Ambea AB (publ) (AMBEA) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Ambea Interim Report Fourth Quarter 202 Conference Call. After the speaker's presentation, there will be a question-and-answer session [Operator Instructions]. We advise today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Jensen. Please go ahead.

Thank you, and good morning, everyone, and welcome to Ambea's Fourth Quarter 2022 Report Presentation. Speaking is Mark Jensen, CEO of Ambea. -- and presenting with me today is Ben Eliasson, CFO. Last quarter, we did a presentation of CLA and today, I will spend a little more time on presenting Ambea's focus on continuously improving quality as part of the introduction before we get to the financials of the quarter. Benner will then describe the development of the financials for the group and for the different segments in Ambea. After that, I will summarize the quarter and compare to our financial targets before we open up for questions. I would like to begin with a brief overview of Ambea. ABA is the leading Scandinavian care provider. We have about 31,000 employees across Sweden, Norway and Denmark and revenues of more than SEK 12 billion. We offer a full range of services within elderly care, disability care, psychosocial support and staffing solutions. We have more than 450 municipalities as our clients, and we are an important partner in solving challenges in the welfare system. Before we turn to our work on quality, let's have a look at some of the reasons to invest in Ambea. Ambea delivered value to society, and we aspire to be the most attractive investment in the care sector. From a distance, care providers can look somewhat similar, but at a closer look, there are distinct differences. We have listed the most important for Ambea here. We are the market leader in all of our markets, Sweden, Norway and Denmark. We have a competency advantage through unique in-house competency solutions in Klara and Lara. We focus on quality and invest in our employees and our quality system. We create growth by actively building up a pipeline of new care homes and through bolt-on acquisitions. We have a balanced risk as our customers are 450 municipalities in 3 different countries and because we provide multiple services through 5 business areas. And Ambea has attractive financial targets and a stable dividend history. In general, this is how Ambea differentiates and can provide an attractive investment in the Scandinavian care sector. On the next slide, we will go through our work on quality management. Our quality management aims at consistently meeting regulatory requirements as well as the expectations of our customers, meaning the care receiver, their relatives and the municipalities. High quality and continuous quality improvement is fundamental to Ambea. On this slide, I would like to give you examples on some of the elements we consider important for improving quality. Twice per year, all units perform self-assessments with about 200 questions to identify areas for improvement. The result of the assessment is reported in our quality system and used for action planning and further follow-up. We update the questionnaire with a certain frequency to improve focus and ensure that the self-assessment is better tailored to recent learnings and the specific needs of each segment and type of care. Every month, we follow up all of our units using a selected quality and HR metrics. This gives us an overview of the situation in all units and the ability to identify higher risks at an early stage. Monitoring of risks is based on existing data, for example, employee engagement and sick leave as well as on our own self-assessment. Together, the data generates a QHR index score. This is one of the cornerstones within our quality management and the purpose is to identify units with a negative trend at an early stage and provide adequate support to achieve consistently quality across the organization. We flag and follow-up units that need closer support, and this includes all new units. The start-up phase of a new care home implies higher risk when it comes to ensuring quality. To reduce the risk, we had a lot of resources into a startup process. Over the last year, Vardaga made an extra investment in the start-up process and have selected a trained a number of project managers to be able to further focus and improve the process. In parallel, we transferred the gain knowledge to LCD in Denmark to achieve further group synergies within quality. And we will use the newly updated start-up process from Vardaga when we open up our second ore managed eldercare in Denmark quarter 2 this year. When it comes to whistleblowing, our employees should always feel safe to report suspected deviations of our code of conduct. Reports should initially be made to the line manager for quick response and action, but it's also possible to make anonymous reports through our whistleblowing function. In June 2022, we have implemented an external visible channel in all countries. The function is in line with the new EU directive and all reports are investigated and follow through. Our quality model is built bottom-up where each and every employee plays an important role. We have operational line measures that frequently visit our care homes and interact with our staff and care receivers as their primary responsibility. They measure and are themselves measured on a range of quality KPIs. We also have central quality teams in all countries conducting both online and on-site quality assessments to both audit our processes and support the local teams and motivate constant quality improvement. As a large defense line, we have the national authorities granting us permits to operate and to control, we live up to local legislation and to the permits granted. Permits are most often linked to a specific care home. We always work from the principle that any control or follow-up process from the municipalities or the authorities is welcome, and we take all changes we can get to learn and improve. Every quarter, we have more than 50 inspections of controls from the authorities and to us, this is usual business. We also believe in transparency and doing all our quarterly reports, highlight number and