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Edited Transcript of ATT.ST earnings conference call or presentation 19-Jul-19 8:00am GMT

Q2 2019 Attendo AB (publ) Earnings Call

DANDERYD Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Attendo AB (publ) earnings conference call or presentation Friday, July 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Koch

Attendo AB (publ) - Communications & IR Director

* Fredrik Lagercrantz

Attendo AB (publ) - CFO

* Martin Folke Tivéus

Attendo AB (publ) - CEO & President

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Conference Call Participants

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* Carina Elmgren

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Carolina Elvind

Danske Bank Markets Equity Research - Analyst

* Hans Bjorn Eskil Bostrom

Crédit Suisse AG, Research Division - Research Analyst

* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

* Victor Forssell

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Andreas Koch, Attendo AB (publ) - Communications & IR Director [1]

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Good morning, everyone, and welcome to this conference call, where we'll present Attendo's results for the second quarter of 2019. My name is Andreas Koch. I'm Communications & IR Director at Attendo.

Today's presentation is hosted by our CEO, Martin Tivéus; and our CFO, Fredrik Lagercrantz. And after our presentation, we will open up for questions. With that, over to you, Martin.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [2]

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Thank you, Andreas. It's been, to say the least, a very challenging first half of the year for Attendo. The results for the second quarter is heavily affected by the situation in our operations in Finland. I do understand and acknowledge that this is a challenging time also for our shareholders.

Having said that, there are no shortcuts in the process of restoring profitability in our Finnish operations. As a leading care company, our long-term success is dependent on our ability to deliver high-quality care and customer satisfaction while delivering value to society and keeping operations compliant. The underlying demand for our services is stable, and long-term market trends are favorable. And with the measures that we communicated in mid-June, I'm confident that we will be able to increase occupancy and restore profitability in Attendo Finland and Hem Attendo as a group over the next couple of years.

I'll now turn to the presentation. And then Fredrik Lagercrantz, our CFO, will take you through the numbers in more detail. Next slide, please.

We reported continued high growth in Q2 as a result of the high number of openings in the past 12 months in Finland and also due to selected M&A activity related to home care in Sweden. While our other segments in Sweden have shown stable development, outsourcing has continued to decrease, and the outsourcing business is now only around 15% of group sales.

We reported significant drop in profit in our Finnish operations mainly as an effect of higher costs related to the earlier communicated action program and more empty beds. Sales of beds have slowed down in Q2 due to problems to recruit staff.

After the Finnish national election in April, the public debates as well as political pressure around care for older people has been calming down. Focus is now shifting from specific private operators towards more overall industry challenges, such as overall public spending on elderly care and a potential increase in national staffing standards.

The past month, we have seen both regulatory inspections and media debate returning to a somewhat normal state but feel the scarcity of staff is an issue for the entire sector and will likely remain for a long time. During the past 3 years, we have more than tripled our opening pace and more than doubled our operations in Finland. We still view Finland as an attractive care market where we can add long-term value, but it is obvious that we need to decrease and balance our growth pace going forward to secure both quality and profitability.

Our Scandinavian operations displayed underlying stable results in most segments. Home care has continued to improve, and we see a stable situation in home operations as well as in individual and family care. At the same time, outsourcing continues to be very challenging. In Q4, some large and profitable contract ended, and our new as well as other existing contracts have been struggling with profitability. We are addressing that problem, but there is no improvement to be expected in the short term.

Next slide, please. Turning to some key financial and nonfinancial KPIs in the quarter. As I mentioned, we reported a strong top line growth in the quarter, up 8% year-on-year, excluding currency. Growth in Finland was 20% in local currency due to the high number of openings while we still have a slight net loss on sales from current operations in Scandinavia. This is an effect of the ended outsourcing contracts and, to some extent, closures of home care and individual and family care units for the past year.

Reported EBITA amounted to SEK 121 million, corresponding to a margin of 4%. In old GAAP, that translates to an EBITA of SEK 42 million and 1.4% margin. Profits were just above 0 in Finland and, in fact, loss-making in adjusted EBITA. Profits in Scandinavia was relatively stable but lower versus last year, adjusted for nonrecurring items last year as an effect of the ended outsourcing contracts.

