Earnings Call: Q3 2020

Oct 22, 2020

Good morning, everyone, and welcome to this conference call. We will present Kended's result for the 3rd quarter. My name is Anders Karlsson, Communications and IR Director at Santander. Today's presentation is hosted by our CEO, Martin Trijos and our CFO, Fredrik Larjkens. And after the presentation, we'll open up for questions. Over to you, Martin. Thank you, Andreas, and good morning, everyone. First, some comments on the corona pandemic in the cities right now. After a very challenging spring, number of cases fell sharply during the summer. After 10 weeks with no infections in our nursing homes across Nordics, we now see a few cases again as a general transmission in society shows signs of increasing. Consequently, we maintain high alert and all protective actions to continue to protect our customers and employees. I will now turn to the presentation, and then Fredrik will take you through the numbers in more detail. Next slide, please. In spite of the ongoing pandemic, we delivered a stable result on group level. On market level, we kept delivering on our turnaround plan in Finland while the pandemic continued to pressure our Scandinavian operations. Organic growth was 3% during the quarter, driven by more sold beds and positive price effects in Finland. Sales of new beds in Finland has normalized during the quarter, Combined with a sharp reduction in opening pace and closure of some units with poor prospects, we managed to increase occupancy and deliver solid result given circumstances in our Finnish operations. Our Scandinavian operations have faced a more challenging quarter. Atento has a large exposure to the Stockholm region, the region in the Nordics most affected by COVID-nineteen. The ban on nursing home visits, combined with anxiety about the pandemic, led to lower net sold beds and a slight decline in occupancy for the Scandinavian business area as a whole. The occupancy and margin pressure in Scandinavia was further fueled by many openings past 12 months. Towards the turn of the 3rd quarter, we have seen a stabilization in our occupancy in Scandinavia and somewhat better inflow on new customers since the start of October. Having said that, the situation may change quickly depending on the development of the pandemic. Our current best guess is that we will experience a negative effect of around SEK 20,000,000 per month the remainder of the year related to the corona situation. This is mainly due to lower than expected sales in Sweden, and we based this estimate on a scenario with unchanged occupancy in Scandinavia during Q4, which means no pickup in demand. Next slide please. We reported the top line growth in the quarter of 1% year on year in local currency, which translates to the organic growth of 3%. Reported EBITDA amounted to NOK 269,000,000 corresponding to a margin of 9%. The resulting Q3 numbers includes a negative impact from the pandemic estimated at NOK 40,000,000. Profits in Finland was doubled versus last year, while Scandinavia was down for reasons explained earlier. Quality remains at a high level according to our quality index. In the latest survey of customer satisfaction by the Swedish National Board of Health and Welfare, we increased our average score and 6 attended units reached a customer satisfaction score of 100%. Still, we have a lot of work ahead of us to reach our long term ambition of reaching highest customer satisfaction in every city where we operate. Total occupancy is up 1 percentage point sequentially. I'd like to provide some color on the underlying development. In Finland, net inflow has normalized in Q3 after challenging Q2. As planned, we halted the strong opening pace of new units after Q2 and achieved an improvement in local occupancy rate in Q3 of 2 percentage points versus AMBA Q2. Furthermore, we have continued to strengthen management and quality work at both central and local level in Finland. In Scandinavia, anxiety about corona and increasing number of empty beds in public operations has continued to damper demand in occupancy during Q3, leading to a decline in local occupancy of 1 percentage point versus last quarter. Year over year, however, local occupancy in Scandinavia is down 13 percentage points, an effect of corona related pressure on sales and increase in mortality during the spring, combined with an increased number of openings during the year. Next slide, please. This chart shows the rolling 12 month opening pace and openings per quarter. We're now seeing clear effects of the strategic shift to decreased establishment of new units in Finland that we decided on in Q4 2018. Next quarter, we will have around 200 open beds, equally split between Finland and Scandinavia. And the opening pace going into 2021 is roughly 900 beds, but the majority is in the Scandinavian business area. Next slide please. We increased number of owned beds in operation by 6% from the corresponding period last year. It's a slight decline versus Q2 as we continue to balance our footprint and close more beds than we opened. Most of the residents from the closed units have been transferred to other more modern at hand units. We will continue to selectively close units where we have limited prospects to increase occupancy, mainly in Finland, but you can expect TASO closures going forward to be lower than the numbers we have reported