Ambea AB (publ) (AMBEA) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Ambea Interim Report Third Quarter 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand over the conference to your speaker, CEO, Fredrik Gren. Please go ahead, sir.

Good morning, everyone, and welcome to Ambea's Third Quarter 2020 Interim Report Presentation. Speaking is Fredrik Gren, CEO; and presenting with me today is our CFO Benno Eliasson; and Jacob Persson, Ambea Head of Business Control and Investor Relations. Ambea delivers a strong quarter with 4 out of 5 business units improving results versus last year. Vardaga continues to be impacted by COVID with lower occupancy than normal but has during the quarter improved efficiency to mitigate revenue losses. I will start today's presentation by giving an overview of the quarter and also cover the status of our growth drivers. Then Benno will take you through the financials for the group and will also describe the financial development for the segments. And we will also be more specific around corona and its likely effects on the fourth quarter. I will then summarize the quarter before we open up for questions. So starting off with some highlights for the quarter. The negative effects from corona in the third quarter is in line with what we said in our Q2 report, around minus SEK 50 million on EBITA. We also estimate a SEK 90 million negative effect on sales since occupancy has stayed roughly flat during the quarter until the end of September. Sales is down 4% versus Q3 last year, driven by currency effects and lower occupancy in Vardaga, but also due to a few contracted units came to an end. In the third quarter, we also opened up 68 new beds. Adjusted EBITA came in on SEK 319 million, which is 2% above last year and margins strengthened from 11.0% to 11.7% versus same quarter last year. 4 out of 5 business units show strengthened profitability versus last year, and especially Norway and Denmark show substantial improvements in the quarter. The restructuring program in Norway was completed during Q3. Synergies came in SEK 10 million higher than earlier communicated, in total, SEK 40 million of savings, which have been realized gradually since Q2 and will have full effect by Q4. We have minor effects from corona in 4 out of 5 business units. Elderly care in Sweden is where we see material financial impact. We currently only have a few homes with spread of infection, but we closely and not without worries, follow the increased spread of the virus in society. All staffs are on high alert to stop the virus from coming into our home. Or if we identify an affected resident, we quickly isolate the individual and rapidly test all other residents and staff. These procedures so far work better than during spring and are important to avoid further spread of the virus. The negative EBIT effect from COVID is minus SEK 50 million in Q3 and is predominantly shown in Vardaga. Occupancy continued to be lower than normal, but major effects have been done to bring down our operating costs during the quarter to mitigate lost revenues. Efficiency metrics are actually close to pre-corona levels when it comes to, for example, personnel costs in relation to sales. So when Vardaga occupancy starts to improve again, these efficiency measures will help up to speed up margin recovery. Every week since the removal of the visitor ban on October 1, we have seen a small net increase of number of occupied beds. We hope that the positive trend will remain, and we work hard to protect our residents from the virus. Our contract management units in Vardaga are now almost back on normal occupancy level and actually have only a few empty beds. But we are low on occupancy in our own managed units, and we are also cautious when it comes to opening up and staffing on new units until we feel certain that demand is there. Given all this, we estimate a lower corona effects in Q4 than in Q3. We forecast that the negative corona effect for Q4 will go down to SEK 70 million to SEK 80 million in sales and minus SEK 30 million to SEK 40 million in EBITA. Turning over to our profitability development, where we continue to deliver improvements despite the negative effects from corona, Ambea's total EBITA margin has improved. Nytida had yet another strong quarter. In fact, it is the strongest quarter we have ever reported. Excluding the effect from COVID on Vardaga, the profitability improvements would have been significant. Important measures have been taken to generate savings in former Aleris units and efficiency improving actions also in other units. Both Altiden in Denmark and Stendi in Norway has improved EBITA significantly versus last year. Cost improvement, implementation of Ambea's operating model and strong local leadership are behind these improvements. We are proud of the positive momentum in both Denmark and Norway but our efforts will continue to bring both countries to their full potential. The LTM margin is continuing to climb upwards and reached 7.5% adjusted EBITA in the quarter. It is fair to say that opening up new nursing homes in Sweden is challenging as many municipalities have empty beds at the moment. Ambea takes a cautious approach, and we will only open up and staff new nursing homes if we feel comfortable that they have a high likelihood of filling up within 12 to 18 months' time frame. If not, we are taking discussions with our real estate owners to delay construction or just keep them empty with no staff cost until occupancy situation is back to normal again. We currently have a handful of such situations. In Q3, we only opened up 1 nursing home in Tyresö, Stockholm, which after 2 months already are at the 60% plus occupancy. In Q4, we plan to open up in Tierp and the second one in Salem, Stockholm where we are moving residents from an old subscale facility called Byholmen, which helped the Salem unit to a good occupancy start. The old Byholmen facility will be turned into a Nytida home. Over to acquisitions, there were no acquisitions in the quarter and only 1 acquisition in Denmark year-to-date, Vivamus, which is continuing to develop financially better than planned. So with that, over to financials in our next session. Benno, will you take over?

