Terveystalo Oyj (TTALO) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Terveystalo's First Half 2021 Results Conference Call and Webcast. My name is Kati Kaksonen, and I'm responsible for the Investor communications. As usual, our CEO, Ville Iho, will present the highlights of the period, and we'll follow that with the CFO, Ilkka Laurila's, more detailed presentation. And after the presentations, we'll take questions from the phone lines as well as from the webcast. Without further ado, over to Ville.

Thank you, Kati. So good morning from my behalf as well. Let's go straight to the business and dive deeper into the highlights and key takeaways from our second quarter and first half. Key numbers, another strong quarter from Terveystalo. This is now a fourth consecutive record quarter for Terveystalo when it comes to revenue and also EBITA. EBITA margin was matched in 2018 on second quarter, but very good levels, especially revenue grew nicely during the quarter. Comparison period, of course, from last year starts to be slightly irrelevant. So of course, we need to look at 2019, which was the last normal comparison period but also against 2019 we are making progress, which is very positive for a company. Clear trends, continue boosted by COVID. So digital is becoming mainstream. We offered 0.25 million appointments through digital during Q2, which is, of course, a very, very high number. Developing this part of our business is very important going forward due to the fact that this is much more scalable and productivity gains can be gained from there. COVID, of course, is with us still, which is unfortunate for us. Of course, it reflects the COVID-related services, and the level of the services was slightly higher than we expected going into the Q2. As we all know that's due to the delta variant also highly active in Finland. But all in all, as I said, positive, very, very strong quarter for Terveystalo and good progress. When we look at the customer groups, strong development with all of the groups. The only bucket which actually wasn't growing during Q2 was outsourcings in public business. That was more or less flat, but that was, as we all know -- known before, that's -- outsourcing area is slowly moving any muscle to speak. And even though the funnel is quite good at the moment, it takes time until it picks up. Several trends which have been visible throughout the pandemic are still going strong. As I mentioned, digital visits, they are becoming mainstream. Well-being services are growing strongly. Maybe a new trend, which is visible now where we can claim that the tide is turning in this business is the fact that not only the specialist appointments demand is strong, also demand for GPs and appointment booking rates are growing quite nicely. They have been growing steadily during Q2 and also during first part of the H2. Landmark for Terveystalo during Q2, obviously, is our international opening. We acquired Feelgood. The process with Feelgood is going according to our plan. It looks very positive. If somebody has taken a look at Feelgood's numbers from Q2, the only thing I would comment on those that we are slightly ahead of our business case going in into this transaction. The process itself is going on a fast-track, which is very good. Last week, Feelgood was delisted from Stock Exchange. And now during this weekend and next week, we get properly our hands on the integration project and can engage Feelgood team into this one as well. And I will use this moment again to welcome Feelgood team on board Terveystalo. Feelgood is a great company. We are very happy that we were able to get this one through, and we have a very, very exciting future when developing Swedish base and this Nordic healthcare ecosystem together. What's going to happen next? As I said, delisting is done and integration and joint business planning starts now. We are fast-tracking some of the streams of our project just to get some concrete developments going on Swedish market. We are sharing best practices. Of course, we do the normal synergies as in all of the M&A cases. But very important for us is really show that we can leverage our digital platform and best practices that we have learned during our occupational health care journey in Finland, we can claim that we are #1 in this field in Finland and also in Europe. There are things that we can learn also from Feelgood, which is very important also. There are some services that we can utilize in Finnish market, and this is going to be, as I said, a joint exciting effort going forward. Terveystalo strategy implementation continues. We are investing in our platform. I will show some examples of the progress later on. We are renewing the relationship with our customers, becoming a true customers' health partner, and we continue selective M&A. At this stage, of course, from Q2, the M&A bucket was populated by Feelgood acquisition. Everybody knows that there were some Finnish acquisitions that we passed during a period. For us, -- maybe it's worth commenting that for us whenever we are talking about M&A, the guiding principle for us is value creation. And even though there would be very lucrative cases close by and which would make, from industrial point of view, a sense if terms or the price tag is at the level that we don't see value creation potential with then we, of course, pass those. Selective M&A, of course, is a very interesting bucket going forward since we are not any more tight inside the Finnish boundaries and our capital allocation possibilities are sort of wider going forward. Digital platform, as I said, we continue investing in. We can see practical real good results from those investments. We are talking about smart platform, which improve the productivity and efficiency of our services, improve demand-supply management; improve customer experience; improve how our customers are able to find right service, right specialists very fast. And just a couple of interesting KPIs from this development. We have been able to optimize searches. We have been able to optimize our digital marketing to create more volume due to our booking channels. More importantly, we have been constantly able to improve the conversion rates and self-service rates. And the last 2, of course, are very important when thinking about the scalability of our services and smoothness of the services for the end users. One important milestone that we reached actually yesterday was that Terveystalo was granted ISO 13485 certificate, which makes Terveystalo a first health service provider in Finland which can develop and market health care supported device -- health care software-supported devices. And even though our decision going forward would be that we don't sell this software devices externally, this is very important when we are leveraging our capabilities, especially in new markets. So important milestone for us and interesting times ahead. A couple of examples of how we can, even though the market share in Finland is high for Terveystalo, still accelerate growth here. There are segments where we are not market leading when we are -- where we are not in a market-leading position. One example is children. And for that segment, we launched children's Terveystalo during Q2. And the response for the new opening has been very positive. We come to this segment from a digital angle. We all know how important digital, easy accessibility is for families, and we can accelerate the growth with digital and take leadership position in this area. So this is a new opening in weaker segment for Terveystalo and presents new growth opportunity for us. Another development in customer is Nightingale product or service that we will launch for the market and consumers in next couple of weeks. And this is also exciting new opening for Terveystalo. This is the first service or product which is fixed fee and based on continuous relationship, continuous measurement of your health. And this is obviously a strong trend. This will not be the last service with the similar features, but this is an important opening for us and very interesting to see how the pickup is going to be. So, obviously, the health care reform needs to be mentioned because it was nailed down during Q2. Positive thing for health care business in Finland, obviously, is that now we have a solid base and public can start building their service models. And obviously, that process will open some new possibilities also for private healthcare providers. Directly, the impact on Terveystalo business is immaterial. There are some outsourcing contracts that need to be renegotiated. But all in all, we see public as -- and relationship with public as a growing area in our business. The demand is strong and activity has been strong, and the barrier to do this cooperation with public has been lowered during pandemic, which is positive going forward. Outlook. We have been saying all along during the pandemic that forecasting demand is uncertain. It's going to be uncertain. But after 4 consecutive record quarters, maybe it's too bleak to say that it's -- we wouldn't be in overall normalizing situation demand for health care services in general is expected to grow during half 2. And due to the delta variant COVID-related services will remain on a slightly higher level than we expected, which for the general health is unfortunate, but obviously, is reflected in the services and demand from Terveystalo. As I said, a strong quarter. Tide is turning when it comes to underlying demand as it looks right now, interesting half 2 ahead of us. And with that, I will hand over to Mr. Ilkka Laurila.

