Ambea AB (publ) (AMBEA) Earnings Call Transcript

Good day and thank you for standing by. Welcome to the Interim Report First Quarter 2023 Conference Call. [Operator Instructions] [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Jensen. Please go ahead.

Good morning, everyone, and welcome to Ambea's first quarter 2023 report presentation. Speaking is Mark Jensen, CEO of Ambea and presenting with me today is Benno Eliasson, CFO. Last quarter, we gave an overview of Ambea's quality model. And today, I'll present Stendi, our business area in Norway before we get to the financials of the quarter. Benno 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. Ambea is the leading Scandinavian care provider. We have about 31,000 employees across Sweden, Norway and Denmark and revenues of more than SEK 12.8 billion. We offer a full range of services within elderly care, social care, staffing and competency solutions. We have more than 450 municipalities as our clients, and we are an important partner in solving challenges in the welfare system. Let's have a look at some of the reasons to invest in Ambea. Ambea deliver 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. The need for care will increase driven by a growing and aging population and regardless of the economic climate. We are the market leader in all of our markets, Sweden, Norway and Denmark. We focus on quality and invest in our employees and our quality system. We have an advantage through unique [Technical Difficulty] solutions in Klara and Lara and well-developed care concepts that create quality and economies of scale. We create growth by actively building up a pipeline of new care homes and through bolt-on acquisitions and through developing new care services. 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. Ambea also has a long history of strong cash flows and stable dividends. 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 some of our recent work within ESG. Sustainability is an integral part of our updated strategy. Our reduced climate footprint and our positive contribution to society within social sustainability through our care services are constant areas of focus, combined with robust governance. During the first quarter of 2023, Vardaga partnered with the Nordic Center for Sustainable Healthcare in the launch of Gronnrokulta, the World's Greenest Care Home. Gronnrokulta is a network and a digital arena for public and private organizations interested in spreading knowledge and sustainable solutions within elderly care. We plan to play an active role in this network and will contribute with our knowledge. We have also signed a partnership agreement with the Swedish Armed Forces. The partnership gives us access to students within the military nursing education. For example, through participating in recruitment meetings and advertise our vacancies on military job boards. The purpose of the collaboration is to establish a structure for flexible careers, combining service in the military with a career at Ambea. Flexibility is an important solution in the context of a future sources of care workers and higher need for military personnel. During the spring, Ambea and Norrmejerier initiated a new collaboration to supply dairy products to more than 8,000 Swedish care receivers, exceeding 1 million liters of dairy products every year. Excited to replace all suppliers with active ties to the Russian market as a consequence of Russia's illegal war in Ukraine. This is a part of our work to guarantee and ethical supply chain. The shift to Norrmejerier also gives us the benefit of a lower carbon footprint compared to our previous supplier. With the change of dairy supplier, we are in principle ready with the supplier changes due to the war in Ukraine. Next slide, please. We continue the presentation of our business areas. And today, I want to give a more detailed presentation of Stendi. The care market in Norway grew 7% annually during the 2017 through 2021 period and is expected to continue to grow. The main drivers for the growth is the political intention to increase individual care and increased number of complex and chronic diseases and technological innovation that enables new types of care. The private market share is approximately 13%, and Stendi is the largest private care provider with almost 1/3 of the private market. Norway is a sparsely populated country with 5.5 million inhabitants and 356 municipalities. The many municipalities have a responsibility to provide care for its citizens in line with the welfare model in other Scandinavian countries. For many small municipalities, it is, however, impossible or overly expensive to build up the competency needed to provide care for a small amount of care receivers, especially if there's a need for expert knowledge. Here, private care providers have an important role to meet both the care receiver and the society's needs. Stendi has approximately 140 municipalities as our clients today. Stendi has a turnover of SEK 3 billion and is our third largest business area. The operation is divided in 3 main segments: First disable and social care, which is our largest segment. It stands for 53% of Stendi's turnover. The services include person under residential facilities and care services for types of complex needs. One target group is people with disabilities such as autism or intellectual disabilities, where the need for social support interventions is often lifelong. Other target groups are people with, for example, substance-abuse often combined with a diagnose. Children and youth is our second largest segment. It contributes 36% of Stendi's turnover. We offer 2 main services, foster care and residential childcare homes. Foster care is the most common and first alternative when the child has moved out of the ordinary