Earnings Call: Q2 2021

Jul 21, 2021

Thank you, Andreas, and good morning, everyone. It's been, to say the least, a very challenging year, both for Atento, for the care sector and for the society as a whole. Hence, it's a great relief that we've never been through a quarter with almost no new infected client in our operations. With this, let me now turn to the presentation and then Fjerdik will take you through the numbers in more detail. Next slide please. Overall, we're reporting improved profit year on year. The main drivers behind improvement is that we continue to deliver on the turnaround program in Finland. Net sales pace is at a good level and with a few new openings we're steadily improving occupancy and margins however from a low level. Our focus in Finland is to continue our sales momentum, while continuing to negotiate our framework agreements to get compensation, both for past and upcoming higher staffing requirements. Prices in Finland are still structurally too low, and we will continue to push for higher prices over the next few years. Scandinavia has been more severely impacted by the pandemic. This is clearly visible in the Q2 numbers as occupancy is still significantly below the pre pandemic period. On a positive note, we have a positive sales trend in Q2 versus Q1 and expect to see a gradual normalization of customer inflow in the second half of this year. Occupancy is flat versus last quarter, in spite that we've added around 200 beds in the quarter. Corona effects have an estimated negative impact of approximately SEK 40,000,000 in the quarter for the group, and we received public reimbursement of around SEK 25,000,000 for cost of incurred in 2020. We do, however, expect significantly lower public conversation in the next quarters. Furthermore, in relation to the comparison quarter, Atento's Q2 results includes a one time cost of NOK 15,000,000 for extra recovery days for employees in Scandinavia to acknowledge the hard work of employees during the pandemic. Slide 3 please. Our overall purpose is to empower individuals and provide good care that leads to higher satisfaction and better health for our customers with the long term ambition to have the most satisfied customers in every location where we operate. During the past year, we have developed Atendo Way, our common operational care model to ensure high quality care faced on common principles, while encouraging entrepreneurship and local engagement. During the course of this year, we continue to develop Atento Way with focus on further improving digital tools, culture and transparency and employee engagement. We're also putting focus on taking the next step in quality with the ambition to improve our performance in terms of quality of life and preventive health. Ultimately, we believe that this creates value for both customers and relatives as well as society as a whole. Next slide, please. As Nordic region's leading care provider, it's important for us to evaluate our own efforts during the pandemic to be even better prepared for the future. During the spring we had a lot of media attention stemming from a documentary on one of our units in Stockholm during the first wave of the pandemic. To get a more holistic picture of our total work during the pandemic, we initiated an extensive internal work that includes all our employees discussing and documenting experiences and learnings during the past year. We've also taken help with external expertise. Sirona Health Solutions has analyzed excess mortality during the entire pandemic at all nursing homes in municipalities where we operate covering a third of Sweden's nursing homes. The result of the analysis show that Atento had a clearly lower during the pandemic versus other elderly care operators in Sweden. As an example, Atento's excess mortality rate in the Stockholm region was 24% versus 42% for other providers. Across all regions where Atento operates, our excess mortality rate was 19 percentage points lower and other providers and 25 percentage points lower than public sector. The past year has been extremely challenging for both employees, residents and relatives. There are many lessons to be learned for the future. At the same time, the evaluations show that Atento's measures to protect residents during the pandemic have generally worked well. Next slide, please. We reported the top line growth in the quarter of 6 percent year on year. The organic growth amounted to 5% despite negative effects on the corona pandemic. The organic growth relates mainly to more sold beds in Finland. Lease adjusted EBITDA amounted to NOK53 1,000,000 corresponding to margin of 1.7%. Occupancy has improved as a result of more sold debts in Finland and quality remains at a good level. Fredrik will provide more details on the financial development shortly. Slide 6, please. This chart shows the openings per quarter and rolling 12 month opening days. The development is a result of the strategic shift we decided on 2 years ago to decrease establishment of new units in Finland and return to a more balanced expansion base by mid-twenty 20. During the 1st 6 months this year, we've opened close to 500 beds. In the second half of this year, we plan to open additional 400 beds equally divided between Sweden and Finland. We do expect these projects to be successful over time given though the low overall occupancy situation in Sweden after the pandemic will likely impact the fill up pace