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

Welcome to the Humana Q4 2023 Report Presentation. [Operator Instructions]. Now I will hand the conference over to the speakers, CEO, Johanna Rastad; and CFO, Fredrik Larsson. Please go ahead.

Good morning. My name is Ewelina Pettersson. I'm the Head of IR at Humana. I would like to welcome you to today's conference call. We're going to talk about the Q4 and full year report of 2023. Our CEO, Johanna Rastad and CFO, Fredrik Larsson, will take you through the main events. And after that, we will open up for questions. Over to you, Johanna.

Thank you very much, Ewelina. 2023 was turbulent for Humana following the revoked permit in Personal Assistance in the beginning of the year, the subsequent legal process and the final win in the administrative court. The Personal Assistance business was largely affected by this, losing about 1/5 of its volume during the year and a substantial part of its profits. The total direct costs incurred due to that event reached close to SEK 50 million over the year, in addition to lost profit in Personal Assistance following lost annual revenues of around SEK 600 million. And despite that, Humana as a group, over the year, grew total net revenues with 5%, maintained positive total organic growth, improved operating profits with 3% and adjusted operating profit with 9%. Excluding Personal Assistance, organic growth reached 10%, which is a historically high level and adjusted net operating margin came in close to 6%. This is an increase with over 60%. Moreover, we improved operating cash flow year-on-year with 21%. This is very clear proof of resilience in challenging times. The Personal Assistance change journey initiated in '23 continues into '24. The court verdict was very clear and gave directional input and clarification to the expectations of us as assistance coordinators going forward. Clear guidance and transparency make it much easier for all serious care providers to operate in the market. The transformation achieved in Finland is a fact and the specialization strategy has paid off with 14% organic growth in the fourth quarter, driven by both occupancy improvements and price increases. Simultaneously, adjusted EBIT margins improved from 1.3% to 4.9% in the fourth quarter. Challenging in the quarter is a relatively tight municipality budgets in the Swedish I&F market illustrated by drop in Individual & Family placement requests of up to 50% in parts of our core business in Adult and Young. And despite this, we increased the percentage of requests turned into placements and we managed to balance up total occupancy levels in December in division Adults, but not in division Young. The volume drop is partly compensated by price increases, but EBIT still drops around 25% in the quarter. We continue keeping up to speed with implementing our strategic plan. The spring events caused us to postpone a few activities, which we're now implementing. And one aspect of this is continue to work with our portfolio according to the specialization strategy. We're also working internally to improve robustness and local business support. In this development, we're integrating Elderly Care into Individual & Family as well as consolidating parts of business support functions across Sweden. Increased robustness being one process of this, but also enable better collaboration between nearby businesses as well as improve efficiency. The total yearly direct effect of these initial organizational changes within I&F and Elderly Care is expected to reach approximately SEK 13 million, with further efficiency gains are anticipated. We're also clearly progressing work with our social outcome measurements. We designated internal resources to drive the work forward and finally start to receive significant interest from municipalities on our outline social outcome contract. This truly drives Nordic care forward with the ambition to improve the everyday lives of people in need of care. Finland and Elderly Care provide the most significant improvements in the quarter. Finland growth organically with 14%, reaches an operating margin of close to 5%. Elderly Care also improves mainly through hardware with occupancy levels particularly in the relatively new established units, but also take steps towards improving steering and control. Personal Assistance continues to have a challenging time. Although the initiatives started in autumn after the legal win is carefully starting to give effect. I&F has temporary optimistic challenges, which for the Adult division comes back to more normal levels in the end of December. The final placement are important contributors to the margin and they are temporarily weighed down in the quarter. Norway continues its stable performance as we've seen over the last years. An overall strong performance from the group, where weaker performance in Personal Assistance is compensated by improvements in our other business areas. And in this picture, we illustrate the relatively strong group performance in '23, despite the major hiccup caused by the revoked permits in the beginning of the year. Removing Personal Assistance from the group equation, we have a good performance for the full year with organic growth of 10% and adjusted EBIT margin of 5.9%. Personal Assistance will come