Welcome to the Humana Q2 Report 2019. Today, I am pleased to present CEO Rasmus Nerman and CFO Ulf Bonnevier. For the first half of the call, all participants will be in listen-only mode, there's no need to mute your individual lines. Afterwards, there'll be a question and answer session. Speakers, please begin.
Thank you and good morning, everyone, and welcome to this presentation of Humana's second quarter of 2019. As always, I will start by giving you some of the financial and operational highlights, then I will hand over to our CFO, Ulf Bonnevier, to take us through the details of our performance in the quarter. Let's move on to the next and first slide, please. In the second quarter, we saw a healthy growth with operating revenues increasing 13% to SEK 1.9 billion. The organic growth in the quarter was 2.5%, slightly down from last year, but an improvement compared to the first quarter of 2019. Our operating profits in the quarter were SEK 45 million, down significantly compared to last year.
If we exclude for acquisition-related costs, also the effects of IFRS 16, our operating profits were SEK 65 million in the first quarter, the negative gap of minus 12% versus last year is to a large extent explained by costs associated with our growth projects. The resulting operating margin was 2.3% or 3.4% when excluding IFRS 16 effects as well as acquisition-related costs. In the quarter operating cash flow was SEK 136 million. Excluding effects from IFRS 16, the operating cash flow was SEK 62 million. Our leverage at the end of the quarter was 7.1 or 4.8 excluding prior IFRS 16 effects. Moving on to the next slide, please. On April 15th, we completed the acquisition of Coronaria Hoiva following the approval from the Finnish Competition and Consumer Authority. In the quarter, we also did an acquisition within personal assistance with Assistans på Gotland joining forces with Humana.
In the rest of the group, the second quarter was characterized by growth initiatives. We've signed no less than four new own managed elderly care units in Sweden during and after the end of the quarter. All units are expected to open in 2021. As communicated previously, we have a rather ambitious growth agenda in Finland, where we opened 10 new own managed units during the quarter alone. Moving on to the next slide, please. In our Individual and Family Care segment, the demand and utilization improved during the second quarter. This after a few quarters with rather volatile and also somewhat changed demand. Despite an overall improvement and stabilization, we do still experience a rather weak demand in the children and adolescents segments. Thus, there is room for improvement remaining.
In the quarter, our increased focus on sales activities has partly offset the effects of lower demand in these segments, but we do still see a negative organic growth, although clearly moving in the right direction compared to the first quarter. I'm also glad to see that our efforts to better align the organization have resulted in increased efficiency and profitability in the quarter, both sequentially as well as compared to last year. These adaptive measures will, of course, continue. Finally, we are also pleased to now welcome Johanna Rastad as the new Business Area Manager of I&F. Moving on to the next slide and personal assistance. In the quarter, we finalized the acquisition of Assistans på Gotland. Through this acquisition, we increase our presence on Gotland, where we now are one of the largest private employers in the region.
The performance within personal assistance continues to be very stable, both from a financial as well as from an operational perspective. Pleasing to see is also that we continue to improve customer satisfaction in our recent Q2 survey. Although we continue to see a decrease in the number of individuals entitled for personal assistance, we do see positively on the proposal for legislative changes this autumn that would allow personal assistance for more individuals. Next slide, please. In our elderly care segment, we continue to see strong organic growth driven by both new openings as well as high capacity utilization in our units. The ramp-up of Staffanstorp, the new managed elderly care unit that we opened in March, has gone very well, and we now turn our focus also to Kungsängen, which will open in Q3.
In the quarter, we signed two new agreements for our managed elderly care units in Falkenberg and Norrtälje, and just after the quarter, we signed additional to another one in Norrtälje and one in Ängelholm. The plan is to open all four during 2021, by which we will have 10 housing units under our managed care in this segment. Moving on to the next slide, please. In Other Nordics, we continue to see healthy growth and strong performance in Norway with demand for our solutions in especially personal assistance as well as care for individuals with disabilities, LSS. We continue to be very satisfied with the progress we are making in Norway. In Finland, the main event in the quarter was, of course, the acquisition of Coronaria Hoiva, after which we are one of the leading Finnish care providers.