status of authorities, reports and quality inspections. A consistent high-quality care is always delivered through a lot of smaller and larger actions and activities. Through attention to both detail and the bigger picture and through constant work and priority on organizational culture, we strive to foster an open and transparent environment where reporting of deviations are prioritized and welcome. This will help us to learn and capture smaller issues before they become big and to avoid repetitions of similar deviations. We also know on quality, we can never rest, but need to work with passion and determination every day across the entire organization. Feel free to ask questions regarding our quality work later in the session. And now let's turn to the results of the latest customer satisfaction surveys. The care receivers experience of Ambea is one of the most important measures of how well we have succeeded with our business. During quarter 4, all business areas have participated in care receivable service, and we continue to have high results in all segments. Altiden and Vardaga has conducted Ambea's own survey and Nytida has been part of the Swedish Association of local authorities and Regions national care receivable survey. In parallel, Stendi also conducted a client survey and 97% of the clients answer that they are satisfied with the cooperation with Stendi, a fantastic result. The care receiver survey are a natural part of our quality improvement process and all units are now turning the results into action plans to further develop the quality. On the next slide, I will give you an update on Ambea sustainability agenda. Sustainability is integral part of our updated strategy. Our reduced climate footprint and our positive contribution to society through our care services are a constant area of focus, combined with robust governance. During the fourth quarter of 2022, we signed a sustainability partnership agreement with a real estate company, Vectura, then in Sweden lease 14 large properties to us today. A green appendix for all leases ensure future proofing of buildings to deal with changes in climate and committed to take joint energy efficiency measures. We welcome more real estate companies to engage in such partnerships so we can jointly turn our sustainability commitments into real action. Regarding social sustainability, during the past quarter, we have joined Diversity charter, part of an international network focused on improving organizations work within diversity and inclusion. We are very proud of the risk diversity we see in our workforce across Scandinavia and look forward through this membership to contribute with our expertise as well as continuing to learn more. I'm also very proud to announce that for the second year in a row, Ambea's among the top 50 employers in Sweden in Universal's ranking, and we are first in the care sector. We work hard to ensure attractive workplaces with a secure working environment for all employees where capability development is always in focus. It's fabulous to see those efforts reflected in this external recognition. Let's turn to organic growth. In quarter 4, the pipeline remains strong, and we have almost 1,500 new beds of placements in pipeline, most of them in Sweden. In Norway and in Denmark, we are building a pipeline in segments with good potential and fair commercial terms, in line with our updated strategy. The pipeline decreased a bit compared to the previous quarter as we opened up 2 new quarter units with 120 beds. We will continue to work to develop good access to new care homes to meet the increasing demand. Demographic change requires the construction of many new nursing homes and care facilities. We continue to actively seek opportunities for organic growth within Altiden, Sweden and Denmark and within social care in all 3 markets. We are pleased to have an active pipeline in all 3 markets with and in Norway, again being more active in prioritized market segments. We are in dialogue with many municipality as society needs to increase the pace of planning and construction of new elderly care homes in both Denmark and Sweden to meet the demand. In Sweden, we hope to see more municipalities on for freedom of choice for care receivers. And in Denmark, the discussions center around fair and predictable commercial terms, which is currently the largest tender for new elderly care projects in Denmark. Let's look at acquisitions. During 2022, we made 5 acquisitions with an annual turnover of SEK 263 million. We are satisfied with the progress of all acquisitions and the ongoing work to integrate and further develop the businesses. We continue to see M&A as a key driver of our growth and as an essential part of our strategy. Ambea has a strong cash generation that gives us the opportunity to seek for bolt-on acquisitions. We are active in all our markets, evaluating potential opportunities for further value creation. But in the short term, we pay high attention to acquisitions within Social Care in Sweden, the segment where Nytida operates. And also the highlights of the fourth quarter. In local currency, all segments delivered net revenue growth compared to last year, apart from Stendi -- and total sales grew by 8% compared to quarter 4 last year, mainly driven by 4% organic growth. Adjusted EBITDA amounted to SEK 170 million, a decrease of 21% versus last year. The decrease was mainly driven by higher costs for food, energy and sickle and costs connected to the reorganization in Altiden. Vardaga continues to show a positive development in occupancy and opened 2 new nursing homes in the fourth quarter. Then is underlying earnings improvement continued this quarter. Klara showed strong performance and increase its contribution to group EBITDA. In Altiden, we saw higher operating costs and costs from the reorganization. By the end of the fourth quarter, Ambea had bought back 3.9 million owned shares of the maximum 5 million shares mandate granted by the Board of Directors according to our share repurchase program. The objective of the program is to optimize the company's capital structure and contribute to increased shareholder value. And now over to you, Benno, for a presentation of the financial summary.

