Humana AB

STO:HUM

Earnings Call Transcript

[Ewelina Pettersson, executive]

Good morning. Welcome to Humana's First Quarter Results Presentation. My name is Ewelina Pettersson. I'm the Head of IR. With me today, I have Johanna Rastad, our CEO; and Fredrik Larsson, our CFO. I will hand the [ floor ] over to you, Johanna. Please go ahead.

[Johanna Rastad, executive]

Thank you, Ewelina, and good morning.

In this quarter, we continued showing that our specialization strategy is successful with good performance in Finland largely due to our units within child welfare, targeting individuals with highly complex care needs, as well as the 16% organic growth in Norway, also that's partly due to specialization.

Financial effects from the revocation of the Personal assistance program last year was mainly seen from Q2 onwards. And in that light, Humana Group performs well in this quarter with adjusted earnings in line with last year of SEK 100 million.

While costs of SEK 13 million in the quarter mainly relates to the acquisition of Team Olivia's Norwegian operations, a transaction signed in the beginning of April. In '23, Team Oliiva Norway generated an annual turnover of just over SEK 900 million and SEK 47 million in EBITDA, and we expect this transaction to close in the end of the second quarter this year.

So, in this quarter, we see solid performance in Finland, high growth, stable performance in Norway, continued improvements in elderly care. We also see good potential in improving collaboration within the Swedish businesses, while we have established a Swedish leadership team to continue driving the development in the country further. So, this is expected to both improve our service offering and client value in Sweden as well as enhance efficiency over time.

And excluding Personal assistance, organic growth in the quarter reached 7.1%. And including Personal assistance, that number is negative 1%. The Swedish operations are negatively affected by Personal assistance, while both I&F and Elderly Care are contributing positively.

Finland has organic growth of 9%, and Norway, as I said, comes in strong at 16%. Adjusted EBIT (sic) [ EBIDTA ] margin in Sweden reached 3.8%. In Norway, it rose quickly, but margins can really keep up in the quarter, reaching a total margin of 4.3%.

For the first quarter in Humana's history, we now consider Sweden as one combined reporting segment. Our ambition with this is to ensure we work wholeheartedly on achieving economies of scale in Sweden. This entails developing customer-centered offerings across the business areas in Sweden and ensuring our central functions efficiently and effectively work towards giving the best possible support to our care employees.

Efficiency improvements already announced of approximately SEK 13 million annually will gradually come into effect during the year with no material one-offs in the quarter. Additional efficiency improvements are expected, but are yet to be finally concluded.

The organic growth for Sweden reached negative 6%, which is due to the volume drop in Personal assistance. This is only partially mitigated by the other businesses in Sweden.

All businesses increased prices in the quarter. State compensation in Personal assistance increased with [ 2.5 ]% from January. OPI in Sweden was concluded in April at 5%.

Now, for some short comments on each business within Sweden. In Individual & Family, Family has weak organic growth and operating profit, mainly due to decline in occupancy [indiscernible] now. That said, occupancy in young does improve sequentially from Q4, reaching an average of around 80%.

[ Restructured ] staff is now less of a challenge, and we have highly content colleagues that are ready to take care of young people in need. The requests for Institutional and Family placements within young are increasing, and we have a good offering ready to service municipality requests.

While we have still relatively slow demand for placements, adult improved both revenue and profitability in the quarter, and occupancy reached around 81%. The 2.1% organic growth for I&F as a whole comes from price increases that balance the negative volume effect.

Now on to Personal assistance, let's go [ through ] adaptation following the changing market conditions. The net client outflow continues. However, the gap towards a positive inflow is clearly decreasing versus Q4. Gladly, we also win the battle versus competitors, where more customers join us from competitors than leave us to the same. Organic growth is negative 16% with negative volume effect only partly mitigated by a 2.5% price increase. Simultaneously, the efforts to decrease admin costs continue to give results and adjusted EBIT (sic) [ EBITDA ] margin reached 2.1% in the quarter.

Elderly Care shows organic growth of 7% to about a 30% occupancy increase and the remaining is price effects. Gladly, our Elderly Care units break the record in number of clients at the end of the quarter, and occupancy is, on average, over the quarter, up another percentage point to 91% from Q4.

Elderly Care has gone through change and has shown sequential improvement since the initiation of the change program last summer. In this quarter, Elderly Care reached a profitability margin of 2% due to improved occupancy and cost control. We still have some way to go but are moving in the right direction.

