Good morning, everyone, welcome to this conference call. We will present Attendo Results for the Fourth Quarter of 2019. My name is Andreas Koch. I'm Communication and IR Director at Attendo. The presentation today is hosted by Attendo CEO, Martin Tivéus, and Attendo CFO, Fredrik Lagercrantz. After the presentation, we'll open up for questions. By that, we will do Martin.
Thank you, Andreas. Earlier this morning, we released the year-end report for Attendo. Focus in 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 it to the presentation, then Fredrik Lagercrantz, 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 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 Attendo. The profit recovery in Attendo 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 result. 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 report 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 sharpened staffing requirements. Key quality parameters have been stable in Q4. 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 12 months and selected M&A activity. Growth was 12% in Finland and 2% in Scandinavia. Reported EBITDA amounted to SEK 139 million, corresponding to a margin of 4.6%. In old GAAP, without IFRS 16, this translates to an EBITDA of SEK 35 million. 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 479 beds. However, the number of beds it only increased to roughly 150 beds versus Q3, as we closed down a number of units with limited prospects. Hence, we've been able to keep occupancy at 80% level, same as in Q3, in spite of the high opening pace. 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 to achieve better operational control.
On a unit level, 140 newly appointed team leaders will reduce workload for local managers and assist with local operational development. With these changes, I'm 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 effect of around 3% for total net sales during 2020. Still, our prices in Finland are significantly lower than public providers' costs for own care homes. As we have already communicated, we are restricted with new projects in Finland. We are selectively terminating contracts with poor prospects. In Finland, there is now a national law proposal to increase the staff ratio in 24-hour care at nursing homes from the current 0.5- 0.7 care workers per resident. The proposed law should take full effect by April 1st, 2023, and be gradually implemented starting in August 2020. During this transition period, we will have to motivate current staff ratios 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 KPIs. Next slide, please. Throughout 2019, we have initiated a number of projects to improve the operating model of Attendo 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 our employees, and provide better traceability to local authorities.
During the latter part of 2019, we introduced a new Good Food culinary concept at all Attendo 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. We were 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 own beds 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 Attendo 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. 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're 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 12-month opening pace and openings per quarter. As you can see, we opened 57 homes with 1,950 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 evenly spread over the year. In 2021, this number will be down even further as we're adding only a few new projects in Finland. Next slide, please. This chart explains group margins in mature and startup units and sales. Top chart is key to understand the drop in margin, but also the potential of our startups. The chart displays the profit margin rolling 12 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 beds 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 2020 onwards, where we will continue to add 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 2016 and earlier. 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. Please go ahead, Fredrik.
Thank you, Martin. Let's turn to page 10. Net sales continued to be strong and amounted to SEK 3.1 billion, 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 only partly offset by negative effects in other areas. The negative effect from ended outsourcing contracts and closed individual and family care units is much smaller than in previous quarters. We also still have a negative effect from some exited home care districts. Reported EBITDA amounted to SEK 139 million in the quarter, I will come back with details on the underlying EBITDA development.
Financial net was SEK -156 million compared to SEK -144 million in the fourth quarter of 2018. IFRS 16-related interest expenses increased by SEK 21 million, while interest expenses for our borrowing from banks decreased by SEK 18 million. 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 SEK 8 million related to the refinancing of our bank debt. Income tax for the quarter was SEK +12 million, which equals a tax rate of 24% for the full year of 2019. Net profit amounted to a loss of SEK 40 million in the quarter, which equals an earning per share after dilution of SEK -0.75. Next slide, please. Overall, our Scandinavian business area is stable, which is largely the same development that we have 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 own 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 fourth quarter of 2018 was negatively affected by SEK 60 million in termination and loss provisions. For the largest service option, own care homes, operating profit was stable as increased profits 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 right prerequisites.
