Humana AB

STO:HUM

Earnings Call Transcript

[Operator]

Welcome to the Humana Q2 2023 Report Presentation. [Operator Instructions]

Now I will hand the conference over to the speakers CEO, Johanna Rastad and CFO, Fredrik Larsson.

[Ewelina Pettersson, executive]

Good morning, and welcome to this earnings call. My name is Ewelina Pettersson. I'm Head of IR at Humana. And with me today, I have Fredrik Larsson, our CFO; and Johanna Rastad, our CEO. They will walk you through the main events of the quarter, and then we will open up for questions. Over to you, Johanna.

[Johanna Rastad, executive]

Thank you, Ewelina. I start this call making the same note as in the first quarter, namely that never has Humana's ambition been more important and clear. We have, in this quarter, successfully concluded the permit process for Humana Assistans, which is a highly important achievement not only for Humana, but for the well-being of the Swedish Disability Act, the LSS reform, which was introduced to guarantee good living conditions for people with severe disabilities.

We won in the first legal instance and IVO decided not to take the process further. And I will revert to this when we walk through the developments in the Personal Assistance business area. But it's important to stress that this has not been possible without the trust from individuals that have chosen Humana as their care provider. The extremely dedicated work of our employees as well as the important user movement and other stakeholders that have believed in us from the very beginning.

So to all of you, thank you for being a part of securing not only Humana Assistans' future, but also safeguarding the freedom of choice in Personal Assistance. In the quarter, we also took steps further digitalize in eldercare, in essence, to increase time spent with our clients rather than with administration and the work towards starting our first social outcome contract continues, and we aim at concluding it during the second half of this year.

On the 21st of June, the Administrative Court ruled in our favor, granting Humana Assistans, the permission back to provide Personal Assistance. Shortly thereafter, the Insurance Board approved us as [ Payee again. ] And in the beginning of July, IVO announced that it would not appeal the Administrative Court's decision. This was an extreme relief for all our dedicated customers and all staff that have stood by us during this process. And despite this, Personal Assistance has, of course, suffered a lot during the spring, both operationally and financially.

Organic growth has been negative 15% in the quarter and underlying profitability has reduced to 0. And despite this, Humana as a group stands strong and continues to grow organically with 2% in line with last year and improves adjusted profitability substantially with 20%, a strong achievement during to say the least turbulent times. With the concluded salary negotiations, we now have improved predictability forwards. Salary increases are overall higher than usual, but with predictability, it is also easier to manage at least for parts of our business. And we continue to act in a high inflation environment, which we try to balance in the best possible way through price increases.

Social outcome measurements work continues, and we aim at signing our first contract during the second half of 2023.

So over to net revenues and EBIT contribution and development over the quarter. And despite challenges with the permit process, I&F and Personal Assistance continues to be close to in par when it comes to group share of revenues around 1/3. And due to strong performance in Finland, its share of revenues reaches 1/5. Organic growth is strong in all business areas, apart from Personal Assistance. And excluding Personal Assistance, organic growth reached a record high 12% in the quarter. Profitability is also relatively stronger in the quarter with adjusted EBIT reaching SEK 77 million, corresponding to a margin of 3.2%. Finland and Individual & Family improved substantially. Norway is relatively stable, while Personal Assistance and analytic care do not reach expectations.

Now over to specifics on each business area, starting with Individual & Family. And I&F continues its satisfactory performance, clearly improving versus last year and growing net revenues with 11% with organic growth of 8%, while simultaneously improving profitability margins to 8.4%, and that is up from last year's 6%. Underlying demand continues to be strong on both placements for Young as well as Adults, and the established health care division continues to grow well in line with expectations. Occupancy is also well managed in the quarter, which together with achieved price increases can balance negative effects from high personnel costs, partly driven by staff shortage.

Now over to Personal Assistance. It was, of course, very pleasing to receive the positive verdict from the Administrative Court. And as said, shortly thereafter, the Insurance Board announced that it was directing payments back to us. which is also welcomed as it enables us to give a better service to our customers. And financially, IVO's revocation of the permit has had a substantial negative impact, mainly caused by the uncertainty our customers and staff have lived through, causing about 70% of our client base to choose other alternatives. Organic growth reaches a negative 15% in the quarter and adjusted EBIT reaches 0. And of course, mainly because of overhead costs not being adjusted as quickly to the net client dropout.

