Humana AB

STO:HUM

Earnings Call Transcript

[Operator]

Hello, and welcome to the Humana Q1 Report 2018. Today, I'm pleased to present CEO, Rasmus Nerman; and CFO, Ulf Bonnevier [Operator Instructions] I will now hand you over to Rasmus. Please begin.

[Rasmus Nerman, Chief Executive Officer and President]

Thank you, operator. Good morning, everyone, and welcome to this presentation of Humana's first quarter of 2018. As always, I will start by giving you a sum on the financial operation and highlights of the quarter, and 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 quarter, operating revenue was flat at SEK 1.648 billion. Home care operations, now divested, contributed with SEK 67 million in its revenues to corresponding quarter last year. In the quarter, Humana also returned to positive organic growth of 2.3%. Our operating growth within the quarter were SEK 81 million compared to SEK 66 million last year. This is an increase of 24%. The operating margin improved to 4.9% compared to 4% last year. Also in the quarter, operating cash flow declined somewhat to minus SEK 32 million compared to minus SEK 16 million last year. This is due to calendar effects in the quarter resulting in higher working capital. Our net debt was lower to SEK 1.5 billion, down 11% from SEK 1.7 billion last year. And our leverage improved from 4.1 in the first quarter of 2017 to 3.8 in the first quarter of 2018. Next slide, please. In I&F, we continue to see the positive trend from end of last year continuing into 2018. As a result of implemented measures, we see a clear improvement in profitability in the first quarter where the operating profit in the important I&F segment increased with 29% compared to the first quarter of 2017. With a lowered cost base, we will now increasingly shift our focus to growth, both organically as well as through acquisitions. From a methodology perspective, we're also very pleased to see that the state preparation for medical and social evaluation, SBU, has presented a national study on the TFCO methodology. This study shows very good treatment results and societal cost savings. Humana is the responsible license holder for TFCO in the Nordics. Next slide, please. In Personal Assistance, the market conditions remain challenging with a number of individuals entitled to personal assistance declining with 1.3% in the quarter. We have, however, reason to believe that there will be certain stabilization in the market going forward as there have been a number of positive developments in the beginning of this year.On April 1, there was a temporary stop to 2-year reviews. Also, the Supreme Administrative Court has ruled in favor of Personal Assistance for individuals with certain somatic needs. And finally, the Swedish government in April decided to remove the directives for cost savings from the ongoing LSS investigation.Due to high quality and efficiency, Humana continues to gain market share, and our ambition is to return to growth in a challenging market but where we also see consolidation opportunities increasing. Next slide, please. In our Elderly Care segment, the revenue development in the quarter still negatively impacted by the divestment of the Home Care Services that contributed with SEK 67 million in the first quarter last year. We do, however, see a solid organic growth of 25%, primarily driven by our newly started on own managed units. We also continue to see an impact on profitability in the first quarter from the ramp-up of Växjö and Åkersberga but that's we see utilization improving steadily. We are quickly approaching the point of breakeven. And from then on, we will see an increasingly positive impact from these investments. For the Elderly Care segment, we have a clear ambition to be profitable in 2018 despite all ongoing investments. On top of the 2 new openings planned for next year, we also have a very promising pipeline.Next slide, please. In Norway, we saw a clear improvement in the first quarter as a result of our reinforced cost efficiency program. On top of the lower cost base, you also see improved processes and planning capabilities as well as an increased demand in several parts of the business throughout the quarter. In Finland, we continue to see very good momentum and high demand for our services. Work on the SOTE reform in Finland continues and a vote in parliament is expected in June. Next slide, please. In summary, here you can see on the graphs on Page 7 and 8 the improvement and the positive development we do see manifested in the numbers throughout the latest quarters, both in terms of organic growth as well as profits versus prior year.With this said, I will now hand over to Ulf and Page #9.

