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

Good morning, and welcome to Humana's Q3 results presentation. My name is Ewelina Pettersson, and I'm the Head of Investor Relations. With me today, I have our CEO, Johanna Rastad; and CFO, Fredrik Larsson. After the presentation, you will be able to ask questions. I will now turn over to you, Johanna. Go ahead.

Good morning. The revocation of the permit in Humana Assistans in the spring and the subsequent regain of the permit towards the summer had a highly negative impact on our group. In the third quarter, Personal Assistance had a negative organic growth of 18% and reduced its profitability with 73% versus last year. And thankfully, the other business areas weigh up, and as a group, we managed to reach an adjusted EBIT in line with last year. This is feasible because of the substantial increase in both organic growth and profitability in Finland as well as a solid performance in both Norway, and Individual & Family. Organic growth is partly driven by price adjustments received earlier in the year, while salary adjustments imposed during the third quarter impacts profitability negatively. In the quarter, we have extraordinary consultancy costs linked to IVO's revocation of the permit in Humana Assistans as well as central costs related to a review of our organization and governance, concerning quality in care compliance, and elderly care change program totaling SEK 13 million. Our strategic ambition to create a new standard of care remains unchanged. In the strategic plan, we include the recovery plan of Personal Assistance and the retake on turnaround for Elderly Care. Personal Assistance remains our largest business area, although I&F is coming closer and Finland is gaining ground. All business areas, apart from Personal Assistance grows organically. Elderly care, Finland, and Norway all show double-digit organic growth, while I&F has slowed down somewhat, mainly due to slightly lower occupancy levels. Excluding Personal Assistance, organic growth would have been above 9% for the group. From an adjusted profitability margin perspective, I&F and Finland stands out with double-digit margins in Norway not far behind from that. Now over to our respective business areas. First out Individual & Family. I&F grows with 4% in the quarter, although the organic portion of that reaches just below 2%. The growth comes mainly from price adjustments. Occupancy levels have been relatively lower than last year, partly due to higher specialization and a more careful buying behavior for some municipalities as budgets are becoming tighter. The healthcare segment is growing more rapidly and the need for highly specialized placements in the vision young remains a fact. Increasing criminality amongst young people is a terrible trend seen across Sweden. And here, I&F plays an important role with amongst others, a dedicated criminality treatment program and several acknowledged methodologies related to clients within family care. And although margins come down somewhat versus last year, they still remain high, reaching 11.6%. This is mainly because of lower occupancy in some units increased salary levels coming into effect 1st of July and a continued prevalence of staff shortages. Since the permit in Personal Assistance was regained in June, the business area has stabilized and net client outflow clearly slowed down. We continue to have a small net client outflow in the third quarter and compared to last year, a net negative organic growth of 18%. A recovery program and an energized management team is in place with a clear agenda of change activities to create new ways of working to regain volume and profitability, while at the same time, working closely with the authorities and other stakeholders to improve quality in the Personal Assistance service. A new salary agreement totaling 4.1% increase came into effect 1st of July, and the government announced price increases per year-end 2023 - '24 of 2.5%. Elderly Care has organic growth of 11% in the quarter, disregarding the start-up of Taby in February, profitability is in line with last year. This is still unsatisfactory, while we have accelerated a change program, including, but not limited to, increased specialization in certain units, increasing support to local managers, and centralizing some processes linked to key cost KPIs. After several months of negative profitability in the Care Home in Angelholm, it was disposed to Angelholm municipality in September. The sales cost and a small net loss of SEK 1.2 million in the business are Elderly Care and a positive IFRS effect at group level of SEK 2.8 million. Finland has a rocket quarter with record high organic growth and EBIT margin, price increases and strong demand in our units, as well as regain capacity in open care services due to lower absence rates lay behind the growth of 18%. Profitability of 11.2% comes mainly from price adjustments and high and stable occupancy within young and adults, balancing increased salaries coming into effect from 1st of September. The strategic shift towards more specialized care within the young has paid off, and we continue in that direction. Norway had a solid quarter with organic growth reaching 14% and EBIT margins increasing year-on-year to 8.9%. The demand for placements of highly complex clients continues to increase. And so is the number of clients within Personal Assistance. Slightly burdened by higher salaries, price increases still balance this effect well. Clients with high complexity levels have relatively high margins but also possesses a higher risk profile. The Humana Quality Index in the quarter increased slightly to 74%. The number of sales deviations reached 79% in the quarter, which is in line with previous quarters. 9 serious deviations within care and 1 data incident have been reported to the authorities. The number of own controls continue to increase, so also internal controls and no whistleblows the quarter. Now over to you, Fredrik.

