Earnings Call: Q1 2019

May 2, 2019

Good morning, everyone, and welcome to this conference call where we'll present Attendo's results for the first quarter of 2019. My name is Andreas Koch. I'm Communication and IR Director at Attendo. Today's presentation is hosted by our CEO, Martin Tivéus, and our CFO, Fredrik Lagercrantz. 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 with a high opening pace and not least the situation in Finland pressures our margins. 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 startup 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. Then Fredrik, our CFO, will take you through the numbers. Next slide, please. We report a strong growth in Q1 as a result of the high number of openings in the past 12 months in Finland and also due to selected M&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 profit 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 startup units and not least the higher costs related to the action program that we announced in March. With this program, combined with a more balanced opening pace forward and price adjustments to reflect shortened 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've more than tripled our opening pace in Finland. Finland is an attractive market where we can make a lot of difference. We need to decrease and balance growth pace 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 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 assistants 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 reach a high and improving performance in the National Customer Survey for people with disabilities made by the Swedish Association of Local Authorities and Regions. 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. 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-over-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 ended outsourcing contracts and also to some extent closures of individual and family care units last year. Adjusted EBITDA according to old GAAP amounted to SEK 160 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 thus 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 for the average score. Target is that all units should be above 80%. We're soon to pass 16,000 beds in own operations. In Q1, we opened additional 400 beds and started establishment of approximately the same number. Total occupancy in Attendo is slightly above 80%, which is a result of the many units we have under startup, 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 own beds in operations, an increase by 20% from last year. In Q1, we started construction of fourteen new units that will add another 426 new beds. These projects are a result of decisions taken in the past twelve months. In total, we had 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 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. As we have stated before we enter new projects, we will ensure the contractual situation. We need to ensure the operational capabilities to manage each start-up, we are also in general more cautious in our risk assessment. Next slide, please. This chart shows the rolling 12 months opening pace and openings per quarter. The number of open beds rolling 12 months for NQ1 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 stand from new projects. Bear in mind that we have lead times of one to two years, both before a project start and in the construction phase, that lead times usually are longer in Scandinavia than in Finland. As we've indicated, we will add roughly 2,000 beds in 2019, slightly lower than that in 2020. The majority of openings this year will still be in Finland, it will be 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, also the potential of our start-ups. The chart displays the profit margin rolling 12 months, stated in old GAAP for the group in total and for mature units. We also excluded Mikeva units for comparability. Before Q3 2017, we opened roughly as many beds as the number of beds that went into mature state. The recent 18 months, we have accelerated openings, which means that we have many more units in start-up phase. The time to fill new units have been prolonged, as we have previously stated. Note that the total group margins have also been affected by one-offs in 2018 and the low margin Mikeva business from Q4 2017 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, 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. We have also the higher cost situation in Finland. Next slide, please. This is 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 new projects to reach mature occupancy of 90% within 18 months of operation. The actual average time to reach 90% is best observed by looking at each vintage, which is shown in this slide. We normally reach break even for a unit when occupancy reaches 70%. For 2017 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 on 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 Mikeva, that's the light green line, still have significantly lower occupancy than mature units in Attendo. 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 Attendo, we are a little bit more restrictive in March, April, to take on new customers to our new nursing homes as we need to be 100% sure to have all staff secured in beforehand. This may affect occupancy in Q2. Next slide, please. Acquisitions is a part of our growth strategy, historically we've been able to grow around 2%-3% annually from M&A. During Q1, we made a couple of home care acquisitions in Sweden that complement 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 SEK 200 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 Attendo as we had a legal dispute with the sellers. The previous owners will buy back the business for the same consideration paid by Attendo plus interest. It's time for Fredrik to explain the quarter numbers more in detail. Over to you, Fredrik. Thank you, Martin. Our reported numbers are now based on IFRS 16, unless stated otherwise, previously reported numbers have been restated. All profit and loss items presented for 2018 refer to continuing operations without the divested healthcare operations in Finland, unless other information provided. Let's turn to the next page. We can see that