In Finland, organic growth reached 9%, mainly driven by price increases and a shift towards more complex clients. Profitability is increasing more than 2 percentage points to 6.5% this quarter. This is mainly due to high demand for placements with young people with extensive care needs, improved prices, and us being able to manage cost better.

Norway continues to deliver, growing organically with 16% also here through the high demand for specialized care and personal assistance. In the quarter, growth to about 20% comes from volume and the remaining from general price increases and mix effects. During the quarter, we see a small net inflow of clients.

Now, we had relatively higher staff costs in the quarter. We have, during the last month, renewed the opportunity to acquire Team Olivia Norway and the transaction was signed in the beginning of April. It's currently under review by the competition authority, and we are aiming for closing during the second quarter. And thereafter, a diligent and careful integration will begin.

And now over to you, Fredrik, for some total financials.

[Fredrik Larsson, executive]

Thank you, Johanna. Revenues are roughly in line with last year. Personal assistance has lost SEK 138 million in revenues, which is almost compensated by increases in other businesses in Sweden, plus SEK 32 million, and SEK 45 million [ in Norway] [indiscernible]. Excluding Personal assistance, Humana delivers an organic growth of 7%, which is above our organic growth target of 5%.

In Q2, the comparables for Personal assistance is, for the first time, impacted by the full year. The full-quarter effect after [indiscernible] and the negative growth Personal assistance should continue to be less negative.

Adjusted operating profit is in par with last year, even though, as a percentage, is down SEK 11 million. Both Q1 this year and last year were impacted by nonrecurring items, which I will elaborate more on later.

As the specialization journey in Finland continues to have a positive impact on margins, I&F's occupancy rates improved in Personal assistance and led to more normal circumstances. We will move closer to our profitability target.

As you can see in the financial report, we will, from now, on disclose additional key metrics, excluding [ any ] accounting effects under IFRS 16. Those measures include EBIT and EBITDA, but also adjusted EBIT, adjusted EBITDA, and leverage.

Worth noting, our business segments are and have always been presented excluding lease accounting effects, and all lease accounting effects are presented under the heading Other.

And as of 2024, we present net debt and leverage without the IFRS 16 lease accounting effect to make the measures more transparent and useful. As a consequence, we have restated our leverage target from 4.5x, including these liabilities, to 3x, excluding these liabilities.

Our net debt and leverage have improved over the last 12-month period. Net debt is down more than SEK 200 million and leverage is down 0.6x, getting closer to the restated target of 3x. In the first quarter, net debt increased with roughly SEK 100 million, where half of the amount is explained by negative cash flow after financing activities, and the other half is due to weakened Swedish krona against euros, increasing the value of our euro-denominated loans.

We have, during the quarter, extended the maturity date of our financing agreement until Q3 2026. Scheduled repayments of some SEK 350 million in Q3 2024 have therefore been deferred, and repayments are going to be made quarterly of SEK 50 million from Q1 2025.

Under the new financing agreement, interest margins are somewhat higher and our interest expense should decrease -- increase with SEK 30 million per year from April 1 at the current leverage, net leverage. The annual interest expense amounts to some SEK 250 million, while SEK 150 million is interest and loans, and the remainder is interest on the lease liabilities.

Our target is to reduce leverage. And as a consequence, interest margins will be lower going forward.

Operating cash flow is SEK 110 million in the quarter, which was a strong number. This is explained by our profit generation, which has been reduced by the working capital effect of minus SEK 60 million, which is mainly due to buildup of trade receivables over [indiscernible].

Worth noting is that we collected some SEK 91 million in trade receivables, the first [indiscernible] in April after Easter.

During the quarter, we had negative items affecting comparability, reducing our operating profit by SEK [ 30 ] million. This amount included costs relating to IFRS allocation of impairment and [indiscernible] SEK [ 30 ] million. and costs related to the acquisition of Team Olivia of SEK 10 million. And we expect to incur approximately SEK 5 million in additional transaction costs in Q2 related to the acquisition.

Q1 last year included SEK 8 million in positive items. The largest item last year was a positive adjustment of contingent consideration of SEK 32 million, offset by costs linked to IFRS allocation of [ Family ].

This quarter is, compared to last year, impacted both by the leap year and Easter. The leap year contributed to revenues of approximately SEK 25 million, and we estimate that the leap year had a positive effect on EBIT with some SEK 14 million, but Easter had a negative impact of SEK 24 million due to higher personnel costs over Easter. The calendar day effect is therefore a net negative of SEK 10 million on an EBIT level. The Easter effect is to be reversed in the second quarter.

