Ladies and gentlemen, welcome to the Humana Q2 Report 2018. Today, I am pleased to present CEO Rasmus Nerman and CFO Ulf Bonnevier. For the first part of the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Speakers, please begin your meeting.
Thank you, good morning, ladies and gentlemen. Welcome to this presentation of Humana's second quarter of 2018. As always, I will start by giving you some of the financial market highlights of the quarter before I hand over to our CFO, Ulf Bonnevier, who will take us through the more detailed financials of the quarter. Next slide, please. In the quarter, our operating revenue grew with 1% to SEK 1.7 billion. Excluding the divested home care operations that contributed with SEK 68 million in the corresponding quarter last year, our revenues grew with 5%. Organic growth in the quarter was at 3.4%, the operating profits in the quarter were SEK 78 million, up from SEK 74 million last year.
Adjusted operating profit was SEK 78 million compared to SEK 60 million last year, as we exclude for capital gains of SEK 15 million following the sale and leaseback transaction conducted in the second quarter of 2017. This is an improvement of SEK 18 million or 31%. The operating margin improved to 4.6% compared to 4.4% last year, the adjusted operating margin improved from 3.6% to 4.6%. In the quarter, our operating cash flow improved to SEK 143 million. This is an increase of SEK 98 million, our net debt was lowered to SEK 1.42 billion from SEK 1.56 billion last year. Our leverage improved to 3.4 times, closing in on our long-term targets. Next slide, please. In Individual & Family, we continue to see a strengthening of operations and positive effects from our implemented efficiency measures.
We estimate that the market for institutional care for youths and adults has stabilized, whereas the market for family homes remains challenging. The rather weak revenue development is dissatisfactory and due to returned contracts in our LSS outsourcing portfolio, as well as slightly lower demand in the FNH segment. So FNH is family homes and outpatient care. Going forward, our focus remains on activities to strengthen growth, both organically as well as requisitions. Next slide, please. In personal assistance, the market conditions remain rather challenging, although we now start to see a stabilization and improvement versus earlier. This is due to the positive developments communicated last quarter. The number of individuals entitled to personal assistance continued to decline in the second quarter, but now at a slower pace compared to previously. The number of withdrawn decisions is significantly fewer compared to last year.
Humana continues our work to maintain high operational efficiency, and we continue to gain market share. Finally, we also continue to see consolidation in the market increasing, and our ambition is to take a more active role in this. On July 1st, we also finalized a small acquisition in personal assistance, the first in many years in this segment. Next slide, please. In our elderly care segment, we continue to see strong organic growth at 35% this quarter. This is primarily driven by our own managed elderly care units. The revenue development is, however, still impacted by the divestment of home care services. With regards to private provision of care. In the beginning of the summer, starting at both the government proposal from Arbetarepartiet to restrict private provision in institutional care for youth. With this said, I will now hand over to Ulf.
Thank you, Rasmus. Moving on now to page eight to give you a little bit more flavor on the performance and the numbers. Page eight, we have the quarter two operating revenue, which ended up at SEK 1,696 million, which is a revenue growth of 5%. If we exclude the divested home care operations organically, we grew with 3.4%, which we're quite pleased with. This relates to our strong growth in elderly care, our improvement in Other Nordics, our startups in Finland, and some price effects here in personal assistance with a stable client base. Pretty much doing well in all segments except parts of the Individual & Family business, especially the family home and open care. The institutional side is doing fairly well. We're not there yet with organic growth in all parts, but it was an improved quarter when it comes to growth.
Moving on to page nine, the six-month operating revenue, it grew again excluding home care with 5% to SEK 3,344 million. We have pretty much the same story going on for the six-month operating revenue. Very strong growth in elderly care, Other Nordics improving, Finland being stable and growing, and we see improvements in Norway, and we see the personal assistance growing with the hiring, investment, and number of hours. Family homes and open care is where we're struggling in Individual & Family, and together with some handed back LSS outsourcing contracts, that is the decline in revenue. Overall, a strong strength and momentum in the quarter and 2.6% organic growth for the full six months.
