Humana AB

STO:HUM

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Humana Q1 Report 2021. [Operator Instructions]Today, I am pleased to present CEO, Rasmus Nerman; and CFO, Noora Jayasekara. Please begin your meeting.

[Rasmus Nerman, CEO & President]

Thank you, and good morning and welcome to this presentation of Humana's first quarter 2021. As always, I will start by giving you some financial and operational highlights, and I will then hand over to our CFO Noora, who will take us through the business in the quarter.Next slide please. A key takeaway from the first quarter is improved operational situation with regards to handling the pandemic. It does remain our key focus. And throughout the first quarter, we have continued to have low transmission of the virus. We have also witnessed that firsthand the positive impact from vaccinations of both residents and staffs across the Nordics. Demand in Nordic Elderly Care is still dampened, but we do see an improvement in Sweden towards the end of the first quarter. We are also pleased to see that our steady performance and momentum continues, where we see a positive development in 4 out of 5 business areas.In the first quarter, Humana continued to grow organically despite the leap year effect on the comparative quarter. As commented earlier, we have finalized the acquisition of Team J-son during the first quarter and integration is progressing well. And finally, the strong cash flow and improved performance allowed for additional repurchases of own shares. All in all, a solid start in new year.Next slide please. In the first quarter, our operating revenues increased with 2% to SEK 1.99 billion. The organic growth in the quarter was 2.4% compared to 3.8% last year. However, as we adjust for the leap year effect, the organic growth was 3.5% compared to 2.7% last year, thus the positive underlying development. Our operating profit in the quarter was SEK 112 million, an improvement of 14% compared to SEK 98 million in the corresponding quarter of last year. The resulting operating margin was 5.7%, an improvement versus last year's 5.1%.In the quarter, we had a strong operating cash flow of SEK 197 million, an improvement versus last year, and we have further reduced our net debt to SEK 3.7 billion. Our leverage was at 4.4x, which is in line with our financial target and down significantly compared to last year.Next slide please. As mentioned in the beginning, we continue to handle the pandemic well with low transmission of the virus and we are also beginning to see the positive impact from vaccinations across our operations. In the first quarter, the Humana Quality Index remained on the high 94%. We continue to see high customer satisfaction and few serious deviations, but we also note that the challenging times are reflected in our employee satisfaction survey. During the quarter, the group reported a total of 4 serious deviations in the Nordics.Next slide please. During last year, we did accelerate our work on sustainability. And in our annual and sustainability report for 2020, you can read more about our work. For instance, that Humana Quality Index reached an all-time high and that we saved Nordic taxpayers approximately SEK 1 billion. We were again recognized for our work on equal opportunities and we also implemented a carbon dioxide index. We reduced our emissions in 2020.Last but not least, we have just recently also implemented a Code of Conduct for nearly 10,000 suppliers of Humana. Our work in important areas of sustainability will continue and much remains, but it is encouraging to see that our efforts are paying off as the Humana was ranked the most sustainable brand and company in the health care category from Sustainable Brand Index.Next slide please and over to our segments, starting with Personal Assistance. In Personal Assistance, we saw yet another stable quarter. We continue to grow in the quarter with 5% of which 2.5% was organic. The continued strong momentum is due to both organizational changes as well as the digitalization efforts. We also received high grades in our quality measurements with very high employee and customer satisfaction. We continue to be positive to the future outlook of Personal Assistance. And during the first quarter, the segment actually grew for the first time in many years.Moving on to the next slide please and Individual & Family. In our Individual & Family Care segment too, the performance was strong, driven by positive organizational momentum and stable demand in all segments. We are also pleased to see yet another step towards strong organic growth with newly established units, primarily in the adult and LSS segments contributes. And as mentioned previously, we also completed acquisition of Team J-son during the quarter. With revenues of approximately SEK 90 million and 120 new colleagues, it is the first acquisition in I&F since 2017, and our journey together has started off well. All in all, a strong quarter for I&F.Next slide please. In our Elderly Care segment, the focus, of course, remains on handling the pandemic. Still safety for clients and staff is top priority. Whereas the situation has stabilized significantly following the vaccinations, we still see negative impact on occupancy. Towards the end of the first quarter, however, we did see demand picking up, but we still expect a dampened demand in the coming quarters.Just after the end of the quarter, we opened up our new own managed unit in Falkenberg. The opening has been very successful so far. And already during the first month, around 40 customers have moved in, corresponding to utilization already at 65%. In May and June, we also plan to open own managed units in Angelhom, Vallentuna and Norrtalje.Next slide please. In Finland, we continue to see underlying operational improvements. But as mentioned earlier, the pandemic has had a negative impact on both revenues and costs. Our Individual & Family segment continues to be stable. During the quarter, new national regulations around institutional care were implemented, which will have a negative impact on our capacity. At the same time, we saw an end-of-quarter normalization of demand in open care services that has been dampened during the entire pandemic. The Elderly Care segment remains challenging, but our new management team has closed in on the problems and is focusing on the corrective measures.Next slide please and over to Norway. In Norway, we continued to see a steady development. Pleasing to see in the quarter was the strong organic growth, driven by both high demand in our disabled care segment as well as strong customer inflow in Personal Assistance [ PPR ]. Due to improvements in our operating model, we also managed to convert top line growth into profitability faster than before. By the end of last year, the 600-page Hagen report was published after 2 years of work. This government report acknowledges the role played by private welfare providers and it is well worth reading by anyone interested in the future welfare in the Nordics. But from a Humana perspective, another solid quarter in Norway.And with this said, I will now hand over to you, Noora.