Now, some final words from Johanna.

[Johanna Rastad, executive]

Well, thank you, Fredrik. So, in the first quarter, we have formed a group while expanding compliance function to make sure the increasingly challenging regulatory pressure is met while maintaining our competitiveness. The compliance function is combined with the ever-so-important quality and improvement activities around the group.

In the quarter, both our employee and client satisfaction improves. We also improved the share of clients within institutional care for young in Sweden that leave our units to a lower level of care. Individuals that completed treatment in institution [indiscernible] in Norway [indiscernible] the quarter have not stated.

And in the first quarter, we did dedicate resources and time to prepare for a change of our IT platforms due in the second quarter. We do this to improve IT security, productivity and reduce costs, but also, over time, to enable better social innovation.

The demand for our services continues to be strong. And despite constrained public budgets, the need for care placements continues to be present. And the specialization strategy includes offering placements for individuals where the municipality or region cannot themselves meet the need.

In this quarter, Finland is an example of where the specialization strategy within child and [indiscernible] pays off, a client segment where we have purpose-built facilities targeting complex clients. Demand is high, and we have high confidence in our [ ability ] to provide good care. And in April, as we have mentioned, we signed this agreement to acquire Team Olivia Norway, in Norway, which close to doubles our volume in the country at a price of 5x EBITDA, post synergies.

And then to our focus going forward, of course, it is to persistently continue to rebuild Personal assistance and implement the plan put in place early autumn of 2023. The young division within Individual & Family in Sweden is a clear focus as well. The area is not only vital for society, but also an important contributor to the financial development of Humana as a whole. The Swedish [ country ] organization is starting to take shape, and although it will take time before we are fully up and running, it's important -- it's an important step to increase collaboration, improve client offering and streamline the Swedish support system.

We will continue working actively with our portfolio to offer specialized care where demand is high, and social outcome measurements will always continue to be an evermore-increasing part of what we do. As the acquisition goes through the competition authorities process, we will do our utmost to give our new colleagues a warm welcome in the second quarter.

And with that, we open up for questions.

[Operator]

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Three questions. First, if you guys could comment on your work to adjust costs in Personal assistance, how much more you could do there to better streamline that with the actual lower number of customers now.

Then, very nice to see the improvement for Individual & Family earnings in Sweden this quarter. Maybe you could comment on the occupancy situation for the start of the second quarter, if you could expect further improvements in normalization in the youth segment.

And then, finally, given the strong margin here in Finland, would you be able to maybe position Q1 from a seasonal effect perspective and how we should think about Finland going forward?

[Johanna Rastad, executive]

Kristofer, let's start with your first question regarding Personal assistance. I mean, we do continuously adapt costs. And as mentioned, we have -- we still have a net negative client inflow, which means that we are also continuing sort of our efforts and further adding to the streamlining of the whole operation.

What we can say in the quarter is that we -- so previous quarters, we have had between 7% to 8% of admin costs. We are at around 10% now. And we think, during the course of this year, we should be able to come not to the 7% rates, but come down to at least somewhere around 8%, 9%. An example of this is how many [indiscernible] clients. We have a client lead to comparable numbers, we had around 14.3% clients per client lead in October. And now that same figure is about 16 clients per client lead. So that -- I think it corresponds to somewhere around SEK 30 million overhead reduction versus the same quarter last year.

And what we're doing [indiscernible].

[Kristofer Liljeberg-Svensson, analyst]

[indiscernible] ask about is when we see it come back down to 7% again, is that, from a geographical perspective, that the clients are not as optimal as it was before this legal situation?

[Johanna Rastad, executive]

No, I think it's more about the adaptation of what we see happening in the market as a whole, where we sort of increase our efforts to sort of improve insight in the assistance and making sure we have the proper support to also the client leads to make sure that we fill everything that we're supposed to to do all the requirements. And we do see that changing. It's not only us being affected by that. It's the whole industry. So I think that's one thing.

What we can also say is that we will have a more streamlined system support, which should also improve our margins going forward. So, I think maybe we won't reach the levels that we've seen 5, 6, 7 years ago, but we should definitely be able to stabilize that at a higher level, so a significantly higher level than we have today.

[Kristofer Liljeberg-Svensson, analyst]

So from a structural perspective, margins in Personal assistance with the current reimbursement should be 1% or 2% lower than historically?

[Johanna Rastad, executive]

[indiscernible] 2.5%. It's a very ongoing debate about the sort of price increases. And I really believe that the whole society will recognize this service as an important part of also coming [indiscernible] the alternative use of sort of health care resources is well placed. It's better placed in Personal assistance than somewhere else in the health care system.

