Earnings Call: Q4 2019

Feb 12, 2020

Good morning, everyone, and welcome to the Skopras call, where we will present Atenda's results for the 2019. My name is Anders Koch. I'm a Communications and IR Director at Altsunda. The presentation today is hosted by Ottendo's CEO, Martin Tewis and Ottendo's CFO, Frick Lagerkamp. And after the presentation, we will open up for questions. By that, over to you, Martin. Thank you, Andreas. Earlier this morning, we released the year end report for Atendo. Focusing this call will be on the development during the fourth quarter. We'll also comment on the past year and our focus areas in 2020. I'll now turn to the presentation. Then Fieri Kaugeklaan, our CFO, will take you through the numbers more in detail. Next slide please. To summarize the key messages in this report, we present a stable result in Scandinavia, and we are making progress with the turnaround program in Finland, even though the financial recovery is yet to come. During Q4, we also finalized a new long term credit facility for the group that will allow us to maintain a higher flexibility during a transition period. Having said that, due to the situation in Finland, we are continuing to deliver a result far below what long term should be expected from a company like Atendo. The profit recovery in Atendo Finland will take time and is primarily dependent on our ability in the coming years to reduce number of empty beds and achieve compensation for sharpened staffing requirements in price negotiations. Our Scandinavian operations displayed underlying stable results. We see continued high interest for our own care home projects, and we have several new projects in pipeline for 2020 and 2021. Our outsourcing operations has been very challenging in 2019, but it's now stabilizing, while home care is continuing to develop in a positive way. In Finland, we reported a significant drop in profit versus last year. This is mainly an effect of the high opening pace of new units in combination with the cost increase from shop and staffing requirements. Key quality parameters have been stable in Q4 and we have carried out a number of projects to improve quality and customer satisfaction. Next slide please. We reported a top line growth in the quarter of 7% year on year excluding currency, mainly as a result of the high number of openings in the past twelve months and selected M and A activity. Growth was 12% in Finland and 2% in Scandinavia. Reported EBITDA amounted to DKK 139,000,000 corresponding to a margin of 4.6%. In old GAAP, without IFRS 16, this translates to an EBITDA of DKK 35,000,000. Profit in Scandinavia was slightly higher versus previous year, while Finland reported a significant drop versus last year, for reasons explained earlier. After Q4, we now have more than 16,600 beds in own operations. During the quarter, we opened additional four seventy nine beds. However, number of beds did only increase to roughly 150 beds versus Q3 as we closed down the number of units with limited prospects. Hence, we've been able to keep occupancy at the 80% level, same as in Q3, in spite of the high opening base. Next slide, please. As we have communicated throughout 2019, our turnaround program to restore trust and profitability in our Finnish operations is ongoing. During Q4, we further strengthened governance and management team in Finland, and the new operational organization is now fully implemented. Apart from the new local management team, we have installed 24 new area managers that are supporting our regional directors, such as better operational control. On the unit level, 140 newly appointed team leaders will reduce workload for local managers and assist with local operational development. With these changes, I am confident that we are better equipped to implement the needed changes to improve quality and performance over the coming years. In the aftermath of the new sharpened staffing requirements in 2019, the entire Finnish care sector has been under severe financial pressure. It's now critical for all private providers to get fair compensation for the substantial cost increase. As of today, we have to a large extent completed the negotiations for framework agreements for 2020. These negotiations cover approximately one fourth of the total number of framework agreements, covering around 15 of total net sales. The price of these new framework agreements is on average about 9% higher. Most revenue streams in Finland will however only be index adjusted in 2020. In total, we estimate positive price effects of around 3% for total net sales during 2020. Still, our prices in Finland are significantly lower than public providers' costs from carons. As we have earlier communicated, we are restricted with new products in Finland. We are selectively terminating contracts with poor prospects. In Finland, is now a national law proposal to increase the staff ratio in twenty four hour care at nursing homes from the current 0.5 to 0.7 care workers per resident. The proposed law should take full effect by 04/01/2023 and be gradually implemented starting in August 2020. During this transition period, we will have to motivate current staff raters by individual client assessments according to a set standard. Our view is that this is generally positive that the Finnish state aims to raise the ambition for elderly care. At the same time, it is problematic to only look at staffing ratio as a proxy for quality, as this might hinder investment in digitalization and other innovations to increase quality of care while