Earnings Call: Q1 2019

May 2, 2019

Good morning, everyone, and welcome to this conference call where we will present Atendo's results for the 2019. My name is Onur Skarcz. I'm Communication and IR Director at Atendo. Today's presentation is hosted by our CEO, Martin Tobias and our CFO, Fredrik Lagercrans. And after the presentation, we will open up for questions. By that, over to you, Martin. Thank you, Andreas. Let me start by saying that this is a weak quarter where the high opening pace and not at least the situation in Finland pressures our margins. And the margin is far below what you should expect as shareholders long term. Having said that, we do make progress in several areas. We see a continued positive trend in Home Care. Sales in new beds are increasing. We demonstrated strong growth in own operations in Finland, and we have sustained stable occupancy in our mature units. The new feature in the reporting this quarter is that we show numbers for the business areas Finland and Scandinavia separately. We're also providing more color on occupancy and profitability in mature and start up units. The ambition is to make it easier for you to understand and follow our development as well as to value our pipeline and long term potential in a better way. With that, I'll now turn to the presentation, and then Fredrik, our CFO, will take you through the numbers. Next slide, please. We reported strong growth in Q1 as a result of the high number of openings in the past twelve months in Finland and also due to selected M and A activity. Our Scandinavian operations displayed a stable result for the quarter in line with profits previous year. Home Care has continued to show positive developments, while we've lost sales and profits from ended outsourcing contracts. Our Finnish operations showed strong top line growth, while the adjusted profit in Q1 was lower versus last year. Main reasons are pressure from start up units, and not the least, the higher costs related to the action program that we announced in March. With this program, combined with a more balanced opening phase forward and price adjustments to reflect short term requirements, we are confident that we will restore both reputation and profitability in the Finnish market over the coming years. After the Finnish national election in April, the public debate around elderly care has been calming down. Also, focus is shifting from specific private operators towards more overall industry challenges, such as overall public spending on elderly care and a potential increase in national staffing recommendations. During the past years, we more than tripled our opening pace in Finland. Finland is an attractive market, where we can make a lot of difference, But we need to decrease and balance growth rates going forward to secure both quality and profitability. Next slide, please. As I mentioned, we launched an ambitious action program in Finland during the first quarter to further strengthen quality, employee engagement, and customer satisfaction. The program consists of many parts. I'll just briefly mention a few. We've we've taken a number of measures to free up time for nurses and auxiliary nurses. This means more time for instances of care and more time with residents. One key enabler is that we take on more care assistance and provide better support to local managers. On a business area level, we're strengthening the quality and HR functions in order to improve recruitment, training and competence development. The progress of this program will be reported continuously at our Finnish website and to media. Turning to customer satisfaction, we reached a high and improved performance in the national customer survey for people with disabilities made by the Central Organization for Swedish Municipalities. During Q1, we also published a combined quality and sustainability report for 2018. In the report, we present a high and stable outcome on key sustainability parameters. We also highlight some of our projects to improve quality, customer satisfaction, contribution to society and other important sustainability aspects. Next slide, please. Now turning to some key financial and non financial KPIs in the quarter. As I mentioned, we have a solid growth in the quarter, up 7% year on year excluding currency. Growth in Finland was 25% in local currency due to a high number of openings and some acquisitions the past year, while we had a slight net loss of sales from current operations in Scandinavia, mainly as an effect of end of outsourcing contracts and also to some extent closures of individual and family care units last year. Adjusted EBITDA according to old GAAP amounted to DKK160 million corresponding to a margin of 5.6%. Profit was stable in Scandinavia, but lower in Finland for stated reasons. Our leverage is lower compared to last year due to repayment of debt following the divestment of our health care operations in Finland. Quality index was 83% in the quarter and remains that on a high and stable level. In our daily improvement work, our focus are on units with low score or units that have dropped in index rather than looking up for the average score. Target is that all units should be above 80%. We're soon to pass 16,000 beds in all operations. In Q1, we opened additional 400 beds and started the establishment of approximately the same number. Total occupancy in Atendo is slightly above 80%, which is a result of the many units we have under store up, but also an indication of the large value to capture when we get these beds occupied. Next slide, please. As I mentioned, we have now around 16,000 owned beds in operations, an increase by 20% from last year. In Q1, we started construction of 14 new units that will add another four twenty six new beds. These projects are a result of decisions taken in the past twelve months. In total, we have 2,400 beds under construction by end of Q1. This is a slight decline versus previous quarter and 15% lower versus the corresponding level of 2018. As you can see also in the details, compared to a year back, we have decreased opening construction pace in Finland from about 2,100 to about 1,500 units, while we are slightly increasing constructions in Scandinavia. We will continue to establish new nursing homes. But as we have stated before, we have stated before we enter new projects, we will ensure the contractual situation. We need to ensure the operational capabilities to manage its start up, and we're also in general more cautious in our risk assessment. Next slide, please. This chart shows the rolling twelve months opening pace and openings per quarter. The