[Noora Jayasekara, Chief Financial Officer]

Thank you, Rasmus. I will now give you some details to our financial performance in the first quarter of 2021. Turning to Slide 11. From a financial perspective, our main objectives remain increasing predictability and stability. We are making continuous improvements regarding digitalization.In the quarter, we have piloted system support within sales in Personal Assistance both in Sweden and Norway. During the first quarter, Humana made further repurchases of shares. Total holding is now 9.44% of total shares to an acquisition value of SEK 313 million. Financially, it has been another stable quarter with leverage in line with targets and strong operating cash flow.Next slide please. On Slide 12 on the presentation, you can see the operating revenue for the group. In the first quarter of 2021, our operating revenue increased with 2% from last year's SEK 1.938 billion to SEK 1.986 billion this year. Revenue is negatively impacted by the COVID-19 pandemic, largely due to lower occupancy in Elderly Care in Sweden and Finland, and open care services in Finland. Organic growth in the quarter was 2.4% compared to 3.8% last year. Adjusted for the leap day effect in 2020, there is underlying improvement. Growth in Individual & Family and Norway contributed to the improvement in the quarter.Next slide please. Now moving to Slide 13 for more information on our results in the first quarter. Operating profit for the quarter came in at a strong SEK 112 million versus SEK 98 million last year, an increase of 14%. The margin increased from 5.1% last year to 5.7% in the first quarter. All business areas contributed to the increase, except from Finland. A stable first quarter.The COVID-19 pandemic has affected profits from several aspects: lower occupancy; increased sickness absences; and increased use of protective equipment. Increased costs are partly offset by government subsidies. Thus the pandemic has had a very marginal financial effect on the profitability for the group in the quarter. Our assessment is also that the effect is manageable going forward.Next slide please. On Slide 14 and the segment performance, starting with Personal Assistance. Revenues for the first quarter are up 5% to SEK 751 million compared to last year of SEK 719 million with an organic growth of 2.5% versus 2.9% last year. Higher reimbursement and acquired operations drive the improvement despite the negative impact from the pandemic. Operating profit for the quarter increased to SEK 50 million, up from SEK 40 million last year. Also the margin increased to 6.6% versus 5.6% last year. The increase in margin is mainly due to increased efficiency. Another well-managed quarter from Personal Assistance.Next slide please. Now moving to Slide 15 with Individual & Family. Revenues for the quarter reached SEK 553 million compared to SEK 519 million last year. Organic growth in the quarter was 3.6%, up from last year's 1.4%. A more stable occupancy in children and adolescents, increased occupancy in adults as well as new units and acquisitions drive the improvement. Some negative occupancy effects can be attributed to COVID-19.Operating profit came in at SEK 41 million versus SEK 33 million last year, and the margin increased to 7.5% compared to 6.4% last year. Improved control and efficiency are the key elements behind the increase as well as new units. Acquisitions contributed only marginally. Individual & Family delivers a strong first quarter.Next slide please. Elderly Care on Slide 16. Revenues grew in the quarter with 3% organically and reached SEK 151 million versus SEK 146 million last year. The