Terveystalo Oyj (TTALO) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Terveystalo's Q2 Results Call and Webcast. My name is Kati Kaksonen. I'm responsible for Terveystalo Investor Relations and Sustainability. As usual, present -- our CEO, Ville Iho; and our CFO, Juuso Pajunen, will present the results, followed by Q&A. We'll take questions, both via the phone lines as well as from the webcast after the presentation. Without further ado, over to you, Ville.

Thank you, Kati. So let's dive straight to the key highlights of Q2. So Terveystalo profitability journey continues. Q2 '25 was all-time high in absolute profitability. EBIT of EUR 36.7 million and relative profitability, with EBIT margin of 11.4%. This was done even with slightly lower revenue than previous year. Basically all of the KPIs that we are reporting on a very high level, except for the revenue, and that one, we'll discuss in depth later. The story throughout 3 different businesses and segments is actually very constant. Profitability journey continues. Starting from the smallest one, Sweden. Execution of turnaround program continues as per plan and is delivering. The turnaround will happen during this year. It's still in negative numbers, but what we are seeing inside the tent, so to speak, is way higher efficiency and profitability improving with lower revenue. Also looking forward, Sweden sales funnel and commercial activities are looking promising, so we will get there. Portfolio Businesses story continues. Revenue is coming down, specifically due to the terminated contracts and some softness in staffing market, but profitability continues developing in positive way. Also, looking forward, looking at the market opportunities, things are looking bright, and that will be commented just in a minute. Within Healthcare Services, in our core business, also profitability journey continues. We came down slightly with the revenue, but all-time high profitability in absolute terms and in relative terms. Strategic KPIs in good shape. We acknowledge that the revenue organic growth did not materialize during Q2, but we have ample opportunities to grow our business going forward, and that's going to be the storyline for the next slide. So if we dive deeper in -- first of all, into H1 and then look forward, how the businesses are tracking and what is the outlook in different markets. Again, if we start from the smallest business, Sweden, we have commented a turnaround journey. Efficiency is improving. Profitability is improving even with lower revenue. But now looking at the market opportunities and active sales funnel, even mathematically, we can see that revenue is bound to grow going forward. And we are expecting that the next year will be stronger with a stronger top line and turnaround activities being finalized. In Portfolio Businesses, we have already seen heightened activities in consumer-driven businesses, dental and massage. And now we have also explicit and implicit indications from public system that activity in their buying of our services will increase going forward. So outlook, from a revenue point of view, brighter than we have seen during the last 2 years, so to speak. Then in the core business, Healthcare Services, during H1, as per forecasted, public business went down. But consumer and insurance business was a good news story. So these combined -- it is always a combination. They were tracking nicely upwards. We were gaining, and we increased the business. Looking forward, the trend will continue and will be further strengthened by Kela 65 pilot that we'll discuss later during the presentation. So consumer-driven business is looking good going forward. Then we acknowledge that the softness that was not forecasted in our plan was in occupational health. And that's specifically in the buying behavior, lower buying activities in our existing customers than we saw during Q1. That's partly seasonal, but it's due to the pressure on different companies with their own finances, and we are taking action on that front. That's going to be a high focus going forward after summer break during H2. But all in all, looking at the revenue picture and market opportunities, there's, as I said, ample opportunities to grow. This will be further supported by a fairly active M&A market, where we are also taking action. Kela 65, it's exciting new model. We have -- of course, as a backbone public system in Finland, we have mature occupational health care and insurance market, but to make sure that there's access to services for all of the segments, new innovation is needed, and Kela 65 is a positive push to improve access to care for people who typically fall out from workforce and fall out from occupational health care services. Under this scheme, citizens over 65 can use private services with the same fee as they would be using public services. And the expected volumes in this trial will be material, and Terveystalo position to capture its fair share of the market is very good. Looking at the consumer preference in this segment, Terveystalo is #1 choice. And we are all in this pilot. And it's going to support H2 revenue. We acknowledge that there was a softness in occupational health care during Q2. We are taking action. We are investing heavily in customer-facing solutions as we speak. In technology front, we hope that we will be able to disclose some exciting news in the area in the coming -- during the coming weeks. We will design our services to cater for changed market demands and customer expectations, and we will improve transparency so that buying is easier and paying is more understandable and traceable. Technology continues to be a cornerstone of our development agenda. We have made good progress already with the efficiency in digital services. And that journey will actually accelerate going forward. We are seeing that the whole journey from customer recognition, customer data, patient guidance to digital or physical channels and improving brick-and-mortar efficiency and specifically the digital efficiency will allow us to improve efficiency materially and also to develop services for our customers with lower price points and, at the same time, higher margin. So customer steering, customer recognition, customer data, heightened efficiency in the services regardless of the modality will be the key. And H2, we are in a position to make some exciting launches in this area. Architecture is there. Capability is there. And as Juuso will explain later, our ability to invest into this area is there. With that one, I welcome CFO, Juuso Pajunen, to the stage.

