Good morning, everyone, and welcome to this presentation of Humana's third quarter in 2017. As always, I will start by giving some of the financial and operational highlights of the quarter. I will then hand over to our CFO, Ulf Bonnevier, who will take us through the more detailed financials of the quarter. Next slide, please. In the third quarter, Humana's operating revenue decreased with 4% to SEK 1.614 billion. The divestment of our home care operations in the quarter has impacted revenues in the quarter negatively. We also had an organic decline in the quarter of 4.3%, primarily driven by the changes in demand for migration-related services compared to last year, as well as a lower utilization in parts of our Individual & Family business area. In the quarter, we had an operating profit of SEK 110 million, that is down from SEK 159 million.
That, however, includes a capital loss from the sale of our home care operations of SEK 14 million. The operating margin in the quarter was 6.8%, down from 9% same quarter last year. As we adjust for the capital loss of SEK 40 million from the sale of our home care operations, the adjusted operating profit was SEK 125 million, and adjusted operating margin was at 7.7%. Next slide, please. In Individual & Family, we continue to focus on operational efficiency. Our improvement program is well on track. In terms of activities, it's about 90% completed. We expect the program to be fully finalized during the fourth quarter. During the quarter, we have, however, experienced a weakened demand in the area of children and youth, where we have seen lower utilization. That's one of our four divisions in I&F.
As many of you know, the HVB bed capacity in Sweden almost doubled during 2015 and 2016, where roughly 60% of the capacity increase was driven by the private sector. Simultaneously, we saw a large number of new companies being registered in the family home and outpatient care segment during the same period of time. Although we now might experience a temporary overcapacity, the absolute majority of these new entrants focus on either migration-related services or less complex social care services. These are services that municipalities typically can provide for themselves. The changes required to convert these operations to more complex care services are difficult. We now see a fast consolidation amongst these new entrants, where almost 400 HVB units from the company Minors has closed down in 2017 alone. The past month, this has accelerated even further, with approximately 80 units being closed on a monthly basis.
The underlying demand for more complex care services is still strong. Humana has a leading position in this segment. Towards the end of the quarter, we also saw utilization recovering. Although we see a sequential improvement also in the third quarter compared to past quarters, we believe there's still further potential to improve. We retain our previously announced expectations that we will be back at an operating margin 9%-10% for the business area for the fiscal year of 2018. Next slide, please. In personal assistance, the market conditions remain challenging. In their latest forecast, released late October, the Swedish Social Insurance Agency, Försäkringskassan, estimate savings of an additional SEK 1.2 billion. That makes it a total of almost SEK 3 billion for 2017 compared to the budget. The number of individuals entitled to personal assistance is also decreasing further, now approximately at 5% on an annual basis.
This has accelerated somewhat. On October 20th, Försäkringskassan sent a letter to the Swedish government around their interpretation of an earlier ruling from the Supreme Administrative Court. In this letter, Försäkringskassan states that the ruling would imply that many individuals will be granted fewer hours. What this means is, in reality, is that for many individuals, this would imply severe deterioration in the quality of their lives. For many families with children, this would imply that the parents can no longer work. Following the letter from Försäkringskassan and an intense media coverage, the Swedish government has asked for a rapid investigation in order to change the law if needed. On November 14th, the government announced that they will propose a new temporary law that mitigates the impact of Försäkringskassan's rapid change of practice during the last two years, as well as possible new changes.
This is obviously positive for all the individuals entitled to personal assistance, it's also positive for the overall market. During the quarter, our visibility has also increased. We have seen the reimbursement level for 2018 being set to 1.5%. This is up from 1% in 2017. A new three-year collective bargaining agreement was agreed, with salaries increasing in the first year with 2.2% from October 1st. This implies a continued margin squeeze, although slightly eased. Despite the tough market conditions, we continue to compensate well for the margin squeeze, Humana continues to gain market share. Next slide, please.
Towards the end of the third quarter, we divested our home care operations, the focus of this quarter has been on the ramp-up of our new elderly care home in Växjö, as well as the opening of our elderly care home in Åkersberga just after the end of the quarter. The opening of these two new units was slightly delayed due to lengthy handling processes at the Health and Social Care Inspectorate, IVO. In ramp-up mode, we are proceeding according to plans, this has an impact on profitability until we reach satisfactory occupancy levels. The one owned managed unit that is fully up and running, Gävle, continues with good occupancy, satisfied customers, strong results.
