Earnings Call: Q3 2017

Nov 9, 2017

Good morning, everyone, and welcome to this conference call, where we will present Atendo's Results for the 2017. My name is Andreas Kotz. I'm Head of Communication and IR at Atendo. Today's presentation is hosted by Henrik Borreles, Atendo's CEO and Atendo's acting CFO, Rebecca Eriksandberg. After the presentation, we will open up for questions. By that, over to you, Henrik. Thank you, Andreas. Good morning, everyone, and welcome to the presentation of Atendo's third quarter results for 2017. I will start by presenting the results in brief and by sharing some business and market highlights. Then Rebecca Erickson Birk, our acting CFO, will take you through the numbers in more detail. Next slide, please. The third quarter twenty seventeen was a quarter with stable growth and a record number of openings and beds under construction. The record high number of construction starts lays a solid foundation for future growth. Net sales amounted to SEK2.7 billion. Growth was 7% adjusted for currency effects. Operating profit amounted to SEK337 million, which was $3,000,000 lower than Q3 last year. The EBITDA margin amounted to 12.3%, 0.9 percentage points lower versus last year. Improvements in Planning and Processes and Acquisitions contributed positively to profits. However, the result was negatively affected by sharply reduced demand for Integration Care as well as by weakened results in Home Care Services, mainly related to Denmark. In addition, the number of newly opened beds in the quarter within our own operations was more than 3x as high as Q3 'sixteen and highest number ever in Atendo, which had a negative impact on profit. Atendo reported an operating cash flow of SEK73 million lower than last year. By the end of the third quarter, Atendo reached more than 10,000 owned beds under operations for the first time. At the same time, we also had a record high number of beds under construction, amounting to 2,757, all in line with our strategy to grow in owned operations. Next slide, please. Let's look at our three contract models: own operations, outsourcing and staffing. You can see that the quarter reflects continued stable growth in our own operations. Net sales increased by 8%. The increase is explained by new care homes and higher occupancy in units that were under start up during the corresponding quarter of last year as well as by acquisitions. In Integration Care, lower occupancy and discontinuation of units had a negative impact on sales. Atendo opened 21 new owned units in the third quarter with a total of around seven twenty beds, a record high number. One of our key strategic focus areas is to continue to grow our business within owned operations. During the third quarter, we started the construction of 28 new units that will add eleven ninety two new beds in total. The total number of beds under construction reached 2,757 by the end of the quarter. Atendo has been successful in identifying demand for new beds and rapidly translating this into construction starts. In May, Atendo acquired the leading Finnish care company, Mykiva. In late October, Atendo obtained approval from the Finnish competition authorities to complete the acquisition. As of the November 1, Mykiva is part of Atendo and consolidated into the financial reports. With the acquisition of Mykiva, Atando is strengthening the expertise in social psychiatry and widening the presence in care for older people in Northern And Western Finland. Mickova had sales of €101,000,000 for the full year 2016 and two thousand eight hundred belts in operation. Now turning to the other contract models. Net sales in Outsourcing operations increased by 7% as a result of us starting two outsourcing combination contracts earlier this year, Solkava and Sussme in Finland. Looking at the results of tendering processes in Q3, a tender won contracts totaling SEK15 million and lost volumes of SEK25 million. Net sales in the contract model, Staffing, were down 4%, a result of ended contracts and lower sales in existing contracts. Next slide, please. Atendo now has 10,378 owned beds in operation, an increase of 15% from the corresponding period 2016. In addition, we will add more than 2,800 beds through the consolidation of Mykiva. The number of beds under construction was 2,757 at the end of the third quarter, which is the highest number achieved so far. All in all, 71 new units were being built at the end of Q3. This is a consequence of our dedicated work to get new projects started, our relations with local authorities and favorable market conditions. We expect continued good underlying demand for new capacity, and we have a strong pipeline in both Finland and Sweden. This is a solid foundation for future growth, even though this high activity level is not likely to remain over time. On the right hand side of the slide, you can see photos of some of our own nursing homes that opened in the 2017. The picture at the top shows the new nursing home, Atendo Kankarunkuisto in Kogola in Southern Finland. This is a combined nursing home and service house built around the lifestyle concept outdoor and garden. The opening took place in late August. Kovala's City Council and civil servants were present, and the new nursing home was warmly welcomed to Kovala region's service production. The interior designs as well as the nice garden were admired by the participants. The highlight of the event was a performance by Kogola's Male Singers Choir. Next slide, please. Let's turn to the overall market trends. I already commented that Atendo continues to see strong interest in own operations in both Sweden and Finland. 