Thank you, Johanna. The organic growth in the quarter is negative with 1.3%. We had stable double-digit growth in Elderly Care, Finland, and Norway and a low single-digit growth in Individual & Family that did not fully compensate for the negative growth in Personal Assistance. If we exclude Personal Assistance, the other business areas together have an organic growth of above 9%. Adjusted profitability is on par with last year, even though reported profitability is down with 5% compared to Q3 last year. In nominal terms, adjusted EBIT is unchanged with SEK 175 million with an adjusted operating margin of 7.3%. Reported EBIT has decreased SEK 9 million from SEK 171 million to SEK 162 million with an operating margin of 6.8%. This quarter included nonrecurring expenses of SEK 13 million, which is an increase from last year's SEK 4 million. I will come back to those items later. These results are clearly scheduled by Personal Assistance performance, which is outbalanced by the great performance in Finland. Thankfully, our leverage continues to decrease to 5x and getting closer to our target to be below 4.5x. Net debt has decreased almost SEK 100 million in the quarter, thanks to reduced lease liabilities, which is mainly explained by the disposal of the Elder Care home in Angelholm. During the quarter, we had negative nonrecurring items, reducing our operating profit. In the quarter, we have recognized nonrecurring incremental consultancy costs linked to IVO's revocation of the permit in Humana Assistans AB amounting to some SEK 5 million. And in addition, the operating profit has been affected by central costs related to a review of the group's organization and governance concerning quality and care compliance, and Elderly Care's change program totaling SEK 8 million. The total nonrecurring items amounted to minus SEK 13 million in the quarter. The cash flow in the quarter was weak, mainly due to the increase of working capital of some SEK 250 million. The working capital increase is partly explained by increased accounts receivables due to calendar effects and partly due to reduced employee-related accruals, such as vacation payments in the quarter. EBITDA of SEK 289 million is in line with last year, and net CapEx, slightly lower than last year due to some disposal of fixed assets in the quarter. Now some final words from you, Johanna.

Well, thank you, Fredrik. So in the third quarter every year, we revisit our strategic direction together with the Board of Directors. So also this year, and I'm happy to conclude that our broad ambition to create a new standard of care remains unchanged. We have continued to disclose social outcome measurements from placements within young and can now probably as promised, also offer our first social outcome contract to municipalities in Sweden together with Utfallsfonden. This ticks several of our impact boxes as this is clearly an example of social innovation with a dedicated focus on quality and price competition. And financially, Personal Assistance weighs down in the quarter. And even if it will take time to recover, we have a clear focus set of making sure our acceleration plan holds. The reenergized and partly new management team has the capability to secure quality development and improving insight into the system service without compromising integrity. From the group perspective, we still need to be successful in the turnaround in Elderly Care. We have a solid strategic direction set out that we will implement. A part of that is, of course, to create a new standard of care, partly driven by social outcomes and ex-associated contracts forward. And with that, we're happy to answer any questions you might have.

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

It's Kristofer from Carnegie. Four, five questions, maybe take them one by one. First, I would like to start with cash flow and if you could give some more detailed explanation what happened with the working capital here in the quarter and what we should expect for the full year?