number of open beds rolling twelve months per end Q1 was roughly 2,300 beds, slightly lower versus last quarter, but still higher versus a year ago. The high number of openings have had a clear negative impact on profit and margins in the quarter, but will form the fundament of sales and profit growth in the years to come. The opening pace will gradually go down as we take a more cautious stance on new projects. However, bear in mind that we have lead times of one to two years, both before projects start and in the construction phase, and that lead times usually are longer in Scandinavia than in Finland. As we've indicated, we will add roughly 2,000 beds in 2019 and slightly lower than that in 2020. The majority of openings this year will still be in Finland, while there will be a more equal balance with Scandinavia next year. Next slide, please. This is a new slide and piece of information in our reporting package going forward. The 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. We also excluded MiKKAVA units for comparability. Before Q3 twenty seventeen, we opened roughly as many beds as the number of beds that went into mature state. The recent eighteen months, we have accelerated openings, which means that we have many more units in start up phase. Also, the time to fill new units have been prolonged, as we have previously stated. Also note that the total group margins have also been affected by one offs in 2018 and the low margin Mikova business from Q4 twenty seventeen and onwards. The profitability in the mature business has been rather stable, as you can see at the top chart. It's slightly lower in Q1 due to the higher cost situation in Finland, and this will continue to pressure margins in 2019. Margins will start to recover when the balance between start up and ramp up units improves and when we recover margins in the Finnish operations over the next couple of years. Just to remind you, we stated in the Q4 report that the possibilities to increase margins from the underlying level 2018 are expected to be limited in 2019 and 2020. In addition, there are also the higher cost situation in Finland. Next slide, please. This is also new information in our reporting, where we state information about occupancy in different vintages. As you can see, the occupancy is high and stable in units started in 2016 and earlier, that's the green line. We target most of our projects, new projects, to reach mature occupancy of 90% within eighteen months of operation. The actual average time to reach 90% is best observed by looking at the advantage which is shown in this slide. We normally reach breakeven for a unit when occupancy reached 70%. For twenty seventeen units, that's the red line, the first year of our accelerated pace of openings, the total vintage is likely to take more than two years to reach mature occupancy. There are, however, many individual differences in this vintage. Also bear in mind that the majority of new beds in 2017 opened in the second half. The 2018 units, which is the purple line, have an average been open for about nine months. So far, we see a slightly better development versus 2017. One explanation is that we have more units that are linked to acquisition of local authority units where we can move clients into our newly built homes, thereby ensuring a higher starting occupancy. Units acquired from Nikola, that's a light green line, still have significantly lower occupancy than mature units in Atendo. We will continue our sales offer efforts in these units to ensure a positive trend. Our targeted time for new projects to meet mature occupancy has not changed. We have not yet seen any negative demand situation in Finland after the debate. At Atendo, we have all been more restrictive in March, April to take on new customers to our new nursing homes as we need to be a 100% sure to have all staff secured in beforehand, and this may may affect occupancy in q two. Next slide, please. Acquisitions is a part of our growth strategy, and historically, we've been able to grow around 2% to 3% annually from M and A. During Q1, we made a couple of Home Care acquisitions in Sweden that complements our current structure. The key in Home Care is to have a high customer density in every location to be able to provide the best service and highest efficiency. In Finland, we acquired a couple of private nursing homes and one unit within social psychiatry. The annual sales value from the operation acquired in Q1 amounts to around SEK200 million. In addition, we also made a couple of facility transactions from local authorities in Finland. We also agreed to divest the operation within Social Psychiatry in Norway that we acquired in September 2017. This was a demand from Atendo as we had a legal dispute with the sellers. The previous owners will buy back the business for the same consideration paid by Atendo plus interest. Now it's time for Fredrik to explain the quarterly numbers more in detail. Over to you, Fredrik. Thank you, Martin. Our reported numbers are now based on IFRS 16 unless stated otherwise, and previously reported numbers have been restated. Also, all profit and loss items presented for 2018 refer to continuing operations without the divested healthcare operations in Finland, unless other information provided. So let's turn to the next page. You can see that net sales continued to be strong. Total net sales amounted to SEK 2,900,000,000.0, up by 10% compared to the corresponding quarter last year. Adjusted for currency, net sales increased 7%. Acquisitions contributed with approximately 5%. Organic growth amounted to 1.8% in the quarter, lower than previous quarters. We see continued strong organic growth for our own nursing homes, but this was offset by negative effects in other areas. The quarter was as early announced negatively impacted by ended outsourcing contracts. Net sales is also still negatively affected by the closed units within the Individual and Family Care business. Reported EBITDA amounted to two fifty eight million in the first quarter, in line with reported EBITDA for last year. I will come back with more details on the underlying EBITDA development. Financial net was negative SEK 135,000,000 compared to negative SEK 121,000,000 in the 2018. IFRS 16 related interest expenses increased by SEK 21,000,000, while interest expenses for our borrowing from banks decreased by SEK 7,000,000. The lower bank related interest expenses are explained mainly by lower debt following the repayment we did in January of about SEK 2,000,000,000. Income tax for the quarter was SEK 21,000,000, which equals a tax rate of 