Hi, good morning, ladies and gentlemen, welcome to Terveystalo's results briefing and live webcast for the first half of the year. My name is Kati Kaksonen, I'm in charge of investor relations here at Terveystalo. As usual, our CEO, Yrjö Närhinen, our CFO, Ilkka Laurila, will give a short presentation on the results, we'll follow that with a Q&A. We'll take questions through the phone lines as well as through the live webcast. Without further ado, I'll give over to Ukki.
Thank you. Thanks, Kati. Good morning, everyone. Now we're here on first half year and second quarter of 2019. I guess the headline hopefully says what we want to portray, which is, of course, our absolute quarter-on-quarter growth is driven by Attendo, but actually we're quite satisfied with the underlying growth, which is seen broadly across the customer groups. If we start to look at the Q2 highlights. As said, strong development in all customer groups, in all physical regions. Attendo healthcare integration proceeding as planned. Lots of work, very active, but basically all plans, integration, synergies, everything is progressing as budgeted and planned. We see continued growth in prevention and wellbeing services. These, as you may recall, we've seen a high double-digit growth.
I think that the positive thing is we are also seeing a clear pickup on, I would say, classical healthcare appointments, which we will classify as private business. The occupational healthcare is performing very solidly. Maybe a little peculiarity, our digital businesses continue to grow. We've seen an all-time high in July on remote appointments, both be it chats or be it digital visits. I think the real trick behind this is that it actually allows us to manage availability industrially better than previously. We see a high demand on digital services or increasing demand as well as then we can see the operational impact of that business gradually coming in. We have a new remote appointment app. Oma Terveys account is basically upgraded, and we get very positive feedback from be it app stores or be it consumer feedback. All-time high on chats.
Actually, if you look at even in some regions in Finland over summertime, you almost see digital visits being as large as physical visits. That clearly tells the story of an increased interest towards, I would say, next to physical doctor appointments and physical healthcare activity. The long-term work on increasing digital presence clearly starts to play in. We are testing small scale still, but basically the whole notion of pre-bookable remote appointment. Our vision there is that the consumer can, over time, choose live whether they want to have a physical visit or a digital visit. I think that work is progressing very well. Not 100% up and running yet, but we're on a beta mode, and we can still gather some more learnings. Very positive development there. Look at the growth numbers, 37% growth quarter-on-quarter.
Of course, a majority of this coming out of the Attendo acquisition, basically more than tripling our public business to a sizable EUR 74 million. Next to it then, almost the same size, private growing by 13.8%, which I think is a very good number. It is a combination of wellbeing prevention as well as then classical doctor appointments. We do see appointments growing, that, of course, then impacts our mix, especially when we come more and more towards wellbeing, you'll see the appointments playing a larger role. We always need to look at the sales mix effect of that. Also very positively, you'll see growth in occupational healthcare, 77.1% year-over-year. That despite having one less business day.
Without being too much of an educator, of course, the impact of one business day means that that lost revenue basically almost fully leaves from the profitability line simply because the cost base remains broadly the same. Always on a quarter-on-quarter comparison, this kind of a working day comparison remains relevant, and then on full year basis, it of course loses meaning. That's the Q2. Puts us on a EUR 526 million sales on first half year, 36% growth, more or less the same numbers. I think the point here to note is that our public and our private business start to be almost the same size.
We're really solidly standing on three different business legs, which is also the way we try to look at our business increasingly, which is on understand the differences and the similarities of these three different business groups, public, private, and corporate. Very much solid growth, and I would say strong underlying growth, and broad growth across all of these groups, customer-wise and geographically. EBITDA year-on-year comparison gets impacted by, as said, this increase in appointments relative to other activity. Attendo coming in with initially lower margin, one working day, and then as you may recall, we had some positive one-offs on a comparison period. If you look at that on a quarter-on-quarter, you actually see, I would say, a kind of lesser impact or lesser growth that we see from an organic point of view. Ilkka will come on to talk about more on longer-term trend.
We are actually quite satisfied with how our business continues to drive efficiency despite Attendo coming in with somewhat different business mix, and then coming with the different business model. The EBITDA then comes at EUR 25.9. Adjusted EBITDA % at 10% of revenue, and then profit at EUR 10.4 million. Look at the market. I think the big message looking at the market is despite there are clouds on the horizon on the broad scale of a macro, be it internationally, and even changes in the way how private consumer looks at the confidence against the Finnish economy, we do see our market being currently unimpacted by it. Basically, we see strong demand for our services. We don't see impact on healthcare policies, be it reform or not reform, basically impacting at all.