Our debt in absolute terms and debt to EBITDA ratio is lower compared to a year ago, but given the current low run rate in profit, we still see a need to improve cash flows towards the end of the year, something Fredrik will talk more about shortly. Quality index was 84% in the second quarter and remains in a high and stable level, and we are putting much emphasis to further improve both technical and perceived quality in all of Attendo. And that is a vital part of our strategy for rebuilding confidence in Finland.

There are now more than 16,000 beds in own operations. In Q2, we opened additional 625 beds and started the establishment of 527 beds. That number will drop as we are sharply reducing the number of new projects going forward. The high opening pace will continue to build the foundation for future growth but is now pressuring the result significantly. We also see a drop in total occupancy from 80% in Q1 to 79% in Q2.

Next slide, please. As we communicated in mid-June, we are taking forceful actions to restore trust and profitability in our Finnish operations. To me, it's clear that our growth strategy in Finland the past 3 years has been too aggressive and that the organization has not been equipped to handle the complexity with strong organic growth and a large acquisition at the same time.

To manage that situation, we're now taking a number of measures. First, we're strengthening the management team. We have recruited Virpi Holmqvist to become the new Business Area Director for Finland starting in November. Virpi has a solid background from the sector. She has background from management in complex organizations and has previously worked with Attendo for many years. We'll also start to recruit a new finance director for Finland. Our current Business Area Director, Pertti Karjalainen, will enter a new role with responsibility for sales and contacts with municipalities.

Secondly, we're taking actions to improve the occupancy situation. From mid-2020, we have sharply reduced the number of new establishments in Finland. We will remain at the lower level until we reach a better balance between sales of beds and new openings. We're also putting large effort to improve access to qualified care staff, and this is key to be able to accept new customers and is currently the main bottleneck for improving occupancy in newly opened units. We have more resources to support recruitment. We're putting more efforts to attract care personnel to Attendo, and we'll increase our recruitment efforts for nurses in the Philippines.

We're also improving the sales organization and put more support to our local managers and sales contacts, especially new openings. In some projects where we see limited prospects for high occupancy, we are seeking options to change operations or terminate the rental agreements to avoid further losses.

The third area concerns pricing. Price negotiations is key to get compensation for sharpening staffing requirements. In existing contracts, the possibilities for compensations are limited, but Attendo has the possibility to establish a new price level in retenders when contracts are expiring. This is a gradual process, and it will take until the end of 2021 before we have renegotiated the vast majority of contracts. With these actions, combined with the already running quality improvement program, we are confident that we will improve both reputation and profitability in the Finnish market over the coming years.

Now turning to quality and employees. Our ambition is to be a leader in quality home care in all countries where we operate and to have the most satisfied customers in each location where we operate. In Q2, we continue the long-term work to further strengthen both technical and perceived quality of care, and this fits into the action program that Attendo has launched in Finland in order to meet the increased demand for home care that follow political discussions during the spring.

As part of the project, Attendo's quality index will be updated to better reflect how individual units performs in terms of, for example, safety, compliance, reporting to authorities, customer satisfaction, handling of complaints and feedback. A new self-control procedure has been launched, and both internal and external channels for feedback on the operations have been established.

Our Norwegian operations received attention for its successful work on animal therapy at nursing homes in the Oslo area, which according to one study, have had a positive health effect and reduced the need for medication of our customers. During the quarter, our home care service was awarded the Täby municipality's quality prize, which is based on the customers influence and satisfaction with care.

Next slide, please. As I mentioned earlier, we now have more than 16,000 beds in own operations, an increase of more than 10% from the corresponding period last year. In Q2, we started construction of 12 new units that will add 527 new beds. These projects are a result of decisions taken in 2018. In total, we had 2,300 beds under construction by the end of Q2.

As you can see in the chart, we're in the process of decreasing our pipeline in Finland. In Scandinavia, we continue to identify attractive opportunities even if we, in general, are more cautious on our risk assessments in all geographies.

Next slide, please. This chart shows the rolling 12 months opening pace and openings per quarter. The high number of openings have had a negative impact on profit and margins in the quarter. We have taken down estimates for openings slightly versus what we communicated in the first quarter. We're now seeing around 1,800 beds being opened in 2019, 1,700 beds in 2020 and significantly lower number in 2021. The majority of openings this year will still be in Finland while there will be a more equal balance in Scandinavia next year.

Next slide, please. Last quarter, we increased transparency in margins in mature and start-up units as well as occupancy per vintage. The top chart is key to understand the drop in margin but also the potential of our start-ups. The chart displays that profit margin rolling 12 months stated in old GAAP with the growth in total and for mature units. They also excluded Mikeva units for comparability.