Moreover, Other Nordics now represent 29% of group sales, equaling both personal assistance as well as individual and family care. We are also very pleased to announce that we have appointed Anu Kallio as the new head of our Finnish operations. Anu currently has the role as CEO of Rinnekodit, which is the leading private provider for disabled care in Finland. Within our established operations, we have already commented upon the fact that we have a rather ambitious growth plan within I&F services in Finland. During the second quarter alone, we opened 10 new own managed units. These openings have been very successful so far, but obviously impacting the quarter somewhat. The recently acquired business in Coronaria Hoiva has, however, not developed according to our expectations before or after the takeover in April.
Our focus now is on integration of the company, including taking over back office function and to improve profitability. We have initiated a comprehensive program aiming at both increasing revenues and reducing costs, with a number of measures already taken. Some examples of measures are performance reviews, unit by unit, and best practice sharing, strengthening of leadership in marketing and sales efforts, a more systematic follow-up using Humana's infrastructure. In order to increase the transparency in the Other Nordics, management and board have decided to report Norway and Finland as their own segments from the third quarter onwards. Moving on to the next slide, please. Finally, it has also been an eventful quarter in terms of creating societal value. We are pleased to see that our HQI, which measures our progress in terms of quality, remains on an all-time high 94.
We are equally pleased to see that our quality director, Eva Nilsson Bågenholm, being appointed new chairman of the Association of Private Care Providers, Vårdföretagarna. In the quarter, we published Barnbarometern, which is a nationwide municipal survey by Humana and Save the Children. For the past six years, we have investigated and analyzed the child perspective in social care and identified improvement areas across the country. For the 10th consecutive year, we also published Tillgänglighetsbarometern, which measures accessibility in the municipalities. This year's winner was Borås Municipality, partly thanks to the progress made by working closely with inhabitants with disabilities in order to improve the accessibility in their home area. We've also launched Socialkanalen, which is a competence hub on YouTube for those who work in the social services and/or with social issues. 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 balance sheet and cash flow-related information, and highlights from the recent sale and leaseback transaction of parts of our real estate portfolio. Operating revenue. First of all, we turn to page nine of the presentation where we see the operating revenue for the group. In the second quarter 2019, our operating revenue grew to SEK 1,918 million, up 13% from SEK 1,696 million previous year. Acquired growth contributed SEK 187 million to revenue, of which SEK 148 million relates to Coronaria Hoiva in Finland, and the organic growth was 2.5% compared to 3.4% previous year. Somewhat dampened organic growth in the quarter was due to the decreased demand that started late last year and has continued also in quarter two in the I&F business area. Next page, please.
Organic growth. As you can see on the graph on page 10, Humana has had a good development all the way through 2018 when it comes to organic growth. In quarter two, the growth dampened all the way up from quarter one to 2.5% overall for the group compared to prior year's 3.4%. This was impacted by the negative growth in I&F of minus 3.6% coming from the decreased demand continuing from late last year, although some improvement visible versus first quarter of the year. With the exception of I&F, we actually have an overall strong organic growth in our business areas. The organic growth is driven for the quarter from new openings and contract wins in elderly care, new openings in Finland, and improved occupancy in Norway. Personal assistance was flat. Next page, please.
Now moving to page 11 for more details and graphs on our profitability development in the second quarter. Our operating profit decreased 42% to SEK 45 million, down from SEK 78 million last year. Excluding IFRS 16 effects, the operating profit decreased 55% at SEK 35 million for the quarter. The effect on operating profit from IFRS 16 is plus SEK 10 million, and this you will find as a reduction in the central costs. The components of the SEK 10 million are decreased rental costs of SEK 74 million and an increase in depreciation of SEK 63 million. However, when we exclude both the IFRS 16 effect as well as acquisition-related items, including integration costs of SEK 30 million, we come to the underlying operating profit, which is down 12% to SEK 65 million versus prior year's SEK 74 million. The margin ended up on 2.3%, 4.6% last year in the quarter.
