Terveystalo Oyj (TTALO) Earnings Call Transcript & Summary

Good morning, all. My name is Juuso Pajunen. I will be having today a dual role as the host of the Terveystalo half year results presentation and as a CFO at a later stage. But let's now give the word to Ville Iho, President and CEO of Terveystalo, and let's start the webcast for the half year results. Ville, please?

Thank you, Juuso, and good morning from sunny Helsinki. Let's start recapping Terveystalo's second quarter. Of course, it was a busy quarter for Terveystalo. We, of course, released multiple big things, not the least, the Silmaasema acquisition, our new financial targets and our new strategy. On the business side, it was still a challenging quarter. The market conditions continue to be abnormally negative, and that has been reflecting into our revenue line and with that one also to profitability to our numbers. We made adjustments according to the lower volumes. And given that one, given the actions we took, we can be, of course, pleased with the customer service results, customer experience numbers are all-time high as well as medical quality key indicator PEI. But revenue line, obviously negative as well as adjusted EBIT EPS and also net debt-to-EBITDA leverage ratio went slightly up. Double-clicking on those negative market drivers. First of all, public purchases from private health care, which are not even seen in this Slide, were still almost nonexistent. So health care counties have insourced quite a bit of their activities, and they are still reorganizing the cooperation models with the private health care providers. So that was clearly negative. Then from our biggest business, occupational health care services, the number of employed persons in Finland, which is the baseline of the baseline was negative. It was still down from the previous Q2. On top of that one, frequency of use was still down and negative [indiscernible] negative is, of course, negative. That's been reflecting into our numbers in occupational health care. On consumer side, it's still negative. Consumer confidence grew slightly, which is, of course, positive news. All in all, in market volumes, we cannot see a positive trend. But in Terveystalo numbers, actually the consumer-driven services grew during Q2, which is, of course, positive. But given the occupational health care headwind, the full volumes of Terveystalo were down. Looking at the different segments and business lines, Healthcare Services clearly down due to lower volumes and lower revenue line with negative occupational health care numbers. Positive is the fact that consumer demand grew, especially against latter part of Q2, and that can be seen as a trend change in that segment, which obviously is positive. Portfolio businesses down due to low demand and some structural changes, obviously, termination of outsourcing contracts and then sale of our child welfare business earlier. Sweden volumes are still under pressure, but the efficiency development has been really positive, and we can see the trend changing in profitability as well. We cannot yet claim a win in Sweden, but clearly, we have been able to turn the trend around and platform is there, efficiency is there. With those numbers, of course, group numbers were negative or trend was negative. Still double-clicking a little bit on the core business, classic business within Healthcare Services. Occupational health care, our largest segment, is the key for turning around our big machine. And we have been conducting a major, major overhaul in that business line. Commercial operations, digital, all are going or have gone through a major overhaul. We are pleased with the progress of the program, occupational health care turnaround, but it is slowly turning a sticky business model where the turning around the contracts, gaining wins take time. And now when looking at H2, looking at the future quarters, we don't see yet a big uptake in the connected employee numbers. It's rather a more stagnant view for H2 and bigger gains have been postponed to 2027. We are moving forward. We are making progress. We are renewing our commercial model, our operational model and introducing world-class digital tools to this business line. But as I said, turning around the bottom line for the business takes time. We are in very interesting state in our business where classic business, of course, needs full focus in turning around that one, specifically occupational health care. We have a great agenda there, great team conducting that part of our agenda. At the same time, as we see, the whole health care services industry is in a transformational mode. And for that reason, we have renewed our strategy. We released our ARC strategy earlier. And we -- there are a couple of major shifts that we start conducting and the new directions where we start moving towards. From a value creation point of view, obviously, there will be more -- way more weight on growth rather than protecting profitability. First example, obviously, is Silmaasema acquisition. In products and pricing, we see megatrends continue to be positive. We, of course, need to tackle reasons not to buy services from private health care providers. And one of them is uncertainty around pricing packages and not being adequately transparent towards organizations or corporates or private consumers. We are moving ahead with more fixed-priced products, productizing more of our services in retail mode. And with that one, increased demand and volumes. Service delivery side, there, we need to have our eye on value for money. We will continue investing in high-value care chains in brick-and-mortar. So that continues to be a big part of our business going forward. On the other hand, more simplistic services will be steered more aggressively to digital channels. And there, we have a great agenda, great tools already in place. And with this combination, value for money for users, for payers will be protected and improved going forward. In customer relationships, we'll -- with the new expanded, more versatile portfolio, of course, we need to be able to leverage that customer base with upcoming Silmaasema acquisition, we are talking about 2 million customer base only in Finland, and that creates a lot of opportunities for cross-selling, increased and enhanced loyalty. But of course, we need to create an engine for running loyalty and cross-selling. And that's a focus area for our strategy. On top of this one, we are making a shift -- gradual shift from reactive episodic care chains and complementing them with more continuous care type of models. And that's going to be visible during H2 this year. We have -- we are on a move. This is, again, not a PowerPoint slide. It's a living agenda where we are already moving forward. When we are talking about growth, of course, biggest components. Currently, most visible components are Hohde and Silmaasema acquisitions, which will -- with jointly, we are going to create the EUR 1.5 billion outpatient masterclass. In products and pricing, we have started already last year scaling these fixed-price products, and I will show some deep dives into the impacts of that one. In service delivery, on top of the earlier world-class digital platform, we have introduced new types of service modalities specifically an asynchronous service model, which is even more efficient, more accessible with a lower price point, but at the same time, still high margin. In customer engagement, as I said, we'll start rolling out continuous services during H2. So we are on a move. A little bit double-clicking on the key points in already implemented ARC initiatives. Obviously, Silmaasema highly visible acquisition. As I said, we will create EUR 1.5 billion outpatient care masterclass jointly with Silmaasema, it's a highly synergistic case with a lot of potential to grow beyond first phase in long term in this market and upcoming markets. It will balance our revenue mix and tilt that one more to growing private-pay domain, which is, of course, positive for Terveystalo and evens up the cycles. And as I already mentioned, we are creating 2 million customer base with respective opportunities for cross-selling and increased loyalty models. This is clearly a spot on against our strategic targets and themes. Then discussing a little bit about these fixed-price models, some of the -- some from the audience have asked why are we moving to this direction? Hasn't it been easy enough to buy services already earlier. But our data shows clearly that the reason not to buy private health care services many times is not the price as such. It's uncertainty around what do you pay for, what do you get? Do you understand what type of package you are getting? And there, we need to make a move as an industry. And of course, we need to lead the way. We have started scaling fixed-price packages in various services. And we can clearly see a stimulation effect in all of these services that we have launched already. So tackling those reasons not to buy clearly will increase volumes, increase demand, and that is going to be a way forward. Of course, not all of the services can be fixed-price because health care is health care, but we can scale this one quite a bit. As I said, we have launched new asynchronous digital service for use in occupational health care, specifically. It's a new modality, which is even more efficient than the previous digital chat and video appointment models with a lower price point, a little bit different type of service package. It's fast. It is accessible and complements our package and creates a new line for growth in digital domain. With ARC, with our new strategy, of course, we also released new financial targets. We are still, of course, aiming at growth -- annual adjusted EPS growth of 10% stays, but we create more room -- headroom for growth with the new leverage ratio and profit distribution targets as stated here. And we are embarking into the ARC growth journey from H2 onwards. And double and triple clicking on ARC, save the date, Capital Markets Day 2026 will be held 1st of December this year. And there, we will share a lot of insights around what has already been done and what's going to happen for Terveystalo -- new Terveystalo in 2027 and onwards. And with that one, I'll invite Juuso on stage.