Before Q3 2017, we opened roughly as many beds as number of beds that went into mature state. The recent 2 years, we have accelerated openings, which means that we have many more units in start-up phase. Also, the time to fill new units have been prolonged as we have previously stated. Please also note that the total group margins have also been affected by one-offs in 2018, low-margin Mikeva business from Q4 2017 and onwards.

The profitability in mature business has historically been rather stable, around the level of 10%. The downward trend that you can see in 2019 relates to the higher cost level in Finland, something that will continue to pressure margins in 2019. Margins will start to recover when we reach a balance between new openings and ability to fill up empty beds.

Next slide, please. Now turning to occupancy per vintage. As you can see on the green line, the occupancy is clearly above 90% level for units started in 2016 and earlier. We target most of our new projects to reach mature occupancy of 90% within 18 months of operation. The actual average time to reach 90% is best observed by looking at each vintage. As you can see in the 2017 and '18 units, the first year of our accelerated pace of openings, we are far below the targeted level, and it will take a lot longer than the 18 months to reach mature occupancy in these vintages.

Units acquired from Mikeva have a significantly lower occupancy than mature units in Attendo. This is very unsatisfactory, and it's a sign that we have not been able to manage organic expansion and integration of Mikeva at the same time. Improving Mikeva performance will be a critical task for the new management in Finland.

It's too early to judge how the 2019 vintage will develop over time. It's real clear that the filling rate so far is slow, especially in Q2. As I mentioned, a major reason has been difficulties to find qualified staff for newly opened units. Another negative factor to 2019 vintages is that the time to get permits for newly opened units has increased from, earlier, a couple of weeks, to now several months. This means a significant delay as well.

Now it's time for Fredrik to explain the quarterly numbers more in detail.

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [3]

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Thank you, Martin. Our reported numbers are based on IFRS 16 unless stated otherwise, and previously reported numbers have been restated. Also, all profit and loss items presented for 2018 refer to continuing operations without the divested health-care operations in Finland, unless other information provided.

So let's turn to Page 10. We can see that net sales continued to be strong. Total net sales amounted to SEK 3 billion, up by 9% compared to the corresponding quarter last year. Adjusted for currency, net sales increased by 7.6%.

Acquisitions contributed with approximately 6%, and organic growth amounted to 1.4% in the quarter, lower than previous quarters. There's a continued strong organic growth for our own nursing homes, but this was offset by negative effects in other areas. The quarter was negatively impacted by outsourcing contracts that ended earlier. Net sales are also still negatively affected by closed unit within individual and family care business and some exited home-care districts.

Reported EBITA amounted to SEK 121 million in the quarter, in line with the communicated forecast for the quarter but down significantly from the SEK 199 million reported for the second quarter 2018. I will come back with more details on the underlying EBITA development. Financial net was negative SEK 137 million compared to negative SEK 134 million in the second quarter 2018.

IFRS 16-related interest expenses increased by SEK 23 million, while interest expenses for our borrowing from banks decreased by SEK 17 million. The lower bank-related interest expenses are explained mainly by lower debt following the repayment we did in January but also lower interest margins.

Income tax for the quarter was a positive SEK 12 million, which equals a tax rate of 25% for the first half of the year. We have a positive tax as we booked deferred tax on the loss in Finland. We will be able to utilize the tax deficits in the future. Net profit amounted to a loss of SEK 39 million in the quarter, which equals an earnings per share after dilution of a negative SEK 0.24.

Next slide, please. From 2019, Attendo is applying the new accounting standard, IFRS 16. We also show restated numbers for 2018. On this slide, we show summary effect on the financial statement. On the balance sheet, there's a continued increase for IFRS 16-related items on both assets and liabilities due to our open increase. For the profit and loss statement, the effect is smaller this quarter compared to the first quarter 2019. In the first quarter, we had accounting effects from discontinued contracts and annual indexation of other contracts. The profit effect from IFRS 16 in the second quarter is a better representation of Attendo's current run rate.

Next slide, please. Based on our segment reporting, I will now comment a bit more on Attendo Scandinavia and Attendo Finland separately. Overall, our Scandinavian business area is very stable with similar trends as in the first quarter. In summary, a good development for home-care business but more demanding for outsourcing.