[Ulf Bonnevier]

Thank you, Rasmus. Page 9, we are here looking at the quarter 1 operating revenue, which was flat at SEK 1,648 million. The now divested home care operations contributed with SEK 67 million in the corresponding prior quarter in 2017. The underlying organic growth is 2.3%, driven by a very strong organic growth in Elderly Care, positive contribution from the growth we're seeing in the start-ups in Finland and a slightly higher reimbursement level within Personal Assistance. We'll move to Page 10, operating profit. As you can see on the graph, the operating profit was SEK 81 million versus SEK 66 million in the prior quarter, the increase was 24%. This is driven by lowered costs in Individual & Family in Norway. We also see some improvements in utilization in the Norwegian operations contributing to stability, but also Finland is doing well. However, we do still have improvement potential in parts of I&F and Norway with regards to utilization. And we still have, of course, an impact, negative impact from the start-ups in elderly care. But overall, a profit development we are pleased with. Moving on to Page 11 and a little bit more detail on the segments and how we have been performing. Individual & Family first. Operating revenue flat at SEK 551 million. Still an organic decrease, but only 0.4%. This is explained by lower utilization within some areas. The operating profit, however, has improved and increased by 29% to SEK 48 million from SEK 37 million. The margin is 8.7%, and the profitability increase is fully explained by the ongoing efficiency program resulting in a lower cost base. And needless to say, we're pleased with the profit development in Individual & Family. Moving on to Page 12. Personal Assistance. Marginal higher revenue for the period to SEK 653 million from SEK 648 million. And the operating profit decreased somewhat marginally to SEK 35 million versus SEK 36 million, with an operating margin of 5.3%. We have seen effects from the margin squeeze here. Personal Assistance coming at pretty much as we have expected. Moving on to Page 13, Elderly Care. Here, we see the operating revenue decreasing by 30%, but organic growth of 24.9%, so the organic growth obviously driven by our own managed units and the ramp-up of them. And the revenue, total revenue decrease explained by the sale of home care operations of SEK 67 million. Operating loss of SEK 1 million versus SEK 2 million is improving and utilization is improving. So we are -- we have a directional improvement where we are pleased with and our ambition is to return to profit in this area. Moving on to Page 14, Other Nordics. We have a revenue increase by 15% to SEK 336 million, driven by our organic expansion in Finland but also some acquisitions. Our own organic increase at constant currency is 4.2%. Operating profit increased to SEK 18 million versus SEK 13 million with margin of 5.3%, so it's going in the right direction, and the increase is solid explained by solid development and good revenue demand in Finland. Very pleased with our performance in Finland, and we're pleased that our efforts in Norway are starting to pay off financially. So moving on from Other Nordics to our cash flow. Cash flow from operating activities for the quarter was minus SEK 17 million versus plus SEK 23 million last year. The investments we had in the quarter was driven mainly by the Nordics and Finland and, of course, what we have to talk about is the decrease in working capital. And this is fully explained by the negative calendar effect of Easter where the end of the month fell within the Easter period and customer payments were delayed and were paid on Tuesday, after Easter. So pretty much cash flow and good control and the calendar effect, obviously, will change [with us tenfold].With that said, I think I'm done with the numbers. Back to you, Rasmus.

[Rasmus Nerman, Chief Executive Officer and President]

Thank you, Ulf. Well, to summarize, we have entered 2018 a company and in a better position compared to 2017. The changed management efforts during last year are paying off and we see improvements in all parts of the business. Although work remains, especially in Norway in Elderly Care, the directional trend is clear, both in terms of organic growth as well as in earnings. Going forward, we will increasingly shift our focus to growth, both organically as well as through acquisitions.And with that said, I think we can now open up for questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from the line of Carl Mellerby from Nordea.

[Carl Mellerby, Analyst of Healthcare]

My first one relates to Personal Assistance. Have you already by now seen any positive effects from the temporary stop to your use in Q2? And then also on the cash flows and the working capital they left in Q1, so we should expect this to reverse fully in Q2?

[Rasmus Nerman, Chief Executive Officer and President]

Carl, I'll take the first question. No, we haven't seen any real effects in the date or statistics there and that's due to lagging of the data that comes from Försäkringskassan. But we would expect the stabilization going forward, perhaps starting it in April, but we'll see those number in a couple of weeks now.

[Ulf Bonnevier]

Right. And I guess the cash flow question is mine. Well, we expect it certainly to improve in the second quarter. But end of the month, the 30th of June is actually on a Saturday, so we'll see how this falls. I am certain it's going to improve. But if it's going to improve fully, we will see. We'll also try and manage that as best we can, but we do have a calendar to adhere to.

[Operator]

Our next question comes from the line of Stefan Andersson from SEB.

[Stefan E. Andersson, Analyst]

A few questions. I'll start with -- on the Individual & Family of low organic growth there. You mentioned that it's because there's low utilization. To me, that's the effect that you get when you're not selling. So could you maybe elaborate a little bit more on why haven't -- the slowness of getting those people in there and filling these -- filling your facilities up?