net sales continue to be strong. Total net sales amounted to SEK 2.9 billion, 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. It's a continued strong organic growth for our own nursing homes, this was offset by negative effects in other areas. The quarter was, as earlier 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 SEK 258 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 million compared to negative SEK 121 million in the first quarter of 2018. IFRS 16-related interest expenses increased by SEK 21 million, while interest expenses for our borrowing from banks decreased by SEK 7 million. The lower bank-related interest expenses are explained mainly by lower debt following the repayment we did in January of about SEK 2 billion. Income tax for the quarter was SEK 21 million, 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 million in the quarter, which equals an earnings per share after dilution of SEK 0.41. Next slide, please. From January 2019, Attendo is applying the new accounting standard IFRS 16. As Attendo has chosen to apply the full retrospective approach, we will also show restated income statement and balance sheet for 2018. On this slide, we show summary effects on the financial statements. On page 25 in the interim report, you can find IFRS' effect 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, this still has the 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 Attendo Scandinavia and Attendo Finland separately. In Scandinavia, revenue decreased somewhat as acquisition and more sold beds in owned homes could not fully compensate for the ended units within primarily outsourcing and individual and family care. Both reported and adjusted EBITDA was up since we last year did a write-down on real estate amounting to SEK 20 million. For the largest service offering, own care homes, operating profit was stable as increased profits in homes opened in 2017 was offset by startup 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 prerequisites. Denmark continues to be loss-making but at stable levels. The largest home care contract in Denmark ends in the last quarter of this year. Individual and family care increased profits as several loss-making units have been closed since last year. The improved profits in home care and individual and family care were offset by lower profits from our outsourcing homes. The lower profits are primarily a consequence of the contract that ended late 2018. In addition to the lost contracts, we also experienced a 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 million and have not lost any contracts. In the quarter, we had a positive calendar effect from Easter across service offers. Next slide, please. The growth continues to be high for Attendo 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 SEK 50 million in additional costs. Startup 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 part offset by more occupied beds and the positive calendar effect from Easter timing. Attendo will seek price compensation for the increased cost over time. Contracts are normally valid for 3-5 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, we should remember that the last year in the second quarter had a charge of SEK 53 million related to the closure of a number of units. Further, we expect positive impact from units that were started in 2017 and early 2018. We also expect the positive trend within home care in Scandinavia to continue. At the same time, we will continue with the high cost base in Finland, and as Martin said, we are currently more restrictive to take on new customers to our nursing homes. Opening will have a negative year-on-year effect, and the negative effect on outsourcing our experience in this quarter will remain. We will also continue to have overhead synergies following the divestment in 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 showed for 2018 includes the healthcare operations in Finland. Free cash flow is a bit lower in the quarter as we have divested the cash flow positive healthcare operations in combination with higher rent payments. The rent payments are reported as IFRS 16 items. In the quarter, we used the proceeds from the divestment to repay external debt corresponding to an amount of about SEK 2 billion. Adjusted net debt amounted to SEK 2.6 billion, which equals an adjusted net debt in relation to adjusted EBITDA of 3.0. With that, I hand back over to you, Martin. Thanks, Ulf Lundahl. I'd like to make a quick summary before we enter the Q&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 and new beds are increasing. As I mentioned the last call, operationally, we set up three main focus areas for 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. 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 the implementation of our mobile planning and documentation for nursing homes. We're also investing in additional resources for competency 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. With that, I hand back over to you, Andreas Koch. Thank you, Martin Tivéus. We'll now open up for question, and operator, please go ahead. Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero followed by the one on your telephone keypad. Once again, to register for a question, it's zero followed by the one on your telephone keypad. There will be a brief pause while questions are being registered. Thank you. Our first question comes from Christoffer Ljungberg from Carnegie. Please, your line is now open. Yeah. Thank you very much. I have some question related to page seven and eight in the slides. 