Thanks, Ville. Like usually, then we take a bit closer look on the numbers. quite interesting, obviously, quarter and the comparison period because of the lockdown during the comparison period. And now like we are saying, we are seeing a normalizing sort of environment in our business. So first of all, Ville already showed these numbers compared to the last year. Comparison period, obviously, private business at the time was hit most during the lockdown period in Q2 when the pandemic started. And now the growth for that was at 44%. Corporate business at the time was not hitting that severely at the time and the growth for the comparison period is at 35%. But if you take out -- look a bit more further back compared to 2019 numbers, you can see that the growth rates are at 8% and 9% compared to private and corporate customers. And those are quite nice, firm growth numbers as well. Then on the other hand, if you go take a look at the contract business, so to speak, the public business. There, you can see that like discussed many times, in outsourcing contract, we have had those contracts which we have paced out. And now the situation has sort of kind of stabilized, and it's almost flat. We ended some of the smaller contracts at the end of the last year. And since last year, April, one outsourcing contracts started. So now we had a almost flat revenue development in outsourcing business. Then on the other hand, in Staffing Services, the sales increased at 11%. But again, compared to a more normal period in 2019, it was at roughly 2%, quite sort of well in line with that one. But then if you take a look at the service sales and the occupational health care sales to the public sector, there we can see quite high growth rates, both for the -- compared to the '19 and as well as for 2020, mostly explained by the -- then on the other hand, new occupational health care contract with the public sector, but also different kind of sample taking, vaccination, et cetera, et cetera, services, corona, COVID-19-related services sold to the public sector. Then if we take a look at the first half year numbers, you can see the development in this slide at 20% and 22%, respectively, with private and corporate segment overall increase with that close to 19%. And the split of the revenue is now such that public has slightly less proportion of the total volume than now than the private. But overall, quite sort of stable development, I would say, in revenue split as well. Then if you take a look at a bit -- take a bit sort of deeper down and take a look at some of the services and the growth areas within the revenue, namely well-being in this slide, even though that the total volume of well-being services, which is mainly comprising of physiotherapy and mental well-being services, obviously, there's other massage therapies, labs and other therapies as well. But still, the total volume of that is at roughly EUR 28 million. And it's mostly served to by corporate and private customers, of which total volume in Q2 was at roughly EUR 400 million. So out of EUR 400 million, EUR 28 million is the proportion of the well-being services. So still quite small. But as you can see from the percentage growth rates with the pandemic or without the pandemic, the growth rates are quite nice. And like I discussed many times, especially the mental well-being services, the demand is continuously increasing and that's also why -- that's also one of the area where we put lots of effort going forward as well. Then on the digital we see -- as you can see, actually, the sort of the number is at least, at this stage, it's flattening, has been quite stable during the last 3 quarters, obviously, still, if you compare to 2020 numbers or especially if you compare the pre-pandemic time, 2019 numbers, for that comparison, obviously, the percentage growth is huge, it's insane that it sort of describes the sort of the change that we have gone through when it comes to health care digitalization, but also when you compare to last year number, the growth is still almost 70%, which is still a really high number. But of course, like you can see, we are facing a tougher comparison period going forward on that area as well. Then maybe it's a good time also to pause a bit and take sort of look at how the testing volume has developed in our case during the pandemic. So this is not -- well, first of all, this is not all kind of testing modalities. This is only PCR test for the Finnish citizen, and you can find it in our open reporting. There's a lot of other sort of testing modalities and COVID-19 services like discussed and vaccination, et cetera, et cetera, and sample taking, which we are selling to public sector, et cetera. But the sort of the graph is following pretty similar pattern with those as well. There's lots of, I would say, maybe things maybe that you would like to point out is in this graph. But if you take a look at the Q2 '21 and Q2 2020, you can see that overall, last summer -- last year, last summer -- 2020 summer, the overall volumes were on a really low level still compared to this year. Then on the other hand, you can see when the school started last year, during weeks 20 -- sorry, 32 and 33, the volumes shooted up. Now we are in the middle of those weeks and you can see that now during the week 30 and 31, the volumes