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 and that the time taken to fill new homes will increase going forward. The outsourcing market in Sweden remains challenging, and the level of competition is high. Tender volumes remained low in the third quarter and were significantly lower than the corresponding period in 2016. Demand may have been affected by the new permit requirements for private providers, which have created new uncertainties for local authorities wanting to outsource operations. The reduced number of refugees coming to Sweden has decreased the need for integration care services. The Swedish government has announced that it will put forward profit limitation proposals that, if implemented, would limit diversity and reduce quality in health care and social care. This, in spite of sharp criticism from both authorities and experts, a proposal will be presented in November, which will be submitted to parliament in March 2018. There is no parliamentary majority behind the proposal. In Finland, higher activity in the outsourcing market can be expected short term due to delays in the software reform. The overall process to implement the software reform in Finland moves forward. The Finnish government recently proposed some changes in the reform, mainly related to the implementation of freedom of choice in Primary Care. The government has decided that the first Active Care choices in Primary Care will be implemented in 2021. A similar Care choice will be held for Dental Care centers the following year. In other respects, the structure will remain. Citizens will be able to choose their health center. There will be customer vouchers and personal vouchers based on individual needs. More details of the reform will be presented during the autumn. The proposals will be submitted to the constitutional committee and to the parliament for debate and decision in the spring. Atendo remains optimistic about the opportunities that the reform offers for private providers. With that, I hand over to Rebecca for a financial review of the quarter. Thank you, Henrik. So looking at Slide number six. We see that the net sales in the quarter were SEK 2,700,000,000.0, up by 7% compared to last year. Adjusted for currency, the growth was 6.6% and acquisitions contributed 3.6%. Our growth in the quarter is mainly driven by new units, both in owned and outsourced. Owned units were up 7.9% and we could see that the net effect from outsourcing units was positive in the quarter. Organic growth accounted for 3% and will gradually increase as we open more units. Acquisitions also had a positive contribution to sales of 3.6%, a result from our increased focus on M and A. The weak developments in the integration and home care business had a negative impact on the year on year comparison in sales. Our operating profit in the quarter was SEK377 million, which is SEK3 million below last year. Improvements in planning and processes and acquisitions had a positive impact on the profit, but could not fully compensate for the rapidly reduced demand for integration services and the weak result in the Home Care business, particularly in Denmark. In addition, openings impacted the profit negatively. I will get back to some more details on the profit development on the next slide. Financial net was minus SEK21 million and income tax was minus SEK61 million, which equals a tax rate of 21.5%. Net profit for the quarter was SEK223 million, which equals an EPS after dilution of SEK1.39 in line with prior year. Next slide, please. As you have seen, the operating profit for the quarter was down 3,000,000 compared to last year. We are pleased to see that our dedicated work with improvements in planning and processes, including lower administration costs, continued to contribute positively to the results. The work with better processes and less administration are important for securing future profit growth. We can also see that our M and A strategy contributed well to our profit, together with the improved occupancy in the new units that were on the start up in Q3 last year. As we have communicated before, the demand for Integration Care has declined during the year. This accelerated during the third quarter, which resulted in a negative impact on profits. The actions to reduce the negative impact from declining demand are to close down units that are no longer needed and convert some of the units into other care services. This will also affect profits negatively during the 2017. Home Care continued to be challenging, which affected profits negatively during the quarter, especially in our Danish Home Care