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

Hello, and welcome to the Humana Audiocast Teleconference Q1 2022. Today, I'm pleased to present CEO, Johanna Rastad; and CFO, Noora. [Operator Instructions] Johanna, please begin your meeting.

Good morning, and welcome to this presentation of Humana's First Quarter 2022 Results. My name is Johanna Rastad. I'm CEO of Humana. And I'm here with Noora, our CFO. Next page, please. In the quarter, our employees continue doing a fantastic job taking care of clients although the new versions of the COVID virus hit us broadly. This caused directed high sick leave and total absence rates across many business areas. Thankfully, sick leaves recovered towards the end of the quarter as restrictions also lifted, meaning our ability to take on clients improved. And the overall cost base was reduced. Obviously, this was a highly welcomed situation. We continue to achieve a good growth of 8.1%, although mainly driven by acquisitions. In the quarter, we welcomed the new company Kalliola to our Finnish operations. Organically, we grew and opened several new units in the quarter. Operating profit decreased significantly versus last quarter due to Omicron and high energy costs, but also a negative effect from new units than previously closed. Next page, please. Noora will go deeper into the financials in the following section, but a few comments from my side. First, despite the challenging environment, we grew revenues compared to last year. Organic growth reached 1.8%, positive contribution from new units in Elderly Care and Norway, which increased clients in Personal Assistance and the Home Care segment. I&F contributed negatively. We have a weak operating profit in the quarter, mainly explained by the pandemic and other external factors burdening the result with approximately 20 minutes -- of SEK 20 million, effect of closed units in I&F, not compensated by new units as well as the 5 elderly care homes that we opened last year, summing up to a negative effect of approximately SEK 12 million. To that, we've seen indirect effect of the pandemic partly explaining an overall lower utilization. Gladly, March balanced the 2 initial very tough months. And that said, we still work to achieve performance improvements in Elderly Care and I&F. Next page, please. With the war in talent being highly present, it's very pleasing to see a recent employee survey showing continued high employee satisfaction and improvement in our leadership index as well as several other important employee-related KPIs, particularly since employees in our industry have been under high pressure during the pandemic. We continue striving to offer the best possible employee experience to retain and attract employees. For the first quarter, we have figures for the new Humana Quality Index, not only an improved index, but also a better tool for internal quality follow-up. The new index reached 73, and customer satisfaction remain high. We use this data to improve in all our business areas. Next page, please. Now moving into our business areas. Personal Assistance managed the quarter well. We see an overall decrease in assistance hours that is partly offset by higher reimbursement. The business area is not immune to pandemic challenges, with strong efforts to secure staffing and recruitment taking place in the quarter. Digital signing to Insurance Board was launched in the quarter, a welcome improvement for customers. We see continued industry tension from the authorities, IVO and the Insurance Board focusing on reclaimed issues and company permits. Next page, please. Over to Individual & Family. I&F is highly affected by external factors, both pandemic and high energy costs. Four new units opened in the quarter, aimed at gradually reducing the gap from previously closed units. Among them, the unit adding to our health care operations extending our offering to more complex clients. Occupancy levels and personnel costs have been challenging in the quarter, partly due to an indirect pandemic effect following an inability to take on clients. The complex clients we have required dedicated staffing and competence. The previously announced dedicated quality assurance work in division Young is now completed and has entered into continuous development. We see improvements at several levels following that, including treatment content in our units, significantly higher employee satisfaction levels and also improved occupancy in the division. The business area Individual & Family is focusing on recovery, securing staffing and competence to match client needs and, of course, targeting -- targeted on closing in on the performance gap. Next page, please. Over to Elderly Care, that is also highly impacted by extreme absence rates affecting staffing and occupancy as well as costs. The 5 new Elderly Care units opened last year continued to bear cost. Despite the pandemic, we continue our previously introduced change initiative. And we see initial positive results in March. Utilization is developing in a positive direction towards the end of the quarter. And we continue to monitor development closely and also push to secure needed -- further needed improvements. Next page, please. Finland is clearly, as the other business areas, heavily affected by the pandemic with also here record high sick leave affecting revenue and cost in a negative way. March also here shows signs of recovery in mainly child welfare services and housing services, while the pandemic effect in open care services continues throughout the period, something we also see for the Swedish operations. We opened 2 child welfare unit in the quarter as well as completed the acquisition of Kalliola in January that strengthens our position in the Nyland region. The acquisition contributes to growth, but not EBIT contribution in the quarter, continue focusing on recovery in Finland and organic growth initiative. Next page, please. Norway. Operations in Norway continued to develop well with double-digit organic growth and improving operating profit. We see growth in assistance and improved efficiency in Children and Youth. To secure continuous growth, staff being essential and the team is dedicated on ensuring employer attractiveness going forward. This team has also historically proven to be very good at adapting to a changing environment, so also with the higher education requirements introduced in January with a good development within division Young. Overall, continued good performance in Norway. Now over to Noora for financials.

