CEO review
Ville Iho, CEO: Current level of profitability is far from satisfactory; a profit improvement program, including an operating model change, is underway and aiming at rapid, structural profitability improvement to support long-term value creation
Demand for healthcare services continued to be strong in the third quarter of 2022. Profitability was weak when the supply fell short of our goals, demand was focused on appointments and lower-margin care pathways, and growth investments increased our costs. Revenue grew by 1.2% year-on-year to EUR 276.4 (273.1) million led by growth in Sweden, and adjusted EBITA decreased by 60.4% to EUR 12.5 (31.5) million.
The number of appointments increased by more than 5% year-on-year, but the supply was clearly below our target. At the same time, the price and margin of the average care pathway decreased significantly due to changes in the service mix, the channel shift, and shorter care pathways. Supply growth was mainly driven by digital visits, where fewer referrals for specialists and diagnostics are made compared to physical appointments. The changes in the sales mix were also negative between customer groups. The share appointments booked by higher-margin consumer customers decreased by 2 percentage points as contracted customers took a larger part of the supply.
Covid-19 has changed the structure of demand. September was the first comparable month, based on which we can conclude the depth and permanence of the post-pandemic changes. The scenario in which the underlying demand returns to the pre-pandemic level throughout the care pathway did not materialize, and we are making immediate changes to improve the underlying profitability of our core business.
We are now rapidly improving the profitability of our business with three different levers. First, in our operating model, we make a clear division between the core business, portfolio businesses, and the Swedish business. The structure of our core business, healthcare services, will be simplified, and a profit improvement program has been launched. The program aims for inflation-adjusted, annualized run-rate EBITA improvement of at least 50 million euros by the end of 2024. Most of the targeted benefits are estimated to be realized already in 2023. The program includes direct cost savings, commercial initiatives to drive top-line and mitigate the effect of inflation, and measures to accelerate capacity growth. Measures that strengthen profitability also improve access to care and the effectiveness of the treatment when we move to efficient and scalable operating models. As the third area of profit improvement, we will develop and optimize the portfolio businesses more independently to achieve the required financial performance and drive value creation.
The already launched profit improvement program is based on a holistic approach to respond to post-pandemic market conditions and sets out to ensure that Terveystalo reaches its financial targets. The long-term growth prospects are good; underlying demand is strong, and we have maintained our position as the preferred employer of industry professionals.
Outside of operational activities, the third quarter’s result was also weakened by an isolated issue, a one-off write-down of 29 million euros to other intangible assets. The impairment loss was related to the long-standing basic IT systems reform project, which included the renewal of the patient record (EMR) system. The development path of the EMR system has been redesigned. The renovation can be carried out with lighter components, and the development work of an external supplier to build a completely new EMR system was decided to be suspended. The suspension does not affect Terveystalo's in-house development of digital services and will reduce future investment needs in basic systems.
Our financial targets and strategy remain unchanged; in our core business, we aim for industry-leading profitability, and we want to continue to be the preferred choice of customers and professionals. Portfolio businesses aim at independent value creation and in Sweden we aim for significant growth in the medium term.
I am confident that the effects of the operating model change and the profit improvement program will quickly be reflected in our performance.
Towards a better tomorrow,
Ville Iho