Good. Thank you, Ville. So let's talk about the financial performance in the first half of the year and especially in the second quarter. First of all, second quarter was as difficult as expected. We are in decline in revenues, in EPS and in EBIT. The market did not materially change if we look the conditions during the quarter or when entering the quarter. But if we see the in-quarter development, it is good to note that especially the consumer market started to pick up, and we saw clear stabilization when it comes to occupational health care. And also in Sweden, we have seen the first glimpses of positiveness in the market. But with all of that one, obviously, we are behind as expected for the second quarter with our numbers. On the positive side, our cash flow was solid, especially compared to income statement performance and our NPS and also the PEI describing the efficacy of care were on all-time high numbers. But let's then double-click it a bit further. So basically, the weak demand continued in all business areas. If we start from the Healthcare Services, the occupational health demand remained weak, both from the upper respiratory perspective, but also, we have the connected employees that are lower than in previous year. Consumer out-of-pocket market was already measured in visits, in growth during the quarter. On revenues, it was stable. Then if we look on the portfolios, we have the known reduction of outsourcing business, but the public sector remains to be very sticky. Sweden, as said, is little by little now seeing improvement in our own performance, but also the market is more and more solid when looking forward. So in Healthcare Services, if we look on different segments, so occupational health, let's look a bit further on the following slide, as you have now gotten used to on the visit growth component, both in occupational and out-of-pocket part. It was sticky. The connected employees, they are now stabilizing. If we compare to Q1 to Q2, we are now in a more stable base. But at the same time, it is still below previous year. And basically, the demand drivers in the occupational health remained the same as earlier. At the same time, it's good to note that now the visit frequency is stabilizing and the other KPIs are also getting more and more stable. Sales pipeline remained at a good level, but the conversion, as Ville also explained into new contract has been slower than we have expected. Then if we look on the operational efficiency, that continues to be in place. We have taken restructuring measures. We announced statutory negotiations in April that were concluded in May. The outcome of those one will start to support further and further in the second half numbers. And at the same time, if you look the decline in revenues, the decline in visits and then you compare the change in our number of people, for example, you can see that we have taken efficiency measures and our efficiency remained on a good level. We will continue, obviously addressing the market conditions also going forward. Then looking on the volume development, it continues to be challenging. The underlying factors that contribute to the decline in occupational health visits have not gone anywhere. We didn't expect them to go anywhere also when we talk about Q2 numbers. So basically, the general decrease in the employee population, we have the employers who are still in the cost-cutting mode, and they are addressing the scopes of the contracts and basically, the number of connected employees in total, they contribute into the decline in the occupational health. But at the same time, as I said, the further we have gone during the quarter, we have seen stability and we have seen, for example, the visit frequencies to stabilize. And if we are looking forward, we have, as Ville explained, we have a solid, solid sales pipeline. Then on the positive side, when we are looking at the consumers, again, the further you look from April to June, we have seen that the consumer market has been picking up and has continued to pick up. And we are now in the visit frequency actually above previous year's second quarter. So all in all, this contributes into a 6.5% decline in the visits, which is also a better number compared to Q1. But obviously, the weight of the upper respiratory diseases is smaller in the slower quarter. Looking on the portfolio businesses, our story has continued pretty much as expected on the trends from Q1. We have outsourcing businesses. Those legacy contracts are declining as we have known, as we have communicated. It is also good to note that these contracts have now been margin-positive, and thus, also the reduction of the revenues is visible on the reduction of the profits. Staffing business and the public sector in total has continued to be in decline. However, the rate of decline has continuously stabilized, and the situation has been improving compared to earlier quarters. Public sector, in general, has been very sticky and is on a very low level continuously. We have seen some positive glimpses that have not yet materialized and there are some contract tenders out there also in the outsourcing side that will come out to play at the later part of the second half. And on dental, this is positive. We are gaining market share. We are positive both in revenues and visits. And at the same time, it confirms the trend that we have on out-of-pocket customers in the health care services perspective. We will get a further boost on dental with the Hohde acquisition. The approval is pending. And at the moment, we are expecting that we will gain approval during third quarter. It would mean that we would be within our own expectations, both from the approval timing perspective and the content perspective when getting to the status that we would get the approvals. But