Earnings Call: Q1 2018

May 4, 2018

Good morning, everyone, and welcome to this conference call where we will present Atenda's Results for the 2018. My name is Nirskotz. I'm Communications and IR Director at Atenda. Today's presentation is hosted by Atendo's CEO, Petty Karjaran and Atendo's CFO, Fredrik Lavikrams. And after the question and we will open up for questions. Over to you, Petty. Thank you, Andreas. Good morning, everyone, and welcome to the presentation of Atendo's first quarter results for 2018. I will start by presenting the results in brief and by sharing some business and market highlights. Then Fredrik Lagercrantz, our new CFO since March 5, will take you through the numbers in more detail. Next. The first quarter twenty eighteen was a quarter with high growth and a high number of openings and beds under construction. The main part of the growth stems from the acquisition of Mikewa. The high number of construction starts in recent and coming quarters lays a solid foundation for future growth. Net sales amounted to SEK3.2 billion. Growth was 18%, adjusted for currency effects. Operating profit EBITDA amounted to SEK240 million versus SEK279 million last year. Excluding a property write down, operating profit was SEK260 million. The EBITDA margin excluding write down amounted to 8.1%, which is 2.4% points lower than last year. Acquisitions and improvements in planning and processes contributed positively to profits. This was offset by the negative impact on profits from newly opened units, write down of real estate values as well as calendar effects, The close down of Integration Care operations and Home Care in Denmark had a negative impact in relation to comparison quarter. Reported an operating cash flow of 101,000,000 By the end of the first quarter, Atendo reached 13,812 owned beds under operations. At the same time, we maintained a high number of beds under construction amounting to 2,828, all in line with our strategy to grow in own operations. Next slide. Let's take a closer look at our three contract models: own operations, outsourcing and staffing. You can see that the quarter reflects continued growth in own operations. Net sales increased by 30% compared to Q1 twenty seventeen. The increase is explained by acquisitions, new nursing homes and higher occupancy in units that were under start up during the corresponding quarter last year. The largest part of sales growth in Own Operations is derived from the acquisition of Mikeva, which was consolidated into Aptendo in November 2017. The integration work is proceeding according to plan, and we are confident that we will be able to improve profitability to Aptendo level within three years. Upenda opened 19 new owned units in the first quarter with a total of five thirty nine beds, a very high number. One of our key strategic focus areas is to continue to grow our business with own operations. During the first quarter, we started construction of 14 new units that will add five seventy seven new beds in total. Now turning to the other contract models. Net sales in outsourcing operations increased by 3% as a result of currency effects and contractual price adjustments. Looking at the results of tendering processes in Q1, our tender won contracts totaling SEK120 million and lost volumes of SEK40 million. Net sales in the contract model staffing were up 10% as a consequence of currency, new contracts and higher volumes in existing contracts. Next slide, please. Akela now has 13,812 owned beds in operation, an increase by almost 50% from the corresponding period 2017. Out of this, around 2,900 beds come from Miquiva acquisition. The number of beds under construction continued on a high level and amounted to 2,828 at the end of the first quarter. All in all, 70 new units were being built at the end of the first quarter. We expect continued good underlying demand for new capacity, and we have a strong pipeline in both Finland and Sweden. This builds a solid foundation for future organic growth. On the right hand side of the slide, you can see photos of some of our own nursing homes that opened in Q1 twenty eighteen. Next slide, please. Let's then turn to the overall market trends. I already commented that Atento continues to see strong interest in own operations in both Sweden and Finland. Due to demographics, there is an underlying need for nursing home beds, and the public sector needs new solutions to get access to new capacity and replace outdated facilities. At the same time, we expect that the competition in the market will remain high. We have seen that the time to fill new homes has increased. The outsourcing market in Sweden was improving slightly in the first quarter. Volumes were up versus previous quarter versus last year in both care for older people and in care for people with disabilities. The demand for integration care services has essentially dried up. In Finland, demand for staffing has stabilized and showed signs of gradual improvement. During the quarter, the Swedish government presented a bill to the parliament proposing to impose a profit cap on providers of welfare services. If the proposals are implemented, they will have negative impact on freedom of choice and diversity in areas including social care. The proposals have been heavily criticized