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

Welcome to Humana Q4 Report 2022. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Johanna Rastad; and CFO, Fredrik Larsson. Please go ahead.

Good morning, and welcome to this presentation of Humana's Fourth Quarter and Year-End 2022 results. I'm Johanna Rastad, CEO. And next to me, I have our CFO, Fredrik Larsson. This is a rather challenging report to present given that we just over a week ago got the information, the Swedish Health and Social Care inspector, IVO, revoked our permit of Humana Assistans AB. That's the main company in the Personal Assistance business. So I'll start this presentation giving attention to that particular post Q4 closure event and thereafter walk you through the remaining business. On the 31st of January, Humana Assistans AB's permit to conduct operations within personal assistance and related services was revoked by IVO. And according to that decision, Humana Assistans had to cease operations by the 10th of February at the latest. And being the largest of our personal assistance companies, Humana Assistans contributes with approximately 37% of yearly operating revenues and 41% of yearly operating profits of the group. So we were given 10 days to terminate the business consisting of over 2,000 clients and 11,000 employees. We did not agree with the decision and the day after, on the 1st of February, we appealed the decision and asked for suspension, which was approved by the administrative court 7 February on the basis that the outcome of the process is uncertain. IVO themselves can appeal the suspension decision before the 28 of February. And as I said, we disagree with IVO's decision, and we find the legal process to be unpredictable and its decision without proportionality. I can and will not speculate on the outcome of the appeal. That's up to the court to decide. We will however -- we are, however, very pleased just to be allowed to try this in court. And on the 7 of February, we were also notified that the insurance board will start sending payments directly to our customers rather than to Humana Assistans. This causes an additional administrative burden on our clients and on us as well and also delays payments to us as they need to go by our clients. And operationally, it has been a very tough period with a lot of frustration, anger and worry amongst clients, employees and other stakeholders. Instantly after we got the message from IVO, we formed a crisis group that has managed this process since, also to ensure that the rest of the operations continue according to previously set plans. And thankfully, Fredrik Larsson, our new CFO, started the 1 of February, a good timing and a warm welcome to you, Fredrik.

Thank you very much.

I understand there are lots of questions about the financial implications of what has happened, and we are analyzing everything as we speak. It is, however, tricky for us to convey a lot of information regarding that due to the uncertainty of the coming period. If we don't have all the information you request at this moment, please bear with us as it has been a rather turbulent time. Now over to the fourth quarter events. In the quarter, we grew with 17.5% and proudly achieved the highest organic growth ever since the IPO, reaching 5.5%. All business areas, apart from personal assistance, contribute to the organic growth. We also achieved improved profitability with operating profits reaching SEK 127 million and adjusted operating profit of SEK 89 million, hence finally beating last year. And in the quarter, we make revaluation of earnouts, which affects operating revenues as well as operating profit positively with a total effect in the quarter of SEK 38 million. The inflation pressure continues, and we estimate it to be about SEK 14 million in the quarter. Staffing continues to be a challenge, so also increasing sick absence rates. We do believe the outlook for '23 to be challenging with both higher inflation pressure as well as continued staffing challenges. During the spring, we have important salary negotiations coming up in our main markets. And gladly, we continue working on social outcome measurements and also started drafting our first social outcome contract to really drive the development of Care forwards. As illustrated in this picture, Personal Assistance and individual family continue to represent the largest business areas, both by revenue and operating profits. And here, you can see the nice organic growth development, reaching new highs of 5.5% in the quarter, hence above midterm target levels. Profitability increases were 54%, but removing one-off effects following the revaluation of earnouts, the increase is 4.2% in the quarter. The leverage ratio increased due to increased lease liabilities following investments in new units and indexation of existing leases, acquisitions, share buybacks in the first quarter and low adjusted EBITDA. The large positive one-offs in the quarter skews this picture. However, the underlying performance continued to improve throughout the year, and we are pleased to have an adjusted operating profit that [indiscernible] last year. This is driven by growth through improved utilization and price increases with the main contributors being individual and family and elderly care. We have worked with price increases over the year, and it has paid off during the quarter. On the other hand, our positives are way down by mainly higher costs following shortness of staff and inflation. And now over to Personal Assistance and their performance in the fourth quarter '22. Sales growth continue, although organic growth has been challenged by the shortage of staff. We have a positive one-off of SEK 32 million following the new estimate of earnout. Staff costs continue to increase, partly due to wage drift, but also overhead costs for assistance and administrative costs related to acquisitions. The reimbursement increase of 1.5% implemented 1 of January is yet another example of the little priority given to individuals in need of Personal Assistance. And then over to a positive note, Individual and Family continues its strong development, growing at 10% with an organic contribution of 9%, and this is driven by continued strong demand in the strategically selected areas, high occupancy in both young and adult as well as well-managed price negotiations. When occupancy is high, we can easily navigate our costs. Hence we see a clear improvement in profitability with operating profits reaching SEK 41 million, and this despite inflation pressure. Turning over to Elderly Care, which continues to deliver positive contribution, and that's mainly due to continued good ramp-up speed, but also clearly improved cost control. We still have relatively too high costs due to high sick leave and inflation and the new elderly care facility in Taby will start in the first quarter. And over to Finland, continues to achieve a solid organic growth of 12%, but struggles with high personnel costs due to high sick leave and shortage of staff. Some price increases has been achieved. As 31 of January 2023, the new counters are in place, and it will be interesting to follow their development. And over to Norway. Norway ends the year with a stable demand and continued slow but steady increase in the number of clients, mainly in Child and Youth and Personal Assistance. Margins are lower than previous years, mainly driven by the challenges in Child and Youth as well as [indiscernible] for continued growth by strengthened administration and system infrastructure. So that concludes the review of the business areas. And a short note on the cash flow. The cash flow for the quarter amounted to SEK 90 million, with cash flow from operating activities increasing to SEK 259 million. Increased cash flow from operating activities is mainly due to decreased working capital, partly offset by increased interest rate. Cash flow from investing activities amounted to SEK 75 million and cash from financing activities minus SEK 94 million. And now over to the next page and the reason why our society should care for Humana and other private care providers long-term health. If you want to have freedom of choice, alternative to the public sector needs to be there. To manage societal challenges, we need price and quality competition as well as some actors driving positive change through social innovation. At Humana, we continue to measure quality through HQI and monitoring -- and the monitoring of development of serious deviations. HQI in the quarter measures at 76 with positive increases in many areas such as more satisfied employees, clients and customers. We have moved into – to present the updated social outcome measurements on our web page. Here, we update results over time and also launch new important measurements. So please have a look. In the quarter, we started to draft our first outcome contract, which is very exciting. And now some final remarks. With respect to Humana Assistans, our focus since the afternoon of the 1st of January, is to, of course, first and foremost, care for our clients and employees. Our focus is set on them, to secure their safety and well-being and, of course, our continued operations. We will also continue to process the case in court. But we also need to see beyond crisis management. We're not perfect. We also need to improve. So we will review our current business model to understand how we can make it more sustainable going forwards. This is the work currently being done by our incredibly strong Personal Assistance team. And we cannot forget we have other clients and employees in our company to care for too. In the remaining businesses, we continue working towards our clearly set goals, and that means securing staff, ensuring price increases and drive social outcome measurements forwards. And with that, over to questions.