family. Residential child care homes are situated in normal residential areas and typically one to 4 children are living in each facility in a home like environment. The children receive daily care and treatment and participate in the daily life, attend regular school and take part in social activities in the local community. Some units offer short-term placements while others are designed for long-term placements. Personal assistance, PPA and home [ teams ] is our smallest segment in Norway with around 10% of the turnover. User-controlled personal assistance is a way of organizing practical assistance and training for people with substantial long-term needs for personal assistance. The care receiver organized and lead the work of the assistance, but they're employed by Stendi. In Norway, the municipalities are solely responsible for personal assistance in a transparent and well-organized model that works well for both care receivers and care providers. Regarding opportunities, Stendi has improved performance during the last quarters with improved profitability due to the capacity adjustments, commercial initiatives and organizational improvements implemented. We see a potential for growth in Stendi due to a growing population and overall increased need. We believe and also experience that private care providers are needed in the Norwegian welfare mix and play an important role in solving their welfare challenge, both short and long term. With our strategic focus on 3 sizable care segments and opportunities for both organic and over time, acquired growth, we look to the future with confidence. Being an active [Technical Difficulty], and I would like to share some examples on the next slide. As a market leader in Norway, we take our responsibility for driving development within the care sector. We are active in the public debate and try to proactively contribute with our knowledge and solutions-focused approach. We have just signed a new national framework agreement on children and youth care, which we see as a sign of excellent work by the employees and of high-quality care delivered. We also have collaborations with schools and universities to further train and develop our employees and offer vocational training opportunities for students. We map competency needs for key roles and ensure we assign training and follow-up on formal competency development through our online training platform -- learning and training platform. This is an important part of our commitment to quality and continuous learning and development. Exercise and physical activity are important for everyone based on their own terms and Stendi is proud sponsor of the Kongsberg Games, a sports event for people with an intellectual disability that aims to spread enthusiasm and inclusion. Stendi also has a collaboration with Salum Kashafali, the world's fastest para athlete. This to increase the visibility of para sports and highlight the right to and importance of personal assistance. Salum has become a fantastic ambassador of Stendi and personal assistance in general and his outstanding achievements and positive mindset continue to inspire us -- also inspires us also outside Norway. I hope this gave you a good perspective on Stendi, a business area we will see develop and contribute more to the Norwegian society and to Ambea going forward. And with that, we go to organic growth. In Q1, the pipeline remains strong, and we have almost 1,500 new beds 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 updated strategy. The pipeline increased compared to previous quarter, and we signed one new nursing home contract in Vardaga and Stendi increased the pipeline with 11 beds. First to develop good access to new care homes to meet the increase in demand. Demographic change requires the construction of many new nursing homes and care facilities. We continue to actively seek opportunities for organic growth within elderly care in Sweden and Denmark and within social care in all 3 markets. We remain positive that the urgent need for increased supply will lead to more opportunities going forward. We are pleased to have an active pipeline in all 3 markets with Stendi Norway, again, being more active in prioritized market segments. On the next slide, we will look more specific into the revenue growth delivered. The organic growth showed in the dark blue bars, has been stable at a good level for a number of quarters now. The total growth this quarter had a lower pace. Lately, it has been helped by a stronger Norwegian currency, but this quarter, the currency impact from Norway is negative. In total, the currency effect on top line is flat in the quarter. The effect from the divestment of the doctor staffing business late 2022 is now netting out the effect from previous made acquisitions, which means that the organic growth and the total growth shows the same number in the quarter. We remain positive about our overall growth potential in the coming quarters. In local currency, all segments delivered net revenue growth compared to last year, and total sales grew by 5% compared to quarter 1 last year. Adjusted EBITA amounted to SEK 216 million, an increase of 11% versus last year. The increase was mainly driven by higher occupancy and higher prices in Nytida, Vardaga, and Stendi. Stendi's underlying earnings improvement continued this quarter with higher occupancy and staffing efficiency. The share buyback program has been completed. By the end of the first quarter, Ambea has bought back 5 million own shares according to 100% of the mandate granted by the Board of Directors. The objective of the share buyback program is to optimize the company's capital structure and contribute to increased shareholder value. And with that, over to you, Benno, for a presentation of the financial summary.