Thank you, Mark. The strong growth numbers we saw last quarter continued in this quarter and all business areas contributed to the growth like in previous quarter, plus 8% year-on-year. Of this 8% growth in this quarter, 4% was organic growth, 2% came from acquisitions earlier this year and 2% came from currency effects. And if we then look into how the different business areas have affected the group numbers, we can see that new data is up 4%, driven by acquisitions and new contract management operations. Vardaga increased 12% versus last year. Like in the previous quarters, there are an increased occupancy trend throughout this quarter, which is very satisfying from our point of view. Furthermore, Vardaga opened 2 new nursing homes in the quarter. Stendi showed growth in SEC but had a negative growth in local currency by 1% versus last year as spending gradually are leaving the elderly care segment. Altiden is up 16% as an effect from both startup of new contracts, increased occupancy in our own managed nursing home and the acquisition of Reflect. In local currency Altiden grew by 7%. Klara increased 30% and continue with growth in all sub segments and due to the acquisition of SkolPool. This slide shows how the different business areas have affected the EBITDA of the group. In Itera, we had lower occupancy in some of our own managed facilities and higher cost for food and energy. In Vardaga, we saw improved occupancy but also higher costs, especially like in it for food and energy, which led to slightly lower EBITDA than last year. And EBITDA was positively affected by government reimbursement for sick leave in both Nytida and Vardaga last year as a comparison. In Stendi, we had positive effects last year that affects comparability of the Q4 figures. We continue to see positive underlying earnings improvement in Q4 this year. LTL is behind expectations as we saw higher operating costs and higher-than-expected costs linked to the reorganization, we will continue to work to build a stable and scalable platform in Denmark. Further, we are confident our videos measures will improve operational efficiency going forward, alterate costs for reorganization are accounted for at group level in order to enhance comparability of the underlying business in Altira. The strong demand within all of Klara sub segments continue and Klara generated a high result in the same quarter last year with more than 100% growth of EBITDA. The acquired school full was the key driver for the growth. The EBITDA in all business areas were negatively affected by high cost of food and energy with a total of EUR 30 million for the quarter. All in all, the EBITDA margin was 5.3%. Operating cash flow increased compared to the same quarter last year, both including and excluding leasing. Rolling 12 operating cash flow is still very high and above 95% of EBITDA. And this gives Ambea good financial flexibility going forward. This slide shows the away from the rolling 12 reported EBITDA of SEK 953 million to the SEK 869 million in EBITDA, excluding IFRS 16, down to the free cash flow post tax, -- we can see that we have invested EUR 105 million in fixed assets and paid EUR 89 million in interest and EUR 123 million in taxes. Other noncash items are mainly changes in provisions from the litigations in Norway. We have gained $116 million from sale of real estate in the second quarter. And during the year, we have had minor negative effect from working capital. All in all, we have generated $536 million in free cash flow post tax based on the old accounting standards. And on this slide, we can see how we use this generated SEK 536 million in free cash flow, SEK 109 million was distributed to our shareholders as a dividend, SEK 225 million was spent on the 5 acquisitions we made earlier this year and SEK 179 million was spent on the share buyback program. At the end of the fourth quarter, we have a net debt ratio of 3x EBITDA, excluding IFRS 16, which is slightly higher than last quarter, but lower than last year. A higher adjusted EBITDA have affected the leverage ratio positively compared to the same period last year. And now I want to go through the business areas, starting with Nytida. Sale initial increased by 4%. It was mainly driven by acquisitions and growth in our own contract managed portfolio. Our own managed home flow showed a slightly lower occupancy than last year, around 1 percentage point. EBITDA decreased by 9% due to lower occupancy rates in some units, but more important due to higher cost for food and energy. And as said earlier, last year's quarter was also positively affected by the government's reimbursement for sick leave cost, which affects the comparison. EBITDA in this quarter landed at 11.7% and rolling 12 EBITDA was still at high 13%. In Vardaga, net sales increased by 12% year-on-year, driven by higher occupancy and by newly opened nursing homes, occupancy in mature units were in the fourth quarter higher than last year, and unit started 2019 in 2020, which is -- which are included within mature units had 33% higher occupancy compared to last year. So very good development there. EBITDA decreased with 10% to SEK 53 million, mainly driven by higher cost of food, energy and cost per cycle. As I said, last quarter was also positively affected by the government reimbursement, particularly which affects the comparison. Stendi. Net sales increased by 3% in SEK, but decreased 1% in local currency. We are gradually reducing our business within elderly care as we live in this segment, but the other segments are now showing growth, which is not the fact previous. In Q4 last year, we saw positive effects from retain salary revisions. With this in mind, the underlying EBITDA increased this quarter. The reported EBITDA decreased by 14% and was affected by higher costs for food and energy as well. Altiden net sales grew by 16% due to new management contracts and increased occupancy at our own managed nursing home, further net sales was positively affected by the acquisitions. The EBITDA in Altiden was behind expectations in the fourth quarter, and EBITDA was down SEK 17 million to minus SEK 16 million, and we saw higher operating cost for food energy and sickle as well as higher staffing costs in some units. We are now making a total reorganization of the business and are integrating all units acquired during the last years into a new platform. This work has proven to be more difficult than anticipated, and most of the management team has been shifted. We will see improvements going forward, but it will take some quarters of continued work before Altiden is at full speed again. In Klara, net sales increased by 30%. We continue to grow in all Klara sub segments, thanks to the increased demand and acquisition of cool fall, Klara delivers growth in the external market as well as through services delivered to Vardaga and Nytida. -- some growth gives us the opportunity to gain scale in more geographies, which in return, provide better staff efficiency and margin improvement. EBITDA margin was in the quarter at strong 13.8% and rolling 12 at 10.9%. Our strategic repositioning of Clara with the acquisition of SkolPool and the divestment of the staffing solution for doctors has proven to be successful in terms of growth, growth potential and also in terms of better margins. And with that, back to you, Mark.

