Terveystalo Oyj (TTALO) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Terveystalo's First Half 2023 Results Call and Webcast. My name is Kati Kaksonen and I'm responsible for Terveystalo Investor Relations Sustainability & Communications. As usual, we'll go through the results presentation, with the presentations by our CEO, Ville Iho, and our CFO, Juuso Pajunen. [Operator Instructions] Without further ado, over to you Ville.

Thank you, Kati. And good morning from my behalf as well. It's nice to present Terveystalo Q2 results from mid-summer sunny Helsinki. Key highlights from Q2. First and most important is the fact that margin uplift is progressing according to our plan and across all 3 segments, and that's really important and we'll share details on that one later in the presentation. A key driver for Healthcare Finland progress obviously is Alpha program, and now we can say that we have clocked EUR 40 million run rate impact at the end of Q2. We are well on our way to reach our target, EUR 50 million, and overperform against that target. Supply has been developing positively for Terveystalo. We have been improving supply close to 10%. Supply and demand are more in balance than let's say 0.5 year ago when we were sold out all the time. I think now we are in a healthier place. But demand and supply balance can be seen -- improvement in that one can be seen, especially in low seasons and shoulder seasons where booking rates are slightly lower than they have been let's say last fall. Key numbers. As said, profitability improving nicely. We are on track to deliver, 20% up to EUR 28.5 million EBITA. We are growing -- Juuso will share more details -- on underlying growth, even though the headline figure is only 1.3% growth. If you take a deeper look into that one, actually we are growing in all of the segments. The underlying business is growing quite nicely. NPS, customer satisfaction, that's something to be really proud of. We are clocking a record number this quarter, 86. So we are not only improving our business, we are improving customer satisfaction. Customers and patients are experiencing value in what we are doing, and of course in long term going forward that's really important. eNPS at 23. Now that's slightly down from earlier measurement. This is still a world-class figure for a service company, but we have been over 30. When one is analyzing the figure in more detail, you can see that actually where the decrease comes from, are the units where the Alpha program has had its biggest impact. So it's very logical. We can also see a very positive development and improvements in eNPS and numbers behind that one, and we are confident that we will get back to earlier levels and even improve from those ones. As said, all the segments are improving, and that's really important for making this whole machinery work. Healthcare Services improved against last year's Q2, and that's driven by improving business environment, but also -- and a big driver has been Alpha program. We are now at 10%. And the improvement must be seen against the fact that we are still fighting against the headwind of loss in COVID-related high margin sales, still improving in Healthcare Services Finland. And quite a nice growth as well. Portfolio Businesses, there are businesses in different type of places, in different types of situations, all in all, improving that part of the business as well. Some very positive moves there and improvements and then some stagnant businesses and some businesses that still require turnaround, but all in all making a positive change. Sweden is making very positive progress this quarter, so basically doubling the EBITA margin to 6%. And that goes to show that when we have been able to build scale and increase volumes in that business through our actions, be them acquisitions or organic growth, it pays out and the profitability is improving. The growth rate there if you exclude the FX impact is also quite nice. And Juuso will cover that one later in the presentation. As said, profit improvement program is making good progress. We are nicely progressing against the EUR 50 million target. We are now clocking, as said, a run rate impact of roughly EUR 40 million, and we are going to deliver over EUR 30 million P&L impact this year. So on our way to overperform against our target. And as everybody understands, this is a key thing for us delivering 12% in '25. Business environment is likely to improve around us, and that's due to the fact that government program has seriously taking patients into the center, customers into the center and they are willing to use all the tools available for them, and specifically, increase the use of private providers. And there are different elements in the program which will impact this market in short term, mid-term and long term. For example, Kela reimbursement, which is a quick fix for improving the queue situation in Finland, is a short-term measure and also will have a short term fast impact into the business environment. On the other hand, improving transparency in the cost and impact of the health care providers will create even playground for all of the providers, be it in public or private, and give us ability to showcase that we are able to make impact -- health impact and be cost efficient. And that's what we do. And that's going to create opportunities for us. Then, for example, having a lot of weight on mental health-related issues, it's positive for private providers, especially for Terveystalo. We have been market makers in a way in that domain by our short therapy products and services for corporates, and we are looking forward to contribute also to public health in the mental health domain. Kela and this will be more strictly followed, and of course that will create more spill due to private sector and direct purchases also. Another highlight for Q2, an operational achievement and advance for Terveystalo is the fact that we introduced for the first time AI driven -- AI-enabled medical device, a software device, which is a care need assessment tool fully integrated into our patient and customer flows. And this is the first time that this type of a medical device is so integrated part of full care chains and patient and customer flows. This is a joint development by a small provider and Terveystalo with our tools, with our data and with our business rules, and then having a medical core inside the shell. This is a big step forward in integrated care in making patient journeys more effective and having more impact and also making healthcare, especially private health care and Terveystalo more scalable, a big step forward. And we are looking for continuing investing in innovative technologies. This is just one showcase, but a big first step. With that highlight, I will give mic to Juuso.