has also now going up. I think we all agree that it's really difficult to estimate that how that will develop going forward. Everything that you estimate related to COVID-19 has always been incorrect. So maybe not saying more about the future development, but the historical development you can see here. And overall, you can also -- if you take a look at the sort of the level where we are at the moment, we are in a sort of similar volume levels where we were at the beginning of this year, quite close to that. So still quite high testing volumes, you can say, compared to the whole period of the pandemic. And like Ville said, we are now saying that H2 testing and COVID-19-related services is -- we are having a quite sort of stable and good demand for those services as well. And that actually combined with the fact that Ville also explained that when the sort of the situation in overall health care demand is kind of normalizing, so that actually, our booking rates is gradually increasing month by month combined with that sort of the COVID-19 development. It's really interesting to see how the autumn will span out in the future, even though -- like in this graph, you can see that we are facing a tougher and tougher comparison period in Q3 and Q4, which were boosted by -- on the other hand, high testing volumes like we saw in the previous graph then on the other hand some pent-up demand which moved from Q2 to later quarters during the last year. So it's really interesting to see how that will develop. And that's why we are saying that the overall health care demand is kind of normalizing, but still we are having a view at the moment that COVID-related services is developing quite stably also during the H2. In this graph, you can also see that the profitability -- as such, the relative profitability, 10.7% EBITDA that is in addition to record sales, that is also record sort of margin level in Q2 that we have been able to achieve. In 2018, we had a similar sort of EBITDA margin at the time. But if you exclude that one, it's also a record high relative profitability. And in absolute terms also, maybe taking a bit longer trend, if you take a look at the Q2 '17, the EBITDA at the time was EUR 17 million; 2018, it was roughly EUR 20 million; 2019, you can see it was EUR 26 million; then down to EUR 9 million and now close to EUR 30 million. So that's how the sort of the longer pattern goes if you would exclude quite a normal quarter last year. Then on the cost development, like communicated many, many times, when we invest a lots of money in digitalization, obviously, that can be seen. The P&L impact can also be seen in IT expenses as well as in the personnel expenses. But if we compare to last period, you can also see that last year, we said that we are freezing some of the expenses, especially in other operating expenses. That's why the sort of level or the number has increased at close to 49%. Now it's a kind of more normal level. Then on the other hand, we had those temporary layoffs at personnel costs during the last year, that has the impact for the personnel expenses development. And on the other hand, we have -- as the sort of sales of COVID-related services is quite high, that also demand some additional sort of resources for the units just to steer the customers between the cohorted area and the sort of the normal area just to avoid any sort of accidents and -- so that we are able to guarantee the safety of the -- of our personnel and the customers. On the balance sheet maybe the key takeaway is that no material changes even though that we made that acquisition in Feelgood acquisition, so that in our EUR 1.4 billion balance sheet, the total amount of the investments, including M&A and other investments is EUR 68 million. And -- so therefore, no material impact on that and not either in our sort of leverage ratio, which is quite stable still, clearly below our target level or which is at 3.5x adjusted EBITDA. So we have a good flexibility to move if we would sort of decide to do so. CapEx development, no major sort of changes there. Total amount of EUR 37 million at the moment, of which roughly half is that related to those intangible assets, meaning mostly digital development and other service development. And like discussed earlier, that will most likely increase also going forward. Then finally, we will have some investor meetings during the autumn. We, at least, at this stage, plan to have a physical -- first physical meetings and road show in some of the European cities, but also some virtual road shows with some of the -- our partners. Then I think I would sort of kind of conclude here. Maybe just finally, once more emphasizing that, that the autumn that we are facing is going to be really interesting, putting together the fact that, that sort of the testing volume seems to be quite sort of high levels. And then on the other hand, we are sort of facing the increasing booking rates and demand for other services. And combining those, we are, again, for those that have been followed us facing quite of that funnel and bottleneck situation that we have had during the earlier years that we are in the situation that we are doing lots of work to open bottlenecks in different places within our organization and operations. But with those words, I think we have time for the Q&A.