So a bit more in detail. Revenue for the business area decreased somewhat as acquisitions and more sold beds in own homes could not fully compensate for the ended units within primarily outsourcing and individual and family care. Within home care, we have also exited some geographical areas. Both reported and adjusted EBITA was up since we last year had closure cost of about SEK 53 million for units within individual and family care.

For the largest service offering, own care homes, operating profit was stable as increased profits in homes opened in 2017 was offset by start-up losses in homes opened 2018 and 2019. We have a positive trend in home care based on our increased customer concentration and improved planning and routing. We are actively acquiring smaller companies and exiting areas without the right prerequisites.

Denmark continues to be loss-making but at stable levels. The largest home-care contract in Denmark ends in the fourth quarter this year.

Individual and family care increased profits as several loss-making units have been closed since last year. The improved profits in home care and individual and family care were offset by lower profits from our outsourcing homes. The lower profits are primarily a consequence of a contract that has ended since last year. In addition to the lost contracts, we also experienced margin pressure in existing and new contracts. This is a trend we think will continue. During the quarter, we have not lost or won any new contracts. In the quarter, we had negative calendar effects from Easter across all service offerings.

Next slide, please. The growth continues to be high for Attendo Finland and amounts to 24% reported and 20% in local currency. The growth primarily accounts for more occupied beds in units opened in 2018 and 2019 as well as acquisitions.

The special situation in Finland have impacted the quarter with close to SEK 70 million in additional costs. Start-up losses from units opened in 2018 and 2019 and more empty beds in general are also impacting negatively, together with some increased overhead cost following the health-care divestment. We also had the negative Easter effect in the quarter compared to the second quarter 2018. The negative development is partly offset by more occupied beds.

There are no short-term solutions to the profitability issue in Finland. This means that the reported numbers of the group for the second quarter is a good representation of Attendo's current run rate. We expect the third quarter this year to have the normal positive seasonality effects on earnings.

In order to restore margins in Finland, you need to adjust prices and improve occupancy. Price increases will be gradual and take several years as most contracts are at least 3 years. During the agreement period, we are contractually only allowed to take cost index-based increases. To increase occupancy and reduce the number of empty beds, we will, as Martin mention, slow down our opening rate, strengthen our recruitment capabilities and increase focus on incremental sales and increasing units.

Next slide, please. On this slide, you can see the complete cash flow statement. First, bear in mind that 2018 cash flow includes the health-care operations in Finland. Free cash was lower this quarter as operating profit is down and the divestment of the cash flow-positive health-care operations in combination with higher rent payments. The rent payments are reported as IFRS 16 items.

Cash flow from acquisitions and divestments are positive with SEK 53 million as a consequence of lower acquisition activity and the reversal of a previous acquisition in Norway.

Adjusted net debt amounted to SEK 2.6 billion, which equals an adjusted net debt to adjusted EBITDA ratio of 3.3x. As our profitability level has declined, our leverage target of being below 3.75x will be challenged during the second half of 2019. And by that, also have covenants with our financing -- in our financing agreement.

In parallel to the initiatives we have taken to improve profitability, we are also reviewing and taking actions on multiple initiatives to improve cash flow. This includes, for example, the possibility to sell some properties and to stop investing in assets held for sales. We also have close and constructive dialogues with our financing banks. Our current financing agreement terminates in December 2020, and we plan to negotiate a new financing agreement before this year-end.

With that, I hand back over to you, Martin.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [4]

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Thank you, Fredrik. I'd like to make a quick summary before we enter the Q&A session.

We have reported a very poor financial development this quarter, and it is and has been a testing period for both the company and all our shareholders. For a company like Attendo, this is not an acceptable profitability level over time, and we take actions on a broad scale to turn the Finnish operations around. At the same time, we need to acknowledge that many of the actions will take time to get full impact.

Operationally, we continue to deliver quality care on a stable level, and we do not see a fundamental change in the market. Our mature units in all geographies are having high occupancy, and Attendo Scandinavia is performing on a stable level. Most important for the long-term value creation is to deliver high-quality care to the benefits of customers and local authorities.

I'm convinced -- I'm as convinced as before that Attendo has an important role to play in the Nordic care market. I'm also convinced that, after we resolve this situation, we are even better equipped to deliver value in Finland for local authorities, customers and shareholders.

Thank you for your attention. With that, I hand back over to you, Andreas.