Perfect. Thank you, Ville. So good morning from sunny Helsinki. Let's talk about the numbers from second quarter. So if we just make a quick executive summary what has happened in the second quarter, I think the big thing is that the underlying margin improved in our segments and it continued. We are on a positive track to materialize our profit improvement program and taking us towards the 12% target in 2025. Another one from balance sheet perspective, we entered into the bond market with our first sustainability-linked bond, and thus, diversifying our sources of fund, but also making a clear and loud statement that meaningful matters and we want to make a positive societal impact. And then finally, of course, from financial perspective, our guidance for '23 is unchanged. We expect our revenues to grow and we expect our adjusted EBITA margin to be between 9.1% and 10.1%. But let's take a bit deeper -- deep dive to the details. So the revenue growth, it's driven by price increases and we have a strong demand. So our market environment is favorable and it is positive. And if we look a bit further into what has happened in the Healthcare Services, we have the loss of COVID-related revenues, some 75,000 tests compared to previous year second quarter, or 254,000 compared to first half. That is a material amount of revenue and a material amount of margin that we have lost. And thus, you see it in the diagnostic column being red. At the same time, we have been able to ramp up our, let's call it, normal diagnostics. So we are catching up and continuously progressing towards pre-COVID levels. So we have a positive underlying momentum in here. If we then look the Portfolio Businesses, the big impact there is the EUR 7 million less revenues from the outsourcing. I could comment that we are not entirely unhappy on losing that type of revenue. It is part of the earlier communicated pattern of ramp down of these old outsourcing contracts. The other momentum has been positive. Staffing and dental are growing. They are performing and growing. And then the other Portfolio Businesses are rather demonstrating quite normal volatility, some of the parts going really well and some of the parts going somewhat well. Sweden, the big impact in there is the currencies. If we exclude the FX impact, we would be growing in constant currencies roughly 7%. So on there, we continue to be on track of delivering the growth, but also you will see in the following slide that we have the margin improvement. The other way of looking these numbers around is that, if we would take out the COVID revenues and we would look the underlying organic growth, it would be roughly 5%. And then if you take the outsourcing impact out of that one, we would be between 7% and 8% organic growth. So we have a positive momentum, we have a growing business, but then we have also deliberate choice of the outsourcing contracts and then we have the environment or circumstances on the COVID tests. Then if we take FX on a group level, that's a bit south of 1% impact negative. And then the M&A is pretty much the same number, in positive manner. So we can talk about that the underlying growth is 5% and between 7% and 8% if you look it, excluding also the outsourcing. So the market environment and the demand is solid. If we then go a bit further and we look the EBITA. First, it's good to know that we had one working day less compared to previous year. So that always drives a certain momentum both in the top line and in bottom line. But then if we go a bit further into the segments, we have the Healthcare Services. So despite losing [ 75 Kela ] of the COVID tests, Healthcare Services is able to improve the results. We have been able to push the prices up, and that has been more than compensating the cost inflation impact. We have the profit improvement is -- our profit improvement program is progressing well and delivering concrete solid results on the bottom line. At the same time, the cost control continued. If you flip through the release and you go to the notes of the notes in the table section, you will see that we have -- the IT costs are not ballooning. I think they were year-on-year something like 1% up. We have -- the other premises costs are still growing up. But then if you see the depreciations on the IFRS 16 leases, those are only moderately up, so -- and below our revenue. So basically, both the Alpha program and the cost control are bearing fruit. We are improving our efficiency. Then if we look to both Portfolio Businesses, we have the positive momentum in most of the underlying market. We have the negative momentum in the outsourcing. But relative profitability is improving. And then finally, in Sweden, the market normalization post-COVID. We need to remember that our occupational health market is different compared to Finland and we don't have