by the Council on Legislation. They charge the proposals to be in breach with applicable legislation. There is no parliamentary majority behind the proposal. The vote on the bill is expected in June 2018. The overall process to implement the SOTE reform in Finland moves forward. The proposals will be submitted to parliament for debate during the spring, and decision is expected in June or July 2018. Atender remains optimistic about the opportunities that the reform offers for private providers. With that, I hand over to Fredrik for a financial review of the quarter. Thank you, Patti. So turning to Slide six, we can see strong growth in net sales this quarter. Total sales amounted to SEK3.2 billion, up by 20% compared to the corresponding quarter last year. Acquisition contributed with 15.6%, currency 2.7% and the remaining 2% were organic growth. The majority of the growth from acquisitions is a result from the consolidation of Mikiva during the fourth quarter, but also a high number of bolt on acquisitions during 2017. Positively, the organic growth is starting to pick up from the low level in Q4 twenty seventeen. Sales from our new units now exceeds the lost sales from closed units within Integration and Home Care. We expect organic growth to gradually improve during the year. EBITDA, including write down of real estate related to the Integration Care, was SEK240 million and EBITDA excluding the write down was SEK260 million with a margin of 8.1%. Underlying EBITDA is positively impacted by acquisitions and our continued work with planning and processes. But this could not compensate for the profit pressure from the large number of start ups in the quarter. This year's quarter was also affected by the Easter holiday. It should also be remembered that the first quarter twenty seventeen was a very strong comparison quarter due to delay in salary increases in the collective agreement in Sweden. I will summarize some further details on the profit development on the next slide. Financial net was minus SEK34 million compared to the minus SEK17 million in Q1 twenty seventeen. The higher interest expenses are explained both by higher debt and higher interest margins after the Mickiew acquisition, but also to some extent currency effects on interest in euro. Income tax for the quarter was SEK38 million, which equals a tax rate of 22.5%. Net profit for the quarter was SEK129 million, which equals an earnings per share after dilution of SEK0.80. Next slide, please. As I mentioned, the operating profit for the quarter was SEK240 million, SEK39 million lower than last year. Our acquisitions are contributing well to our profit in this quarter and we are pleased to see that our work with planning and processes, including lower administration costs, continues to improve profits and margins. Working with planning and processes are important measures for us to be able to stay competitive also in the future. This quarter, we received good contribution from our units that were in the start up during the first quarter twenty seventeen and have improved their occupancy since then. The record level of new openings that was highlighted during the Q4 presentation is now starting to increase the pressure on profits. This quarter, we have had almost 2,200 beds in start up phase, which shall be compared with approximately 900 beds during the same period last year. This opening pace continues throughout the year and with that also continued profit pressure. Long term, we are confident that there is a need for new nursing homes and that we will be able to fill these homes, but short term it has a negative impact. In addition, it should be highlighted that we're experiencing some longer times to fill the homes in certain locations. The decline in integration care continues and related to the discontinuing of this business, we have been reviewing assets connected to the integration operation. Attendu is an asset light company and owns very few own homes. Some of them have been used to integration care. When the Integration Care started to decline, we initiated a review of whether the real estate could be used as other care units. For some of the real estate, we have now been able to find an alternative operation. We have not been able to find an alternative operation and we have therefore decided to write down this real estate to fair value. This continuing of the Integration Care business continues, but it is important to highlight that at the end of the first quarter twenty eighteen, there are only 100 beds in operations. So the negative impact on this business will be lower going forward. Profit was also affected by the Easter, which partly occurred in the first quarter compared to last year when the holiday occurred entirely in the second quarter. Other items with negative effect on the profit for the quarter were lower sales in the Integration Care and some continued negative effect from the Danish Home Care. However, the impact was less than in the 2017 and the impact is expected to continue to decrease. Going forward, we expect this to be a year with a very high number of openings with following profit pressures. The integration of Mickiewa is continuing and progressing according to plan. However, the profit impact this year will be minor and the acquisition