Terveystalo Oyj (TTALO) Earnings Call Transcript & Summary

Good morning, everybody and welcome to Terveystalo's Half Year Results Webcast and Phone Conference. My name is Kati Kaksonen, and I'm responsible for Terveystalo Investor Relations, Sustainability and Communications. As usual, we'll have the presentations held first by our CEO, Ville Iho, and then the results analysis; followed by our CFO, Juuso Pajunen. And after that, we'll have time for your questions. We'll take questions from the phone lines as well as through the webcast after the presentations. Without further ado, over to you, Ville.

Thanks, Kati. And from my behalf as well, very good and hopefully sunny July morning from Helsinki. Terveystalo Q2 results, I have a great pleasure to present them today, we can say that this is a strongest second quarter ever in Terveystalo history and it's not only one number, it's across the board, great results and strong consistent development against our targets. Healthcare Services, our biggest business is driving the positive development and momentum, both top line and margin growth. We are very glad to see that the portfolio of businesses where we have started individual profitability improvement initiatives in respective businesses is also improving and contributing to the group result progress. And with Sweden, we don't see the full results yet, but we are very pleased to see how our agenda has been evolving and how committed and determined work, the team in Sweden is putting in place and we are confident that the same pattern will follow in Sweden, we will turn around the business in '25. This all and positive results when it comes to our finances is -- comes with the backdrop of continued high quality. Our NPS is on a record high, high level, also medical quality is improving, which is very important for the future of our business and business model. Key numbers, as I said, no matter where you look this is extremely strong quarter and continues on the path set for Terveystalo some 20 months ago with our profitability improvement program. Revenue is up by some 5%, driven by Healthcare Services. EPS strong improvement there with 91%. EBITA, EUR 42.5 million, and 50% improvement also there year-on-year. And EBITA margin at 12.5%, NPS as I said 86.4 improvement from very high level there as well. And we continue creating strong, strong cash flow with our profitability. All in all, as I said, a record quarter, but this is not where we want to end. This is second quarter in a row, where we can see that we are on new high level and from this level we continue progressing. Our P&Ls, our segments presented in graphical format, as said, Healthcare Services is leading the race, the agenda for that one was set some 20 months ago with Alpha program. Great improvement still from Q2 last year to this second quarter. Portfolio business is, as said, is starting to improve. And that's, of course, very important for the company. It's not only one cylinder which is contributing, it's already 2, and it will be 3 as we turn around the Swedish business in the course of next 12 months. For Terveystalo future, it's important to see the progress that we are making and also the phasing of the progress. In this slide, you can see the different P&Ls in order of magnitude, but this is not only order of magnitude, this is also the phasing of our program and our progress. Healthcare Services is now set on new high level, but it continues to improve and we see further potential with our new agenda. Portfolio Businesses, as said, has started to improve, and there's a new ambitious target set for each and every businesses. And we are determinedly progressing against those targets. And Sweden, we will turn around. And this 3 cylinder at the end contributing to Terveystalo's future. It is very important for our story and supports also the new guidance that Juuso will walk you through in detail in a few minutes. This also, of course, begs the question what's next for Terveystalo. We are now in a new level, and we see further potential and we invite you to listen to our new agenda and new set of targets on 4th of December this year. With that one, over to you, Juuso.