And going forward, we need to dedicate all our efforts on our acceleration plan. So the way to get Personal Assistance back on track. And this entails total focus on our existing clients, new clients, our employees and to take further steps in our quarter assurance work. We want to stay close to the authorities, of course, and develop our business and the industry in a way that sustainable, both for the individuals and the broader society.

Now over to Elderly Care, which is -- actually represents the largest financial disappointment in the quarter. Elderly Care has not reached the anticipated occupancy levels and suffers from shortage of staff, which clearly drives staff costs up in an unsustainable manner. The quarter also continues to carry startup costs with the new unit in Taby totaling close to SEK 5 million. An accelerated change plan has started with several new initiatives we've taken, including increasing the degree of specialization in some units, increasing local support and also centralizing some processes linked to key KPIs.

Looking at Finland, it has a very solid performance in the second quarter and organic growth reaches a record high, 17%. And also profitability margin improves remarkably year-on-year from all almost 0 last year, up to 5.2% in this quarter. We see a successful increase in occupancy in the newly started units and also price increases in housing services paying off. Our specialization strategy is clearly providing results, allowing us to turn high demand into placements and also getting paid for a specialized offering. With reduced sick leave, we clearly have an improved staffing situation too. And in Finland, we divest 4 property companies in the quarter. And overall, we have a very strong performance in Finland.

And over to Norway. And the positive news for Norway is that the conditions for placements within Young is improving. And recently, the Ministry of Children and Family has clearly stated that they want to increase the use of private alternatives due to severe shortage of placement in the country. That's really good news in an otherwise rather negative political climate in Norway. And net client intake continues to gradually increase and organic growth reaches 12%, and we also managed to pick up slightly on margins so closing in on previous year, but not really getting there. This despite Personal Assistance being challenged by higher salaries.

And before handing over to you, Fredrik, for details on group financial performance, a few words on the quality development in the quarter. And for those of you that follow us, we have Humana Quality Index that in this quarter increased to 73%, with all business areas improving year-on-year. Personal Assistance has been negatively affected by the relatively lower customer satisfaction, and that's primarily due to issues arising from change in payment process. Employee satisfaction is also coming down somewhat, also that mostly related to the permit process and the challenges and the uncertainty.

Sick absence is decreasing notably in Finland and Elderly Care and we also improved education efforts across the group. The number of data incidents reported to IMY increased mainly in Personal Assistance, also that due to the change in payment flows. The process has improved. And in a few months, payments will be directed back to us following the decision from the Insurance Board, as I mentioned previously.

As we announced earlier in the spring, the we had a data breach in March that was reported to IMY, which decided to close the case without further actions. So that's also very pleasing. Now over to you, Fredrik.

[Fredrik Larsson, executive]

Thank you, Johanna. The organic growth is in line with last year. And if we exclude Personal Assistance, the other business areas together have an organic growth of close to 12%, which is great. Profitability improved with 38% compared with Q2 last year and adjusted profitability with 20%. In nominal terms, EBIT increased from SEK 65 million to SEK 89 million with an operating margin of 3.7%. EBIT includes positive nonrecurring items of approximately SEK 12 million. Hence, adjusted EBIT for the quarter is SEK 77 million with an adjusted EBIT margin of 3.2%. I will come back to the nonrecurring items.

These results are clearly shadowed by Personal Assistance. Thankfully, our leverage is coming down. Net debt has decreased roughly with SEK 100 million during the quarter, thanks to good cash flow. Leverage decreased to 5.1x, getting closer to our target of 4.5x. This is explained by both the improved profitability and reduced net debt. During the quarter, we had nonrecurring items that contributed positively to our profit. The first item is a remeasurement of the continued consideration to be paid for the acquisition of Assistans [indiscernible] The remeasurement amounts to some SEK 42 million. This is a similar remeasurement as we did in Q1 and Q4 amounting to SEK 32 million each. The remeasurements are made because of the negative recent development in Personal Assistance.

