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

Hello, and welcome to the Humana Audiocast with Teleconference for Q4 2021. [Operator Instructions] Today, I am pleased to present CEO, Johanna Rastad; and CFO, Noora Jayasekara. Speakers, please go ahead.

Well, thank you, and good morning, and welcome to this presentation of Humana's fourth quarter and year-end 2021 Results. My name is Johanna Rastad and I am since a bit less than 2 months, the new CEO of Humana. In the room and by my side, I have Noora, our CFO. Second page, please. Humana achieved a solid growth of over 8% in the quarter, driven by organic initiatives and acquisitions. The weak operating profit in the quarter is primarily explained by nonrecurring items in the Individual & Family business area as well as the pandemic. The wider spread of the pandemic in society, mainly towards the end of the quarter caused significant challenges in staffing across most business areas. The effect was seen on both occupancy levels due to an inability to take in clients as well as increased cost, not compensated by the state to the same extent as previous periods. In the quarter, several new units were started and 2 businesses acquired. Turning to the full year. Our financials remain solid with stable growth, profitability and debt position. We are closing in on our targets, although obviously, after this quarter, a good potential for further improvements. Next page, please. Noora will reflect deeper on financials, both in the fourth quarter and for the full year later in the presentation, but a few comments from my side. In the quarter, as said, we had a total growth of 8% versus last year, of which 3.4% was organic. Profitability-wise, the picture is less appealing with operating profit decreasing versus last year. However, the main reasons behind the decrease are nonrecurring costs related to closed premises in Individual & Family and the pandemic. Next page, please. Turning to the full year. Total revenue reached SEK 8.2 billion, an uplift of 5% versus last year and an organic contribution of 3.1%. Our targeted operating margin of 7% was not reached instead remaining at a static 6% for the year. Investments in operations were made in the fourth quarter, making us a better position for the future was to capture growth opportunities as well as continue working towards our profitability target. Next page, please. Humana Quality Index, HQI was introduced in 2017 and has over the years, served as an important tool for us to measure total quality development. In the fourth quarter, we're pleased to see the HQI remaining at a stable 94 in times when the pandemic hit way broader than before. As mentioned previously, an intensive work on quality assurance and methodology development has taken place in Individual & Family to meet the increasing degree of complexity our clients now show and to meet market demand in a better place. This quarter marks the end to our old HQI, giving room to the new and improved index aimed at better illustrating the broader group quality. The new index measures 12 indicators, all important to illustrate the structure and process in how we work with care quality at Humana. Please also, see the newly published quality report for more details. Now turning into respective business areas. Next page, please. Personal Assistance showed continued signs of strength, delivering a stable and well-managed quarter. We see a slight increase in the systems hours in a somewhat declining market. In the quarter, Enigheten Personlig assistans was acquired, adding another SEK 50 million in revenues and approximately 150 employees to the business area. Recruitment of skilled personnel remains a challenge, particularly through the widespread pandemic towards the end of the quarter. The industry continues to attract attention from authorities partly relating to company permits and reclaim issues. Next page, please. For Individual & Family, the quarter was marked by adaptations and quality assurance, a fairly complex quarter from a financial perspective. The profit deviation relates primarily to closed units in Young, where accruals for empty properties were made and costs for leased staff taken, totaling approximately SEK 15 million. Other investments in existing properties, competence and methodology were also made in the quarter, costing us approximately SEK 10 million. The pandemic had a negative effect in operations, mainly through shortage of staff, which impacted our ability to take on new clients, hence affecting occupancy and our business significantly. A handful of new units opened at the same time, although from a result perspective, not compensating for the closed units in the quarter and previous quarters. We welcome Balans Behandling to division Family, adding SEK 60 million in unit revenue and about 20 employees to the business area. With the adaptations and quality assurance activities completed in the quarter, Individual & Family is now better placed to meet clients with more complex demands going forward. Next page, please. Our Elderly Care business has done a tremendous work, opening 5 new own managed units during a burning pandemic. Ramp-up of the units continued, although slower than planned, also that partly explained by the pandemic. Worth to mention is that 3 new contracts started in the quarter. We are now taking required measures, intensifying our work to achieve better financial performance in the business area. Next page, please. Finland continues to develop according to plan despite a challenging situation with the pandemic. The team is focusing on organic growth initiatives, while at the same time, managing the staff shortage, particularly towards the end of the quarter. A nonrecurring cost burden in the quarter, but otherwise, performance is in line with expectations for the business area. Post end of quarter in January '22, elections to the new welfare counties in Finland were held. And the Right and the Centre party is winning a majority of the countries. And in January, we also welcomed Individual & Family company, Kalliola, adding approximately SEK 100 million in turnover and 200 staff to the business area. Next page, please. Last, but far from least, over to Norway, where we see continued strong momentum operationally as well as financially. The main part of growth contribution comes from personal assistance and care homes. In Norway, there are political headwinds flowing and the government expected to appoint a public inquiry on how to phase out commercial operators. And as of 2022, we also see increased requirements on educational levels within children and youth. However, to sum up, Norway continues to perform well. Now over to financials with Noora.