Thank you so much, Bernard. So to sum up our financial development versus our targets. Our growth target is 8% to 10% through a combination of organic and acquired growth. We have reached our growth target in 2022 with 10% growth. In 2022, we completed 5 acquisitions and had a strong organic growth and high occupancy rates. To summarize the year, organic growth amounted to 5% acquired growth to 3% and exchange rate affected growth by 2%. Looking at the profitability target, we have a mid-term adjusted EBITDA target of 9.5%, which we have not reached. Achieving the profitability target implies fair revenue index adjustments over time, continued improvements in Norway and getting the new platform in LT established. In Sweden, our large business areas must continue to grow through increased occupancy, establishing new care homes and continued bolt-on acquisitions, all of this in line with our updated strategy. And finally, leverage is still at low 3x EBITDA at year-end. We expect our solid cash conversion to continue, which gives us potential to grow and leads to financial flexibility. And that brings us to the final page of the presentation. Ambea continued to show good overall growth and good organic growth in the fourth quarter. The positive occupancy development within Vardaga has continued month-on-month throughout the quarter and into quarter 1 this year. We plan to open several new homes for social care in quarter 1, 2023. Higher costs for food and energy of approximately SEK 30 million affected EBITA negatively in the fourth quarter. Cost inflation is a matter of fact, and we have, during the year, worked with several initiatives to dampen the effect. This included investments in central procurement and energy efficiency program, staff awareness and good overall cost control. We will continue this work in 2023. Municipalities across Scandinavia continue to prioritize care as one of their main tasks even though many are under pressure from the overall financial situation. To maintain the established model of equal care for everyone, the revenue index adjustments must reflect changes in relevant costs over time. This is important for the quality and the stability of the Scandinavian welfare system and for fair treatment of all braiders in the system. Over time, we will get compensated for a majority of the cost increases through revenue index adjustments. But short term, it affects our profitability negatively as we saw in the quarter in quarter 4. We continue to see underlying earnings improvement in Stendi and further improvements are expected in 2023. In Altiden, we continue to establish the right future platform and have special focus on improving profitability. Our share buyback program initiated in quarter 4 will be concluded in quarter 1, 2023. And the Board of Directors proposed a slightly higher dividend compared to last year of SEK 1.25 per share. Finally, I want to thank each and every one in our 1,000 large staff employees for their personal contribution to a good and independent life for more than 16,500 care receivers. And with that, I conclude our presentation and open up for questions. Can we have the first question, please?

