Ladies and gentlemen, welcome to the Humana Q3 Report 2018. For the first part of this call, all participants will be in listen-only mode. Afterwards, there will be a question and answer session. Today, I am pleased to present CEO Rasmus Nerman and CFO Ulf Bonnevier. Speakers, please begin.
Thank you so much. Good morning, ladies and gentlemen, welcome to this presentation of Humana's third quarter of 2018. As always, I will start by giving us operational and financial highlights of the quarter. Hand over to our CFO, Ulf Bonnevier, who will take us through the financial details of the quarter. Next, first slide, please. In the quarter, operating revenues grew at 6.8% to SEK 1.68 billion, when we exclude the home care operations that we divested last year. When included, our revenues grew at 4%. The organic growth in the quarter was 4.4%, a clear step in the right direction. Our operating profits in the quarter were SEK 151 million. This is up from SEK 110 million last year. This is a solid improvement of 37% or SEK 41 million. The adjusted operating profit was SEK 151 million as compared to SEK 125 million last year.
As we exclude the capital losses of the divested home care services, this is an improvement of 21% or SEK 26 million. Our operating margin improved to 9% compared to 6.8% last year. The adjusted operating margin improved to 9% compared to 7.7% in the corresponding quarter of last year. In the quarter, our operating cash flow improved to SEK 148 million. This is an increase of SEK 162 million. Our net debt was lowered to SEK 1.4 billion from SEK 1.6 billion last year. Our leverage is now 3.2 times, closing in on our long-term targets. Next slide, please. In Individual & Family, I&F, we do continue to see a strengthening of operations and positive effects from our already finalized improvement program. During the quarter, we have also seen a continued stabilization of demand across I&F.
Whereas the overall revenue development in I&F is still dissatisfactory, we do, however, see increased demand in some important sub-segments of the Individual & Family. Given our strength in operations and stabilization of demand, we will now put additional focus to growth. One of the key areas for future growth is within own managed housing units for individuals with disabilities, LSS. We have a strong pipeline. Our current focus is on ramping up a number of units in the fourth quarter as well as 2019. Going forward, our focus remains on activities to strengthen growth, both organically as well as through acquisitions. Next slide, please. In Personal Assistance, we do continue to see certain stabilization in the market, where the decline of number of individuals entitled to Personal Assistance has slowed down. So has the number of withdrawn decisions.
We continue to work successfully on quality development and customer satisfaction while maintaining high operational efficiency, and we continue to gain market share. As of recently, we have also finalized two selective and high-quality acquisitions within personal assistance, the first acquisitions we've done in several years. During the third quarter, we acquired Västgöta Assistans, and in October, we acquired RIK Assistans, which gives us a much stronger position in the northern parts of Sweden. The ongoing LSS investigation, which was due in December this year, has been delayed, and we expect it to be presented on January 10th of 2019. Next slide, please. The result from the 2018 National Board of Health and Welfare's annual quality survey has just come out. This is Socialstyrelsens Öppna jämförelser, and Humana again receives very high-quality grade from our over 700 customers.
We come out well ahead of the national averages for both public and private providers. During the quarter, we continued to see strong organic growth of 32.4% in the Elderly Care segment, primarily driven by our new own managed elderly care units. On November 1st, we also opened up operations in two new units in Stockholm City. Our focus remains the same with a high demand for Humana's own managed elderly care concepts, very high occupancy rates in our units, and very good quality grades. Our vision is to continue delivering strong organic growth in this segment. Next slide, please. In Finland, our strong momentum continues with high demand for our services in all segments. Our focus remains on growth to meet the demand for Humana services in Finland.
In our Norwegian operations, we have also a strong momentum where we see good effects from our implemented action program, and we are also experiencing high demand in several of our key segments. We are very pleased with the performance and the sequential improvement that we see in Norway. During the quarter, we have also taken a first step into Denmark through the acquisition of StøtteCompagniet, a specialized provider of outpatient care in the greater Copenhagen region. Humana StøtteCompagniet has collaborated for several years and know each other fairly well. The Danish care market is attractive. Given recent regulatory changes and political ambition to increase private provision. This acquisition provides us with a good opportunity to approach the growing Danish market with local presence and knowledge. With this said, I will now hand over to you, Ulf.
