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

Good morning, and welcome to Humana's First Quarter 2023 Earnings Call. My name is Ewelina Pettersson, and I'm the Head of IR. With me today, I have Fredrik Larsson, our CFO; and Johanna Rastad, our CEO. We will, in a regular manner present the quarterly events, a result summary and then open up for questions. And with that, I hand over to you, Johanna.

Thank you, Ewelina, and good morning. Before we go into the quarterly events, I want to highlight that never before has Humana's ambition and strategy has been more clear. This quarter, we have had full focus on our operations in all our business areas, while at the same time, managing crisis within Personal Assistance in Sweden. This has been possible through a clear division of labor, solid leadership in our business areas and support functions together with the results orientation. At Humana, we have since many years, outlined our vision to safeguard everyone's right to a good life, and we continuously improve our processes and we are working. The Personal Assistance industry is going through change, and we work hard on trying to secure its future. Simultaneously, we continue to drive Nordic Care forwards. And making social impact by expanding their as we include in our social outcome measurements. We're also in the face of outlining our first up social outcome contract linked to family care. So now over to the quarterly events. We continue to drive the process linked to their book permit within Personal Assistance. We're preparing for an oral hearing in the administrative court in the end of May. We're also reviewing a place in the market, outlining how we can vend our service offering to meet the new market circumstances. And despite the around 15% client loss in Personal Assistance since the EVO decision, we achieved organic growth of 5.5% for the group and a 50% increase in profitability, with EBITDA reaching SEK 117 million, 4.8% margin in the quarter. Adjusting for one-off items, we reached an EBIT of SEK 100 million, corresponding to 4.1% margin. The improved profitability has been achieved through focus on performance, clear division of crisis management and other operations and the strength in having solid leadership in our operations. In the quarter, we see continued high inflation, which on the cost side, excluding salaries, has a negative effect of about SEK 22 million in the quarter. Over the period, we had data intrusion, which we immediately reported to the police and relevant authorities. The incident did not have any substantial impact on our ability to carry out our operations. We have in the quarter included further business segments that measure social outcomes and continued working towards getting our first social outcome contract in place. Now a few words on the revenue and EBIT split. The speed of growth continues to be high, and Finland and Individual & Family gains ground, while Personal Assistance has a natural reduction to 35% of revenues. Turning to share of adjusted EBIT, Personal Assistance share decreased about a quarter while INF climbs up to over 50% and Finland increases its share to close to [ 5 ]. Now over to you, Fredrik, for more details on group financial performance.

Thank you, Johanna. Very pleased to notice that our organic growth for the second consecutive quarter exceeds our target of 5% and reached 5.5%. Reaching 5.5% is very satisfying, even though Personal Assistance has a negative organic growth of 5.1%. The organic growth, excluding Personal Assistance exceeds record high 11%. Net revenues increased with 13% from Q1 last year to SEK 2,435,000,000. This is on par with the Q4 revenues. EBIT increased from SEK 77 million to SEK 117 million with an operating margin of 4.8%. EBIT includes positive nonrecurring items of approximately SEK 18 million. And adjusted EBIT for the quarter is SEK 100 million with an adjusted EBIT margin of 4.1%. I will come back to the nonrecurring items. Even though net debt has increased since year-end due to negative cash flow and increased lease liabilities, leverage has decreased to 5.4x due to improved profitability. The new Elderly Care facility in Taby that we opened in February has increased our leasing liability and net debt with SEK 145 million. During the quarter, we had nonrecurring items that contributed positively to our profit. The first item is a remeasurement of the contingent consideration to be paid for the acquisition of [indiscernible]. The remeasurement amounts to some SEK 32 million. And this is a similar remeasurement as in Q4 last year, that also amounted to SEK 32 million. In Individual & Family, there is an adjustment of the purchase price for old acquisition amounting to SEK 4 million. And during the quarter, we have recognized nonrecurring incremental consultancy costs related to the data breach of almost 3 million and consultancy costs linked to IOs revocation of the permit in Humana AB amounting to some SEK 8 million. The net nonrecurring items amounts to almost SEK 18 million. Adjusted EBIT increased with [ 13% ] from SEK 77 million to SEK 100 million. This improved profit is driven by significant improvements in I&F and Finland, but Personal Assistance contribution declined with SEK 24 million. Elderly Care, Norway and headquarter only reported minor deviation. Our acquisitions have contributed to EBIT in I&F, Finland and Personal Assistance . In the quarter, we have been able to see important price increases, mainly in I&F and Finland, and there have been ramp-ups in all business areas, except Personal Assistance. And our utilization has increased in many businesses, but is offset by the fewer assistance hours. Inflation in terms of rent, electricity and food have increased our cost base with some SEK 22 million. Increased working capital, reduced cash flow from operating activities. And there, we had increases in trade receivables in Finland and in Personal Assistance. Cash collection in Personal Assistance is approaching more normal levels. And in May, we will introduce digital invoicing directly to the individual clients. We have one item of shareholders' contributions of SEK 10 million, and this is related to our 4 real estate subsidiaries in Finland, where we had minority shareholders that only with Humana has injected equity during the quarter. Now some deeper insights into the business areas, Johanna, please.