increase is due entirely to contracted operations. Dampening the growth, COVID-19 is still impacting occupancy negatively. Operating profit was SEK 5 million versus $0 million last year, and the operating margin was 3.6% versus minus 0.3% last year, driving the increase or improvements in new units. The pandemic affected the results from lower occupancy and higher costs for sick leave and protective equipment, partially offset by government grants. Handling the pandemic has still been main focus in Elderly Care.Next slide please. Finland on Slide 17. Revenues for the first quarter in Finland came in at SEK 316 million compared to SEK 350 million last year, a decrease of 10% and organic decline of 4.6% versus growth of 10.2% last year. The decrease is due to exits from nonperforming outsourcing contracts and the negative utilization effects from the pandemic. Operating profit decreased to SEK 11 million versus SEK 17 million last year, with a margin of 3.6% versus 4.7% last year. The decrease is partly explained by the negative effects of the pandemic on occupancy and increased costs particularly. The first quarter was not in line with expectations, but progress is being made.Next slide please. Norway on Slide 18. Revenues increased with 8% to SEK 210 million versus SEK 194 million last year, and the organic growth was 11.2% versus 4.6% last year. The growth development this quarter is due to new units and more customers, especially in Personal Assistance. Operating profit increased to SEK 17 million from SEK 13 million last year, and the margin improved to 7.9% from 6.7% last year. High operational efficiency and a more favorable revenue mix drives the improvement. We are again pleased with the steady performance in Norway.Next slide please. Moving on to Slide 19 and central costs. Underlying central costs are at the same level as last year. Sale of real estate affected the comparative period positively.Next slide please. On Slide 20, you can see our financial position. Interest-bearing debt decreased by SEK 110 million to SEK 3.688 billion compared to Q1 2020, and leverage decreased to 4.4x from 5.2x, being still below our financial target. Interest-bearing debt is up slightly compared to Q4 2020, partly due to higher IFRS 16 that's related to the new Elderly Care unit.Next slide please. Operating cash flow for the quarter on Slide 21 amounted to SEK 197 million versus SEK 95 million last year. The increase is due to higher profit and decreased working capital and lower investments. The strong cash position allowed us to continue to repurchase shares in the quarter.Next slide please. In the first quarter 2020, Humana made good progress and continues to increase stability and predictability.With this one, back to you, Rasmus.

[Rasmus Nerman, CEO & President]

Thank you, Noora. So for the first quarter of 2021 was characterized by stability and also gradual improvements the way we see it. Vaccinations have improved operational situation across the Nordics. We also continue to grow both organically as well as through value-adding acquisitions. And we also continue to see improvement, both in terms of profitability as well as financial situation with a strong operating cash flow. Our priorities going forward remain the same: to handle, of course, the pandemic in a good way; to focus on value creation and also stability and predictability; continue to drive organic growth; and also further accelerate our efforts in the area of sustainability.We can now open up for questions. Thank you very much.

[Operator]

[Operator Instructions] Now our first question comes from the line of Kristofer Liljeberg of Carnegie.