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 second half of 2018. I think looking at the graph, shouldn't it be the other way around? That's my first question. Yeah. Thank you, Christoffer. I'm not sure how you come to that exact conclusion. I mean, it seems occupancy levels improved in the second half versus the first half, both for openings in 2018 and openings in 2017. Nevertheless, I think earnings were, if anything, weaker in the second half of 2018 than in the first half of 2018. This must have been before you started to see the, of course, extra cost for quality-related stuff in Finland. Or am I missing something? If you look at page six where you see all operations growth base, you can also see that during the first half of 2018, especially in Q2, we had a huge amount of openings, the highest number of openings that we've ever had. The 2017 vintage was improving in occupancy. We released a huge number of new beds just before the start of the second half 2018, which of course pressures margins. Okay. That's not reflected in the purple line? It is, but it doesn't show. Volume increased volume of number of beds. As Martin indicated, our break even is often around 70%. The 2018 stays well below 70% all through this period. The more beds you have, the more loss again. Okay. Maybe we should take this discussion afterwards. Sure Sorry for that. Second question related to this slide with margins. Thank you for releasing that. The weakening trend for mature business, is that mainly related to Mikeva, or is it also due to lower margins in the outsourcing business? Thank you. It's not Mikeva. As we say, Mikeva is excluded from the mature line. It's other factors. It's a combination of, now in the recent period, it's the extra cost we see in Finland. Before that, it's outsourcing, it's IOF, and if you go back also, problems in Denmark. It becomes a bit technical, but you need to decide on a definition of what is a mature unit or not. Here during 2018, we've used a 12-month definition. That means that units that are more than 12 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. They also impact that line a bit negatively. Okay, that's fair enough. 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%? It's hard to say currently. We will have continued pressure in Finland. We believe this to be pressured if you look short and midterm. 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 Mikeva. You say that's excluded from the mature units. What is the prospect of bringing Mikeva margins up going forward? What is required and a sort of timeline on that, is question one. Thank you. Good question. When we did the acquisition, according to our acquisition case, the initial plan was to get margins to Attendo average level, in three years. 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 Mikeva, but we are at least a year late. We assert that we will reach group margins around 2022 on Mikeva. Excuse my ignorance on Mikeva a bit. Where would Mikeva sit on a mature margin profile then? If I am taking your group margin, if I actually relate that Mikeva also on your timeline of 12-plus months to- Yeah maturity, what's called 18/24 on that timeline, where would the Mikeva mature margin be then? We believe that Mikeva units should be able to reach the same margin or similar margin as other mature units in Attendo by 2022. It's not only occupancy, it's several things. Because Mikeva units came in with lower operational efficiency as well, with a higher cost base. There is a lot more work than just occupancy to bring up Mikeva to good margins. Right. Okay. Thanks for that. Second question. Again, going back to the very useful slide, it was slide seven on the mature units. Getting an idea of the phasings. When would the impact from the lower number of unit openings in the mature margin bottom out? Are we looking at the first half 2020, second half 2020, or do we have to wait to 2021? What I said was that we expect an opening pace of around 2,000 this year and slightly lower next year. If you look at it mathematically, margins would start to lift next year. What we said in Last quarter report was that it will be challenging to get the margin uplift this year and next. The main reason 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 base in Finland, but we're going up in Scandinavia. 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. It turns that balance a bit. Right. My last question was just something. We've gone through the press release. You were making the commentary with regard to the change of political climate in Sweden, at least it read like theoretical beneficial for pricing, or at least discussion. You haven't seen any traction on that front. Why do you think that is the case? Maybe we weren't clear enough, but we didn't say anything about expectancy on price in Sweden. What we have seen after the Swedish election is that number of left-wing influenced municipalities has gone down from 94 to 38. We have much more mid to right influenced municipalities in Sweden post-election. Historically, that has been positive for privatization in the municipalities. 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. It's around 50 municipalities in Sweden, some of them very large, though, that we can actually establish own operations. We believe that there is a good opportunity now during this managed period that number of municipalities where we can run own operations will increase. That is something that we have said. On Finland is they just had an election in April. They don't have a government yet, even though it's likely to be formed within the next couple of weeks. In Finland, we expect a change in national guidelines for staffing requirements post-election. That's what I said. Right. Okay. I apologize for my phrasing. price. Yeah. What you were saying was that you expect the environment in Sweden, also on page 11, political climate, et cetera. However, any market growth as a direct consequence of the election results is yet to be observed. Is that just because it's too early, or is there some kind of friction? It's a bit too early. from what you'd expect? Okay, it's just the timing. Absolutely. Yeah. Okay. Gentlemen, thank you very much. Thank you. Thank you. The next question comes from Viktor Forssell from ABG. Please go ahead. 