Moving on to page 10, the adjusted operating profit for the quarter is SEK 78 versus SEK 60 in the corresponding quarter, and we see positive impact from Norway revenue increase and lower cost in Norway, and we're seeing our elderly care turning from losses to profit. We still see some negative impact from the startups in elderly care, but that is moving in the right direction. Moving on to page 11. The adjusted operating profit for the six-month period was SEK 159 versus SEK 125. A 27% increase on operating profit. We see lower cost in Individual & Family in Norway. We see utilization improvements in the Norwegian operations being an important factor. We're seeing continued high efficiency within personal assistance. We see some small negative effects from the startups in elderly care. Moving on from the group to the different business segments.
We go to page 12 where we see the development in Individual & Family. We see an operating revenue decrease of 2% to SEK 555 million, partly explained by the LSS contracts that have gone back to municipal management and some slow development within family homes and outpatient care discussed earlier. The operating profit is in line with the prior year, SEK 40 million versus SEK 40 million, and the margin is stable at 7.1%. Moving on from Individual & Family to personal assistance business, which we see on page 13. And the performance, which we are very pleased with, no surprises, no explaining factors. Good development. What we see is the operating revenue growing 1% to SEK 659 million. The operating profit decreased to SEK 25 million, and this is explained by slightly fewer clients, but the client base are actually having more hours per client.
Net, a fairly stable revenue base. But we do have the margin squeeze coming from the salary increases that is higher than the increase in the reimbursement level. Although we are running an efficiency program, the effect is coming towards the end. We actually do see some small effects here of the margin squeeze in personal assistance. But overall, good development in personal assistance. Moving on to page 14, our elderly care business. The revenue decreased by 27%, fully explained by the sale of the home care operations. Organically, there's a big growth, 35.3%, and the operating loss has now gone from minus SEK 6 million to actually plus SEK 1 million, which we're pleased with. And this hopefully we see will improve going forward. Good development for elderly care in the quarter. Other Nordics, page 15. We see revenue increase of 23% organically, at constant currency 11.4%.
Very pleased with the development on revenue, and especially pleased with the performance and operating profit, which has moved from SEK 16 million to SEK 28 million to a 7.8% margin. This is explained by a very stable growing Finnish operation and considerable profit improvements in our Norwegian business. Savings programs is going well, and we're seeing some good revenue improvements in Norway as well. A good quarter for Other Nordics. Moving on to page 16, our cash flow. And here we see a positive turn on the working capital, which has improved considerably. As we recall, our first quarter we had very unfavorable calendar. It wasn't fantastic in June, but we managed to improve our working capital. Cash flow was SEK 148 million versus SEK 20 million last year. Our investments driven by Other Nordics or Finland and Other Nordics and Individual & Family.
Continue our quest to invest and grow the business. Moving on to page 17. Here we have given a bit more detail and clarity on what is going on in the central costs, which you can see is SEK 16 million versus SEK 5 million in the quarter to SEK 17 million. And here are the explanatory factors. The underlying central cost is SEK 21 million versus SEK 20 million. And then we have the effects of the final settlement of additional purchase prices is SEK 9 million and SEK 5 million, so net SEK 4 million. We have some effect of this long-term incentive programs and some other one-offs. Net SEK 16 million in the quarter. If we look at the net of the additional consideration of SEK 4 million, we look at some other one-offs and we see some other effects in other parts of our P&L. Our estimate is that the positive coming from one-offs net is SEK 1 million.
Rasmus, back to you.
Thank you. Well, to summarize, we continue to see sustainable effects from our change management efforts and especially encouraging is the development in Norway and Other Nordics during this quarter. We believe that improvement potential still exists, but we are convinced that we are on the right path. It's also pleasing to see that our financial situation developed well during the quarter with both improved cash flow as well as reduced debt and leverage. I think we can now open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press zero and then one on your telephone keypad now. Please note that you are limited to one question per round. Please hold until we have the first question. The first question is from the line of Hans Mähler from Nordea. Please go ahead, your line is now open.
Yes, good morning. My first question is regarding INF and I just wonder in your confidence level in reaching the 9%-10% margin for the full year now given the pressure on volumes we're seeing in the first half. Can you elaborate a little bit on that? Thank you.
