Ladies and gentlemen, welcome to the Humana Q3 Report 2019. Today, I'm pleased to present CEO Rasmus Nerman and CFO Ulf Bonnevier. For the first part of this call, all participants will be on listen-only mode. Afterwards, there'll be a question and answer session. Speakers, please begin.
Thank you. Good morning. Welcome to this presentation of Humana's third quarter of 2019. As always, I will now give you some financial and operational highlights of the quarter. I will hand over to our CFO, Ulf Bonnevier, who will take us through the details of our performance in the quarter. Next first slide, please. Financial highlights. In the third quarter, we saw a healthy growth of operating revenues increasing 15% to SEK 1.9 billion. The organic growth in the quarter was 3.2%, down from last year, an improvement compared to the first two quarters of 2019. Our operating profits in the quarter were SEK 176 million, a healthy improvement of 17% compared to last year. Excluding the effects of IFRS 16, the operating profit increased 9% to SEK 164 million.
The resulting operating margin was 9.1%, or 8.5% when excluding the effects of IFRS 16. The quarter was also strong in terms of cash flow, with an operating cash flow of SEK 206 million compared to SEK 35 million last year. Excluding the effects of IFRS 16, the operating cash flow was SEK 121 million. Our leverage at the end of the quarter was 6.0 times or 4.1 times excluding IFRS 16 effects. Next slide, please. Moving on to operational highlights. Most parts of the Humana Group continue to be characterized by growth and initiatives to ensure also future organic growth. In the quarter, we signed two new contracts for elderly housing units under own management, one in Norrtälje and one in Ängelholm, both units planned to open in 2021. We also finalized the sale and leaseback transaction to a total value of SEK 468 million in the quarter.
Our most important quality indicator for the whole group, the Humana Quality Index, remained stable on a very high 94% in the third quarter. The improvement compared to both 2017 and 2018 remains. Finally, Humana was again nominated for the 2019 Allbright Award for our work on promoting diversity and gender equality. Moving on to the next slide, please, in the business area, starting with Individual and Family Care. In our Individual and Family Care segment, the operating margin increased to 13.7%, mainly explained by improved efficiency and better adaptation to meet the current demands. Occupancy in the segments for children and adolescents, we can characterize as stable, also weak. Our focus on sales activities has partly offset the effects of changes in demand, we still see some negative organic growth, although clearly moving in the right direction compared to the first and second quarter.
Under the new leadership, the business area is now implementing a number of changes, aiming to reduce volatility and improve performance over time. Moving on to personal assistance, the next slide, please. In personal assistance, our steady performance continues, and during the quarter, we see both high customer satisfaction and increased market share in a somewhat declining market. Our margin remains stable due to investments in quality and efficiency. Challenges in the market remain, though, as the number of individuals whom Försäkringskassan considers eligible for assistance continues to decrease. We do, however, welcome the definition of basic needs that was widened on November 1st, so that individuals with need for respiratory aid, et cetera, are now entitled to personal assistance. The remuneration will increase by 1.5% in 2020, according to the government's budget proposition. Next slide, please.
Moving on to elderly care, where we continue to see strong organic growth driven by both new openings as well as high-capacity utilization. Our own managed unit in Staffanstorp, which opened in March, is now fully up and running, and Kungsängen, which opened in September, is off to a good start. In the third quarter, we also signed two agreements for own managed elderly care units, one in Norrtälje and one in Ängelholm. The result from the 2019 National Board of Health and Welfare's annual quality survey is just out, Humana again receives very high-quality grades from our customers. In 2019, we improved versus last year, Humana also comes out well ahead of the national averages for both public and private providers. Moving on to the next slide, please, where we now start to report Finland and Norway separately, we start with Finland.
In Finland, we continue to see strong organic growth driven by our individual and family care segments. We're also making progress in improving the financial performance of the newly acquired Coronaria Hoiva. Work remains, though, to realize the full potential, our structured improvement program will continue as planned. With regards to integration, the work proceeds as planned, the ambition is to fully integrate Coronaria Hoiva by next quarter. In parallel, we're also rolling out the Humana brand across all our operations in Finland. The debate around Finnish elderly care has calmed down somewhat, focus is on potential new staffing requirements. The inspection authorities, however, remain very active, conducting inspections on both public as well as private providers. Moving on to the next slide, please, in Norway. In Norway, the performance was stable during the quarter, although revenues decreased slightly compared to the corresponding quarter of last year.