Thank you, Rasmus. Let's look at a little bit more detail around the numbers. We are on slide number seven, the quarter three operating revenue. The operating revenue grew 6.8% to SEK 1,677 million, exclusive of the earlier divested home care operations. We have an organic increase of 4.4%, our best for a very long time. It's driven by the organic growth within Elderly Care, the improved occupancy we heard earlier here, and Other Nordics, where we have started some new number of units. Moving to slide eight. The nine-month operating revenue increased 5.5% to SEK 5,022 million, and the organic increase, since we started the year, slightly down on the organic increase pace. It is, on nine months, 2.9%. Again, this is explained by the Elderly Care and Other Nordics, and also on the reimbursement level within Personal Assistance. Moving on to page nine.
The adjusted operating profits up 21% to SEK 151 million. It's driven by Norway and the revenue increase and lower cost base, and also turning from loss to profit in Elderly Care, driven by occupancy. Actually, the truth is all business areas are contributing to this profit increase in the quarter. Moving to page 10. The nine-month operating profit is SEK 310 million, up 24% from SEK 250 million, and the margin is 6.2%, driven by lower cost base in Individual & Family Norway, improvements in utilization in the Norwegian operations, very high efficiency within Personal Assistance, and it partly compensates for the cost increases that increases the reimbursement level. Moving to page 11, into the business areas, where you have first Individual & Family, the third quarter results. Operating revenue, SEK 538 million, in line with last year. Organic growth, 0.4% positive, which is up from 5.6% negative the comparable quarter.
The operating profit increased 3% to SEK 72 million, and the margin was 13.3%. Improved profit is mainly due to the lower cost base from the implemented action programs. In addition, the investments we've made in several sub-segments are beginning to contribute both to growth and profitability. We're going in the right direction. Moving to page 12, Personal Assistance, a very steady and very good quarter. Operating revenue of SEK 666 million, in line with last year. Small organic decline of 1% compared to 0.6% decline the comparable quarter. The operating profit increased 3% to SEK 51 million from SEK 49 million, and the margin was 7.6%, up from 7.4%. A slight decrease in number of hours, number of clients, but the quarter had excellent efficiency, and we're very pleased with that performance. Moving to page 13, Elderly Care business.
Here we have an organic increase of revenue by 32% driven by our new units. When we exclude the home care services, if we include the home care services, the revenue actually decreased by 12%. This business was divested in September last year. If you look at the operating profit, it's now SEK 6 million, which is a huge step in the right direction compared to minus SEK 1 million in the comparable quarter, and the margin was 5%. We're pleased with the performance in Elderly Care, high occupancy, as well as improvements in efficiency. Moving to page 14, Other Nordics, where we have an operating revenue increase of 28% with SEK 20 million of acquisitions that contributed. The organic growth was 17% for the quarter compared to minus 12% in the third quarter 2017, where we had issues in Norway.
Operating profits increased to SEK 40 million, a big step up from SEK 26 million, and that is a 52% improvement with a margin of 11%. Increased efficiency and capacity utilization and reduced costs from the action program in Norway is the reason for the strong performance in the quarter in Other Nordics. Moving on to page 15, our cash flow. As you all recall, the third quarter is not great when it comes to working capital, but we have improved versus prior year, so the cash flow is up compared to the comparable quarter. We have SEK 67 million in the quarter versus SEK 17 million last year, cash flow from operating activities. Lower amounts of tied-up working capital. We see actually improvements also in Personal Assistance when it comes to working capital, which we're pleased with.