unit. We expect this to continue during the fourth quarter as well. Our actions are to close down subscale home care units and to focus on areas with high customer density and healthy conditions. In addition, we also have a large number of openings this quarter that pressures the results. The number of opened units that we have had this quarter is on a record level, and we expect the opening rate to remain very high. And hence, the profit impact will continue into the next quarter and the 2018. Long term, this is positive for our profit growth, but short term, it has a negative impact. Going into Q4, you should also bear in mind the consolidation of Mykeva from the November 1. Mykiva will increase our sales, but the profit impact in the fourth quarter is close to zero due to the initial restructuring costs. For the fourth quarter, you should also remember the calendar effect year on year. Q4 'seventeen has more paid holidays than Q4 'sixteen, which will have a negative impact compared to the strong comparison quarter in 2016. We can go to the next slide, please. So a few comments on the cash flow in the quarter. Cash flow continues to be fairly stable. Operating profit in Q3 amounted to SEK337 million. And the change in working capital, pay tax and other non cash items had a negative impact of minus SEK499 million in the quarter. This is a normal seasonality in Atendo mainly related to the payments of personnel related liabilities in the summer and early autumn. Net investments in CapEx amounted to minus SEK65 million mainly related to fixed assets in the many openings of new homes in nursing homes. And this takes us down to an operating cash flow in the quarter of SEK73 million. Interest payments amounted to SEK8 million. Atenol's strategy is to be an asset light company and not to own real estate. However, to support our strategy with focus on own nursing homes, we continue to do short term investments in real estate projects to facilitate the construction starts. And this quarter, we have had an outflow of cash of $300,000,000 All of these building projects will be sold after completion, but as the number of construction projects increases, this number is also expected to continue to increase in the coming quarters. Cash out related to acquisitions amounted to $95,000,000 in the quarter and from other financing activities to minus $14,000,000 This takes us down to total cash flow of minus $344,000,000 for the quarter. Net debt amounted to $3,300,000,000 which equals a net debt to EBITDA of SEK2.7 billion, in line with last year. With the acquisition of Mickova, net debt to EBITDA will increase in the coming quarter. So with that, I hand back to Henrik. Thank you, Rebecca. Next slide, please. Outdoor activities are an important part of everyday life at Atendo. In Q2 and Q3, most nursing homes in home nursing home units in Atendo arranged the Atendo Fitness Walk, Atendo Loke. During the third quarter, Atendo and the Norwegian Outdoor Council arranged a sleep out activity in which several older people at Atendo Romsos and Atendo Rottratsykjem in Oslo camped out in camps. Visit Norway even made a short film about this activity. Dementia remains a common reason to why older people need to move to a nursing home. Atendo is a leading provider in dementia care, and we are continuously working to improve our services. In the third quarter, we decided that all Atendo's own homes in Sweden will be connected to the Swedish register for behavioral and psychological symptoms in dementia. This working method ensures that we work with the best available measures to improve the quality of life for people with dementia. Another measure intended to improve the quality of life is the introduction of new digital aids. A number of nursing homes in Finland have started to use a new large format tablet in order for customers to get easier access to the Internet and to improve communication with relatives. This has been very popular, and Ulle and other Finnish media have reported about the success. During the quarter, Atendo Ulkuljunga LSS in the South Of Sweden expanded its bed and breakfast with a hostelry. The aim is to provide people with disabilities with meaningful daytime activities that provides social contact and also satisfied restaurant guests. With that, I would like to summarize the quarter. Atendo showed stable growth, a record number of openings and a record number of construction starts. As indicated before, margins in the third quarter were negatively impacted by lower performance in Integration Care and Home Care, something that spills over into Q4. In addition, the high number of openings impacted earnings in the third quarter. We will continue to increase the number of openings, something that short term has a negative impact on profitability. But at the same time, this is the foundation for our future growth. By establishing more new units than any other provider of care services, Atendo is not only supporting society's growing need for care. We are also giving individuals access to modern personalized care in comfortable homes and creating long term value for our investors. Thank