Our good momentum within personal assistance and disabled care housing services continue, this is also where we see the largest growth potential going forward. Looking at the recently presented Norwegian budget, we do see increased grants to segments where Humana is strong, we do also closely follow the political developments in Norway and note the will to increase the share of non-profit organizations in procurement of care in certain segments. With this said, I will now hand over to you, Ulf.
Thank you, Rasmus. I will now give a brief summary of some more details about the numbers, performance overall and per business area, as well as central cost and cash flow related information. First of all, we turn to page 9 in the presentation where we see the operating revenue for the group. In the third quarter 2019, our operating revenue grew to SEK 1,928 million, up 15% from SEK 1,677 million previous year. Acquired growth contributed SEK 200 million to revenue, of which SEK 151 relates to Coronaria and Finland, and the organic growth was 3.2% compared to 4.4% previous year. Somewhat lower organic growth overall in the quarter is due to the weaker organic growth in the INF business area. Organic growth. As you can see on the graph on page 10, Humana has had a good development all the way from 2018 when it comes to organic growth.
In quarter three, the growth dampened, although up from first and second quarters, somewhat, to 3.2% overall for the group compared to prior year's 4.4%. This was impacted by the negative growth in INF of -1.7% coming from low occupancy in the quarter. With the exception of INF, we actually have a good organic growth in our now five business areas. The organic growth is driven for the quarter from recent openings in elderly care, new openings in Finland, and personal assistance in Norway also contributed, but with smallish numbers. Next page, please. Now moving to page 11 for more information on our profitability development in the third quarter. Our operating profit increased 17% in the quarter to SEK 176 million, up from SEK 151 million in quarter three last year. Excluding IFRS 16, the operating profit increased 9% to SEK 164 million for the quarter.
The effect on operating profit from IFRS 16 is SEK 13 million, and this you will find is a reduction of the central costs. The components of the SEK 13 million are decreased rental costs of SEK 85 million, an increase in depreciation of SEK 72 million. The margin ended up on 9.1% versus 9% last year in the quarter, and excluding IFRS 16, the margin ended up at 8.5% compared to 9% previous year. The increase in the profit for the quarter is due to stable or better performance in all business areas. Of course, we're not satisfied with our performance in our newly acquired Coronaria and therefore Finland as a whole, but work is progressing as expected and moving in the right direction. Next page, please.
When we look at the profitability for the nine-month period on page 12, excluding IFRS 16 of SEK 30 million and acquisition related costs of SEK 36, the operating profit is flat at SEK 304 million versus prior year SEK 305. When we look at operational performance, we see a weak start of the year from the INF business area compensated by stronger performance in elderly care, personal assistance in Norway, but we also have the negative contribution from Coronaria impacting. Next slide, please. Now moving to page 13 and the segment performance starting with individual and family. Revenues for the quarter reached SEK 529 million, a decrease of 2% versus prior year's SEK 538 million, negative organic growth of -1.7% versus +0.4% prior year. The decrease is due to low occupancy, especially for housing solutions for children and adolescents.
Operating profit came in flat at SEK 72 million versus SEK 72 million last year. The margin increased to 13.7% compared to 13.3% prior year. Stable margin. Q3 is a seasonally high margin quarter, is due to increased efficiency and adaptation of the organization to better meet current demand. We're pleased with the solid performance in INF in the quarter, more work to be done to get back to positive organic growth and more stable occupancy. Next slide, please. We'll now move to page 14, another steady quarter from personal assistance. Revenues are up 6% to SEK 708 million compared to prior year of SEK 666 million, with organic growth of 1.3% versus -1% prior year, with a stable number of hours in a declining market and the increase in the state reinvestment level impacting.