Thank you, Johanna. I will now give you a summary of the detailed performance of Humana in the fourth quarter of 2021. Turning to Slide 11. From a financial perspective, our main objectives remain, to increase predictability and stability. The weak fourth quarter dampens the otherwise positive financial development in 2021. Despite the challenges in Elderly Care and temporary dip in performance in Individual & Family, Humana as a group stands financially stable. During the first quarter 2022, a new CIO will join Humana, strengthening the team and ensuring continued progress with digitalization. Next slide, please. On Slide 12 in the presentation, you can see the operating revenue for the Group. In the fourth quarter 2021, our operating revenue increased with 8.3% to SEK 2.1 billion this year. Full-year revenue increased with 5% to SEK 8.2 billion. Most business areas contributed to the increase, both in the quarter and for the full year. We have also managed to keep up the pace with acquisitions. Revenue is negatively impacted by the COVID-19 pandemic, largely due to lower occupancy in Elderly Care in Sweden and Finland, but also in other operations. Organic growth in the quarter was 3.4% and 3.1% for the full year. Strong organic growth in Norway and Elderly Care are the main drivers. Next slide, please. Now moving to Slide 13 for some more information on our results in the fourth quarter. Adjusted operating profit for the quarter came in at SEK 85 million versus SEK 101 million last year, a decrease of 15.8%. Adjusted profit for the full year amounted to SEK 495 million versus SEK 453 million last year. The adjusted operating margin decreased to 4% in the fourth quarter and increased to 6% in the full year. The decrease in the quarter is mainly attributed to nonrecurring costs burdening Individual & Family, but also negative contribution from Elderly Care. For the full year, the increased profit is dampened by the weak fourth quarter in Individual & Family and overall challenging year for Elderly Care. In the fourth quarter, the pandemic has had a negative financial impact on the profitability for the Group, both through lower occupancy, increased absence rates and lower cost compensation. We are closely following the development of the pandemic and the potential financial impact on Humana as a whole. And our current assessment is that the challenging situation will continue in support of 2022. Next slide, please. On Slide 14 and the segment's performance, starting with Personal Assistance. Revenues for the fourth quarter are up 3.3% to SEK 768 million with an organic growth of 1.5%. Higher reimbursement partly offset by fewer assistance hours and acquired operations drive the improvement. Adjusted operating profit for the quarter increased to SEK 46 million. Also, the adjusted operating margin increased to 6%. The increase in operating margin is mainly due to increased efficiency, higher reimbursement and lower social security contributions for young. Acquired operations contributed as well. A strong performance from Personal Assistance. Next slide, please. Now moving to Slide 15 with Individual & Family. Revenues for the quarter reached SEK 578 million. Organic growth in the quarter was negative with 2.8%. The negative effect of closed operations and the pandemic are only partly compensated by new units. Acquisitions contributed to the increase of revenue. Operating profit came in at SEK 7 million and the operating margin was 1.3%. The deviation in the quarter is explained by 2 main factors. Discontinued units have had a negative effect in the quarter, both related to personnel and real estate costs, totaling SEK 15 million. In addition, the profit in the quarter was negatively affected by quality enhancing measures in operations of approximately SEK 10 million. The total impact was only partly compensated by acquired operations and new units. Individual & Family is clearly a disappointment financially in the quarter, but mainly due to temporary effects. Next slide, please. Elderly Care on Slide 16. Revenues grew in the quarter with 20.7% organically and reached SEK 190 million. Naturally, the 5 new own managed units contribute. However, COVID-19 is still impacting occupancy negatively. Operating profit came in at minus SEK 8 million and the operating margin was minus 4%. The quarter is affected by start-up costs for the new Elderly Care homes under own management as well as lower occupancy overall related to the pandemic. A weak quarter for Elderly Care still clearly affected by the pandemic. Next slide, please. Finland on Slide 17. Revenues for the fourth quarter in Finland came in at SEK 328 million. Organic growth was positive at 1.5%. The improvement is due to increased utilization in outpatient care and new units. Adjusted operating profit increased to SEK 15 million with an adjusted operating margin of 4.7%. The increase is explained by improved contractual terms in Elderly Care and better operational efficiency. We continue to show signs of improvement in the fourth quarter, even if, as Johanna mentioned, also Finland has challenges with staffing. Next slide, please. Norway on Slide 18. Revenues increased with 25% to SEK 241 million and the organic growth was 17.5%. The growth development this quarter is due to new units and more customers in Personal Assistance and the Care Home segments. Operating profit increased to SEK 33 million and the operating margin improved to 13.8%. High operational efficiency and more customers drive the improvement. We are very pleased with the performance in Norway. Next slide, please. Moving on to Slide 19 and Central costs. Underlying central costs are slightly up from last year, partly driven by the ambitious digitalization agenda in the Group. The effect of IFRS 16 is up from due to new lease contracts. Next slide, please. On Slide 20, you can see our financial position. Interest-bearing debt has increased with SEK 715 million to SEK 4.2 billion and leverage increased slightly to 4.6x. Interest-bearing debt is up, mainly driven by higher IFRS 16 debt related to the new Elderly Care unit. Next slide, please. Operating cash flow for the quarter on Slide 21 amounted to SEK 157 million. The decrease is due to lower profits and increased working capital. Next slide, please. From a financial perspective, the fourth quarter was a disappointing end to a stable and predictable 2021. The full year, however, shows clear advancements in our strive to reach our financial targets. Now back to you, Johanna, for some final comments.