We're basically busy developing our own business, driving our own efficiency, and of course, making sure that our Attendo integration continues to play in, and so that we are ready for whatever may come out of the public side. Despite, I would say, political discussions, I remain very confident that public-private partnerships is one clear way forward for Finland and for Terveystalo in that same sentence. 2019, I think the impact of any political decision is limited. I think we'll see that playing in on longer term. As said, market environment for us remains positive despite, I would say, somewhat weak in consumer confidence. We remain confident on the market outlook and basically are busy with our own work. With that, I would like to hand over to Ilkka. Ilkka can run through the financial numbers.
Good morning on my behalf as well, and as usually, we take a closer look on the financial performance as well. Starting with the profitability and especially EBITDA. If you take a look at the longer trend of the EBITDA development, as the result for Q2 was now at 9.9%. If you would compare that to 2017 number, it's already clearly higher than that. If you would compare it to 2018 numbers, it's somewhat lower still because of those mix issues that Yrjö already earlier sort of described. If you would compare our performance versus the Q1, so if you take a look at the Q1 2018, in which the EBITDA was at 13%, and Q1 2019, having full impact from the Attendo acquisition +12%, so 1%, relatively speaking, lower.
If you would do a sort of working day adjustment for the Q2 result, which is roughly that 1.7% for the top line, roughly 0.5% for the margin level, you will end up having roughly 10.4 margin level for Q2, and which is already quite close to 2018 performance. Therefore, we are quite happy with the operating leverage and the operational improvement and the profitability that we achieved during the second quarter. As usually, the root cause for that is obviously the operating leverage of our business model. That still applies, especially when it comes to the corporate and private customer segments as described earlier. The logic with the public business is somewhat different. If you take a look at the cost structure again, if you take a look at other operating expenses, clearly increased less than top line.
If you take a look at the material expenses, which is sort of included in the materials and the service line, it has only increased some 5%-6% versus the top-line growth. If you would do the IFRS 16 adjustment back to the rent leases and premises expenses, it has only increased some 17% or 18%, roughly speaking. Also that has increased less than the top line, and that will end up having the operational leverage impact that we are having in this kind of corporate and private businesses especially. On the balance sheet side and the targets on the balance sheet, the leverage ratio target is the three times multiple. Now we are having that close to EUR 200 million impact after the IFRS 16 impact.
Still, if you take a look at the leverage ratio, if you would exclude that, to put it sort of comparable numbers, we are already quite close to the three times leverage ratio. If you would do that, even any kind of LTM adjustment for the Attendo acquisition, you will end up already having below that three times leverage ratio, which is then why we see that we are not worried about the leverage ratio development. We are already sort of in our internal targets when it comes to the leverage ratio. One big reason for that is that if you can see the operational process improvement in the P&L side, you can also see it in the balance sheet side.
If you take a look at the working capital development like described already during the earlier quarters, sort of if you are able to operate efficiently your operations, you can see the improvement also in working capital development as we can see again during the second quarter of 2019. Also having obviously impact for the improvement in the leverage ratio. As already also mentioned during the earlier quarters, we will continue our investments in the digitalization of the healthcare and our operations. The increase in the CapEx level can be seen here then, so that if you compare it to the last 12-month investment in tangible assets in Q4 in 2017 was EUR 5 million, versus the Q2 2019 LTM number is EUR 14 million.
It has almost tripled during the time, which is according to our strategy and what we have said, that we will continue investing in digitalization of our business and the healthcare. Cash flow still. End result of the both the positive P&L development as well as the working capital development end up on having a situation that you can see here, that our operating cash flow, even though that you would do IFRS 16 conversion back to those numbers, the operating cash flow developed very positively during the second quarter 2019, and showing the good sort of operational development of the business during the second quarter and the first half of 2019. I think that we can open the lines for the questions and the Q&A.
Thank you, Ilkka and Yrjö. Do we have any questions from the phone lines?
Participants, if you would like to ask a question, please press 01 on your telephone keypads. You can press 02 to cancel. Our first question comes from the line of Panu Laitinmäki of Danske Bank. Please go ahead. Your line is open.
Thank you. A couple of questions. Firstly, on the organic growth rate, I know you are not giving the number anymore. Can you kind of confirm whether it was roughly on the same level as in Q1, when you kind of gave the number?