Operating profit for the quarter increased somewhat to SEK 52 million up from SEK 51 million, this comes mainly from the increase in the state reinvestment level. The margin ended fairly flat in the quarter at 7.4% versus 7.6% prior year. Next page, please. Elderly care on page 15. Revenues grew well in the quarter with 30% organically and reached SEK 146 million versus SEK 112 million prior year. This comes from the recent openings and good occupancy overall. Operating profit was SEK 8 million versus SEK 6 million last year, the operating margin was 5.6% versus 5% in last year. Start-up costs for two new openings in the year, Staffanstorp and Kungsängen, had a rather small negative impact of a -SEK 2 million on profits, all thanks to good work successfully ramping up our new units. Overall, a strong development in the elderly care business area. Next slide, please.
On page 16, we're now reporting Finland and Norway separately for the first time, we begin with Finland. Revenues for Q3 came in at SEK 336 million compared to SEK 163 million last year, an increase of 106%, driven of course, by the acquisition of Coronaria. Organically, at constant currencies, the growth was 9.6% versus 21% last year. A strong performance driven by new openings in RJS. Operating profit increased somewhat to SEK 19 million versus SEK 18 million last year with a margin of 5.7% versus 11.3%, which we're far from pleased with. Of course, this is mainly due to the development in Coronaria, where results are still weak. Results in Coronaria did however improve in Q3, we're making good progress both in integration as well as the operations, this is our current focus. The integration costs in the quarter were SEK 4 million.
Next slide, please. Norway on page 17. Revenues decreased slightly in reporting currency, the organic growth was 2.1% versus 14.2% last year, this development is explained by a different mix of clients. Operating profit was flat at SEK 21 million versus SEK 21 million last year, the operating margin was 10.7% versus 10.9%. Overall, stable development in Norway. We now move to slide 18, central costs. Here, we can see items affecting comparability. In Q3, we have some small items like profit on the sale of real estate of SEK 4 million impacting, the large item is the IFRS 16 effect, which is a reduction of central cost of SEK 13 million. The underlying quarterly central costs are therefore SEK 18 million versus SEK 17 million prior year in the quarter, a small increase. We move to page 19, our cash flow.
Cash flow from operating activities for the quarter was SEK 182 million versus SEK 168 last year, excluding IFRS 16, and the quarter was positive when it comes to working capital development. Our CapEx investments continue to be fairly high, but lower than last year, and of course, this is compensated by the sale of real estate of SEK 325 million. On page 20, you can see our financial position. In the graph, we see our leverage, although still too high, moving in the right direction versus second quarter. Excluding IFRS 16, our leverage is 4.1 times and including IFRS 16, we're at six times. With overall a solid quarter, back to you, Rasmus.
Thank you, Ulf. To summarize the quarter, we're quite pleased with the overall development where we see a rather strong growth but also organic growth picking up. A steady performance in all business areas and improvements in operating profits. Progress made in Finland, although much work remains. In the quarter, we're also advancing our position in the important area of quality, where the commitment and responsibility of our staff is translated into very high customer satisfaction across the group. That said, much work remains. During the quarter, we've also reviewed our strategy together with the partially new board of directors. We have reconfirmed that we are attracting the segments where we're also performing well. However, there is a potential to improve profitability and predictability in our operations, and this will be the focus going forward. With that said, I think we can now open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. In the interest of time and fairness, can you limit yourself to one question before rejoining the queue for any further follow-up questions? Our first question comes from the line of Christoffer Liljeblad of Carnegie. Please go ahead. Your line is open.
Good morning. Can you hear me?
Absolutely.
Very good. I wanted to ask you about first, could you give the Coronaria margin so we could compare that versus what you have in the first quarter of the acquisition? Also just a housekeeping question, the financial net adjusted for leases here around SEK 20 million. Is this a good run rate after the acquisition? You think that's it. That's all from me. Thanks.
Well, I will jump into your financial net question first. We have leases coming from IFRS 16 of SEK 20 million, and then we have both currency gains and currency losses. The remainder is interest cost of around the same as we have coming from financial leases. The currency effect has been positive about I think SEK 18 million in the quarter.
Okay. The run rate is more like SEK 35 million?
No, SEK 20. We can do that offline. Yeah. Financial net around SEK 20, and then financial leases of IFRS 16 of around the same. If you want to do it-
Okay. Yeah. Okay. Thanks.