Thank you, Noora. Well, to sum up, we lay a quarter behind us with solid growth and a relatively stable underlying operations. The weak financial result in the quarter, as we have explained is primarily due to nonrecurring items in I&F and the effect of the pandemic on staff, occupancy and costs. With facilities and confidence now adapted to the new environment, we are better positioned for the future. As a Group, we start several new units and welcome acquisitions in the quarter as well to lay foundation for additional growth going forward. Quality is a prerequisite for long-term sustainability. And with the new HQI, another piece of our quality puzzle is laid with more to come. And in the near term, we need to manage the challenges that pandemic brings. We need to secure staffing across all areas in times when absence is very high. And although new in my role, priorities remain the same; driving profitable organic growth coupled with accretive acquisitions. And with that, we open up for questions.

[Operator Instructions] Our first question comes from Kristofer Liljeberg with Carnegie.

2 questions from me. First is, quality enhancing work you have done. Could you explain a bit more what you're doing and how much of this is more one-off effects and how much of this is going to result in a higher cost base also going into 2022? And the second question is if you could explain the weakness in the Elderly Care margin here? Of course, you have a lot of openings impacting but also the effect from the [indiscernible] in the quarter, if you could quantify that?

Well, thank you, Kristofer. I'll take the first question and leave the second to Noora. The quality activities, the quality enhancement activities that we've done in I&F literally over, I would say, 2 quarters, almost 3 quarters, is about adapting both our facilities and our staffing to make sure that we can take on the more complex clients that we see. So we try to adapt to the demand. And for that, we have the ongoing operations. The SEK 10 million that we illustrated is literally, if you want to call it an investment for the future to make sure that we have operations tailored to this specific -- these specific client groups. So that's one thing. The majority of the costs taken for the weakness in I&F is represented by the closed units, both units closed in previous quarters and in this quarter, they had a positive contribution on the bottom line that is not compensated by new units.