and Swedish openings during the start up period. Slide 7 please. In the upper chart, we present the number of wells in operation. As of Q1 this year, we've been presenting the number of wells in all Atambo including own operations as well as outsourcing. We increased the number of beds in operation by 1% from the corresponding period last year. The comparison includes 400 divested bets in Norway as we exited Norway last year. During Q2 number of betting operation was slap versus Q1 in spite of opening 2 40 new beds as we've been exiting some units as part of reviewing and refining our footprint. In line with our strategy, we continue to reduce number of new projects and by the end of Q2 we have 600 owned beds under construction, majority in Scandinavia. In Finland our focus is to fill the units that we have established during the rapid expansion of recent years and continue to deliver improved occupancy and margins coming quarters. Next slide, please. Now turning to occupancy development. After Q1 representing occupancy for all Atento Homes across all segments. We've been able to increase the overall occupancy in Finland and care for older people, bringing up the average to the highest level for several years. The positive trend is expected to continue as we have good sales pace and low number of openings coming period. In Scandinavia, we see the opposite situation with a historically low occupancy. This is a consequence of the lower number of new customers in 2020 and due to the increased number of openings recent year. These two factors have had an equal impact on occupancy development. We've seen an improvement in sales base in Q2, and we expect the inflow on new customers to gradually normalize during the second half of the year. Slide 9 please. This chart presents the occupancy development of own operated units by opening year. We have excluded the large acquisitions Mikkiva and the recent UMSK in Finland, so we can isolate development of our own initiative projects over time and percent of fill up in openings are proceeding. We have a slight improvement versus last quarter in mature units and Okotans in the more recent vintages are continuously improving. Slide 10 please. This chart presents on the Group level net sales and margins divided into mature units and start up units. We have historically presented a mature margin including all administration costs. To give a better view on the mature margin, we have some Q1 calculated margin for the mature units with a proportionate share of administration cost in relation to net sales. As you can see from the yellow line, the mature margin is increasing. Lower margin in Nursing Homes in Scandinavia has been compensated by higher margin in Finland. Let's take a closer look into the financials for the quarter. And please go ahead 3 of it. Thank you, Martin. So let's turn to slide 11. Net sales increased to NOK 3,200,000,000 up by 3% compared to the corresponding quarter last year. The exit from Norway impacted the comparison with about NOK 90,000,000 and currency had a negative impact with 2.9%. Organic growth for the quarter was 4.8%. In Finland, we continue to see growth across all service offerings, while organic growth in Scandinavia is still negative, affected by exited home care areas and closed units in supporting housing within the individual and family care. The growth from new nursing homes in Scandinavia has been offset by lost occupancy due to corona in existing homes. Lease adjusted EBITDA amounted to NOK53 1,000,000, up from NOK42 1,000,000 last year. The negative effects on corona are estimated to around NOK 40,000,000 which has been partly offset by received government reimbursement of in total NOK 23,000,000 but relating to additional costs in 2020. The comparison between the years are further impacted by the capital gain of SEK41 1,000,000 last year and that we also had a negative one time cost of SEK50 1,000,000 this quarter related to recovery dates for Swedish employees. The IFRS 16 effect on reported EBITDA was smaller than last year due to one time items last year. Financial net was negative SEK158 1,000,000 compared to negative SEK168 1,000,000 in the Q2 of 2020. IFRS 16 related interest expenses increased by SEK 2,000,000 while interest expenses for our borrowing from banks decreased by SEK 6,000,000. Currency effects also impacted the comparison positively. Income tax for the quarter was positive NOK 3,000,000. The adjusted earnings per share for the quarter was NOK0.19 up from NOK0.11 last year. Next slide please. The Scandinavia business area continues to be impacted by corona. Net sales for the business area decreased as we have exited Norway and corona's impacted sales. We put a lot of focus on our processes to attract new customers for example by more online marketing. During the quarter, occupants were stable despite the pressure from new openings. Lease adjusted EBITDA decreased from SEK126,000,000 to SEK 4,000,000 Adjusted for last year's capital gain, the extra cost of personnel recovery this year and both periods' corona effects, The result is down somewhat underlying. The lower underlying result is caused by start up costs related to units opened during the last 18 months. We're also working on improved processes for tendering with good results in the quarter. During the quarter, we have internally processed net 1 but yet not started contracts with an annualized revenue of SEK 70,000,000. Next slide