AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the AcadeMedia Q1 2018/19 report. Today, I'm pleased to present CEO, Marcus Strömberg; and CFO, Eola Änggård Runsten. [Operator Instructions] Speakers, please begin.

[Marcus Strömberg, Chief Executive Officer]

Yes, good morning, everybody, Stockholm here. And I'm Marcus, together with Eola. We'll go through this quarter 1 report. And I will start to give you some comments from the CEO, and then Eola will go through the numbers. And of course, quarter 1 is an important quarter for us, because it's the starting of the school year. The earning is always low if you compare to the total result of the company. But what is important for us is to look at how has the school started, how many students are in the schools, how is it developing, and of course, how is the Adult Education performing because we have announced that we have issues among this, and I will tell you a little bit more about the development of the Adult Education. So I go to Page #3, to the CEO introduction. And first, I would like to mark out that we have really a record result when it comes to number of students and -- into our different schools. The growth is more than 15%, and of course, we are very proud of this. And this is really the all-time high for us at AcadeMedia, and that is really, really, really good. And the driver in this development is mainly the Upper Secondary Schools. And this is a segment where we also see a demographic good development and a strong urbanization in the bigger cities. And more than 10% of the students in this sector in Sweden is now going to an AcadeMedia school. And we started last year with a result -- a record result of 10,000 students; and this year, 30,500 students entered our schools. And that is really also promising for the future of this segment because we have a very strong position, we have good brands and we have also developed the brands this year to make clusters that we can invest more in marketing and in the concept, so to say, and also in quality. So that is the situation when it comes to Upper Secondary Schools. And also to mark out this the development in the Preschool segment, if we look at the total number of preschools that we run in AcadeMedia in Europe now, it's almost 250 preschools. And the development in the International segment has been really, really strong. We started this quarter, 6 new units in Germany. And as we have said before, the market in Germany is very strong and the need of new cases is very high. And we had board meeting yesterday, and it's coming always new starts, new starts, new starts. So we have a very strong possibility to grow in the International Preschool segment mainly focused on Germany. And then when it comes to the problem that we have, where we have the situation in Adult Education, and we -- this is mainly caused by the development of the employment agency in Sweden. The development of the market -- employment market in Sweden is strong, and they are not giving us students as we have planned. So we will see a delay. We will continue to take down the costs. And what is also important to say that the Adult Education is divided in different parts, and we have this problem when it comes to the employment agency. But if we look at the development when it comes to vocational training and the municipality training program, the development is quite strong. So it's a little bit different situation, but the employment agency causes us this problem, that we'll have to continue to take out costs and to develop a stronger situation when it comes to the Adult Education sector. Then when it comes to the Pre- and Compulsory segment in Sweden, I think we have a good start with good growth -- good organic growth, a lot of new children coming to our schools so the demographic development is also good. And this is a quite weak quarter, the start of the school year, and we will continue to look out for the wages when it comes to the salaries for the teachers that has been an issue, and we will continue to work with efficiency program through -- during this year. And we also have focused to some of the turnaround schools that we have worked with last year. We will continue to work with some of these. Many of them are improving, but we still have some problems. And we also will report our quality report. It will be published shortly. And we will report all the quality results of the schools. And we can say that the quality results have been stable. So if we look at the overall situation, we still have problem when it comes to Adult Education. It -- we will continue to take out costs, but we have a part in the Adult Education that is performing very well. The problem is focused on the employment agency, but the development on the school side, mainly on the Upper Secondary and the International Pre-school, has started very, very well. So that is the introduction. And then we can go through the figures. So we can continue to Page #5, I think.