Thank you, Mark. The strong growth numbers we saw last quarter continued further and all business areas contributed to the growth in local currency, like in previous quarters, now at plus 5% year-on-year. If we had a look into how the different business areas have affected the group numbers, Nytida is up 3%, driven by acquisitions and new contract management operations. Occupancy in own management is slightly lower than last year. Vardaga increased 10% versus last year. Like in previous quarters, there is an increased occupancy trend throughout this quarter. There were no new openings this quarter, but the 5 openings we made last year contributed to the growth. Stendi was more or less flat in SEK, but had a growth in local currency by 3% versus last year, and the sales grew in the own management portfolio by 7%. Altiden is up 12%, which is mainly driven by currency effects and the effect of the acquisition of Reflekt. In local currency, Altiden grew by 5%. And Klara increased 9% and continues with growth in all subsegments. We have a new structure in Klara, which is making the comparison year-on-year a bit trickier, but more about that later on. EBITA. This slide show our different business area affected EBITA of the group. In Nytida, the EBITA was the same as last year. We have a stable, profitable business in Nytida, which performs very well even if we had had external cost pressure in the quarter. In Vardaga, we saw improved occupancy, primarily in the units started last year, which affected the EBITA positively. In Stendi, the positive effect of the improvements made in the first quarter last year continues to show in the EBITA and the EBITA margin increased by 3.3 percentage points from last year. Altiden is behind last year, as we saw higher operating costs and higher cost linked to the reorganization. Last year was also positive affected by a reverse of purchase price on the acquisition by EUR 7 million. The strong demand within all Klara subsegments continued and Klara generated higher EBITA than last year. The strategic repositioning of Klara is delivering higher margin than in previous quarters. So with some of this, all-in-all, the EBITA margin was 6.7%, up from 6.3% last year. Then cash flow. The operating cash flow increased compared to the same quarter last year, and we see that the rolling 12 operating cash flow is almost 95% of EBITA. And this gives, of course, Ambea good financial flexibility going forward. If we then look at the free cash flow, rolling 12. We see that we -- from the EBITA of SEK 975 million to the SEK 887 million in EBITA, excluding the IFRS 16, down the way to the free cash flow post tax. We can see, for example, that we have invested around SEK 100 million in fixed assets. We have paid SEK 100 million in interest and around SEK 100 million in taxes. Other noncash items are mainly changes in provisions from litigations in Norway. We have also gained $117 million from sale of real estate in the second quarter last year. So during the rolling 12 period, we have a minor negative effects on working capital. All-in-all, we generated $551 million in free cash flow post tax based on the old accounting standard. And on the next slide, we see how we have used the generated SEK 551 million. SEK 109 million was distributed to our shareholders as dividend, SEK 136 million was spent on the 3 acquisitions we made in the last 4 quarters and SEK 226 million was spent on the share buyback program. We are very pleased that an active capital allocation has enabled Ambea to acquire profitable growth, maintain dividend payout according to our policy and for the first time, also buyback program. At the end of the first quarter, we had a net debt ratio of 3x EBITA, excluding IFRS 16, which is the same ratio as the last quarter at 0.3x lower than last year. A higher adjusted EBITA has affected the leverage ratio positively compared to last year. And now to the development of the different business areas, starting with Nytida. Sales increased by 3%, mainly driven by acquisitions and the growth in our contract management portfolio, own management's homes showed slightly lower occupancy compared to last year. And EBITA was at the same level as last year, SEK 119 million. We think this is a strong performance given the external cost pressure and the fact that last year's first quarter included government reimbursement for high sick leave costs. Cost increases have so far been met with efficiency measures and higher prices. EBITA margin in the quarter landed at 12% and rolling 12 EBITA is at high 12.9%. In Vardaga, net sales increased by 10% year-on-year, driven by high occupancy, mainly due to the nursing homes we opened last year. Occupancy in mature units were also slightly higher than in the first quarter compared to last year. The own management portfolio as a whole increased net sales by 17%, while the contract management decreased by 3%. EBITA