Ilkka is keen to answer, we'll let him. Yeah, I will open it, the logic a bit. As a preemptive strike, we did put in Q1 slides here already as an appendix. If you take a look at the Q1 and the growth in these numbers, basically you can see that the impact from the Attendo for the private sector was roughly 9%. It had only immaterial impact for the corporate segment being less than 1%. The growth for the public segment we already also said during the second quarter.
If you would also put sort of rough impact of the working day during the second quarter, you will end up, you have to do some sort of math, but you will end up having end result that during the second quarter, our growth was actually in line with our long-term targets as well, being the 6%-8%.
All right. That's clear. Thank you. Second question actually on cash flow. That was very strong in Q2. Do you think this is kind of a trend to continue, or was there something in the working capital that will normalize in the second half?
First you have to take into account that that is, even though the IFRS 16 it's Yes, it's ridiculous. Even though that IFRS 16 is not cash flow item, it will have impact on the operating cash flow calculation. The impact for the Q2 is roughly that EUR 10 million.
Yeah. Sorry, I meant like excluding that.
Yeah. On top of that, if you take a look at the working capital, there's a certain sort of non-recurring impact from the pension-related payments in Finland with the sort of the Katso system here in Finland is not operating as the government or the pension institutions planned. That's why it has had a positive impact for the second quarter working capital. Even though that you would exclude that impact as well, we had a sort of good, solid operational development for the working capital also for the Q2. Like I said, it's not that good as the number shows. Going forward, we also see that there is no reason why the historical development should change. As we have been historically able to improve our operating cash flow and the working capital development, we continue to believe so that also in the future.
I think that's the key point which is that as we continue to grow top line, our ability to drive efficiency further down the P&L continues, and I think operating cash flow, I think, is a great example of our continued ability to drive operational efficiency. I think that is exactly as Ilkka says, will continue and should continue.
All right. Thank you. My final question is a broader one on the market and the public side of that. Since you last reported, there we have a new government and some clarity.
Yeah
on the kind of outlook on this sort of thing. What are your thoughts now? It seems that we are not seeing that many outsourcings, but something else on the public side. Any comments on the.
Yeah
kind of timing and your plans and what you expect. Thanks.
I think, yeah, not to dwell too much on kind of the political outlooks, but it is a little bit unfortunate that Finland continues to struggle with renewing its, I would say, basic services, be it infrastructure, be it schooling, be it social care, healthcare. These things take a long time. We as an operator within that market, we need to be accustomed to that the demand, I judge, will be there and is there. If you look at the status of municipalities financially, there's a highest number of municipalities ever to make an operational loss, which means the financial situation out in municipalities in Finland is actually quite serious. Therefore, I think we do need solutions to help our public healthcare. The question there is much more how and when will that demand materialize?
As we all knew, there was a kind of a period with quite a lot of complete outsourcing. I think if you look at the political tonality right now, it's probably a little bit against that. There are other forms of collaboration being discussed. What does that mean? That means that the overall sentiment is probably more waiting and people are more on the waiting mode. We see a lot of interest and demand. We also see that the new government is a little bit trying to form their words into action, and we haven't really seen that in practice yet. Therefore, our focus is to make sure that if there are new types of services, be it staffing services, be it service vouchers, we need to be ready for those or other forms of tendering.
My current judgment is that we see less of a focus on complete outsourcings, and we see more of a focus on kind of specific activity going forward. I'm struggling to see that the demand would lessen. That probably means that whatever will happen in the next half of the year, second half of the year, we'll see quite modest financial impact of that because these tend to be long processes. The tendering processes, when they start, will take a while. I think the market will be in a little bit of a waiting mode, 2019. Having said that, there is a lot of demand, there is a large number of small activity going on, so we remain quite positive on the developing and investing into the public business. All right. Thank you. That's all from me.
Thank you. Our next question comes from the line of Alex Gibson of Morgan Stanley. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking the questions. My first one's on staffing. I remember last year you talked a lot about not being able to get in enough consultants to keep up with booking demands. Are you seeing any of these pressures or has that alleviated given the good growth rates that you've shown in the business?
Staffing, I think it's a very observant question. I think, staffing overall tends to vary quite a lot from one period to another, and rightly so. We had to spend quite a lot of time on the first half year, actually, to make sure that we stabilize the situation. I think it has stabilized. One of the key drivers, I think, is these are people who look for short-term employment, and given the fact that we had not closed the deal, there was uncertainty about when will the deal close, and all of those. All of these impacts are gone now. We see the pipeline for professionals being better, and that helps our, let's say, access for the physicians.