Thank you, Fredrik. As we've said, we are rather pleased with our financial performance in all business areas given the challenging circumstances. So if we look into how the different business unit areas have affected the group numbers, we can see that starting with the Vardaga, sales was down SEK 44 million, but important to remember that -- is that most of the SEK 90 million that we reported as corona effect was just in Vardaga where occupation were lower than normal and rather flat throughout quarter. In total, the decline in sales was 5% versus last year. Nytida sales declined by SEK 17 million or 2%. The comparison versus last year is affected by both adjustment on capacity after the Aleris acquisition last year as well as an increase in contract management. Sales is only marginally affected by corona. In Norway, Stendi, the rapid weakening NOK in the first quarter this year has affected the reported SEK numbers, of course. The average NOK-SEK rate is down 10% versus last year, which means that the sales in local currency is more or less flat versus last year, but down SEK 80 million reported in SEK. In Altiden, Denmark, we made 2 acquisitions around New Year, which have added on SEK 41 million in sales in the quarter. And last Klara, who is still hurt by the Swedish VAT regulation that changed for her health care staffing services in Q3 2019 and cool down the market for these services significantly. So turning to the profit numbers. Overall, we are pleased with that we managed to increase our EBITA and EBITA margin under these challenging circumstances in 4 out of 5 business areas as well as for the group in total. Vardaga actually declined in EBITDA by SEK 32 million or in margin by 3.3 percentage points and was as said hurt the most by the negative corona effect. The Nytida margin is benefiting from the capacity adjustments made in 2017 -- 2019, sorry, as well as the productivity increases, and EBITA was even higher than last year despite the lower sales. In Stendi, the restructuring programs started to having effects already in Q2. And now in Q3, we saw further improvements and reported a double-digit EBITA margin in the quarter. Altiden is still in a build-up phase. We are improving our capacity and competence. Altiden had a very weak Q3 last year as comparison, but nevertheless, performed a very strong Q3 this year. The Q3 seasonality is more obvious in Denmark than in other segments. And finally, the Klara continues to deliver stable margins. IFRS 16 effects, we have since the beginning of 2019 being reporting, including the new leasing standard. This means that all reported quarterly and year-to-date data that 2020 are comparable with the reported number for 2019. However, data that includes quarters from 2018, like the rolling 12 data up to Q3 2019 is still affected by the different reporting standards. In this slide, you can see the effect of this. We can see that the rolling 12 margins, excluding IFRS 16, is increasing as well for 3 quarters in a row. Turn to cash flow. The strong operating cash flow continued in the quarter. This was the fifth consecutive quarter that we increased versus last year, now to SEK 369 million versus SEK 318 million last year. If we exclude the IFRS 16 effect, we are at the operating cash flow to SEK 163 million in the quarter versus SEK 117 million last year. Q2 and to some extent Q3 were positive affected by the government program in Norway where tax payments in Q2 and Q3 were moved into Q4. This means that the Q4 cash flow will be, in some way, affected negatively by this. If you measure our cash conversion rate, which is the operating cash flow versus the EBITA on a rolling 12 basis, we can see that the second quarter -- for second quarter in a row, we were above 100%. The deleveraging of the group is continuing, of course, in line with the good cash flow. If we look back and compare with the third quarter last year, we have decreased our net debt by almost SEK 600 million and come from a net debt ratio 4.6 to below 3.6 as of now, and we are getting closer to our financial target at 3.25x. As corona stroke the financial market in late Q1, the market for unrated commercial papers like ours, more or less vanished, which means that we at that time shifted the financing to more traditional bank financing. In the third quarter, we can see that the markets are normalizing again and are almost back to the credit spreads we saw before corona, and we can again utilize and fully -- deploy our program fully and benefit from lower financing costs going forward. The increase in lease debt of SEK 949 million year-to-date reflects the fact that we have increased the number of startups of new units under our own management and these units comes with longer rental conditions than the average portfolio. Turning into the different business areas starting with Vardaga. We see the total sales reached SEK 860 million in the quarter, was down 5% versus last year. This is, of course, mostly driven by the lower occupancy rate in mature units, but also a decline in contract management due to cease contracts. If you compare quarter-on-quarter with Q2, we see a decline of 1% if we adjust for 1 more invoicing day in Q3. New units in the ramp-up have, of course, affected the sales number versus last year positively, but not as much as expected. We have seen a slower ramp-up phase