Investments in the quarter driven by Other Nordics, Finland, and Individual & Family, especially in a couple of the divisions where we are continuing to invest for growth. Moving to page 16, central costs. No real major items to discuss. It is a fairly straightforward quarter with underlying central costs of SEK 60 million, and we have got some small costs for acquisitions. The other comparable items that we have discussed earlier are in that chart. The acquisitions, the sale of the ISPAQ, capital loss gain, et cetera, in the nine-month period for last year. All in all, a fairly simple quarter to explain when it comes to the financials. Handing back to you, Rasmus.
Thank you, Ulf. Just to summarize the quarter, we are fairly pleased with the overall development in the group. We continue to see sustainable effects from our implemented action programs, and as a result, notable improvements in our operating profits, especially encouraging is again, the development in Norway and Other Nordics. We also start to see some rather healthy organic growth in Humana, although our growth ambition is higher for the future. Equally important is the positive development with regards to our financial position with improved cash flow, reduced debt, and improved leverage. The combination of these improvements will enable us to be more active going forward, and we are in a much better position for future growth, both organically as well as through acquisitions. With this said, I think we can now open up for questions. Thank you very much.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypad now. Once your name is announced, you can ask your question. If you find it is answered before it is your turn to speak, you can dial zero two to cancel. Once again, that is zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Kristofer Liljeberg of Carnegie. Please go ahead. Your line is open.
Yes, I have some questions here. First one, if you could give some further details in how you managed to improve margins in Personal Assistance despite the salary increases that I think should have kicked in this quarter. Also, could you comment on the different segments within the Swedish Individual & Family business? It is of course positive to see your comments here. The fact is that both your larger competitors have complained about the continued challenging markets. I am interested to see how you might view that differently. I think I will stop there. Thanks.
You want to begin? Kristofer, starting with INF. You do know that during last year, in the end of 2016, we had demand issues and rather big changes within the institutional care for young people. That has improved and now stabilized fully over the course of 2018. We did also experience a downturn in family home and outpatient care, which is a rather big segment for us as well. We also now see that the stabilization there started already towards the end of the second quarter and has continued to stabilize in the third quarter of this year. Within our operations within adult as well as LSS, we have had a rather stable demand throughout this period, and we do also actually note an improvement in demand, especially for unmanaged LSS housing units.
Overall, looking at our entire Individual & Family care service offering, I would say it's fairly stable now with clear signs of improvement, especially in the LSS segment. I cannot really comment on what our peers are doing, but I can say, however, that they are larger to size, but we are larger in Individual & Family. There is no one that comes even close to us in terms of breadth and competence within the Individual & Family segment. We see the market stabilizing, and we actually have a positive view on it also, even though challenges remain. I hope that gives some light to it.
Yeah, that's very helpful. Maybe a follow-up on that and the new units you're planning to open now. How much should we expect this will contribute to sales, and will it negatively impact margins, you think, short term and now in the fourth quarter?
There is always, Kristofer, a negative impact on margins in the short term when we open up new institutional care units. We have worked on our pipeline extensively throughout the year, and we opened up three units now in the third and fourth quarter with an ambition to open up several more during 2019. There will be an impact, of course, on margins. That obviously depends on the speed in which we can increase the utilization of the newly opened units. I think equally important is also that we do feel we are on solid ground. With that said, there is lots of improvements to be made still in INF, and stable means not declining demand. We still want to increase our utilization in several parts of an INF, but we feel that there's stability here, and we want to return to organic as well as acquisitive growth.
Opening these units will have a negative impact on margins in the short term.
The ones you're planning to open up, is that the typical size with five beds or so?
Yeah. Six, seven beds. Exactly.
Moving on to your question on efficiencies in Personal Assistance. First of all, I think we should recognize the fact that there is some natural variation between quarters, and the second quarter maybe was a little bit shy. Really the underlying business was strong and maybe we're having some small positive variations here in the third quarter. Clearly, this has continued to be a market where efficiency is very important to perform well on a quarterly basis. With that said, we've had an excellent quarter, even underlying when it comes to efficiency, and this is due to nothing more specific or exciting than a lot of hard work from the teams in the Personal Assistance. It's improvement program. It is the day-to-day operations that has been doing very well, and we're very pleased with the performance there.