Thanks, Kristofer. Half of the working capital, you can say, is related to employees. Since we pay out the vacation salaries during the summer, the accruals for vacation reserves always decrease in the third quarter. So that's roughly half of it. And the other half can be explained by account increase in accounts receivables. And the fact that September [indiscernible] was on a Saturday rather than a workday, -- many of the invoices we have a due date on the last day in the month. And some -- in Sweden, for example, you should pay invoices that are maturing on the weekend on the day before. But in Finland, the law is different than you should pay it on the first business day after the quarter. And regarding the accounts receivable, we have the same sort of calendar effect in December the last business day is the 29th of December. So it's a risk that we will not collect all the receivables in December that we usually collect in the quarter. For example, in June, we had the last business day or last day here is the 30th was on a Friday.

I'm a bit surprised because if you take a tender, for example, with half of the business in Finland, they delivered a surprisingly good working capital in for the quarter. So is this something that's particularly impacting you in Finland? Or I don't know if you have any further view on that.

I can't comment on their accounts receivables. But our agreement at least, when we have discussed it with Finnish management, their invoices are due on the last business day -- not last business day, the last day in each month, and then it has falled over to October rather than September.

The other question I had is when it comes to individuals and family occupancy, how we should think there going forward? And also whether you expect you would be able to continue to adjust prices there into 2024?

Well, I'll just take that. I think what we have seen in I&F is that it's literally 2 effects. The adult division has a relatively lower occupancy than we had the same quarter last year. And then you should -- so the third quarter last year was very strong in all -- and at the same time, I think that's where we see also a slightly slower demand due to the municipalities buying behavior. And then in division young, we have seen a slightly slower sort of recovery from the sort of seasonally low summer period. That's, however, sort of changing now as we sort of soon are approaching at the end of October. So I think from a municipality buying behavior, young people are generally prioritized when it comes to constrained budgets.

Okay. So adjusted for seasonality, you expect a stronger Q4 than the third quarter because of this pickup in demand in the child segment?

Yes, it should be higher, particularly in division young.

Okay. And maybe I stop with one more question. If you could comment on the work yet to regain volumes in Personal Assistance and whether you still expect to get back the number of clients as you have talked about before?

Yes. I mean we have lost about 330 clients within Personal Assistance since the revocation of the permit. We have identified and sort of come through all those clients, and we still have the target to regain about 50% of the lost clients over time. We have already now sort of between 10% to 15% returning clients since we regained our permit in June. So we still believe it's feasible to take back part of that group.

So do you expect Personal Assistance to grow sequentially than in Q4 versus third quarter?

Well, I think it -- I mean we also have -- of course, it's not just the returning clients, it's also the original client base that sort of also leave for natural reasons in a sense. But I think it is likely that we will be able to have a sort of a double effect in the sense that we can regain the clients lost. While at the same time, working to gain also clients not only based on the effect initiative, but also from the market as a whole as we are perceived as a safe place to be, given that we passed through IVO's review, et cetera. So I think we -- I mean, our target is definitely to come back to organic growth.

Okay. But I mean, in Q4, has this negative outflow, could you confirm that has stopped now?

It's a slowdown, we still have a slight negative effect in the Q3. And I think what's sort of talks for having a slightly positive organic growth in the fourth quarter is that the clients resign from other personal assistance or caregivers, and they have up to 3 months of resignation times. So I think we should probably see a bit higher returning rate in Q4 onwards.

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

Okay. So if there's no other calls, I could continue 2 more. If you could comment on the restructuring program in Elderly Care? And then I also wonder these pickup improved margins in Norway this quarter versus the first half of the year. Give some more explanation if that's driven by something in particular that you would like to highlight and how sustainable this better margin level sequentially?

From an Elderly Care perspective, I mean we have formed a more extensive program than we had previously, and it's targeting both sort of occupancy increases in sort of a handful of units that have been lagging behind. And there, we can, as of now, see an actually fairly good progress, so we've picked up occupancy from a total perspective from 1.5%, up 2%. And the other activities, centers around cost management partly relating to scheduling. We have also centralized some processes linked to KPIs that we need to be better, so need to be better steered centrally, but also to be in even more support locally. So our target here is to, over time, of course, reach profitability in line with the market as a whole and also beat that. And then the second question...