in these new units due to the COVID-19 situation. In the later part of the quarter, we saw an improving occupancy in our care homes under contract management as well as an increased demand in our home care business. In the beginning of the fourth quarter, we now see many of our homes under contract management showing almost the same occupancy as before corona. EBITA for Vardaga reached SEK 50 million versus last year SEK 82 million. Most of the negative are corona effect of SEK 50 million in EBITA, of course, throughout Vardaga. However, we also saw improved operational cost KPIs in the former Aleris units and better efficiency ratios, which indicates that the margin improvements can come rather rapidly when the occupancy rates are raising again in our own management portfolio. Newly started and ramp-up units is now representing 18% of the total Vardaga portfolio. The EBITA margin of mature units went from 15.5% last year to 11.1% this year in Q3. This decline is both driven from low occupancy, as we said, unit by unit, as well as we're now reporting the former Aleris units as mature, and these units came in with lower profitability on average. If we turn to Nytida, where we have total sales reached SEK 915 million in the quarter. It was down 2% versus last year, and own management were down 6%, which is SEK 757 million in the quarter. This is an effect of the adjustment of the capacity that we did in 2019 and that we have relatively few new startups this year. Contract management sales reached SEK 159 million, which is 29% up versus last year, and we see that the strong win rate in 2019 are now clearly turning around the negative sales trend in contract management that we had earlier for some time. EBITA reached SEK 177 million in the quarter or 19.3% margin. This is an increase by 0.7 percentage points and it's actually the seventh consecutive quarter that we see an EBITA margin growth in Nytida. We saw effects of the Aleris synergy realization as well as from taking out the overlapping capacity. We also have fewer startups, of course, as said, and that helps the EBITA margin. And the rolling 12 EBITA margin now reached 15.4%, up 0.2 percentage point from last quarter. So turning to Norway and Stendi. Sales decreased in SEK by 10% and reached SEK 733 million. Currency effects had a major impact in the quarter, and sales in local currency were more or less flat. In local currency, the own management sales were actually increased by 4%, but were down 6% in SEK and reached SEK 679 million. Contract management sales reached SEK 54 million versus last year SEK 87 million, and decline is explained by returning of the nursing home contracts in late 2019. EBITA reached SEK 79 million or a margin of 10.7% in the quarter versus 7.6% last year. We saw both better sales mix, but mostly the profit increase comes from the cost improvement program that we launched in Q1. The adjusted rolling 12 EBITA margin increased by 0.7 percentage points from last quarter, and we are now at 4% rolling 12. The announced program to reduce the administrative cost and strengthen the operational leadership in the organization was finalized now in Q3. As we saw more potential than first communicated, we increased the program, we've now recorded SEK 27 million in realization costs in the quarter and totally SEK 50 million in the whole program, with annual expected savings of SEK 40 million realized from next quarter. Some of the savings have already been realized since the start of the program in Q2. So over to Denmark and Altiden. Sales amounted to SEK 166 million, which is up 31% versus last year, explained by the 2 acquisitions made around Christmas. In local currency, the sales increase was even higher by 34%. The acquisitions called Vivamus and Casablanca have performed well, in line with expectations, and contributed positively on the profitability. In the seasonal strong third quarter, Altiden had an EBITA of SEK 11 million or an EBITA margin of 6.6%. We are comparing, as said, with a very weak Q3 last year, which were affected by some one-offs. We are now, for the first time in positive rolling 12 EBITA numbers slightly, but nevertheless. We have invested in overhead, both for building up our own support organization as an independent company after the carve-out from the former Aleris organization in Denmark and also strengthened both disabled care management and resources to support the organic growth going forward. We plan to continue our strategy to grow in more profitable segments of disabled care or own managed nursing homes. And we are actually starting our first Greenfield nursing home in Q2 next year in the municipality of Holbæk. In Klara, net sales were down 13%, reaching SEK 59 million in the quarter, SEK 1 million down versus the previous 2 quarters. Sales decline versus last year is predominantly in the staffing business towards private operators, impacted by the changed VAT regulation introduced last summer. Total revenue, which includes internal sales were flat versus Q3 last year. And we continue to grow our Klara team services and with favorable mix development and administrative savings, we continue to grow our EBITA as well, now from SEK 7 million to SEK 8 million. And if we look at the rolling 12 EBITA margin on total revenue, we are now at a decent level of 8%. And on that note, back to you, Fredrik.