is diluting Atendo's margins. Next slide, please. And then some comments on the cash flow in the quarter. Operating profit for the first quarter amounted to SEK240 million and change in working capital, paid tax and other non cash items had a negative impact of SEK89 million. The negative working capital is mainly explained by paid income tax and timing effects. Net investment in CapEx amounted to SEK50 million, mainly related to fixed assets in the new owned nursing homes. This takes us to an operating cash flow in the quarter of SEK101 million. Interest payments amounted to SEK23 million. As communicated earlier, we now start to free up cash from investments in real estate projects. We still have about SEK500 million invested in these projects and we expect a positive cash flow from these investments also during the second quarter. Cash flow from acquisition amounted to minus SEK108 million and cash flow from financing activities plus SEK49 million. Total cash flow for the quarter amounted to SEK226 million. Net debt amounted to SEK4.8 billion, which equals a net debt to EBITDA of SEK3.9 million. This is slightly above our financial goal and we expect it to gradually decline during 2018. With that, I hand back over to you, Patrik. Thank you, Fredrik. Next slide, please. During the first quarter, we launched our first combined annual quality and sustainability report for 2017. This report replaces our annual quality report that we have been releasing for last six years. The report summarizes the most important progress we have done in the prioritized sustainability areas: development of society, quality and employees as well as initiatives in the areas of human rights, anti corruption and environmental sustainability. Let me shortly mention the highlights from the report. First, by opening more new units than ever before, we managed to increase our contribution to reducing waiting lines to local care. Secondly, Artendo achieved a quality index in 2017 of 85% in our internal quality index, showing that we maintain a very high quality level in our operations. Thirdly, we saw a stable development among our employees with high scores on job satisfaction and satisfaction with the closest manager. This and more you can read about in the report on our web page. During the quarter, one of our local managers got an external recognition. The Pensentan Ilmarinen in Finland named the local manager Werra Boomann Martikainen at the Achenda Pihleja Haraju Nursing Home, the best manager in Eastern Finland. We thank you, Vera. We continue to develop new activities for our customers. During Q1, we arranged a tour for the residents at nursing homes in the Oslo area to watch the iconic 50 country ski race in the Holland Kollen, as you can see in the picture to the left. In Finland, we will follow-up on successful tango concerts. This year, Atenda will arrange a music tour with the entertainer Joel Haulikainen. He will tour around 80 nursing homes across the country. With that, I would like to conclude the presentation. We have presented a quarterly development that follows the long term plan to open more units, to continue to identify new business opportunities and to generate value for our stakeholders. The fast pace of opening new units have a negative impact on profitability short term, but it's also the foundation for long term growth. Our strategy is very clear, to provide new nursing homes to the benefit of people in need of care and to help local authorities reduce waiting lines. We expect to remain a leading developer of new capacity for years to come. Thank you for your attention. Over to you, Andreas. Thank you, Farneshir. We will now open up for questions. Operator, please go ahead. Thank you. Our first question comes from Hans Mela from Nordea Markets. Please go ahead. Yes, good morning. If I should limit myself to one question, I would like to ask about what's the status of the sale of the Finnish Healthcare business? Can you please update us on that? No. Yes, no decisions have been taken. We are evaluating several options. One of them could be a divestment. So our strategy is on operations in care and increased focus on that would be positive. And time wise, when do you know more? Can you guide us? Is it within months or quarters ahead? Yes, we've indicated that we'll do this during the first half of this year. We'll And that is still the valid time line? Exactly. Okay. Very good. Thank you. Thank you. The next question comes from Christoph Lillebrand from Carnegie. Please go ahead. Your line is open. Yes. Hi and good morning. My question relates to the higher cost or the pressure you had on margins. Is it possible to quantify the Easter effect? And also, what I wonder is the start up costs you have or the dilutive impact from start up costs, do you expect that to be more severe in the coming quarters? Or will it remain at the current level? Yes. So this is Frick Lagerchans. Yes, so the Easter this year, you can say that half of the Easter effect came in, in the first quarter since the monthly break was in the middle of the Easter holiday. But we also had some holiday effects in from January on how the holiday holiday days came in there compared to 2017. But you can say that we kind of had half of an Easter effect compared to what we've seen