back over time, and then we're well placed to perform substantially better at group level. In '23, the total group reaches an adjusted EBIT of SEK 441 million, corresponding to a margin of 4.6%. And now over to some insights for each individual business area. Starting with Individual & Family that has a financially challenging quarter driven by relatively more careful buying behavior by municipalities which in turn is driven by tight year-end budgets. Organic growth was 0.8%, of which most of the positive effect is weighed down by the volume drop in both the Adults and Young divisions. The Adult division reaches an average occupancy of 82% in the quarter, which is slightly lower than in Q3 and Young, 79%, which is about 3 percentage points lower than the previous quarter. I&F starts and takes over a total of 7 new units in the quarter, which, together with the 3 closed units, contribute negatively to profitability compared to the prior year. Among the new units, we find 5 new LSS units in Skarpnäck with 100% placement guarantee. In the end of the quarter, volumes in the Adult division returned to more normal levels, while Young, towards the end of the quarter, completes treatment of a dozen of adolescents will then leave our units before Christmas. A large part of these young people leaves our institutions to a lower level of care, such as family placements and moving back home again. Over '23, a relatively larger share of our clients within Young leave to a lower level of care, a win for the individual and, of course, to society as a whole. Now over to Personal Assistance, where the transformation continues. The reorganization and new ways of working have started to give small effects, carefully lowering administrative costs and substantially improve quality. Volumes are continued to be net negative, all at relatively lower levels. Returning clients and new clients cannot compensate for the partly natural outflow. We have a negative organic contribution of 20% in the quarter. Positive adjustments for pension costs contribute to the result with around SEK 10 million. Operating profitability decreased significantly, mainly due to the decreased volumes. Operating margin decreases to 1.5%, and we continue to work towards adapting central costs to relatively lower volumes. Admin costs in the quarter reached above 10%, which is well above historical levels. Activities to further streamline support operations are ongoing. At 1st of January, the state compensation increase is 2.5%, and we will persistently continue with the change program, and we expect it to give increasing effect over time. Then a few words on Elderly Care that improves their business in the fourth quarter. Organic growth reached 6.4%. Occupancy increases 1 percentage points to 90% from Q3. EBIT more than doubled to SEK 14 million and improvement is mainly driven by the revenue increase. That's in turn related to price increases and higher occupancy. Higher efficiency in staffing and administration offsets the relatively higher property costs. EBIT margin reached 6%. This even though we've opened a new unit in Taby in February with associated start-up costs of approximately SEK 2.5 million in the quarter. Over the last half year, an extensive focus has been set at increasing local business support and centralizing key KPIs, so that some units have increased specialization through a collaboration with I&F. Occupancy improved somewhat over the quarter and key to forward success is continued occupancy improvements and cost control tied to the key central KPIs. Then over to Finland. Finland ends the year on a good note with a strong organic growth of 14% with substantially improved profitability. The organic growth is 70% driven by price increases relating to both a service shift mix towards more specialized services as well as general price increases with the remaining 30% being volume growth. The main reasons for the profitability uptick relates to growth. Inflation-related costs partly offset the positive revenue effects, so does relatively high cost for sick leave. And the specialization journey, of course, continues and we're now the market leaders in our main segments: child and welfare services and open care services. Now finally, over to Norway, where the underlying business continues to perform well with an organic growth of 16%. Approximately 70% of the growth is generated by volume increase and the remaining 30% by price. Norway has managed to get a steady inflow of new customers, which serves them well. This, however, does not come for free. The Norwegian management team is working extremely hard and focused to maintain a solid performance month by month, quarter by quarter. And over the years, they've managed to continuously improve to meet the market as well as incorporate new regulatory standards and agreements. The new collective agreement within Personal Assistance that came into effect this spring has pressed margins so as new scheduling arrangements in the institutional care, but today must met the challenges by further operational improvements and innovation. Particularly good profitability improvement is seen within the Young division. So thank you, Norway, for another year with solid delivery. And now over to you, Fredrik, for more details on group financial performance.

