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

Ladies and gentlemen, welcome to the Humana audiocast with teleconference Q2 2021. I am pleased to present CEO, Rasmus Nerman; and CFO, Noora Jayasekara. [Operator Instructions] Speakers, please begin.

Yes. Thank you, and good morning, and welcome to this presentation of Humana's second quarter of 2021. As always, I will start by giving you some of the financial and operational highlights and then hand over to our CFO, Noora Jayasekara, who will take us through the details on the financials of the quarter. Next slide, please. During the second quarter, we continued to see good overall progress. Needless to say, we have had a lot of focus on our Elderly Care segment, where we, during the quarter, are ramping up 4 new own managed units. Handling the pandemic is, of course, too, a major focus for the group, and we are pleased to see that the situation is well under control, helped by vaccinations of both staff and customers. Whereas the transmission of the virus in our operations is basically 0, we still see a dampened, although slightly improving, demand in our Nordic Elderly Care. Financially, the quarter was solid with organic growth and improvements in operating profit. During the quarter, we also signed the acquisition of Balans Behandling. The acquisition will, however, be closed in the fourth quarter of this year. Next slide, please. In the second quarter, our operating revenues increased with 4% and Humana reached the milestone of quarterly revenues exceeding SEK 2 billion. The organic growth in the quarter was 3.4%, in line with last year. Our operating profit in the quarter was SEK 107 million, an improvement of 7% to SEK 100 million in the corresponding quarter of last year. The adjusted operating profit improved 28% compared to last year's SEK 83 million as we exclude the capital gains from sale of properties. The operating margin was 5.2%, an improvement versus last year's 5.1%. And in the quarter, we had a strong operating cash flow of SEK 251 million, and our net debt is at SEK 3.9 billion. The leverage was at 4.5x, which is in line with our financial target and down slightly compared to last year. Next slide, please. As mentioned in the beginning, we continue to handle the pandemic well with very low transmission of the virus, none in the Nordic Elderly Care. We are also pleased to see the positive impact from vaccinations, but we do keep to our strict procedures and protocols in all operations. In the second quarter, the Humana Quality Index remained on a high 94%. The number of serious deviations reported to authorities was in line with last year. One of the deviations referred to the tragic accident in Platea in June. Next slide, please, and over to our segments, starting with Personal Assistance. In Personal Assistance, the performance again was solid. We continued to grow in the quarter with 3%, of which 1% was organic. During the quarter, a public investigation on the right to personal assistance was presented. If proposals here are realized, it would strengthen the right to personal assistance for many individuals and their families and thus be very positive. Needless to say, Humana contributes actively to this work. During the year in the quarter, we have also seen some increased regulatory focus. Although we welcome strict regulations, there is an industry concern around the unpredictability that we currently see. At Humana, we continue to be positive to the future outlook for Personal Assistance. And moving on to the next slide, please, in Individual & Family. In our Individual & Family Care segment, too, the performance was fairly strong, although the quarter was turbulent. We continue to see a fairly good and stable demand in our roughly 180 units. Towards the end of the quarter, our focus was, of course, on the tragic incident at one of our units in Platea. The entire organization was affected by this incident and we take it very seriously. Following our Lex Sarah investigation, we decided to immediately close the concerned unit. We're also taking a number of other actions, including steps to further develop our systematic quality control. And as mentioned previously, we also signed the acquisition of Balans Behandling. With revenues of approximately SEK 60 million, Balans Behandling is one of the leading providers of psychosocial care in Northern Sweden. The acquisition will be closed in Q4 this year. Next slide, please. Moving on to Elderly Care, where we had a busy quarter, with 4 new own managed units under ramp-up, a total of 260 apartments in 4 locations. So far, the openings are progressing according to plan, both in terms of demand as well as recruitment. On top of ramp-up, our focus, of course, remains also in handling the pandemic, where we continue to see stable situation, thanks to vaccinations. We have no transmission of virus in our Elderly Care. We're pleased to see certain improvements also in utilization over the quarter, although there is some seasonality here as well. Although demand is picking up, we do still expect a dampened demand in the coming quarters as well. Next slide, please. Moving on to Finland, where things are moving in the right direction, with operational improvements resulting also in better performance. We are also pleased to see positive organic growth in the quarter. Whereas the pandemic still has a negative impact on operations in Finland, we are pleased to note an overall improvement in occupancy in all divisions in Finland over the quarter. Going forward, we will put additional focus on organic growth and new openings, especially in the Finnish I&F segment. Next slide, please, and over to Norway. In Norway, we continue to see operations developing well. Pleasing to see in the quarter was the strong organic growth of almost 16% driven by both high demand in our disabled care segment as well as a strong customer inflow in Personal Assistance. We also saw a stable occupancy in our other I&F segment, Daneva, which has been slightly more volatile in the past. Towards the end of the quarter, Humana also won a number of smaller tenders within the disabled care segment, HOT. Another solid quarter also in Norway. With this said, I will now hand over to you, Noora.