Thank you. And to sum up our financial development. Our growth target is 8% to 10% through a combination of acquired and organic growth. 2020 year-to-date shows only marginal growth given the corona effect on Vardaga and also low M&A activities and a cautious approach to greenfield opening. Profitability-wise, we have a mid-term adjusted EBITA target of 9.5%. We have seen small EBITA margin improvement 3 quarters in a row, but we also need to have the negative effect from corona on Vardaga behind us and also further margin improvement in both Norway and Denmark coming from delivering on the plans that are put in place in both these countries. These improvements are necessary to reach the mid-term target margin level. And finally, regarding leverage, where we have seen improvement in many consecutive quarters. Cash flow is normally weak in the third quarter, but our cash flow actually came in better than expected and leverage is likely to continue to go down in the coming quarter, excluding effects from potential M&A activities. Over to sustainability. Since many years, Ambea has had a strong focus on sustainability and how we as a company can support the 17 global sustainability goals set up by the United Nations. We have presented details around targets and activities in our annual reports over several years. During the last year, we have strengthened our work around the environment and reduction of our CO2 footprint, both in terms of broader tracking but also raised our target for CO2 reduction. Our new target is a 50% reduction of CO2 emission by 2025. Actions have been initiated around electricity, travel, food to ensure a rapid impact. So summarizing the third quarter, we believe Ambea did a strong Q3 despite the corona difficulties in Vardaga. Profitability improved in all other 4 business units and the profitability improvement momentum in Denmark and Norway are, of course, especially important. The increased spread of the virus in the last few weeks will, of course, mean negative effect on Ambea. However, we believe that the negative impact is likely to be lower going forward due to both slightly improved occupancy in October and early November and the efficiency measures taken. We are also starting to see some municipality compensation for increased costs earlier this year being paid out even if we're still taking a cautious view when it comes to forecasting the effect on such payments. And thanks to Ambea's high cash conversion. Our debt position is improving. Compared to 12 months ago, our leverage is actually down 1 turn. Net debt to adjusted EBITDA is 1.0x lower year-on-year. Debt has been reduced by approximately SEK 600 million. And on an ending note, I'm very proud to tell you that Stendi in Norway won a very prestigious award last week. We were awarded a price as the Service Company of the year by NHO, the Norwegian Enterprise Confederation. The price was awarded to us for our responsible and industry guiding work in the corona pandemic. Another important sign on the positive momentum of our best Norwegian business unit, Stendi. So with that, I conclude our presentation and open up for questions. So operator, please, could we have the first question?

