Thanks. Right. Good afternoon, everybody. Welcome to this afternoon's session. My name is James Vane-Tempest. I'm Jefferies' European Healthcare Services Analyst. I'm delighted to be here this afternoon with Ville Iho, who's CEO of Terveystalo, for a chit-chat about healthcare in Finland and Sweden. So thanks so much for joining us.
Thanks, James. Happy to be here.
Perhaps if there's some people who are unfamiliar with the business, it could be good to just give an update in terms of where we are in nine months, and what to think about for the rest of the year.
Yes, yeah, thanks. If I start a little bit from the basics, I'm sure there are people who are not familiar with the business model and what Terveystalo is about. So we are in Finland, market leader in resilient, robust, gradually growing and profitable healthcare services market. The business model is mainly fee for service and pricing power that Terveystalo has enables us typically to price in the inflation. So that's a typical topic that we get asked around.
In our model, we run end-to-end outpatient care, and the model enables us to have full control of the care chains, from first contact to whatever is the end stop of the treatment, and with that one, maximize the value for the patients, maximize the value for payer, and also maximize the value for the business. What it also means is that we have been able, with that one, have a ownership of the customer relationship and medical care chain, which again, enables us to put in quite nice digital investment. So digitally, ourselves and of course, Mehiläinen, who is presenting today later, we are the leaders in this space, and that stems from the business model.
Business-wise, of course, those who have been following Terveystalo have seen, we had a little bit difficult outcome from COVID one year ago. Since then, we have been constantly improving our core business. We have a profitability improvement program in place, which is ahead of schedule. We are targeting 12% EBITDA margin in 2025, and we are on track to deliver that one.
Thank you. A lot of healthcare services companies have delivered good top-line growth this year because there's been some price increases. Can you help us think about what the volume, pricing, and mix dynamics are, that we're seeing?
So, if we talk about the core business in Finland, the growth has been roughly 50/50 volume and price. As I said earlier, the business and the volumes are gradually growing, not with the huge percentages, but on top of that one, we are able to use our pricing power and price in new services. And it's not only whenever people think about price increases, it's not only that we are increasing a price for a particular service. We are all the time, with our model, learning how to price in different elements that we, for example, didn't charge previously. So it's not only like increasing prices, it's a really sort of pricing excellence exercise.
Yeah. Obviously, the pricing helping to kind of combat the inflation, but the other question we get a lot from the market is, you know, while obviously you have your corporate base, but there's also some private customers, you know, what's the continued ability for consumers to absorb essentially higher pricing?
Well, that's of course a consideration, but looking back at the history of our model, also Mehiläinen's model, we have been able to basically top the inflation each and every year, let's say 10 years in a row, and that continues to be the case. It's not going to be sort of huge price hikes going forward, but with our versatile customer base, with the market position, I'm sure there are things that we can play with, with the pricing and continue on the same track.
Your business is very diversified. You obviously got the public business, you got the corporate business, and the private business. Can you help give a flavor in terms of where you're most optimistic about the growth between those, and where the different opportunities are in those segments?
Absolutely. So, still the biggest part of our business is corporate business in Finland. So, so that's a, that's a bulk of our core business. Corporate market in Finland is really robust, really stable, partly preventive care is mandated by, by government in Finland, and, and on top of that one, corporate, corporates, they do have great incentives to invest in, in, in the employer's health, and, and there's a long-standing tradition to do so in Finland. So corporate continues to grow gradually, not with huge percentages, but, it's, it's really robust. When we think about consumers, on the other hand, there's two payment models in, in, in play there. Partly it's covered by insurances, which are growing. People are, in a way, hedging their future in, in healthcare in Finland.
Even younger people are getting insurances nowadays because of the strain that the public system is in and how people see the service delivery going forward. Out-of-pocket, this is the final part, and that has been stagnant. So the growth from consumer base comes from the insurance market growing.
So let's talk a little bit about the public business, because I guess we do understand that there's been some financing deficits, you know, across some of the regions which have stalled. So I guess, how confident are you that's gonna come back next year? And I guess, how should we think about the overall kind of results in the portfolio?