in the past 12 months. In the 3rd quarter, we started construction of 3 Nersgenhongs, adding 140 new belts in Finland. These units will replace all units that local authorities will close down. As you can see, we have reduced the total number of beds under construction by more than 40% since the same period last year. And by the end of Q3, we had 1200 beds under construction, the majority in Scandinavia. Our pipeline in Finland is now only around 300 beds, which is historically low level compared to last year's. Our focus is to fill the units that we established in recent years and continue to deliver improved occupancy in Finland in the coming quarters. Next slide, please. This chart explains group margins in mature and start up units and sales. The downward trend since 2017 is primarily an effect of the aggressive opening pace that started in 2017 in Finland. Early 2019, sharpened staffing requirements were introduced in Finland, increasing cost of operations and further pressured margins. In Q2 and Q3 this year, we also see the impact of the corona pandemic. Excluding the estimated corona impact and real estate gains, as indicated in the dotted line, you see that we are at an inflection point. We should see stabilization and margin improvement going forward. However, given the fact that we're still affected by the pandemic, we expect the recovery to be slightly delayed. The key drivers to regain margins are higher prices, reflecting our new cost base in Finland and to regain occupancy. Prices started to increase in Finland from beginning this year, and we're now entering price negotiations for 2021. Occupancy in Finland will also increase as we sharply reduce opening pace from Q3 combined with regained momentum in sales. So short term, it's mainly Scandinavia that are hampering the occupancy and margin improvement as we experienced lower inflow of customers on the back of the pandemic, fueled by many openings also in the coming 12 months. Next slide, please. So turning to the occupancy development. As you can see on the top green line, the occupancy in mature units has continued to drop in Q3, something very unusual and related to lower sales of beds in Sweden. In spite of corona, we have increased total occupancy with 1 percentage point versus previous quarter, mainly as an effect of good customer inflow at units started up in Finland recent years. Since July, we have had a normalized inflow of residents in Finland. We connect this to the fact that the Vision Japan was lifted during the summer and level of transmission has stayed at low levels in a Nordic perspective. In Sweden, inflow was low during the quarter, but has slightly improved so far in October. With that, we move into the financials for the quarter. Please go ahead, Sverdik. Thank you, Martin. So let's turn to Page 8. Net sales decreased somewhat to NOK 3,000,000,000, down by 1% compared to the corresponding quarter last year. The exit from Norway impacted the comparison with about SEK 100,000,000 and currency also had a negative impact with 1.6%. Organic growth was 3% despite the negative impact on growth from lost revenue due to the corona Netherland Care Nursing Homes and in Home Care. Reported EBITDA amounted to SEK 269,000,000 in the quarter, and I will come back with the details on the underlying EBITDA development. The positive SEK 10,000,000 reported as items affecting comparability is only currency effects on the write down we did in the Q2 this year. Financial net was negative SEK 166,000,000 compared to negative SEK137,000,000 in the Q3 2019. IFRS 16 related interest expenses increased by SEK 18,000,000, while interest expenses for our borrowing from banks increased by SEK 1,000,000. Income tax for the quarter was SEK 19,000,000, which corresponds to tax rate of 23%. Profit for the period amounted to SEK 64,000,000 in the quarter, which equals an earnings per share after dilution of SEK0.40. From this year, we also report adjusted EPS. This is earnings per share adjusted for FX from IFRS 16, acquisition related amortization, items affecting comparability and the corresponding tax effects. The adjusted EPS for the quarter was 0.64 percent down from 0.90 percent last year. Next slide please. The Scandinavian business area is clearly impacted by corona. Net sales for the business area decreased as we have exited Norway and corona's impacted sales. EBITDA decreased from NOK 252,000,000 to NOK 153,000,000. Capital gain on sold real estate contributed positively with SEK 31,000,000 in prior year, while corona impacted negatively with about SEK 45,000,000 this year. Home Care Homes opened in 2019 2020 had a large negative impact on operating profit from start up costs as expected, while underlying profit increased for Home Care. During the quarter, driving tendering processes lost, but yet not exited, contracts with an annualized revenue of SEK 61,000,000. Next slide, please. Growth continues to be high for Atento Finland and amounts to 10% reported and 13% in local currency. The growth primarily counts for more occupied beds in units opened in 2019 2020 as well as price increases and acquisitions. Price increases amounted to around 3%. EBITDA increased from SEK 60,000,000 to SEK 121,000,000 this year. Price increases and improved occupancy among mature units was only partially offset by startup costs from units opened in 2019 2020 as