During the quarter, we have recognized nonrecurring incremental consultancy costs linked to IVO's revocation of the permit in Humana Assistans AB amounting to some SEK 29 million, including the nondeductible VAT. The net nonrecurring items amounted to positive SEK 12 million in the quarter. The cash flow in the quarter was very strong. The decrease in working capital of close to SEK 200 million is the key contributor to the solid cash flow. The main explanation to the decrease in working capital is the increase of employee-related accrued expenses and trade payable. Worth mentioning is that Personal Assistance's trade receivable balances is slightly lower than as per end of both Q1 and Q4, even though the payments are made via the clients.

In the quarter, we had some other cash payments that had no or only minor impact on the net debt, such as the payment of the continued consideration of SEK 91 million. The sold properties in Finland in sales and leaseback transaction of SEK 113 million, and borrowing of SEK 150 million and the repayment of lease liabilities of SEK 102 million.

Now some final words from you, Johanna.

[Johanna Rastad, executive]

Thank you, Fredrik. Well over to focus going forward. That, of course, needs to be set on making sure that we can accelerate Personal Assistance back on track. It has been a very turbulent time, and we need to revert to growth and secure that we have a strong and energized team in place to cater for ramp-up in client base and conclusion of the quality initiatives planned for. We are in a rebuilding phase, and we will work on coming out of this in an even stronger and better place. Elderly Care is a disappointment. And I'm full aware of the fact that the financial performance in this segment has not been satisfactory for a long time. Hence, we now need to take further steps in creating other solutions that will secure a proper turnaround.

Given that we're still in a high cost environment and collective agreements show relatively high salary adjustments in the foreseeable future, we need to find ways to become more efficient in both operations and central admin. And then, of course, close to our hearts, developing the Nordic care for the Nordic citizens. That work will continue to be on our agenda. We will strive to safeguard freedom of choice, work with quality and price competition and social innovation. And further social outcome measurements will come, and we will also strive to improve our ability to standardize treatments and incorporate new learnings to improve our treatment and care because that's the future.

So with that, we are open for questions.

[Operator]

[Operator Instructions]

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

I have 3 questions. First, do you have any view on whether there's a possibility to get financial compensation from IVO for the destroyed value in the Personal Assistance business? Secondly, also related to Personal Assistance and the poor profitability right now. Could you talk a little bit more about the possibility and also about likely timing of turning around that segment and how you're thinking about the overhead cost now? And finally, Finland, this massive impressive turnaround this in the quarter, would you say that sustainable? Or would you say it's an exceptionally good quarter for Finland?

[Johanna Rastad, executive]

Thank you, Christopher. Well, first, to your question on the claims, the possibility of sort of getting compensation. I mean our main focus is, of course, on our clients and employees because both groups have suffered substantially in this process. But that said, the revocation of the permit and this process has had a large impact on our business with both, of course, lost revenues to a yearly amount of slightly north of SEK 600 million. And then the direct costs specified in the report. So what we're doing, we are very much in a sort of evaluation phase. So we haven't landed in any conclusion yet. I mean it's really important that we have a sustainable relationship to the authorities and that we can have a dialogue. And I think in the long term, we really want that to improve. But that said, we have to investigate it further before we can give any conclusions on it.

Then on to the second question on the Personal Assistance turning around. I mean there are some -- of course, we will be burdened by the salary agreements that come in sort of close to the mark or the market of 4%. So that will be sort of a bit challenging. At the same time, it's not for all employees, and we have had a fairly large shift in our employee base over this period. So that balances that effect. And then we have had -- when this process started, we had about 330 admin personnel of which about 50 have chosen to leave that will also then have the effect starting of post the summer. So there is a natural sort of relief in overhead costs that will come into effect in the autumn.

And then finally, like minutes after we got the positive verdict from the Administrative Court, we also received calls back from clients that had left us due to that process. And over the last weeks, we've had a net positive inflow of clients. So there are a few sort of positives on Personal Assistance towards the Q3 period.

[Kristofer Liljeberg-Svensson, analyst]

Do you have any follow-up there on clients coming back. So what do you think is realistic? If you lost 17% of clients, could you believe half of them could get back? Or is that...

[Johanna Rastad, executive]

Yes, I think that's at least what we are aiming for. I mean there is a -- it's not going to be an instant process. I mean, it takes a little while. First of all, we are in a summer period where it's challenging to move. So it's sort of in a vulnerable period from that perspective and also the actors that the clients have left to also have a different sort of resignation times. So it will take a little bit of time before we can see that type of movement for some of our clients. But I think it's fair to believe that it's -- we will target about half that will come back.