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

I'll start with 2 questions, and then I could take the other ones afterwards. But first of all, when it comes to your cash flows here, which are becoming more important, of course, how are you thinking about the investments, CapEx investments in 2023? And for the Personal Assistance business, can you say anything, what you could do to prevent clients and make them happy to stay as Humana Assistans provider?

With regards to your first question, CapEx investments will, of course, be held at the limited. Some of our commitments we need to honor, of course, but we won't start new larger projects. But this is also something that we have sort of turned down the pace already before this event due to the leverage situation. And regarding your second question.

Sorry, is it possible to provide the approximate figure for CapEx versus what you have in 2022? Is it fair to assume that you could pass that amount or something similar?

I have to come back to that. I'll think about it, Kristofer, and see if I can come up with something that is worthwhile for you to get. And relating to your second question, I think there's plenty that is -- that can be done, and that's already being sort of happening right here and right now. And we have a lawyer client base, and I think this event has lifted a lot of the questions that the whole Personal Assistance market as such has had and the challenges that -- that has prevailed over quite some time. And I actually believe and I know from the responses we get from our clients that we have a fairly large support out there. So I feel confident that, if you want to call it stickiness of our clients is relatively good. That said, just to give you some indication, I mean, there are 2 events that have triggered -- that can trigger the clients leaving over the last with 9 days. And with the revoked permit, the first announcement of that triggered about 40 clients leaving us. And after the second event with the insurance board coming out and saying that they will pay directly to the clients, that makes the administrative burden higher for some clients, and it's difficult for them to manage. So we lost approximately another sort of 40, 50 clients post that. So that's where we stand right now. And it's difficult for me to predict going forwards. But given actually very positive feedback from several of our clients, we do believe that they actually believe in us also going forwards.

The next question comes from Jakob Lembke from SEB.

I have a few questions. And I think the first one is a follow-up on lost clients. I'm wondering, how flexible you are in adapting the cost to these lost clients and also if you continue to lose clients during 2023.

Well, thank you. First and foremost, we will try to protect all our clients and our employees. It's been 9 days since this event. And even though we have lost clients, we have also, during this period, gained new ones. So we know the -- we are not thinking about adjusting the cost base right here and right now, but rather meet the market and make sure that we can try to offer a very good service even despite these decisions. So I think that's the priority right here and right now.