[Eola Änggård Runsten, Chief Financial Officer]

Yes. So skip the overall picture and go to #5. So then if we sort of translate Marcus' comments into the numbers, I just want to sort of, again, point out that we have a sort of very seasonal development in AcadeMedia, which means that the first quarter that we're now reporting is naturally the weakest during the year. And the good news is that we have strong volume growth, 15.7% is the increase in number of students. And it's especially promising that the organic growth, i.e., excluding our 2 large acquisitions, Vindora and KTS, is at 4.8%. So 4.8% organic growth, including the smaller bolt-ons.And the growth in net sales is then a consequence of the volume growth and the acquisitions. But on the sort of counteracting side, we do have a sales decline in the Adult Education segment. So taking all that into account, the organic sales growth amounted to 2.8% in the quarter. As I said, Q1 is a small quarter for us. And this quarter, it is lower than last -- the corresponding period last year. And this is, again, largely -- it is due to the Adult Education segment. I will get back also to commenting on cash flow, which also sort of follows a seasonal development throughout the year. But if we turn to the next slide, Page 6, you have an illustration of the change in relation to the corresponding quarter last year, an EBIT bridge. And here, we see quite clearly that the deviation is due to Adult Education, which had SEK 43 million of EBIT last year and 0 in sort of this quarter, whereas Upper Secondary School is actually contributing or counteracting some of that effect. So looking quickly then on Page 7, which just highlights the sort of rolling 12 months development, we can conclude that we're now above SEK 11 million -- SEK 11 billion, sorry, of turnover. The EBIT and EBIT margin on a rolling 12-month basis has, obviously, declined somewhat due to development in the Adult Education segment, which is natural. So we move on then to Page 8, and I will then quickly go through each of the business segments to tell you what's going on in each of them. In the Pre- and Compulsory School segment, we have increased the number of children with some 4.1%, including a few smaller bolt-on acquisitions. Net sales grew 7%. So this is sort of fairly good development. The EBIT margin, perhaps we shouldn't -- I mean, this is a small quarter, and as you can see on the graph below, the seasonality is the strongest in the Pre- and Compulsory School segment. So we have SEK 5 million of EBIT this year versus SEK 3 million last year, it's quite a small number, and margins and margin development should not really be over interpreted at this stage. I mean, it's fair to say that our margins are still challenged by the continued salary inflation, and we do still have a handful of schools which we're working hard on to turn around. And this -- although progress is being made, we're not quite at the level where we would like to be there yet. There is still more work to be done. So I would say sort of stable development in Pre- and Compulsory School segment. I would, again, just like to highlight the seasonality in -- you can see clearly in the graph, this is the business segment that has the most distinct seasonality. And this is due to the fact that in this school segment, we add students, and especially preschool children, during the year. So there's quite a significant uptake in our quarter 3, which is January. And this means that you get a further improvement of results in the second half of the business year. So with that, I will move on to Page 9 and the Upper Secondary Schools segment. The Upper Secondary Schools segment has had a very positive development during this quarter. It's obviously boosted by the acquisition of Vindora. But it's also true to say that last year's establishments, where we're now adding a new group of first year students and the 3 new establishments that we started this fall, are also adding. And we have 4.5% organic volume growth in this quarter. I think it's also worth mentioning that, as Marcus also said, that we have a more focused brand portfolio and you probably still think there are a large number of brands here, but actually, 3 brands with quite a few schools under them have been now put into these brands. And we are also sort of focusing the offering that these brands encompass. And I'm sure we will see further trimming of the brand portfolio as the year progresses. But it's important now to see how we do because we start -- we'll soon start marketing our Upper Secondary School brands for the upcoming school year, i.e., that starting in the fall of 2019. Already, during November, we will have the student secondary school fares, which are an important marketing ground for next fall. And as Marcus pointed out, that's -- we see a lot of potential here, especially in the urban areas where we operate, where there's a large lack of upper secondary school places. And you also are reminded -- can be reminded that the demographic development is now quite positive for this age group. All in all, Upper Secondary School does very well in this quarter and also reinforces its margin. I should also point out that we have, in this year also, some SEK 5 million of retroactive revenues relating to one of these sort of equal-terms processes, cases, that we have run with a midsized city in Sweden, and where they have now sort