Thank you, Ville, and good morning to all of you. My name is Juuso Pajunen. I will present our Q2 numbers to all of you. So let's start from the group level. I think that it's very good to note, and I'm really happy to state that this is the all-time best second quarter in absolute EBIT and in relative EBIT. And if you look on the EBIT numbers, all of our segments improved. So we have relative profitability improvement and absolute profitability improvement in Healthcare Services, in Portfolio Businesses, in Sweden and even in the reconciliation items. So we are solid, efficient, lean and mean machine when we look how we can digest the revenues. But then we do know and do acknowledge that we had headwinds in the revenues, and the total volumes did not meet our ambitions like Ville explained. But then it's still very good to remember that we have the megatrends that support us. If we look shorter term, we have the Kela 65. We have the gradual opening of the public market, and we have a solid plan when it comes to the occupational health. And all of this one is tied up with our very strong digital capabilities and the digital transition that is happening at the moment. So record strong second quarter what comes to profitability, and revenues will follow. Then if we take a bit deeper look under the hood and go to the segments. So we have Healthcare Services. We have the profitability increasing, both in relative terms and in absolute terms when we are looking about the adjusted EBIT. We do note that especially in the consumer market, we have growth. If you look by decision-maker, if you look by payer, then it is captured by the insurance as a payer. So we have a positive momentum in there. We are growing, and we need to remember that all of this one happens despite 1 working day less. Then if we look our biggest customer group, we have occupational health, which was negative. Also, this one was burdened by 1 working day less, and the volumes were -- or the revenues were down by roughly 2.5%. This is coming from less connected employees, though this is, give or take, the same amount as we had in Q1. But like Ville explained, the buying behavior of our clients has changed mainly due to weak macro and increased cost consciousness. But these are topics that we are addressing at the moment, and we are confident that we are getting forward like we have always delivered on our initiatives. So all of this one, if we think about, once again, looking forward, we are in a positive place what comes to outlook. It's supported by digitalization, Kela 65 and then also the reviving demand, especially in the public sector, of course, depending how you define also Kela 65. Then if we look portfolios, we have a clear improvement in profitability also in here. We have the termination of low-margin outsourcing contracts. We have an improved operational efficiency. And those ones are, in total, leading to 3.2 percentage points increase in the adjusted EBIT margin and EUR 1 million more in the adjusted EBIT in absolute terms. If we then look on the different market segments, we have the public market. Outsourcings have been weak as expected. There's normal volatility on the contract volumes. So there's a bit more contract volume loss than we have maybe anticipated. But there's nothing specific in that one. We have the staffing market that has been declining partly due to our own tendering selection earlier. And then the market has been weak when well-being counties have been ramping their operations up and establishing themselves. It's good to note that in both of these material segments within portfolio, we see positive movement. There are a couple of bigger outsourcing or partnership contracts coming to be tendered now in the second half. And we have the staffing market, little by little, coming back. As an anecdotal factor, we have just won Itä-Uusimaa, own doctor services for elderly people. And this just highlights that, little by little, also this market is revitalizing. And then if we look the private demand, this echoes what is happening in the Healthcare Services. We have a positive trend continued in the dental, especially. Then going for Sweden. Also in here, EBIT is up a bit. EBIT margin is up, and we are progressing in our profit improvement program as planned. Second quarter was burdened by 1 working day less, and also the timing of the public holidays or bank holidays was such that it incentivized people to stay Friday also off the office. So the calendar impact is a bit heavier, especially in Sweden compared to other regions. But