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

Can you hear me?

Yes, we hear you.

All right. Great. Two topics I would like to discuss. The first is COVID situation in Sweden. So now in the -- just in the last couple of weeks, what have you seen happening with the move in rate has the virus is spreading or the spread of the virus is accelerating again, and there are more alarming news in -- around that. And also related to the virus, when you talk about SEK 40 million in negative impact on EBITA in the fourth quarter. Does this also include the negative effect you're having from generally slower ramp-up of new homes? I guess that's maybe difficult to break out, but that's interesting to see that. And then regarding the margin improvements in Norway and Denmark, just to make sure there were no extraordinary positive things in the quarter. And I'm also interesting to hear how much of the SEK 40 million in savings in Norway have been achieved in the second and the third quarter? Yes. I stop there.

So if we start with the COVID situation, since the visitor ban in October 1, we have seen a small but still a net increase in number of occupied beds in own management every week. And the other thing is that what we have also seen is that the contract management units are showing same level of occupancy as we normal have. So that means that there are very few empty beds to be moved into in the contract management unit and thereby sort of the empty beds are in own management. I think that is also one of the things that are driving that. And we haven't seen -- and that has been since October 1. And it's clear that the general spread in society has taken off in the last couple of weeks. But that's sort of small increase week-by-week has actually continued the last 2 weeks as well. Does that mean that sort of we can be certain that, that will continue? No, it doesn't. I mean we are kind of -- we are, of course, carefully following the general trend in society, and it's hard to see exactly where kind of that is -- kind of what the impact is going to be on our nursing home. So it's -- but that's basically what we see up until now.

Could I follow-up what you said about the contract management units? How much was occupancy down before and how much has it improved?

I don't have the exact number of that. But that's -- when we saw in Q2, we saw impact hitting both our elderly care in own management as well as the elderly care in contract management. We feel it's pretty natural that the municipalities are filling up the contract management units before that's where they have costs anyway, so to say. So it's pretty clear that the ramps or the return to normal occupancy levels started already this summer on contract management and has sort of filled up since then. I know that wasn't exact the full answer to you, but I don't have the...

Yes. But reason I'm asking is, that sounds like a very positive signal as if that capacity is gone now, the next step will be to fill up your own management ban. So that should be a good leading indicator for the coming quarters. Do you agree?

Yes. Yes. That's what we see. And the difficulty is, of course, to kind of fully project what is going to happen with the increased society spread. But apart from that, absolutely.

And then on Norway and Denmark.

Yes. On the negative SEK 40 million, that includes the impact of slower ramp-up on new units. So that's the negative impact is -- also is on like-for-like, but also slower growth of both new units and units under ramp up. So that's the full effect. And Norway and Denmark, do you want to take that, Benno?

We can say that we started the program in Norway in late Q1. So we saw effects in Q2 and Q3. And of course, we took, you can say, the most obvious things in Q1 already and the more difficult things, if you can call it like that in late Q3. So we would say at least half of the total savings were already achieved in Q2 and Q3. And we have the full savings from Q4.

Okay. And what's the next step then to bring the margin from here to maybe more normalize. I don't know what that is in Norway, but maybe 8% or so.

I mean, the next step is kind of a lot of, kind of, smaller activities because that comes down to being more efficient in staffing, making sure that all new tenders that we submit are done with the right margin and pricing strategy. And then, of course, continued kind of initiatives to do normal kind of savings in procurement. So you shouldn't expect sort of a step-wise improvement, but rather sort of a continued gradual improvement.

Okay.

And regarding -- if there are extraordinary kind of positive effects impacting Q3. I think you had a question, Kristofer, regarding if there are extraordinary positive aspect.

I'm not asking about one-offs, but from time to time, you have these type of all the effects that we learn about afterwards that does impact that quarter. So just curious to see if there were any quantify the things help.

No, we can't see any material effect supposed to be in the quarter.

No, no. I think the financials in Q3 are very representative on that.

Yes, on the underlying performance.

Your next question comes from the line of Klas Pyk from Nordea.

Two if I may. The first one is on your guidance for Q4. So you say that negative sales impact of SEK 70 million to SEK 80 million and negative EBITA impact of SEK 30 million to SEK 40 million. And that's what the drop-through from sales to EBITA was higher. So can you elaborate a bit on how you calculate that? Or the expected impact, are there any cushions in that, that is extraordinary? That's my first question.

We have been working with, of course, with staff cost when the occupancy is down. And to start with, when the occupancy go down rather rapidly, there is not so much in short term that you can do with staffing. But if the occupancies stay low in a -- for a period of time then you can work with the staff cost in another way. So we have structured in saving more costs over time. That's one of the factors that we have not seen so much drop down on the revenue loss. And the other factor is that we see some money coming in from the municipalities in extra cost coverage that we are starting to get now in Q4.

Okay. And my second question relates to Norway. So Q4 last year was a disappointment in Norway, owning to lower volumes due to budget constraints, if I'm not mistaken. Can you say anything about how your view is on this for this year?

Yes. We -- I think there is, of course, a seasonality with Q3 being strong and Q4 being weaker, and that is likely to happen this year as well. However, we do not see that kind of impact -- negative impact on occupancy as we saw last year. So the savings coming from the child welfare services, we're not sort of -- they were not as big as last year. So you shouldn't expect sort of that similar kind of negative impact this year as we saw last year.

Your next question comes from the line of Karl Norén from Danske Bank.