Denmark continues 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 part offset by lower profits from our outsourcing homes. The lower profits are still primarily a consequence of the contract that have ended since last year, although this effect is smaller this quarter compared to earlier in 2019. During the quarter, we have in tendering processes lost, but yet not ended, contracts with an annualized estimated revenue of SEK 44 million. This means we will end the year with a small positive balance between won and lost contracts. In the quarter, we had a number of smaller positive items of a more temporary nature, which supported the result at about SEK 20 million. About half relates to other income according to IFRS 16. The other half impacting costs.
Next slide, please. Growth continues to be high for Attendo Finland and amounts to 16% reported and 12% in local currency. The growth primarily comes from more occupied beds in units opened in 2018 and 2019, as well as acquisitions. The new situation with sharper requirements has affected the quarter with about SEK 70 million in additional costs, primarily related to increased staffing. In addition, the Christmas and New Year holiday effect was about SEK 10 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. We also see that price development during the year has not been able to compensate for cost increases with an impact of about SEK 10 million.
The negative development is partly offset by more occupied beds. We also want to give a few comments on the coming quarter for both Finland and Scandinavia. We should remember that although the high number of inspections in Finland started in the first quarter of 2019, we did not see the full financial effect on the sharper requirement. More empty beds in Finland will continue to have negative year-on-year effects as the high opening pace continues. As we build a stronger organization, we are increasing the cost base somewhat, also in administrative costs. 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 open many beds year-end 2019 and in the first quarter of 2020, which really impacts start-up 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 is 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 SEK 2.4 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 3.6. During the quarter, we finalized the new credit facility with three Nordic banks, as earlier communicated. The new facility gives Attendo 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, Fredrik. To make a short summary of the full year 2019. First, if we look at financials, net sales in 2019 amounted to SEK 11.9 billion and a growth of 8.6%. Operating profit amounted to SEK 812 million, 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 2019 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 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. Consideration has been taken to the fact that we made a refinancing in Q4 2019. To sum it up, we've 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. I want to say a few words regarding 2020. 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 the coming years. It's important that we develop and strengthen the long-term competitiveness of Attendo. Consequently, we're now updating the Attendo 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'm confident that we are taking the right steps to strengthen Attendo and to build a platform for future value creation. Many of the actions and initiatives are already up and running and supporting us in our daily operations. We need some more time before we will see the financial effects of these efforts.
Thank you for your attention. Over to you, Andreas.
Yes, sure. We are now entering the Q&A session. Please take one question at a time. Operator, please go ahead.
Thank you. If you would like to ask a question, please press zero one on your telephone keypad. If you wish to withdraw a question, you may do so by pressing zero two to cancel. It's zero one if you would like to ask a question. Our first question is from Carolina Elvind of Danske Bank. Please go ahead, your line is open.
Hi, good morning. Just a few questions from me, starting with the price increases in Finland. 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 cost inflation there?
The ongoing salary negotiations in Finland are not yet decided. We know that the union has high demands, but we have to wait for the final outcome, which is likely to come in Q2 this year. On the 9% increase on our renegotiated framework contract in 2020, we see this as a necessary first step. We have many years of price negotiations ahead of us to negotiate the entire portfolio.
Okay. On those 9% increase in certain contracts, do you feel 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 have to remember, this is just the first step in a three to four-year period of renegotiating contracts.
Okay. Just 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 is 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. We have a number of years ahead. Until then, we have to make individual assessments of client needs to motivate current staffing ratio. I think generally, if you look at the amount of care staff needed to support 0.7 in 2023, it will be generally challenging for the entire sector. We need to make sure that we are the most attractive employer at that point in time.
Okay. Thank you. That was all for now.
Our next question is from Kristofer Liljeberg from Carnegie. Please go ahead, your line is open.
Yeah, I also have questions about the prices in Finland. Did you say that you have new contracts now with 25% of your customers in Finland? Was that correct?
It's 25% out of framework contracts, a framework contract is about half of the revenue. In total, it's about 15% of total revenue base. It's a bit more than one quarter of the framework contracts.
Okay. 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. It's like 25% of the contracts, you could say, or 25% of the beds, more or less.
No, because we have also a service voucher system.
Okay.