Thanks, Ilkka. And we'll -- are there any questions from the phone lines?

[Operator Instructions] And our first question comes from the line of Panu Laitinmäki from Danske Bank.

Yes. I have a few questions. Firstly, starting on the test. So you report the volume and we can make estimates on how it develops. But what kind of price would we have soon for tests in different segments? And how has this developed over time? Are you seeing price pressure on the corporate side? And how do you expect this to develop going to the second half and maybe beyond?

Well, obviously, a very interesting question. We have not commented on the pricing levels as such, but the same logic applies to this service as for the rest. So bigger the buyer, the lower the price. That's very typical. Price point, average price point has been developing, so during the pandemic that it has been going down steadily, which is very normal. The price pressure is always there when you have professional buyers on the other side. The price point that we see for the individual consumers is, of course, not even close to the average price that we are getting for the test at the moment. But fairly steady development, no drastic changes from 1 month to another.

But maybe on the profitability level, would you expect that test or the COVID-related services in general will be like a smaller driver for your earnings in the second half this year than it was in the last?

Yes. If you would compare to last year, most likely yes. So given the fact that like Ville said, overall, sort of the prices have gone down and most likely the sort of the trend will continue. And obviously, the last H2 volumes were quite high, even though it's -- like we all know, it's impossible to forecast the volume development, most likely, I would say yes to that question.

Okay. Then secondly, I'd like to ask on the public sector outlook. It seems that you slightly upgraded the outlook commentary for the segment now saying that demand will continue strong and previously, the comment was stable. So maybe on that, what do you mean by practice? What has changed there? And then secondly, on the public sector business. I mean, you have recorded quite strong growth in the service sales and the health care. But is this mostly like COVID related? Or have you grown also in services that would kind of remain if the pandemic would disappear tomorrow?

Maybe if I -- you can answer the pipeline and I answer the historical. So I would say that the bigger proportion comes from the COVID-related services in that service sales. But on the other hand, we have also been able to continuously increase the total amount of the occupational health care customer -- public occupational health care customer under our contracts. So those are the 2 key drivers, but splitting in so that the bigger driver is COVID-related services, mostly sample taking, secondly, sort of the normal COVID tests sold both to the public sector as well as those public sector occupational health care customers, which are also buying COVID tests. And the third one is sort of kind of other COVID-related services, including vaccinations, et cetera, et cetera. But that has not been a huge driver so far.