24%. The high tax rate is mainly explained by losses in the Danish Home Care business and to some extent of a lower share of remaining business in Finland. Net profit amounted to SEK 66,000,000 in the quarter, which equals an earnings per share after dilution of SEK 0.41. Next slide, please. From January 2019, Atenda is applying the new accounting standard IFRS 16. As Atenda has chosen to apply the full retrospective approach, we also show restated income statement and balance sheets for 2018. On this slide, we show summary effects on the financial statements. On Page 25, in the interim report, you can find IFRS effects on the full income statement and on our website. Quarterly statements for 2018 are available. Both on the balance sheet and on the profit and loss statement, the impact from IFRS 16 is larger this quarter compared to the comparison quarter. This increase correlates closely to the amount of open beds during the last year. As we are in an early phase of many of our leasing contracts, we still see negative effects on earnings per share. This will change over time as we get a more balanced portfolio of contracts. Next slide, please. Based on our new segment reporting, I will now comment a bit more on Atendo Scandinavia and Atendo Finland separately. In Scandinavia, revenue decreased somewhat as acquisition and more sold bets in own homes could not fully compensate for the end of units within primarily Outsourcing and Individual and Family Care. Both reported and adjusted EBITDA was up since we last year did a write down of real estate amounting to SEK20 million. For the largest service offering, Home 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 have a positive trend in Home Care based on increased customer concentration and improved planning and routing. We are actively acquiring smaller companies and exiting areas without the right prerequisite. Denmark continues to be loss making but at stable levels, the largest home care contract in Denmark and in the last quarter of this year. Individual and Family Care increased profits as several loss making journeys have been closed since last year. The improved profit in Home Care and Individual and Family Care were offset by lower profits from our outsourcing hubs. The lower profits are primarily a consequence of the contract that ended late twenty eighteen. In addition to the lost contracts, we also experienced margin pressure in existing and new contracts. This is a trend we think will continue. During the quarter, we have won new but not started contracts with annualized revenue of about SEK 5,000,000 and have not lost any contracts. In the quarter, we had a positive calendar effect from Easter across service offerings. Next slide, please. The growth continues to be high for ATHENTO Finland and amounts to 30% reported and 25% in local currencies. The growth primarily comes from more occupied beds in units opened 2018 and 2019 as well as acquisitions. The special situation in Finland has impacted the quarter with a bit less than SEK50 million in additional costs. Start up losses from units opened in 2018 and 2019 are also impacted negatively, together with some increased overhead costs following the Healthcare divestment. The negative development is partly offset by more occupied beds and the positive calendar effect from Easter timing. Atender will seek price compensation for the increased costs over time. Contracts are normally valid for three to five years. And during the contract time, the price adjustment should normally only be based on index development. We are planning to be very active in upcoming price discussions, but we expect very limited impact in 2019, and the longer term effect will come gradually and is still uncertain. Before we turn to our cash flow development, I'd like to say some comments about the coming quarter. First, you should remember that the last year the second quarter had a charge of 53,000,000 related to the closure of a number of units. Further, we expect positive impacts from units that were started in 2017 and early twenty eighteen. We also expect the positive trend within Home Care Scandinavia to continue. At the same time, we will continue with the higher cost base in Finland. And as Martin said, we are currently more restrictive to take on new customers to our nursing homes. Openings will have a negative year on year effect, and the negative effect on outsourcing we experienced in this quarter will remain. We will also continue to have overhead dis synergies following the divestment of Finland. And finally, we will have a negative Easter related calendar effect. In summary, we believe that the second quarter will be the most challenging on a year on year comparison. Next slide, please. On this page, you can see the complete cash flow statement. The numbers shown for 2018 includes the health care operations in Finland. Free cash flow is a bit lower in the quarter as we have divested cash flow positive health care operations in combination with higher rent payments. The rent payments are reported at IFRS 16 items. In the quarter, we used the proceeds from the divestment to repay external debt corresponding to an amount of about SEK2 billion. Adjusted net debt amounted to SEK 2,600,000,000.0, which equals an adjusted net debt in relation to adjusted EBITDA of SEK 3. With that, I hand back over to you, Mark. Thanks, Verdict. I'd like to make a quick summary before we enter the Q and A session. We have indeed had a challenging quarter where our Finnish operations has been scrutinized in great detail. In this context, it's important to note only a fraction of the 200 external inspections have rendered in serious complaints, showing that we have a healthy operational base in Finland. I'm convinced that after this situation, we're even better equipped to deliver value in Finland for local authorities, customers and shareholders. We have also many positive signs in Q1. We are improving in Home Care. We have stable occupancy in mature units and sales of new beds are increasing. As I mentioned in the last call, operationally, we set up three main focus areas for 02/2019. To maintain high and stable technical quality of care, to achieve the highest customer satisfaction in every location, and to provide more care for money spent than our competitors and local authorities on alternatives. With that, in order to achieve these goals, we started a number of initiatives. The action program in Finland is one important task. Another important initiative for this year is implementation of our mobile planning and documentation from nursing homes. We're also