Okay. Thank you.
Thank you.
Coming back.
Sorry, go ahead.
Yeah, I think it's Christoffer, we can take the first question as well. Coronaria Hoiva, Christoffer, we're obviously still far from where we want to be, but we're making some pretty steady progress now in the third quarter. Looking back at the second quarter, you know that we did a loss of SEK 6 million. On top of that, we had one-off an integration cost of roughly SEK 4 million. We still have integration cost of around SEK 4 million. There's still no really solid margin to talk about in Coronaria Hoiva, but we're making steady progress compared to where we came from. They're roughly break-even now, basically.
Great. Thank you very much.
Thank you. Our next question comes from the line of Carina Almgren of Handelsbanken. Please go ahead. Your line is open.
Yes, good morning. I have a question about how you look at the market in Finland. Do you find it hard to recruit personnel? I believe you mentioned in the last quarter that it was not such a big problem for you. Do you see any other changes when it comes to behavior from municipalities or competitors?
No, I think that my response would be the same as it was in the second quarter. No, we do not experience any additional difficulties in recruiting staff. In some locations, whereas it could be Finland or Sweden, it's always difficult to recruit specialist nurses, et cetera. No, we do not experience any additional difficulties in recruiting the staff that we need. It's actually not a showstopper in terms of opening new units. However, basically all of the units that we have opened year to date are within the individual and family care segment rather than elderly care. That should be taken into consideration as well. I think the political climate in Finland, the debate is still ongoing. I would say it has calmed down significantly. It's also fairly nuanced.
If you look at the main political parties, there is not really a discussion on whether private providers should exist or not. I think also looking at some of the peers that had some improvement potential, that debate has also calmed down. There is, however, quite a big debate ongoing in Parliament around the future staffing requirements in Finnish elderly care, which we think is healthy. I think there is a draft and a proposal to change the staffing requirements come 2023. Obviously, will that or should that be reflected in reimbursement we get? I think from political media perspective, it certainly has calmed down somewhat. We have the inspection authorities, which I mentioned during the call, that are very active still. They're inspecting all private, not-for-profit as well as public providers.
That obviously is a very positive thing, but on the other hand, consumes a lot of time from our unit managers, of course.
Okay. Very well. On Norway, could you also give maybe a little bit more color on the political climate there and what it actually means for you and what your conclusions for your business is?
Norway has had municipality elections recently, and there was a change in several important Norwegian municipalities. There has been an ongoing debate around private provision of care and healthcare in Norway ongoing for many, many years. I think what is a slight difference now is that we actually see some municipalities taking a step in insourcing parts of care and healthcare such as elderly care in Oslo and also Barnevernet in Oslo. It has virtually no implications for Humana since we're not present in elderly care at all in Norway, and also in Barnevernet we have very few placements from that particular municipality, which is Oslo. I think if you look at the national budget proposal, we do see increases in grants rather to the segments where we are strong, DPA and disabled care housing services, et cetera.
In reality, no implications whatsoever, but obviously we follow the development closely, and we're heavily engaged in the debate as well as a leading provider in Norway.
Okay, great. Thank you.
Thank you. We have a follow-up question from Christoffer Liljeblad at Carnegie. Please go ahead. Your line is open.
Yeah, thank you. It's actually three of them. I hope that's okay. The first one is on individual and family. You're talking about reducing the quarterly volatility. I'm interested to hear how you will actually do that. It's small units at a short duration in stays, it can't be that easy, but I'm interested to hear that. Secondly, for the personal assistance, given the price increase now or reimbursement increase of 1.5% next year, I guess salary increases, there's a risk that will be higher. What's the possibility to continue to compensate for that gap versus salary increases and the reimbursement increases? Finally, on elderly care, could you provide the timing of openings now going forward? Thank you.
Hi, Christoffer. Let's start with personal assistance. Yes, we have a proposal now from the government, which is 1.5%. It is too low, it's also what we had expected, and it's what we've had for the past years now. Just to say, we do not yet know the result of the negotiations on the collective bargaining agreement. If we assume that it ends up around where it has been the past three, four years, just north of 2%. Personally, I believe our ability to continue to mitigate the margin pressure is fairly strong. However, it does, of course, become more and more difficult. Given the current market setting, the circumstances, we of course, do not expect any margin expansion from this business area.