Thank you, Rasmus. I will now give some details to our performance in the second quarter of 2021. Turning to Slide 10. From a financial perspective, it has been another stable quarter, with leverage in line with targets and strong operative cash flow. After the quarter end, we have signed a new 3-year financing agreement. The agreement ensures Humana's long-term financing needs and has improved terms compared to previously. Next slide, please. On Slide 11 in the presentation you can see the operating revenue for the group. In the second quarter of 2021, our operating revenue increased with 4% from last year's SEK 1.98 billion to just over SEK 2 billion this year. Individual & Family, Personal Assistance and Norway are contributing. Revenue is negatively impacted by the COVID-19 pandemic, largely due to lower occupancy in Elderly Care in Sweden and Finland. Organic growth in the quarter was flat at 3.4%. Lower organic growth in Personal Assistance and Elderly Care is compensated by improvements in both Individual & Family as well as Norway. Next slide, please. Now moving to Slide 12 for more information on our results in the second quarter. Operating profit for the quarter came in at SEK 107 million versus SEK 100 million last year, an increase of 7%. Adjusted operating profit increased by 28%. The margin increased slightly from 5.1% last year to 5.2% in the second quarter. All business areas contributed to the increase, except for Elderly Care. A stable second quarter. The pandemic has had a very marginal financial effect on the profitability for the group in the quarter. Our continued assessment is also that the effect is manageable going forward. Next slide, please. On Slide 13 and the segment performance, starting with Personal Assistance. Revenues for the second quarter were up 3% to SEK 756 million compared to last year of SEK 733 million, with an organic growth of 1.1% versus 5.4% last year. Higher reimbursement, partly offset by fewer assistance hours and acquired operations, drive the development. Operating profit for the quarter increased to SEK 35 million, up from SEK 29 million last year. Also, the margin increased to 4.7% versus 4% last year. The increase in margin is mainly due to increased efficiency, higher reimbursement and lower social security contributions for young. Acquired operations contributed as well. Another well-managed quarter from Personal Assistance. Next slide, please. Now moving to Slide 14 with Individual & Family. Revenues for the quarter reached SEK 578 million compared to SEK 532 million last year. Organic growth in the quarter was 4.2%, up from last year's minus 0.7%. A stable occupancy in several segments as well as new units and acquisitions drive the improvement. Operating profit came in at SEK 50 million versus SEK 49 million last year, and the margin decreased to 8.7% compared to 9.3% last year. The operating profit in the quarter is, however, affected by costs for terminated operations of SEK 8.9 million. Excluding these costs, the operating margin increased to 10.2%. Stable occupancy and contributions from acquisitions are behind the increase. Individual & Family delivered a good second quarter. Next slide, please. Elderly Care on Slide 15. Revenues were flat in the quarter. 4 new own managed units were opened. But dampening the growth, COVID-19 is still impacting occupancy negatively. Operating profit was minus SEK 4 million versus SEK 1 million last year, and the operating margin was minus 2.4% versus 0.7% last year. The start-up costs for the new Elderly Care homes under own management are affecting the quarter. The pandemic affected the results from lower occupancy and higher costs for sick leave and protective equipment, partially offset by government grants. Opening the new unit has been main focus in Elderly Care. Next slide, please. Finland on Slide 16. Revenues for the second quarter in Finland came in at SEK 325 million compared to SEK 338 million last year, a decrease of 4%. Organic growth was 1% versus 0% last year. The improvement is due to improved utilization and new units. Operating profit increased to SEK 16 million versus SEK 11 million last year, with a margin of 4.8% versus 3.2% last year. The increase is explained by improved utilization and better operational efficiency. The second quarter shows continued improvement in Finland. Next slide, please. Norway on Slide 17. Revenues increased with 20% to SEK 240 million versus SEK 201 million last year, and the organic growth of 15.7% versus 9.5% last year. The growth development in this quarter is due to new units and more customers in Personal Assistance and the Disabled Care segment. Operating profit increased to SEK 22 million from SEK 16 million last year, and the margin improved to 9.3% from 7.9% last year. High operational efficiency and more customers drive the improvement. The strong momentum in Norway continues. Next slide, please. Moving on to Slide 18 and central costs. Underlying central costs are slightly lower than last year. Sale of real estate affected the comparative period positively. Next slide, please. On Slide 19, you can see our financial position. Interest-bearing debt increased with SEK 318 million to SEK 3.9 billion compared to Q2 2020, and leverage decreased slightly to 4.5x from 4.6x. Interest-bearing debt is up slightly compared to Q4 2020, partly due to higher IFRS 16 debt related to the new Elderly Care unit. Next slide, please. Operating cash flow for the quarter on Slide 20 amounted to SEK 251 million versus SEK 221 million last year. The increase is due to higher profit and decreased working capital. Next slide, please. From a financial perspective, yet another stable and predictable quarter for Humana. With that, back to you, Rasmus.

