to the next slide, please. In our Individual & Family care segment, the performance was weak in the fourth quarter, primarily driven by too low demand and occupancy imports of the youth segment. Humana is affected by the strained financial in many Swedish municipalities, which has resulted in lower demand in the quarter and year for services within the youth segments, particularly. Important to note, though, however, is that the main challenges are still centered around 2 regions within the youth division of I&F. The performance in other parts of I&F is either stable or good, which makes this a critical, but also fairly isolated challenge. Importantly, our internal efforts are moving clearly in the right direction, with the new management systematically addressing our capacity, the services that we offer as well as utilization and flexibility in our cost base. We can now move to Page #5 in Personal Assistance. In Personal Assistance, our steady performance continues. And during the quarter, we see very high customer satisfaction and increased market share in a market that declined with 2.4% in 2019. Our revenue remained stable, but margins were, as expected, somewhat lower in the quarter. On a full year basis, we are rather pleased with the performance, and we entered 2020 on a very good level. In January, a public inquiry on the profession of personal assistance was presented, and this report contains a number of positive proposals. We also do note that the government clearly expresses its intention to strengthen the right to personal assistance. Next slide, please. In our Elderly Care segment, we continue to see healthy organic growth, although, quite -- somewhat lower than previous quarters. The capacity utilization remains high in our units. Profitability in the quarter was impacted by the opening of Kungsängen, which is ramping up faster than expected, thus, incurring higher costs in the short term. It does, however, also imply that we anticipate reaching breakeven profitability faster than planned for this unit. As commented upon earlier, we are, of course, very pleased to see that we improved our already very high grades in the 2019 National Board of Health and Welfare's annual quality survey. Moving on to the next slide, please. In Finland, the performance in the quarter was, of course, disappointing. We continue to see a very strong structural and organic growth, but the profitability in the quarter was impacted by a weak performance in the newly acquired Coronaria Hoiva, one-off costs for integration, costs associated with opening of new units within the I&F segment in Finland. Plus, we also had some calendar effects due to the placement of public holidays in the fourth quarter. During the quarter, we finalized the integration, which is vital in our efforts to improve profitability going forward. Now our management can focus entirely on the turnaround, supported by better access to relevant data. This is hugely important. Needless to say, also, our operations have been impacted by increasing -- increased staffing requirements and regulatory pressure, not yet fully reflected in all compensation levels. But we do also know that we have a number of internal work streams that will lead to improvements in profitability throughout 2020. As mentioned earlier, we have made several changes to the Finnish management to drive the development for the coming years. And Anu Kallio, the new Head of our Finnish operation, now joins us in a couple of weeks. Next slide, please. Moving on to Norway, where the performance was stable, although, revenues decreased slightly organically during the quarter compared to last year. This is mainly attributable to a planned ramp down of some nonperforming units. Profitability wise, the year was strong, but the quarter was impacted by one-off costs for leaving a number of rented premises early, which, however, will lower rental costs for us going forward. Overall, the strong momentum in Norway continues, and we entered 2020 in good shape, with personal assistance and disabled care housing services being the main drivers for growth going forward. Next slide, please. As touched upon earlier, the Board of Directors have agreed on new financial targets for the group from 2020 onwards, reflecting both, the new financial reporting standard or IFRS 16, but also the outcome of an extensive strategy work done during the autumn. The new targets distinguish more clearly between value creation through organic versus acquired growth. The new medium-term financial targets have been defined as: an operating margin of 7% over the medium term; annual organic revenue growth of 5% over the medium term, bolt-on acquisitions may generate additional annual growth of 2% to 3%; interest-bearing net debt not exceeding 4.5x EBITDA; and the dividend policy remains unchanged. So I think with this said, I will now hand over to you, Ulf.