investing in additional resources for competence development, values work, as well as in quality department. All in all, I think we're well equipped to meet future demands for our stakeholders. Thank you for your attention. And with that, I hand back over to Andreas. Thank you, Martin. We'll now open up for questions. And operator, please go ahead. Thank you. Our first question comes from Christopher Lilleberg from Carnegie. Please go ahead. Your line is now open. Yes. Thank you very much. I have some questions related to Page seven and eight in the slides. So first, on Page eight, when it comes to occupancy development. When I see this, I struggle a little bit to understand why the earnings deteriorated in the 2018. I think looking at the at the graph, shouldn't it be the other way around? That's my first question. Yeah. Thank you, Christoph. I'm not sure how you how you can count to that exact comparison. I mean, it seems occupancy levels improved in the second half versus the first half, both for openings in 2018 and openings in 2017. And and nevertheless, I think earnings were, if anything, weaker in the '18 and and than in the first half of of eighteen. And this must have been before you started to see the, of course, extra cost for for, you know, quality related stuff in Finland. Or I I might be missing something. If you if you look at page six, where you see own operations growth base, you can all see that during the 2018, especially in q two, we had a huge amount of openings, the highest number of openings that we've ever had. Even though that the the 2017 vintage was improving in occupancy, we released a huge number of of new beds just before the start of the second half two thousand eighteen, which of course pressures margins. Okay. And that's not reflected in the purple line or It is, but it doesn't show the increased volume on number of belts. And as Martin indicated, our breakeven is often around 70%. And the 2018 stays well below 70% all through this period. So the more bets you have, the more lost they give. Okay. Maybe we should take this discussion afterwards. And Sorry for second question related to this slide with margins. Thank you for releasing that. But the weakening trend for mature business, is that mainly related to Nikkeva? Or is it also due to lower margins in the outsourcing business? Thank you. It's not Nikkeva. As we say, Nikkeva is excluded from the mature lines. So it's other factors. It's a combination of now in the recent period is extra cost we we see in Finland. But then before that, it's it's, outsourcing. It's, IOF. And and if you go back also, you know, problems in Denmark. But then yeah. And then it you know, it's also it becomes a bit technical, but it's a bit hard to you know, you need to decide on a definition of what is a mature unit or not. And and here, during 02/2018, we've used a twelve month definition. But that means that units that are more than twelve months in this graph look like a mature, but if you look at our occupancy lines, they haven't reached necessarily a good margin yet. So they also impact that line a bit negatively. Okay. That's fair enough. But do you think the current around 10, is that the new long term level? Or are there reasons to believe you could get back to 11 plus percent? It's, you know, it's hard to say currently. We we expect this we will have continued pressure in in Finland. So this we believe this to be pressured if you look short and midterm. But then, as we stated, we have high hopes that we can seek price compensation for the increased costs. Thank you. Thank you. Our next question comes from Edward Donahue from One Invest. Please go ahead. Your line is open. Good morning. A couple of questions from my side, if you don't mind. Just on the can you say that's excluded from the mature units. What is the prospect of bringing Mikvekar margins up going forward? What is required and a sort of time line on that is question one. Thank you. Good question. We are when we did the acquisition, according to our acquisition case, the initial plan was to get margins to attend the average level in three years. We have we are at least around one year late in that plan. We did a reassessment of the acquisition case just a quarter ago, and our conclusion was that, we should be able to reach group margins with Mikhailov, but we are, at least a year late. So we we assess that we will take us we will reach group margins around 2022 with Mikvev on on Mikvev. And then just just and excuse my ignorance on Mikvev, where would Mikvev sit on a mature margin profile then? See, I'm taking your group margin and then if I actually relate that, Mikvev, also on your time line of twelve plus months to maturity, let's call it 1824 on that time line, where would the Mikvev mature margin be then? Yeah. We believe that that MICIVA units should be able to reach the same margin or similar margin as other mature units in Otando by 2022. And it's not only occupancy. It's it's several things because Nikola units came in with lower operational efficiency as well and with a higher cost base. So there there is there is a lot more work than just occupancy to bring up Mykiva to good margins. Right. Okay. Thanks for that. Second question. I mean, again, going back to the very useful slide on Slide seven on the mature units. But getting an idea of the phasings of so when would the impact from the lower number of unit openings in the mature margin bottom out? I mean, we looking at the first half twenty twenty, second half twenty twenty? Or do we have to wait to 2021? What I said was that that we have we expect an opening pace of around 2,000 this year this year and slightly lower next year. So if you look at it mathematically, margins would, you know, would would start to lift next year. What we said in in our last quarter report was that we don't expect it'll be challenging to to to get the margin uplift uplift this year and next. And the reason major is for that is that we have a much higher share of openings in Scandinavia next year versus this year. We're going down in opening phase in Finland, but we're going up in Scandinavia. And opening a unit in Scandinavia is more costly than in Finland. We have higher staff density, we have higher staff costs, salary levels, and we have larger facilities with higher facility costs. So it turns that balance a bit. Right. And my last question was just having you've gone through the press release, you were making a commentary with regard to the change of political climate in Sweden, as at least it read like theoretical, beneficiary beneficial for pricing, or at least