Yeah. Yeah, in our revenue pool, public business is roughly 20%, so it's not a sort of a make or break type of a thing for us. But it's. It is a question mark, but it's in our case, and I would say in Finland, it's a positive question mark. We have never been bullish about the public market opening hugely up in Finland. We are there. We are providing services whenever we are able to add value, but we are not banking on that one to grow rapidly during the course of next years. There's a clear opportunity for that one to happen.
If there are some people in the conference who know the history, there was a big promise earlier, 2017, that there would be a so-called Sote reform that would basically double or triple the private market in Finland. Didn't happen. Then there was a total reverse of the direction by the left-wing government. Now, there's again a right-wing government in play, and they are boosting the use of private services. So we have a tailwind when it comes to growing that part of the business. But at the moment, as you pointed out, the healthcare districts do have some financing difficulties, so it's a bit sort of a little bit stalled, but queues are growing. Queues are record high.
They continue to grow, and these public entities, they need to find new solutions, and of course, we are there. And as I said, government will boost that development going forward. But in our planning, we are not banking on that one to double.
I guess there's a balance, right? 'Cause on the one hand, there's the needs and the access for the public contracts, but on the other hand, you know, you're a business, and I guess you're showing good discipline in terms of discontinuing some of those unprofitable contracts. So I guess, where are we in terms of that curve, and secondly, how does that work
Yeah.
locally doing that?
Absolutely. You are referring to outsourcing contracts that we used to run due to the Attendo deal that was done in 2018, right? And, of course, they were stable outsourcing contracts, but, of course, as everybody understands, when you hit the inflation curve, these contracts can be a little bit difficult. And, we saw that one as well happening. What we are doing is we are renegotiating those as we can, but, in a way, reassuring thing is that they will run out anyway. So it's a self-solving dilemma for Terveystalo, and the back end of the contract base is more profitable than the front end.
It has been sliding down already, so it was EUR 100 million, now it's EUR 80 million, going into EUR 60 million in 2025, and sliding down further. We have been able to get some price increases also in those contracts, but it's something that it's an old school model that we are not sort of sponsoring anymore.
Perhaps if we can talk about the portfolio business, and I guess how are segments like dental? We certainly get, you know, some questions from people on more of those kind of outpatient, sort of consumer-focused bits.
Yeah. Yeah. Dental is reorganized to a more independent entity inside our group and for good reasons. Earlier, it was part of rest of the healthcare services delivery, but the synergies did not materialize, so the decision was to, in a way, make it an independent vertical. It has proven to be the right call. The profitability has increased during the course of this year. What we are seeing in dental, which is typical for that segment, is that it's more sensitive to macro because people, in a way, tend to delay whatever issues they do have in their mouth and make that kind of decisions. We saw that also during COVID crisis.
That was always the first thing to react. But the demand is there, and our government will boost that business, starting from next year. They will increase the reimbursement values quite significantly. So, I'm confident that next year, the consumer demand will be more robust than during this year.
Just to make sure I understand, in terms of that dental demand, is it routine? Is it more the expensive kind of procedures? You know, where is it, where you're seeing perhaps some consumer sensitivity at the moment?
Well, it's across the board. I would say it's from whatever simple procedures to more sort of, either it's delay or then just skipping one of the
Yeah.
checks.
Yeah. And I guess with preventative healthcare
Mm.
You know, how are you seeing, you know, the overall demand, you know, given there is a cost of living crisis, you know, both for, you know, individuals and some of the corporates?
In Finnish system, the preventive care is actually thing that is being heavily boosted by government, and it's mandated. So, that continues to develop positively for us. Then, you might be referring to Swedish model, where the preventive care is bulk of the corporate health, and we are also present there, and that's more sensitive.
Yeah.
But that's only 7% of revenue of Terveystalo. And, for the first time in my business career, Swedish macro is worse than Finnish macro, which gives Finns some comfort, but, from business point of view, it's something that we need to keep our eye on.