well as high costs in operations. By the end of the quarter, the number of empty beds was lower than 1 year ago. Kronor related increased costs were offset by reduced pension payment. Before we turn slide, I also want to give a few comments on the coming quarters for both Finland and Scandinavia. The corona pandemic will Scandinavia. The corona pandemic will impact the coming quarters, although the magnitude is uncertain. Revenue in Scandinavia will continue to be impacted negatively as we enter the 4th quarter with the lower occupancy. Our best estimate is that the profit effect for lost revenue during the Q4 will be around $20,000,000 per month. We have in Sweden applied for government grants to cover for corona related extra costs. Those applications are sent to every municipality individually who takes them forward to the national government. Timing and to which extent our applications will be covered is currently unclear, but it may impact the Q4. Besides corona, we can anticipate the normal seasonality effect in the 4th quarter. From a seasonality perspective, the Q4 is similar to the Q2 regarding profitability. Also as mentioned before, we will open around 200 beds in the 4th quarter. Next slide, please. On this slide, you can see the complete cash flow statement. Cash flow is always softer in the Q3 related to vacation payments. Adjusted net debt amounted to SEK2.1 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 3.8. We still have substantial unutilized credit lines and no maturities until early 2022. With that, I hand back over to you, Martin. Thank you, Felix. Next slide please. I'd like to make a quick round up before going into the Q and A session. Q3 was a rather stable quarter looking from the group numbers. But below the group numbers, we see that Finland is in a positive trend, while Scandinavia experienced the opposite situation. It remains to be seen when the demand for beds pick up again in Sweden. The long term underlying demand for care has obviously not changed, but still psychological factors matters a lot in the short term. In the meantime, our staff is doing a great job to keep the virus out of our units. We maintain all safety measures from the spring. And with the experiences we have made, we're better equipped to handle potential new cases of infections. From October 1, we once again welcome visits from relatives. We apply the same safety procedures for visitors as we have for our employees to prevent the virus from entering our facilities. Finally, let me once again express my heartfelt thanks to all our incredible employees who made huge contributions in very challenging circumstances. Before going into the Q and A session, I'd like to mention a few words about a much appreciated TV show that was filmed before the pandemic in one of our nursing homes north of Stockholm. The idea was to let a group of 4 year old children from a nearby kindergarten spend time at the nursing home with our residents and work together in daily activities during 6 weeks. Meanwhile, experts measure changes in health status of the participants, both physically and mentally, and the results were striking. After the project, all participants showed clear improvements in health status, cognitive as well as physical strength. And most important, the residents clearly felt improved life satisfaction. Atend already had cooperation with kindergartens at several locations. Based on the evidence from the project, we will intensify the type of interaction and spread the concept to more units where possible. Thank you for your attention and over to you, Andreas. Okay. Thank you, Martin. We'll now open up for questions. Operator, please go ahead. Thank you. We have our first question from Thomas Groff from Deutsche Banken. Please go ahead. Hi, everyone. Thank you for the presentation. I just if you could give some more details regarding you've increased now profit effect from you stated earlier SEK 10,000,000 per month for the remainder of the year and now SEK 20,000,000. Of course, it's regarding the occupancy. So what but can you just say what has changed in your estimates to get to that number? What has happened during the Q3? Thank you. Going into Q2, we saw that when the visitor ban was lifted in Finland, we can see new sales in occupancy coming back to more normalized level already early summer. And we had expected similar situation to happen in Sweden as the pandemic calmed down. That is something that we haven't seen in the Swedish operations. The visitor ban was held throughout the entire quarter and anxiety among customers were still high. Would you like us to move into other liquor homes as a consequence? So what we see is a softer occupancy development than we have expected going into Q3. All right. And could you just also give some details? There are less occupancy due to, of course, less inflow patients, as you said, and also increased number of openings in Sweden. How is the split between that? It's about fifty-fifty. Okay. Fifty-fifty. And also now regarding the government grants, have you got any in Q3 and especially now in Q4, when will they be decided? Can you expect because you sent in everything that is that should be covered from the pandemic. But when would we decide that? It's sort of fragmented in all the process because the government gives grounds to the municipalities and the