If we exclude IFRS 16 and acquisition-related costs, the margin ended up at 3.4% compared to 4.4% previous year. The decline in profit for the quarter of minus 12% compared to last year is attributable to project-related and startup costs of new units and an initial negative contribution from the newly acquired Coronaria Hoiva in Finland, including the Other Nordics business area. For all other business areas as well as Norway in Other Nordics, we have seen a satisfactory rather good development in the quarter with stable or improving profits year-on-year. Next page, please. When we look at the profitability for the six-month period on page 12, excluding the IFRS and acquisition-related costs, the operating profit has gone down with 12% to SEK 137 million, down from prior year's SEK 155 million.
The narrative from the second quarter is generally the same for the six-month period when it comes to the reasons for the decline. Project and start-up costs for your new units, negative contribution from Coronaria Hoiva, we also here have the weak start of the year from the I&F business area impacted. Now moving to page 13 and the segment performance, starting with individual and family. Revenues for the quarter reached SEK 535 million, a decrease of 3.6% versus prior year's SEK 555 million. With negative organic growth of -3.6% versus -2.4% prior year. Decrease is due to low demand, especially for care solutions for children and adolescents. Operating profit, however, increased with 2.5% to SEK 41 million compared to SEK 40 million for the second quarter prior year, and the margin was up to 7.6% for the quarter compared to 7.1% prior year.
The positive operating profit development is explained by lower costs as we adapt our organization to better meet current demand. Given the weak start of the year and first quarter, we are pleased with both revenue and profit development in the second quarter. Sales and efficiency efforts seem to be paying off. We're still not back to growth, and this needs to change. Otherwise, we'll need to adapt further. Next slide, please. Now move to page 14 and another steady quarter from personal assistance. Revenues are up 4% to SEK 685 million compared to prior year of SEK 659 million. Increase in revenues comes from acquisitions with organic growth of -0.1% versus +1% prior year. This is due to lower number of hours performed versus prior year and comes from a challenging market.
Operating profit increased somewhat to SEK 26 million, up from SEK 25 million. This comes from the price increase in the reinvestment level. Margin squeeze on staff cost versus reinvestment level is still there but will be visible later in the year. The margin ended fairly flat in the quarter. Next page, please. Elderly care on page 15. Revenues grew well in the quarter with 31% organically and reached SEK 142 million versus SEK 108 million prior year. This comes from the recent contract wins and good occupancy. Operating profit was zero versus SEK 1 million prior year, and the operating margin, if you count the decimals, was 0.3% versus 0.8% last year. Start-up costs for our two new openings in the year, Staffanstorp and Kungsängen, had a rather small negative impact of -SEK 2 million on profits, all thanks to our very successful ramp-up of Staffanstorp since the opening mid-March.
Last quarter, we talked about our strengthened pipeline of projects. This quarter, we can announce on the actual projects too. Falkenberg, two times Norrtälje, and Ängelholm brings our own managed portfolio up to 10 units in 2021. Overall, a strong development in the elderly care business area. Next slide, please. On page 16, we have now moved to Other Nordics. Revenues for the second quarter came in at SEK 556 million compared to SEK 362 million prior year, an increase of 54%. Organically at constant currency, the growth was 8.1% versus 11.4% prior year. Again, a strong growth performance driven by new openings in Finland and good occupancy in Norway. Operating profit decreased by 25% to SEK 21 million from SEK 28 million prior year with a margin of 3.7% versus prior year's 7.8%, which we are far from pleased with. Decline in profits was explained with the acquisition of Coronaria Hoiva.
This contribution was negative, -SEK 6 million, as well as the high number of new openings, 10, in our established operations, Arjessa, impacting their margin temporarily. The Norwegian operations did very well with an increase in the operating profit. We are very pleased with Norway and our new, much stronger market position in Finland. Of course, not so pleased with the financial development so far in Coronaria Hoiva. Measures have been taken. More work is ahead of us to improve the current performance there. We also need to finish the work to fully integrate the operations. Next slide, please. We've now moved to slide 17, central costs. Here we can see the items affecting comparability clearer. In quarter two, we had SEK 26 million of acquisition-related costs in the overheads plus SEK 4 million prior year.