[Kristofer Liljeberg-Svensson]

And first, I just wonder if you had any sort of cost compensation in the quarter for earlier excessive costs from the pandemic last year. And also wondering, Individual & Family, I'm a bit surprised by the strong margin here and how you manage to keep these levels. Then I guess the positive government grants that we saw last year, they should be gone now. So I guess this is just pure positive on the [ line of credit ]. If you could explain what you're doing there? That's my 2 questions.

[Rasmus Nerman, CEO & President]

Yes. As we said in the report, the net effect from government grants as well as the impact from utilization is marginal on Humana as a whole. And that also goes for Individual & Family. So the improvement that we do see now is basically underlying. In the Elderly Care segment, we did have some retroactive payments based on costs we had earlier in the quarter and also during last -- a little bit during last year. It's not magnitude. However, it's SEK 1 million or SEK 2 million basically. So the financial impact on demand is marginal. And then we also foresee it being so in the coming quarters. And as you do say, the grants have disappeared, not only in Sweden but also Norway and Finland gradually. So it is an underlying development we're looking at.

[Kristofer Liljeberg-Svensson]

Could I ask -- add a question? So could I ask another question on Elderly Care? And the openings now you will have in the second quarter, how you feel about them? It was very successful start for the one in Q1, but I guess that's where you had an agreement already with the municipality.

[Rasmus Nerman, CEO & President]

We're sticking to our guns. We're opening according to plan with one small exception that we communicated earlier. We have postponed that opening to after summer mainly because of construction delays due to the pandemic, and that's the second one in Norrtalje. I mean, the market is still slightly volatile. I think we as well as other providers have seen somewhat of a normalization in demand.In the course of the first quarter, it's still not at all where we're used to this. It was calm basically. It's present across the board in Sweden. But we do get some confidence in the utilization development over the past -- in the past months. And we also have, in the first one in Angelhom, we have a good collaboration with the municipality there. So we do expect a good start there as well. I mean, that said, I mean, of course, it will cost a lot of money in the second quarter for us to open basically 4 units.

[Operator]

And our next question comes from the line of Victor Forssell of ABG.

[Victor Forssell, Analyst]

I hope you hear me well. Just starting up, I think -- Rasmus, I think you stated in the presentation here that on the occupancy trend for Elderly Care in Sweden that you see an improved demand towards the end of the quarter, but you will have a negative effect for the coming quarters. So I'm just trying to get some more granularity on how you think that this will progress perhaps more towards the second half of the year, if you think that you will see normalized customer inflows towards that period in time.

[Rasmus Nerman, CEO & President]

Yes. So there are a number of factors at -- Victor. I mean the first one, obviously being vaccinations and committee being restored to this unit. The second one being public opinion and media also. So clients now should feel safe into moving to Swedish Elderly Care homes. I think one of our colleagues said that it's probably one of the safer places you can still be. And both staff as well as clients have all been vaccinated. We have no COVID transmission in any of our Nordic Elderly Care units as of today and we haven't had it for a while.Now a pattern that we see is that municipalities prioritize their own units. Secondly, they prioritize tender contracts. Thirdly, they prioritize what we call the own-managed units. And we've seen an increase in utilization, primarily in the tender contracts, but now also slowly in the own managed contract. So the situation today as I see it is better compared to last year, but there is still some room to go before we are at pre-Corona levels.

[Victor Forssell, Analyst]

Yes, that sounds fair. And just moving on to your margin improvement in Personal Assistance. If you just could remind us of the wage increase that you foresee for 2021 and how the net effect of the reimbursement increase compared to these wage cost increases have played out in this specific quarter to understand where you are underlyingly?

