Terveystalo Oyj
OMXH:TTALO
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Earnings Call Analysis
Q1-2024 Analysis
Terveystalo Oyj
Terveystalo's first quarter of the year showcased a robust performance, particularly in the Healthcare Services segment, which is the largest contributor to revenues. Total revenue grew by approximately 3%, indicating a positive trajectory. More impressively, earnings per share (EPS) more than doubled, highlighting significant financial improvement. The company reported an EBITDA of 47.2 million euros with an EBITDA margin of 13.5%, on track to meet their target of 12% by 2025. This reflects solid operational efficiency and effective cost management, essential for ongoing profitability.
Despite the overall positive earnings, Terveystalo faces challenges in its Swedish operations, which reported stagnation at a flat breakeven result. The company has launched a new profitability improvement program tailored for Sweden, drawing inspiration from the successful 'Alpha' initiative in Finland. While financial constraints persist, management remains optimistic about turning around the Swedish segment by 2025.
Customer satisfaction continues to be a focal point for Terveystalo, as evidenced by an impressive Net Promoter Score (NPS) of 86.4. The company's commitment to enhancing service quality is reflected in its innovative approaches, particularly surrounding mental health services, which have proven effective in reducing sickness days for organizations. The correlation between increased diagnoses and decreased accumulated sickness days suggests that Terveystalo's care models are efficient and valuable.
Looking ahead, the company is optimistic about the continued expansion of its Healthcare Services, supported by ongoing improvements from the Alpha program. Management has indicated confidence in achieving a minimum EBITDA margin of 12% by next year, reinforcing their strategic focus on operational improvement. They've also noted that while the healthcare sector may experience some volatility, the overall trend is towards sustainable growth, particularly in their corporate and insurance segments.
During the earnings call, Terveystalo narrowed its revenue growth guidance for the year. The prior range of 10.1% to 11.5% has now been updated to 10.5% to 11.5%, reflecting a more conservative outlook given the fluctuating market conditions. Last year's performance was 9.8%, indicating consistent growth potential moving forward despite external challenges.
Terveystalo's management has expressed willingness to pursue small-scale acquisitions to enhance service offerings and address any operational white spots. They emphasize a cautious approach, ensuring that any mergers or acquisitions bolster the company's existing strengths and facilitate a more comprehensive service palette across their segments.
While Terveystalo does acknowledge potential pressures from macroeconomic factors, particularly regarding inflation and salary growth, they remain confident that these challenges are anticipated and already accounted for in their financial models. The stable competitive landscape in Finland further supports their strategic positioning in the healthcare market.
Good morning, everybody, and welcome to Terveystalo's First Quarter Results Call and Webcast. My name is Kati Kaksonen, I'm responsible for the rest of our Investor Relations, Sustainability and Communications. Today, as usual, we'll have the brief results presentation held by our CEO, Ville Iho; and our CFO, Juuso Pajunen. And after the presentation, we'll take questions through the phone lines as well as the webcast. So without further ado, over to you, Ville.
Thanks, Kati, and good morning from my behalf from Helsinki, Sanomatalo. Q1 brief highlights from the quarter, very strong start for Terveystalo as a group, strong performance, especially in Healthcare Services, the biggest business, which drove top line and margin growth. Also, even though the revenue decreased in portfolio businesses, the EBITDA margin improved, and it goes to show that the independent profitability measures taken in our respective independent businesses are delivering.
As we have discussed earlier, Swedish macro is not helping us, so we have a headwind in our Swedish business. But we have launched, as discussed earlier, profitability improvement program, similar to Alpha, which has been a great success in Finland, and it's going to deliver results in '25. We're not only improving our profitability and our finances, we continue to deliver extremely high quality -- medical quality customer satisfaction, which is, of course, key to what we do. We fight for healthier lives.
Q1, briefly, in numbers. So revenue grew by some 3%, driven by Healthcare Services. Our EPS, earnings per share, more than doubled, which is, of course, a very strong development. EBITA, on absolute terms, 47.2, strong number. EBITA margin, 13.5%, on track in our plan to reach the targets in '25. And as everybody remembers, the target is 12% on annual basis. Asset quality continues to be on a world-class level, NPS 86.4. And as per our business model, we are not only reporting profitability, we are delivering cash.