We also have the net effect of the IFRS 16 as a reduction in the central costs of SEK 10 million. Underlying quarterly central costs are SEK 26 million versus SEK 22 million prior year in the quarter. The increase in the central costs relate to strengthened central functions, also project costs taken earlier for our future organic growth. For instance, you have hopefully seen that we've announced recently that we're opening a further four new elderly care units in 2021. Now moving on to page 18 and our cash flow. Cash flow from operating activities for the quarter was SEK 122 million versus SEK 118 million last year. This is excluding the IFRS 16 impact. The quarter is rather normal when it comes to working capital. In quarter two 2018, the quarter was, however, very positive coming from a very weak first quarter in 2018 with adverse calendar effects.
We do have overall seen an improvement in collections in personal assistance versus what we had earlier, but the further improvement potential is limited going forward. As you can see, the recent acquisition of Finland is visible both in the line investing as well as acquisition financing. Our CapEx investments continue to be higher than last year in this quarter, and is driven by real estate investments in new units in Other Nordics, mainly Finland, Individual & Family, but also elderly care within new units in Staffanstorp. I am now moving to page 19 where we can see our financial position. In the graph, we see our leverage moving well above our target of 3 times to 4.8 times excluding IFRS 16, driven by our recent acquisition in Finland. Including IFRS 16 effect, our leverage is 7.1.
The recent sale and leaseback of our property portfolio will, in quarter three, affect our leverage in a positive way, but we have already reaped some benefits already in quarter two. Now moving to final page 20. You can see the highlights of the sale and leaseback transaction in July. SBB is the buyer. The portfolio is across the Nordics, but dominated Finnish properties. We have received a deposit of EUR 20 million in June prior to the transaction, which helps leverage. Our rental costs are SEK 32 million, with an average rental period of 14.2 years, and it will be a gradual transfer of buildings that are under construction when they are ready to SBB in the coming quarters. With a potentially lighter balance sheet, back to you, Rasmus.
Thank you, Ulf. To summarize the start of the year, now including the second quarter, has been characterized by growth initiatives, quality development, and actions that drive a positive change in society. Whereas we see a rather healthy growth of 13% in the quarter, we believe there is still room to improve, especially the organic growth even further. From an earnings perspective, we are not pleased with the second quarter, but the reasons for that are few, identifiable, and we are now addressing them at full force. The temporarily high central cost due to M&A and many organic growth projects, we expect to start normalizing from now on. The poor performance in our newly acquired Finnish business, we will of course improve, and we have already launched a comprehensive improvement program. The underlying performance in the rest of the group is either stable or strong.
We are pleased with the development in personal assistance, elderly care, the Norwegian operations, and also Arjessa in Finland. We are also pleased with the fact that our measures within Individual & Family are having an effect. Going forward, our focus is pretty clear: integrate and improve profitability in Coronaria Hoiva, which we acquired during this quarter. We can now open up for questions. Thank you all.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Please limit yourself to one question per turn, then you can rejoin the queue to ask any follow-up questions. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Christofer Lilja of Carnegie. Please go ahead. Your line is open.
Yeah, thank you. I actually have two questions, I hope that's okay. The first one relates to the weak earnings in Other Nordics. I think you said that Norway has been stable, meaning there must be a pretty steep decline in Finland. Could you talk a little bit about the profitability in the acquired business? When you acquired it, I think you mentioned an EBITDA margin of 8%. Is this business now loss-making or do you also have lower earnings in the underlying Arjessa business because of all the openings? Some more color on that would be very helpful. The second question relates to personal assistance, I struggle a little bit to understand why earnings are so much weaker in the second quarter compared with the first quarter. Of course, we have the Easter effect, but it was the same pattern last year.
If there's something seasonal there I need to think about. Thanks.
Christofer, let's start with personal assistance question. We are actually not disappointed with the performance of personal assistance in the second quarter. We have done a number of acquisitions that are not yet fully in line with our own margins, but we are working on it and we're making steady progress. There is a certain calendar effect and Easter you mentioned, but overall personal assistance in the quarter is pretty much in line with our own plans. Moving to your first question about-
Sorry, could I follow up on that? I think you made SEK 39 million in EBIT in Q1, and now it was SEK 26 million. Even if acquisitions are not having the same margin, I guess it is still not loss-making. I remember, of course, Q1 was exceptionally good, but since we saw exactly the same pattern last year, if there is something seasonally between those two quarters that explains this?