please. Growth continues to be high for Atento Finland and amounts to 10% reported and 15% in local currency. The growth primarily counts for more occupied beds in Nynas open since 2019, price increases as well as acquisitions. Price increases amount to more than 3%. Lease adjusted EBITA improved from negative SEK 67,000,000 to 0. Price increases and improved occupancy was partially offset by higher cost in operations largely due to the implementation of the new law. Price negotiations will continue in the fall ahead of next year's adjustments and the price level is still overall structurally too low. By the end of the quarter the number of empty beds in Atento Finland was lower than 1 year ago. Atento received reimbursements for some kroner related costs that occurred in 2020 which resulted in that corona related supportive measures more than offset the cost for the isolated quarter. The acquisition of UMSK had a small positive effect on the profit. During the quarter, the Finnish Parliament voted yes to the revised proposal for SOTA reform. This means that the responsibility for healthcare and social services will be transferred from municipalities 22 regions in 2023. Although many details still remain to be clarified, Atento is in general positive to the planned reform. This will mean that there will be more clear separation between the role as a payer versus an operator of social services. Before we turn slide, I just want to give a few comments on the coming quarters for both Finland and Scandinavia. The effects from corona will continue to impact the coming quarters mainly in Scandinavia. Net sales in Scandinavia will be impacted negatively as for operating with a significantly lower average occupancy than normally. At the same time, the cost level in Scandinavia will continue to be higher than normal due to absorption issues. We expect lower corona reimbursements going forward. And in the year on year comparison, you should remember that we got relatively more public reimbursement in the second half of last year for both Finland and Scandinavia. Also there is some additional cost pressure in Finland due to a new seller agreement valid from July 1. We do however expect a normal positive seasonality effect for the Q3. Next slide please. Free cash flow was positive with NOK 72,000,000 lower than last year as the last year had the larger positive impact from working capital. Adjusted net debt amounted to SEK1.6 billion which equals an adjusted net debt to adjusted EBITDA ratio of SEK2.7, a clear improvement to last year and well below our maximum target. With that, I hand back over to you, Martin. Thank you, Fredrik. Next slide please. A few words before the Q and A session. Financially, We see an underlying improvement versus last year, driven by the progress of our turnaround program in Finland. Scandinavia still suffers from low occupancy after the pandemic, but we do see signs of improvement in the sales pace in Q2. During the quarter, we made a thorough evaluation of our work during the pandemic. It shows areas of improvement for us and the sector in general. At the same time, the external analysis indicates there are measures to protect residents during the pandemic have generally worked better than for other providers. We are committed to continue to deliver high quality care for our customers and local authorities and the learnings in the past year will help us in our ambition to become the leading provider of care in every municipality where we operate. Thank you for listening and over to you Andreas. Thank you, Martin. We'll now open up for questions from investors and analysts. And please state one question at a time. Maybe operator can give the instructions, please. Thank you. 1 on your telephone keypad. And our first question comes from Paul Lujan, Danske Bank. Please go ahead. Your line is now open. Yes. Good morning. So if we start off with a question on Finland on the sales side. I think your sales in Finland increased by around SEK 100,000,000 sequentially from Q1, which is an increase of around 6%. But when I do my math here and I see that the number of occupied beds seem to increase by just around 2%. So I have a question regarding what is driving the strong sales in Finland. Is it price? Or is it something with the acquisition you announced? Because I guess that is something that is also impacting this. So it would be interesting just to hear what is driving this strong growth other than the net inflow of new customers, [SPEAKER KARL HENRIK SUNDSTROM:] Because we can see that I think there seems to be something else than just the inflow, which would be interesting to hear. Thank you. This is Frederik. Yeah, you're right. It's a combination of more occupied bed, but it's also price increases, which is a bit more than 3%. And then it is the acquisition of UMSK, which was consolidated from March 1 only. So it's only had a partial effect in the Q1 and now we have a full quarterly effect in the Q2. So that clearly impacts the sequential comparison. Yeah. But The sequential increase in prices, is that what can you say anything about how much that is from Q1 to Q2? That's very limited. Okay. And then there's also this seasonality. We didn't have the full effect to the price increases in Q1, but the most part of it. Okay. Understood. And then if we look on margins within Finland, can you say anything about how this acquisition you made impacted profitability? It impact