Segment view from Q1. As discussed, Healthcare Services, extremely strong performance and rapid prompt development, both in revenue and EBITA, very, very good turnaround since the launch of Alpha program. Portfolio businesses, as said, decreased in revenue. But despite that one and despite some headwinds in commercial -- consumer-driven businesses and fairly muted demand in public services, EBITA margin continued to improve. So good work done in independent respective businesses.
Sweden, as said, decreased to basically a flat breakeven result. But as said, we have a situation well in control in the heels of Alpha program we have launched profitability improvement program this year. We have a really good and strong road map, and it's executed by a new team in Sweden.
To deliver value to our customers, we fight for healthier lives. And of course, in this call, the focus is in finances. But we are fighting for healthier lives. We need to improve the value for our customers. We have earlier discussed the mental health care parts and what type of services we have been able to innovate in that space, which is unfortunate trend in the society and working life. On individual diagnosis level, we have been able to prove great effectiveness of our low barrier services, early intervention and cooperation with the customer companies. Now looking at the full population level data from last year.
We have another proof point. So what we are seeing today is that number of diagnosis in the populations, which we are -- they are increasing. But at the same time, the full -- or accumulated sickness days is -- they are actually decreasing. So more diagnosis, so lower barrier to enter into our services, more effective care pads and hence, decreased number of sickness days for the organization. So our model really works and delivers value for our customers.
Our focus going forward, we have, of course, been very clear on the Alpha program and its targets. We reached the minimum targets already by the end of last year. Looking at the trends where we are going with the EBITA, of course, we can be even more confident that we'll reach 12% next year. Thinking about the phase of the company. We have made a strong turnaround. We continue to deliver the tail of the turnaround during H1. We are shifting the company into a continuous development mode, and that shift is key for this year. We'll reach 12% next year and continue from that base as a renewed and more effective, more efficient company. With that one, over to you, Juuso.
Thank you, Ville. So let's talk about numbers a couple. So I'm Juuso Pajunen, CFO of Terveystalo, and let's hit it. So what has happened in Q1, I think that the biggest message is that no matter how you look the numbers, the efficiency improvement flows through. Our EBITDA is increasing 30%. Our EPS is over doubling. our deleverage is coming via the operating cash flow that Ville mentioned also, we are at 2.7%. So the efficiency improvement flows through. It comes through the income statement. It converts to cash and benefits then, of course, the whole company and stakeholders.
We delivered 13.5% EBITDA during the quarter. It's especially supported by Healthcare Services revenue growth and the efficiency improvements and the commercial actions. But at the same time, relative profitability grew also in portfolios. Sweden didn't perform within a satisfactory range, but we have the roll off profit improvement program ongoing, and we will turn that one also back on track. So with these ones, we have been able to narrow our guidance range, and we are progressing swiftly towards our EBITA margin target of 12 in '25.
So all in all, a solid quarter driven by efficiency. If we then look on the top line, Healthcare Services growing, it's continuously good to note that we had 1 working day less compared to previous year first quarter, and we were 1% down in the appointments. But despite this one, we are growing. We are growing throughout the appointments, diagnostics and other service sales. And this is coming from our commercial actions. And we have been capable of really delivering on the top line. In Portfolio Businesses, our outsourcing contracts continue to decline. The top line decline is not as rapid, as we have communicated, but this is normal volatility between Q4 and Q1. So there are certain items that depend on how the cost split, for example, in Specialty Care goes between different municipalities or welfare districts and so on.
So there's nothing abnormal as such on that one, and it's not a profit driver. It simply brings a bit of volatility on the top line.
Staffing services declined. But the biggest reason in there is that, as in Healthcare Services, where we have been careful on which value-add services we provide, we have been doing the same in the portfolios and in the staffing.
So the underlying performance is solid. But at the same time, public sector behavior has been not so robust still when ramping up the welfare districts and seeking for the new operating models.
In the consumer part, we continue to see lower demand, but at the same time, some flashes of better future going towards the end of the quarter. So it is on a lower level than previous year, but maybe sequentially, month by month, there could be some type of lapping upwards. Sweden, difficult macro. At the same time, we have some public sector contracts that have ended and that have put pressure on the top line.
But with all of these ones, EUR 9 million more revenue growth in the Terveystalo revenues and with 1 working day less. If we then look on the profitability, Healthcare Services, operational efficiency throughout the services and due to the profit improvement program, especially. We have a solid sales mix improvement. We have all sort of commercial actions in place and then the cost control. So we have been able to take next steps as we have communicated throughout previous year in our profit improvement program. We have been able to deliver that one, and now you see the results. They are coming through and we continue to improve like, Ville also told.