Thank you, Ville. So let's talk about the red hot part of our quarterly release, so that's the numbers. Obviously, a week ago, we took a bit of the wind out from this presentation, but I'm really proud and happy to show what we are doing at the moment. So if we take the highlights, we have continued the margin recovery in Q2. Actually, we had the best-ever Q2 during the company's listed history, what comes to relative margin. We are -- our adjusted EBITA is increasing 49%, EPS 91%. Or if you take half year EPS, it has more than doubled. Our leverage is at 2.5, all included what comes to IFRS 16. So no matter how you look at this performance, it's solid. You can pick a line in the income statement, you can pick a line in balance sheet or you can combine those ones and we are on track. And then as Ville mentioned, it's not only the financial performance, but we have the NPS, client satisfaction, we have the medical quality, pace, all of those ones are strong and solid. So we are truly delivery now. Our performance is coming from the Finnish segments and especially from the Healthcare Services, which you will see a bit further when we go forward on the slides. Sweden is not visible in the figures, but we have a very clear agenda. We have taken solid steps forward, and we are very confident on the profit improvement program progress. So it will be coming and coming in '25. And all of this one may reach the guidance update. We will be between 11.5% and 12.5% at the end of this year. So if we then look a bit on the revenue, basically, you could read the headline profit improvement program working, commercial actions delivering, we are growing 5.5%, one needs to remember that we had 1 working day more in second quarter compared to previous that helps a bit also on that growth. So the volume adjusted appointment growth, our workday adjusted appointment growth is not heavily growing. It's stable, even though it is 1.4% during the quarter in absolute terms. But that helps us on the growth part. Then we have both the customer and service mix are working in our favor. We need to remember also that this is a low demand quarter, this is the third quarter what comes to diagnostics and other service sales. So the appointment delivery is more important and the appointment performance maybe than in Q1 and Q4. And then it's worth to note that revenue is increasing in all customer groups and in all services. So we are consistently improving our Healthcare Services. What comes to portfolio businesses, we have the outsourcing decline, we have all known, we have communicated, you have all known, and it continues on the pace as anticipated. Staffing continues to track from Q1, we have been doing some proactive customer selection. We don't want to offer whatever we want to offer those services where we have the solid value add, which also converts into profit. Then what comes to dental and massage we are continuously impacted by the lower consumer purchasing power. The decline has stabilized, but the trend deal very wobbly. It would be difficult to say that it is clearly demonstrating improvement. But it has clearly stabilized during the year and most likely bottom out during Q1. Then if we look Sweden, also the story continued, we have the ended customer contracts, customer selection but also a weak demand environment which is in our business model hitting more than in our Finnish business. So all in all, 5.5% growth. Very solid growth in our Healthcare Services, which is the big motor, and basically, margin improving, customer selection and revenue selection, especially in Portfolios and Sweden. Then if we look at the EBITA development, adjusted EBITA from EUR 28.5 million to EUR 42.5 million, almost 50% improvement. We have the Healthcare Services truly delivering. We are clearly seeing the operational efficiency. And here, I want to highlight continuously that it's the low demand season. And during that season, the sales mix capability to yield margin through all of the services is very important. And this is what we have demonstrated now with our profit improvement program that has progressed quicker than anticipated but also delivers very solidly. So this one combined with the successful commercial actions and the continued scrutineer cost delivers the profit improvement. If we then see the Portfolio Businesses, we have positive development in staffing and outsourcing. And here also, we have the commercial actions. We have the operational efficiency improvement. But then it's good to note that we have been fairly solid and good in adjusting in our consumer-driven businesses to the lower demand. So once the demand starts to pick up, we are lean and mean to go forward also in that end. And finally, in Sweden, the reduction in revenues converts into bottom line. But as said, the profit improvement program is progressing. Then finally, good to note, it's not an adjusted EBITA topic, but we have in the adjustment items as written in our profit warning last week, we have a roughly EUR 6 million additional item related to renovation liabilities coming from rental contract older than a decade. So that is truly not for this period, and we don't have similar type of items in our portfolio. So that's good to note when you look our total numbers. Going into the sales mix, that is improved in Finland. We continue to have the headwinds in Sweden. Here is nothing particularly new that I wouldn't have said earlier. But as I said, good to note in Healthcare Services, all client segments growing, all services growing in revenue perspective and the margin creation is really solid. Portfolio business is a bit of mixed bag, but the revenue is declining in the public sector by choice and in the consumer segments from the market environment. If we look then H1, as I told, this story continued. Revenues are growing 4%. So now we don't have work that adjustments needed. We don't have these type of so it's fully comparable year-on-year, 4% up, appointments a bit less than 1 percentage down and despite that one we are improving our adjusted EBITA by 38%. The big contribution coming from Healthcare Services, Portfolio Businesses, still in a phase of going into the better and better yielding momentum. And Sweden, in early steps of profit improvement program. So very natural, very understandable phasing. And the H1 tells the same story as Q1 and Q2, so very consistent, very understandable in my opinion. Then if we look cash flow, when we make profit we make cash, as simple as that. This clock is ticking. We have a really strong EBITA, really strong cash flow. We have been fairly stingy on the CapEx side, minus EUR 38 million LTM. We continue to be slightly below of our own expectations, maybe, but at the same time, we are doing what is the right thing. We are investing in digital. We are a bit investing in the [ walls ]. And that's pretty much that. Then if we look at our leverage, 2.5 continued improvement on the leverage ratio, interest-bearing liabilities going slightly down. And good to note that in Q2, we paid our dividends out and we have already funded that with the operating cash flow. EBITA converts into cash, which is how it always should be. So then we go to the guidance. So we expect revenues to grow, no change in there. Adjusted EBITA to be between 11.5% and 12.5%. So as you know, the midpoint is at 12%. So 20 months ago, we let out that we will make 12% in '25. Now there's a clear likelihood that we could do it already in '24. Our estimates are based on everything we know at the end of second quarter so inflation, consumer demand, employment and normal morbidity. So still on the Q4, we would expect that we have normal flu season. That's important for our profit generation. We are confident that our performance improvement program continues to deliver and is sustainable. And then we have the same disclaimers as earlier. So all in all, we are very confident on our visibility. We are confident on our past delivery and we are confident on our future delivery. And with these ones, it's easy to say, that 11.5% to 12.5%, a clear improvement compared to Q1 release, a clear improvement compared to start of the year, and that's where we are. With these words, any final words, Ville?

It's a big thanks for Terveystalo team for delivering this result over the last 20 months. Literally, there has been thousands of people contributing both on frontline and back office to this achievement and bright future ahead.

Absolutely. So now we have time for your questions. Do we have any questions on the phone lines?

[Operator Instructions] The first question comes from Joni Sandvall from Nordea.

Congrats for those. Maybe starting with quiet strong corporate sales growth, and it was clearly picking up from Q1. So what is actually driving the growth? Is there a pricing component? Or have you been just successful on the commercial front?