obviously, it is an authority process, and it is completed when it is completed. But our expectation is after the summer. This will also double our dental business, and it is exactly in line with our ARC strategy. Going into Sweden, I'm really happy that now we are little by little getting clear improvement when it comes to the -- both EBITDA in absolute terms and in relative terms, both EBITDA and EBIT are improving against still a declining revenue. What we have seen during the quarter and what we have seen during the year is that our efficiency starts to be really strong. And now on the next step, we will have more and more eyes on the growth, and the operating leverage will support the business. At the same time, the market environment is slightly better than it has been earlier. And when going forward within the quarter, we have seen that, for example, the purchase frequency of our clients has been growing first time in a long time, which is a positive signal for the market recovery being in action. Our investments, we have not changed our strategy. We are accelerating digital. You have seen the M&A. We have announced Silmaasema. We have -- we are expecting to close the Hohde deal during Q3. We will continue to invest into future growth. M&As will be selective, will be value-creating and organic investments, they are basically especially in digitalization and then on the physical infrastructure, including also leasehold improvements and medical equipment. So we have not changed our investment strategy going forward. Looking on the cash flow. Q2 cash flow was actually fairly solid. We are at EUR 175 million operating cash flow in the last 12 months, and we saw a positive development, especially net working capital. The net working capital was supported on the inflow side with the 2 last banking days of June being Monday and Tuesday, which is always positive. But all in all, our cash machine continues to work like a Swiss clock. What we deliver on the income statement, we deliver on balance sheet also. Our net debt amounted to EUR 560 million and net debt to EBITDA on adjusted EBITDA was 2.5 and on EBITDA was 2.7. We are within our target range, and we have a solid, solid balance sheet also when going forward. At the same time, we all know the announcements on the M&A. And we have now -- during the quarter, we have renewed our funding structure to fund the ongoing acquisitions and to refinance our old loans. So during the quarter, we have secured EUR 550 million of committed bank financing, both for the Hohde and Silmaasema acquisitions and as said, to further boost the maturities. We have also increased our revolving credit facilities from EUR 80 million to EUR 100 million and completed a debt issue under the existing sustainability-linked bond. With all of that one, we have now -- the maturity curve is very stable. And it is good to note that the '27 and '29 packages are also including extension options. So our funding is at a very good place when looking forward and supporting our strategy. Then going into the markets, the demand environment is anticipated to improve during the next 12 months and at the end of this year at the same time. But also looking the trends, they have not materially changed. If we look at the second quarter, consumer market has been better. In Q1, it was a red downward arrow. Now we have the visits are in growth and the revenues are stable. Hence, we are yellow in the Q2 performance. But at the same time, the next 12 months in all of the market segments remain to be within the same trends as we have communicated earlier. So public sector is on a very low level. We see some movement and positive indications that it has bottomed out, and it could be also at least stabilizing forward. Consumer pool is good, both in out-of-pocket dental and massage services, and it is expected to continue on a positive trend. Insurance follows fairly well the consumer market and occupational health that has been widely explained during this call also has been red and is expected to stabilize during -- and that has started to stabilize during the year and then improve little by little within the next 12 months. And Sweden sees a positive indication on market recovery when looking forward. With these ones, let's go to the guidance. You have seen that we updated our guidance 2 days ago. We expect our full year adjusted operating profit to be between EUR 120 million and EUR 140 million. Previous year was EUR 156 million. Profitability in the first half was clearly below the level of comparable period in '25, and that has been impacting the guidance, and the environment has been challenging. When looking forward, we are expecting the demand environment to gradually improve, and upper respiratory diseases are anticipated to return to long-term averages during the second half of the year. At the same time, we are not expecting material improvement from the connected employees for the second half, and we are expecting the wins to materialize in '27. No changes for the outsourcing operations in the portfolio businesses, and these do not include material transactions, not Hohde, not Silmaasema. At the same time, having said that one, it is good to note that if Hohde transaction closes within our expectations, we are getting, let's say, a couple of months of performance. So it would not materially change our guidance range at that point of time. With these words, let's invite Ville back and let's start the Q&A. And as explained in the beginning, I will work at the same time as a CFO and host when it comes to the questions. We will start with the questions from the lines. We have nobody sitting in the room. So we start with the questions coming from the webcast listeners, and then we will go if there are questions remaining on online-posted questions.