of concluded to give us some SEK 5 million of retroactive revenue, which we have shown as a nonrecurring item, a positive nonrecurring item. If you look just at the graph at the bottom of this page, I think it's worth sort of just noting the difference versus the Pre- and Compulsory School seasonality that this is not as distinct. And this is due to the fact this is a voluntary school form, students are admitted in the beginning of the fall and then some of them, unfortunately, decide to either change schools or drop out of upper secondary school. And this means that if you look over the course of the year, the student numbers actually decline, and it's difficult to add additional students throughout the year, which is different to Pre- and Compulsory School. And with that, I think we move on to Page 10 and the Adult Education segment. As you know, we have issues here. We have worked hard to bring down cost level. However, we see a development in the market versus the Public Employment Agency and the labor market that is actually a more sort of severe decline than we had anticipated. And therefore, our cost adjustments are not sufficient. I think it is worth pointing out, however, that there are other parts of our Adult Education segment that are doing well and are improving in comparison to last year. Our higher vocational education and also our business towards the municipalities, with Swedish for immigrants training and that kind of business, is also actually doing better than the corresponding period last year. So we continue to work hard and will reinforce our capacity and cost adjustments as we move on throughout the year. And -- however, we want to be clear on the fact that it will probably take a bit longer than previously anticipated to reach stable margin levels. Again, just to comment on the seasonality, you can see that this is a business segment that doesn't really have a seasonality and is more affected by sort of contract basis and the development of the underlying markets. With that, I will move on to Page 11 and the International Preschool segment. Here is the area where we have the strongest organic growth, really, because here we are opening new preschool units at quite a fast pace. The comparison with last year, however, is also affected by the acquisition of KTS which was made in March last year. So overall, we opened 6 new units in Germany this quarter already. We have another, I think, 5 to 6 due to be opened during the rest of the year. And as Marcus indicated, we have a strong pipeline and we have new sort of business cases coming up for resolution on a continuous basis. It's also very promising that we have now opened our first Espira branded preschool in Germany, and this has proven to be very successful. And has -- the concept is very clear and attractive both to the business partners we have, the municipalities, the entrepreneurs who built a preschool, the employees as well as the parents, and we have high hopes for this going forward. This, again, is the Preschool business, and you can see sort of quite a strong seasonality in the development looking at the graph. So moving on then to Page 12 and a brief look at the financial position. Q1 is normally the sort of weakest quarter over the -- of the year, with term -- in terms of cash flow. This is a period where we have a vacation period and there's a lot of changes in the schools, which means that before the municipalities can issue payments to us, they really need to be sure which students are in which schools, and that's why there's somewhat of a delay in the prepayments. But we are, nevertheless, paid for all the students as of July, which you know. There are a couple of other things that have reinforced the negative cash flow sort of effect in the quarter. And one is that we actually had quite high accounts payable at the end -- at the year-end, i.e., June 30, and these obviously were funds that were due to flow out in the beginning of July. That amount is about SEK 130 million. And in addition, we also have the effect of our largest client, the municipality of Stockholm, who resets their prepayment from a quarterly prepayment to a monthly prepayment model. And they have normally boosted our cash flow in Q1 with a substantial inflow of cash. So that effect is about SEK 90 million. So all in all, we have seen and -- a decline or a worse development of working capital and negative cash flow relating to that which has meant that our net debt has increased in terms of short-term sort of debt and our net debt ratio has worsened somewhat, and is at 2.9. Nevertheless, we're still below our own financial target of 3.0. And as you perhaps know from previous communications, our leverage target versus the banks is at 3.75. So then the next page, Page 13, just summarizes the status of our financial performance versus targets. And yes, we -- there is a somewhat decline in the margin and capital structure development. But we're sort of -- yes, in line with targets, basically. And with that, I think we are ready to conclude and open up for questions.

[Operator]

[Operator Instructions] And as we have no questions registered, I now hand back to our speakers for any closing comments.

[Marcus Strömberg, Chief Executive Officer]

So I will say thank you very much, and we wish you a very good day. So thank you for joining the meeting. Bye-bye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.