Thank you, Johanna. Organic growth in the quarter is negative with 2.5%. The stable double-digit growth continues within Finland and Norway; however, this does not fully compensate for the negative growth in Personal Assistance of 20%. If we exclude Personal Assistance, the other business areas together have an organic growth of solid 8%. Adjusted operating profit is on par with last year, even though reported profitability is down with 33% compared to Q4 last year mainly related due to large nonrecurring item in Q4 last year. In nominal terms, adjusted EBIT is unchanged with SEK 89 million and a margin of 3.7%. Reported EBIT has decreased SEK 42 million from SEK 127 million to SEK 85 million with an operating margin of 3.6%. This quarter include costs related to IVO's revocation of the permit in Humana Assistans of SEK 4 million, and last year included a positive adjustment of continued considerations of SEK 38 million. Thankfully, our leverage continues to decrease to 4.8x, getting closer to our target to be below 4.5x. Net debt has been reduced due to good operating cash flow in the quarter, which is offset by increase of lease liabilities due to the year-end rent increases. Operating cash flow in the quarter was strong. This is explained by our profit generation during the quarter but also the reduction of working capital of almost SEK 200 million explained by good cash -- collection of receivables. Capital expenditures have been reduced since last year. And now some final words from you, Johanna.

Thank you Fredrik. The Humana Quality Index for the quarter improved from the third quarter with all business areas apart from Norway increasing their total score. Worth noting is the employee side, where an even larger share of our employees complete accurate training within Humana Academy and receives continuous professional development. This is one part of our offering to our employees that also causes our eNPS to improve from 14 to 17 this year. That's not worthy given our tough experience earlier in the year within Personal Assistance. Eight serious deviations were reported to the authorities, 3 in I&F, 2 in Personal Assistance and 1 each in Finland and Norway. And on top of these, 1 data incident was reported to the data authorities. This quarter, we continued to extend our social outcomes even further, including Personal Assistance regulated by the LSS Act. The purpose of the law and the effort stemming from it is that people covered by the law achieve equality in living conditions and full participation in social life. Individuals must be able to get to hit the need in the daily life and to be able to influence the support and service they receive. Individuals in our Personal Assistance care have serious and long-lasting function impairments. And despite this, 78% of our clients perceive that they can impact the life situation. This is an example of how we at Humana proudly make positive impact. And that's only possible through the social innovation I am pleased to show every day when performing the direct care and, of course, through the trust from our owners. And we really mean to make sure that this market continues to develop and for that, we need capital. This market is more cyclical and dependent on people, not products. With a clear legal verdict received in Personal Assistance this summer, our regulatory environment is more certain and predictable. Transparency and predictability are important for operating environment and we're placed where the societal need is the highest. We managed to grow substantially over the years being a part of continuous consolidation in development, managing through the spring events and at the same time, improving adjusted operating profit with 9% clearly demonstrates the strength of the group portfolio. Investing in Humana means being a part of developing society to enable support at the right time to those who need it. And the importance of investing in sustainable value creation, particularly on the social side, will be a clear advantage in the years to come. And in that transition, don't forget where you first heard the concept of social outcomes. Now to the focus forwards. And of course, Personal Assistance and acceleration activities is about most relevance and focus for us and ensuring we stick to the plan that's starting to give effect and continue to drive development. The same goes for Elderly Care and the turnaround program. The team needs to find its place in the arms of Individual & Family, and I'm sure they will. We will continue working on establishing the Swedish organization to further strengthen the robustness and support to our operations within the Elderly Care and Individual & Family and Personal Assistance as well as ensure efficiency across the Board functions within the country. And finally, we will never stop driving positive change to the Nordic care receivers. Our contribution will focus on establishing and deepen social outcome measurements. And with that, we're happy to answer any questions you may have.