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

I have a couple of questions. We'll take these one by one. Firstly, regarding the guidance cut this week. How much of the reduction is driven by Q2 performance? And how much is related to the second-half outlook?

First of all, thanks for the question. It's both. Obviously, we are trailing during Q2 slightly against our targets. So that's one factor. The other one as usual and hopefully also I explained is the stickiness of the occupational health care market. Despite the healthy sales pipeline, we have not been able to materialize a major increase for the connected employee numbers for H2, rather the increase is expected to time at the year-end. So those are the 2 drivers. Maybe Juuso wants to double-click on the ratio between those.

Yes. I'd say that like Ville said, it is both components and the ratio, this is a bit academic, maybe we have a bit more emphasis on the occupational health connected employees development compared to the performance in Q2 specifically, which was slightly below our expectations when entering the quarter.

Okay. And then continuing on this outlook, if we think about the new midpoint, what needs to happen for you to get there? So what are you, kind of, assuming regarding second half developments related to current trading, for example, in Q2, how much improvement is assumed?

So basically, if you look at the midpoint, EUR 120 million, EUR 140 million, so the midpoint is EUR 130 million, which basically means that in a year or the second half development is broadly in line with the second half development previous year. So what we are expecting in there is that we have the upper respiratory diseases would remain into the long-term average, and we have a slight pickup in the market, let's say, especially in the consumer side. What we are not expecting is a material increase in the connected employees that would generate revenue during the second half in that guidance.

Okay. And then regarding the development in the connected employees during second half, it seems that you're now quite a bit more negative on that. You said that you're expecting the situation to improve at the year-end, but not before the year-end. Have you already won those deals? Or -- I mean, do you have visibility on this sort of stronger '27 on this front?

Yes. So it's always a mathematical exercise when you are looking at the sales pipeline and renewal pipeline as we have discussed earlier, then you estimate the win rates in respective categories and then you push that forecast forward. There are obviously a couple of wins won already, which will start at next year, 1st of January. But really, what we are looking at is a forecast based on our pipelines. And as to the more negative basically during Q2, the number of connected employees has been stagnant or stable. So there, we are not more negative. We are rather slightly more negative on the forecast because we see how the earlier pipeline has turned to actual revenue-generating deals for H2.

Okay. So the real change in second half outlook within connected employees is that during Q2, sort of your win rates were not as high as expected.

No, you are right. In new sales, yes.

Okay. And then you're talking a lot about growth investments, but I'm not hearing much regarding cost savings. Your competitors talk more about those. So given the oversupply situation during the past year, can you summarize what cost measures you have taken? And what are you still planning to do during the remainder of the year?