discussion, but you haven't seen any traction on that front. Why do you think that We're is not mentioning on it. Yeah. Maybe me maybe we didn't we weren't care enough, but we we didn't say anything about expectancy on price in Sweden. What we have seen after the Swedish election is that, number of of left wing influence municipalities has gone down from 94 to 38. So we have much more mid to right, influenced municipalities in Sweden post election. Historically, that that has been positive for privatization, in the municipalities. And currently, we have freedom of choice in 21 municipalities out of close to 300 in Sweden. We have framework agreements in slightly more than that. So so there's around 50 municipalities, in Sweden. Some of them very large though that we can actually establish own operations. And and we believe that there's a good opportunity now during this amount of period that number of municipalities where we can run on operations will increase. That is something that we've said. Then, on Finland is with they just had an election in April. They don't have a government yet even though it's it's likely to be formed within the next in the next couple of weeks. And in in in Finland, we expect we expect a change in national guidelines for staffing requirements post election. That's what it's up. Right. Okay. I apologize for my phrasing, but but you've been used for the price. Yeah. But what you were saying was that you expect the the environment in in Sweden, you know, something on page 11, the political climate, etcetera, etcetera. However, any market any market growth is a direct consequence of the election results is yet to be observed. Is is that just because it's it's too early, or is there some kind of friction with what you'd expect? Okay. So it's just a timing? Absolutely. Okay. Gentlemen, thank you very much. Thank you. Thank you. The next question comes from Victor Fotel from ABG. Your line is now open. Thank you very much. Just a quick question on the recent developments in Finland. If you could somehow quantify the number of inspections on your units compared to the figure we were given in March, please? Is that has something changed there recently looking into April? Yes. Because we I mean, of course, we follow number of inspections on a day by day basis in in Finland, and we had a huge peak in in in March March or, specifically, March that has started to go down. So we had around 200 inspections during this this period. Now if you look at this week's development, we're basically down to the same level as before this, this situation occurred. So we're basically down dive back down to January numbers. So it's in in more normal state. So it has calmed down significantly. Okay. And that and that just to to remind us, that was about 50 inspections on a yearly basis, or how how was that? Yeah. Roughly that. So it's it was very intense during February and specifically March, but now it's not done. So it's flown out. Yeah. Okay. Thank you. And secondly, how is the process ongoing with hopes on being able to be compensated in 2020 for these increased cost requirements? Could you give some more color on what you're currently doing proactively and not just in terms of when the contract ends? Well, we we have good discussions with the municipalities. We have contracts with many municipalities in Finland, and those contracts are and the the contract link is normally two to four years. So they will gradually end up up up until 2022. And so we have contracts up for negotiation already this year, and then they they move on even though the the the bulk of the the agreements ends to the start of 2022. But, of course, we have we have discussions with all the local authorities and municipalities in in Finland on an ongoing basis to prepare them for for price compensation. There is really no reason for a municipality to to raise prices during an agreement period, even though that they understand that that pressure is coming not only from us, but from basically all other private operators as well. So now we have we have very limited opportunities to get price compensation during an agreement. But we are starting price negotiations now for for contracts ending this year. So that that that process is underway. What could happen sorry? Sorry. Would you say that you're more positive as of right now than compared to a month ago in these discussions? I think it's it's a bit too early in the day to say. We'll see the outcome during the the coming months. We've got we we're gonna report that in the next quarter next quarter, you know, if you haven't seen any progress so far. But there is a bit of pressure upwards from all private operators. So we are we are positive and optimistic about being able to recoup margins over the next three years. All right. Fair enough. And just a last one. When you're saying that it will be tough to lift margins in 2020 again, that is still from the levels of the adjusted margins in the year end of 2018. Is that correct? Yes. Yes, is. And then on top of that, we have the, the cost effect of the Finnish situation. Here, we, we added basically 200,000,000 of cost during, in this year. And that is something that we will gradually recoup to price increases over the next couple of years. That's our strategy. Okay. But so that that is more of a a flat margin between 1920 then? Yeah. Okay. Thank you very much. Thank you. The next question comes from Hans Bostrom from Credit Suisse. Please go ahead. Your line is now open. Good morning. A couple of questions, please. So thank you very much for the providing this increased disclosure. You're very welcome. And in that spirit, given the previous questions regarding the phasing of these contracts in Finland, it certainly would be very interesting to understand what is the actual, should we say, phasing of contract renewals in Finland, whether it's particularly well evenly spread or whether it's because of the very strong growth in the last twelve to eighteen months, most of these contracts will indeed only be renegotiated in 2021, 2022. I'd be interested in that. And secondly, I've struggled to marry the overall, occupancy figure, I think, of 81% with the Finnish number of 80 and the Scandinavian of 86, the weighted average of that clearly being in excess of 81. Is that because you've taken out Nikkev altogether and indeed or or are there other factors here? Thank you. You start on the contract phasing. Yeah. On the contract phasing, if you start with us, most of our agreements are written in in the spirit of someone on the line? Do you hear me correctly? Yes. I can. Okay. Good. Most of