I get Easter having an effect coming in in Q2, whereas it was in Q1 last year. Otherwise, no, Christofer. We look on personal assistants on a monthly basis and where we stand year to date, we are in line with our plans. The companies that we did acquire, especially Assistans på Gotland, for instance, but also the other ones that we have acquired, were not close to the margins that we have. We are, however, quickly approaching our own margins in the acquired companies, but the contribution from start for all the companies was below the margin that we have in personal assistance.
Okay. Thanks.
Moving to Finland, and I know you have only had the report for an hour or so, but you can find there that the Coronaria Hoiva results in the second quarter is minus SEK 6 million. Then we have also told you that Norway is doing quite well and improving. The reason for a slight decline in the Arjessa margin is the high number of new openings, which is also impacting in the Other Nordics. Those are sort of the facts around Other Nordics.
Okay. Thank you very much for that. At SEK 6 million, that doesn't include integration cost, et cetera, I guess.
The integration costs, we're sort of midway into the integration, of course, the costs come when the costs come. Far in the second quarter, we have integration and restruct costs of SEK 4 million, and some of that is sitting in the minus SEK 6 million Coronaria Hoiva. Some of that is also sitting in other parts of the business, in Group Central Cost, for instance. The 4 are distributed.
Okay. Do you dare to give some estimate how quickly you could be back at 8% margin in the acquired business?
No. Not right now, Christofer. As you know, this is a carve-out, our focus now is to fully take over the back office central functions and integrate it we get to know the company even better. We have launched this rather comprehensive program, looking at the quarter, looking at how we enter Q3, we are of course making progress, we're positive to the progress we're making. Needless to say, the performance has been a disappointment, we're working fully on that.
Thank you.
Thank you. Our next question comes from the line of Karl-Johan Bonnevier of DNB Markets. Please go ahead. Your line is open.
Yes, good morning. To continue on Coronaria Hoiva, obviously this is a little strange pattern that has come up with you saying that you had seen the, say the performance both before and after your takeover being much, much lower. Which part of the operation is this stemming from, and is it group-wide? I also figure the same thing as Christofer talked about, the 7%-8% margin you discussed earlier. How visible is that? Do you think it's illogical to get it up to that level at some stage, even though you can't commit to timescale? Or how do you see it?
Absolutely. That should be our target, of course. What we mean by before and after, Coronaria Hoiva did not perform according to plan, basically between signing and closing, and also after. Of course, since we took over, we're working intensely on improving the situation. They did not come into Humana on the same level as they were in half a year ago. There are, of course, several reasons for that. One is slightly the vacuum created when you undergo a competition trial with the competition authorities. Another one is partly affected by the Finnish market overall. Most importantly, it's about internal capabilities. I would say Coronaria Hoiva has been fantastic in terms of driving quality and growth. We just need to add a third leg, which is also profitability in their plans. We're on it full force, Karl-Johan.
None of the problems that you are now experiencing Coronaria is something similar to what Attendo has experienced in their Finnish operations, say staffing problems being much higher or resourcing requirements being much higher or anything like that has basically changed the whole investment thesis for the acquisition?
No, we have 130 units in Finland. None of them has had a negative verdict from the inspection authorities in Finland. We do, however, need to improve both revenue generation, and we need to be a little bit more on top of our costs. I think you asked initially also a question regarding the performance within Coronaria Hoiva. There's roughly 64 units. I would say that about 15%-20% are underperforming, which basically represents the deviation from our plans. That also enables us to have a clear focus moving on to those units. It's mainly within elderly care, but also a few units within disabled care and mental care. Most of the units are actually performing rather well with room to improve.
I think you said in the call earlier that looking at your own I&F openings in Finland, they are on schedule and on plan, the 10 new units, and you had a good ramp-up of them.
Yes. As Ulf commented, the Arjessa, if we call it that, the business that we had entering the quarter performs slightly worse in terms of profitability. This is, however, fully according to plan, if I may say. We opened 10 new own managed units. The way I look at the business, looking at the ramp-up process, looking at where we stand today, I'm very comfortable with our existing Finnish operations. That will also be visible in the quarters to come.
Excellent. If I may, Ulf, could you just help us explain how the property deal would look in IFRS 16 terms? Do we need to look at this in an adjusted way to really get the full benefit in here? Obviously, I guess you need to capitalize quite a lot of those rental payments according to the new rules.