improving efficiency. It's also important that the reform is fully financed during the transition period and to create more clarity regarding the transition period, something that we will follow closely going forward. Now turning to quality and employees. Next slide please. Throughout 2019, we have initiated a number of projects to improve the operating model of Atendo to enhance customer satisfaction and internal efficiency. Our mobile tool for planning and documenting care instances is an example of our digital agenda that aims to improve safety for customers, saving time for employees, and provide better traceability to local authorities. During the latter part of 2019, we introduced a new good food culinary concept at the Olafembe Nursing Homes in Sweden. The concept involves more locally prepared food and reduced usage of ready made dishes. We also strengthened the central dementia competence team in the fourth quarter, where we are gathering key individuals who have specialist knowledge in the field of dementia and who want to take a more active role in spreading knowledge about dementia to other employees and the families of people with dementia. Next slide, please. As I mentioned earlier, we now have around 16,600 owned that in operation, an increase of 9% from the corresponding period last year. In Q4, we started construction of seven new units that will add roughly 300 new beds. In Natande, Finland, a large part of these are related to social psychiatry and disabled care. In total, we have slightly less than 2,000 beds under construction by the end of Q4, and as you can see in the chart, we are in the process of decreasing our pipeline in Finland, which is now only about half the size a year ago. At the same time, we continue to identify attractive opportunities in Scandinavia. Next slide please. We are taking several actions to improve the occupancy situation. We have sharply reduced the number of new establishments in Finland and we are working to exit some contracts in areas with poor prospects. This chart shows a rolling twelve month opening pace and openings per quarter. As you can see, we opened 57 homes with nineteen fifty beds in 2019. In 2020, we expect to open close to 1,600 beds. Most of the Finnish openings will be in the first half of the year, while openings in Scandinavia are more even spread over the year. In 2021, this number will be down even further as we are adding only a few new projects in Finland. Next slide, please. This chart explains group margins in mature and start up units and sales. Top chart is key to understand the drop in margin, but also the potential of our start ups. The chart displays the profit margin rolling twelve months, stated in old GAAP, for the group in total and for mature units. The downward trend in 2019 relates primarily to the higher cost level and more empty belts in Finland, and to some extent to lower contribution from outsourcing in Scandinavia. In order to turn this trend going forward, we need higher prices and higher occupancy. Prices in Finland will start to increase from Q1 twenty twenty onwards, but we will continue to have more beds until the second half this year. Next slide, please. Now turning to occupancy per vintage. As you can see on the top green line, the occupancy is clearly above 90% level for units started in 2016 and earlier. And as you can see, in the large 2017 and 2018 vintages, we are steadily but slowly increasing occupancy quarter by quarter. The occupancy in the 2019 vintage, predominantly units in Finland, has had a slower start than previous vintages, partly driven by lack of staff for newly opened units as a consequence of the care crisis. The main reason for total occupancy not lifting is that we are still opening more beds than we fill and the high opening pace will continue until mid this year. With that, we move into the financials for the quarter and please go ahead, Frederic. Thank you, Martij. So let's turn to page 10. Net sales continued to be strong and amounted to SEK 3,100,000,000.0, up by 8% compared to the corresponding quarter last year. Adjusted for currency, net sales increased by 6.8%. Acquisitions contributed with 3.2% and organic growth amounted to 3.6% in the quarter, up sequentially from previous quarters. We see continued strong organic growth for our own nursing homes. This was partly offset by negative effects in other areas. The negative effect from ended outsourcing contracts and closed individual and family units is much smaller than in previous quarters. We also still have a negative effect on some exited home care districts. Reported EBITDA amounted to DKK139 million in the quarter and I will come back with details on the underlying EBITDA development. Financial net was negative SEK156 million compared to negative SEK144 million in the 2018. IFRS 16 related interest expenses increased by SEK21 million, while interest expenses for our borrowing from banks decreased by SEK 18,000,000. The lower bank related interest expenses are explained mainly by lower debt following the repayment we did in January 2019. In the quarter, we had a one off cost of SEK8 million related to the refinancing of our bank debt. Income tax for the quarter was positive SEK12 million, which equals a tax rate of 24% for the full year of 2019. Net profit amounted to a loss of 40,000,000 in the quarter, which equals an earnings per share after dilution of negative SEK 0.25. Next slide, please. Overall, our Scandinavian business area is stable with largely the same development as seen earlier in 2019. Strong