Thank you, Noora. We can move to the last slide in the presentation. We are pleased to see yet another stable quarter with good overall progress for the group. We continue to grow organically, and we have opened 4 new Elderly Care homes in own management during also now in the spring. Our focus on the pandemic remains, but the situation is well under control, partly, or mainly, thanks to vaccinations. We continue to see improvement, both in terms of profitability as well as financial situation with our strong operating cash flow. We have also secured a new financing agreement that ensures flexibility in the future. Following my decision to leave Humana after 10 fantastic years, the Board has started the process to recruit my successor. But my, as well as our, priorities going forward remain the same. We want to continue our focus on value creation, continue to drive organic growth and continue to build the pipeline of accretive acquisitions. We can now open up for questions. Thank you very much.

[Operator Instructions] And our first question comes from Kristofer Liljeberg from Carnegie.

Yes. A few things. First, on the Individual & Family business, I'm surprised about the strong margin if we strip out the cost for closing a few units. So if you could explain how that's possible, considering, I think, last year was positive -- you had a positive impact from a lot of various government support programs. Second quarter is if you could comment -- second question, if you could comment a little bit about the ramp-up in the 4 new Elderly Care units. Maybe it's possible to quantify the start-up costs and when you think that business will return to profitability. And just finally, Norway. After the strong growth we have seen here recently, is it possible to continue to drive inflow of new Personal Assistance customers from current levels? Or is that effect over now, so to say?

Kristofer, maybe I can start and, Noora, you can fill in. The second quarter of I&F was a very strong quarter. I think we've seen, not only this year, but also towards the end of last year, that we have been seeing an increased stability and also more stable and actually fairly high utilization in our units. I would say maybe that the underlying performance in I&F in the second quarter was very strong, and that was driven by both high efficiency but also very high, I would say, utilization overall in our 180 units. And I would not maybe bet on that very high utilization being a new normal. We're obviously looking into the reasons why, but we've seen higher demand over a couple of quarters now in Individual & Family. So the Q2 in I&F this year was strong for us as well. In terms of the Elderly Care, we see our 4 new own managed elderly care units basically following the plan that we have. I think the average utilization in these 4 new units is around just north of 50%, which I would consider really good given the fact that we opened some of them just recently. One of the units has almost 100% utilization. One is still very much in ramp-up, with the utilization just below 20%. We've seen also over the second quarter that utilization or demand overall in Elderly Care has gone up a little bit. It's not -- it's not a magnitude movement, but 1% or 2% up over the second quarter. There's always a bit of seasonality in the summer where utilization in Elderly Care actually often goes up a little bit. But obviously, we do interpret that as a signal of demand slowly coming back in Swedish Elderly Care. We also see the same pattern in Finland. Norway, we do feel that we have a very strong momentum. Of course, we cannot anticipate Norway coming in at 16% organic growth quarter after quarter. But we have a strong inflow of customers in Personal Assistance which should be reflected in our quarterly reports -- for a number of reports going forward. We do also have a strong momentum in HOT, which is another area in Norway. But again, there, 16% is, of course, something we're very pleased, not with -- but not something that we anticipate for the future.

When it comes to the ramp-up costs in Elderly Care, obviously, we have opened 4 new units in 1 quarter and have a cost in this quarter around just below SEK 10 million when it comes to those units. And when it comes to reaching positive results in Elderly Care, our ambition is still to reach or slightly beat last year. Of course, it is hard today to say whether or not we are going to reach it. It depends on the development of the ramp-ups and, of course, on the development of the pandemic.

Our next question comes from Karl-Johan Bonnevier from DNB Markets.

Rasmus and Noora, the tragic death you had in the Platea unit and the closure of that, have you seen that having any impact of, say, placings and reluctance for you getting placings after that?

I guess the short answer, Karl-Johan, is no. I mean, obviously, besides we closed these units.

And when you look at -- I guess SEK 8.7 million is the cost for the closure of that unit. Would you expect any additional, say, negative impacts coming from that kind of extras?

I mean, of course, we have -- we immediately closed the unit, so we do not count on any contributions from those 2 units. So there will be an impact, which is not material on I&F. If you look at the contribution for the first half year for these 2 units, it was around SEK 7 million, SEK 8 million. However, going forward, obviously, we do open new units all the time, so we hope to compensate that from 2022 and onwards.

And when you look at the replacing of the other caretakers you have in these units, you were able to do that successfully within your own operations?