AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2020-Q1

[Operator]

Hello, ladies and gentlemen, and welcome to the AcadeMedia Q1 2019/2020 report. [Operator Instructions] So today, I'm pleased to present CEO, Marcus Strömberg; and CFO, Eola Runsten. Please begin.

[Marcus Strömberg, President & CEO]

Good morning. Thank you very much for your time. And we will now -- Eola and I have -- go through the interim report for our first quarter, and I have also with me our new CFO, Katarina Wilson. And this first quarter is a small quarter in AcadeMedia, but it's an important quarter. It's about how we start this school year, how everything has developed. And I think we have started this new year in a very positive way. And I will start on Page #3. And now we're a few months into the New Year. And we have started a lot of new schools. And we have, of course, focused on Germany, but we have also started schools on the upper secondary level in Sweden. So it's 12 new schools and organic growth -- and adjust organic growth is almost 7%. And we are quite pleased with that. And it is important for us to show that we can grow in a good way organically. And this is despite that we have taken out some preschools in Sweden, so the overall number of students is up 3.4%. And this quarter, we also have improved the profit with around 30%, and the main driver is the development of the Adult Education. And we will tell a little bit more about that later on, but we have really worked hard with Adult Education, and now we see stabilization and a very positive development in the parts that -- of Adult Education that is not labor market programs. And as I mentioned, the German expansion is developing very well. We have a lot of new possibilities all the time. And for the moment, when we entered the summer, we were around 3,000 children in Germany. We have now new schools that we can reach number of 6,000 children in Germany. So in the coming year, Germany will be a substantial part of AcadeMedia. One important thing when it comes to this report is that we have taken into account the IFRS 16, and it has a major impact of our accounting. But I think that we have done a good work to explain to you how the figures looks like both when we take that into Act and also without IFRS 16. And AcadeMedia is really a company that is working very much with gender equality. And in fact, we are one of the best companies in Sweden when it comes to gender equality. And we have also, last week, reported our quality results, and they are very stable, and they are very good and what we see that is very positive is that we have improved the results when it comes to upper secondary schools. And then I continue to Page #5. And just to make this very clear when it comes to IFRS 16, it has no commercial impact, but, of course, we have it taken it into our accounts. But when I report now when we come to that what we will talk about during this minute, all figures in this presentation exclude the effects of IFRS 16 in order to better reflect the development of the underlying business. But of course, you can also see the numbers, including IFRS 16. So -- and then I continue to do to this first quarter on Page #6. I think I mentioned most of the numbers, but then as you can see, the number of students is up 3.4%. And it's important to see the development of the different segments, and Eola will tell you more about the development in the different segments, but we are very pleased to see the development when it comes to upper secondary, and also the development in Germany is quite strong. And also that we haven't focused on the compulsory schools because we haven't started any new compulsory school, and we try to increase the capacity utilization, and that is also something we are very pleased with in this first quarter. And together, this gives us, as I mentioned, a good organic growth of around 6.8%, and also we have improved the results. And as -- Eola will tell you more about the free cash flow, but this quarter is weak, but we also have improved the free cash flow and that is caused by the working capital development in the quarter. And if you look a little bit closer into the numbers on Page #7, we tried to explain a little better how the different segments build up to the reported results in the quarter, and I will just comment what has happened in -- from the different segments. And last quarter, we had SEK 52 million in results -- reported EBIT results. And then when it comes to preschool, as we have mentioned, we have this situation in Norway with higher personnel costs and also pensions costs. But we just wanted to mark out that we see a very positive development when it comes to the pensions cost in Norway because they have worked a lot to try to find out new pension scheme in Norway. And from the 1st January of 2020, more than 80% of the employees will go to defined contribution plan, which provides greater predictability in the pensions cost. And we will also see a major positive effect that will come into the accounts in quarter 3. But the development in the Swedish preschools is a little bit better than we expected, and the development in Germany is very strong for the moment. And then when it comes to compulsory school, I must say that we are, as I mentioned, very happy for the development. We see positive voucher development, we see a positive organic growth, we see positive capacity utilization. We have also worked very hard to develop our concept and pedagogical brands, and this has helped us to improve the capacity utilization and also the result of the compulsory schools. And then when it comes to upper secondary, that is really the key driver to the growth in Sweden, and we see now very interesting development where a lot of municipalities don't start new schools. And we have really created a position that can bring great growth to the company. We have contracted a lot of new lease contracts, we have negotiated with the municipalities, and we have also started a lot of new schools and a new concept. So the underlying growth and the possibility to growth is very favorable when we are looking into the future. And then when it comes to Adult Education, and we have worked very hard with Adult Education, and we really want to mark out that our cost programs has really given effect now, and the labor market programs is just around 10% of the all of -- 10% of the revenue for the moment. And the other part of the Adult Education is developing very well. When we announced our numbers, our student numbers maybe few weeks ago, we -- I didn't know if you marked it out, but we also mentioned the development when it comes to vocational training in Adult Education. And the total number of students has improved with 30%. And so the vocational training programs and the municipality training program is now 90% of the revenue and that is very positive and that has generated this stable development. And I think that we will also see possibilities when it comes to labor market in the future, but not the coming quarter. The coming quarter, we will have focus on municipality program and this vocational part.Then when it comes to the overall growth level, we have -- the cost has increased and that is caused by 2 different parts. It comes to that we have invested in a new payroll system that has costed a little bit money. We think in the long-term that this is a very positive thing. But for the moment, it costs us a little -- a lot of money. And we also have invested in digitalization because we have -- this August, we announced a new system, which is called Campus Online, and our vision is that we should have -- all our students will have the possibility to have totally seamless online training when it comes to upper secondary and that has -- we invested a lot in. And then you can see also how the IFRS 16 is affecting the results. On Page 8, it's just the rolling numbers, and I don't think it's important to look at that. And then we go into the different segments, and I give the word to Eola.