development for home care, while more demanding for outsourcing. Net sales for the business area increased somewhat as more sold beds in owned homes and acquisitions was partly offset by exited geographical areas in home care and ended units within outsourcing and individual and family care. Please note that profit in the 2018 was negatively affected by SEK60 million in termination and loss provisions. For the larger service offering, owned care homes, operating profit was stable as increased profit in homes opened in 2017 was offset by start up losses in homes opened in 2018 and 2019. We continue to have a positive development for Home Care based on increased customer concentration and improved planning and routing. We are actively acquiring smaller companies and exiting areas without the route prerequisites. Denmark continues to be to be loss making in the fourth quarter, but the largest loss making home care contract in Denmark ended now in the fourth quarter. The improved profits in home care were partly offset by lower profits from our outsourcing hubs. The lower profits are still primarily a consequence of the contracts that have ended since last year, although this effect is smaller this quarter compared to earlier in 2019. During the quarter, we have tendering processes lost, but yet not ended, contracts with an annualized estimated revenue of 44,000,000 kroner. This means we will end the year with a small positive balance between won and lost contracts. In the quarter, had a number of smaller positive items of a more temporary nature, which reportedly resulted in about SEK20 million. About half relates to other income according to IFRS 16 and the other half impact on costs. Next slide please. Growth continues to be high for Atendo Finland and amounts to 16% reported and 12% in local currency. The growth primarily comes from more occupied Western units opened in 2018 and 2019 as well as acquisitions. The new situation with sharper requirements has affected the quarter with about SEK70 million in additional costs, primarily related to increased staffing. In addition, the Christmas and New Year holiday effect was about SEK10 million more negative this year as we are a larger company and staffing requirements have increased. Start up losses from units opened in 2018 and 2019 and more empty beds in general are also impacting negatively together with increased overhead costs following the healthcare divestment. Also see that price development during the year has not been able to compensate for cost increases, with an impact of about 10,000,000 kronor. The negative development is partly offset by more occupied beds. Before we turn to slide, I also want to give a few comments on the coming quarters for both Finland and Scandinavia. First, we should remember that although the high number of inspections in Finland started in the first quarter twenty nineteen, we did not see the full financial effect on the charter of mine. Further, more empty beds in Finland will continue to have negative year on year effects as the high opening pace continues. In addition, as we build a stronger organization, we are increasing the cost base somewhat also in administrative costs. On the other hand, we will have a positive price effect, although not fully the 3% now in the first quarter. The salary negotiation has started and we expect financial impact in the second quarter, but the outcome is still unclear. In Scandinavia, we opened many beds year end 2019 and in the 2020, which really impacts startup costs. Next slide, please. On this slide, you can see the complete cash flow statement. Bear in mind that 2018 cash flow includes the healthcare operations in Finland. Free cash flow was stronger this quarter despite operating profit being down. Cash flow from taxes was positive since preliminary tax payments were returned and had a positive development in working capital. Adjusted net debt amounted to $2,400,000,000 which equals an adjusted net debt to adjusted EBITDA ratio of 3.6. During the quarter, we finalized the new credit facility with the three Nordic banks as earlier communicated. The new facility gives Atendo more headroom regarding leverage covenants for the next two years, which gives us ability to focus on the turnaround program. With that, I hand back over to you, Martin. Thank you, Frederic. To make a short summary of the full year 2019, first, if we look at financials, net sales in 2019 amounted to SEK11.9 billion and a growth of 8.6%. Operating profit amounted to SEK $812,000,000 corresponding to an EBITDA margin of 6.8%. The lower margin versus 2018 is mainly due to three factors: the high opening pace in Finland both 2018 and 2019 and slow occupancy progress in '19 due to the care crisis, higher cost for staff in Finland, and lower contribution from outsourcing in Scandinavia. The board of directors proposes no dividend for 02/2019. This is an exception from the current policy, which is to distribute 30% of net profit. The reason behind the decision is primarily the challenging year in Finland and weak results. As a consequence, our financial ratio, measured as net debt in relation to EBITDA, is higher than it has been historically. Furthermore, consideration has been taken to the fact that we made a refinancing in Q4 twenty nineteen. To sum it up, we have been through a very challenging year in Finland, and we still see the financial consequences in Q4. At the same time, we have had a stable situation in the Scandinavian business area in 2019. Finally, want to say a few words regarding 