Thank you, Rasmus. I will now give a brief summary of some more details about the performance overall and per business area as well as cash flow and financial position. First of all, we turn to Page 10 of the presentation where we see the operating revenue for the group. In the fourth quarter 2019, our operating revenue grew to SEK 1,912 million, up 12% from SEK 1,700 million the previous year. Acquired growth contributed SEK 165 million to revenue, of which SEK 143 million relates to Coronaria Hoiva in Finland. And the organic growth was 0.7% compared to 4.8% previous year. The lower organic growth in the quarter is due to the weaker organic growth rate in Elderly Care and Norway versus earlier. Next page, please. Operating revenue, full year, on Page 11. For the full year, operating revenue grew to SEK 7,467 million, up 11% from SEK 6,725 million previous year. Acquired growth contributed SEK 613 million to revenue, and SEK 443 million of that relates to Coronaria Hoiva in Finland. The organic growth was 2% compared to 3.4% for the full year 2018. On Page 12, you can see Humana's development with regards to organic growth. After a reasonable development earlier quarters in 2019, the level in quarter 4 was lower-than-expected. This is mainly due to lower growth rate in Norway and Elderly Care. In Norway, we've closed a couple of unprofitable units, and therefore, the organic growth is lower compared to the comparable quarter. And in Elderly Care, we still have a good growth level of around 10%, but last year was really strong with both new unit openings and contract wins, combined. Now moving to Page 13 for more information on our results in the fourth quarter. Our operating profit decreased 13% in the quarter to SEK 71 million, down from SEK 82 million in quarter 4 last year. Excluding the effects of IFRS 16, integration and acquisition-related items, the operating profit decreased 36% to SEK 61 million for the quarter, down from SEK 95 million prior year. The effect on operating profit from IFRS 16 is plus SEK 16 million, and this, you will find as a reduction of the central costs. The components of the SEK 16 million are decreased rental costs of SEK 83 million and an increase in depreciation of SEK 67 million. Integration costs for Coronaria Hoiva was SEK 6 million. The margin was 3.7% versus 4.8% last year in the quarter. And excluding IFRS 16, the margin ended up at 2.9% compared to 4.8% the previous year. The decrease in the profit for the quarter is mainly attributable to a disappointing quarter in Finland, mainly the Coronaria Hoiva performance, low occupancy in children and adolescents in I&F and start-up losses in Elderly Care. Apart from operational issues, we also had one-off items totaling approximately SEK 10 million of integration costs as well as costs for terminating leases in Norway. Next page, please. When we look at the profitability for the full year on Page 14 and exclude IFRS 16 of plus SEK 46 million and acquisition-related costs of minus SEK 42 million. So they largely balance out. The operating profit is down 11% at SEK 365 million versus prior year's SEK 409 million. When we look at the operational performance, we see a weak year from the I&F business area, mainly due to a weak demand in the youth segments, performance below expectations for the first 9 months of consolidating Coronaria Hoiva, but also, the market in Finland has impacted negatively. Stronger or more stable performance in Personal Assistance, Elderly Care in Norway, but this is not nearly enough to compensate for the development in I&F in Finland. Next slide, please. Now moving to Page 15 and the segment performance, starting with Individual & Family. Revenues for the quarter reached SEK 518 million, a decrease of 3.8% versus prior year's SEK 540 million, with negative organic growth of minus 3.8% versus minus 2.6% prior year. The decrease is due to lower occupancy, especially for housing solutions for children and adolescents. Operating profit came in at SEK 27 million versus SEK 37 million prior year, and the margin decreased to 5.1% compared to 6.8% prior year. And the decrease is due to lower occupancy. The financial performance is less than satisfactory, but internal efforts are moving in the right direction. The new management is addressing the main issues with capacity utilization and flexibility in the cost base. Next slide, please. We'll now move to Page 16 and another stable quarter from Personal Assistance. The revenues for the fourth quarter were up 3% to SEK 707 million compared to prior year of SEK 689 million, with organic growth of 0.3% versus 2.2% last year. The number of assistance hours naturally vary per quarter. And the market also declined last year with 2.4%. Most of the revenue increase comes from acquisitions. Operating profit for the quarter decreased, as expected, somewhat to SEK 37 million, down from SEK 41 million last year. And this comes mainly from the increase in staff cost versus the state reimbursement level. The margin ended in the quarter at 5.2% versus 5.9% prior year. Next page, please. Elderly Care, on Page 17. Revenues grew in the quarter with 11% organically, and reached to SEK 143 million versus SEK 129 million prior year. This comes from the recent openings and reasonable occupancy overall. Operating profit was SEK 0 million versus SEK 4 million last year, and the operating margin was 0.3% versus 2.9% prior year. start-up costs of SEK 4 million has impacted the quarter, and it relates to our opening of Kungsängen, which is progressing well, with occupancy developing better than expected. Overall, a reasonable development in the Elderly Care business area. Next slide, please, and moving to Finland. Revenues for the fourth quarter in Finland came in at SEK 348 million compared to SEK 159 million prior year, an increase of 119%. And organically at constant currency, the growth was 10.7% versus 6.9% prior year. Again, a strong growth driven mostly, of course, by our new acquisition, but also by new unit openings in the I&F area together with more customers. So the operating profit decreased to SEK 9 million versus SEK 17 million prior year, with a margin of 2.7% versus 10.9%. [Technical Difficulty]