the COVID test positives, rather the home working and such has been negatively impacting the results previous year. So we are improving -- we are in normalization. But then the second big boost is that we show that the scale matters. We are able to leverage the scale and improve the efficiency of the underlying operations, and thus, we have almost doubled the underlying margin. And we also announced 2 small acquisitions in Sweden that just highlight that we continue on this track of profitable growth in Sweden. So basically, this just highlights what I said earlier. We have profit improvement, margin improvement in all of the segments. At the same time, if we look a bit on the underlying portfolio, especially into Healthcare Services Finland, you do see that our corporate and private clients, consumer clients are increasing, while the public sector is decreasing. This is also a choice. In a high demand environment, obviously, we want to address our supply to the places where it's the most profitable. Then at the same time, it's good to know that when Ville highlighted that the seasonality is back, this is exactly also what is happening. I will talk a bit further on that topic when we talk about the guidance slide. But basically, we see from all different aspects the world is normalizing. COVID revenues out. COVID tests out. Laboratories, imaging, all of that one ramping towards the pre-COVID levels. Imaging, obviously, didn't have an issue earlier. But basically, we are going into the normal way, sickness leaves all of that one pointing to the same direction. We are going to a normal world. So basically, when the sales mix is normalizing, we have the price increases that we have been able to push forward and we have the profit improvement program progressing. The outcome is here. We are improving our relative profitability from 7.6% previous year second quarter to 8.8% now, while at the same time we are at 9.8% for the first half. So basically also that one now, the first half, in relative profitability terms is above previous year first half despite losing 250,000 COVID tests, which is a material amount of revenue and material amount of profit. So all of this one demonstrates that we are now going towards a positive trend and we are capable of improving both through our own actions and through the normalization of the world. Our CapEx spending, we have been talking quite a lot about this one in the past couple of quarterly releases and in the Capital Markets Day. And all I can say is that this confirms what we have been saying continuously. We have been coming down from the EUR 59 million, 4.7% from the revenues to the current EUR 48 million, 3.8% from the revenues. I've been various times stating that probably the range we are talking about is somewhere around 4.4%, 4.5% of the revenues depending on the business cases, depending on the needs. And this is now CapEx excluding M&A. So we continue to invest in our growth. On the balance sheet perspective, first on the operating cash flow. It continues to be solid. At the same time, it's good to note that our account receivables have increased a bit. And the material reason for that one come from the public sector. The new welfare districts are being in the ramp up phase of their operations and there has been some slowness on those payments, which I would deem quite natural when handing over responsibilities from municipalities to the welfare districts. So that has created some friction or stickiness into the account receivables that I'm pretty sure we will overcome. The second part is on the net debt to adjusted EBITDA. We are 3.3. And this one is now all included, so basically IFRS 16 lease liabilities and then the interest-bearing debt from capital markets, banks and so on, less the cash. And what has happened in there is, first, it's very good to note that our lease liabilities have gone up some EUR 20 million from the end of December last year. And this is something that continues to evolve. We are a big premises user, and we have hospitals, we have lots of physical presence that will remain. And this portfolio we continue to evaluate continuously. We want to have it as a stable, but at the same time, today is actually quite a good moment to negotiate on lease agreements. So sometimes to gain on the rental levels you may need to give up a bit of the maturity on the contracts. And this is something that we actively do, we actively balance. And now you see it in the numbers on the lease liabilities. But at the same time, the interest-bearing debt has gone EUR 16 million down, the non-IFRS 16 part. And remembering that we paid the EUR 18 million of the dividends in the first quarter. So we have a positive leverage. And especially looking excluding the IFRS 16, we are continuously trailing in a good part and with the solid cash flow we are able