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

Yes. Christopher from Carnegie. 4 questions. First one on Denmark. Could you give any indication how many quarters it might take until you're profitable again in Denmark? Staffing positively surprised here by earnings in the fourth quarter. I thought there would have been more seasonality, i.e., that the third quarter should have been stronger than Q4. Does this mean what we saw now in Q4 is this a good run rate going forward? And then I just want to confirm in Norway that there were no positive one-offs this quarter, something we have seen from time to time before. And then finally, on Vardaga, do you think this continued improved occupancy rate is enough to compensate margins in 2023 versus 2022 for the negative effects at the same time see from cost inflation.

Thank you, Christopher. In terms of your first question, how many quarters it will take before we reach profitability, positive result, again, in Denmark, I would say, 2% to 3%. The second question was around the staffing run rate. Did I understand that correctly in the fourth quarter? Nothing cost you want to...

Yes, exactly. If this -- is this the level of earnings this business should do not per quarter going forward?

Okay. I can take that one. We -- as you said, we have some seasonality. And normally, the third quarter is the strongest in -- also in the Staffing segment. We had a very strong Q4, and you should probably take that as a standard for all quarters going forward. But we will have definitely higher margins than we are -- have been used to in the starting segment.

The positive one-offs in Q4 or just down the line...

Strong performance and growth in all sub segments. And then your third question on one-offs in Norway. There are no such one-offs in quarter 4 numbers. And your fourth question was around the margins in Vardaga, whether the increased occupancy can compensate, and we don't think that -- so there will be an impact on margins in 2023 in Vardaga.

And the question comes from the line of [ Jakob Lemka ] from SEB.

Good morning, my first question is on the unallocated items in the quarter, which are quite high. Can you give some more details on that, please?

Yes. The unallocated is the EUR17 million for the restructuring program in Denmark that is reported as unallocated. It is a one-off for Denmark, but it's not a one-off for the group. So that is how we have reported that.

And then my second question is on sort of the inflation impact you see in 2023, if it's possible to quantify the magnitude and also still any segments that will be less impacted.

The main cost -- the main driver for cost inflation is, of course, our wages and salaries, and that we have no visibility of -- well, as any of the countries. We have, from March up to June, we have salary increases in all countries, and we don't have no by now, no visibility in that so far.

[Operator Instructions] And the next question comes from the line of Victor Forssell from Nordea.

Starting off on a previous question as well, since you do not expect, let's say, occupancy improvements in Vardaga to compensate, I would rephrase the question a little bit. At what levels are your current sort of indications for the indexations within your Swedish units landing at and the divisional sort of variances from Vardaga to Metals that would be interesting to see what you hear.

The index in Sweden are different systems. We have the so-called OPE OPI that is a care price index, and that goes for the majority of our businesses, some for the going year and some for last year. And we know that there is a preliminary index number of 3.5%, which we now have invoiced in January for some of the contracts. We also know that some large municipalities used last year's index. So we have a 1-year lag in that. And last year's index is 1.9. So there is a lag for compensation. But we also have a portion of contracts where there is a political decision on what the index to use and at which level. And we -- what you can see right now is that it will probably be a little bit lower in these cases than the OPI index, that is the information we have as of now.

Okay. So the weighted sort of average is a touch below the 3.5% in general. Is that average.

Is below the 3.5%. Correct.

Yes. And does that mean that when you're saying that adage won't be able to compensate, you expect sort of a negative margin of, I don't know, 100 basis points? Is that a good start to model for us? Is that how you view your progress in that division as well in 2023?