Portfolio Businesses, we have positive development throughout. We have similar kind of medicines as in the Healthcare Services. But since the business mix and the provided services are different, of course, the medicines are tailor-made for that one. But we have the commercial actions. We have the operational efficiency, and then we have the natural ending of low-margin contracts. Sweden, already discussed through, but basically, we have the profit improvement program in place. We have kicked it off. We have started to progress it. The progress is in plan. But at the same time, it's good to note that we are not expecting to progress with leaps and bounds.
So year '24 will be difficult in Sweden, but we will improve sequentially in that one. Not too much to go deeper into the details of this slide. But it's good to note that especially in Healthcare Services, if the service mix shows growth throughout, also the client mix shows growth throughout. Public consumer, corporate, all growing. And of course, the margin improvement is positive, 3.5 percentage points quarter-to-quarter or year-on-year improvement.
Portfolio Businesses, outsourcing, revenues declining, staffing dental revenues declining. The business is muted. But despite lower development in revenues, the relative profitability as well as the absolute profitability are going up.
Sweden already discussed, not meeting our targets, not on a satisfactory level, but the plan is in place, we are progressing. And I think that with Finland, we have demonstrated that we have some experience and capabilities on turning businesses around.
Other part, balance sheet, shareholder returns, we continue to be strong cash motor. We delivered very solid operating cash flow, our leverage goes down. And then if you look at that one, improving margins, solid EPS, doubling EPS and strong cash flow. It's -- those are all signals of a strong company.
So no matter whether you look at the income side, whether you look on the balance sheet side, we are demonstrating what we are doing close through the numbers. CapEx levels now stabilizing into the EUR 40 million levels, having still the same buckets, intangible assets, mainly going to software. Tangible assets, are the leasehold improvements or machinery. So same investment pockets as earlier, nothing new in this one.
So with these ones, we are narrowing the guidance range. Earlier, it was 10.1% to 11.5%. Now we have taken it to 10.5%, between 11.5%. Last year was 9.8%. And basically normal disclaimers, we are basing the guidance on an information available at the closing of the quarter.
So the other inflation, consumer demand components in there, normal sicknesses. Now of course, we have Q1 in the pocket. So the next heavy season is in Q4. And basically, outsourcing contracts will continue to contract. Sweden will not be great during this year. A new topic, we are highlighting that the possible increase in the VAT rate in Finland is not expected to have a material impact on '24 results. We do not yet know when this one will take place, what is the final date, but presumably, it will land on H2. And basically, we are excluding, like always, material acquisitions and divestments from our guidance.
So profit improvement will continue. With these words, back to Kati.
Thanks, Juuso. Do we have any questions from the phone lines?
[Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank.
I have 3 questions. We'll take this one by one. Starting from Healthcare Services, where we had a strong Q4 performance. Do you still see levers that you would be able to use to improve margins even further? Or is the Q1 margin level something that we should expect going forward?
Thanks, Sami, if I start, Juuso can continue. Yes, Q1 for Healthcare Services was a strong one. We have still a tail of the Alpha program ongoing. As we have communicated, we closed that one down during this spring. So we have still things and some elements in the pipeline for the improvement.
Also other way around, on an LTM basis, we are not where we want to be. So that's for sure. We have also future levers like they will let us.
Yes. Maybe to rephrase, if we think about sort of next year, will we still target here, do you think you could still be able to improve on this level at Healthcare Services? Or is it so that the improvement will come from other areas of the business?
For sure, the improvement will be more rapid in other areas, as per phasing of different segments, but Q1 was really positive for Healthcare Services. There's nothing sort of a one-off type of things in that basket. The efficiency has truly improved. But as Juuso said, on LTM level, we are not where we want to be. And this is really putting things into the context. Turnaround has been strong and rapid, but this is the first quarter where we can honestly say that we are pleased with the margins of Healthcare Services. This is not the end. This is sort of a new base from which we continue developing the business.
Okay. And then moving on to your guidance upgrade. I think it almost looks a bit conservative, given how strong margins you had in Q1. What are maybe some of the key reservations you have for the rest of the year that could bring margins down in addition to normal seasonality?