Yes. And as to the funnel that Ilkka referred to. We have said previously that the funnel looks quite strong and that remains to be the situation. So different kind of services are requested from us from public. And we have some wins that we can claim already [indiscernible] Terveyskeskus outsourcing was an important step for Terveystalo due to the fact that it's in capital region, which has not yet prior to this one open to private providers and it was what we went after, and we got that one. So that's a nice opening. But overall, as such, we have said the activity on the with our public partners is strong. And now with the SOTE reform nailed down, hopefully, with the more stable situation, the materialization from that funnel will be faster than before.

My final question is on the margins. If I look at the past year, the EBITA margin was 12.8% like the past 12 months, which is close to the upper end of your 12% to 13% target range. So how should we kind of think of this going forward? Is the target conservative? Or has it been better than expected? Or do you see that there is pressure in the margins going forward? Or how should we think about this in the next 1 to 2 years?

Well, if I start by just saying that we have not changed the mid- and long-term targets for the margins, and we don't have intention to do so at this stage. Of course, we are in a transformation as a business, in general. There are levers that point to the positive direction, something negative. And of course, we intend to be winners in the transformation.

Yes, nothing much to add on that. So you're always facing sort of some threats for the margin development. And then on the like Ville said, we have also seen a positive development. It's -- maybe just adding 1 more thing is that because we talk a lot and that the questions also are obviously a lot related to COVID services and the testing volumes, et cetera. But it's also good to know that we are selling more than, let's say, 50 or more medical specialties and which we are not talking a lot about is that like, as an example, the influenza-related services or flu-related services or ear, nose, throat operations or certain dental services. There, we are facing -- obviously, in this kind of situation, we are facing a really low amount of the demand. And obviously, it's just putting 1 thing on top of each other. So you can just do the math that you would exclude COVID part because most likely, if the COVID would disappear, we would have an influenza and flu and parasites and other kind of sort of service system. So that's also sort of maybe just as a mental note, but not to make complex thing too simplistic.

Our next question comes from the line of Sami Sarkamies from Nordea Markets.

My main question would be on the operating leverage in Q2 that turned out to be somewhat weaker than anticipated and just trying to understand reasons for this? We could first start from the cost base. So was it so that in Q2, you were running with, let's say, pretty much normal cost base, but that was maybe not the case in Q1 and definitely not a year ago?

Pretty much so. Definitely not a year ago when we had those cost freezes and layoffs. The Q2 is quite, quite sort of a normal level, I would say. The Q1 was also more or less in a normal level. The difference, I would say, between the Q1 and Q2 is that we have put sort of more emphasis on customers steering. And because the sort of the COVID-related services, the demand of those has been quite sort of high, and we have had lots of sort of good volume development in -- within our sort of customer service channels as well. And that's why we have put sort of -- more sort of costs and personnel and employees on those, meaning call centers, et cetera, et cetera, because of the increased activities.

Just to add on to that one. As you suggested, yes, during Q2, we are on a normal level. We are investing heavily into our platform. We are implementing our revised business plans for different customer groups. And obviously that requires some investment and funding, and we have not been easy on the cost, we will never be that, but we need to make conscious decisions. Without funding, without investments, we will not develop new products, new services, new type of products and models.

Okay. And is there a possibility that going in the second half of the year, you would even step up sort of investments and costs from the Q2 level?

Well, not -- I would say that we are -- like I said, we are now in a sort of normal level, so to speak. So I would say no major changes during the second half of the year, ceteris paribus, the market outlook that we are saying.

Yes. Okay. And then if we look at the figures from 2019 that you were using as a reference, which was quite useful, I think, in 2019, Q2 adjusted EBITA margin was 2 percentage points below the Q1 level, now it was 3. What could sort of explain this?

Well, overall -- well, I think we can't control most of the sort of the numbers already. Like I said, we are now -- like Ville said, we are now investing more on our operations and the sort of the personnel cost structure is somewhat different because we have now sort of recruited more people to steer the customers, et cetera, et cetera. So that is the key -- sort of key element on that.

Okay. And then I would ask about that sort of COVID testing outlook. I think you were a bit flagging that in the second half of the year, the EBIT contribution will be smaller than a year ago. Should one be sort of equally concerned about third and fourth quarter? Or is it sort of mostly fourth quarter that might sort of be a bigger challenge for you in this respect?

Well, first of all, it's -- we have an outlook now, which we have disclosed. And as we all know, predicting progress of pandemic and delta variant or whatever variant will be the next one is -- it is challenging, even though we are living our daily lives amongst experts, but it is challenging. So really difficult to comment on what kind of pressure we'll see from Q to Q. As it looks right now, as we can all see, the levels and volumes are higher than basically, at least, we expected and maybe the rest of the world expected.