We do, we finalized the deal here in the summer period. We're still working on figuring out the IFRS impact. Let us come back to that when we have a little bit more clarity internally as well, this is new rules for us. You're right, we will need to capitalize that. Yeah.
When you look at the payment profile of the remaining proceeds from it, I understand there is a long tail end to it, would the majority of the remaining cash come through in Q3?
I'd say about two-thirds will come through in Q3 and Q4.
Excellent. Thank you.
Thank you. We have a follow-up question from Christofer Lilja of Carnegie Investment Bank AB. Please go ahead. Your line is open.
Thank you. I'm back. Regarding Finland, the 15%-20% underperforming units, mainly in elderly care. Is this mature units or recently opened units? The reason I'm asking is, again, I don't think you answer really about whether the problems were similar to Attendo with difficulties to find enough nurses and increased salaries, et cetera.
Hi, Christofer. Let's put it this way. All the newly opened units are part of this 15%-20%. They have not followed the opening plan that the company had. We do not experience any problems in recruitment. The salary increase bargaining agreement was slightly higher than planned. It was two versus one percent, originally. We need to strengthen our sales and marketing efforts in order to get more customers to our units. We also need to be slightly more swifter in the future when it comes to adapting staff costs to the current utilization in all of our units, things that we do on a daily basis and all over Humana. As I said, Coronaria Hoiva have been excellent in driving leading quality and growth. I think what we can add to the table is also some efficiency thinking in order to get profitability out of there.
no, we don't experience any problems in recruitment. We do not experience any problems in terms of quality issues with Valvira.
Okay. Coronaria, they also had a lot of newly opened units, and that's where problems are.
Yes. Partly, yes. Also some mature units that are underperforming. The newly opened units are all part of this.
Okay. That makes a lot of sense. Are there a lot of new units that's going to be opened during the autumn here?
Needless to say, since we took over, we want to have a very clear focus in this operation. Both when it comes to new organic growth as well as mergers and acquisitions, we are obviously being extremely selective on that. Our focus now is fully on the existing business and to improve that. We have maybe one or two openings the coming year, but we have also paused a few initiatives within Coronaria Hoiva, which makes a lot of sense actually, since we had this very aggressive opening scheme within Arjessa during the quarter.
How have you been able to pause that if there's new buildings that's already under construction?
Well, there is only one building that's under construction in contrast. The other ones are in stages in the process where we can pause or delay or actually say "No, thank you.
The second thing I would like to come back to, I think you mentioned something about the portfolio of new units within Swedish elderly care until 2021. If you could repeat that, please.
Yes, we have signed contracts to open two in Norrtälje, one in Ängelholm, and one in Falkenberg in 2021. Those are our new projects. We talked about the strengthened pipeline we had of going a little bit faster in elderly care, now we have announced four new projects in a short space of time.
Does that answer your question?
Yeah. Sorry, I was muted. I think you're opening two units this year in Swedish healthcare, how many in 2020?
We're figuring this out. I think it's Vallentuna. Vallentuna only? No. Okay, one in 2020.
Thank you. That's all from me.
Christofer, Norrtälje also in 2020.
Okay.
That's late in 2020.
Late in 2020. Two.
Yeah.
Thank you once again. If there are any further questions, please dial zero one on your telephone keypads now. We do have one further question coming through so far. That's a follow-up from Karl-Johan Bonnevier of DNB. Please go ahead. Your line is open.
Yes, just a question on the new business structure. Will you basically discontinue Other Nordics as a business unit and then report the three separate units, so to say, on the full line as you have been doing for the moment with clients and Sweden and all the countries?
Our plan is to break out Norway and Finland as separate segments or separate business areas. Little Denmark will be included in the central group functions in the other unit. You'll have a full P&L for Finland and Norway from quarter three.
Excellent. Thank you.
Thank you once again. If there are any further questions, please dial zero one on your telephone keypads now. Okay, as there are no further questions coming through, I will hand back to our speakers for the closing comments.
Well, no further comments from our side. Thank you all very much for the attention, and when it comes, have a fantastic weekend. Bye.