despite these, we are improving the profitability, which basically highlights that we are reaching a point where we can state that we are efficient. We have clear operational KPIs such as utilization or occupancy rates that are now on levels that we have never seen in Feelgood earlier. And this one highlights that once we start loading the volumes into the machine and we move forward, it will yield results as we have been saying for the past 18 months. So all in all, we start to see the improvement, and with the efficient machine, it will come through the whole income statement in the future. Investments, there's nothing new in here. We continue to invest in organic. We continue to do disciplined M&A. During the quarter, we have made 2 smaller M&As in the mental health part and then in the dental part. But at the same time, it's good to note, like Ville has also explained and said, that technology is the place where we have our eyes on, whether it is organic, but it could be also inorganic. So we will accelerate our technology agenda when we are going forward. And the EUR 42 million, 3.2% of the revenues, is still below the levels we have been saying for the past year or so. Looking at cash flow and the net debt position. We have a strong leverage ratio. Net debt to EBITDA is strong. It's developing positively. And remembering that in second quarter, we paid out half of our annual dividends. And if you remember, the annual dividends are materially higher than they were in previous years. So we continue to have lots of powder in our balance sheet. Then if we look at operating cash flow, it is a tad bit soft. We have normal seasonality in the net working capital. We had some bigger outflows during the first half, mainly taxes in the first quarter and then in the accounts payable side for the second quarter that don't increase the cash flow into the levels that our profitability immediately would indicate. But that's normal seasonality. And we are in a nice position, especially when it comes to accounts payables that we can -- due to our very stable and predictable environment, we can accept earlier cash flows every now and then when we get the financial benefit for that one. So this type of behavior creates a bit of volatility on the cash flow, but it's chosen volatility. So all in all, we have a strong balance sheet. We are in a positive place what comes to cash generation, and it has minor volatility, as you can see from the stability of the graphs. Then let's go to the guidance. So first of all, I think that when we are now clarifying our guidance structure, it's a natural step on our journey within how we guide the investor community. We have started from EBITA percentage and growth, and then we have basically changed our financial targets to be EPS. And now what we are taking is the final step on that structure that instead of guiding profit and growth separately, we are guiding profit growth, so absolute EBIT. And we think that this is the best proxy for the EPS development on an operational level. And with that one, our guidance is stating that our full year '25 adjusted EBIT is expected to be between EUR 155 million and EUR 165 million. And then if you are mathematically oriented, you quite quickly grasped that this is, in material parts, same guidance as we have issued earlier, but we have narrowed the range. So this is a clarification on the earlier guidance and removing one mathematical rehearsal from the analyst Excels or other market participant Excels in that sense. Basically, the assumptions behind the guidance remain the same, excluding that we are expecting that the portfolios in the outsourcing operations will lose EUR 30 million instead of EUR 25 million. Then if we take a bit wider look and we look for the H2 and we think about where we are standing, we are in a position where 5 out of 6 KPIs are ticking in the right direction. We have the cultural ones. Employee engagement, indicating that our people are happy, is on a high level. We have the client satisfaction in place. We have the medical quality in place. We have the operational efficiency and cash flow in place, whether you look EBIT margins or leverage ratios, and now we have all of our eyes on growth, which you understand that the market is coming back. We have the megatrends supporting, and we have positive underlying momentum in those ones. So with these ones, I'm happy with our all-time high Q2, and iterating our guidance, our full year EBIT will be EUR 155 million to EUR 165 million. With these ones, let's jump to questions, Kati.