The second thing that does help is that we'll be able to stabilize the situation in terms of making sure that the deal base, if you wish, is more healthy. We've done a lot of work on stabilizing staffing and then kind of turning that into a growth mode. My expectation is that the second half is significantly more stable than the first half, at least from a work-based point of view.
Is that helped by the launch of that new app, the consumer booking app?
No, the consumer app basically allows us to serve, I would say, the private customer. Okay, sorry. Now you have two different answers. We need to specify. Staffing as a rental doctor staffing business or staffing physicians. If I comment on the rental doctors, that was my first answer. There, I think we have seen better access to professionals, and that business has clearly stabilized. There we see also demand, almost indefinite demand.
Yeah
you could argue. Getting access to physicians, and if that's your question, there the app will help because the whole point is to be able to, I would say, even out the gaps between supply and demand. The better we are at supplying healthcare services digitally, the better we are on evening out these gaps between supply and demand. There, the new app and the digital services will definitely help.
It will especially help the availability of the specialty care doctors.
Yes
for the smaller municipalities and the smaller cities. Have you seen a lot of those specialty doctors not be available in the past then? I always got a sense.
Yeah
it was the initial bookings that
If you recall the discussion about a year ago, where basically we saw very high booking rates, and we were kind of talking about how do we even out one of the limitations for growth is our ability to provide access or offering, basically. That indeed, where we are seeing now the benefit of being able to provide digital services is that indeed opens up availability for some specific specialties in areas that there was not a doctor available earlier. At the same time, the other thing that it does is that it evens out gaps on supply. Basically, my judgment is that with lower individual percentages, if you would look at availability gaps of 1%, 2%, 3%, digital tools will definitely help there to even out these gaps. That is essentially the magnitude we saw a year ago in terms of.
a shortfall of supply. I would say that these tools will allow us to withstand, even if there would be capacity increase, we are now more and more capable of supplying the required amount of services, despite if there would be new supply. I think that just goes to show that we have a lot of ways, continuous possibilities on driving efficiency, on managing supply and demand, if you excuse the term.
Okay. Yeah. On those IT investments as well, because you've updated that consumer bookings app, is there any other technology investments that you need to make significantly that are going to be large CapEx projects? We know that IT investments, particularly on building out infrastructure can escalate. Do you have to do anything either with your existing business or Attendo to get everything up to a new level of technology capabilities?
Yeah. Basically the answer for that is we continue to do immaterial investments, which is IT investments increasingly. Our systems are fully operational as is, but I think we increasingly see a demand and need to be able to provide new type of digital services, be it booking, connect that to billing, use the data better. We continue to invest in IT, definitely. I think the trend you've seen is probably a good indication of where we will continue to be. The balance between IT and physical investments will continue to be growing more towards digital investments. Definitely.
CapEx as a % of sales, do you anticipate that moving up further compared to the last 12 months?
We haven't sort of provided certain numbers and estimates. As mentioned, the intangible investments will increase. You can see the trend line for the network and the machinery or the medical equipment investment. Trend-wise, it will continue as it is at the moment and should be taken into account that if you would do the percentage calculation, you obviously have to take into account for the last 12 numbers also the Attendo impact for the full year. Absolute investment will continue to be significant. I would say we're glad somewhat upping the investment driven by IT. If you look at relative to sales, I think it's more stable.
Okay, great. One final one from me. On the new CEO search, is there any update there? What is the expertise and background that you're looking for?
Yeah
with the new candidate?
Yeah. Sorry, I did not have that slide here. I mean, just basically for personnel, had that, so for the spirit of transparency. I think one of the key thing for us in terms of operational structure is really where I think we are quite unique and we continue to be unique, is that we have a, I would say, healthy balance between medical expertise and commercial expertise. The profile for the CEO does not need medical expertise, which I think is very critical. That then allows us to look at individuals who are able to run service businesses, understand the need for digital, and basically has an experience of running a large organization. Now, that process is actually proceeding very well, and I think we can expect to hear some updates on that rather sooner than later.
I think with that, I'm quite pleased that it's progressing quite nicely, and hopefully we'll be able to come with some news quite soon.
Okay. Thank you.
Thank you.
Thank you. Just to remind everyone, if you would like to ask a question, please press zero one. There are no further questions on the telephone lines at this time. Please go ahead, speakers.
Thank you. We have one question from Sami Sarkamies, Nordea. Actually, three questions.
Three, one
through the webcast. Yes, exactly. The first one is that you mentioned softer consumer confidence in your outlook comments. Is this based on your own observations or are you just referring to changes in views by external forecasts?