So I don't think we will come back to the 1.5% price increases that we have seen during several years, but rather the 2.5% also going forward. So, I think that's a fair assumption to make. And in that way, we'll also see an improved margin situation over time.

And just as with the key actions going forward to reach there, it's the further adaptation of the lower -- relatively lower client base. It's one operating system. It's also diversification within personal assistance and, of course, the net client journey to make sure that we have a positive net inflow.

Then over to your second question about I&F earnings, the occupancy, what we can see in what's been -- what we've seen in the first quarter is that the adult division is sort of flattish in occupancy from the fourth quarter, but they have a slightly better position to also adapt costs to it, which is why they also managed to balance the results easier. That's not the situation in young. They need their final placements. And what was sort of really nice during the quarter is that, from the 1st of January up to the end of the quarter in division young, we see a good improvement. It's a steady inflow of clients, which is really nice to see. They're also improving the occupancy rates.

And in young separately, we can see from the 1st of January to the end of the quarter, we improved with about 50 clients in division young, which is -- it's -- so clearly in leaving the quarter on a better note than we entered into the quarter. And of those, we have about 20 net clients coming into our institutional -- institutions, which is also very important for margins [indiscernible].

[Kristofer Liljeberg-Svensson, analyst]

Could I just follow up on that? Have you seen any changes to occupancy of the Easter holiday?

[Johanna Rastad, executive]

And so change in occupancy from the Easter holiday, we haven't...

[Kristofer Liljeberg-Svensson, analyst]

[indiscernible].

[Johanna Rastad, executive]

Not really.

[Kristofer Liljeberg-Svensson, analyst]

[indiscernible] the Easter holidays.

[Johanna Rastad, executive]

Not really. It's -- we have a nice net inflow of clients. Sometimes, there are hiccups around the larger holidays, but no major there. What we see is that we have -- we complete treatment and our clients are in a good position, which is also very promising for the requests coming forward and also sort of [indiscernible] [ news ] of our collaboration partner also going forward.

And then Kristofer, can you repeat the third question regarding seasonal effect in Finland?

[Kristofer Liljeberg-Svensson, analyst]

Yes, just Finland was quite a bit better than what I expected here on the margin. So [ I'm ] just wondering the margin improvement you saw in Finland Q1 versus Q4, is that a seasonal effect? Or...

[Johanna Rastad, executive]

No, if we look at...

[Kristofer Liljeberg-Svensson, analyst]

Or underlying improvements?

[Johanna Rastad, executive]

No, it's -- I mean we don't see a significant seasonal effect from an Easter perspective in Finland. The largest of the seasonal effects we see in the quarter for the group as a whole relates to Personal assistance in Norway actually. So Finland is almost at 0 from that perspective.

[Operator]

Thank you. The next question comes from Jakob Lembke from SEB.

[Jakob Lembke, analyst]

My first question is on Individual & Family. I'm wondering here, with the better trend in occupancy you were talking about here in the quarter, do you see that you could return to improving earnings year-over-year in Q2?

[Johanna Rastad, executive]

Well, I think we -- as I sort of mentioned, we're ending the first quarter at a significantly better note than in Q4. We are still a bit -- in the first quarter last year versus this quarter, we are still sort of a few percentage points behind in occupancy, both in adult and young. Second quarter was fairly strong in Individual & Family. Then I think from Q3 onwards, we should be able to match up the results.

[Jakob Lembke, analyst]

That sounds promising. And then more of a general question. I mean, also in '24 here, we will have quite high salary increases. I'm just wondering how you see this impacting the margin here throughout the year and the coming quarters.

[Johanna Rastad, executive]

Yes, there are sort of different points in time when these effects come in. I think, as a general aspect, versus last year, the salaries are not increasing at the same rates across the group, which is sort of -- which is, in our situation, I think, is also good from the OPI sort of adjustment perspective for the Swedish operations where the preliminary figure of 4.7% stated in interest [ income ] has now been confirmed to 5%, which is a fair level given what we have from a salary perspective. So, I think, on the balance, we should not be worse off than last year.

[Operator]

The next question comes from Karl-Johan Bonnevier from DNB Markets.

[Karl-Johan Bonnevier, analyst]

Good to see that you continue to clean up the number for the IFRS 16 effect. And Fredrik, just to understand it, certainly, the change of the debt target from 4.5x, including IFRS 16, to 3x, excluding it, does that imply any change to the underlying target?