profitability or how much one effect did that have in Q2? It had a small positive profit effect, but not that it's noticeable on the margin. So since it's also, of course, had some revenue. Just on the sequential comparison, it's a bit coming back that it's a bit tricky to compare because we have some seasonality effects. And also you should remember that the Q1 have 89 days and the Q2 had 91 days and many of our revenues are day based fees. So you need to adjust for that as well. And that's why we most often do year on year comparison because then you don't have that the same amount of seasonality effects impacted the comparison. Yeah, yeah, understood. I just meant more within how the acquisition impacted if it Because I guess the acquisition that you did had a positive margins. And it would be just interesting to hear how much of this Comparison year over year is driven by the consolidation of the acquisition and how much is underlying. Comment on that. Yeah, I would say on the It's a limited impact. It depends yes, it has a limited positive impact, but it's a smaller it's a much smaller part If you look at the SEK67 1,000,000 in improvement, it's mainly driven by other factors. Yeah, Understood. And then just a question on the Scandinavian business. I mean, as you said, when doing all these adjustments and looking year over year, I mean, it Still seems that your margin is relatively flat or even somewhat increasing despite significantly lower occupancy year over year. Could you please just explain if there's What is driving the increased margins despite lower occupancies is lower costs because that seems quite odd. So if you could comment on that. And also how much governmental subsidies did you receive in Q2 last year in Scandinavia? Close to nothing last year. Okay. So what is it can you say anything On the margin side, because I guess if we adjust for that, the margin may be relatively flat year over year despite lower occupancies. Is that correct or? Lastly in Q2, we had a pretty tough quarter in terms of corona impact. We took a lot of cost in Q2, while not receiving any governmental reimbursement for that cost. So of course, that impacted Q2 last year as well negatively. Okay. Yes. Thank you. And our next question comes from Christoph Milleberg, Carnegie. Please go ahead. Your line is now open. Hi, good morning. I have a few questions around the topic of pandemic effects. First, I wonder, is it possible to give or just remind us what the net effect from the pandemic was on the EBITA in the Q3 and Q4 last year That's the starting point. I don't have that exactly in front of me, but we can of course we can give you that. We have that in our reports. Yeah. If you could come back to that, would be helpful. And also, if we look then at the expected impact Yes, from the pandemic. Now in the second half of the year and if we look at Q3 and Q4, you had like, I think you said SEK 46,000,000 negative for the group in the second quarter. If we take that as Starting point, how much lower do you expect that impact will be in the 3rd and 4th quarter? The corona effects they are different this year if you look at next year. If the last year it was a lot of kind of additional cost with higher sick leave and personal protective gear. And the difference is that this year the vast majority of the negative effects are is coming from a lower than normal occupancy in our kind of mature units. And that is of course a much more sticky effect. So the way to get those to Diminish and decrease is to attract new customers. And that is a gradual work of us attracting the customers, but it also a bit dependent on how the decision processes in different municipalities on how they view kind of some municipalities have prioritized their own units before Atento units. But as stated we see gradually better and better inflow of customers. So we think that the negative effect of around SEK 40,000,000 that we had this quarter will gradually decrease look going forward. And also it will yeah. And But at the same time, you will have less of the government grants related to 2020. So if you take the Q3, do you think it's Fair assumption, assuming the net effect being rather similar as in the second quarter and then hopefully Even lower net effect in the Q4. Yes, something like that. Yes. Okay. It's hard to yes, exactly. Yes. And if you could come back then with the impact last year, that would be helpful. And if I may, just one more thing. I'm a bit curious to hear your view on all the media Attention or what we should call it during the spring, how do you think that has The move in rate and what have you heard from potential customers? Have they chosen not [SPEAKER KARL HENRIK SUNDSTROM:] To move into Atento because of everything that has been written in Swedish media? Just after the meet at the day started, we took contact with every municipality where we operate and we had I'd say we have a good dialogue with our payers on local level. They also have a more thorough understanding of the challenges during the pandemic in the adult care sector. And recognize a lot of the challenges that we had in Sebastiao has been in this specific unit, which was reported on. So how is that impacted? Not the inflow, we saw a clear impact in May, because we had a pretty good April. We saw a clear impact in May and then there was nothing coming back in June. So it was a pretty short impact. But also I think supported by the fact that