to do that well. Then the second part. It's good to note in the balance sheet and especially in the debt structure is that we have now a weighted average of interest around 3.6%. So everyone is taking a normalization compared to the market interest levels. They have been rapidly increasing during the past 12 months. And at the moment, we do all know where the interest rate levels are. And that one will and continues to burden then our financial expenses also in the future. We have hedged 50/50, but that is basically a handbrake when you approach the market levels. So little by little this is also something that we need to see and we need to evaluate continuously. If we then look on the sustainability-linked bond, this one I am extremely proud and happy of. We launched a EUR 100 million bond 1st of June this year, and this comes from 2 different angles. The first one is we have broadened our sources of funds. So we have now entered the capital markets on the debt structure and we did it successfully. At the same time, we are now walking the talk. We are saying that we want to have a positive societal impact. We want to do good in the world. And now on the KPIs that we are putting forward, that has an impact on the interest. We are promoting and saying we do good. The second KPI is the NPS. Basically, if we don't have happy clients, they are probably not healthier than when entering our operations. And thus, the link to our sustainability target to deliver healthier life. Then we have a relevant proportion of occupational healthcare patients referred to short-term psychology. This is more from the science perspective, medical impact perspective. Petri Bono, our Chief Medical Officer, has been demonstrating and showing the whole Terveystalo team that if you refer patients to short-term psychotherapy treatment, the sickness leaves goes materially down, meaning that we have healthier individuals, but at the same time, the employer wins. So it is a win-win concept. And this one we want to push both internally to our doctors, what you do matters, but also externally, walking the talk. So I'm really happy that we are now able to go to capital markets, and we have done it in a sustainability-linked bond manner. Then if we talk about the guidance, I think that the first big thing in the guidance is that it doesn't change. We estimate the revenues for the full year '23 to grow and we estimate the adjusted EBITA margin to be between 9.1% and 10.1%. The underlying market trends are materially the same as earlier. We do see that we have some prolonged inflation. We do see that it has lasted a bit longer than probably all of us estimated. At the same time, we do know where we are standing with the profit improvement program. It will deliver over EUR 30 million real P&L impact this year. So otherwise, the market conditions remain similar. We have -- the number of employed in May remained strong. We do see that the underlying demand is stable. But what we do see also is then the seasonality. We have now -- especially, in the latter part of the quarter, in June, we started to see that the sunny weather pushed people to vacations. At the same time when you don't have any kind of a sickness season, influenza time, then our operations are accommodating to that one. Taking the vacation, that delivers less revenues, a bit less profit. So we are going into the normal world where we have seasonality, both from a calendar perspective and then from the sickness -- general sickness level perspective. And what does that mean if we look a bit forward? So our full year guidance for adjusted EBITA margin is between 9.1% and 10.1%. But obviously then that splits into 2 different quarters, third quarter and fourth quarter. We do not know up to which level the third quarter and fourth quarter will follow and go back to the normal seasonalities. But I would quite carefully look the year '17, '18, '19, where we have the seasonality patterns existing pre-COVID. Those are the years where you don't have a COVID disturbing material the operations. There are always volatilities. There are always items that impact. But I would look a bit those ones. And then you would see that in '17, '18, Q3 was some 2.5 percentage points below the full year profitability and Q4, similarly, was above. So H1, H2 are fairly comparable to each other normally. But if you take the full year profitability, you see that Q3 is clearly the weaker one and Q4 is clearly the stronger one. So this is on the guidance perspective, full year between 9.1% and 10.1%. But there will be the normal seasonality impact between the quarters 3 and 4. So with these ones, I reiterate our guidance. We will grow -- we will deliver 9.1% between 10.1%, and we are confident that our financial targets we will be at 12% in '25. So with this word, it's time to transition to the Q&A.