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

I have 4 questions. I hope that's okay. First, could you maybe give a figure for the one-off costs you had in Norway?

The figure for the one-off cost in Norway?

You mentioned there were some cost of extraordinary nature, I guess you haven't adjusted for that.

No. It was a few millions.

Okay. Good. And then could you also -- just a housekeeping question, if you could repeat what you said about occupancy rates for Individual & Family.

Yes. So if you look for their difference depending on which part you look at Individual & Family...

I think you said 82% for Adults, yes, and that was down some from...

Just a little bit down on average over the quarter. And that's sort of really thanks to December, where we lift up levels, where the first 2 months are relatively lower. So December is -- so we're ending the quarter on a good note in Adult, relatively lower than Q3. And in Young, we are 3 percentage points lower on average versus the third quarter. So those are the main...

And what's the figure in Young in absolute term?

79%.

Sorry?

79%, yes.

And could you comment on the occupancy situation for these 2 segments now in Q1?

Yes, I think we can say that we sort of follow the same pattern as we do in December, where Adult is sort of holding up their levels and even slightly increasing in January, whereas the Young division actually sort of picks up towards the mid of December just before Christmas and then drops about 20-plus placements because they sort of completed their treatments and now we're sort of moving around the same levels as we end December in Young.

Okay. So that's -- but if you compare year-over-year then, how is the situation right now for Young?

It's slightly lower for Young. It's better for Adult.

Okay. And if this remains now in Q1, what would that mean for earnings year-over-year? Will this be another quarter with declining earnings then for the Swedish Individual & Family business?

Well, I think, it is really important that the division Young picks up. I mean, if the Adult continues to improve, as they've done, sort of during the fourth quarter and also a bit into the first quarter, then they would be able to compensate partly for the Young -- the drop in Young. So that's the sort of -- I think we -- if we are -- if we manage to build up well in Adults, we would be able to compensate for the drop in Young alternatively then and pick up in Young. But I think the belief is that the requests will sort of steer how much we can place. And in terms of requests, we can see that coming back somewhat in January and that puts us in a better position and it's easier for us to make placements when we have more requests to work with subject.

Okay. Great. And finally for me, how we should think about profitability or earnings here in Personal Assistance in 2024. It seems difficult to regain a positive net inflow of customers. So how much could you do on -- and cost and what -- and when could we expect this business to start earning money again?

I think I'll start on the sort of the client side. I mean we had -- we lost about 330 clients post IVO decision. And out of these, we targeted about 200 that we thought were suitable to sort of approach to come back to us. But we have a relatively lower number of returning clients. It's not easy for clients to move so we see that the returns are lower than we expected. And then I think the net loss in volume, the target is to make that to compensate with the price increase we get over the -- from the beginning of the year. So we end up in maybe plus/minus 0 on organic growth. That's sort of where we stand right now. And I think from a profitability point of view, we've done some good initiatives on streamlining the central overhead costs. We're still at somewhere around slightly north out of 10, so 10.7% and in the -- on average in the quarter, which is well higher than the around 8% that we've had historically. And I think -- and that's what we will target as we don't see the growth sort of returning.

Because I guess -- yes. But even if the number of clients are smaller now, I guess if you go back a few years, you have the same amount of clients, much better profitability. Of course, you have had inflation, et cetera. But I guess it should be possible to do much better margins and earnings than what you do right now. So isn't it just to be pretty aggressive on cost here or is that more difficult than it sounds?

Yes, I think it's a bit more difficult. But I think you're right. Over time, it will be doable. But I think we've been a bit careful with the organization because it's been such a turbulent time. And now we've done a bit more in terms of reorganization. We have reduced the number of districts. We have sort of consolidated other central overhead functions. So -- and we also have a good chance of streamlining based on sort of the digital infrastructure. So there's definitely more to do. And I also think that over time, this is definitely doable. I mean 10.7% of admin cost is way higher than it has to be. It just takes a little bit of time. It's a large organization.