[Kristofer Liljeberg-Svensson, analyst]

Do you think it will happen already this year before year-end or...

[Johanna Rastad, executive]

I think it's definitely possible. I also think it's -- I mean, it's still some uncertainty in the industry as a whole. It's a lot of companies that are sort of exposed to similar type of processes that we have been through. So I shouldn't say that we're a safe haven, but I think we will be perceived as a relatively safe place to be in, during a turbulent period. So I think it's fair to believe. But then as I also said, I mean, there is a -- there will be a relief in overhead costs towards the autumn, but we also need to make sure that we have a team that can also cater for a sort of fairly rapid increase in volume. So it's a very fine balance that we're walking towards the autumn.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then Finland.

[Johanna Rastad, executive]

Your final question on Finland, whether it's sustainable. The price increases that we have achieved, I believe, are sustainable. I also think from a ramp-up perspective, we should be able to keep the volumes that we've had. Now there will be -- the salary increases that will kick in towards September might be -- might affect us slightly, of course, but there is nothing major on the horizon that should sort of send any signals that we should not be able to uphold a fairly reasonable profitability level going forward.

[Kristofer Liljeberg-Svensson, analyst]

Just a final one on Finland. Have you quantified how large price increases you received on average?

[Johanna Rastad, executive]

Yes, it's -- I mean it's about -- so in the quarter, 75%, roughly that relates to price and about 25% that relates to volume. But within the price segment, we also have special -- a degree of specialization sort of increase, which should -- that's a part of our strategy that we can also get higher prices because we offer more advanced service in [ sets ] but somewhere there.

[Operator]

The next question comes from Jakob Lembke from SEB.

[Jakob Lembke, analyst]

Okay. I have few questions. I'll take them one by one. So first on Personal Assistance, good comments here earlier on the call. But I'm wondering a bit on the cost base, how much of costs are related to overhead and how much are Assistance?

[Johanna Rastad, executive]

And so, you mean how much in terms of -- so the burden or how do you mean with increased costs?

[Jakob Lembke, analyst]

No. The cost base in Personal Assistance, how much that is overhead and how much that is related -- directly related to the cash?

[Johanna Rastad, executive]

Yes, that's a good question. I probably have to revert on that. I can't really say that sort of directly. I mean what we can say is that though we have -- I mean the Assistance have a very sort of short -- relatively shorter resignation time, so to say, they got about 2 weeks to leave when the volume leaves. So that -- when we reduce the volume, we also -- it's a fairly large part of the costs that fairly quickly, so leave us too. And then we have, from an administrative point of view about yes, we had about 330 people and about 50 people have left and they have between 3 to 6 months resignation times. So that will sort of be -- that's why we expect the overhead costs to be relieved from September sort of onwards September, October onwards. If that gives you a bit of guidance, and we don't have much other costs. I mean it is really personnel costs.

[Jakob Lembke, analyst]

Okay. Good. And then my next question is on Elderly Care. So if you have any sense of when these measures will start to sort of give any effect and how long it will take to get back to positive earnings?

[Johanna Rastad, executive]

Yes. That's -- I mean, it was towards the latter part of the quarter where we saw the largest negative effect partly driven by the salary agreements. And so it's -- so I think that's -- it is partly related to that. But I think looking overall, I mean we have -- we need to get the occupancy levels up. And if we do that, we will have a lot -- we will be in a lot better position to manage our costs. And then if you look at the -- what are the key aspects of this program. I mean we will monitor the staffing a bit more closely. We have other units in sort of the near vicinity of our Elderly Care facilities that sort of within I&F and also partly Personal Assistance, but I&F primarily, where we can also balance our staffing in a better way. And that's something that fairly quickly will -- we can sort of turn to, I should say.

And then from increase -- sort of degree of specialization or diversification of some of the units, that will take longer time because it means sort of applying for a license to do something else in parts of our facilities. And that probably takes sort of 6 to 9 months to get and then the start-up phase is slightly longer. So I think there are a few short-term measures that we will be able to manage quickly and then it's a longer-term aspects that where you see sort of 6 to 9 months before you see an effect.

[Jakob Lembke, analyst]

Okay. That's helpful. And then just a final question. Now that these legal proceedings seems to be over. Do you expect to sort of not have any more of these nonrecurring items in the coming quarters?