municipalities as they are sending in their requirements to the state. We are sending in our demand calculations to each and every municipality, where they treat that as part of the entire demand from both private and their own operations in the sector and then sends it further to the government. So it is a fairly slow process. We have very poor insight in the way that is handled on municipality level. So there is we have a lot of uncertainty, both in terms of when money will be paid out and how much of it will be paid out. Our next question comes from Karl Norgen, Danske Bank. Please go ahead. Yes. Good morning, guys. Just a couple of questions. Firstly, if we look at the Scandinavian segment, the lower occupancy rates, how will do you see that developing into 2021? Because I mean that will have a pretty large impact on the profit if you can't if you don't really see that going up, I mean how could you say anything about how it has been changing going now into Q4? And yes, some comment on that would be helpful. Yes. We can see that the occupancy development in is primarily Sweden that we're talking about. It started to stabilize towards the end of Q3. And we've had a somewhat sort of positive development the 1st weeks of October. But it's this has a lot to do with general anxiety in society. It's also dependent on the upcoming development of the pandemic. So it's difficult to forecast occupancy development in the current situation. Yes, yes, of course. But I mean, if you don't see really any a large increase in occupancy, would it be fair to expect that some of this, what do you say, the increased or decreased profits will continue maybe into H1 2021 as well? Yes. The NOK 20,000,000 per month, that is assuming unchanged occupancy level in Sweden. Okay. And also you have around 900 beds under construction in Sweden or Scandinavian in Scandinavia. How do you think this will affect occupancy going forward? And what is like the opening, if you could put it out there like a schedule? Yes. What we said was that we have we expect around 900 total openings next year. We're around 600 in Scandinavia and 300 in Finland. Yes. And how do you think that will impact profitability? Or how when you now see a pretty slow demand, I mean, how will that do you think you can fill up those beds quite quickly? Or how do you view that? Of course, that opening more beds in Scandinavia will this always has a pressure on margins because we have a start up phase during where we fill new units. And pending the pandemic. And of course, that might take longer time pending the development of the pandemic. Yes. Can and also can I just comment just anything on the in price increases and price negotiations in Finland? How is that developing? And when can we when and yes, can you just say anything how that is developing going forward? Or how we should expect that? Yes. Last year, we achieved price increases of around totally 3% of total sales in Finland. We expect around the same but it's actually it's going to be decided in Q4. So we have now very little visibility. So we will report that in the Q4 report, how it's been going. What we saw last year is that it seems like everyone is last year demanded around the same price increases. Everyone is affected similarly for the other staff requirements. The good thing going into this year's negotiation is that now we have the firm law on staff increases over the next couple of years. So it's the prerequisites for negotiations, both from municipalities point of view and our point of view, it's clearer this year than it were last year. Yes. Thank you. That's very helpful. That was all for me. Thanks. Thank you. Our next question comes from we don't have any further questions. Ladies and gentlemen, if you wish to ask a question, please press 1 on the telephone keypad. Thank you for holding until we have our next question. There are no further questions at this time. Dear speaker, please go ahead. We have a follow-up question. Sorry. Okay. Go ahead. We have a question from Mr. Karl Morien, Sociedenk. Sir, please go ahead. Yes. Just a follow-up on the financial aid, which you have applied for. I mean, how much of this can how much of your, what do you say, expected negative impact of corona? Because I mean, the negative impact right now seems to be more kind of demand driven than like cost driven. So can we expect to get any kind of aid for this? Or will that more be in line of supportive gear materials? Or how do you view that one? Thank you, Karl. This is Fredrik. So it's very clear from the government instructions that you cannot you can only get coverage for increased costs, not for lost revenue. But the way the process works is 2 different applications. So first, we applied by the end of August and then there's a second round in by the end of November. In August, we have applied for in total NOK 65,000,000 and that is roughly 2 thirds of our total corona impact for Sweden. Okay. Postified. Yes, that's great. Thanks. Thank We have a question from Patrick Ward. Sir, please go ahead. Hi. Just a quick one. Can you just repeat the number of expected openings in Q4 and the split? It's roughly 200 in Q4, then the split is roughly fifty-fifty. Thank you very much. In Finland, yes. Thank you. There are no further questions at this time. Okay. It's back to you. Okay. Sure. Well, we'll then conclude the conference