2020. First of all, our top priority is to manage the turnaround program in Finland, to rebuild trust and confidence for our services and to ensure that we get fair conditions to operate. With the price negotiations for 2020 concluded, we need to ensure a better balance between growth and demand to improve occupancy. We also need to strengthen our efforts in recruitment and ability to develop and keep employees, as well as raise the quality bar in our units. These initiatives will be key to regain reputation and profitability in our Finnish operations in coming years. Further, it's important that we develop and strengthen the long term competitiveness of Atendo. Consequently, we are now updating the Atendo model to ensure that we faster share and spread best practices and implement our digitalization agenda to further improve operational excellence, efficiency, quality and customer experience. When we look ahead, I am confident that we are taking the right steps to strengthen Atendo and to build the platform for future value creation. Many of the actions and initiatives are already up and running and supporting us in our daily operations. Still, we need some more time before we will see the financial effects of these efforts. Thank you for your attention and over to you, Andreas. Yes, sure. We're now canceling the Q and A session, and, please take one question at a time. Operator, please go ahead. Thank you. Our first question is from Carolina Yarlin from Danske Bank. Please go ahead. Your line is open. Hi, good morning. Just a few questions from me, with price increases in Finland. So you say it's unclear on the cost side going into 2020, but do you think that the 3% price increase will cover eventual wage wage cost inflation there? The ongoing salary negotiations in Finland, they are not yet decided. We know that the union has high demands, but we have to wait to the the final outcome, which is likely to come in q two this year. On the 9% increase on on our renegotiated frameworks contract in terms of 20, we say this is necessary first stop. We have many years of price negotiations ahead with us to negotiate in via portfolio. Okay. And on those 9% increase in certain contracts, are you due to that that covers the increased personnel costs that you've seen during 2019 from increased staffing requirements, are you happy about that level? I think we must continue to work with price increases over the years. If you look at margin impact, that is dependent on, of course, cost increases and occupancy improvements going forward. I think you just have to remember that this is, just the first step in a three to four year period of renegotiating contract. Okay. And just one one last question about the, government proposal of 0.7 personnel ratio. If you could give some more perspective on that and perhaps how many more, employees you would need to hire, and if you think that there's enough labor on the market. Yeah. We don't expect the 0.7 new law to have a substantial impact until the law is in fact operational, which is in 2023. So we have a number of years ahead. Until then, we have to make individual assessment of client needs to motivate current staffing index. I think, generally, if you look at the amount of cash that's needed to support 0.7 in 2023, it will be it will will be generally challenging for the entire sector. And we need to make sure that we we are the most attractive employer at that point of time. Okay. Thank you. That was all for now. And our next question is from Christopher Ligeberg from Carnegie. Please go ahead. Your line is open. I also have questions about the prices in Finland. So did you say that you have new contracts now with 25% of your customers in Finland. Is that correct? It's 25% out of framework contracts, and framework contract is about half of the revenue. So in total, it's about 15% of total revenue base. It's about it's a bit more than one quarter of the framework contracts. Okay. And when you don't have a framework contract, what do you have then? We have client rents paid directly to us. In some municipalities, we have a service voucher system. Okay. Okay. Okay. But then you have so it's like but it's like 25% of the contracts, you could say? So 20 or 25% of the belts, more or less? No. Because we have also a service voucher system. Okay. About so that's all around me. Around 50% is framework agreements and around 20% is service vouchers, where we have to raise prices more gradually over a longer period instead of negotiating year by year. Okay. But and then you said so I guess the 9% is is an average. I believe in some of those contracts, you have been more successful and in some contracts, you might have you maybe have not been able to increase prices at all. So could you give that range? And also, how much would you need to increase prices to fully compensate for the higher cost level or the higher staffing level versus a year ago? The first question, we can't answer. I will not not gonna, you know, give you any sort of exact details on on the range of our negotiations. This is negotiations that we continue for the next three years, one of the entire portfolio. But of course of course, it's it's dependent on municipality by municipality and also previous price levels. But we reached an average of 9%. Looking ahead, that's a very difficult question to answer because it's it's gonna be very dependent on on seller negotiations going forward, more confront situation and so forth. So it's very it's it's quite a lot of things that affecting margin recovery rate