our our contracts in Finland are written in the spirit of the software reform, the health care reform that was planned in Finland. And that was planned to be fully implemented by 2022. So most of our contracts have an ending period 02/1920 with optional one plus one year, and they can execute. Meaning that if the municipalities choose to to use the optional one plus one year, then most of our contract ends 02/2021, 02/2022. So we're yet to see how these optional years are being are are going to be used by municipalities. But it looks now the majority of our contract ends so that we will have a new con new contract, basically, from 2022 if they're not, choose to not exercise their right for optional years than they can end earlier. So should we understand then that it is their prerogative to actually continue with the same terms in the extension years? Yes. What what could change is that that there is a political pressure in Finland to change the national environment for staffing, where I think all but one party proclaimed that they would they want to see a raise in in national staffing requirements, especially for intensive credit care, meaning twenty four seven, while it might be lower for for light care, which is twelve seven. So and that will come with a price compensation. And they they have ring fenced some funds today, which is debated whether that is enough or not, some €250,000,000 for for Finnish elderly care market. So when we get the government in place, the next couple of months will be very interesting, to see if there will be a change in national, software requirements and what price conversation will that will come from that. So that could that could change the picture a bit going forward, But it's too early to say. Okay. And on the question on occupancy, know, we have almost 3.5 times as many beds in Finland versus Scandinavia. This is calculated only on own management, so when it's on operations. And that's so the weighted average is at 81 something percent, and that's just the consequence on the number of beds are split between the two business areas. We don't talk about occupancy in the same way for outsourced homes because there were other contractual mechanisms with the municipalities. Okay. And, may I go back to the first point? I mean, obviously, this type of situation where you're having to incur all these extra costs for better quality of care and not being automatically compensated almost lacks precedent, and, suddenly, my coverage across Europe. And I just wonder and I go back to the question I think I raised on the March 27 call, how the public sector, the less efficient public sector is supposedly going to cope with this type of, but if if indeed this type of extra hires are replicated across operators without their impact incurring substantial losses. I mean, is this a debating point in Finland or won't you won't we be seeing any type of staff increases in the public sector at all? Yes. It is a it is a debating point, and they're now starting inspect inspection rounds for for public public sector nursing homes as well. So far, it's it's been quite focused on private homes. So we expect to see a similar reaction in in in public sector. And we think that this will continue to to create a great plan for for pilot operators among municipalities. One part being that we already, before this happened, have a cost level around 20% lower than municipalities' own operations. It's not cost level, but the price they are paying us is around 20% lower than than the cost of their own operations. That's one part. So it's a significantly significant value creation for municipalities to buy homes from us and other private operators compared to, running their own units. And, we would need around 5% price compensation to fully recoup the margin pressure from from this cost increase in Finland. Even if we would take take the full full 5% over the next couple of years, it will still make all the sense for municipalities to buy from us rather than run themselves. That's also why municipalities are basically not building any new facilities in Finland as accounting on private operators to do that, while the elderly population is growing. Now, if the inspection turns out that that the municipalities also have to increase costs, that just strengthened the case for private operators in Finland. Okay. I'll jump back in queue. Thank you. Thank you. The next question comes from Johan Bonnevin from DNB Markets. Please go ahead. Your line is open. Yes. Good morning. With all these nice tables you now provide us with the added disclosure and IFRS 16 implementation and so on, sorry if missed I this, but have you done any changes to your financial targets on the base of implementing IFRS 16? We haven't yet. We said that we are going to over the course of this year. We want to allow for a bit more time to to have more more more stability and a bit more history before we provide you with new financial targets. The both reflects IFRS 16 and and our strategy going forward. We would also like to see the effects of the Finnish election. Finland is a big part of our business, and should they change requirements on both starting and pricing in Finland on national level, we want to see we want to see that before before coming out with new financial targets. And now having been in the operation for some time, how do you see the old capital kind of financial target of a net debt to EBITDA below 3.75? Isn't 3.75 quite an aggressive kind of level to look for? Or how do you feel about that? And then also, when you look at the dividend distribution, how do you see that, obviously, with IFRS 16 having huge impact on the net reported numbers? When it comes to leverage, for most recent companies, 3.75 would be aggressive. In this business, however, I don't think it is. We could we we could have more than than this because we have it's a stable, very, very long term business, which is not very capital intense. So I don't I don't think the 3.75 is is aggressive. However, we will come back with with updated targets when we release new financial long term targets by the in the by the end of this year. Excellent. Thank you for the extra color. Thanks. Thank you. The next question is a follow-up question from Christopher Lilleberg from Carnegie. Please go ahead. Your line is now open. I wonder, do you see the other private providers also increasing their staffing levels? And and have you seen this in the public sector as well? The reason I'm I'm asking is that if you look at the national service, attend the quality doesn't appear to be to to be worse than any anyone else. Of