I guess you mentioned that at least in terms of Sweden, you know, what can you do to diversify that business? 'Cause I know you kind of said at nine month, the business in Sweden wasn't where you'd like it to be.
Yeah. So we went into Sweden, two years back. We are today only, as, as I said, in corporate health, and plan all along has been that we will diversify the portfolio and go into the healthcare, specialist care. Obviously, it's going to require acquisitions, and there has been some really interesting opportunities along the way. But thus far, we have not been able to finalize anything. There's an interesting pipeline, also today that we are seeing some interesting opportunities, and I'm hoping that, sooner than later.
We'll get there. And then, of course, it's going to be a totally different ballgame.
Yeah. I do want to talk a little bit about your digital platform. It is, you know, sector-leading to some extent, and I guess to maintain that leadership, you do need to invest. So I guess, how much more do you need to invest in order to kind of maintain that? And perhaps talk about how it's differentiated and how you can expand it into other territories.
Well, as I said, the basis for digital leadership is in the business model. Because we are taking care of the full care chains, we own the customer relationship. We are in the B2B and B2C, and there's a incentive both for the customers and us to be really, really high level on digital, and there's a customer value on that one. There's value for professionals, and there's value for payers. We continue to invest in digital. Roughly half of the CapEx that we are using is going into digital development, and we have some 130 professionals, digital professionals, working in our own shop, and of course, we use partners as well.
What we need to eye on going forward is, of course, not only to create customer value, but also increase the productivity. The focus will be more on increasing professional productivity because there will be a scarcity of resources and professionals also in Finnish marketplace, and really sort of focus on the right stuff. Digital is such a wide world in a way that you can, of course, invest, and you can do great stuff with our skills, but you need to get the payback as well.
There's a lot of healthcare services markets which maybe don't have the best kind of digital tools, so what scope is there to leverage what you developed in Finland, you know, either into broader Scandinavia or the rest of the world, so in terms of completely monetizing that digital asset that you have?
Well, use of data is something that we master really well. We also in medical software and just being able to develop medical softwares is a asset, and then customer focus, customer-focused tools, and that's something that we can bring into the table. Just as an example, if you start your journey within our services today, the most usual way is just to go through the app. You start the engagement with us.
You start the engagement with the AI tool that basically dictates if you are in a need of acute care or then if it's something that we can take care of, then it guides you if it's a remote that you need, or do you really need a physical, and then sort of a next best option. And then also it's full integration from start to finish. Customer never drops out of the care chain.
We continue engagement with her or him throughout the care chain, and with that one, we can, of course, maximize the value for him or her, maximize the value for the business and maximize the medical value also for the services. So it's really nice end-to-end fully integrated world that we have been able to create.
I guess this is your omni-channel delivery, right? In terms of how
Yeah
you've been wanting to do that. So you get the data, you get the medical expertise, and then the access to the patient. So I guess what are the, I guess, the challenges in terms of developing in that, and I guess, at what point do you think that would be at an optimal position for you?
I would say that the biggest challenge. Well, let's start from what is not a challenge. Finns typically are really digital savvy, so everybody is used to use the digital tools, be it healthcare or whatever service. So, the appetite for that type of solutions is really, really high. What is difficult, what is always difficult, is to change traditions, and we are talking about medical professionals' tradition. If doctors, for example, specialists, if they have treated certain type of care chain for 2,000 years in one way, adding some steps on the way, which would then enable higher productivity with the help of digital tools, it's not an easy task.
Yeah.
So that is the focus area right now for Terveystalo.
Can you talk about your M&A ambitions, and I guess broader capital allocation priorities, and I guess in the current interest rate environment, you know, how do you, how has that changed potentially?
We are actively looking at acquisition opportunities, as I said earlier, in Sweden. So, there we need to diversify the portfolio, and there are some interesting targets that we are looking at. Then, we talked about the digital development. That's going to be the bulk of the more organic investments going forward. When it comes to interest rates, of course, this conference is all about investments, and there are people who know how the valuations have evolved over the last couple of months, and I'm not. We are seeing that one, of course. There's some sort of resetting, but
Okay.
it's a positive for us.