Ladies and gentlemen, please bear with us as we try to reconnect the speakers.

Okay. We are in Finland and numbers. And we are with operating profits. So the operating profit decreased to SEK 9 million versus SEK 17 million prior year, with a margin of 2.7% versus 10.9%. Of course, this is a dissatisfactory performance. When breaking it down into its 3 components, we have the following: one, the newly acquired Elderly Care operations need to improve occupancy and efficiency. Both occupancy and efficiency could have been somewhat better in the quarter and we are addressing these issues together with the new local management. Two, we are now finished with the technical integration of the support functions, and this consumed SEK 6 million in the quarter in terms of cost. So we are now fully separated from the previous owner's technical structure. We are, however, still working hard on refining our processes further. Three, the I&F part of Finland is doing well in general. This is the part where we have good organic growth, but suffered a smallish negative impact on the margin due to the opening of new units. Next slide, please. Now we're moving to Norway on Page 19. Revenues increased in reporting currency to SEK 196 million versus SEK 177 million prior year, and the organic growth was negative minus 0.7% versus 4.8% prior year. This development is explained by a lower number of customers in the comparable period as a result of the closure of a couple of unprofitable units. Operating profit declined to SEK 13 million versus SEK 20 million prior year, and the margin was 6.8% versus 11.1% prior year. The decline in operating profit was impacted by one-off costs of SEK 3 million for leaving rented property early. Adjusted for that, the development was in line with our expectations since the comparable period last year was exceptionally strong. Overall, a stable development in Norway in the quarter and also good for the year as a whole. Next slide, please. Now moving on to Page 20 and 21, and our financial position and cash flow. Cash flow from operating activities for the quarter was SEK 206 million versus SEK 191 million last year, excluding the impact of IFRS 16. And the quarter was positive when it comes to working capital driven by good collections. Our CapEx investments continue to be fairly high, but compensated by a further batch of real estate sale and leaseback of approximately the same level. In the graph, we also see our leverage, although, on the high side, but moving clearly in the right direction versus second and third quarter. Excluding IFRS 16, our leverage is down to 4x, and including IFRS 16, we're at 5.4x. Although, our quarter 4 results are not great, we've managed to improve our financial position to a better level. So with that comment, I hand the word back over to you, Ras.

Thank you, Ulf. And so to summarize the quarter and the year, it has certainly been full activities, both during the quarter as well as over the full year. We have continued to build a sustainable Nordic care group with strong quality positions in all of our segments. We have experienced strong growth, but we've also struggled with profitability. The weak finish to this year is far from satisfactory, but we are convinced that our hard work in the quarter will pay off. Come 2020, there is ample room for improvements, and we do enter the year with a sharp focus on profitability. We have good confidence and also very good momentum in Personal Assistance and Norway. The performance in our Elderly Care segment was reasonable, but we do expect improvements from increased capacity utilization in our newly opened units over 2020. In I&F, we need to see further stabilization, but we do also see that our internal efforts are moving in the right direction, where we're addressing challenges systematically with an ambition to improve permanently. In Finland, we have experienced a challenging year with acquisition of Coronaria Hoiva, the changing and challenging marketing -- market environment, many new openings and also, focus on integration. As we now enter 2020, we do that in better shape. With the integration finalized, the new management in place and activities already ongoing, we do expect gradual improvements throughout 2020. In parallel to improving our performance, we will also continue the important work on increasing stability and predictability. Much work remains, but we're well equipped to face 2020. So I think with that said, we can now open up for questions. Thank you.

[Operator Instructions] The first question comes from the line of Kristofer Liljeberg from Carnegie.