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. Has something changed there recently looking into April? Yes. Of course, we follow number of inspections on a day-by-day basis in Finland, and we had a huge peak in March, specifically March. That has started to go down. We had around 200 inspections during this period. Now if you look at this week's development, we're basically down to the same level as before this situation occurred. We're basically back down to January numbers. It's in more normal state. It has calmed down significantly. Okay. Just to remind us, that was about 50 inspections on a yearly basis, or how was that? Yeah, roughly that. Okay. It was very intense during February and specifically March, but now it has gone down. It is slow now. Yeah. Okay. Thank you. Secondly, how is the process ongoing with the hopes on being able to be compensated in 2020 for these increased cost requirements? Could you give some more color on what you are currently doing proactively and not just in terms of when the contract ends? Well, we have good discussions with the municipalities. We have contracts with many municipalities in Finland, and the contract length is normally two to four years. They will gradually end up until 2022. We have contracts up for renegotiation already this year, and then they move on even though the bulk of the agreements ends to the start of 2022. But of course we have discussions with all the local authorities and municipalities in Finland on an ongoing basis to prepare them for price compensation. There is really no reason for a municipality 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. Now we have very limited opportunities to get price compensation during an agreement. We are starting price negotiations now for contracts ending this year. That process is underway. What could happen. Would you say that you're. 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 a bit too early in the day to say. We'll see the outcome during the coming months. We're going to report that in the next quarter, if we have seen any progress so far. There is a pressure upwards from all private operators. We are positive and optimistic about being able to recoup margins over the next three years. Just the 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, it is. On top of that, we have the cost effect of the Finnish situation. Here we are basically SEK 200 million of costs during this year. That is something that we will gradually recoup through price increases over the next couple of years. That's our strategy. Okay. That is more of a flat margin between 2019 and 2020 then? Yeah. Okay. Thank you very much. Thank you. The next question comes from Hans Boström from Credit Suisse. Please go ahead. Line is now open. Good morning. A couple of questions, please. Thank you very much for providing this increased disclosure. It's very welcome. 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 evenly spread or whether it's because of the very strong growth in the last 12 to 18 months, most of these contracts will indeed only be renegotiated in 2021/2022. I'd be interested in that. 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 for that clearly being in excess of 81. Is that because you've taken out Mikeva altogether and indeed or are there other factors here? Thank you. You start on the contract phasing. Yeah. On the contract phasing, if you start with that. Most of our agreements are written in the spirit Someone on the line. Do you hear me correctly? Yes, I can. Okay, good. Most of our contracts in Finland are written in the spirit of the SOTE reform, the healthcare reform that was planned in Finland, and that was planned to be fully implemented by 2022. Most of our contracts have an ending period 2019 and 2020 with optional one plus one year that they can execute, meaning that if the municipalities choose to use the optional one plus one year, then most of our contracts ends 2021, 2022. We are yet to see how these optional years are going to be used by municipalities. It looks now the majority of our contract ends, so that we will have a new contract basically from 2022. If they choose to not exercise their rights to optional years, they can end earlier. Should we understand that it is their prerogative to actually continue with the same terms in the extension years? Yes. Okay. What could change is that there is a political pressure in Finland to change the national requirement for staffing. Where I think all but one party have proclaimed that they want to see a raise in national staffing requirements, especially for intensive care, meaning 24/7 while it might be lower for light care, which is 12/7. That will come with a price compensation. And they have some funds today, which is debated whether that is enough or not. Some EUR 250 million for Finnish elderly care market. 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 staff requirements and what price compensation that will come from that. That could change the picture a bit going forward, but it's too early to say. On the question on occupancy, we have almost three and a half times as many beds in Finland versus Scandinavia. Because this is calculated only on management, so when it's own operations. The weighted average is that 31 point something%, and that's the consequence of 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 we have other contractual mechanisms with the municipalities. May I go back to the first point, M? 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 is almost lacks precedent, certainly my coverage across Europe. I go back to the question I think I raised on the 27th of March call, how the less efficient public sector is supposedly going to cope with this type of If indeed this type of extra hires are replicated across operators without their, in fact, incurring substantial losses. Is this a debating point in Finland or won't we be seeing any type of staff increases in the public sector at all? Yes, it is a debating point, and they are now starting inspection rounds for public sector nursing homes as well. Far, it's been quite focused to private homes. We expect to see a similar reaction in public sector. We think that this will continue to create a great plan for private operators among municipalities. One part being that we already, before this happened, have a cost level around 20% lower than municipalities' own operations. Not cost level, but the price they are paying us is around 20% lower than the cost of their own operations. That's one part. It's a significant value creation for municipalities to buy homes from us and other private operators compared to running their own units. We would need around 5% price compensation to fully recoup the