There is natural variation, so it's difficult to draw a line from the performance in third quarter and go moving forward. The cost pressure is still there.
On Personal Assistance, what's going to happen with reimbursement now when there are no government in place?
I'll leave that question to Rasmus.
If we ever get the new government in place. You saw probably yesterday, Kristofer, that there was a shadow budget released by the government, where they, on an overall level, proposed no changes compared to last budget, so that the new government can run their politics. In that budget, there is a proposed increase of 1.5% to SEK 299.8. This is not enough. It's similar increase as we had last year. However, just a few hours after that, Moderaterna as well as Kristdemokraterna said that they were going to release their own budget. Our assumption is that we would see an increase of 1.5%, but we obviously hope and expect it to increase. There are forces and political parties who drive quite an active agenda to improve the remuneration in Personal Assistance, but our assumption is 1.5% again. Unfortunately.
Thank you.
Thank you. As a reminder, if you do wish to ask a question, please dial 01 on your telephone keypads now. Just in the interest of fairness, if you could limit yourself to one question per turn. You're more than welcome to rejoin the queue to ask additional questions. Our next question comes from the line of Karl-Johan Bonnevier of DNB Markets. Please go ahead. Your line is open.
Good morning. Looking at this, as you said, strengthening organic pipeline again. I see that CapEx is starting to go up again in Q3. Is that a good assumption also going forward that you now have projects for basically keeping CapEx at around SEK 150 million going forward or on an annual basis?
Well, Ulf here. As we have communicated earlier, our base case is that we will spend around SEK 100 million in CapEx on an annual basis. With that said, we've had a run of a number of interesting projects that we've invested in the near time here, which are coming to fruition. Of course, as we have done twice before, we will at some point contemplate another look at doing a sale and leaseback. We will see when the timing is right for that. We have invested well, and we will open a number of new units. We'll consider the need for strengthening the balance sheet going forward.
A good assumption for this year would be around SEK 150 million, looking at where you now are at after nine months. This was slightly above the SEK 100 million talked about before.
Well, seeing we're over SEK 100 million, the assumption is yes, it's going to be slightly over that.
Yeah.
Whether it's SEK 150, we'll see when we look to the
Full year.
For the full year. The pace we're hunting. Yeah.
Looking at working capital situation coming up towards the year end, I guess it's a fair assumption that you also will have a good release in Q4. Is there anything specific happening there that we should be aware of?
No, we're expecting a Q4 cash flow similar to last year. That is the normal pattern, so that is what we are assuming.
Excellent. Thank you.
Thank you. Our next question comes from the line of Mikael Holm of Danske Bank. Please go ahead. Your line is open.
Yes. Hello. I have a question on the Elderly Care segment and the opening of new unit. You have two in pipeline for 2019, if you would take a somewhat longer view on the segment and given what you see in terms of potential market demand, do you believe this number could accelerate a bit in the coming years? Where do you see this in the three, four years out?
Mikael, our ambition has been to open two to three new units per year, roughly. As you say, we have communicated to open next year so far. I would say our ambition is to accelerate that growth going forward. We have a strong pipeline of our new own managed Elderly Care homes. At the same time, we are also very picky and selective when choosing these projects. We have 50% disappears out of these projects because we are selective on the location, on the building, on the demand in municipalities, and we obviously also look at what our peers as well as the municipalities are doing. Looking at the underlying demand, it's obviously very high. I think only in Stockholm, there's a need to build 200 new Elderly Care homes for the coming age 10 years, and that's Stockholm alone.
Our ambition is to grow faster than we actually are doing today. I think we're strengthened in that confidence due to the very fine momentum that we experience in the Elderly Care, the quality grades we receive from our customers, as well as some recent wins on quality tenders. What we do think is exciting as well is that we see a new type of hybrid combination contract coming out in the market where municipalities want us to build our managed Elderly Care housing units, but it's also a tendered contract. There is a utilization guarantee. This is a rather interesting idea that we start to come more and more because municipalities in Sweden have a high leverage, so to say, and they prefer not to invest in these units. We are hopeful in our Elderly Care segment for the coming years.