[Rasmus Nerman, Chief Executive Officer and President]

Stefan, the main complexity with this last year was, as you know, within the youth division. So residential and housing services for younger people, which is by far the biggest division in Individual & Family care segment. That segment has stabilized significantly over the end of last year as well as in the beginning of this year. However, there is improvement potential in there still. What we are now facing is a more, I would say, a bit more normalized situation, and as you say, now we need to focus on our sales efforts. How do we approach municipalities? How do we market our offer? And how do we communicate the specialty that we have in our different units? What we do see is a slightly lower demand within parts of the family home and outpatient care segment, which is another division. But overall, it's quite a big improvement versus last year.

[Stefan E. Andersson, Analyst]

Okay. Then on Easter effect on the margin, is there -- I guess, you've had little bit higher cost this year than last year. Is it material, or anything to mention at all? How should we think about this going into Q2?

[Ulf Bonnevier]

Well, Stefan, I think -- you can think about this is, for us, totally insignificant in the quarter. So very little financial effect on Easter because you have -- beginning of the quarter, there are some days that goes in favor of you and then it goes against you because of Easter. Net-net, it's a small, a very small minute effect.

[Stefan E. Andersson, Analyst]

On the Elderly Care, you mentioned report that SEK 4 million is the cost relating to new openings. Just so I understand that correctly, is that -- it's a one-off cost in the quarter? Or is that the impact, the running losses for these 2 entities during the quarter?

[Rasmus Nerman, Chief Executive Officer and President]

This is the running losses for the 2 entities during the quarter.

[Stefan E. Andersson, Analyst]

And then on financial costs, has been high in Q4 and Q1. Now it looks like the interest rate is very high. I guess, there's revaluations in there?

[Ulf Bonnevier]

I can answer that straightaway, this is FX effect of SEK 8 million.

[Stefan E. Andersson, Analyst]

Okay. I think -- well, the last thing. You mentioned about -- you talked about M&A. So I guess that you are thinking about that during '18. It could -- that we have a pipeline and something could happen. I mean, how do you view that and also in relation to your balance sheet, where you're a little bit above your debt target?

[Rasmus Nerman, Chief Executive Officer and President]

Stefan, we are certainly above our debt target, and our ambition is surely to close that gap and get closer to the longer-term target that we have. But we see more M&A activity. We see interesting candidates. We are being increasingly approached in basically all segments and countries. Our ambition is to become more active on the M&A side this year with respect for the debt situation, of course.

[Stefan E. Andersson, Analyst]

So what you're saying is some smaller deals could be closed. That's how we should see it?

[Rasmus Nerman, Chief Executive Officer and President]

Yes.

[Operator]

Our next question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Four questions, I think. First of all, if you just could quantify a little bit more how Norway did improve versus the fourth quarter and how Norway did year-over-year. The second question relates a little bit about family business. Nice to see the improvement, but you still, on the margin, saw 1% to 2% below the peak. Is that difference only explained by utilization? And what could you do then to improve that? You talked about more marketing, being out selling to municipalities, et cetera. On the Easter effect, I don't think you answered the previous question, what the impact will be sequentially in the second quarter versus the first quarter, if that's possible? And finally, the comment you had about Personal Assistance volumes being down 1%-something. Was that market related or Humana specific?

[Rasmus Nerman, Chief Executive Officer and President]

So Kristofer, I can take question one, two and four. Thank you, by the way, for asking one question at a time. Norway, I'm not going to quantify it for you. We see a significant improvement in the first quarter versus the fourth quarter of last year. We do see an improvement also versus the fourth -- the first quarter of 2017. It's more the direction that we see and also the initiatives that are to be materialized in the financials. So we are pleased with the trend. We're not pleased with these results yet in Norway. In terms of Individual & Family, I would say that we are well on track to achieve our expectation for I&F as a whole for this year of 9% to 10%, looking at the first quarter, taking into consideration calendar effects and the length of the quarter, et cetera. Maybe Ulf, do you want to go ahead with the third?

[Kristofer Liljeberg-Svensson]

Sorry, on Individual & Family, so you have lowered the cost. And now it's only about filling up the units. Is that correct?

[Rasmus Nerman, Chief Executive Officer and President]

It's about filling up the units, but also focus increasingly on ramping up new units and building new capacity.