Yes, I think that if you look at the guidance range, first of all, like always, we do our scenarios and we do our thinking, and we set range based on that one. And if you think about kind of the implied year to go how it looks like the lower end of the range would say that we have only modest improvement from previous year to go. And then the upper range says that we are somewhere in the performance levels of '17, '18, '19. And there are scenarios that merit the lower end. There are scenarios that merit the higher end. The lower end part would then mean that we have some kind of a labor market distraction type of items. And the higher end, of course, assume that we continue on the track where we are. So depending how you put your probabilities, you could assume that, especially after Q2, we have quite good place to evaluate further.
Okay. And then finally, any color regarding the second quarter that has already started? So how is that sort of paving out?
Well, we are not seeing any -- if you are referring to markets, for example, and different segments, we are not seeing any major shifts or changes in our environment. Our internal work continues as per plan environment with corporate, consumer, insurance is predictable. It is behaving as we have expected. And we are in our plan.
The next question comes from Joni Sandvall from Nordea.
It's Joni from Nordea. A couple of questions from my side. Maybe on the Portfolio Business deal. Sales were down, and you mentioned selection in the staffing. So should we expect this kind of selection to continue and be visible in the sales development during the rest of the year? And what kind of margin impact this has?
Well, if we slice and dice it, I think that the first message is that we continue to be selective. We are very careful on how to use this cost resources in the health care professional world. So yes, we will continue to be selective. We are margin-first company in that sense. So we would not sacrifice margin only for the sake of volume. That's the first message. Then obviously, the guidance on the revenues we give on the group level, we are expecting revenues to grow. There could be some volatility in staffing, but that highly depends on how the market and the clients are also behaving. So that's probably covering the question.
Okay. Okay. That's clear. Then on the diagnostics volumes were still down, but sales were up similar amount. So is this mainly due to the pricing or is there an improving mix in the diagnostics side? And maybe you can comment also the referral rates, how they are evolving?
Yes. So if I start, and Ville can complement. There is both impact. There's the pricing and there's the mix impact, both in there and volumes. We continuously need to remember that we had the one working day less, which then makes the appointment or PCs volume look different. So that's good to know. Then if we look on the referral rate we have developed. It has been one of our profit improvement program initiatives to bring the referral rate first back to pre-Covid levels, given the mix impact and then we are looking for levers to push it even forward. But one could now say that we have stabilized into a certain place.
Yes. Maybe to add on that one. We had a normal flu season this quarter. So nothing -- no major differences from earlier trends. We have been able to normalize or come back from sort of acute flu type of diagnostics from lower levels of COVID pandemic, but still, we have some work to do with longer care chains and their referral rate. Maybe one important note here is that if you look at the margin profile of Terveystalo, we have been able to sort of diversify our profit levers. And now it's been very important in our Alpha program that we have been able to improve the profitability of the appointments and reasons and different type of mixes going forward.
Okay. That's clear. And then maybe lastly on the inflation and especially salary inflation, what's your expectations? And on the other hand, how is the softer situation evolved now during first quarter?
So basically, if I start the first question on the salary levels and the inflation, as you all know, our CLA will end at the end of this month, and there will be a negotiation phase. However, we do know how public sector, same salaries have been behaving and there are some hints on the export sector. So we are obviously expecting salary growth, but nothing that would be an outlier in our excel models. So the dialogue is ongoing and we are expecting a normal way of discussion to a certain degree on that part. Otherwise, inflation is, let's say, that until the Iran situation, it was fairly well predictable and evening out.
And now, obviously, you can't rule out scenarios where geopolitical unrest would impact, for example, energy prices, but we are in a alert situation to react if that one would happen.
I would add that we have fairly -- of course, we do have a fairly good visibility on the ongoing CLA negotiations and where are the gaps and expectations on that one. And with the knowledge, it's fairly easy to say that we are prepared in our scenarios for the outcome. And so as Juuso said, they will not -- we are not expecting anything drastic. We know the situation we know how to -- how it's going to impact our numbers and it's all counted in already into our scenarios. Then you asked about the supply. Supply continues to improve during Q1. The utilization rate -- booking rates of the deployments, they have normalized as we have discussed. But still, the supply is improving, which is important going forward.
The next question comes from Iiris Theman from Carnegie.
This is Iiris from Carnegie. Just a couple of questions also from my side. So, firstly, a follow-up on the volume decrease in Healthcare Services. When do you basically expect volume growth? Could it be already in H2? Or is it more likely next year?
