Earnings Call: Q2 2021

Jul 21, 2021

Thank you, Andreas. Good morning, everyone. It's been, to say the least, a very challenging year, both for Attendo, for the care sector, and for the society as a whole. It's a great relief that we now have been through a quarter with almost no new infected client in our operations. With this, let me now turn to the presentation. Then Fredrik 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 the improvement is that we continue to deliver on the turnaround program in Finland. Net new sales pace is at a good level. With 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. 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. We 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 million in the quarter for the group, and we received public reimbursement of around SEK 25 million for costs that incurred in 2020. We do, however, expect significantly lower public compensation in the next quarters. Furthermore, in relation to the comparison quarter, Attendo's Q2 results includes a one-time cost of SEK 15 million for extra recovery days for employees in Scandinavia to acknowledge the hard work of our 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 Attendo Way, our common operational care model to ensure high-quality care based on common principles, while encouraging entrepreneurship and local engagement. During the course of this year, we continue to develop Attendo 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've 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're also taking help of 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 Attendo had a clearly lower excess mortality rate during the pandemic versus other elderly care operators in Sweden. As an example, Attendo's excess mortality rate in the Stockholm region was 24% versus 42% for other providers. Across all regions where Attendo operates, our excess mortality rate was 19 percentage points lower than other providers and 25 percentage point 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 evaluation show that Attendo's measures to protect residents during the pandemic have generally worked well. Next slide, please. We reported a top-line growth in the quarter of 6% year-on-year. The organic growth amounted to 5%, despite negative effects from the corona pandemic. The organic growth relates mainly to more sold beds in Finland. Lease-adjusted EBITDA amounted to SEK 53 million, corresponding to a margin of 1.7%. Occupancy has improved as a result of more sold beds 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 pace. 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 pace by mid-2020. During the first 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, even though the low overall occupancy situation in Sweden after the pandemic will likely impact the fill-up pace in Swedish openings during the startup period. Slide 7, please. In the upper chart, we present the number of beds in operation. As of Q1 this year, we've been presenting the number of beds in all Attendo homes, 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 beds in Norway as we exited Norway last year. During Q2, number of bed operation was flat versus Q1 in spite of opening 240 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 had 600 own 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 Attendo homes across all segments. We've been able to increase the overall occupancy in Finland in 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 have seen an improvement in sales pace in Q2, and we expect the inflow in 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, Mikeva, and the recent UMSK in Finland, so we can isolate the development of our own initiated projects over time and present how fill up in openings are proceeding. We have a slight improvement versus last quarter in mature units, and occupancy 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 startup units. We have historically presented the mature margin, including all administration costs. To give a better view on the mature margin, we have since 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. A lower margin in nursing homes in Scandinavia has been compensated by higher margin in Finland. Let's take a closer look into the financial for the quarter. Please go ahead, Fredrik. Thank you, Martin. Let's turn to slide 11. Net sales increased to SEK 3.2 billion, up by 3% compared to the corresponding quarter last year. The exit from Norway impacted the comparison with about SEK 90 million, 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 exit of the home care areas and closed units in supporting housing within 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 SEK 53 million, up from SEK 42 million last year. The negative effects from corona are estimated to around SEK 40 million, which has been partly offset by received government reimbursement of in total SEK 23 million, relating to additional cost in 2020. The comparison between the years are further impacted by the capital gain of SEK 41 million last year, that we also had a negative one-time cost of SEK 50 million 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 SEK 158 million compared to negative SEK 168 million in the second quarter of 2020. IFRS 16-related interest expenses increased by SEK 2 million, while interest expenses for our borrowing from banks decreased by SEK 6 million. Currency effects also impacted the comparison positively. Income tax for the quarter was positive SEK 3 million. The adjusted earnings per share for the quarter was SEK 0.19, up from SEK 0.11 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 was stable despite the pressure from new openings. Lease-adjusted EBITDA decreased from SEK 126 million to SEK 74 million. Adjusted for last year's capital gain, the extra cost for personnel recovery this year, and both periods' corona effects, the result is down somewhat underlying. The lower underlying result is caused by startup 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 in tendering processes net 1 but yet not started contracts with the annualized revenue of SEK 70 million. Next slide, please. Growth continues to be high for Attendo Finland and amounts to 10% reported and 15% in local currency. The growth primarily accounts for more occupied beds in units opened since 2019, price increases as well as acquisitions. Price increases amount to more than 3%. Leased adjusted EBITDA improved from negative SEK 67 million 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 Attendo Finland was lower than 1 year ago. Attendo received reimbursement for some corona-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 JMSK had a small positive effect on the profit. During the quarter, the Finnish Parliament voted yes to the revised proposal for SOTE reform. This means that the responsibility for healthcare and social services will be transferred from municipalities to 22 regions in 2023. Many details still remain to be clarified, Attendo is in general positive to the planned reform. This will mean that there will be a 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 we are 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 a year-on-year comparison, you should remember that we got relatively more public reimbursement in the 2nd half of last year for both Finland and Scandinavia. Also, there is some additional cost pressure in Finland due to a new salary agreement valid from July 1st. We do, however, expect a normal positive seasonality effect for the 3rd quarter. Next slide, please. Free cash flow was positive at SEK 72 million, lower than last year, as last year had a larger positive impact from working capital. Adjusted net debt amounted to SEK 1.6 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 2.7. 