Just after the third quarter, we also received the annual elderly care quality survey from the National Board of Health and Welfare, again, Humana comes out very well, scoring better than the national average on basically all of the 21 dimensions covered. Next slide, please. In Norway, the measures taken to increase capacity utilization and efficiency in the operations continued during the quarter. We are on track with our improvement program, there is a need to increase utilization in parts of the business, especially our newly started units within addiction treatment and psychiatry that have impacted profitability in the quarter. In Norway, much work remains, our expectation remains that in 2018 we'll achieve an operating margin that exceeds the 6% growth target in our Norwegian operations. In Finland, we continue to see good momentum, high demand for our services.
During the quarter, we entered the elderly care as well as the LSS segment in Finland through the acquisition of NSS. After the end of the quarter, we also finalized a smaller acquisition in Raide, which offers psychosocial care and treatment for children in the Tampere area. With regards to the Sote reform, the work proceeds, we expect the Finnish government to issue a new proposal on the freedom of choice model as part of the health and social services come March 2018. With that said, I will now hand over to you, Ulf.
Thank you, Rasmus, I will shed a little bit more light on the numbers. Moving to slide seven, this explains the Q3 operating revenue. It decreased by 4% to SEK 1,614 million, this was impacted by the divestiture of the home care operations. Organic decline is 4.3%, this is caused by the lower utilization within the children and youth area and Individual & Family and Norway. Acquisitions contributed with SEK 31 million to revenue. Moving to page eight, this is the operating profit for the third quarter. Operating profit SEK 110 million, the comparable quarter was SEK 159 million. This includes the capital loss from the sale of the home care operation of SEK 14 million, we have acquisitions that contributed with SEK 6 million. The adjusted operating profit was SEK 125 million versus SEK 159 million, operating profit margin of 7.7%, that's down from 9.5%.
Please remember that the operating profit in the third quarter in 2016 was a very strong quarter, driven by very high occupancy and migration impact. The negative impact this quarter when you compare is the weakened demand for children and youth care and Individual & Family in Norway, resulting in lower utilization rates. We've had the impact from the startups in the Other Nordics as well as in the elderly care. Moving to slide nine. Nine months, we have operating revenue of SEK 4,940 million. The revenue increased by 6%, driven by Other Nordics. The organic decline is 1.9%. The organic decline is explained by the low utilization in children and youth care in Individual & Family and Norway. Moving to slide 10, the operating profit for the nine months is SEK 250 million, compared to SEK 256 million in previous year, that includes the cost of the IPO SEK 40 million.
We also have SEK 14 million capital loss from the sale of home care and SEK 14 million capital gain from the sale and lease back of the real estate portfolio in predominantly I&F. Acquisitions contributed with SEK 56 million. Adjusted, we have SEK 250 million versus SEK 296 million in the prior year. That is a margin of 5.1%. The adjusted margin is 6.3%, negative impact from the utilization we talked about, the conversion of the migration units, and the improvement program, and impact from the low demand for migration-related services in Norway. I think that's all the overall group profit. Moving from page 10 to page 11 and going into the individual segments, starting with Individual & Family, where although the operating revenue decreased to 3% the organic decline is down 5.6% due to the low utilization, we can see that our improvement program is making good progress.
Please remember, the comparable quarter is very strong. The operating profit is SEK 70 versus SEK 79 in the comparable quarter, margin 13% versus 14.3% prior year. We have a very high capacity utilization, a very high demand in the comparable quarter. This quarter we have been working on our efficiency program and lowering our costs according to the earlier communication, but we do see a lower occupancy in the children youth care area. You can see the effects of the improvement program on the bottom of the graph, where you see the employee numbers are actually going down year-over-year. Moving from page 11 to page 12. Personal assistance, very stable and strong business, and a stable quarter, although the market is very tough. Market is down 5%, as you heard earlier.
Operating revenue down 1% in a market that's down 5%. The operating profit increased from SEK 43 to SEK 49. The margin is up to 6.4% from 6.4% earlier quarter. This is a quarter where we actually see a negative margin squeeze, and this is the overall picture. This quarter, we actually have a positive margin squeeze where we have increases in remuneration of 1%, but no salary increases, because the salary increases start from October 1st. A strong quarter and solid operational efficiency as we've communicated before. Moving from personal assistance to elderly care, where we are continuing to move and change and start new units and try and grow this business. If we look at the operating revenue, it's down from SEK 145 to SEK 128.