But would you be willing to say -- give any sort of indication what type of margin we could expect for this business in 2024?

I'm also like generally really careful with giving predictions. But I think as the fourth quarter is still fairly good and I think it's somewhere there and slightly north that over the fourth quarter that I think we can expect.

Yes, but I mean the fourth quarter includes SEK 10 million of nonrecurring pension liabilities. So adjust for that, you make 0 margin.

Yes. That's why I think we can come back to. If you account that SEK 10 million as the regular margin, I mean, we should be able to deliver 1.5% plus if you look on that for this year. That's what I see now. We should be able to incorporate that into the underlying business in a sense.

The next question comes from Jakob Lembke from SEB.

I have 2 questions. Starting on Individual & Family, I'm not sure that I heard it correctly, but this caution that's from municipalities to place clients, has that sort of improved? Or do you expect that to continue in 2024?

Well, it did improve in the Adult division during the quarter. And then we've sort of entered into January on a good note for Adult. We also have a slightly higher requests in Young, but we haven't, in the beginning of the year, managed to build up any sort of large occupancy improvement in Young.

Okay. But you think that it will get back to normal during the year? And what sort of the...

Yes. I mean it's -- we believe this is a temporary dip. We are well placed in our offering. So I don't expect this to continue over a long time, but it takes -- we have to also make new placements carefully. And we -- in division Young, for instance, about a bit more than 20 clients completed treatment towards the end of the year, and that makes a difference for occupancy levels. And then we need to bring in new clients in a careful way and really make sure that we match properly with their sort of underlying resources that we have to take care of the people because we are in a highly specialized environment. So we need to do that carefully. So I don't expect us to bounce up with 15, 20 clients over a week. I think it will take a little bit of time for Young. Adult is slightly better than last year. So I think we should -- it will take a bit of time, but over time, we will be able to balance that.

Okay. And then on Elderly Care, good to see the rebound here in Q4. Would you say the margin in the quarter is sort of representative of the current run rate, would you say?

Well, I think we are sort of a bit helped with the government support that is retroactive. It's not to any large degree, but a bit helped. But of course, it's clearly that occupancy levels have increased, so that's a benefit for us. And we also managed to get price increases that sufficiently sort of cover for cost increases. So given that, I think it's slightly more maybe than we had on the underlying, but I still think it's still a good performance in the fourth quarter.

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

First of all, it would be good to just hear your take across the divisions, how you see the potential for price adjustments this year compared to cost inflation and how they balance for you to say, going into 2024?

Yes, what I would say, the price adjustments in the Swedish market, we have Personal Assistance of 2.5% as of first of January that will sort of help us until we get the adjustment on the collective agreements in the summer. So that's, for PA, is really transparent, it's sort of one price tag there. For Elderly Care and I&F, it's a slightly more complex picture. What we know now is that we have the preliminary OPI of 4.7%, sort of adjusted as of first of January. So that's -- generally, the preliminary rates are at the level of the confirmatory rates reached towards the April time when that's set. So I think that's a relevant figure given what we've seen on the cost increases. So -- and then, of course, not all of our contracts and our placements are tied to OPI, but it's still used as a reference, even for the individually negotiated hike. For Finland, I think we have -- I mean, parts of the price increase effect comes from the specialization strategy where we have more severe clients and hence, also can charge higher prices for them and then partly related to price increase within the housing services, where the price increases were relatively sort of beneficial for us from the beginning of the year. So I think for Finland, given that we continue on the specialization journey, I think we should be able to get good compensation for that specialization strategy. And again, it's the final placements that make the most of the profitability. So it's really vital that we are placed right in the market. And I believe the specialization and that sort of aspect of the Finnish journey is clearly giving good effect. And then for Norway, I mean we have the largest increase. We've got the 16% organic growth, whereas the largest impact there comes from volume increase rather than price. But I think some -- the political headwind that we have within the Young division has changed somewhat, I would say, from the summer. And it's clearly a very strong need for that type of placements. But I still think the volume effect will probably be the highest even in sort of near coming months in Norway. So if that gives you some sort of direction at least.