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Andreas Koch, Attendo AB (publ) - Communications & IR Director [5]

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So let's then go into the Q&A session. (Operator Instructions) And so operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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A question related to the occupancy level and -- on mature units. First, on the decline you saw in the quarter for the 2019 vintage. Is that related to the units that opened in the quarter? Or does it also relate to Q1 openings? And could you comment what the trend is for the openings in Q1? Is that just flattish or so?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [3]

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Yes. The churn in Q2 is mainly related to the Q2 openings. We have seen a number of effects. During the spring, all the players in the market, full-sized operators, has been staffing up to fulfill the sharpened staffing requirements, meaning that I think this sector as a whole has recruited around 1,000 care staff or FTEs. It means that we have seen difficulties to recruit in Q2 for new openings. That is one major reason.

Another thing is that the regulator has also been stretched with all the inspections that they've made. So normally, when we open a new unit, we get the permit to operate that unit within a very short period of time. It's a formality. What we see now is quite heavy delay of many units. So it can take 2 to 3 months to get the [health department] to open the house. So the Q2 openings have had a -- we've seen a severe impact on occupancy development in those units.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [4]

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But is it more difficult for you, given all the media attention, that -- so that the brand reputation has taken a severe hit? Was there something -- I guess, when you -- what do you hear from your competitors? Are they having the same problem as you?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [5]

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Everyone has challenges on recruiting currently. And of course, with the amount of openings that we see in -- that we still have, I'd say we have an extra challenge on it.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [6]

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Okay. Makes sense.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [7]

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And I'll also add that just before the summer is not the best period of time of the year to recruit. There are a lot of graduates from nursing schools coming out, but they're looking for job after summer, not in April, May and June. So it's -- yes, it also has an effect.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [8]

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Well, let's say if you have had -- if it would have been possible for you to hire as many people as you wanted, how much would that occupancy rate -- how much better would it have been? Because, I guess, there's also maybe a problem from municipalities that doesn't want to use you to the same extent as before given both asking rate and in the press, et cetera.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [9]

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We still have good relationship with the municipalities, and we still see demand from municipalities for our services. So I think that effect is not that big. I spent time with all the region managers in Finland, and they all say that recruiting is a main issue to fill up more beds currently.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [10]

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Okay. That's good. And then I just wanted to take the opportunity also to ask you about this. Martin, in the mature units, you mentioned that's, of course, down to the higher cost in Finland, but isn't it so also that your definition of mature isn't really mature because it's impacted by the start-ups in recent years?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [11]

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Yes, that's correct.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [12]

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So -- but if you look in units that's really mature where you have the 90% occupancy level, how much are those margins still down?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [13]

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In the -- if you look at the 2016 vintages and backwards, they're sort of the real mature units. We see -- we still see margins around 10%.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [14]

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Okay. Even in Finland?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [15]

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Even in Finland.

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Operator [16]

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The next question comes from the line of Victor Forssell from ABG Sundal Collier.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [17]

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I'll start off with the first one. Is it possible for you to give some indication on the outlook for July in terms of either empty beds or further decreasing occupancy in the beginning of quarter 3 for primarily your 2019 vintage please?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [18]

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Yes. I understand that you asked a question, but we don't give any forecast on July.

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [19]

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But just to be clear on the 2019 vintage that the lower reported occupancy percentage is an effect of more openings. It's not that we have lost clients in -- sequentially in June is that opened in Q1.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [20]

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Yes, absolutely. But what indicates that you now have -- sort of given that profit run rate that you are giving us that you have a better forecasting ability in Finland now that you previously had?

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [21]

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We have taken multiple actions to address those issues, both operational but also our forecasting and analytical capabilities. So we are working with -- yes, both with new methods. We have -- I'm personally more closer to the situation. And they are also looking at new tools on how to collect and analyzing data. So it's not one single thing, but we are working differently and more focused on making sure that we get a better ability in this area.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [22]

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Okay. So there won't be sort of a transition period here up until November, so to say, until we'll be arising in the Finnish operation?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [23]

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I think we can do things before these arise, clearly. And...