But I still want to understand if we should think about this SEK 10 million returning as a higher cost base in, for example, in the first quarter of 2022?

The part of that, those SEK 10 million relates to properties that is already less an investment made in the quarter that will not come back into quarter 1. The other part relates to staffing and that you can also divide into 2 portions. One that is sort of releasing some staff that were not -- did not have the educational levels to meet the new clients and also partly related to increasing the -- how should I say, the staffing levels to make sure we can take on new clients. But that will -- I mean, the whole idea is for us to be able to also meet demand and for those clients that also -- the income relating to those clients are also higher. So obviously, that's -- we expect that investment to pay off in the periods to come.

Okay. Now is it possible to quantify how much of the SEK 10 million was properties? And maybe how much was cost for release employees? Because, again that won't come back in the first -- now in 2022. That's in my view, that's more of a one-off, maybe, but...

Well, in terms of the release -- or the SEK 15 million relating to closed premises, that staff costs and premises that will not be going into the coming quarter. So the SEK 15 million are one-offs relating to the quarter, not coming into the first -- or into 2022. The SEK 10 million investment is on the lower -- the properties of that is on the lower end and the staffing is on the high end.

Okay. That's helpful. But how quickly do you think you will be offsetting that investment by higher more new clients?

Well, if you look back in the quarter, I mean we closed down the 4 that related to the closures in the second quarter. As you know, in the third quarter, we managed to balance that closure well. So I think in previous years, we've been able to balance. It's when the pandemic hit harder and we closed a couple of new units, that's when it was difficult for us to balance the closures with new units. So I mean, I am underlying I&F is challenged by the pandemic. That's what we take into the first quarter, the absence rates. And the reason why we see a profit effect by the pandemic is because the final clients in the units are the ones contributing the most to the bottom line. So I think still we have a stable operations in I&F. In total, it's the vision young that is challenged by -- primarily challenged by the pandemic and the final clients in those units. We have relating to the Elderly Care question as well. So just give us a second.

All right. So when it comes to elderly care, obviously, the quarter looks quite disappointing. The weakness is related still to the ramp-up of the 5 new Elderly Care units. It was not optimal to open this many units in the midst of a burning pandemic. Also in the fourth quarter, we have taken over some contracted units and that caused some in the quarter. The business area is still as a whole, also affected by the pandemic. We are focusing on working with what we can affect ourselves, that will, say our internal efficiency in running our operations and expect to continuously improve in the business area.

Our next question comes from Jakob Lembke with ABG Sundal Collier.

I was just wondering on the Elderly Care, it seems like the -- at least the sales is developing quite well. So with this sales improvement, are you sort of in line with your expectations in terms of ramping up not considering the costs?

Sales are improving in the right direction, but they are not in line with our expectations, which also shows in the profits.

And then if we look into next year for Elderly Care, do you expect to have a positive profit contribution from the segment?

Well, that depends on the development of the pandemic. Obviously, our goal is to start making profits within Elderly Care. It goes without saying.

And that's why we also now launched an intensified work to make sure that Elderly Care is successful in their ramp-ups, of course.

And then just on I&F, I'm trying to understand how sort of much additional -- or for how many quarters are you expecting to have additional sort of ramp-up or adaptation costs in 2022?

Well, that's a good question. I mean, we continuously change in I&F. It's -- we start up units continuously, we also closed down units actually continuously and just to make sure that we're adapted. So it's an ongoing process that has been -- also has been ongoing for a couple of years. What happened in the quarter is that we intensified the pace of that transformation and that was partly due to our own ambition to meet the market demand, but also from a regulatory pressure perspective. So I think what we take with us, I mean, we leave a lot of these -- the majority of the costs now that we take in the fourth quarter, we lay that behind us. We will enter into '22 with the pandemic and the effect on occupancy and a slight difference in the contribution of new units versus profitable closed units.

This time, we have no further questions. I will now hand back to our speakers for a final remark.

Well, thank you very much. I mean, we are fully aware that this quarter is not exactly what we wanted and it's also not really a fun quarter to present like this, but we -- this is primarily due to the temporary weaknesses. So we lay that behind us and step into '22 with good comfort. Thank you very much.