If I -- or do you want to start?

Well, you can start.

Yes. So basically, if you look at the corporate revenues purely from a number perspective, we have the connected employees are now slightly improving after Q1, we have one working day more so those are the mathematical components, but then we have an improved client mix and, of course, the pricing and commercial actions that are also contributing to the growth.

And as we have discussed earlier, when we think about the commercial actions, it's not sort of headline price increases, which we are solely talking about. Of course, that's a contributing factor, but there's a lot of different elements, how we slice and dice the commercial offering and how we, for example, close the price leakages and improve on that front.

Okay. Then maybe on the appointments and your remuneration plan, what you've launched early this year. Has this actually progressed faster than you have earlier anticipated?

Yes, one can say that it's slightly above our expectations, the contribution, the mix has been slightly different and better from our angle. Not fast because it's sort of -- it's a sequenced actions that we chose to do, and then we see the impact but as you asked the -- it has been slightly overperforming against our expectations. But maybe important to note that this is not it yet. So there's some more to come during the course of this year.

Okay. And then one question about the diagnostic sales. Obviously, it's more quiet quarters now, but sales growth improved there. Is there any improvements in the funneling on this front or and how should we think about the growth rates going now for H2?

If we start from sort of our longer-term progress and the discussions that we have had during 20 months, there's no drastic change to be expected in how the appointments are then contributing to diagnostics sales. We have been able to improve the digital appointment conversion to diagnostics. There's some work to be done when we think about the rest of the pool, and we are steadily progressing slowly, but steadily progressing in the -- mainly, it's down to the flu seasons and starts what is the actual customer demand.

Okay. And maybe one question on Healthcare Services margin improvement potential. I think you mentioned that there's still improving trend in profitability. But how much of this is still related directly to profit improvement program and how much is just normal business improvement but you are expecting?

Well, of course that's a little bit a theoretical question because now we are in the middle of transit, or actually we have done a handover from profit improvement program in Healthcare Services due to line organization. And it's a blend of new actions in the new agenda of Healthcare Services and then the tail of Alpha initiatives. But as I said earlier, there's continued progress. And of course, we have not fully emptied the tank yet.

And we don't guide on segment flavor but obviously to reach 11.5% to 12.5% this year, it means that there's also some contribution from Healthcare Services. So as we have said we are not expecting anything materially positive from Sweden this year, especially compared to previous year and portfolios are progressing on their own pace, so of course also Healthcare Services will continue to contribute in a positive manner.

That's clear. Last question from my side on M&A from now and the profitability. Levels have been -- how do I say, restored or improved? How is your M&A appetite going forward?

Well, recipe for success during the last 20 months has been keeping the eye on the ball. And as we discussed in the presentation, the phasing is important. Healthcare Services, during the last 2 quarters now, it has been on a new level. We see further potential there but it is, we can claim it solid and good pace for future progress. So in that front, we see opportunities, of course, no reason to not do those. Portfolio is a slightly different story. They are -- they have started later, and they are progressing now, which is very good for the whole group. And there, we need to be very, very selective on what we do and there's a further considerations also in that mix, how we deem each and every business going forward. But important is that it's improving and continues to improve. Sweden, lastly, is better. It's totally sort of eye on the ball agenda. So we'll concentrate now solely on delivering the results through the profit improvement program in our Swedish business and then when the time is right we will return to this M&A discussion.

The next question comes from Sami Sarkamies from Danske Bank.

Okay. I have 3 questions. We'll take this one by one. Firstly, starting from seasonality, how should we think about this going forward, in the past, second and third quarters have tended to be quite a bit weaker quarters than Q1 and Q4. Now second quarter was actually quite strong relative to the first quarter. What are you thinking on seasonality at the moment?

Well, firstly, if we now look purely the technically part of the seasonality, we have 1 working day more in Q3 compared to previous year, which actually comes from July. So it's traditionally more difficult to evaluate that technical impact because it comes in the vacation period. Then Q4 is flat, same 62 working days. So on that sense, we have a bit of positive momentum coming for the second half from the working days. Then the second part of the seasonality, which then relates into the, especially on the flu season, which makes Q4 and Q1 strong. That one obviously remains in there. Q3 will be seasonally weak. That one will not go away. The big thing, what has -- what we have done in our profit improvement program is that now we are clearly better in making margins also from appointments. And once you have an appointment-heavy Q3, I think that we have all the room to improve in Q3. But obviously, still it will be seasonally weaker than other quarters. So maybe not as big volatility as sometimes in the history, but the underlying reasons for seasonality have not actually vanished away.

Okay. That's very helpful. And then the second question would be on the diagnostics area of the business where you achieved 8% revenue growth on the back of 1% volume growth. Was there anything special in the second quarter? Or have you raised prices this much overall?

As Juuso said earlier, it's mixed, it's price, that combination. And also a slight improvement in conversion in what we are doing.

And then thirdly, you reported quite negative trends at portfolio business overall. We had negative growth rates, not only in outsourcing services, but also staffing and dental care. Do you see any potential for improvement in staffing or dental care during the second half of the year?