increased with 35% to SEK 66 million, mainly driven by strong occupancy development in the units opened in the beginning of last year. Mature units showed a margin of 8.3%, up from 8.0% last year. So this means that we are so far have been able to compensate the high cost pressure by efficiency measures, a better price mix and by price increases. And as in Nytida our last year's first quarter was positively affected by government reimbursement for high sick leave costs. Stendi. Net sales were flat in SEK, but increased with 3% in local currency. We saw a stronger demand and our own management portfolio increased net sales by 7% in local currency with growth in all subsegments. Contract management was down because we are gradually reducing our business within elderly care as we are leaving the segment with our last remaining contract ending in March 2024. Elderly care represented 4% of the business in this quarter. The EBITA tripled or increased by SEK 25 million to SEK 37 million. This is mainly an effect of the actions we took in Q1 last year, which gained full effect from Q3. The EBITA margin in the quarter was 4.8%, and the rolling 12 margin increased by almost 1 percentage point to 4.7%. Altiden, net sales grew by 12% in SEK and by 5% in local currency, mostly due to the previous made acquisition of Reflekt. The EBITA in Altiden is still at an unsatisfying level. In Q1, the EBITA was minus SEK 11 million, which is SEK 25 million behind last year. Last year was, however, positively affected by earn-out revaluation of SEK 7 million. We are making a total reorganization of the business and are integrating now all units acquired during last year into a new platform. This work has proven to be more difficult than first anticipated. We will see improvements going forward, but it will take some quarters still of our continued work before Altiden is at full speed. Klara. In Klara net sales increased by 9%. We continue to grow in all Klara subsegments, thanks to increased demand and because of SkolPool, our solution within student health services. The divestment of the doctor staffing business affected sales negatively by SEK 31 million that was more than fully compensated by the acquired SkolPool, the new -- that now include a training company, Lara and the underlying growth in other segments. Klara delivered growth in the external market as well as through services delivered to Vardaga and Nytida. EBITA increased from SEK 8 million to SEK 13 million, and the EBITA margin was at 11.2% and rolling 12 at 11.7%. Our strategic repositioning of Klara with the acquisition of SkolPool and divestment of the staffing business 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, Benno. 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 reached our target in 2022 with 10% growth. In the first quarter of 2023, we grew 5%. We have not made any acquisitions since quarter 2 last year, and we also have a negative effect from the divestment of the doctor staffing business. In terms of acquisitions, there are still interesting qualitative targets that will complement Ambea well. We remain active and are in several dialogues, but in the current environment, we closely evaluate all opportunities for capital allocation. Over time, the growth target can still be reached. Looking at the profitability target, we have a mid-term adjusted EBITA target of 9.5%, which we have not reached. The pandemic and the rapid increase in inflation have made the target tougher to beat short term, but is still reachable midterm. The leverage level is still 3x EBITA in quarter 1. We expect our solid cash conversion to continue, which gives us potential to grow and lead to financial flexibility. On the next slide, we will look beyond the first quarter before we open up for questions. Ambea continues to show good organic growth in the first quarter. The positive occupancy development within Vardaga has continued month-on-month throughout the quarter. Predictability will increase by the end of quarter 2 with concluded salary negotiations and collective bargaining agreements in all our markets. The majority of cost increases will be met by efficiency measures, price adjustments and higher occupancy. Since last year, we have worked with several efficiency initiatives to dampen the effects of inflation. These efficiency measures include central procurement, energy efficiency programs, staff awareness and overall operational cost control. We continue to see underlying earnings improvement in Stendi, and further improvement is expected. In Altiden, we continue to establish the right future platform and have special focus on improving profitability. Last but not least, I would like to thank our 31,000 employees for taking care of our 16,500 care receivers. Their work makes me proud. And with that, I conclude our presentation and open up for questions. Operator, can we have the first question, please?