You mentioned in your opening remarks that profitability improvement program has been delivering ahead of expectations.
Mm-hmm.
You know, what are the key building blocks within that, that have done that, and how much further scope is there to do?
This type of a program typically is front-loaded with commercial activities because that's how you get the P&L to react the fastest. And I'm really pleased in the way that the commercial team has been able to not only price in, but really really sort of bring in the pricing discipline and pricing excellence and pricing new services as well. So commercial excellence has been a big driver early on in the program. Then, we have done clear-cut cost cuts, and they are as planned as they should be. It's...
You just do them, and there's always something that you can do to your structure and organization and your service model. Then, the more back-end loaded area is operational efficiency, which is now the key focus for us. So, a little bit changing the service model, really getting more productivity out of the service delivery system and the network, and increase the productivity of our healthcare professionals.
When we look at Q3, it's probably an unfair thing to do, but I guess if you were to look at the improvements that you made with the profitability improvement program and take those out, business obviously declines. You're rolling over from kind of COVID. You know, some of the questions we get is, is all the profit growth coming from this profitability improvement program, or how should we think about the floor core business, kind of excluding that, either when COVID kind of rolls over
Yeah.
or these other dynamics that you're seeing?
Yeah, very, very good question. So you need to of course calculate out the COVID impact. Still, during last year, we had a fairly sizable amount of high, really, really high margin COVID testing included in the numbers. When you clear that one out, the core business and underlying core business has been improving gradually, step by step, from quarter to quarter, and it continues to do so. There's a high confidence inside the team, and I'm fully confident that that's going to continue. We will outperform against the targets in the profitability program.
We are ahead of schedule, but of course, we need to do that one also because, against what we assumed going into the program, of course, for example, inflation has been higher. So, so
Yeah.
there are some new elements that needs to be put on top of the original program. But looking at, if I look at the next year's agenda, it's comfortable to say that we are on track to deliver.
Yeah. So I guess today is 15th of November, so we're exactly halfway through the quarter. Q4 tends to be the most volatile, and I guess in terms of, you know, seasonality, people wanting to use your services. What can you give us a feel of in terms of where we are during the quarter and looking at full- year?
Yes. For the first time in Terveystalo's history, we gave a guidance on the profitability, so EBITDA margin between 9.1%-10.1%. And if, as you said, we are in mid-quarter right now, and if our CFO would be sitting here, he would softly be guiding you to look at the midpoint of the range. And of course, we still have some six, seven weeks to go, but there will not be such a surprise that would totally change our mind on the guidance.
Okay. And you've also given a mid-term guidance, so can you help build the building blocks to see how we can get to more than 5% revenue in terms of the cadence of that, whether that's sort of annual or back-end loaded?
So you are referring to growth?
Yes, yes.
Yeah.
2028.
Yeah, yeah. So, of course, there will be, as I said earlier, a mix on top line. Development has been 50/50 volume and pricing. That continues to be the case. Inflation obviously will ease out as, w ell, at least that's the assumption. The underlying markets will continue to grow. That's going to be one element. Public market will grow. We are not counting on that one to double or triple or anything like that, but it's going to be faster growth than in consumer or B2B market.
And we'll be selective in providing services there so that we can get to both growth targets and also the profitability targets. Then Sweden is a growth market for us, and as said a couple of times already, we are eyeing at some
Yeah.
some targets there.
Mindful of time, just kind of curious, in the discussions you have with the market, where you feel part of your investment case is most misunderstood. I guess there might be people in the audience who are looking for investment ideas, so why should they consider Terveystalo for next year?
Well, as I said, it's a robust business, profitable business, steadily improving in the core. Really high pricing power, no concerns on the inflation, a market leader in its field, digitally savvy company with big, good promises going forward. Maybe the one thing that the people don't understand in the, especially the international investor community, is that our cash flow generation is really, really strong and unstable, and hence, we are able to keep our leverage ratio higher than one would maybe expect from a company. But leverage is not a concern for Terveystalo, even at the current levels.
That's great. With that, I'll close the session. Ville, thanks very much.
Thank you.