It's a good, you answered a lot of different questions with that. But if you look at, say, how you see it now standing at the start of '24, the balance between, say, your price adjustment you see and the cost inflation you see, is this a year where you can regain some lost territory? Or is it balance year? Or is it a year where you will see continued headwind? I understand what's happening in Personal Assistance, but the other areas mainly.

Yes, that's really right. When we look sort of in the backward mirror and look at the inflation effect across the group, I think we anticipate that when the sort of high inflation environment started that we would sort of net out over time. And I think when we look at the 2023 figures, that's actually the case. It has sort of netted out with a sort of a larger effect in the beginning of the year and less so in the latter part of the year. And that's, of course, partly driven by -- it's slightly skewed and the price increases versus the cost increases in the different areas. But I think -- and I would say also one sort of complicating factors is that strategically, we have placed ourselves in the sort of higher specialization area. So -- and it's like -- it's not always so easy to separate out what's the general price increase and what's the price for us actually providing a more specialized service. But I think on average, we managed to balance it out. And I think that, yes, the rear mirror maybe speaks a bit for the coming road, too.

Excellent. And Fredrik, I see that you had a good release on working capital normal in Q4, I guess, the normalization over the year. Is that how we should see it? Or is there more opportunities to come there?

I think we should look at this over the full year, where the working capital was if I recall the number correctly, it was minus SEK 29 million over the full year. So I would say it's in normalization. We have normalized the level.

And I guess you normally say that they're about 4% of sales negative is a good assumption as well where you ended up. So that is how it should be basically.

Yes, yes. And we managed -- I mean, you remember that in Q3, I commented on the calendar effect where we had September 30 on a Saturday. And now we had the year-end, of course, also on a year on a holiday, which we managed pretty good. And then we should remember that in March. The last business or the 29th is, let's call it, it's Friday, leap year. So we might have the same problem, but a cut off problem with the Q1. But year-over-year, it should be fine or the full year, frankly.

Good to hear. And looking at the gearing level of 4.8% at the end of the year, is it fair to assume that also 2024 will be a year where let's say the primary capital allocation will be to gear the balance sheet?

Yes, that's our expectation.

[Operator Instructions]. There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

We have 2 written questions. So I will read them up to you. The first one comes from [ Johan Lingen. ] When do you expect the quarter-on-quarter adjusted operating results within Assistance is not affecting the overall results within the group negatively in Q year this year or in later quarters?

Well, I think, unfortunately, I mean, we've lost about SEK 600 million in yearly turnover from Personal Assistance and those SEK 600 million will take a long time to get back. So it has sort of impacted us substantially with a profit loss, of course and so on. And I think what we won't take with us is all the costs that incurred during the spring from like a process perspective. But I think it will take time. So that's why we're also working intensively to try to balance up the performance with the other ambitions there. And as we also actually spoke about a bit earlier with Kristofer, I mean, we should be able to balance up the margins in Personal Assistance over time, but it will take a bit of time. It's a large organization.

Thank you. The next question comes from Octopus Scott Holding. What does the new Swedish organization mean in terms of cost savings in administration?

Well, the direct -- there are literally 2 things that happened this quarter, one being the integration of Elderly Care within Individual & Families. That direct event is expected to reach about SEK 13 million in annual savings. And then to that, we're also streamlining the central functions across all the 3 business areas in Sweden. And that's also expected to give some effect. We will have one-off costs related to that in the first quarter to also get that gain. But over time, I think the largest win will be the increased collaboration between the Swedish business areas. That's where we will see the real benefit, and that will be -- should be -- will contribute more than those SEK 13 million.

We have no further questions. Thank you, everyone, for listening. Have a good day.

Bye.