Thank you, Johanna. I will now give you a summary of the detailed performance of Humana in the first quarter of 2022. Turning to Slide 10. As Johanna described, the challenging environment has marked the financial performance in the quarter. Despite growth, group profit is below expectation. The direct effect of the pandemic is approximately SEK 15 million. And the total effect of external factors amounts to approximately SEK 20 million. Profit is also burdened by effects of closed and ramp-up units summing up to approximately SEK 12 million as well as generally lower utilization. Group financial stability has created space for further share buybacks. Humana currently holds 10% of outstanding shares. As such, the Board has proposed canceling the shares to the Annual General Meeting. In addition, the Board has proposed to the AGM that no dividend is to be paid for the financial year 2021. Next slide, please. On Slide 11 in the presentation, you can see the operating revenue for the group. In the first quarter of 2022, our operating revenue increased by 8.1% to SEK 2.1 billion. Norway and Elderly Care are the main drivers as well as contribution from acquisitions. Revenue is negatively impacted by the spread of Omicron from late 2021 continuing in the first quarter and this time affecting most of our operations, occupancy in Elderly Care and outpatient care in particular. Organic growth in the quarter was 1.8%. Strong organic growth in Norway and Elderly Care did not fully compensate for the lower growth due to fewer assistance hours in Personal Assistance as well as low utilization in Finland and Individual & Family. Next slide, please. Now moving to Slide 12 for more information on our results in the first quarter. Operating profit for the quarter came in at SEK 77 million, a decrease of 31.9%. The operating margin decreased to 3.6% in the first quarter. Naturally, the spread of Omicron affected across all segments. As already mentioned, the direct effect amounting to approximately SEK 15 million for the group in the quarter. The total effect of external factors sums to approximately SEK 20 million. The decrease is also explained by a negative impact from closed units in Individual & Family and new units within Individual & Family and Elderly Care, the effect of approximately SEK 12 million in the quarter. Also utilization has been lower in general. Towards the end of the quarter, the situation has improved gradually although to a varying degree in different regions and operations. 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 financial impact of the pandemic is decreasing going forward. Next slide, please. On Slide 13 and the segment performance, starting with Personal Assistance. Revenues for the first quarter are up 1.2% to SEK 761 million with an organic growth of 0.1%. Higher reimbursement partly offset by fewer assistance hours and acquired operations drive the improvement. Operating profit for the quarter is flat on SEK 50 million as well as the margin of 6%. The maintained margin is mainly due to efficient cost management and positive contributions from acquisitions. A stable performance from Personal Assistance. Next slide, please. Now moving to Slide 14 and for Individual & Family. Revenue in the quarter reached SEK 577 million. Organic growth in the quarter was negative at 7.1%. Acquisitions contributed to the increase of revenue. The negative effect of closed units and the pandemic is only partly compensated for by new units. Operating profit came in at SEK 23 million, and the margin was 4%. The low performance in the quarter is explained by effects related to the pandemic, closed units and ramp-up costs for new units and higher energy costs. Also, utilization and efficiency have been generally lower, partially offset by acquisitions. Individual & Family is clearly a disappointment financially. Next slide, please. Elderly Care on Slide 15. Revenues grew organically in the quarter with 30.1% and reached SEK 196 million. Naturally, the 5 new managed units from last year contributes. COVID-19 is still impacting occupancy negatively. Operating profit came in at SEK 4 million, and the operating margin was minus 1.8%. The quarter is affected by the pandemic and start-up costs for the new elderly care homes under own management, partly offset by improvements in the contracted units. While Elderly Care is still clearly affected by the pandemic, the improvement initiative is showing some results. Next slide, please. Finland on Slide 16. Revenues for the first quarter in Finland came in at SEK 361 million. Organic growth was positive at 1.7%. Organic growth is primarily driven by new opened units in the Child and Youth segment. The recent acquisition naturally contributes to the revenue increase. Operating profit decreased to SEK 3 million with a margin of 0.7%. Reduced occupancy and a sharp increase in sick leave due to the pandemic were the main drivers. Also, integration of the former nonprofit operations of Kalliola is ongoing. The performance in Finland has been severely affected by the pandemic in the first quarter. Next slide, please. Norway on Slide 17. Revenues increased with 17.7% to SEK 247 million, and the organic growth was 10.8%. The growth development this quarter is due to more customers in Personal Assistance and the Care Home segment. Operating profit increased to SEK 18 million, and the margin was 7.3%. High operational efficiency and more customers drive the performance. We are again very pleased with the financial performance in Norway. Next slide, please. Moving on to Slide 18 and central costs. Underlying central costs are slightly up from last year. The effect of IFRS 16 is up due to new lease contracts. Next slide, please. On Slide 19, you can see our financial position. Interest-bearing debt increased by SEK 720 million to SEK 4.4 billion. And leverage increased slightly to 4.9x. 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 20 amounted to SEK 115 million. The decrease is due to lower profits and increased working capital related to delay payments for assistance operations in Sweden. Next slide, please. From a financial perspective, the first quarter leaves room for improvement. The quarter was heavily affected by the pandemic and much work remains to close the performance gap to reach our financial targets with continued stability and predictability. Now back to you, Johanna, for some final comments.