External. External.
Single-word answer to that. The second one is, can you elaborate on magnitude and growth rate of sales currently taking place through the digital channels or remote appointments?
Yes. Trying to. I would say that the growth rates are astonishingly high. Enormous. The base is very low. Quite typical. If you look at, for example, give you a particular number. In July, I think we did 12,000 chats. Now, 12,000 chats on a digital front sounds like a lot. If you look at an index, that's enormous. We're doubling the business. If you contrast that to the number of physical visits, it's still quite modest. Right now, I would say that the numbers are encouraging. It clearly goes to show that there is demand. It clearly goes to show that it kind of supports the existing infrastructure. The numbers in itself would suggest that you would not want to run digital-only business, or it would be quite modest in our scale.
Fair enough. Third one is, can you still open up reasons for particularly strong private growth in Q2 and elaborate your views regarding the expected growth rate during the remainder of the year?
Well, I would just take one point, which I am particularly pleased about. It comes back into Alex's earlier question on availability. This business is driven by the operational ability to create space, i.e., basically open doctor times. It's a very complex question. It basically means how can we connect supply and demand at any given time and space? How can we allocate that demand to right professional, how do we make sure that people don't do work that they're not basically asked or trained for? There are many types of activity going on. One is the digital front. One is how can we direct more work towards nurses, physiotherapists, so basically take a burden away from the doctors, the physicians. The third point is look at ways on how can we drive development like labs without referrals, things like this.
The combination of those basically means that we can offer a larger availability, which then I think manifests itself in growth rates. Is there an increased demand, per se, on an absolute market? I don't have the data to indicate that, so we can only see that through our own data. I think the key driver for us is the excellent daily work on managing availability.
Yeah. To add on that, it's basically that is the availability and the improvement in there. On top of that, I would also like to add that in our smaller businesses, be it dental, be it well-being, be it digital offering, we also saw a high growth number during the second quarter, although the nominal value, like I said, is considerably smaller versus the whole private business. It had a significant positive impact for the second quarter.
Well-being starts to be significant.
Yeah.
Yep
the Attendo acquisition.
Yes.
Great. Do we have any questions from the room?
Yeah. Iiris Theman from Carnegie. Regarding your public customers, I understand that two full outsourcing agreements are terminating at the end of this year, and also some pilot contracts will end in the second half. Are you able to offset the sales decline coming from these contracts?
Well, point number one, they were budgeted for, i.e., we knew at the time of the acquisition, the lifespan of these contracts. That's point number one. Point number two, there are always certain amount of contracts terminating. You never really know how that will continue. Our judgment is that some of them may terminate completely, that means that the service will end. If you ask this from the citizens, they would definitely not want this to terminate. We're quite confident. These are political decisions. The third point is this business, as I said, some parts will terminate, some parts will grow, I think the key point is, of course, to be very alert on the new things. It could be that complete outsourcing there's less of, there are other types of activity that will offset.
Our aim is, on a more mid to long-term range, is to be able to provide that growth. We're not 100% sure what terminates, what not, but from a paper point of view, there are two large contracts terminating. If you look at the pipeline, potentially, it could be quite significant, of course, none of these tendering processes have actually been announced. We don't know. That's the situation, there may be variation from quarter-on-quarter.
Yeah, to add on that, those freedom of choice trials.
Yeah
I mentioned that those are really immaterial and insignificant in our numbers. Those complete outsourcings, like Yrjö said, those are bigger outsourcings. You should also take into account that those complete outsourcings quite typically include quite significant part of the pass-through invoicing, meaning that the top-line impact is bigger than the impact on the EBITDA.
Yeah
The EBITA, especially if and typically as it converts to some other sort of shapes or formats of the public business.
Okay. Thank you. That's clear. Secondly, given that you have had changes in the board early this year, and also Yrjö will be stepping down, are you going to review your strategy or is that already ongoing?
Well, that's, of course, for the board to look at. It is fair to say that very often when it comes to CEO change, I think they need to coincide. Of course, if you would look at from trying to answer it from my personal point of view, it is quite natural that should I have engaged in strategic work, that means that I would've been around for quite some time. So far, we have a solid strategy. We can continue with this strategy. We've had a board discussion on the spring, I would say it's fair to expect that there's a new CEO will look at and develop the strategy somewhere.
Okay. Thank you.
Thank you.
Thanks, Iiris. Any other questions from the room? I assume not. Thank you.
Thank you.
Thank you.