Yes, first one question regarding the restructuring costs. Are they on the overhead cost line? Or do we find them in the different business lines?

You will find them in the different business lines.

And so it's SEK 6 million in Finland? And what more than that?

SEK 3 million in Norway. SEK 3.5 million for leaving rented property early.

Okay. And the SEK 3.5 million, is that towards -- is that in the -- where elderly base care line are?

No. No, it's in Norway.

Okay. And then is it possible, regarding the Individual & Family business, you mentioned there were 2 underperforming units in Sweden. Is it possible to quantify the impact there? If it's really so that the problems are -- is related as you said? And also looking into 2020 here and the work you're doing to trying to stabilize operations, and that should result in less quarterly variations. How soon do you think that will start to help you?

I can comment on that, Kristofer. I mean just to clarify, it's not 2 units. Its 2 regions, of course. It's the southern and western region. I think we have been discussing those -- these 2 regions for well above a year now. I think trying to quantify them. It's obviously a simplification of reality. We have some units that are underperforming in other segments as well, but trying to isolate the 90% of our issues, they are kind of isolated to these 2 regions. Trying to quantify them. Basically, they alone would represent the deviation from last year. I mean that's the way to quantify, both on the top line as well as bottom line, perspective. And the work on stabilizing, I mean, that's work ongoing. It obviously contains many elements. We do need to look at our portfolio in these 2 regions. We're not alone here. I mean there is a market component. These municipalities, [indiscernible], et cetera, they're obviously with pretty strained financial situation as well. So we must look at what kind of offers -- offering do we have. Do we perhaps need to pause or close some units? Do we need to transform some of these units, et cetera? And once we've done that journey, we will see an increased stabilization as well. And I also like to highlight, which I did, I mean, the bulk of business in I&F is fairly stable, I mean, both in terms of utilization and also in terms of profits in a sense. These regions have a majority of units that typically have shorter-term placements, they're slightly larger, and they're not as specialized as the rest of units that we have in the northern part of Sweden.

How confident are you improving Individual & Family earnings in 2020?

I think it's a little bit too early to say. I mean that is, of course, our ambition to improve earnings in Individual & Family. It's in our own plans as well. Then the question is -- I mean, equally important for us is also to counteract the negative organic decline to start growing as well organically. Ambition is certainly to improve I&F in 2020, no doubt about that. But I would be hesitant to give exact number.

Yes, I understand that. And finally, Finland, the earnings in Q4 versus third quarter, is that just reflecting seasonality? Or has that business seen further deterioration, underlying, if you strip out the restructuring costs?

If you strip out the restructuring costs and wanting to enter 2020 in good shape as well, the underlying business performance is about the same. Coronaria Hoiva, which is the acquired business, is slightly loss-making in the fourth quarter. We do, however, expect that to improve gradually now in 2020. But I also have some other effects, which I mentioned, among -- one, of course, is that we put a lot of work into the integration. Now that has been finalized, so business as usual. And in our operations, it's, of course, exceptionally important that our managers can focus on their ordinary business. And that will in itself drive improvements and that we expect to see now already in the first quarter.

And the next question comes from the line of Karl-Johan Bonnevier from DNB Markets.

Yes, on the new financial targets, are -- do you see them just as an adjustment to IFRS 16? Or have you -- could you allude a little how you have thought about coming up with the safe organic growth target instead of the previous one where you'd bundle it? And also on the net debt-to-EBITDA target, does that now give you more flexibility? Or how should we see it?

I think, Karl-Johan, it all started -- I mean IFRS 16 is just a layer that we've put on the targets. The targets themselves originate from the strategic planning that we did this autumn. We looked at a 3-year plan, where we should be as a company in 3-year, what we think that we can accomplish given the projects that we have in the pipeline. And then we simply apply IFRS 16 to that. So if you look at the operating margin, I mean, it's basically the same to what we have today, maybe a slight increase. If you look at the leverage, it's about the same, justifying our IFRS 16. But it's also, as you can see, more emphasis on value creation through organic growth. And that is, of course, because we have a number of exciting organic growth projects in our pipeline in the coming 3 years. I think with that also comes a more internal stricter focus on capital intensity, return on capital, return on investments, et cetera, in the new IFRS 16 world.

And we have a follow-up question from the line of Kristofer Liljeberg from Carnegie.