you for your attention. Over to you, Andreas. Thank you, Henrik. We will now open up for questions. Operator, please go ahead. And we have our first question from the line of Hans Bordstrom from Credit Suisse. So my question is, could you specify what the effect of the extra Christmas holiday would be in Q4? And add to that in the same vein is really what type of additional costs are we looking at in Q4 that could be seen as extraordinary, such as closing down integration units, Home Care and Emekeva integration costs? Yes. If we start with the paid holidays, it will be some effect from having more paid holidays in the coming quarter, but we can't specify the exact amount. It will have some effect, but not to a big extent. Then looking at the impact from the integration on Home Care and Mykiva, we expect this to continue into the fourth quarter. That is correct. And currently, we expect the integration and Home Care to be approximately on the same level as we have seen during this quarter. When it comes to Mykiva, I mentioned that it will contribute with some profits, but it's only consolidated for two months. So the restructuring costs will take this down to approximately zero. And some additional to remember going into Q4 is, of course, the many start ups that we are mentioning. So I must have missed what the actual specified cost was for Home Care and integration in Q3 as you referenced that for Q4. No, we have not specified that. But we have said that it will continue into Q4. So we, in other words, have no idea how much of your costs would be of a nonrecurring nature for Q4 because that's the conclusion of your guidance here? We have not specified that, no. The next question comes from the line of Christopher Lieber from Carnegie. Yes. Thank you. Follow-up on this. Could you maybe, in another way, rank the negative impacts when it comes to new openings, lower migration volumes and the Home Care operations in Denmark? Sure. The one that has had the biggest impact is the reduced demand for Integration Care. After that, it's Home Care and after that, it's own units under start up. Do you think that the negative impact from new units will be bigger than what we saw in the third quarter and now in the coming quarters? And if you could just maybe say something how the new homes are filling up? Yes. We expect the impact from new openings to be larger in the coming quarters. We see that the new units are filling up well. We expect longer term, we think it's going to take longer to fill new units, but we haven't seen it yet. So it's more that the amount of openings is larger than we've seen before than that the nature of the openings has changed. Okay. And did you say the negative impact will be larger? Yes. Okay. Thank you. The next question comes from the line of Lars Eberling from Danske Bank. Can I just ask about your comments on Integration Solutions and why this is mentioned now because this, I guess, was a strong effect towards September, October and then with the delayed impact on care providers such as used? But is that something that has happened now in the third quarter? Has that been an earlier effect also in the first and second quarter? No, we have mentioned it in previous quarters as well. And of course, I think it's quite natural as the market has declined, so have we. Think we have been in a sense, I think it's been positive that our strong relationship with the payers has meant that we've been able to maintain these units for a fairly long time during the year. But we saw a negative effect in the earlier quarters, as we communicated. But now in the third quarter, the headwind became stronger. So it accelerated. Is it possible to say anything about the year over year effect if you look at, say, third quarter earnings last year or what the comparison is? I think the main message is that it is larger in Q3 than it has been previous quarters. The next question comes from the line of Christian Reinhold from SmallCap Please go ahead. Your line is now open. Yes. Good morning. Have two questions actually. First of all, this Mickiewa acquisition, it will, of course, be margin dilutive, I expect, in 2018. But in the longer perspective, what should we think about that? Will it dilute your margins? Or can you get it back to normal Atento margins? We have said that there are a number of things. The margins are, as you say correctly, they are lower in Mykkaeba right now. But one should remember that there are a number of units under ramp up and under start up. So we see a strong potential in Mykkaeba, both in terms of synergies, planning and processes and improving occupancy. So we have said that within three years, this company should have a post multiple that is below Atendos. And we're saying that within three years, it should have the same margin as Atendos has overall. Okay. As I am from Denmark, we have heard from in the television, we have seen some not very positive stories about Atento's performance in Denmark. And also, you have said here that you have problems with the earnings. Do you have any thoughts about leaving Denmark at all? Or are you here for the