[Eola Änggård Runsten, Chief Financial Officer]

Okay. Good morning, everyone. So now we are on Page 9, and I'll just give you a rundown on some more details of the segment results. And just once again to point out that IFRS 16, we have implemented this on the group level. So it's only the group numbers that are affected by IFRS 16, and the segment reporting is unchanged. So we're starting then with preschools on Page 9. And as you probably also remember, this is a new segment that we created on the 1st of July 2019, and it includes all of our preschools in Sweden, Norway and Germany. And you can also see here the breakdown of the preschools. So we want to give you some guidance on the breakdown of this segment. We have 107 preschools in Sweden following the restructuring last June. We have 102 preschools in Germany -- in Norway, and now we have 44 in Germany. So in total, more than 250 preschools in 3 countries. And the reason that we created this business segment is in order to capture the growth opportunities and the potential we see in the European preschool market, which is really now undergoing some very interesting development. And if you're interested in seeing more about this then you can look at the material that we presented on our Capital Market seminar in August, which is on our website. So please have a look at that if you want to know more about how we view the outlook for preschools in Europe. So this segment had a growth of 1.4% in the number of children and that is following the start of 8 units in Germany and Norway, Sweden, 6 of them were in Germany. So we had a very active quarter in Germany this year. And if we adjust for the trial divestments and closures in Sweden, the organic growth figure was actually 5.6%, and this took us to a total revenue growth of 6%, which is mainly then derived from Germany and Norway. As Marcus mentioned, we have guided you previously on the effects of the new staffing regulation in Norway and also increased pension cost in Norway. I can say that the adjustment to the new staffing regulation which was implemented on August 1 this year is going according to plan and also the financial effects of both of these 2 things are as expected. And it's very encouraging to see that the earnings improvement in Sweden and Germany actually, to a large extent, offset the negative impact of these things in Norway. Another positive thing on pensions. Marcus has already mentioned that we're now transitioning 80% of the Norwegian staff into a defined contribution plan, and we do expect, based on preliminary estimates that this will have a one-time positive effect in our Q3 numbers. So with that, I think we conclude preschools. And I mean, one thing that we have also stressed in this report is that Germany really now is poised to double in size over the next 2 years. We have very strong pipeline there. So with that, we move on to Page 10, compulsory schools. And this is also actually a new segment, as the preschools were separated out. And so this was created in July 1, and it comprises 108 compulsory schools in Sweden under 2 brands. And despite one school being closed at the end of June, we actually have an increase in the number of students by 3%, and this is then entirely in the remaining -- these students have been added to the existing units, which has a very positive effect on capacity utilization and thus margins because adding 1 additional student in a classroom has very good financial effects. So growth was good here, and we can also see that the adjusted EBIT and adjusted EBIT margin improved as a result of this improved capacity utilization. I also want to highlight that we do have a sort of seasonal vacation effect in this quarter which improved the result was about SEK 5 million, and this we expect to be evened out during the remainder of the year. So please make a note of that. But looking on sort of the margin on a 12-month rolling basis, we actually see that for the second quarter in a row we are improving a little bit, at least, a few notches up quarter-by-quarter. So we're in the right trend here in compulsory schools. And with that, I think we move on from Page 10 to Page 11 and upper secondary schools. And as you know, upper secondary schools is the other main area where we have a strong organic growth plan and this continues. We started 4 new schools at the beginning of this autumn term in 2019. And as you know, we also have new establishments from 2017 and '18. And as these schools grow and get more established and well-known, they fill up and they add substantially to the volume growth. So in total, we increased 8.5% in revenues, and that is basically only from organic growth i.e. new schools and new students in existing schools. So we improved EBIT and -- a little bit. Margin, however, was slightly lower. And I think, again, we reiterate what we said in the fourth quarter that -- and what we have indicated since we acquired Praktiska is that we do need to add additional resources to safeguard the quality in these schools. And this is sort of a permanent resource that's been added. But we think this also will safeguard the quality and the attractiveness of these schools, which, in general, have a higher margin than, for instance, theoretical for secondary schools. So it's a good -- makes good financial sense to safeguard the quality and attractiveness of these schools. Also in the upper secondary school, we have a positive vacation effect of about SEK 5 million, which we, again, expect to even out over the coming year. With that, we move on to Adult Education. Adult