margin pressure from this cost increase in Finland. Even if we would take the 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 is also why municipalities are basically not building any new facilities in Finland. That is accounting on private operators to do that while the elderly population is growing. Now, if the inspection turns out that the municipalities also have to increase costs, that just strengthen the case for private operators in Finland. Okay. I will jump back in queue. Thank you. Thank you. The next question comes from Johan Bonnevie 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 on IFRS 16 implementation and so on. Sorry if I have missed this, but have you done any changes to your financial targets on the base of implementing IFRS 16? We haven't yet. We said we are going to over the course of this year. We want to allow for a bit more time to have more stability and a bit more history before we provide you with new financial targets that both reflect IFRS 16 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. Should they change requirements on both staffing and pricing in Finland on national level, we want to see that before coming out with new financial targets. 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? When you look at the dividend distribution, how do you see that, obviously, with IFRS 16 having a huge impact on the net reported numbers? When it comes to leverage, for most listed companies, 3.75 would be aggressive. In this business, however, I don't think it is. We could have more than this because it's a stable, very long-term business, which is not very capital-intense. I don't think 3.75 is aggressive. However, we will come back with updated targets when we release new financial long-term targets by the end of this year. Excellent. Thank you for the extra color. Thanks. Jim? Thank you. As another reminder, to register for a question, please press the zero followed by the one on your telephone keypad. The next question is a follow-up question from Christoffer Ljungberg from Carnegie. Please go ahead. Your line is now open. I wonder, do you see the other private providers also increasing their staffing levels? Have you seen this in the public sector as well? The reason I'm asking is that if you look at the national service, Attendo quality doesn't appear to be worse than anyone else. Of course, there was a lot of political debate around this with the upcoming SOTE reform, so it was very politically sensitive. Could it be so that you have been too quickly committing to those increased staffing levels when the situation now seemed to have calmed down pretty quickly after the election? I think that's a great question, Christoffer. We are the only listed company in Finland, at least of any size. Humana quite recently entered elderly care in Finland, but on a very small level. The second largest operator in Finland, which is Esperi Care, they released, actually before we did, a comprehensive program with a similar package on the cost increases. We've had discussions with the number three as well. We know that they're taking similar actions. We are not the only one. I think 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're done with this round of high-number inspections of private operators. We know that the large other private operators, Esperi and Mehiläinen, which is number two and three, they've had as many inspections as we have compared to their size. Now we know that they're starting the public sector round. I think that's yet to see. Do you think the fact that they are back now at the number of inspections at historical terms, do you think if this is a result of the election having been completed, or you think it's the result of you, Esperi, and Mehiläinen being more active and committed that there's a need to increase staffing level? I think it's a combination, of course, the number of inspections was to a large extent also extra driven by the election process as the opposition in Finland, a couple of weeks before the election, they voted for an interpellation of the sitting government and wanted to throw the sitting government off due to this situation. The sitting prime minister, that then actually resigned just weeks before the election. This was before he resigned, he gave EUR 50 million extra to Valvira, which is the inspection organization for additional inspections this year, which is a huge number. It was really a lot of political pressure to show action given what came out early from Esperi. Having said that, Valvira has been doing inspections on this competing company, basically the entire 2018. They released the results in February. It has been going on for a while. The extra fuel, I think, was triggered by the whole election process. That's I think also partly why it's also calmed down. Bear in mind, they have also inspected half of our units. Focus has been on startups and Nikkilä units. Not on mature because we've shown a very stable and high quality of mature units for a long time in Finland. We haven't had any complaints on mature units so far. While Esperi has almost had all their units inspected, and Mehiläinen a large part. Okay. Interesting. Your comments here about margins and potential to get compensated with prices. 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 recoup margin through price negotiations. We are a bit in the hands of many of the larger municipalities, dependent on if they choose to exercise their option years or not. When it comes to the other factors that was why you said initially back in connection with the fourth quarter that margins would not improve in 2019, 2020. Has anything changed there to the better or to the worse? No, I think that's about the same situation. As I said, mainly driven by the higher share of openings in Scandinavia that cost more in 2020. Yeah. Okay. Thank you very much. On having said that, we do have a very strong underlying growth, so we should be able to demonstrate growth in net sales and EPS. Okay. Thank you. Thank you. The next question is a follow-up question from Hans-Erik Bergstrom from Credit Suisse. Please go ahead. Your line is open. Yes. Hello again. A couple of questions, Tage. Could I go back to I think