Thanks, Juuso. Do we have any questions from the phone lines?

[Operator Instructions] The next question comes from Iiris Theman from DNB Carnegie.

Thanks for taking my questions. I'll ask these one by one. So firstly, regarding your volumes in Healthcare Services, those were down by 6% year-over-year. So are there any drivers in H2 that could basically reverse this trend? Or do you expect a recovery more likely next year?

So if I start, actually, I went through the revenue split in Healthcare Services presentation. The big lever -- positive big lever is Kela 65 and continuing trend in insurance business. That has been positive for quite some time. Then within occupational health care that was discussed in detail, the Q2 softness was partly from buying behavior, and that's something that could reverse. Especially when we think about typical Q2 when companies are buying preventive services, H2 typically is more sickness-related services, which are not sort of controlled so much by a payer. So that depends more on the average morbidity rates that we'll see during H2. But there are positive things that will boost the revenue during H2. We will work on the occupational health care segment.

Okay. And then regarding your guidance, so you are no longer providing sales guidance. So does this imply that you are not expecting growth this year, given that your H1 sales were down by 3%?

No, basically, you shouldn't take any kind of guidance from nonguidance. So to be specific, this is a natural step on that we have been continuously highlighting after the CMD that we are doing everything that enhances our EPS. And from that perspective, we have taken our guidance to be on absolute EBIT. Then nobody needs to guess percentages on percentages, and it is absolutely clearer way of doing that one. But you shouldn't take any kind of notion that we would have feelings about where the revenues are going. This slide that we have now on the screen pretty much describes the growth drivers. And to me, at least, it looks fairly green if you look the next 12 months.

Okay. And probably still regarding sales headwinds that you mentioned in the report. So did you anticipate this level of headwind?

So as I think I said in the presentation, there were maybe -- majority of this one was forecasted. In Sweden, we anticipated negative trend. But the buying behavior with the existing customers were slightly lower than -- or buying activity was slightly lower than we expected due to negative macro still in Sweden. In Portfolio Businesses, equally, most of this one was forecasted. Some more softness in the staffing business, but there, we see a sort of a reversing trend already. In Healthcare Services, the only sort of nonforecasted thing was that within the existing customers, the buying behavior was slightly more passive than it has been during typical Q2.

And probably one question still, if I may. So regarding ASP, it was up 5% even though comparison figure was quite high. So what is basically driving ASP? Can you explain which customer groups? And is this a good proxy for the rest of the year?

By ASP, do you refer to average sales price?

Yes, in Healthcare Services.

Yes. So basically, our average sales price is always a bit volatile depending on the structure of who buys and what buys. So I think that we have -- it is clear that year-on-year, we have higher sales prices than we had in '24. And as we have stated since CMD that you can't bank on that we will continuously increase the prices in that type of a level. So at the moment, the best proxy is to look the sales mix from previous year and adjust it with the kind of known price escalations.

The next question comes from Anssi Raussi from SEB.

Yes. A few questions left. And if I start with the occupational health care, which was, of course, clearly weak in Finland. So you mentioned this corporate customers' buying behavior as one reason. So was it more about customers buying less services or tenders in the services included in contracts? Or did you actually lose some corporate customers?

It's actually -- sort of for full transparency, it's a combination of different things. So we are down with the contracted employees by 4% since last year. It has not changed throughout the year this year. But buying activity has come down. The 4% is a combination of sort of the market shrinking slightly. Depending on the source, the employed personnel within our segments has shrink from 1% to 2%. So that's part of that one. But then we have lost some agreements. We have been very -- throughout the profitability journey, we have been very prudent and strict with our pricing and protected profitability rather than volume. And with the sort of post-inflation environment, of course, companies are more and more cost conscious and are looking at the price more and more. So there, we will most likely see -- or do some changes to our policies, but we have that room because we -- the profitabilities or the margins are going up all the time. Then the buying behavior as such is a combination of sort of a scope within the contracts. There's a slight change and volatility in that one, but nothing material. It's more like activity. So within the pressures of -- on different companies due to the macro, that's pressing the buying activity down or did so during Q2.

Okay. And if we look at the -- you mentioned that the next 12 months, you expect flattish trend in occupational health. So I guess, of course, you have some kind of outlook there, internal outlook, but is it more about the number of working days? Or is this flattish expectation, working day adjusted expectation to say?

Well, this is more like -- we are not guiding as such. This is more like an anecdotal view on how the market is tracking in our terms. So don't take this one too sort of mathematically. And we are not adding new numbers to our guidance. But what this is stating is that we don't expect sort of new changes to the market during H2. Of course, we are taking action, and we have some new tools kicking in early in H2.

Okay. Got it. And maybe one question regarding this Kela 65. So how should we think about the margin impact? So how is the pricing in these services from your point of view, if we compare to your typical business and services?