before. And what's that in Swedish krona? Was it like SEK 20,000,000 loss or something, so that would imply around SEK 10,000,000? That's rough. That's in the right magnitude, I would say. Okay. And just to get a better understanding how we should forecast this going forward, if you take the other external or not external, but other factors with migration or closing down migration units and the Danish Home Care, is that a similar type of amount as the Easter effect this quarter? Or is it smaller than that? Yes. This is Perthikarlanes. We expect the integration business impact and Danish Home Care impact to be less negative in the upcoming quarters. And as you know, Kesavar, we are always putting now out in the order of magnitude, so Integration Care and then it shifts below the known operations, the write down calendar effect. Okay. That's good. And then, yes, the second part of the question was the dilutive impact from the high number of start ups coming quarters, if that will be more or similar to what we have seen in Q1? Yes. The openings impacted the profits in Q1, and they will have a negative impact on profits also in coming quarters. However, we will be in better balance with a number of units in start up phase and units that are getting into mature phase. This means that on year on year comparison, it will look better in the 2018. Thank you. Thank you. Our next question is a follow-up question from Hans Miller from Nordea Markets. Please go ahead. Your line is open. Yes. My question is on the number of beds under construction now for the first time in a long, you have a sequential decline. Should we expect that the decline will continue in the coming quarters and that we had a temporary peak in Q4? Or how should we sort of model the pipeline during the course of 2018? Yes. This is in line with our strategy and that we have many beds under construction. The Q1 twenty seventeen was probably all time it was the all time high. We foresee a strong growth in the upcoming quarters as well And the historic level of 500, 900 level, I think we will stay higher than that. But Q4 peak, probably we don't reach that in the near future. Okay. So you won't come back to 2,900 again during 2018. Is that a good understanding of how you answer? There is, of course, fluctuation between the quarters, but basically, no. Very good. Thank you. Thank you. The next question is another follow-up question from Christopher Lugibwe from Carnegie. Please go ahead. Your line is now open. Okay. Since it's only since then, since it's me and Hans, I would actually ask two, if that's okay. First one is the strategy here when it comes to investing in real estate projects, is this something you're going to continue with, I. E, that it will be more neutral for cash flow going forward? Or will we see a big release this year as you do less new investments? And second question for you, Palfrey, expert about the Finnish market. Could you explain a little bit more about the opportunity continue, maybe not the similar pace, but the high pace of new openings and new constructions in Finland and what the competitive situation looks like? Thank you. Okay. This is Rick Larkhausen. I will start with the real estate question. And we started in 2017 to invest in construction phase and we see clear operational benefits because we can be faster to market and have a better control when we kind of build in our own books. But the strategy has all the time been that this will be sold as the project is finished. And that's what we're starting to see now in the first quarter when we get some positive cash flows. And on a net level, I think we predict that we'll see positive cash flows also in the second quarter. But we think that it's an attractive way of getting new units and constructing new units. So we will continue to use our balance sheet when we see opportunities. So I think longer term, we should not expect any larger positive cash flows because we will continue to use this opportunity. But for this year, you expect a positive net effect? Yes. Some metals already had some in the first quarter, and we will get some in the second quarter. But after that, it depends a bit on what opportunities we see also and it's local market conditions if we find the right opportunities and the right plots to start projects on. Okay. Then, yes, and what comes to Finnish market in own operations. We foresee strong underlying demand for new beds in Finland keeping up. And we have persistently focused on own units in Finland for many years. And now we have a strong pipeline, and we are confident of keeping high pace in construction in Finland. And the underlying demand is reflected by old premises in local authorities and the demographic growth, a combination of those both. And it's reasonable to believe that there is a high competitive environment as it has been. But we feel confident that, that tender will reach our long term goals in keeping high pace. Okay. Thank you. Thank you. There appear to be no further questions. I return the conference back to you. Okay. Thank you. And thank you all for your participation. And if you have any further questions, please contact me directly afterwards, and I'll make sure that we answer them. And by that, basically, we wish you all a pleasant weekend. Thank you.