Well, thank you, Fredrik. Individual & family continues to improve in the quarter. And as you can see, achieved organic growth of 11%, driven by continued solid underlying demand in core business and price adjustments. Occupancy increased slightly on the total level, carried by increases in the young division, but also strong performance in adults. Division Healthcare expands according to plan in the quarter, and we welcome our new colleague [indiscernible] in the quarter, the medical assisted treatment business, adding almost SEK 50 million in annual turnover. Profitability also increases remarkably, more than doubling margins year-on-year, reaching 8.3% in the quarter. The most significant reason for the increase is the high occupancy that enables efficient resource management and price increases. Turning to Personal Assistance. We have substantial one-offs in the quarter, mainly relating to the revaluation of a contingent consideration. Following the decision by EVO to revoke the permit at 31st of January, client losses have reached net 15% and a negative organic growth in the quarter. Profitability reached SEK 57 million, 6.7%, although adjusted profits reaches SEK 26 million corresponding to a 3% margin. Profitability is negatively affected by increased staff costs, cost for assistance and few resistance are has delivered. Given the decision by the insurance board to pay directly to clients, we have worked to reduce the friction in the payment flows. And towards the end of the quarter, we are approaching more normal levels, as Fredrik indicated. In the elderly care segment, occupancy improved year-on-year and organic growth reached 10%. In the quarter, we opened a new unit in Taby, which during the period gradually welcomes new clients. Underlying profitability is better than last year, but actual performance is burdened by start-up costs for Taby of SEK $4.5 million. And to that, we have an inflation effect of negative SEK 3 million and a reduction in government grants. In Finland, we see continued solid underlying demand and high organic growth of 14%. This is due to achieve price increases and increased occupancy. Profitability improved mainly as a consequence of price adjustments and decreased sick leave. Higher attendance clearly improves our ability to both take on clients and reduce costs. Inflation hits also here, particularly on rental costs but also other. And we continue to build and fill our capacity for specialized clients, where we see strong demand. Parliamentary elections were held in Finland on the 2nd of April. The opposition's national coalition party won the election with 20.8% and the effect on our business is still difficult to predict, but overall, this is likely to be positive for the private sector. Norway continues to see good demand for our services, net client inflow continues to be positive and organic growth reached 9%. Profitability is somewhat more challenged mainly due to increased personnel costs. There are currently clear negative political overtones in the country and challenging discussions around employee conditions. Now a few lines on quality management. We apply a system we call the Humana Quality model, which in essence finds it's basis within the own controls that have performed regularly within all our operations. To assist technically our units use a system for follow-up and margin. Internal controls are added systematically over the year to secure all quality aspects are conducted properly. A natural part of operations is also external reviews conducted regularly by various authorities. 95% of external reviews conducted in the quarter have concluded without remark. We have, of course, a whistle-blowing function available should our employees or other stakeholders perceive us to be engaging and low following more activity. Using evidence-based methodologies as well as our efforts to measure care results are vital parts of our quality work. And in the first quarter, Humana Quality Index reached 75%, stable versus last year. Our yearly employee survey, we can proudly conclude that our employees continue to be highly satisfied. In the quarter, we're also very pleased to introduce social outcome measurements for Norway relating to institutional care for young people. This quarter, 44% of concluded placements within HVB in Sweden have resulted in a lower level of care and the corresponding figure for Norway is approximately 50%. When it comes to reaching targets in the care plan, levels in Sweden increased slightly to 63%, while the same numbers for Norway reached around 80%. Now a few lines on the near-term future. Of course, our focus is continued delivery in all our business areas as well as securing the future for Personal Assistance. We have managed to achieve substantially improved results in both Individual & Family, as well as Finland in the quarter, and it's highly important that we continue in the same manner throughout the year. And this will be done by continued specialization, price negotiations, solid occupancy levels and, of course, maintained cost awareness. The upcoming salary process in the Nordic region will be essential for a possibility to manage personnel costs in an environment with high inflation. And social outcome measurements clearly represents the future of care, and we will continue to work on both introducing more measurements and improving the use of analysis in our work with individual clients to improve their life situation. [ Never before has Humana's ambition and ] strategy been more clear. And with that, thank you very much for listening, and please feel free to ask any questions you may have.