I'd also like to comment here, Mikael, that these planning processes are fairly long, and it takes a little time to decide on a ramp-up and make it happen, so to say. In terms of planning time, organizational resources, et cetera. Certainly, with the recent successes, we have more appetite.
Okay, perfect. Just a follow-up with you in terms of price pressure on the frame agreement on new units. Do you see that as a concern or do you see stable pricing?
It certainly is a concern. We haven't experienced it firsthand yet, but obviously we follow the development in some municipalities that we hear that the lower remuneration in LOU remuneration, for instance. That is certainly something to bear in mind going forward. What we do right now is that we build in a lot of flexibility in our new houses so we can increase capacity, and we can modify the buildings as an example. It certainly is one of the risks that we see in this segment, but as of now, it doesn't keep us up at night.
I think it's fair to say that the cost pressures will increase over time. However, we feel very confident that we have high efficiency and lower costs than some of the current public providers of the same services. It should be a good idea to come to your mind.
Okay. Perfect. My final question is, just if you have any view on the politics on the municipality level after the election. Do you believe it has changed in some way and the view on the service you can provide?
It's still to be decided 100%, Mikael. What we can say, of course, is that the alliance parties in different forms of coalitions obviously have a tight grip of Sweden's 290 municipalities. The rule in the municipalities has almost doubled, from 140 to well above 230, I think right now. There is a certain positive news in that. On the other hand, one has to bear in mind that local municipality politicians are significantly more pragmatic than their national peers. We have business ongoing in municipalities run by Social Democrats as well. As long as care is high on the agenda, and they're open to private provision, it obviously doesn't matter. It's a certain positive news for sure.
Okay, thank you.
Thank you once again. If there are any further questions, please dial 01 on your telephone keypad now. We do have a further question in the queue. It's a follow-up from Karl-Johan Bonnevier of DNB Markets. Please go ahead, your line is open.
Yes. Looking at your market entry into Denmark, obviously an interesting addition to your geographies. Would you consider moving into the other segments in the Danish market as well, going outside the I&F segment?
No. Karl- Johan, let's be honest. We have acquired a fantastic company which is leading in its niche in Denmark, but it's a SEK 20 million turnover company, and we have 30 fantastic colleagues in Copenhagen. Actually, the Danish market is the market which grows the least in the Nordic region. There have been some regulatory changes as well as new political ambitions. Denmark is interesting. The way we look at the Danish market, we are now in the market segment which is growing the fastest, which is outpatient care within. I think looking at also at some of our peers who are struggling in Denmark in Elderly Care, in Personal Assistance, we will be quite cautious at going into other segments as of now. Reason for entering Denmark is obviously that we were provided with this opportunity. We know them well from before.
We have collaborated around methodology development, et cetera. Now we can get to know the Danish market firsthand.
Excellent. When you look at your Personal Assistance acquisitions, what kind of scale economy can you get out of, say, acquiring these kind of smaller units and pooling them into your own operation?
This is obviously what we are doing and want to do is we will absorb them into our system fairly seamlessly. That's basically it. We have systems, we have staff, we have methods that we can In some respect, not Brækjæsesands, but these very small companies that it's more of buying a customer portfolio than a company.
Yeah.
If you know what I mean. It depends on the structure of the company, but the smaller ones, absolutely, we will absorb them fairly seamlessly.
Normally in this kind of situation, would you have an overhead cost in those companies of one, 2%, or is it higher? I guess they're fairly streamlined, aren't they?
I mean, our ambition is always basically to get them up on our margins within six months time, roughly. That's always our ambition.
Excellent. Thank you very much.
Thank you, once again. If there are any further questions, please dial 01 on your telephone keypads. Okay, there seems to be no further questions at this time. I'll hand back to our speakers for the closing.
Well, thank you all for your attention and for listening in. Have a fantastic Friday and weekend when it comes. Bye.