Education, as you know, has been through a difficult period. I think it's very positive now to see that we are adding sales on a quarter-by-quarter basis. So sales are actually [Audio Gap] [ 7.6% ] in Q1 versus the prior year. And we've also chosen now to show you sales breakdown percentage of the segment in the various -- the 3 areas that we work in. And as you can see now, municipal education is, by far, the largest with 63%, which has increased, higher vocational training is that it has increased the most. And as Marcus mentioned, we have 30 more students this fall term than we had the prior year. And they're now at 24% in the segment, while the public employment agency, the area that we've been struggling with is down in the corresponding amount and only is around 12% of the segment's revenue at this time. And then as we see this sort of both the cost measures we've taken within the public employment agency business but also deposited both sales and earnings development in the other 2 areas has had a positive impact on results and margins. And -- so despite the fact that sales actually are somewhat lower in Q4 than -- sorry, in Q1 than the other quarters of the year, we have good earnings development and an EBIT margin of 6.5% in the quarter. And you can see the graph in your -- in the bottom right-hand corner, you can see that we have a positive margin trend on a 12-month rolling basis. One other positive event or a couple of positive events that I'd like to mention is that you might be aware that we have ongoing tenders for the municipality of Gothenburg and Stockholm, and while these are being appealed they have the contracts -- our contracts have been extended until next summer. So this also provides some stability in the business for this coming year. And with that, I move on to the next page, Page 13. And here, we have some new figures that we'd like to show you. Partly as a result of the IFRS 16 change but also the fact that we are a cash flow-strong company, we feel that we'd like to show you more data on this. So we have -- you will see in the report and in this presentation that we have defined for equation so that the investments that we exclude are acquisitions and new property in Norway. And as you understand, so this free cash flow is comprised of cash flow from operations, but also cash flow from changes in working capital and then investments into the current business. And the main swings you see in the graph on the left-hand side are due to changes in net working capital. The underlying free cash flow is very stable. And as we've mentioned many times before on these calls, there's been a -- with a distortion in change in working capital between '17/'18 and '18/'19. But our normal working capital level is about 9% of sales negative. So strong free cash flow in the company, and this can fund both our organic investments and, to a large extent, our growth investments. And on the graph on the right-hand side of this page, you can see a breakdown of our investments. And how these are comprised, it includes both the sort of maintenance CapEx as well as the growth investments. The line -- the percentage line shows you maintenance CapEx as a percentage of net sales. And it's worth mentioning here that the growth in investments -- maintenance CapEx investments is really driven by 2 things. One thing is that we have had a focus on more organic growth during the last couple of years, but also that we have taken a sort of financial decision to fund some of the investments in our leased properties ourselves because it's a better financial deal than letting our property owners fund this investment. So with that, we will move from that new slide, Page 13 to Page 14, which shows the overall financial position of AcadeMedia. And maybe I should just remind you again that cash flow is normally the slowest in the beginning of the school year because the municipalities are sort of reconciling which students are at which schools and payments are somewhat delayed, but we are paid for July and August as well. Nevertheless, we've actually improved the net debt-to-EBITDA ratio this quarter as compared to last year. And as you know, IFRS 16 has a huge impact. We've added some SEK 7.4 billion of right-to-use assets in the balance sheet and -- or debts related to right-to-use of assets of SEK 7.4 billion. And yes, one thing that I also want to highlight is that we do have quite a bit of property in Norway, and the book value of this property is SEK 1.1 billion, which has increased compared to last year. This is the book value of property. And depending on what view you take, you could view this as a sort of capital reserve. I think that's important to bear in mind that we have this asset. And adjusted for this the debt relating to property, we actually have a better-adjusted net debt. You see that figure also on the table. So the adjusted net debt is about SEK 1.8 billion. So that's actually the debt that funds our operations, excluding capital investment.Okay. So we're moving on to Page 15 and starting to summarize this situation at the moment. So growth on a 12-month rolling basis is up 5.2% as compared to last year. Our margins are at 5.5%, which is slightly better than the full year last year. Capital structure is well below the group target. And as you know, we've announced a dividend of SEK 1.25 per share as to be confirmed by the shareholders' meeting in a month. And with that, we have 1 more page and that is presenting my successor, Katarina Wilson. Katarina, why don't you just say a few words about yourself?