This is partly due to, of course, the sale of the home care operation that we did in the quarter, but we also see the positive effect from the unmanaged elderly care homes, thus an organic growth of 4%. This will continue as we fill the new units. The result is minus SEK 1 versus SEK 6 in the comparable quarter. We have an impact on the profitability from the new openings in Växjö and Åkersberga because they are in startup mode. The startup costs in the quarter have been SEK 4 million from those two units. Moving on from elderly care to Other Nordics, where we see some improvement here from the second quarter. Looking at the operating revenue to start with, it declined 8%. The underlying organic decline. Ulf Bonnevier here again.
We concluded just a few moments ago, the elderly care and the explanations for the profit. Moving on to page 14, Other Nordics, where we have an operating revenue decline of 8%. Organically, at constant currency, this is down 12%. Acquisitions contributed with SEK 15 million. Operating profit decreased to SEK 26, up from a very strong quarter of SEK 44. Margin of 9.3% versus 14.2% in the comparables. This is the migration-related services in Norway that's contributing less to profitability and obviously impacting our revenue. The conversion and efficiency program in Norway is developing according to plan, and Finland continues its solid development and made two acquisitions, one during the quarter and one just after the period end, Nordic Senior Services and Rymäkoti Raide. An improving quarter for Other Nordics. Moving on from page 14 to page 15 to shed some light here on the central costs.
You can see in the table what the underlying central costs are in the quarter, SEK 15 versus SEK 13. We also have some other moving parts. Capital loss in the home care sale of SEK 14, which is part of the adjustment when we get to the adjusted operating profit. We also recorded in the quarter the cost for the shared savings, our long-term incentive plan, as well as for SEK 2 million and SEK 2 million for cost of acquisitions, making it a total of SEK 33. You see the nine-month equivalent comparables where we also have a sale and leaseback and a little bit more on acquisition. For nine months, our underlying central cost of SEK 52 versus a comparable period last year of SEK 44. Moving on to page 16, we see some highlights of the cash flow.
We have talked about the impact of the change payment terms in personal assistance. This is actually moving in the right direction of SEK 10 million. That is positive. We continue to work on this issue, and we continue to drive this forward, and our expectation is that hopefully we can gradually improve this going forward. Investments are slightly higher than the comparable quarter, SEK 15 million. This is investment in capacity and new projects and growth in Finland and part of the conversion in Norway, but also part of the ambition to also start new units in the Oslo area. The negative working capital is, as you can look in the comparable third quarter in 2016, it has the same characteristics. This is negative changes to the calendar effects, and it is actually to a large extent, release of the holiday accruals.
I think that is all that I would like to say about the numbers now. I will hand back to you, Rasmus, for a summary.
Thank you. To summarize, there has been a clear focus in the quarter in improving our response to various initiatives. We are pleased with the overall development in our main business areas. In personal assistance, we are doing well in a tough market. We are also pleased with how we manage our improvement program in I&F although the latest market development has offset some of the visible results. In our smaller business areas, they have made healthy progress, but they have more work to do going forward. With that said, I think we can now open up for questions. Thank you very much.
Thank you. Ladies and gentlemen, if you do have an audio question for the speakers, please press 01 on your telephone keypad and you will enter the queue. After you are announced, ask your question. Please ask one question at a time. Our first question comes from the line of Carl Mellbin from Nordea Markets. Please go ahead. Your line is open.
Yes. Hi. Thank you for taking my question. My first question relates to the changing dynamics with the Individual & Family segment and what possible implications this could have going forward in 2018. Also in regards to the IVO permits, how many units have been impacted by this delay? Thank you.
Thank you for the question, Carl. Rasmus here. I am not overly concerned in the longer-term I&F. We have conducted our own market survey, talking to well above 100 municipalities in Sweden. The underlying market demand for more complex care services, which is basically everything now in our Individual & Family, is still very strong, unfortunately. We are, however, now in a temporary time of overcapacity, but we see an increased dynamics also in the market with the capacity going down. It is especially driven by the municipalities, but also private companies dismantling their operations as they cannot convert it for traditional psychosocial care. It does not actually, in any sense, change our expectations for 2018. We obviously need to work tirelessly on utilization quality in all our operations as we have always done.