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&A session. Financially, we've seen underlying improvement versus last year, driven by the progress of our turnaround program in Finland. Scandinavia still suffers from low occupancy after the pandemic. 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 that our 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. The learnings from 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. Please take one question at a time. Maybe operator can give the instructions, please. Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Our first question comes from Paul Lurian, Danske Bank. Please go ahead. Yes, good morning. If we start off with a question on Finland, on the sales side. I think your sales in Finland increased by around SEK 100 million sequentially from Q1, which is an increase of around 6%. When I do my math here and I see that the number of occupied beds seem to increase by just around 2%. 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? I guess that is something that is also impacting this. It would be interesting just to hear what is driving this strong growth other than the net inflow of new customers, we can see that, I think, there seems to be something else than just the inflow. It would be interesting to hear. Thank you. This is Fredrik. Yeah, you're right. It's a combination of more occupied beds, but it's also price increases, which is a bit more than 3%. It is the acquisition of JMSK, which was consolidated from March 1st only. It's only had a partial effect in the first quarter, and now we have a full quarterly effect in the second quarter. That clearly impacts the sequential comparison. Yeah, the sequential increase in prices, can you say anything about how much that is from Q1 to Q2? That's very limited. Okay. There's also this seasonality. We didn't have the full effect of the price increases in Q1, but for the most part of it. Okay. Understood. If we look on margins within Finland, can you say anything about how this acquisition you made impact the profitability? Did it impact profitability positively, or how much of an effect did that have in Q2? It had a small positive profit effect, but not that it's noticeable on the margin, since it also, of course, had some revenue. Just on the sequential comparison, coming back that, it's a bit tricky to compare because we have some seasonality effects. Also you should remember that the first quarter have 89 days and the second quarter had 91 days. Many of our revenues are day-based fees. You need to adjust for that as well. That's why we most often do year-on-year comparison, because then you don't have the same amount of seasonality effects impact the comparison. Yeah. Understood. I just meant more within how the acquisition impacted, 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. If you could comment on that. Yeah, I would say it's a limited impact. It has a limited positive impact. Okay. Yeah, sure. It's a much smaller part than if you look at the SEK 67 million in improvement. Yeah it's mainly driven by other factors. Yeah. Understood. Just a question on the Scandinavian business. As you said, when doing all these adjustments and looking year-over-year, 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 what is driving the increased margins despite lower occupancies? Is it lower costs? That seems quite odd. If you could comment on that. How much governmental subsidies did you receive in Q2 last year in Scandinavia? Close to nothing last year. Okay. Can you say anything on the margin side? I guess if we adjust for that, the margin may be relatively flat year-over-year despite lower occupancy. Is that correct? Last year 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. Of course, that impacted Q2 last year as well, negatively. Okay. Yeah. Thank you. Our next question comes from Kristofer Liljeberg, Carnegie. Yeah. 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 third quarter and the fourth quarter last year, as a starting point? Yeah. I don't have that exactly in front of me, but of course, we can give you that. We have that in our reports. Yeah. If you could come back to that, would be helpful. Also, if we look then at the expected impact from the pandemic now in the second half of the year, third quarter and fourth quarter, you had, I think you said SEK 46 million negative for the group in the second quarter. If we take that as a starting point, how much lower do you expect that impact will be in the third and fourth quarter? Yeah. The corona effects, they are different this year, if you look at next year. Last year, it was a lot of additional cost. higher sick leave and personal protective gear. The difference is that this year, the vast majority of the negative effects is coming from a lower than normal occupancy in our mature units. That is, of course, a much more sticky effect. The way to get those to diminish and decrease is to attract new customers. That is a gradual work of us attracting the customers, but it also a bit dependent on the decision processes in different municipalities on how they view. Some municipalities have prioritized their own units before Attendo units. As stated, we see a gradually better and better inflow of customers. We think that the negative effect of around SEK 40 million that we had this quarter will gradually decrease going forward. At the same time, you will have less of the government grants related to 2020. If we take the third quarter, do you think it's a fair assumption assuming the net effect being rather similar as in the second quarter, and then hopefully even lower net effect in the fourth quarter? Yeah, something like that. Yeah. Okay. It's hard to estimate exactly. Yeah. If you could come back then with the impact last year, that would be helpful. 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 impacted the move-in rate? What have you heard from potential customers? Have they chosen not to move into Attendo because of everything that has been written in Swedish media? Just after the media debate started, we took contact with every municipality where we operate. 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 elderly care sector, and recognize a lot of the challenges that we had in Sabbatsbergsbyn in the specific unit which was reported on. How has that impacted? We saw a clear impact in May, because we had a pretty good April. We saw a clear impact in May, then we saw nothing till coming back in June. 