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [24]

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And we have done already.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [25]

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And we have already done.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [26]

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Yes, okay. And just the last one from my side. But now looking at your cash flows and given that you expect this SEK 120 million to be your new run rate while at the same time having these leasing cash outflows of roughly SEK 300 million each quarter, could you explain in a bit more detail what type of financing solution you are reviewing with the banks? I mean it seems to me as if the short term at least you could potentially breach any covenants if this trend continues.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [27]

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No, you're correct in that if the trend continues, our covenants will be challenged. But we are -- one thing we're doing is that we're looking at what can we do to improve our cash flow, and there are things we can do there. For example, as you may have seen in our balance sheet, we have assets held for sale, and we are stopping to invest in new such assets, so that means that we can free up cash flow of roughly SEK 300 million once these assets are sold. And there are out there similar -- or not similar but that's an example of how we can improve our capital over time.

And then exactly how we take the discussions with banks and other parties, that needs to be done in a smaller group and not in the public domain. So that, we need to revert to once we have a solution. But that stated, we foresee that we will be able to have a new solution in place during 2019.

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Operator [28]

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The next question comes from the line of Hans Bostrom from Credit Suisse.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [29]

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A couple questions. Could you elaborate on your comments regarding margin pressure in existing outsourcing contracts and how that comes about? I presume that's related to the Scandinavian business.

And connected to that, just looking at your Q2 EBITA unadjusted in your statement for Scandinavia, it seems to be down a reported SEK 26 million year-on-year. And then there's a comment about SEK 53-odd million of restructuring costs. How should we think about the comparability of those numbers? Are they truly comparable? Or is one burdened by costs -- nonrecurring costs and the other one not? Just to get an understanding of how significant this outsourcing margin pressure is to explain that consideration.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [30]

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Yes. In the -- in Q4, we ended a number of outsourcing contracts that were quite large and quite profitable. So that has a clear effect, and that's the main part of the effect on outsourcing. We have seen a gradual increase in price pressure in tenders on outsourcing in Scandinavia over the past 1 to 2 years. So you can also say -- we also say that existing -- some existing contracts that we have, we have to really work and fight for margins. But the main reason is the loss of the ended outsourcing contracts that were very profitable.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [31]

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Okay. So you're not saying that the effect is having to change the terms of existing contracts, which is supposed to be one reason there's price pressure?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [32]

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No, we can't -- it's not possible to change the terms on existing contracts while they're running. So you tender for a contract, then you sit with it and try to improve it as much as you can during the contract period. And normally, outsourcing contracts are toughest in the beginning, and then it takes time over the contract period to improve the business gradually and install our best practice methods and so forth.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [33]

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And then you guys talked about second half of the year being an increase in outsourcing opportunities. Could you guide us through what type of volume of business that is and what type of reasonable market share you could get out of that, just to get a sense of how significant that opportunity is? I mean also tying in with your statement about the new government budget and effectively reneging on promises made during the election campaign and not just on the -- what the implications of the absence of additional resources for older people are and the equal conditions in welfare services that you made a comment about.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [34]

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When it comes to the outsourcing market, if you look at number of tenders, it has been fairly stable. We don't have a super clear visibility on new tenders that will come out. But given the political situation in the Swedish municipalities, we have a positive view on that it will come with more tenders having -- during this mounted period. Having said that, we have -- as I stated, we have seen an increased price pressure in tenders. And if price is too low, we choose not to participate because we feel -- want to go into contract where we can make a decent margin. That's also a reason why we have not been winning that many tenders over the past periods as we found price points not attractive enough.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [35]

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And that comment regarding the -- well, the national situation, is that -- what should we read from your comments there?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [36]

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Could you repeat that question?

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [37]

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Well, there is a statement in your press release talking about effectively -- as I read, the government in place has effectively made promises about changing plans for the better for the elderly care but has effectively not delivered.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [38]

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Yes, that's really affected Finland.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [39]

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Finland, okay. I thought that was a Swedish issue. Okay. Fair enough. Okay.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [40]

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In Sweden -- I mean, in Sweden, it's really -- the political landscape here, according to the agreement that's made between the political parties in January, was that they will strive for equal terms between public and private sector. That is something that we view as positive. Now we have -- we're still yet to see what comes out of that political promise or agreement because we haven't seen anything yet. But the overall idea with the equal terms is, of course, very positive, and this is something that we view as good.

In Finland, there has been a political discussion regarding the situation for elderly in Finland and the investment level that the Finnish government seeks for elderly where staffing requirements and investments in Finland are significantly lower currently than the other Nordic markets, and they're looking to increase national guidelines for staffing. That is something that we foresee will take a long time until it comes into effect as there weren't enough qualified staff on the market to support such change in regulation now. So it has to take a number of years before they can install it.