Well, first of all, it is from a company performance point of view, it's very, very positive that we have been able to deliver this level of results with slightly decreasing appointment or transaction volumes. And it goes to show that we are a different company. We are a more efficient company. If the positive scenario then would come to pass where volumes start to increase in different segments, of course, the operating leverage is even higher than previously for Terveystalo and the impact on bottom line is going to be very, very strong and positive.
We know -- from our different segments, we know that the corporate base is fairly solid. The pipeline, from our point of view, looks pretty good, actually. But in this segment, changes are typically not rapid. So it's going to be a fairly stable towards H2. We did some more selective segmentation last year, and it slightly dampened the occupational health care volumes, but it was per design. Now we are in a new sort of base and continue to muscle with the pipeline going forward and gradually start building that pace, but it's not going to be drastic or rapid.
Then insurance customers continue to grow and those volumes continue to grow. The question mark always is with the consumers and out of book. And that has been fairly muted during Q4 and then also Q1. There, you have the sort of -- also the positive scenario where it would start increasing. And it can happen, of course, fairly rapidly.
And secondly, how do you see the price component developing this year in Healthcare Services?
Well, I think that, obviously, we don't comment on future pricing environment. But we have been fairly consistently saying since the CMD last year that we see that we have capability to overperform compared to inflation. And I think that, that statement still holds.
Okay. And finally, perhaps on competition in the Finnish market in private and occupational health care. Any comments on competition? Has it become more intensified?
Well, I would say that in Finnish private health care landscape. We have a healthy situation where we have different players competing from different customers and bids. We have 2 big ones, then the slightly smaller one and then even smaller one. And we have a good market and it's a functioning market. There has not been any drastic changes as the competitive situation. We feel that we are in a strong position, be it any segment -- customer segment inside Healthcare Services. We have good visibility. We have a good road map also ahead. And we are not expecting anything sort of dramatic happening in the customer front. No competitive landscape.
There are no more questions at this time, so I hand the conference back to the speakers.
Thank you. At the moment, it's a busy results day. So we don't have any online questions, but do we have any audience questions?
[ Roni Perm ] from Inderes. Maybe one question regarding the current cost to treatment guarantees Finnish government has made. In which way have you been following this conversation? And how do you see it affecting your demand possibly?
Well, yes, the discussion around the care guarantees on public sector. It's -- in a way, it can be positive either way for Terveystalo. Earlier scenario from our side was that, since the new government is pushing for the care guarantees to be stricter, there will be increased service procurement from public side directly to our services. Well, that will not now materialize, they will ease up the requirements for the care guarantees. What it means that the public site access to care will remain on a low level. And what that then means is, to our current business model, Healthcare Services, especially positive because there is always this spill effect from public use to private side.
Thanks. I think we still have one additional question from the phone lines.
The next question comes from Joni Sandvall from Nordea.
Maybe one follow-up on the M&A front following the Alpha program, successful implementation of this. Have you actually discovered some areas where you would need some bolt-on acquisitions?
Well, if I start on that one, we made a small acquisition at the closing of Q1, and that indicates that, obviously, we are continuously keeping our eyes open. We are in a position that they are always potentially smaller white spots that we want to address. So if we look segment by segment in Healthcare Services, obviously, we -- our coverage is quite good, but they are both geographically and service was something that we can always in a modest manner do if opportunities emerge.
Obviously, then in portfolios, we are going through with our strength, and we want to have that one in a positive place from a margin perspective, but also in the there's potentially something bolt-on possible. And then finally, Sweden, we want to turn it around first. We would not do anything material at the moment.
So yes, we are looking around. We have white spots, we are willing to address them on a inorganic manner also should there be such opportunities.
Exactly right. So we need to always have a solid base on which we then can add bolt-ons or even new services. The key for last quarter has been a turnaround, especially in our biggest business, now going forward, slightly more focused on portfolios and Sweden and continuous improvement in Healthcare Services. But as you said, there are always some white spots. And now when we have been able to solidify the base, we -- during this spring, of course, we will evaluate some new opportunities, but we will do it in a very, very cautious manner. And all of the things that we plan and will execute are going to be a value-adding.
Thanks. I assume that there are no further questions from the phone lines or the webcast at the moment. So any closing words? Over to you, Juuso.
No, thank you for participating. And let's see in 3 months.
Yes. Thanks for following a strong Q1, strong start of the year, strong trend, confident on delivering our targets. And a big thanks to Terveystalo team.
Great. Thank you for joining, and have a good weekend when that time comes.
Thank you.
Thank you.