There is always a seasonality in utilization in the third quarter, where utilization traditionally goes up slightly before the summer, then it goes down during the summer, then to come back again in September, October. What we saw this year, I would like to stress also that it is not entire I&F. We are talking about one out of the four divisions. In two divisions, we have fantastic utilization. In one, we have normal, but we have the slight dip in the youth division. We also see utilization now recovering towards the end of the quarter. In terms of implications from IVO and the lengthy handling processes, IVO is impacting all licenses for all business areas in Sweden.
Where we really saw an impact was obviously in our two elderly care homes that we own, also in the unit that we have open in individual and family during the quarter. We have had extremely long waiting times. This is obviously not exclusive for Humana. This hits everyone in the sector, every private provider who needs the permit.
Okay. Thank you.
Thank you. Our next question comes from the line of Christopher Liljeblad from Carnegie. Please go ahead. Your line is open.
Thank you very much. First question is a follow-up on this individual and family business in Sweden. Is it the whole market that is seeing lower volume, or is it a Humana-specific problem? If it's the market, I struggle a little bit to understand the reason for that. That's the first question. Then I wonder if you could maybe give some flavor on how much impact the lower migration services had on the organic growth since it was pretty negative in the quarter. Thank you.
Christopher, obviously, I don't have full transparency into other providers, but we do hear that a lot of the more classic providers are experiencing a downturn in utilization during this year, but seeing the same pattern as we have. The fundamentals and the correlations are a bit tricky, I agree. One has to remember that about 40% of the capacity increase in the market was driven by the public providers or municipalities. Municipalities do not need a permit for these kinds of businesses, such as we private providers do. What we are seeing now, and I think we also discussed this in our previous quarterly calls, is that municipalities increasingly are closing down their operations as well. The comparables between the third quarter this year and last year is obviously driven by migration to a certain extent.
We had the third quarter last year where we had, I wouldn't say the full impact from what we had in migration-related services, but almost, and now we have 0.0. It's also driven by this lower utilization in our youth division.
Would the organic growth still be negative if you strip out the migration effect?
It probably would be slightly negative, due to utilization, not due to our bed capacity, so to say.
Okay. Then again on this lower utilization, is it that smaller providers that were previously focused on migration services, you mentioned that they have now turned some of them into traditional HVB services. Is that, you think, the reason for the lower utilization rather than that total demand has come down?
We just had the latest figures. We don't see the similar increase as we've seen in the past, nor have we seen a similar increase in privatization, but that goes for the entire care segment, regardless if you talk about I&F, elderly care or LSS services. I think you have a mix of the two, and you have another factor as well, and that is that municipalities have been struggling with their own budget this year. We've spoken to lots of heads of different municipalities, and they told us that building up the capacity was easier compared to dismantling the capacity. We've seen these kind of patterns through the past as well, that municipalities try to cater these services themselves, but they actually never succeed when it comes to more complex care of individual and family care.
That's also confirmed in the analysis, in the survey we've done with more than 100 municipalities. I am not overly concerned in the longer term, Christopher.
Okay. Thank you.
Thank you. Our next question comes from the line of Lars Heveling from Danske Bank. Please go ahead. Your line is open.
Thanks. Regarding the earnings development in the non-Swedish business now in Finland, is that due to demand in adolescent care in Norway and startup cost in Finland? Could you say something more about that?
As both Ulf and I said, the business in Finland is developing really well. In Norway, we have started a number of fairly large units, as you all know. This is a fairly new business to us, and it's a fairly new market since they introduced the freedom of choice. These units were ramped up during the last quarter as well as this quarter, and we now are working really hard on filling occupants in these units. We are progressing quite fast, but obviously, as I said, these are fairly large units with capacity of between 20 and 40 clients, so it impacts profitability during the ramp-up. In a sense, it's like we established five small elderly care homes in one business area.
The market is again, unfortunately, very strong, the demand in Norway, and we have a very positive development in these units, but they're new and they're large.
Could you give an overall estimate of your comments about occupancy also in I&F in Sweden and Norway, and what's the current total impact on earnings?
I don't have that figure here, Lars.
Okay.
Thank you. Our next question comes from the line of Karl-Johan Bonnevier from DNB Markets. Please go ahead. Your line is open.
Good morning. Ulf, maybe you could help me understand a little better what's happening in the cash flow statement. Obviously, you alluded to that holiday accruals were impacting working capital in the quarter, and I guess that's the seasonal pattern. Underlying, it still seems like Försäkringskassan is still, say, contracting money from you rather than coming back into payment of the full amount. Is that the case?