[Rasmus Nerman, CEO & President]

So I mean, the reimbursements we all know is 3.5%. The way we look at the cost increases in the new collective bargaining agreement, it was basically 3.3%. There was one change this year and that is that the new wages kicked in February. So we had sort of a month for free, if you so may. I would say now reimbursement obviously helps, but so does the digitalization efforts that we saw the effects of already last year. And so does thirdly also the changes that we've made in the organization. So we now have kind of -- we have a more efficient organization where decisions also are made closer to our customers and we see a fantastic impact from that already in terms of customer satisfaction and peer satisfaction and also quality. So there are a number of factors that actually give us quite a lot of confidence in our Personal Assistance.

[Victor Forssell, Analyst]

Okay. And just finally on Norway and the continuously strong performance there, just trying to be reminded about how much new capacity you will have in 2021 compared to last year in terms of disabled care from current levels, that is?

[Rasmus Nerman, CEO & President]

Sure. I mean, our disabled care in Norway works very differently compared to what it does in Sweden. In Sweden, we build all managed LSS units. They typically have 6 -- a capacity of 6 beds. In Norway, it's very different. It's oftentimes a one-to-one dialogue with the municipality where you open up a unit particularly for that client and you build a whole care service around that particular client. So it's much longer negotiation. So it is very different. We do not look upon the disabled care operations like in Sweden where we increase capacity. That said, we have won a number of tendered contracts in Norway, so basically [indiscernible] and Oslo and many other municipalities. So we do foresee a strong organic growth in that segment also going forward. But it's different, as you can hear, compared to Sweden.

[Victor Forssell, Analyst]

Have those contracts already kicked in in this quarter?

[Rasmus Nerman, CEO & President]

Some of them have. Others are kicking in later during the year.

[Operator]

[Operator Instructions] The next question comes from the line of Karl-Johan Bonnevier of DNB Markets.

[Karl-Johan Bonnevier]

Yes. It's really good to see how you're increasing the predictability and the stability of the operations and giving us easier comps to follow and lesser moving parts. Great efforts. And on that topic, Noora, it would be great if you could describe how you see the use of share buybacks so we can understand how that plays into your financial targets. When are you looking to do it? Is that dependent on how you lie on -- in relation to your capital structure goals? Or is it relative to what kind of hurdle rates you see on potential acquisitions out there? Any clarity on how we could look for, say, share buybacks being a natural part of your development of the business model forward would be great.

[Noora Jayasekara, Chief Financial Officer]

Yes. When it comes to the own shares, obviously, the use of the shares is a Board decision. There are, as you mentioned, multiple options for us. So it remains to be seen. For the time being, the shares are on our balance sheet in share capital.

[Karl-Johan Bonnevier]

But there is no -- say, you are not looking to say -- also in this area talked about predictability, stability. So we know when you might be using this as a tool. And obviously, you are now coming close to a 10% threshold that will not make a possibility to the same degree as has been over the last 2 quarters.

[Rasmus Nerman, CEO & President]

I think the way we look upon it, I mean, for instance, I mean, they can be used as part when we acquire companies. We could maculate them. We could introduce into the market. But at the end of the day, I mean, a company doesn't become cheaper just because we buy it through shares. It is a discussion being held. As you say, we have the right to own 10% and we're very close to that right now. So I mean, we cannot simply buy more shares as it is today. We'd be interested in doing so, then, of course, we would need to use the shares somehow. It is a discussion being held and I don't want to preempt that right now. But what we are, of course, pleased with is that it has improved the capital structure of the company. And depending on how we look at it, it is a hidden asset of quite a lot of money, which we have, which is good.

[Karl-Johan Bonnevier]

Excellent. I think it's a very practical way as a capital allocation tool. And any clarity how you will use it going forward, I think, yes, we'll, say, add to the attraction of your company's development.

[Noora Jayasekara, Chief Financial Officer]

Thank you.

[Operator]

There seems to be no further questions on the line at this time. So I'll hand back to our speakers for the closing comments.

[Rasmus Nerman, CEO & President]

Thank you all for dialing in. Thank you all for very good questions. And I hope you have a fantastic day. Thank you very much.