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Operator [41]

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(Operator Instructions) The next question comes from the line of Carolina Elvind from Danske Bank.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [42]

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Just one question from me. So you say you will decrease the opening pace from second half of 2020. Can you quantify that? And what should we expect for 2021?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [43]

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We have chosen not to quantify it. As -- the decision was that now is that we will significantly take down opening pace in Finland. And now we have -- what we're doing now is we are fulfilling all of the existing contracts in terms of openings. That means that we need to fulfill those contracts. It runs basically for openings up to first half 2020. From second half 2020, we can choose our opening pace. And as it is now, we have significantly taken down opening pace from that point. If situation stabilizes, meaning that if we see a better balance between -- in sales and recruitment, then we can reevaluate that. But we have chosen not to present an exact number at this day.

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Operator [44]

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The next question comes from the line of Victor Forssell from ABG Sundal Collier.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [45]

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Just the last one from me. When could we expect any -- say, any news regarding an update of your financial targets, both in terms of implementation of IFRS 16 or perhaps operationally as well?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [46]

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Before the end of the year. Had we not had the situation in Finland, we would have done it earlier. But now we want to present long-term targets that we can live with, meaning that we want to see where we're having in the second half of the year before we do anything else or before we communicate it.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [47]

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So within this calendar year, so to say?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [48]

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Within this calendar year, that's our ambition.

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Operator [49]

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The next question comes from the line of Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [50]

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I just wanted to hear your view about the risk of oversupply in the Swedish market and whether you see that being very different from the situation in Finland. Of course, you're not that as aggressive as in Finland, but the number of new beds will increase more than in the past.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [51]

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Yes. Swedish market is vastly different than Finland. It's also a much bigger market. So demand is about double the demand in Finland. So if you look at how much we're -- our opening pace in Sweden compared to Finland, it's on -- it's a much lower share of the total market even if we're increasing our openings next year in Sweden and, to some extent, in Denmark as well.

So we also believe that, over the coming years in this mounted period, we hope to see more municipalities in Sweden opening up for private operators. That's a trend we have been seeing historically -- I mean we've seen in more mid- to -- or we see less influence from left-wing parties in municipalities, which is something we see now for this mounted period. So I think we're -- obviously, in Sweden, it's very balanced. I don't see a risk for overcapacity in Sweden.

In Finland, it's been different. It's a smaller market. It's -- the wholesale market has been opening up due to the SOTE reform over the past couple of years. And it's been a land-grab phase over the past couple of years where we have been, in hindsight, building too aggressively. But it's on a completely different scale than what we're opening in Sweden.

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Operator [52]

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(Operator Instructions) We have a follow-up question from Hans Bostrom from Credit Suisse.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [53]

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So the SEK 70 million that you state were extra costs in Finland in Q2, that's obviously would be a bit higher annualized rate than the SEK 200 million you've stated. How should we marry those 2? Is it just a one-off particular in Q2 that will come down a bit in the coming quarters? Or are you changing your view on the total investment that you announced in late March?

And second question I have relates to the surprisingly large, certainly from my standpoint, contribution from acquisitions of 6%. Can you just, well, remind us where these acquisitions had taken place? Of course, obviously, most of us can't be a contributor to that.

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [54]

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Yes. So -- okay. So yes, it's a bit -- it's not really SEK 70 million. It's a bit less than SEK 70 million in the quarter. And the first quarter was lower. It was a bit below SEK 50 million. So the current trend is that we would probably come in, in higher cost than the SEK 200 million as stated for -- a bit higher than the SEK 200 million -- approximately SEK 200 million that we stated for 219 (sic) [2019]. And I also think that annual effect is a bit or slightly above the SEK 200 million, but it's -- some of the parameters of the extra costs we're taking is still too early to say if they are, long term, sustainable at a higher level. But the majority will stay of the SEK 70 million that you see in the quarter.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [55]

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Yes. So roughly -- we have roughly SEK 50 million that's related to staff costs. And then we have some other costs from managing the situation in Finland and some costs that are also temporary in nature.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [56]

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And while we're on the topic of costs, the SEK 53 million in -- that you specified nonrecurring cost, is this breach of leases? Or what are these costs? And are they particularly in Scandinavia? Or...