[Fredrik Larsson, executive]

No. It's -- what we have done is that, at year-end, we had -- the old target was 4.8x. The old leverage was 4.8x, and the target was 4.5x. So, you had a difference of 0.3x.

And then in -- if we calculate the leverage at the new method, then we have 3.4x and a minus 0.3x then rounded to 3.0x [indiscernible]

[Karl-Johan Bonnevier, analyst]

And that's [indiscernible] it's, like-for-like, pretty much the same, basically.

[Fredrik Larsson, executive]

Yes, exactly.

[Karl-Johan Bonnevier, analyst]

Excellent. And when you look at how you report IFRS 16 in the business areas, there is no change to that. You do the adjustment on the other levels rather than trying to push out the IFRS 16 effect in the business areas.

[Fredrik Larsson, executive]

No, no. We report -- we have always reported excluding IFRS 16 effects on the business areas, and that has not changed at all.

[Karl-Johan Bonnevier, analyst]

Excellent. Good to hear.

[Fredrik Larsson, executive]

[indiscernible]

[Karl-Johan Bonnevier, analyst]

And when I look at the new Swedish organization reaching a margin target on a group level of 7%, Johanna and Fredrik, do you think it's reasonable to think about it like that, given the underlying mix of the different operations?

[Johanna Rastad, executive]

I actually do think that we, over time, will get there. That's also why we also maintain that target. We have a clear specialization strategy in Sweden and across the group. And the reason for that is it's not only where we see the demand, but also where we have an ability to come higher up in the margin.

And I think, from a Personal assistance perspective, we're working a lot with the cost side so that we should be able to both come down from the levels we see now in admin, and as I said, previously, maybe not to the 7% to 8%, but coming closer to that from what we see now of about 10%. But, at the same time, it's very clear that the 1.5% price increase over the last years has not been sufficient. And I think it's clear now from the discussion that's ongoing in the market that has to be adjusted.

Personal assistance is a relatively -- it's good from a societal point of view. And the alternative for these individuals is way more costly than the Personal assistance service. So I think, both from an income perspective or from a price perspective and from a cost perspective for us internally, I think that Personal assistance has potential going forward.

For Individual & Family, the margins in I&F have, of course, a larger potential to come up far above the 7% target. But really it has to do with the occupancy levels and our ability to manage costs and do that also in a sensible way. So, we make sure that there are no shortcuts or anything has been taken. So, we worked actually persistently over a few years to make sure we have an adapted offering that has high quality and that can also offer higher specialized service to relatively higher prices that we are also -- that we also can work together with our -- with the municipalities to also make sure we end up in a good way. So, we have better pricing ability with higher specialized care and also higher margins.

For Elderly Care, I mean [indiscernible] it's better than what we've seen before, but it's far from what we believe the carriers have an ability to do. So, we just need to continue with full speed on the change program and sort of continue with the incremental improvements that we have been able to achieve. So, that's for the 3 areas in Sweden.

And I think from [indiscernible] really part of your question. But both Finland and Norway have a specialization strategy that should be able to come up to those levels over time.

[Karl-Johan Bonnevier, analyst]

Listening how you describe it, Johanna, it sounds like the Sweden organization, so to say, the way now you're going to start having the main reporting from, it's really going to be -- to get -- reach the margin target is really going to be basically driving the model in a similar way as you've done historically on the business area levels of the 3, say, operational levels in Sweden.

[Johanna Rastad, executive]

Yes, definitely. And I think - I mean, why we also arrange and make sure that the Swedish team can really work together is both to make sure we have an even better offering. And so from an income -- or from a revenue perspective, we should be able to position ourselves well and also make sure we have a customer-centered way of looking at our service, for instance, around certain client groups that today also move between the current business areas, but also, of course, from an admin perspective, that we're able to achieve [ central ] efficiency. And that's really a key to also make sure that we have good support to our employees so they can focus on delivering care rather than administration.

[Karl-Johan Bonnevier, analyst]

Makes sense. Thank you very much, and all the best out there.

[Operator]

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

[Ewelina Pettersson, executive]

Thank you. We have received a written question from Anton Lund at Kepler Cheuvreux. I will read it out. Can we expect Team Olivia to follow the same margin trend as your current Norwegian operations before synergies?

[Johanna Rastad, executive]

That's the expectation, yes.

[Ewelina Pettersson, executive]

Okay. Thank you.

[Johanna Rastad, executive]

Thank you very much. Have a good day. Bye-bye.