course, there was a lot of, political, debate around this with the upcoming software. So it was very politically sensitive. Could it be so that you have, you know, been too quickly committing to those increased staffing levels when the situation seem to have calmed down pretty quickly after the election? I think that's a great question, Christopher. We have we are the only listed company in in Finland or it is of any size. Humana quite recently entered elderly care in in Finland, but but on a very small level. But we have the the second largest operator in Finland, which is Espercare. They they released, actually, we did, comprehensive program with similar a similar package on on the cost increases. We've had discussions with the number three as well, and we know that they are doing doing similar actions taking similar actions. So we are not the only one. I think it's that it's an industry wide thing that everyone has to increase, at least the larger ones. That's also been the ones having the most inspections so far. Public sector, I think we're yet to see because they're actually starting their inspection rounds in public sector now. It seems that they've they're done with this round of of high number of inspections of private operators. We know that the other private the large other private operators, s three and a, Lehman, which is number two and three, they've had as many inspections as we have compared to their sites. And now we know that they're starting the public sector, round. So I think that's yet to see. Well, but do you think the fact that, you know, they are back now at the number of of inspections at historical terms, do you think if this is a result of this of the of the election having been completed, or you think it's the result of due, Esperan, and Mahelin being more active and and committed that there's a need to increase staffing level? I think it's a combination. But, of course, the number of inspections was, to large extent, also driven, extra driven by by the election process as the opposition in Finland, a couple of weeks before the election, basically, demand they they voted for an interpolation of the sitting government and wanted to show the show the get sitting government off due to this situation. And then the the prime minister the sitting prime minister that then actually resigned just weeks before the election, this was before he resigned, he gave €50,000,000 extra to Valvira, which is the inspection organization, for additional inspections this year, which is which is a huge number. So it was really a lot of political pressure to show action given what came out early from from s three. Having said that, while we have been doing inspections on this com competing company, basically, the entire 02/2018, and then they released the the results in in February. So it has been going on for a while. But the extra fuel, I think, was triggered by the by the old election process. And that's, I think, also why it's also partly why it's also calmed down. But bear in mind, they have also inspected half of our units. Focus has been on startups and Nicola units, not on mature because we've had a we've shown a very stable and high quality of mature units for a long time in Finland. And we haven't had any complaints on on mature units so far. While has almost had all their units inspected, and make to a large part and then a large part. Okay. Interesting. And and then your comments here about the margins and potential to get compensated for with with with prices. So are you saying that margin in 2020 will be flat versus 2019? Or should we expect at least some improvement as you will get at least some higher prices in some of the contracts? Thank you. Our ambition is, of course, to be able to improve margins and and recoup, margins through price negotiations. And but it we are a bit in the hands of of many of the larger municipalities dependent on if they're if they're they choose to exercise their option years or not. That's but when it comes to the other factors, that was, you know, why why you said initially back off in connection with the fourth quarter that margins would not improve in in 2019, 2020. Has anything changed there to the better or or to the worse? No. I think that's, that's about the same situation. And it's it's as I said, mainly driven by the higher share of openings in Scandinavia, that cost more in in 2020. Yep. Okay. Thank you very much. On having said that, we do we do have a very strong underlying growth, so we should be able to to demonstrate growth in in net sales and EPS. Okay. Thank you. Thank you. The next question is a follow-up question from Hans Bertrand from Credit Suisse. Please go ahead. Your line is open. Yes. Hello again. A couple of questions further. Could I go back to what you I think you mentioned some restrictions that may be imposed on taking up new residents in Finland. I missed what that referred to. It's not there's no restrictions. But during March and April, we have been cautious in accepting new clients to our nursing homes to to just be a 100% sure that we are well above staffing requirements and all these new new units. As you remember, we we lost the permit to one unit earlier this this spring. It was a newly opened unit. It's only been open for five weeks, where at opening, the municipality chose to close, their own homes and move all the clients directly upon opening. And we haven't been able to recruit enough staff when that happened. Historically, we, you know, we we don't have a traditional say no to municipalities or or yeah. And accepting new clients. And then they're not not historically allowed us a couple of months to to to recruit up staffing, and we had followed that that principle. Now we have an inspection the same Friday as we we accepted all these clients, and we were a few a few employees short at that moment, and that cost us a permit. Even though at at on the Monday after the weekend, we were fully staffed. But then on Friday, they they took the permit. So and that can from for us, that was a a wake up call and say that we need to be absolutely sure that we have all the stuff that is needed before we accept new new residents as we bear 100% of the risk if it comes to inspection. Even though that the municipality, which is our client, says it's okay. It's not okay by the by the inspection authorities. So we have been more cautious in accepting new clients in March and April, and that will that will that will show a bit in the the net sales numb in the net sales bed numbers and the in the occupancy development in in Finland, most likely in in in q two. However, we