during May, we discontinued marketing activities due to the media attention, which we restarted again in June. So it's a bit tricky to say what is what. Was the lower Net inflow in May, which came back in June, was that how much of that was driven by the fact that we discontinued marketing initiatives and sales initiatives versus actual media impact. So we saw a clear impact for a number of weeks, specifically in May and then coming back in June. Okay. Thank you. Very helpful. That's all for me. Christophe? Yes. Christophe, coming back to the corona effect, in the Q3 of 2020 was negative SEK40 1,000,000 and in the Q4 it was net 0, but that was due to negative effects of around SEK50 And then that we started getting more reimbursements of the cost we've had over another positive SEK 50,000,000. So that's what's in there. And the minus SEK 40,000,000 that was the net effect, Yes, to be clear. In the Q3, yes. Yes. Okay. Thank you. And our next question comes from Mik Dorfoschl, Nordea. Please go ahead. Your line is now open. Thank you very much for taking the question. Just starting off with the improved moving rates that you witnessed by the end of the quarter In Scandinavia, how far would you say that you are from what we can call a normal inflow also Given that your occupancy development was quite flattish sequentially? If you look at the net inflow in June, it was on par with our expectations. We still believe that we will have a continued gradual normalization of inflow during the second half of this year as the capacity situation in the municipality where we operate gradually normalizes post the pandemic. We still have a situation like in West Sweden or Gothenburg region, where they decided to completely prioritize their own operations within public sector in the first half this year. So they basically haven't given the declines in private sector during the first half of this year due to the corona impact. And that is something that is expected to be released starting the second half this year. So we see signs of or gradual normalization second half. I would say that the June was pretty good in terms of net inflow. Okay. That's interesting. Thanks. And just moving on to Finland. I think that you changed your wording here slightly in terms of price increases. It was a bit up sequentially, But only now part I think that you offset your costs slightly better than you did in Q1. So Is there anything on the cost side that we should be aware of in terms of cost increases that were perhaps not As high as you have expected. I think the cost increases is about We did have new elderly care law that came into play in Q4 last year. That implies a sequential upgrade of staffing requirements to 2023. So it went up from SEK0.5 to SEK0.55 starting January. We to continue up to 600 in January next year and then to 700 in 2023. And We will negotiate we are negotiating our prices accordingly. But there was nothing sequentially that we [SPEAKER KARL HENRIK SUNDSTROM:] To be aware of in terms of the costs in Finland? Not really, no. Mind you that when we negotiate prices for 2021, for example, as we did last year. We have about 200 different municipality contracts in Finland that we are continuously negotiating. And the starting date is not January 1 and all of those. So They gradually start between January 1, and I think the last one starts in May 1. So We don't get the full impact. Even though most of the contract starts in the beginning of the year, we don't get the full impact. Okay. And just finally, your current expectations heading into new negotiations for the second half of the year in Finland. And also perhaps if you could elaborate a bit on what you've learned from previous years' discussions. Are there any sort of industry organizations that will help you from here or all the private providers in Finland To get the compensation needed or how should we what's your expectations really into the second half here In terms of that. This is a sensitive topic because there are competition loss in Finland as they are in Switzerland. So We're not allowed according to competition, we also to say beforehand what we're targeting in terms of price increases in Finland. That would be to flag for all the other players what we're targeting. And then That could be assumed as trying to affect other operators. But what we have seen during the past few years of renegotiations is that the industry as such has been fairly disciplined. So we haven't seen any low balling in terms of prices so far from competitions to get volume. It's It's been pretty good discipline in the Finnish market, because everyone is in the same place. And that's a good side of the new Andelikarlo in Finland is that it gives a clear playing field in terms of all our requirements are moving up and what costs are related to those requirements. So we expect the market to continue to be a participant and that is basically as much as we can say about it. And do you get Yes, industry support, yes, exactly. Yes, there is an industry association called Halle. They don't do actual negotiations, But of course they argue and drive the public debate on what the law implies in cost impact, how there is also some It's a lot of details on about the financing that goes from the state to the municipalities. And then it's still although the municipalities have the financing from state is still for Elbe operated to negotiate contract by contract exact price