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

I have 3 questions. First, could you say something about what you expect for the salary increases in the 3 different countries and your opportunity to compensate for that now for the remainder of the year? And on that topic, do you still expect Vardaga earnings to be lower in 2023 versus last year? And on Denmark, I don't know if you comment there about restructuring taking longer, if that was relative to the initial plan or if it takes longer than you thought a quarter ago. So maybe you could comment when you think Denmark will reach breakeven again?

Okay. We can start with the first one then, salary increases in the 3 countries. We have not concluded the negotiations in all the countries. There is still local negotiations to take place in Denmark and Norway, and there is also the central agreement in Sweden, which is not yet set. We have, of course, the export-oriented industry, the so-called market in Sweden, and we have the municipality organization set their contracts, but our contract with their employees is not yet set. In Sweden, there is the 4.1% in the so-called market is there, and we think that our agreement will be something like that, but we don't know yet. In Norway, that is a little bit higher in -- but in the central agreement, but we haven't concluded a local agreement. So we are not -- we cannot say really what the percentage will be. But we think that in Norway, we can compensate rather well with price adjustments. In Denmark, there's also the same way as in Norway, the central agreement is set, but not the local ones. And the central is a little bit different in different categories, but between 4% and 5.5%, something like that is expected to be in Denmark. In Denmark, it's a little bit harder to compensate fully because we have a 2.6% increase. In most of our agreements in Denmark it's the so-called the municipalities organizations that set that, that mark. In Sweden, we have now what we call OPI -- care price index in English, which is set for 4.6% this year. And as we said before, we don't have all our agreements linked to that. We have some agreements linked to last year's index and some are not linked to anything, but that just set the price in the municipality decisions. So a little bit early to say if we can compensate fully with price adjustments and efficiency. But as we said in the report, we think that we can compensate most of the cost increases. So we are not predicting any Vardaga earnings or margin going forward because there is not that transparency yet, and it's hard to say still.

Could I ask a follow-up on that. So with a strong start of the year and the OPI here 4.6% versus a lower preliminary figure. Are you more optimistic today than a few months ago on the Vardaga earnings for this year?

Slightly a little bit more optimistic maybe.

And then your last question, Kristofer, was in Denmark. And there's no real change versus last quarter. So what we mean is just that it will take some more quarters before we have Altiden at full speed again. So no real change. The work is ongoing, and it's progressing, and it's a comprehensive work, but we are getting there, and we will get there -- we will get Altiden back on track, but it will take some quarters.

Your next question comes from the line of Jakob Lembke from SEB.

I have a few questions. I'll take them one by one. If I start with Norway, if I recall correctly, children and youth have been sort of one of the tougher areas in Norway. And is it possible to give any more color on sort of how low the profitability has been there? And is it possible to bring it back to more sort of the profitability of other segments now with the new agreement.

Yes. So we have a new agreement as we have stated. And we actually have quite high demand for placements in that specific -- in that type of care service. We believe it's possible to bring the margins back to where they were with the new agreement and the higher demand. So we are more comfortable on that segment now than we were before we signed the agreement.

Okay. And then a follow-up on the sort of price and cost dynamics here. If we look into Q2 and Q3, do you think it's possible to sort of increase price levels more from the level in Q1?

Yes, there is. We have ongoing negotiations all the time with the short-term placements that we can set new prices and that is primarily in Nytida. In Vardaga, the prices are more set on a yearly basis, so there is more mix issues or something like that, that is affecting the price. But we also have some agreements and saying that price adjustments are from 1st of April or 1st of June or something. But the majority is [Technical Difficulty], so there could be still some price increases going forward throughout the year.

Okay. And then just finally on Vardaga, is it possible to give any guidance on where the occupancy is at the moment and sort of your outlook for this year?

No, we don't communicate the occupancy percentage. What we can say is that this is higher than last year in mature units and are now at a level where the potential is not so high any longer for the mature units, but we have still a number of units that we opened in 2021 and 2022 that can increase occupancy. But maybe the pace won't be as high as we have seen last year.

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

Just coming back to your statement, Mark, when you looked at the margin chart and the target of 9.5%, which are the building blocks that you see for getting you up to this whole capital margin level?