Yes, it's a combination of sort of appointment price and margin and then diagnostics, and diagnostics prices are low in our sort of spectrum. It's -- they are not lower than in our -- some of the lowest corporate contracts, but they are low. And of course, it's going to be then combination of these 2. But actually, the margin contribution will be clearly positive. It's a new inflow of customers, and especially the appointment price allows us to get healthy margins from these new customers.

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

I would still like to go back to some of the topics discussed earlier in the call. Related to previous discussion, you said that you're down 4% in contracted employees within occupational health care. Was this the case already in Q1? Or was this change during the first half of the year?

Yes, it was the situation coming into this year. And there's always volatility. There's outgoing and incoming customers, but really, the starting point is the same as where we are today.

Okay. So this is not explaining the sequential change within occupational health care?

Not from Q1 to Q2, no. The buying behavior and morbidity rate is the explanation.

Okay. And then if we think about Q2, you're talking about changed buying behavior. Is that purely related to preventive services?

Buying behavior as such with the sickness-related services cannot be controlled. So when people are sick, then they are sick. Preventive services are, of course, of a different nature. Then sickness-related services are, of course, related to scope of the services. And within certain agreements, there are some changes in the scope as well, but they are -- against the big picture, they are not material.

Okay. So most of the softness was in preventive, but also some in sickness-related services? Hello?

Yes. We just confirm what you said.

So I understood it right.

Yes.

Yes.

Okay. Good. And then there were some bad publicity during Q2 regarding some over-invoicing cases. Did Q2, to any extent, suffer from those, for example, from any compensation payments? I mean any onetime impacts from those cases impacting Q2 negatively?

No, no, not from that angle. We can see a sort of billing behavior change. Also, there's sort of inherent additional control amongst the professionals and because the billing behavior is always a distribution, and some self-control was imposed, maybe too much during Q2. So that's something that we can see in the numbers, but nothing related to sort of any one-offs or compensations.

Okay. And then finally, regarding operating cash flow, quite a bit lower than a year ago for the first half of the year. Can you still give the main reasons for that? And what are you expecting in the full year relative to last year?

Yes. I think that already last year when we closed Q4, we reminded that we had an exceptionally strong Q1 and a strong Q4 in total. So we had a solid cash quarters in those ones, and the timing meant that the total cash flow was quite high for '24. So this needs to be always bear in mind when you look at comparables. And what comes to Q4, I think the LTM trends and those ones are fairly good places. Calculate EBIT and calculate operating cash flows and see those trends, how they move a bit back and forth. But we don't guide cash flows, so this is just for tools to evaluate it. Then if we look first half on this year, so in the Q1, we had tax payments that you see very transparently in our cash flow statement that we basically paid '24 taxes out in '25, which is quite natural. When you have a material profit improvement in place, then the taxes come a bit after the improvement. Then otherwise, if we look Q2, we have, on the positive note, our accounts receivable levels have been decreasing basically because we had 1 banking day more. So the last of June was Monday. Then we have accounts payables that have been -- we have been paying more out money to our vendors due to timing of the invoices, which is also normal volatility. So these ones go to different direction. Then I referred a bit on my slide for this topic on that. Sometimes, especially when it comes to IT services and software, you get fairly good payment terms if you are willing to commit to a term and pay beforehand. And these type of items, with our very stable and predictable business, we like to utilize. And that's why if you look our balance sheet, you see that we sum up accounts receivables and other receivables, you see that there's actually increase. So we have taken a benefit, which is EPS enhancing due to very low interest rate levels in these type of agreements. So that is the final component why you see that we have a receivable in balance sheet related to tools and software that we tend to use also in the future.

Okay. And then finally, if we look at the revenue development, it's down 3% during first half. Are you expecting a stronger second half? And what would be the main levers?