Thanks, Juuso. I think that we are ready for your questions. Do we have any questions from the phone lines? Or do we have phone lines? Yes.

[Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank.

I have 4 questions. Starting from growth. Even though you seemed fairly content with growth in Q1, Q2, there was some slowdown relative to Q1. What is driving the slowdown? And do you think this will continue also in the second half of the year?

So as Juuso said, we are now seeing seasonality coming back. We don't see any changes in sort of normal working days, normal working weeks, but around low season, shoulder seasons, we see sort of normal fluctuation of demand. And that has been seen around different holidays, against the peak holiday season in June. So that's really the -- where the slight change has come from us, as Juuso said. But again, maybe reiterating a little bit what Juuso said around the H2 also, the Q3 and coming back from the holiday season has always been a slight question mark how the demand and also the supply will ramp up. I think we are -- and I'm confident that we are well footed now with the supply, but there's always volatility around when the demand pattern starts after the holidays when do the normal infection season start, et cetera, et cetera. On the other hand, Q4, one can be very confident that that's going to be strong demand all along.

Okay. And then the second question is on the demand supply balance. That is now sort of more balanced than in the past. How much of the change can be explained with improved supply and how much with softer demand?

Well, I would say that it's -- from our part, it's explained by improved supply. So we have been able to improve the supply roughly 10%. And there you basically have the figure.

Yes. And are you satisfied with the current situation? Or are you planning any sort of actions?

Regarding?

The demand-supply balance. I think you [indiscernible]...

Well, I'm really happy about the progress around improving our recruitment, our market share when it comes to professionals and boosting and ramping up the supply. In long term, the trend is going to continue positively. So this is a growth market. Healthcare Services demand will increase step-by-step steadily over the coming years. We see also some improvement, as I said earlier, in the market conditions. So in the long-term trend, there's no changes. And hence, we continue our efforts to increase our supply to increase our market share. At the end of the day, regardless of the volatility around different seasons, the one who has the supply has the business as well.

Okay. And then moving on to diagnostics. You did flag softer sales in the month of June. How do you explain this? And are you concerned the pattern could extend in the second half of the year?

If I start on this one. So basically, we have not said soft demand on that one. What we sees is the seasonality coming in and normalizing. The ramp-up of the diagnostics to pre-COVID levels or the revenues from diagnostics compared to doctor appointments continue to ramp up but demonstrate normalization and are in the solid fundamentals. So we are rather talking about truly, truly the seasonality coming in summer holidays, less sickness in the general population. And that one is visible in the medical appointments. And when that one is visible there, it has a correlation towards the diagnostics appointments. And that correlation continues to grow. So diagnostics revenues in relation to medical appointment revenues are approaching the pre-COVID, I would call normal levels.

Yes. I would actually reiterate what Juuso said. So as I said, this is seasonality and there will be always fluctuations in normal times post-COVID, as Juuso explained earlier. It's not normal, it's not healthy to be fully booked all the time. And as you might remember and I think you will remember, for example, Q3, Q4 booking rate figures, they are not healthy. That also prohibits us from providing availability of right professionals at the right time. But in long-term -- even long-term, mid-term and looking at the sort of true patterns of the demand, demand will grow. So to your question, we are not worried and I'm not worried about the seasonality in a way spreading to normal times.

Okay. And then finally, how and when do you expect the new government program to impact your financials?

So as I said earlier, there's short-term fixes in play, namely Kela reimbursement boost. That's the fastest way to impact the queues and healthcare crisis in Finland. And that's expected to land somewhere during H2. And that is a short-term fix, as also said in the government program. Then the rest will follow normal legislation timetable. We'll have more info on that one in August and in September. But normally the time lag for putting material legislation in place will take -- it will take 1 year, 2 years. But there are, as I said, measures in short-term, in mid-term and in long-term.

The next question comes from Joni Sandvall from Nordea.

Maybe a follow-up on the diagnostic sales. Could you comment anything on how far from the pre-pandemic levels you are? And what were actually diagnostic sales level on pre-pandemic level?

We have not disclosed in detail those numbers. We are not yet on pre-COVID levels. We are ramping towards that one. There's some way to go. And then you can always think about that how do you measure it, whether it's in absolute terms. Then the answer would be different. When it's in relation to medical appointment sales, then the answer would be different. But we are approaching it. We are a little by little getting there.