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.

I have 3 questions. I hope that's okay. The first one is on the working capital situation. You sound pretty positive, but I wonder here how much higher was working capital in Personal Assistance here in the first quarter? And what do you expect for the full year with the new digital payment module? So that's the first question. Secondly, I'm surprised by the very high margin in Individual & Family. So naturally, how sustainable would you say the current profitability is there? And finally, the improvement you see in Finland, how much of the better earnings year-over-year was from a normalization of the sick leave situation?

Thank you very much, Kristofer. Regarding the working capital question, I'll hand over that to you, Fredrik.

Yes. The working capital or trade receivables in Personal Assistance is some SEK 50 million higher per end of -- end of March compared to what it would have been if the invoicing has been directly to us instead. And we have seen a better collection in April than in March. So I think in the long term, it will be slightly better.

So with that digital tool or what you call it, how many more payment days do you expect versus previously?

It's -- I mean it's very difficult. I mean, it's the invoicing we made in February related to the services that we provided in January, the first time we sent out invoices there. As of end of April, we have collected 96% of those receivables. So it's -- and if we send electronic invoices, I think we will have a more internal better process or the collection process will be smoother. And hopefully, we will gain some time also. But it's difficult to say if it's 1 day or...

Yes, of course, I understand. But I mean that's fine.

Then relating to your margin question, Individual & Family. We have a solid high occupancy in the important areas of [ Yanan adult ]. And we also, as we sort of expected, have been able to increase prices as well. And so that's why we can also balance the inflation effect in a good manner. I don't see really any reason for why occupancy should come down. I mean, there can always be events during the spring and summer that is unexpected. But there is no -- nothing on the horizon that says we should be substantially lower, at least in -- on that occupancy side.

Could I follow up on the -- sorry, on the occupancy. Is it Humana that does things much better? Or would you also say that it's a more balanced market than maybe 2 years ago?

I haven't really checked how Ambea is doing on Nytida, for instance. But I think we have substantially improved a way of working with occupancy over the last couple of years. I think that's clear. And that's -- it's a lot about working with overlapping the clients, for instance, if you know someone is moving out, you have to be quick on replacement. And so I think probably a combination, I would say. And then your question on Finland. It's -- our estimation is that it's roughly SEK 5 million of EBIT effect in the quarter that relates to about 2 percentage points improved sort of sick leave levels. Rough estimate.

The next question comes from Victor Forssell from Nordea.

I'll start with a question on the assistance side. Thanks for updating us again here with a number of lost clients that you've seen since the revoke permit. What can you say about the trajectory of losing clients here in the beginning of the second quarter? We can obviously understand that it's around 3 percentage points lower than your last update. So pleasing in any sort of qualitative manner. If you could explain the situation for you right now that would be interesting to hear.

Yes. Of course, it's difficult to predict, but we do believe that there would be a slight net outflow during the process. But it's clearly that it's -- the pace has come down in terms of the net outflow over the recent weeks. We have also clearly improved customer gains over the recent weeks, too. So there's a natural outflow of clients, and we've also gained 22 clients since the revoked permit. So -- and that over the last few weeks, has clearly improved. But I think we -- during the uncertainties, it's difficult for us to balance the negative outflow. There is one thing that could, of course, have a positive effect, and that's the assistance initiative, where the expectation is that there will be more clients as of somewhere around the summer that would be granted personal systems. But of course, it's a tricky situation for us to gain at the high speed and new clients under these circumstances.

Sure. Understood. Anything here in the time line after the oral hearing that you've mentioned in late May. What can we expect from the outside here in terms of communication? And what do you think will happen in the time line you foresee from that event and onwards?