Of all types of the revenue, 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. You said, I guess the 9% is an average. I believe in some of those contracts you have been more successful, and in some contracts you maybe have not been able to increase prices at all. Could you give that range? 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 answer. We're not going to give any sort of exact details on the range of negotiations. These are negotiations that will continue for the next three years, done of the entire portfolio. Of course, it's dependent on municipality by municipality and also previous price levels. We reach an average of 9%. Looking ahead, that's a very difficult question to answer because it's going to be very dependent on salary negotiations going forward, market situation, and so forth. It's quite a lot of things that affecting margin recovery rate going forward. We think that now this is concluded, the first step, which is necessary first step, and we have many years of price negotiations ahead of us. Kristofer, any more comments?
Our next question is from Carina Åkerström from Handelsbanken. Please go ahead. Your line is open.
Yes. Hello. I have two questions. One is on exits in Finland. Could you first remind me how many new beds you are going to open in 2020 and maybe an indication of how many you will exit as it looks like now?
We're planning to open roughly 900 beds 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 unit- by- unit basis. It's very hard to forecast, and it's often long processes where we evaluate a number of different options. In Q4, we managed to exit quite a number of beds, it's really up to negotiations on a unit- by- unit basis.
Okay. You cannot give an indication if you are talking about four units or eight units or?
No, it's impossible to forecast-
Okay
because in every different case, we evaluate different options and we find different things. To say beforehand how these negotiations fall out is just very difficult to forecast.
Okay. Also you mentioned a positive one-off of SEK 10 million. Did I understand it correctly for Scandinavia?
I would say in total, Scandinavia has been supported with about SEK 20 million in more temporary effects. You can argue if you should call it one-off or not. Part of it is that we've been over-accrued a bit earlier during the year. About around half of those SEK 20 millions are related to IFRS 16. If you look at-
Yeah. Sorry, the other half was?
It's about SEK 10 million. It's related to different cost items. One example is that we have over-accrued some personally related expense earlier in the year. It's different type of smaller items.
Okay. Will that have a negative effect in Q1 or more smoothly over 2020?
It will not have a negative effect on 2020. When you make comparisons year-over-year, you need to be aware of that we've been supported by more temporary items in the fourth quarter 2019.
Okay. Thank you.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. Our next question is a follow-up from Kristofer Liljeberg from Carnegie. Please go ahead. Your line is open.
Yes. Thank you. Some follow-ups. First, 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 towards 2021 or even 2022. Is that still the case?
Yes, that's still the case. We have actually some contracts that was moved earlier that we thought we were going to negotiate next year that actually came out this year. We have a larger part this fall or next fall.
Okay. Regarding the wage increase discussions or negotiations ongoing, you said that decision will come in the second quarter. When do they typically kick in? Is that in the third or fourth quarter? I guess that's also part of the negotiation.
They're valid from first of April, but sometimes the negotiation is not finalized and then we need to make an estimate. To say, finally negotiated later, there's a retroactive payment to the employees.
Okay. I understand you can't comment on how much wages will go up. 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. If you take the current run rate, would you have to increase staffing levels from the current level?
Yeah. Generally, the cost inflation in Finland is about 1%. I guess your question is more about our run rate. If you look at the fourth quarter and adjust that for seasonality, the cost base is a good representation of where Attendo is today. Of course, for 2020, it's all dependent on what happens with salary negotiation, what happens with occupancy development, and the new law proposal. Those are the factors that you need to take into account. There's nothing else.
Like we don't expect staffing levels to raise. Now we have the staffing that we need according to the current situation.
Yeah. Okay, that's great. The turnaround program you talked about, has that been costed? Are there some costs that you think you could remove, administrative costs? It doesn't sound like that, but just to make sure.
No.
It's becoming more of the normal way of operating now, that this is the way we have to operate from now.
Okay. I think adjusting for IFRS 16 overhead costs, there's maybe SEK 10 million higher than previous quarter. Is that a new run rate? You talked about higher overhead costs.
No, we have strength in the management and governance, as Martin mentioned, and that comes with some extra cost. Also if you compare 2019 in total with 2018 and early, we had some dis-synergies after the Finnish healthcare divestment. 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.