In the second quarter, we had SEK 380 million from Försäkringskassan, and in this quarter we have SEK 370 million. There is still a huge amount but slightly moving in the right direction. The holiday accrual is a big item in the working capital. There are also other factors which might be details, but they do impact. The 30th of September happened on a Saturday, as though we collected the money on the Monday, which is past month end. That also has an impact.
Everything else equal, so to say, going now into Q4, should we expect this to be, say, a traditional seasonally strong quarter? Last year it was these particular impacts from Försäkringskassan that hit that.
Yes. I think we're looking at, from a cash flow point of view, that the fourth quarter will be a normal fourth quarter. Not the negative changes in working capital, which we see in the third quarter, but a more normal quarter.
There should be good release normal basically in Q4 looking at this year. Everything else equals well.
Correct. Yeah.
Excellent. Looking at CapEx, it also seems like you're driving quite a high CapEx ratio for the moment. Is that driven by the turnaround or the changes in these units that you have highlighted? Because obviously you also disposed quite a few of your property. I guess CapEx should be coming down, or where are we in that cycle?
Because we have full capacity utilization and more in Finland, we need to build more capacity. That is one of the areas where we're spending the most on investing. The conversion in Norway is less of a capital-intensive, we're actually also gaining headway on winning some contracts. We've needed to open some units on the back of that. Of course, we also have the investments in Växjö and Åkersberga which are large ramp-ups. They all impact on the CapEx. From the elderly care side, there will be less investments now that will taper down somewhat. We'll continue to invest in Finland, and I think we have done most of the investing in Norway. Net-net, I think this should be going down somewhat, going forward.
We will continue to invest to grow the business, and we will continue to offload our real estate portfolio as and when we have the chance to do so and it's suitable. We do not want to tie up too much capital in real estate. This is a vehicle for us to grow the business.
Excellent. If you look at, obviously gearing is now sliding up to quite high levels compared to your target. Is that, as you see it, impacting the dividend decision that you might take at the Q4 stage?
Well, I can happily give that question to the board. I'm sure there'll be a discussion around that topic. We will see where we end up.
Just a final one. Looking at elderly care, obviously you disposed of the home care operation during this quarter. Can you provide, say, end of quarter number of employees and the number of patients rather than the average, which I guess doesn't make much sense anymore?
We do give in the quarter report.
Okay.
Yeah, end of. If you go to the back-
I only found the average numbers when I looked at the report, sorry.
I think there is end of as well. We can take that offline if you like.
Excellent. Thank you.
Thank you. Our next question comes from the line of Christopher Liljeblad from Carnegie. Please go ahead. Your line is open. Christopher Liljeblad from Carnegie, please go ahead to ask your question.
Yeah, thank you. On the elderly care business, could you comment now how you're filling up the two new own management units? Also, what type of profitability could we see this business having now after having divested the loss-making home care business?
I think, Christopher, Växjö we opened up just before the summer. As you know, summer is holiday for most people. We are now filling up Växjö according to plan. I would say we are maybe 60% occupancy in Växjö right now, increasing at a healthy pace. Åkersberga we just opened up, it's obviously being ramped up right now. Typically, in our own models, we calculate with a 12-18 month start-up time before we reach business as usual, so to say. Gävle went significantly faster, in our own models, we calculate with 12-18 months. In terms of profitability, I think we discussed this before. For our own managed elderly care homes that are fully up and running, we expect a double-digit profit north of 10%.
Obviously, as you know, we have only one elderly care unit under our management, which is fully up and running. The other units that we have are operational contracts where margins are significantly lower.
Thank you.
Thank you. Our next question comes from the line of Karl-Johan Bonnevier from DNB Markets. Please go ahead. Your line is open.
Hi, sorry for coming back to working capital again, obviously Trygg & Trygg is implementing this digital signing as we speak. How has that progressed so far, and do you see that going more smoothly than the previous kind of processes that has affected you?
Well, it's not been a smooth process at all with their new digital tools, they've structured it in such a way more for individual use than for company use. That's actually not helping us greatly. With that said, I do think that we can facilitate and work on and try and improve this SEK 370 million going forward. Exactly what steps, we'll see. Actually the digital signing that they come up with isn't a fantastic tool and doesn't help us a lot.
It shouldn't tie up even more capital looking at Q4, at least?
No.
Excellent. Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. As we have no further questions, I will return the conference to our speakers.
Well, thank you all for listening in and asking questions. I think we have nothing more from the Humana side, so we wish you a great day. Thank you all.