Yes. So if we reiterate what I said also earlier that if we look forward, first of all, in the longer perspective, we have the megatrends. We do know how aging and all of that one is happening. Then if we look purely on the second half and we look at this picture that Ville went through carefully, so we see that public sector is, little by little, opening up. So we do see that in the short end, staffing, for example, we now have tenders, we have won tenders, and it looks like that this market is coming, little a little, back. Those ones will happen on time to support also second half. The bigger outsourcing contracts will not have an impact in the second half. Those are, by nature, longer agreements. And if we win, the service provision will not start this year. Then if we look otherwise, we have the consumer insurance market. You have seen the plan. We have been talking about the occupational health. So then on this one, the biggest component is basically Kela 65 that, as said, Kela is expecting 1 million visits, and we are confident that with our top-of-mind and preferences, we have our share of that one. So these ones will support growth also in second half.

There are no more questions at this time. So I hand the conference back to the speakers.

Thank you. Maybe going back to the occupational health care, there is a question from Joni Sandvall from Nordea. Can you please clarify what actions are we taking on the occupational health care to boost top line development?

There are several. It's actually a program that we have embarked into. A lot has to do with the digital development, specifically providing new type of services to SMEs where we are not so strong today, additional transparency for larger customers and easier buying, easier tracking, easier tracing, easier impact reporting and, all in all, sort of improved and enhanced efficiency in our services. We have a solid agenda to be implemented, and we are sort of full throttle on with this one from August onwards. And yes, we hopefully have some sort of supporting news coming up in the coming weeks for this specific segment and technology.

Great. Thank you. Then maybe over to you, Juuso, a question on the Easter timing and how does that explain the differences in turnover. Easter does tend to happen every year, but it was -- timing was a bit different.

Yes, of course. So we are in a business where a number of working days impacts our revenues. When people are not working occupational health or when you don't have a working day, you have far less population who use our services. So every working day less reduces our revenues, and that's purely natural. And now Easter was timed differently than previous year, which led to having 1 working day less in the quarter. And then you can also think about that, especially in Sweden, which I highlighted, that when these bank holidays or national holidays occur also impact people behavior. So for example, this year, 1st of May was Thursday, and everyone who works in professional services or kind of white collar job understands that, that Friday was probably half a day or even increased holiday absence day, meaning that people are away. And all of that one then impacts on how occupational health services especially are used. So it's, in the end, simple mathematics.

Thank you, Juuso. Then over to you, Ville. Could you open a little bit more about the upcoming technological changes? And what's the sort of potential impact and time line to P&L impact regarding this one?

So the fundamentals that we have in place are there. So architecture-wise, we are where we should be. We are actively implementing and executing. So this is not sort of a dreaming type of scenario. We will have launches in our core service ERP called Ella during H2, which will boost productivity in our brick-and-mortar. It has already boosted productivity in text-based services, in chats. And that -- on that basis, the journey will continue, adding more modules, more automation, more AI into that core ERP. And potential is there. That's going to be combined with even more intelligent and more comprehensive customer steering engine. Now we are good in steering customers when they are coming in from certain segments through certain agreement. But we are making this one comprehensive. So through whatever channel you come from, be it physical or be it call center, be it booking engine, the customer steering logic will be the same, and through intelligent customer steering, the right channel, right service from the first activity onwards, we can lower the cost and improve the sort of a solution rate and time to solution for our customers. We -- with this one, we can also be more active in customer steering. As we know, in digital services, we have a higher potential for efficiency than within brick-and-mortar. And that shift is going to change over time. As to the timing, as I said, there will be launches throughout this year. The journey has started. We can see already improving efficiency and continue next year. And then really, the journey is endless, but we are not talking about sort of a 5-year hockey stick. We build on existing platform and keep on delivering.

Anything that you want to add, Juuso?

No, I think that was very comprehensive.

Great. At the moment, we don't have any further questions from the webcast. So maybe final words? Over to you, starting from Juuso.

Yes. As stated, we have recorded record-high Q2. What comes to EBIT, what comes to relative EBIT, we are really proud on that one, and we will continue delivering. And as you heard, we have also headwinds, but we are fully capable to steer this boat in different wind directions.

Yes. Efficiency and profitability journey continues in all of the segments. Specifically positive thing is that since, I guess, decades, there will be a new element kicking into the private health care, which is Kela 65. It's not a silver bullet, but it's a very strong indication that this market continues developing and continues providing opportunities for Terveystalo.

Great. With that, thank you for your time, and have a nice rest of the week.

Thank you.

Thank you.