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. It's a bit tricky to say what is what. Was the lower net inflow in May, which came back in June, how much of that was driven by the fact that we discontinued marketing initiatives and sales initiatives versus actual media impact? Okay. We saw a clear impact. Yeah for a number of weeks, specifically in May, and then coming back in June. Okay. Thank you. Very helpful. That's all from me. Yeah. Kristofer Liljeberg, coming back to the Corona effects. In the third quarter of 2020 was -SEK 40 million, and in the fourth quarter it was net zero, but that was due to negative effects of around SEK 50, and then that we started getting more reimbursements of the cost we've had of positive SEK 50. That was negative. Okay. Yeah. The minus SEK 40 million, that was the net effect? Just to be clear. In the third quarter, yes. Yeah. Okay. Thank you. Our next question comes from Mick Dörfelshul, Nordea. Please go ahead. Your line is now open. Thank you very much for taking the question. Just starting off with the improved move-in 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 municipalities where we operate gradually normalize as 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 during the first half this year. They basically haven't given any clients to private sector during the first half this year due to the corona impact. That is something that is expected to be released starting the second half this year. We see signs of gradual normalization second half. I would say that June was pretty good in terms of net inflow. Okay. That's interesting. Thanks. 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. 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 as expected. With the new elderly care law that came into play in Q4 last year, that implies a sequential upgrade of staff requirements to 2023. It went up from 0.5 to 0.55 starting January. We continue up to 0.6 in January next year, then to 0.7 in 2023. We are negotiating our prices accordingly. There was nothing sequentially that we should 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 renegotiating. The starting date is not January 1st in all of those. They gradually start between January 1st, and I think the last one starts in May 1st. 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- Sure. Yep. until mid-June. Okay. 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 what's your expectations really into the second half year in terms of that? This is a bit sensitive topic because there are competition laws in Finland as there are in Sweden. We're not allowed according to competition laws 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. What we have seen during the past 2 years of renegotiations is that the industry as such has been fairly disciplined. We haven't seen any low balling in terms of prices so far from competitors to get volume. It's been pretty good discipline in the Finnish market because everyone is in the same place. That's a good side of the new underly care law in Finland is that it gives a clear playing field in terms of how requirements are moving up, and what costs are related to those requirements. We expect the market to continue to be disciplined, and that is basically as much as we can say about it. Do you get industry support? Yeah, exactly. There is an industry association called HALI. They don't do actual negotiations, but of course they argue and drive the public debate on what the law implies in cost impact. There's also a lot of details about the financing that goes from the state to the municipalities. Although the municipalities have the financing from the state, it's still for every operator to negotiate contract by contract the exact price adjustments you should have. Of course, HALI is working in the public debate to explain the situation and what's happening. 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 by every municipality and every operator by itself. Just to give an additional comment on this. That's on the SOTE reform that was actually finally passed parliament during the quarter, which will be implemented in 2023 in Finland, which will lead to a separation between the payer role, which will be in the regions, and the provider role, which is public and private sector in municipalities. 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 will be a more level playing field between private and public providers on municipality level. Whereas the public providers on municipality level operates as of today at a clearly higher cost than private providers. We think that that will strengthen our competitiveness in Finland over the long run. Yep. 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'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 Attendo seems a good opportunity or indeed, if you have done any particular efforts in that regard? Secondly, a bit on the other side of this argument, you mentioned that your relationship with local authorities is very good. On the other hand, I understand you've lost the contract in Järfälla in the Stockholm area, 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 three or four months? I'd be interested to hear that. Thank you. Thank you, Hans. It's Martin here. On your first question, how you could potentially leverage the analysis done by Sirona to improve reputation after the media is we have a published report on our website. We also published a pretty extensive evaluation of all our efforts on our site. The City of Stockholm did an evaluation of the specific unit that was criticized in media. That evaluation came out very good, which also Stockholm City published on their website. I think we have to allow for some time because media that's been written negatively at Attendo can't really directly afterwards put up 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. Since we published these reports, we haven't seen any more negative things. On your second question, I think this is part of both the beauty and the complexity of working in this industry, to manage hundreds of different municipality contracts and municipality relationships on local level. That complexity is something that we as a company are used to 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. That's also part of our differentiation, working in so many municipalities. That gives a sort of a long-term stability. I think generally we have a good relationship with our local authorities. I think it's clear for Stockholm 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 at the same time saving tax money. It's a portable adding quality and efficiency. Every now and then, we see municipalities swing on the negative side. On the other hand, we have other municipalities that will start trying out private players. Järfälla was one of those cases. 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 green majority that might not have been the case when you won the contract, et cetera? I'm just curious as to whether you see this as a particular business risk after the bad publicity you received. We don't see a particular business risk on that. We have a close contact with all municipalities. We've had even closer contact after this event. Also mind you that there is quite a big difference between national politics and local politics. Local politics are much more pragmatic, where there's a challenge that needs to be solved. While on national politics, it's more ideology. Okay. Thank you much. Thank you. As a reminder, if you would like to ask a question, please press 01 on your telephone keypad. We have not received further questions at this point. I will hand back to the speakers. Okay. Thank you for participating. We will now conclude the call, and please don't hesitate to contact us directly if you have any further questions. Thank you.