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [57]

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That was -- last year, we had SEK 53 million, and it was related to closure of units within individual and family care. So it was a combination of -- yes, it was closure costs. It's both personnel and property-related mainly. But -- and that affects both the -- what we call then the reported EBITA and the adjusted EBITA that is in the old GAAP with the same amount, SEK 53 million, for last year, 2018.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [58]

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On your other question on acquisitions, this is mainly related to all nursing homes we acquired during 2018 in Finland. It can be both smaller companies but also kind of real estate asset deals from municipalities. And secondly, it's home-care companies within Sweden.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [59]

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Okay. Just going back to the first point. I mean it seems you do have a kind of new, more so to say, policy of weeding out the lease cost -- or contracts that aren't likely to ever become particularly profitable, so I imagine there might be some lease cessations that are required from that. And I just wondered how much of costs there might be incurred. And are you going to specify those costs on an ongoing basis?

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [60]

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Yes, it might be. That's -- every contract, of course, is a single and individual decision on if they are -- if they lack the long-term prerequisites to be healthy, there can be a penalty breakup fees to get out of it. Part of that was the external provisions we took in the fourth quarter of 2018 to handle such situations, but -- we have not seen nor indicated that there's further need of any significant or material amounts in this area.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [61]

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Okay. For the rest of 2019, you wouldn't expect any additional costs from that particular aspect over and above what you already provided for?

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Fredrik Lagercrantz, Attendo AB (publ) - CFO [62]

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Not to any material level. But it can be a cost in the P&L, but no provisions. We don't expect any material effects from that.

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Operator [63]

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The next question comes from the line of Carina Elmgren from Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [64]

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I have one question regarding Finland. As I understand it, now you guide for a stabilization of losses going forward. So could you just summarize the main factors impacting this but now are different than before or has changed and that will help turn this negative trend? And also, when would you expect a sequential improvement regarding the profits in Finland if excluding all seasonal variations?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [65]

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Yes. As I say, that there is no quick fix in Finland. So we need to reduce number of empty beds that we have in Finland, i.e., increase occupancy levels, and we need to renegotiate contracts for the next couple of years to get compensation for the increased cost level related to the sharpened staffing requirements. Those are the major things that we need to get in place.

If we look at the occupancy levels or decreasing empty beds, whereas now we are still in the process of opening a lot of beds, we need to secure that we get back on a healthy fill-up rate or net sales level, which has been dropping significantly in Q2 versus previous trends. We didn't see any effect in Q1 on that topic. And the main reason for that has been challenges to recruit but then also partly that regulator has taken a very long time to give us permits for newly opened homes. So there -- basically we cost them. We can't open them for a number of months before we start. And so a lot of work is now into how to make sure that we do our utmost to improve recruitment situation. Of course, we believe that it will be slightly eased by the fact that there should be more graduates available after summer break, but there is a number of things that we need to focus on to secure recruitment situation.

Another part is that if you look at sales efforts, we see a tail effect of the crisis in Finland is that local managers have been very focused on just securing staff and, in some cases, have been a bit afraid of accepting new clients because they're afraid of an inspection. And then they, in some cases, wanted to be a bit overstaffed to make sure that there isn't a sick leave when the inspection comes and so forth. So we also see the tail effect on that side, that there's been less focus on sales and actually filling the empty beds, which is normally part of everyday work as a local manager. That is also something that we need to reinstate, that attitude and way of working.

Another part is -- with the sales efforts on openings is doing -- we've been opening this many beds. Normally, when we -- before an opening, we do a lot of sales efforts to a -- towards municipalities and make sure that we start the new home with a decent occupancy level and get the municipality to close down an outdated facility when we open. That is also work that hasn't been as effective over the past 6 months. So there are a lot of things that we need to improve and we'll work on to improve going forward.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [66]

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Okay. But looking a bit more into the near term, should we expect things to get a bit worse before you can actually see the benefit from all these measures?

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [67]

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We are seeing that, that performance in our Finnish operations has been stabilizing during Q2. So that's also what we are trying to say that the Q2 represents the current run rate of financial performance in Finland.

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Operator [68]

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There are no further questions at this point. I'll hand the conference back to you.

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Martin Folke Tivéus, Attendo AB (publ) - CEO & President [69]

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Okay. Well, thank you all for listening in. We appreciate that you are listening in and more engaged in the middle of the summer. I hope you have a great summer holiday in front of you. And we're looking forward to additional calls.

Of course, if you have any further questions, you are always welcome to send us a mail or give us a phone call. We would be available during the -- all the time. Thank you for listening in.