Our ambition is still to be within the 9%-10% for individual for the full year.
In terms of your confidence level, has it changed anything if you look on the Q2 performance?
I think the net confidence level is unchanged. We see, as we commented in the report, somewhat changing markets, whereas we see a stabilization in the demand for institutional care, both on the youth as well as the adult side. We have grown our LSS portfolio during the year as well, which is positive, which is actually more than we expected. We also encounter a rather challenging market on the family home and outpatient care division, which represents roughly 20% of INF. Net, it's fairly unchanged. Market change and they change all the time, of course.
Understand. Thank you.
Next question is from the line of Daniel Thorsson from ABG. Please go ahead, your line is now open.
Yes. A similar question that Hans had regarding I&F. The weaker areas, how much is dependent on the market development going forward versus your ability to improve the business from here?
I think it's a mixed effect, Daniel. You all know that the market for institutional care, especially in the youth side, has been rather turbulent. As I commented now, we see stabilization and fairly good demand on that side, which obviously is the dominant part of I&F. Family home and outpatient care, there is much more capacity out there, but the demand is fairly high still. What we experience as well as all other providers is that the bottleneck right now is the access to family homes. That's something that we experience as well as all other providers, as well as the public providers, mind you, that they are still the biggest in this. We obviously need to find new and high-quality family homes, and we do not lower our quality demands on these family homes.
All things equal, we should be in a very good position to actually find these homes given our national reach and high quality in these operations. That's the bottleneck. It's not that the municipalities do not want to place clients, it's access to family homes.
Yeah, thanks. Understood.
Next question is from the line of Michael Holm from Danske Bank. Please go ahead. Your line is now open.
Yes. I have one question on the personal assistant segment regarding the potential for more cost savings, considering that the reimbursement levels are lower than the salary increases and it's been the trend for a few years. How much of overhead or improved utilization of the employees could you actually find in this business with this trend?
I'm sorry. We could not hear that question. The line was so bad. Was the question around the margin squeeze on personal assistance? It was really tough to hear.
Do you hear me better now?
Please repeat the question.
Yes. On the personal assistance, the potential for more cost savings to help the margins. Where could you find this considering that you have looked into the cost base for a few years, I guess?
Okay. Yes. The line is really bad. I'll try to answer what I think was the question. You all know that we launched an efficiency program personal assistance many years ago. The effects that we see are, so to say, sustainable. Obviously, looking at entry salary is a big part of that. We are currently in a three-year collective bargaining agreement where each year, depending on the state remuneration, of course, but so far there has been a negative squeeze of roughly 1% per year. We have been successful in the past to mitigate this almost completely, as you could see from our full-year figures last year. That said, of course, it does become more challenging as we go along because our personal assistants can choose other jobs. The labor market right now is currently quite good.
We also want to be cautious and say that it will be difficult for us to fully compensate this going forward. We are dependent on that the government increases the remuneration for personal assistants as the first step to be in line with the collective bargaining agreement salary adjustments. Positive side, which you also commented though, is that we have started to see end of last year, we continue to see this year a real consolidation now in the market. Number of personal assistance companies is going down, and we see more frequent M&A activity in actually companies going bankrupt. This is obviously something we want to follow and be closer to in the future.
Okay. Thank you.
Next question is from the line of Kristofer Liljeberg from Carnegie. Please go ahead. Your line is now open.
Yeah. Thank you. The margin in Other Nordics or actually Norway, how sustainable is the improvement there? Do you think you could see further sequential improvements for the remainder of the year? I also wanted to ask you about what do you think is the reason now for the improved tender markets in elderly care? I'm a bit surprised given the upcoming election. Thanks.
Well, I can start on Other Nordics, Kristofer. You can never be 100% certain, but we are feeling quite good confidence in Other Nordics and especially Norway right now, because it's not only about the profit, it's also about the operational control as well as the financial control over that entire business. There is still further improvement potential, and I'm glad you asked that question because the volumes of the revenues as well as the profits that we have in Norway are not the kind of volatile operations that we've had in the past. This is sustainable, both I&F business, adult business as well as personal assistance business, very similar to Sweden. In terms of elderly care, we've only noted that the number of contracts tendered has gone up somewhat.