[Johanna Rastad, executive]

I think there would be -- I mean, of course, the absolute majority of the costs relates to the legal process and the oral hearings for instance, and sort of preparing for all of that. And that will not be in the same manner in the third quarter. So definitely, it might be a bit that comes into the third quarter, too. But it's very, very little compared to the second quarter.

[Operator]

The next question comes from Stefan Knutsson from ABG.

[Stefan Knutsson, analyst]

Johanna and Fredrik, I have a couple of questions. First, regarding the Personal Assistance. Do you have any sense with gaining market share when you and your public players are losing clients here?

[Johanna Rastad, executive]

Yes, I mean, it's a lot of the smaller actors that have received. So it's a sort of a scattered picture in a sense. It's not the single actor that has taken -- been a safe place for our clients. I mean it's very much a scatter picture.

[Stefan Knutsson, analyst]

Okay. And secondly, also, before all this happened, you talked about the possibility of an increased market where more people were granted access to Personal Assistance during 2023. Has that played out?

[Johanna Rastad, executive]

Well, actually, the fact, Assistance initiative started in the beginning of '23, and the estimates from the Insurance Board is that somewhere around the mid sort of somewhere around the summer sort of June, July, that's when we would see an effect in volume. So I think we -- that -- if we listen to them, then that's at least an effect that will probably come now. And then we have, during this process, also gained clients and it's been clients that have actually chosen us despite the fact that we've been under this sort of legal process. And I think that's really a sign of strength in many ways. So I think that's like Assistance initiative, the effect is likely to come here in the near future.

[Stefan Knutsson, analyst]

Perfect. And then lastly, on the working capital. Now you recouped some working capital here in Q2, but do you foresee additional collections as for [indiscernible] now will grant you manage.

[Johanna Rastad, executive]

Yes. I mean, yes, the process will be smoother. But as I said in the call, we have actually a lower accounts receivable balance in Assistance as of today compared to both Q1 and Q4. The number we are talking about is -- I mean, it's like SEK 50 million, I think, compared with year-end. And that is partly, of course, explained by the fact that the revenue in Personal Assistance has reduced. So I mean, if we have the same -- it will have some minor impact, but I mean, it will not be hundreds of millions. It will be tens of millions.

[Stefan Knutsson, analyst]

Okay. Perfect. And then my last question is regarding the salary increases that you write about in the report. Have you had any effect of them here in Q2? Or when do they start? And secondly, how much do you think ballpark that you are able to offset with pricing.

[Johanna Rastad, executive]

Let me say like this. I mean we have -- part of the salary agreements have kicked in as the 1st of June. Like the -- and it of course, differs depending on each individual contract in the different sort of 3 main jurisdictions. But just looking at Sweden and the Personal Assistance agreement has been settled for 27 months. And that's -- that agreement will be -- it will cost us from 1st of July. So that's definitely going to be an effect on that. But it's also -- it's a bit difficult for us to really estimate because of the shift in our employee base that has taken place over this latter part of the spring. And because the contract -- of course, it depends on which type of employees we're looking at in terms of salary adjustments.

And I would say the other agreements with the other unions, they traditionally will follow sort of the mark with new salaries starting 1st of July. So that's for Sweden. I mean from a Norwegian perspective, that's sort of already clear. That's -- yes, it's already settled in a sense. And in Finland, that the new agreement will start in September. So that's also spanning for a longer period of time. And how much -- yes, it is really difficult for us to sort of estimate, right?

It's also important to know that there are a few of our business areas that can balance price increases in a better way than others. I mean from a Personal Assistance perspective, we have the 1.5% increase of the yearly adjustments starting from 1st of January, and then we have the salary increases as 1st of July. So it's very important for us that we can get a reasonable price increase by the year-end. And of course, when we see the -- all other prices in society increasing, it's -- one can expect also the politicians to believe that 1.5% is a low uptick in this type of climate. But that's difficult for us to manage. Elderly Care is also slightly more difficult. It's linked to contracts in a different way. It's easier for the business areas, Finland, Individual Family and partly in Norway, where it's a bit higher turnover in client base, and you can adjust as you go.

[Operator]

[Operator Instructions]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Johanna Rastad, executive]

Well, thank you very much for this. And if you have any further questions, don't hesitate to give us a ring. Okay. Bye-bye.