see no change of demand. We still have a strong demand. We have good relationship with the municipalities in Finland. So and that we we see that as as positive, because that would would have been that would have been a risk otherwise. And, actually, if you talk about, occupancy, a number that really struck me as as, unexpected was the flat occupancy in Finland a year. I mean, is there any other explanation than that the occupancy in the historical units has gone up considerably? The flat occupancy level in in Finland is due to the high opening phase. We opened we have been opening a lot of units during 2018. But I I wouldn't I wouldn't expect it to go down rather than that. Yeah. The 2018 vintage, I think we commented on that. If you if you look at the occupancy curve on 2018 vintage, you can see that it's it's it's a bit better than the 2017 vintage on average. And the then the the 2018 vintage, on average, has only been open for nine months given time of opening during 2018 so far. So I haven't reached the eighteen months yet. But you see it's it's it's a better curve. One reason for that is that we have had a higher share in the 2018 vintage of projects where we have bought municipality old municipality buildings, built a new one, and then moved the clients, meaning that we have this higher starting occupancy when we start than we had in two thousand eighteen seventeen. Sorry. Okay. And finally, there was also a comment about, I believe, net lower margins overall in Swedish outsourcing. Could you elaborate on that, please? Yeah. Outsourcing market, which you only we we have it in in only in Scandinavia, dementia of that is in in Sweden. It's it's a it's a market where you always have a price pressure because every time a contract ends and goes up for for re tendering, there is a new, you know, price pressure on the market. Meaning, what I wanted to say with this is that for new contracts, always comes in with a much lower starting margin. And then we have to work, because we you know, then we inherit stuff and everything. And then, during the five year contract, we work a lot with with operational efficiency, applying the tender model of of running operations in with our IT systems, change local managers, some staff, etcetera, and then we gradually increase margins over the course of the outsourcing contract. And then it's normally at best where we leave it for for re tendering. So and in the in 02/2018, we ended quite a few very large outsourcing contracts that have very good margins, while new contracts coming in are coming in with very thin margins to to start with. Mhmm. That's that's the nature of the the outsourcing, business. So that's also why we say that that to create really strong, you know, better shareholder value going forward, we focus on own operations. That's where we because then we are in control. There is no five year contracts that we can keep them forever and making sure that we can capture the value that we create with our operational model over time. Okay. That's very helpful. Thank you very much. Thank you. Thank you. The next question is also a follow-up question from Edward Donahue from One Invest. Go ahead. Your line is now open. Hi. Thanks for the opportunity. It's just a couple. One staying with Finland, just to get the what's actually happening with regard to wage inflation and the ability to pass that through on existing contracts? I can understand density of employees. That's something that that's up for renegotiation later, but I'd have thought actually a cost inflation uplift would be a pass through. And are you seeing any changes on your expectations on cost inflation, bearing in mind the new desire for greater density of staffing, just actually being able to attract people or those in work expecting more? Excellent question. In our contracts with the municipalities in in Finland as well as in in Scandinavia, we have index clauses that enables us to recoup normal wage inflation and cost inflation. And, historically, we've been able to do that. So but it doesn't take into account staff density. So if we need more staff due to regulatory reasons, which has happened now, we can't recoup that. We can recoup, we can recoup, salary increases and and cost inflation generally, but not staff density, not numbers. That's why it hits, the margins trade off. Right. And just going to your phrasing, normal cost inflation, is the cost inflation in the system at the moment still normal that you're able to recoup that and that there's no spiking taking place where there's maybe a cap element? No. It's it's, very stable. We, we follow we follow, of course, cost per car day in on many different levels, on a month by month basis in all our businesses, and, it's it's very much under control. Right. And then just a couple of other detail ones. It it just with regard to when you were talking about the options on the finished contract, so I missed that. My line broke up. With were you saying that if the option is activated, that the existing terms on the contract continue? Or you have in an that period? Or is it just as an extension? No. Legally, it continues. Right. Of course, we will take the opportunity to debate the price level and start pushing for higher prices anyway. But legally, they have the right to just continue the same contract Right. For the And fully understanding the discussions that are taking place from your side, but within the industry, are there any either anecdotal or precedents being set with regard to contracts coming up for renewal on a phasing basis that actually are seeing price increases going through as expected? We had actually, the first time, it was a very, very small contract. We actually had two ones. We have a very, very small contract. There's only 1% of our operation in Finland. There was two municipalities that came out now. One, have four units and one, we have one unit. But then and then we achieved a a a full price compensation in in those contracts. But it it doesn't have any any effect on the whole so far because it was so small municipalities. But that was sort of the that's the only, you know, first kind of example that we have, but that just recently happened. Okay. Well, that's fine. But that's a 100% success rate there. Yes. I'll leave it on that high note. Thank you, gentlemen. Thank you. You. There appear to be no further questions. I'll return the conference back to the speakers. Okay. Thank you very much. We'll now conclude the conference call. And please don't hesitate to contact us directly if you have any further questions. And well, thank you for your participation.