Thank you, Noora. To sum up, we've managed a quarter -- we've maintained growth despite the highly challenging environment with the pandemic and global instability. The weak operating profit is explained by both external factors as well as internal factors where we have actions in place to secure performance in both Individual & Family and Elderly Care. We concluded an acquisition in Finland and opened 2 units in the country as well as 4 in Individual & Family. Our employees remain satisfied, and our leadership index is improving from already good levels. And at the same time, we launched our new Humana Quality Index, which is an important step for us being able to measure and follow quality development in the group. We entered the latter part of spring with absence rates recovering, which is very welcome in our operations. Regarding our priorities going forward, it continues to be creating sustainable value for customers, clients, owners and also the society as a whole. And after a period, we've had to dedicate time and effort to handle external factors. We now intensify required return activities, securing a few elements along the way, the positive and timely increase in occupancy in our new and old units, particularly in I&F and Elderly Care. We will also secure the change initiative in Elderly Care, the full recovery from the pandemic in Finland as well as making sure we have a good infrastructure for both Norway and Personal Assistance to continue their delivery path and, finally, to ensure our central functions have the right focus, enabling our employees to do deliver care at the very best. And with that, we open up for questions.

[Operator Instructions] Our first question comes from the line of Jakob Lembke from ABG.

Johanna and Noora, I have a few questions. And I'll start with Individual & Family as I was a bit surprised of the negative or how much negative the organic growth was in the quarter. So I'm just wondering with the sort of adaptation of demand you're speaking about in the new opened units, when we can expect these to offset the closures you have had and take you back to growth in this segment?

Well, it's a tricky question to answer when we will get back to positive organic growth. We have the closures in the last -- in 2021 that we carry with us into this year. We do, however, opened up both new units in the fourth quarter as well as this quarter with an attempt then to gradually balance that effect. So -- and I would say looking at this quarter as a whole, the initial 2 months were tougher than the final month. So we're moving in a positive direction there.

Okay. And then I was just wondering on the margin in Individual & Family, how much of the -- roughly how much of the temporary costs you highlight in this quarter relates to Individual & Family?

In terms of the profit deviation, it's obviously substantially in Individual & Family. And it's not isolated to the pandemic. But I would say pandemic and higher energy costs is somewhere roughly around high single digits. And then you have the closed units and the contribution from start-ups along similar lines. And then you have a remaining deviation that is related to the lower utilization as a whole. And I would say that's partly related to the pandemic. But it's not the full explanation. We are not performing as we should because we have slightly a positive -- we have a positive effect also from acquisitions. So I think with that, you have a fairly good guidance on the profit levels in the Individual & Family.

Okay. And finally, a question on Finland. And as you mentioned, it's quite a tough environment there in the quarter. And if I recall correctly, they are a bit behind Sweden in their sort of phase in the pandemic. So I'm wondering a bit on how Finland developed towards the end of the quarter and maybe also now in the beginning of Q2?

Yes. Well, as you say, the Finnish society as a whole is sort of slightly behind Sweden in recovery from the pandemic. And we can see the same tendencies in our own operations not improving in the same manner as our Swedish and Norwegian operations, although improvement can be seen in the early second quarter or late first quarter.

And the next question comes from the line of Kristofer Liljeberg from Carnegie.