long term? I think the way we look at Denmark, we are long term in everything we do. But I think the Home Care market in Denmark is challenging. So that is something we have to review continuously. And as you know, there's been a number of bankruptcies in the Danish Home Care market. It's been very tough. Large and smaller companies have had tough times. And there's been a fairly unique, I would say, political situation in Denmark, where all the Danish political parties in parliament have unified around changing the Home Care market. The way we address it from a tender side is that we review our units and we exit areas where we have too low density of customers. And also, we exit areas where there are unfavorable conditions. But you're not leaving Denmark? No, we want to continue in Denmark, but the home care market in Denmark is challenging. And we have a follow-up question from the line of Hans Wollstrom from Credit Suisse. Given that you mentioned the integration business being the biggest impact, could you give us a sense of what type of revenues you're running at on a quarterly basis and where you were, let's say, a year ago? I think what we've said about our Integration Care business throughout is that it's a very small part of Atenda overall. So it's a part of our Care business, and it's a small part of Atenda overall. So I think it's more longer term, this is not a big business in Atlanta, but it had a major impact in this quarter. But I mean, if it's such a small part, why does it have such a big impact as being the biggest impact? I think it's because the market has basically disappeared. Okay. So we're talking about the £100,000,000 business that is zero or, I mean No, think the market has disappeared. So therefore, it has had a large impact on this specific business. Okay. And if I may, just on your Home Care business. And you obviously talk about Denmark being a challenging market, and you have made the well, you've taken over the Humana business in Sweden. And you have also made an additional few acquisitions, smaller ones in Sweden. How do you view this? Because, obviously, we're talking about adverse margins, and I presume this is because of high levels of competition, as always, in Home Care, but you are investing more. How should we view your strategy in Home Care? It's a good question. I mean we're very, very selective in our approach in Home Care. So there are a lot of players leaving the market in Sweden. And when we look there, we're very selective in our growth. So when we get proposals on acquisitions, we're looking at very, very low multiples and even taking over companies for free. We only do it in areas where we can increase customer density and areas where we see favorable conditions. And we are we definitely exit areas where we don't do that. So you're very positive. Okay. Okay. Thank you, Hans. Let's take the next question in line. And we have a follow-up question from the line of Christopher Leiber from Carnegie. I'm a bit interested to hear your view about potential for starting new building projects. I'm surprised to see that the number of new beds under construction continues up every quarter. And at the same time, you say it's not a sustainable level. But you also said now that the pipeline looks pretty healthy. So for how long do you think you could continue this strong type of growth? I think we're seeing a very strong underlying need in the market right now. And we are now capitalizing on very long term work that we've done to establish strong relationships with payers across Sweden and Finland and driving this type of market. So we see a very healthy growth opportunity right now. But I think what we're trying to say is that we don't expect this type of level that we are at now to remain for a very long time. In the medium term, we are around this level. But longer term, we will not be. And the next question comes from the line of Edward Donahue from One Investments. Good morning. A few questions, if I may. Can you split the lower margins between the impact of newly opened units on the start up on one hand versus the issues in demand for the integration services in Danish Home Care on the other? That's the first one, please. I think the short answer to that is that we have kind of presented them in order of magnitude. So the biggest impact is Integration Solutions after that Home Care, primarily Denmark and after that own unit openings. Right. Are you able or willing to give a bit more granularity on that as it seems to be a bit of a focus on the core? I think this is the level we're discussing in that. Okay. And then can you give some view on how significant the issues on integration services in Danish Home Care will be on EBITDA on a twelve month forward basis? We see that Integration Solutions and Home Care profit impact, we expect that to continue into Q4. But we don't see an impact, a strong impact of that in the quarters beyond that. However, own unit openings will continue to impact earnings going into 2018. Right. Okay. And then just on the step up in the units under construction. Does this relate to the integration of Mykiva? And