I think one thing which we will do slightly different next year and end of this year compared to what we've done in the past, is also that we are investing in an upgrade of our digital solutions. That will drive efficiency to the right way to compensate also going forward. INF, of course.
Sorry, Rasmus.
Sure.
Just on what you said about the investment in the digital, is that something that will drive cost initially?
Of course, it will drive some cost initially, but the magnitude is not large. It's an upgrade to what we have, and it's more about internal resources, training the people that we have in these new systems. It's not a big cost to consider. INF, Christoffer, of course, we are the leading provider in individual and family care. We've done it for the past 100 years in some of our locations. We are pretty good in adapting to the demand. I think one thing which remains the same in INF, and it has remained the same for the past year or year and a half, and that is the fact that 80% of our 150 units or so in Sweden actually are really stable. We do, however, have a volatility in around 25 units within the youth and adolescent segment.
There we have a plan, which obviously depends a little bit. If you want to be successful and drive permanent change, the change must be adapted to the needs of that specific unit. For some of the units, I would say roughly half of them, it's about sales. It's about productivity. It's about ensuring a stable top line as well as utilization. For others, we want to transform a little bit the content that we have to demand that we see is clear from Swedish municipalities today. In a few units, we also need to work on quality leadership or the methodologies that we use. It really is a unit-by-unit analysis, and the ambition is, of course, to drive the permanent change in these units.
I think if we do that, and we increase our forecasting abilities in terms of, a fancy word, but pipeline management, I think that we will over time be able to reduce the volatility in terms of utilization. That's the ambition, at least. It's not something we'll do over a day, of course. It's a long-term project, but ambition is to do it also permanently.
If highlighting maybe most important, is it about cross-selling between the units? Transfer incoming calls to being able to offer that capacity somewhere else?
That is part of the solution. We are, however, Christoffer, quite successful in that. We have a care chain concept that no one else has. We can always improve on that, and we are improving on that. If you look at the number of, we call them care chains. If you now look at the number of clients that we transfer internally, depending on their needs, that's increasing by 25% per year, roughly. That is an improvement lever, but it's really about what I said, it's about stability on the unit level. Okay, moving to your question on elderly care, Christoffer. We have two projects in Norrtälje, one set for the spring of 2021, and one is slightly later during the same year. Vallentuna will be end of 2020 or early 2021. We have Ängelholm and Falkenberg in the spring of 2021.
Actually, with the exception of Vallentuna, very little will open in 2020.
Thank you.
Thank you. Once again, if there are any further questions on the line, please dial 01 on your telephone keypads now. We have a follow-up from Carina Almgren of Handelsbanken. Please go ahead, your line is open.
Hello. Yes, a follow-up on the INF segment and the youth sub-segment. Do I understand it correctly that it's more the nature of the business and the management of it that is causing the volatility rather than some changes in underlying demand? Is that correct?
You have three components here. Answering the question, we obviously focus on what we can affect. You have a market component here in terms of the demand from Swedish municipalities, the type of the demand we have. That has changed over the years, and it's still rather volatile. You have obviously a competitive component here where the capacity in Sweden has more than doubled compared to, let's say, three years ago. You have an internal component which is about our own improvement potential, and that is where our focus lies, of course, and we think that that component is actually fairly big over time.
Okay. The demand, is it decreasing, or how is that developing?
Demand, looking at all of INF services in Sweden, is increasing. It's increasing faster, however, in low complexity, low intensive segments such as supportive housing or open care. That is obviously an area where we are looking into. We're hardly present at all in that area today. Our focus has always been on the very high complexity cases where there really is no other alternative in a sense. Given, of course, the fact that municipalities have slightly tougher budgets, and also there is a need for example, for supportive housing. This is obviously something that we are looking into in the revised strategy for INF.
Okay. That was all for me.
Great. Thank you.
Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. Okay, there seem to be no further questions coming through at this point. I'll hand back to our speakers for the closing comments.
No additional closing comments. Thank you all for the attention as well as good questions, and when it comes, have a fantastic weekend. Bye