adjustments you should have. So of course, Harley is working in the public debate to explain the situation and what's happening. And what we can see is that Prices are structurally too low. There's a clear difference between what the municipalities pay the private operators versus their own cost. And they're arguing in all these factors, but they're not involved in the specific price negotiations. That's the difference. That's not binary. The municipalities never operated by itself. Just to give you an additional comment on this. As on the SOTRE reform, those those actually finally passed Parliament during the quarter, which will be implemented in 2023 in Finland, which will lead to a separation between the payroll, which will be in the regions, and the provider role, which is public and private sector in municipalities. And we think that this is a Good thing long term for the Finnish market because then hopefully payers will go for the right quality to the right price. And then it would be a more level playing field between private and public providers on municipality level, whereas the public providers and municipality level operates as of today at a clearly higher cost than private providers. So we think that, that will Swensen, our competitiveness in Finland over the long run. Yes. Okay. Thanks a lot. Thanks. Our next question comes from Hans Monstrom, Trinity Delta. Please go ahead. Your line is now open. Good morning. I had a couple of questions for me. I I'm just wondering how you would be looking to leverage the positive outcome of this Sirona survey to turn the tide in terms of the media Opinion on Atento seems a good opportunity, indeed, if you have done any particular efforts in that regard. And Secondly, and a bit on the other side of this argument, you mentioned that your relationship with local authorities is very good. But then on the other hand, I understand you've lost the contract in Jarfella in Stockholm area. And I'm just wondering how big a risk there are for Other adverse changes to contracts you have where the political, should we say, composition of local authorities is such that, Well, you could lose just simply because of the bad publicity you received in the last 3 or 4 months. I'd be interested to hear that. Thank you. Thank you, Hans. It's Martin here. So on your first question, the analysis done by Sirona to improve reputation after the media. We have published a report on our website. We also published a pretty extensive evaluation of all our efforts on our site. Also the city of Stockholm did an evaluation of the specific unit that was criticized in media. And that evolution came out very good, which also focused on Sittiv published on their website. I think it's about we have to allow for some time, because Media has been written negatively to Atento, can't really directly afterwards, but that's a very positive article saying that actually they did a lot better than everyone else. We believe that the facts are really good to have out there. Now they're published. They are, I think, aware of it, but we have to allow for some time to let it sink in. And since we published these reports, we haven't seen and in more negative things. On your second question, I think This is part of the both the beauty and the complexity of working in this industry to have to manage hundreds of different municipality contracts and municipality relationships on local level. And that complexity is something that we as a company or use handle. We have a long history of managing all these relationships. That's I think part of our competitive edge. Part of that is also that Sometimes the majority in a specific municipality will swing, and that can mean a negative change of direction. But that's also part of our differentiation working in so many municipalities. That gives us sort of a long term stability. I think generally we have a good relationship with our local authorities. I think it's clear for them that we add value. There is no municipality that would buy services from us unless we have a quality that's on par or above standard, while saving at the same time saving tax money. So it's a part of both adding quality and efficiency. And then in every now and then, we see municipalities being on the negative side. On the other hand, we have other municipalities that will start trying out public players private players. So yes, for that it was one of those cases. But you wouldn't consider it a Particular risk now, well, let's say, up until September 2022 that you would be losing contracts where there is a S Green majority, that might not have been the case when you won the contract, etcetera. And I mean, I'm just curious as to whether you see this particular business risk after the Bad publicity received? We don't see a particular business risk on that. We have a good contact with all municipalities and we had even closer contact after this event. But there's also, mind you that there's quite a big difference between national politics and local politics. The local politics are much more pragmatic, where there is a challenge that needs to be solved. So while on national politics, it's more a geology. Okay. Thank you much. Thank you, And we have not received further questions at this point. I will hand back to the speakers. Okay. Thank you for participating. And we will now conclude the call. And please don't hesitate to contact us directly If you have any further questions. Thank you.