going forward. But we think that that now this is concluded, the first step. It was a necessary first step, and we have many years of pricing negotiations ahead of us. Okay, Sofra. Any more comments? And our next question is from Karina Engen from Handelsbanken. Please go ahead. Your line is open. Yes. Hello. I have two questions. So one is on exits in Finland. Could you first remind me how many new bets you are going to open in 2020 and and maybe an indication of how many you will exit as as it looks like now? We're planning to open roughly 900 beds in in Finland during 2020, the absolute majority during the first half. When it comes to exits, we don't give any forecast on that because that's individual negotiations on a on a unit by unit basis. So it's very hard to forecast, and it's often long processes where we evaluate a number of different options. In q four, we managed to exit quite a number of bets, but it's it's really up to negotiations on a unit by unit basis. Okay. But you you cannot give an indication if it's if if you are talking about four units or or or, like, eight units or No. It's impossible to forecast Okay. Because in every different case, we evaluate different options, and we we're trying different things. And and to to say beforehand how these negotiations fall out is just very difficult to forecast. Okay. Okay. Then also you you mentioned a positive one off of 10,000,000. Did I understand it correctly for Scandinavia? I would say, in total, Scandinavia has been supported with about 20,000,000 in more temporary effects. But it's you know, then you can argue if you should call it one offs or not. Part of it is that we've been over accrued a bit early during the year. But then about around half of those 20,000,000 are related to IFRS 16. So if you look at the adjusted Sorry. The other half was? Yes. It's 10,000,000. It's related to, you know, different cost items. It's one example is that we have over accrued some personally related expense already in the year, and and we have a different type of smaller items. Okay. So will that have a negative effect in Q1 or more smoothly over 2020? It will not have a negative effect on 2020, but if anything comparisons year over year, you need to be aware of that we've been supported by not by more temporary items in the fourth quarter twenty nineteen. Okay. Okay. Thank you. Our next question is a follow-up from Christopher Lilleberg from Carnegie. Please go ahead. Your line is open. Yes. Thank you. I have some follow ups. First, could you when it comes to the timing of price negotiations for contracts where you haven't done that yet, I think you previously said majority of this is you know, towards 2021 or even 2022. Is is that still the case? Yes. That's still the case. We had, actually, some contracts that, was moved earlier that we thought we were going to negotiate next year that actually came out this year. But the we have a larger part this fall and next fall. Okay. And regarding then the discussion about the the the wage increase discussions or negotiations ongoing, you said that decision will come in the second quarter. So when do they typically kick in? Is that in the third or or fourth quarter? I guess that's also part of the the negotiation. They're valid from April 1, but sometimes the negotiation is not finalized, and then we need to make a an estimate. But they valid and and if it's, so to say, finally negotiated later, there's a retroactive payment to the employees. Okay. Okay. And I understand you can't comment on how much wages will go up. But besides this, what type of price or cost inflation do you expect in 2020 versus the level in Q4? Of course, we understand it wasn't until the second quarter last year that the problems really started. And if it takes the current run rate, would it be a would you have to increase cost? Would you have to increase staffing levels from the current level? Yeah. So, you know, the the the cost inflation in Finland is about 1%. But but I guess your question is more about our run rate. And if you look at the fourth quarter and and that for seasonality, You know, the cost base is a good representation of where Tandem is today. Then, of course, for 2020, it's all dependent on what happens with salary negotiation, what happens with occupancy development and and the new law proposal. But but the the, you know, those are the factors that you need to take into account. There's nothing else. We like to like, we don't expect staffing levels to result. We have now we have the staffing that we need according to the current situation. Yeah. Okay. That's great. And and the turnaround program you talked about, is that has that good cost to do as are there some costs that you think you could remove? I have been a state request. So it doesn't sound like that, but just to make sure. No. It's becoming more of the, you know, normal way of operating now that this is the way that operate from now. Okay. And and I think adjusted for IFRS 16, since overhead costs there's some, maybe 10,000,000 higher than than previous collected. Is that the new one that was, you you talked about higher overhead costs? No. But we have strength in management and governance, and that's as Martin mentioned. And that that comes with some extra cost. And also, if you compare 2019 in total with '18 and earlier, we had some dis synergies after the health care divestment. But the fourth quarter level is, according to current assessment, where we need to be. We don't expect any further major adjustments. Okay. Thank you very much.