[Kristofer Liljeberg-Svensson]

Okay. Of course, you said the market is better, but have you or Humana become less good, that -- has competition increased versus before? So I don't fully understand it. If the market is better, why utilization is not picking up more than this?

[Rasmus Nerman, Chief Executive Officer and President]

When we say that utilization -- the organic decrease of 0.4% is quite a big improvement versus Q4 and especially versus Q3 last year, Kristofer. We see an improvement in the markets, basically what we said during last year as well. There certainly is more competition, but we also believe that, that will wash out over time, and I think that's what we are seeing. We see more companies actually closing down. We see them attempting to sell operations. I think we also have improved our own operations. We are filling up the units that we converted last year. They are now basically all at satisfactory utilization. With that said, there is certainly more improvement potential in the different areas. We have one division, which we call the LSS division, where we are investing heavily in organic growth, ramping up a number of new LSS homes in Sweden. We are more confident and more positive to the I&F segment as a whole compared to last year, but we have some work to do still. Kristofer, before I hand over to Ulf on question number three there, when I said that the number of clients decreased with -- sorry, the number of individuals in Personal Assistance decreased with 1.3%, I was talking about the overall market.

[Ulf Bonnevier]

Do you want me to move into Easter? And when I say Easter effect is insignificant, I really mean insignificant. We're talking about a very, very small number, if any number at all, between the quarters.

[Kristofer Liljeberg-Svensson]

Okay. But so you won't have any big impact in the second quarter either? That's the...

[Ulf Bonnevier]

Well, that would be the consequence, yes, correct.

[Operator]

And our next question comes from the line of Karl-Johan Bonnevier from DNB Market.

[Karl-Johan Bonnevier]

Looking at -- then looking at the strong development you've seen in I&F and also the Other Nordics in the quarter, you already alluded to that, the 9% to 10% is well within reach in Sweden. Do you see the same thing for Norway now? I think you earlier talked about the hope for getting maybe up to 6% already during this year, but I think you also postponed that likely at some stage?

[Rasmus Nerman, Chief Executive Officer and President]

Our absolute ambition is for Norway to be at least in line with the group target of 6%. I think we did see a worse development towards the end of last year and then we reinforced our improvement efforts in Norway. And we do see that paying off as well as materializing. We're not that all giving up the hopes for Norway to achieving at least 6% for the full year, but we certainly have more work to do.

[Karl-Johan Bonnevier]

And looking at Norway from an organic point of view, I guess, it was still negative numbers in Q1. Are you seeing that -- in fact, now, I guess, you're also coming up to slightly easier comps in that respect with, say, all the challenges in the numbers when we look at last year's comparisons. Is that something that you believe can start to grow from here on?

[Rasmus Nerman, Chief Executive Officer and President]

Last year, we saw a challenging market in Norway, and I think we communicated that fairly well as well. It was a challenging market in basically all segments. And for all providers active in Norway, we have seen a significantly -- we have seen higher demand in the Norwegian market in several segments during and throughout the first quarter. This is obviously very pleasing to see, but it's a little bit too early to say whether that's really a lasting change, so to say. But we are still a little bit cautious with organic growth initiatives in Norway. As you know, we did convert a number of units last year, and our focus in the near term is simply to fill those up before we start a new journey, so to say.

[Ulf Bonnevier]

But you're absolutely right, Karl-Johan, about the effect of the migration washing out of the system. And I think the comparable is more like-for-like going forward.

[Karl-Johan Bonnevier]

And the strong growth we saw in Finland in Q1, if I calculate backward, you must have been up to towards 20% organic growth rate there. Is that some particular thing happening in Q1? Or is that the kind of impact you are seeing from all the organic initiatives you're taking there?

[Rasmus Nerman, Chief Executive Officer and President]

It's a combination of the organic initiatives we're taking. As we said previously, we have no spare capacity in Finland, so we're investing heavily in new capacity. But it's also a result of actually all business areas in Finland performing according to plans right now.

[Karl-Johan Bonnevier]

Excellent. Just one final question to Ulf as well. Have you done any early calculation on what IFRS 16 could mean for you?

[Ulf Bonnevier]

No.

[Operator]

[Operator Instructions] And as we have no further telephone questions at this time, I'll return the conference to our speakers.

[Rasmus Nerman, Chief Executive Officer and President]

Well, again, thank you all for listening into the presentation of Humana's first quarter, and I wish you a fantastic day, wherever you are. Thank you very much.