can you give some background to the pipeline of new developments units going forward? No. The increase in units under construction that we see in the third quarter is not related to Mykiva because Mykiva was consolidated on November 1. So that's a separate thing. And when we think about the pipeline going forward, we have a very solid approach to this, which is the same we've used all the time, which is basically to thoroughly assess supply demand locally. It's a very local business. So the nature of this business of these projects are very local. Of course, to have a strong dialogue with local payers to ensure that there is an interest for our units. And that's basically the work that is giving these results. It's the result of many years of hard work that is now paying off. Okay. If I just take that comment, and I go back to Slide five. Just on your comments with regard to the political uncertainties, does that actually have any drag? It wouldn't look like it, but do you actually see any drag with regard to pipeline commitments? Not specifically. It's this is a more long term thing where I think it's rather like this that we see an even stronger demand in Finland, and that is driven by stronger demographics in Finland and also a larger need to replace old facilities. So we have a stronger pipeline in Finland right now. That will continue to be the case for a while due to demographics and replacement needs. Further down the road, Sweden will catch up due to demographics an increased need. So it's more driven by that. And then one must remember, it's very much driven by local situations. So attractive, our ability to find real estate investors is fairly easy, but also to get attractive terms for the new houses and, of course, to convince local payers that they're going to work with private companies because still in Sweden and Finland, this is primarily a local authority monopoly in most places. So in most places, there is no private provision whatsoever. Right. And within that context, you're not seeing a changing of terms or expectations on supplier side in any way? No. It's what we've said, no, it's not a kind of a change in terms. It's more that we expect going forward that the competition is doing this as well. That will impact start up times over time. And also the fact that we're going into areas where the payers are less used to work with private companies. So it can take longer to get the units full from that perspective. But it's more kind of an opening up the market phenomenon and increased competition phenomenon rather than politics or payer behavior. Right. And just last question, just on the M and A front. Is there anything that you're actively looking at? Or do you concentrating on the organic plus the integration of Michelin? See M and A as an integrated part of our strategy, so we continue to work with that in parallel. And do you see the opportunities on that in existing markets or new markets still looking attractive? Yes, both. I mean there is a large unconsolidated market in The Nordics, and then we see attractions in other markets as well. And if you rank those, which other markets would you look at? Let's take the follow-up questions from other in line. And we have a follow-up question from the line of Hans Morstrom from Credit Suisse. Well, I'm not sure there's all that much more to say, but it relates to the last question relating to your non Nordic acquisition strategy. You gave us, hopefully, an update in Q2. If you wouldn't mind sort of giving us your thoughts right now? No, of course. I think expanding into other markets is an attractive opportunity. We see lots of growth in the Nordic Sea since the private share is so small and the tenders market share of the total market is still very small. This is primarily a government monopoly in most places. But of course, we see attractions outside. And as we communicated before, our focus in other markets is own nursing homes for own people. That's a big and healthy market. And there are attractions all across Europe. So it's all about finding the right target with the right quality of its assets, the right performance and the right capital management. But there are many markets that are attractive. And specifically, and this would be my last question, the very large asset that is for sale ostensibly according to the press in Germany is of 10,000 plus types of beds. Are those types of acquisitions you would review and consider realistic for Atendo? Are they simply too large? We look at all assets. But as we have communicated before, I think our sweet spot is more something around the Mykiva size, so 2,000 to 3,000 beds. Okay. Thank you. Thank you. Any more questions? As it appears that there are no further questions at the moment, I'll hand back to the speakers for closing comments. Okay. Well, thank you all for participation. And if you have any follow-up questions, feel free to call me during the late or later. And we look forward to hearing you at the year end conference call. Thank you. This now concludes our conference call. Thank you all very much for attending. You may now disconnect your lines.