Just to make sure I understand it correctly, the SEK 50 million Omicron effect, is that a direct effect from higher costs?

Kristofer, the SEK 50 million is a combination of higher cost, but also the -- partly the effect of lower utilization due to the pandemic.

Okay. And is it possible to say anything about occupancy rates here in April, if that has improved further versus what you saw late in March, for example?

Our occupancy levels are gradually improving across all operations. But the change between late March and today is not significant yet, although we see the trend towards the right direction in all operations. But the pace of the improvement is not what we would like to see.

And what do you think is the reason for this?

The reasons are different in the different operations and in the different countries as well. In Finland, the pandemic is still affecting to much larger extent. In Elderly Care, also there's a difference between our different regions, I would say. There's a -- and in Individual & Family, we have sort of several factors affecting the utilization, not only the pandemic.

What factors are there? Because it seems that the pretty solid performance you have in Individual & Family for 2 years has completely stopped and now you are underperforming the market. So do you have any sort of explanation for this happening?

I mean there are 2 parts of it. One that is driven by the external factors we have. So the -- I would say the profit deviation is partly then related to the pandemic and the higher energy costs somewhere around the high single-digit area. We're still burdened by the closed units. And we have the new units not contributing to the bottom line to weigh up for those closures. And then there's also -- and we were speaking of an indirect effect. We have complex clients with -- and with us not being able to have employees in place and the confidence in place, it's been tricky us for to make those -- make placements and to increase the occupancy levels in the units that we have, that we wanted in particular in the first 2 months of the quarter. So I think it's a balance of both external factors and internal.

Okay. And final question for me. The reason for the fewer assistance hours, is that also Omicron related or?

Yes, partly. It's been tricky for us to find staffing. I mean we have outperformed the market in Personal Assistance over several quarters, several years even. But it has been tricky for us to find the proper staffing, particularly in the rural areas.

[Operator Instructions] We have one more question from the line of Victor Forssell from Nordea.

Yes. I'll start off with a question regarding Individual & Family. Just looking at the new units that you're opening and the needs that you -- yes, the needs for those units really, how do you see that occupancy over time? Would you say that it will still be as volatile as perhaps in Children and Youth? Or how do you see sort of the long-term character of those types of needs?

No, I think from a demand perspective, there is demand for our services. And we have a good foundation to stand on in terms of both newly built units and capacity in existing units. So we are able to fill up our units in a good way going forward. There is a challenging part that relates to employees and both the shortage of staff and the shortage of competence. But I think that's also shared from -- with the broader market. But there's no reason to believe that we won't be able to increase our occupancy in Individual & Family in the long run.

Understood. But just in terms of the care needs, are these of a character that perhaps require longer-term stay, i.e., meaning a more stable occupancy over time as you're filling up these placements? Or will sort of the character of these needs that you now open up or the specialization that you drive for have the same volatile character as other parts of Individual & Family?

That's a very good question. And I think from a mix perspective, we have focused our organic initiatives on the LSS sort of assisted living facilities. Those are of characters that you move in and then you stay in general. So that's a very stable division, so to say, and that's also where we dedicated our efforts. The division Young is more volatile of character. Parts of the Adult division related to drug abuse can also, to parts of the business, be more volatile. But I think also here, over time, since the mix is changing, I think we should see stability. But it will take time because the division Young is still a large segment in our Individual & Family operations.

Yes. That's clear. And just finally, on Personal Assistance, just to understand that you perhaps saw some lost market share in this specific quarter due to the staffing issues. And also what are your expectations for next calendar year with the proposed, at least, new regulations regarding [ site ] assistance as it stands here in Sweden? What do you foresee in terms of market development? Are you quite certain at this stage that, that market will be able to grow in general? Or what's your thoughts there?

Well, we've had a challenging environment also for Personal Assistance in the pandemic times. That's absolutely clear. So we have -- the shortage of staff has affected our ability to take on new clients. We have managed the challenging market conditions over quite some time. [ Site ] assistance is obviously warmly welcomed because, for us, it's a large provider of personal assistance, it's likely that we will be able to grasp part of that volume or to get part of that volume increase. Price-wise, I think we're looking at probably 1.5% even going forward, which we'll see if that will increase depending a bit on the inflation pressure. Cost levels, also there. We have the collective agreements, but again, I think, will pressure slightly. But our judgment is that we will manage it going forward.

And as there no further questions, I'll hand it back to the speakers.

Thank you very much and have a continuing good day.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.