And then I'm wondering about, do you have some sort of estimate on one-off related costs that you will have relating to the situation you are in now?

No, we haven't made any assumptions yet.

And then I'm also wondering about your borrowing and if you have any covenants, such as net debt EBITDA ratio, for example?

We have covenants in the loan agreements with our banks. We have a very close dialogue with the banks and have had since this event. So it's a good dialogue with the banks.

And there's no level you can communicate, I mean, you are a bit above your financial target now, for example?

Yes, we are slightly -- we have been too high on leverage over a few quarters. So that's definitely so. And we are monitoring that closely. That's also why we have invested quite a bit in expansion, which is also shown in the growth achieved, but it is clearly on the agenda to tone that down. And so -- but it's no default or so.

And then just a final question, more operationally. I mean, Individual and Family, obviously, was a very weak quarter last year. And I'm just wondering if it's possible to quantify how much of the growth this year, is it the price and how much is volume?

It's an estimate. So you have to take it for what it is. The challenging bit we're making that sort of estimate is that we have continuously shifts in the client base. So the level of the service offering is sort of changes. But I would say, out of that 9% organic growth, it's roughly 2%, 3% that relates to price increases.

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

Looking at, coming back to Personal Assistance, just to get a feel for it, when [indiscernible] starting to pay your clients rather than you, how quickly can you turn around your system? Is that something that will take a couple of quarters to be able to do it or is it monthly or weeks that you feel that you're -- before you're going to be able to say, change your setup, so you get paid indirectly?

Well, I would say the main payment -- I'll start with the main payments from the insurance board generally lands with the customers around the 20 each month. That's the main payments. And then salaries are paid on the 23. So we have -- it's a small frame for us to make sure that we get the payments. And we have to then send invoices to the clients. But we have some experience with this. And during some of the acquisitions, we have had this, I would say, the administrative way of working. So that's really what the team is working intensively on now. I think the difference in this respect is that it has to go for all the over 2,000 clients, and it's been done in a smaller volume before. So it's a bit more challenging due to volume. On the other hand, it's one model fits all. So I think in terms of the process, we know what to do. It's not a black box.

So it sounds on you like you should be able to basically reshape the model already during the Q1 to this kind of new strange setup that you are forced to work in. So it's from an administrative point of view.

Yes, yes. That's what we believe. And the key -- as soon as we got the message, the Personal Assistance team, and they are very well managed from an administrative point of view. So they are already on this having information sessions and instructing our clients how to go about it and also holding their hands through the process. And that is a really important aspect. I mean it is a service that we offer our clients because it's actually quite tough when you have a lot of personal assistance, people around you helping you out on a daily basis and it can get a lot at some point in time.

Yes. And I guess from a client retention point of view, if you get questions about that, this must be one of the key items to also see that it really works because I guess that's something that the clients never has worked with either before. So if you can -- the more you can help now, I guess, the better retention rate you should get.

Yes, exactly. So it's important that we -- and also in terms of communication, and I think it's a lot about holding hands. But -- and it's also -- there are different ways of doing it, and there are different levels of services that you can achieve. So it's really -- I view this as a -- this is a bit for us to change our business model in a sense, just to make sure that we can offer our clients a good service and that we can keep our operations steady.

And then the second question is really looking at the price adjustments you indicated before in the previous question, looking at the inflationary environment going out there for the moment, what do you see, say, in the form of, say, cost pressure that is -- that you are not able to mitigate through price increases at this stage and where are the risks?

Well, I'll start with the first in the inflation pressure. I mean, in the quarter, we estimate the other costs, which is then still a relatively small portion of the total cost that we have of SEK 14 million sort of fuel electricity in fuel. There are 2 large components of costs being the salary increases that will happen depending on where you look in the organization, but somewhere across the latter part of the spring, early summer. That will really define how, if we have a high salary inflation that will, of course, be challenging for us. And then the adjustments of our leases that will land despite our efforts of trying to get a lower increase, but that will most likely learn somewhere around 10%, 11%. And so that's on the cost side. And our ability to balance with price increases, I mean we got the OPI in December of 3.5%. So that's for the Swedish individual family in elderly care, that's something to sort of hang on to. And it's a lot easier within the individual family segment, not only in Sweden but also across the borders and to adjust prices. First, because it's a higher sort of client turnover, but it's more individually negotiated prices.

And how do you see Finland and Norway in this perfect looking at price cost?

Yes, it's -- if you put them next to each other, it's slightly easier for us to navigate the prices in Norway than it is in Finland. But the child welfare service, for instance, there, we have invested quite a lot in making sure that we have a good offering and it's easier to also be more competitive from our side on prices or get higher prices in child welfare.