you mentioned some restrictions that may be imposed on taking up new residents in Finland. I missed what that referred to. There is no restrictions. During March and April, we have been cautious in accepting new clients to our nursing homes to just be 100% sure that we are well above staffing requirements in all these new units. As you remember, we lost a permit to one unit earlier this spring. It was a newly opened unit. It has 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. We had not been able to recruit enough staff when that happened. Historically, we do not have a traditional say no to municipalities in accepting new clients. They historically allowed us a couple of months to recruit up staffing. We had followed that principle. Now we have an inspection the same Friday as we accepted all these clients. We were a few employees short at that moment, and that cost us a permit. Even though on the Monday after the weekend we were fully staffed, on Friday they took the permit. That for us was a wake-up call and say that we need to be absolutely sure that we have all the staff that is needed before we accept new residents as we bear 100% of the risk if it comes to an inspection. Even though that the municipality, which is our client says it is okay, it is not okay by the inspection authorities. We have been more cautious in accepting new clients in March and April, and that will show a bit in the net sales bed numbers in the occupancy development in Finland most likely in Q2. However, we see no change of demand. We still have a strong demand. We have good relationship with the municipalities in Finland. We see that as positive, because that would have been a risk otherwise. Since you talk about occupancy, a number that really struck me as unexpected was the flat occupancy in Finland year. Is there any other explanation than that the occupancy in the historical units has gone up considerably? The flat occupancy level in Finland is due to the high opening. We've been opening a lot of units during 2018. I would have expected it to go down rather than up. Yeah. The 2018 vintage, I think we commented on that. If you look at the occupancy curve on 2018 vintage you can see that it's a bit better than the 2017 vintage on average. The 2018 vintage on average has only been open for nine months given time of opening during 2018 so far. Haven't reached the 18 month yet. You see 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 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 2017, sorry. Okay. Finally, there was also a comment about, I believe, lower margins overall in Swedish outsourcing. Could you elaborate on that, please? Yeah. Outsourcing market, we have it only in Scandinavia. The main share of that is in Sweden. It's a market where you always have the price pressure, because every time a contract ends and goes up for retendering, there is a new price pressure on the market. Meaning, what I want to say with this is that for new contracts, always comes in with a much lower starting margin. We have to work, because then we inherit staff and everything, and then during the five-year contract, we work a lot with operational efficiency, applying the Attendo model of running operations in with our IT systems, change local managers, some staff, et cetera. We gradually increase margins over the course of the outsourcing contract. It's normally at best when we leave it for retendering. In 2018, we ended quite a few very large outsourcing contracts that had very good margins, while new contracts coming in are coming in with very thin margins to start with. That's the nature of the outsourcing business. That's also why we say that to create really strong, better shareholder value going forward, we focus on operations. 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. 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's up for renegotiation later, but I'd have thought actually a cost inflation uplift would be a pass-through. 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? Yeah. Excellent question. In our contracts with the municipalities in Finland as well as in Scandinavia, we have index clauses that enables us to recoup normal wage inflation and cost inflation. Historically, we've been able to do that. It doesn't take into account staff density. If we need more staff due to regulatory reasons, which has happened now, we can't recoup that. We can recoup salary increases and cost inflation generally, but not staff density, not number of staff. That's why it hits the margins straight off. Right. 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 very stable. We follow, of course, cost per care day on many different levels, on the month-by-month basis in all our businesses. It's very much under control. Right. Then just a couple of other detailed ones. Just with regard to when you were talking about the options on the Finnish contracts, sorry I missed that, my line broke up, but were you saying that if the option is activated, that the existing terms on the contract continue? Or you have Yes an opportunity in that period, or is it just as an extension? No. Legally, it continues. Right. Okay. Of course, we'll take the opportunity to debate the price level and start pushing for higher prices anyway. Legally, they have the right to just continue the same contract. Right with the option. 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? Actually, the first one, but it was a very, very small contract. We actually had two ones. They were very, very small contracts. It was only 1% of our operation in Finland. Those two municipalities that came out now, one we have four units and one we have one unit. Then we achieved a full price compensation in those contracts. It doesn't have any effect on the whole so far because they were so small municipalities. That's the only first kind of example that we have. It has just recently happened. Okay. Well, that's fine. That's 100% success rate then. Yes. I'll leave it on that high note. Thank you, gentlemen. Thank you. Thank 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. Please don't hesitate to contact us directly if you have any further questions. Well, thank you for your participation.