My guess is that it probably has to do with the change of requirement for permits for tendered contract that you all know came into play a while ago. That led to municipalities stopping the tendering for a while just to understand what the changes actually mean. Now we're back into more of a normalized situation. What is rather surprising though is that typically the tendered market goes down during election year as also the municipalities form themselves for municipality elections. This year, we see rather the opposite in the elderly care segment.
Could you also maybe comment a little bit more, coming back to the previous question about the margin in the Individual and Family in Sweden. The sequential decline in the margin versus the first quarter seems there's a little bit mixed message about some parts being good while others bad. What's the reason for the lower margin in the second quarter versus the first quarter?
Well, you always have calendar effects, of course, to start with. Then obviously we lost volume, but we also managed to maintain the margin. You all know the program that we ran, especially last year, was very much focused towards the institutional care side where we had challenges. Those effects we believe are sustainable.
The change that we've seen in our beginning of this year is in the family home and outpatient care segment, which represents a bit less than a fifth of the business area. It's impossible to say going forward. Our challenge now and our ambition is to find new family homes to meet the demand that is actually out there. One should bear in mind, though, that the efficiency program started early last year. Obviously our comparables will be more difficult as we start to improve throughout the year.
Okay, thank you.
Next question is from the line of Karl-Johan Bonnevier from DNB Markets. Please go ahead. Your line is now open.
Good morning. I'll be slightly more well-behaved than Kristofer. Just asking one question to you. Looking at Norway, it's obviously encouraging that you so quickly managed to get back to what I guess was this margin target of 6%, because I guess you should be pretty close to that now in Q2 already. Do you feel that is the margin level also for the full year?
Karl-Johan, Ulf here. I think we are very pleased with our improvement that we're seeing here in Norway, strength in margin, and we are taking this on a month-by-month level, and hopefully this will solidify. Our ambition is still to achieve the 6% for the full year. We are obviously dependent on making sure that we continue to run the program successfully and continue to have the current demand level that we have. Our ambition is the same as we set out to do, which is to achieve the 6%.
I guess the confidence level in that must have gone up after the Q2 performance.
Correct. Yes.
Thank you.
Next question is from the line of Hans Mähler from Nordea. Please go ahead. Your line is now open.
Yes. I have a follow-up here on Elderly Care when it comes to the contracts you won here. What would be the full-year revenue impact from those three? Is it fair to assume that Q4 will be the first quarter where we have full impact from all three? Thank you.
Yeah. We're pausing a little bit here, Hans, because we're doing the math. Obviously, outsourcing contracts have lower margins than our own managed units. We will certainly see at quarter three, we'll certainly see more profits coming through the P&L because that is the normal behavior in Elderly Care because of a quarter with low costs and high occupancy and some positive summer effects. When it comes to the contracts that we've won, we think it's certainly above SEK 50 million, but maybe approaching SEK 100 million on a full-year basis. It depends on how these contracts have been constructed and whether it was included in revenue. The margin is Okay. Fully operational and fully effect, we have SEK 100 million additional revenue of these three contracts.
Okay.
Obviously the margin is lower.
They are all operational as of Q4 or?
No. 1 has already started, the smaller one, roughly SEK 20 million. The other two, we hope, again, depending on the permits, we expect them to be operational in the middle of Q4, actually.
Can I also follow up on Elderly Care when it comes to the start-up costs we see now in the first half. Should we assume that they will be zero going into the second half, or will you have some fractions of that also in Q3?
We will have some fractions, but it will be minor, I think.
Okay, great. Thank you.
Next question is from the line of Daniel Thorsson from ABG. Please go ahead. Your line is open.
I think my question was quite similar from Hans Mähler's. Are you profitable in Växjö and Åkersberga? If not, how far into the future is that?
It's here and now.
You have reached break-even in both units on a standalone basis?
Yes.
Okay, thanks.
Just as a reminder, ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now, please limit yourself to one question. There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Nothing more to add from our side. Thank you all for listening in, have a fantastic day. Thank you.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.