[Katarina Wilson;Incoming CFO]

Yes. Good morning. I'm Katarina Wilson. I will take over from Eola on the 1st of November. I'm very happy about that. Very short about my background, I've been with AcadeMedia for 3 years. I'm currently heading Business and Controlling Group Accounting. And before that, I was the Director of Group Business Control at Husqvarna. So yes, this is a great responsibility, and I'm very happy to do this. And we're looking forward to meeting you soon.

[Eola Änggård Runsten, Chief Financial Officer]

Great. Thank you, Katarina. So as you can hear, this is a very well planned succession and no drama. And with that, I think we're ready to open up for questions.

[Operator]

[Operator Instructions] And our first question is over the line of DNB Markets and Karl-Johan Bonnevier.

[Karl-Johan Bonnevier]

First of all, thank you very much for the way you have implemented IFRS 16. I think it's very clear and it's easy to at least look through the numbers. I know how much work you have spent on it. And it makes sense how you do it, I must say. Then on that topic, just to confirm, you will continue to report it like this rather than, say, changing your financial target, adjusting them to the new accounting policy?

[Eola Änggård Runsten, Chief Financial Officer]

We will continue to report in this format as well as we can, allowing column space for the rest of this financial year. I think the Board will most likely perhaps review financial targets later this year. But yes, these should be adjusted or if we should maintain. But so far, the financial targets are maintained on a frozen GAAP basis. As our financial covenants to our banks, they are also on a frozen GAAP basis.

[Karl-Johan Bonnevier]

Excellent. And on the new slide, you showed the Page 13 with the free cash flow and investment, just to be clear there so that have you also neutralized the impact of IFRS 16 on the free cash flow?

[Eola Änggård Runsten, Chief Financial Officer]

Yes, yes, yes.

[Karl-Johan Bonnevier]

Excellent. Then operationally, just on Germany. Obviously, it was a busy quarter, opening quite a few units. Can you give us some color on how those opening has gone, the ramp-up, your ability to secure staff for those units and all the challenges you normally see when you're opening up a lot of new units in 1 quarter?

[Marcus Strömberg, President & CEO]

So you can see these new units, they are already full, all of them and so far we have managed to recruit staff to them. So they have been successful, all of them.

[Eola Änggård Runsten, Chief Financial Officer]

And we are set to open another 12 to 15 units in Germany -- or a total of 12 to 15 during this year, '19/'20 and another 12 to 15 next year. And so far, we don't see any issues in recruiting. It is a challenge. But so far, we seem to be doing well, and we're working a lot with our Espira brand which seems to have a lot of traction with regards to staff.

[Karl-Johan Bonnevier]

And when you do this much quicker ramp-ups, then I think you've at least showed us in your theoretic models for ramp-ups. How does that imply or impact, say, short-term headwinds and then getting up to targeted profitability in these kind of units?

[Eola Änggård Runsten, Chief Financial Officer]

You're talking about negative margin impact in the starting phase. Is that your question?

[Karl-Johan Bonnevier]

Exactly. And then getting up to, say, the full benefit of being at full capacity.

[Eola Änggård Runsten, Chief Financial Officer]

I would say that these units are usually looking on a sort of month-by-month basis, they are breakeven towards the end of the first year and on an annual basis in year 2. So it's mainly the first half year following a start-up that is more demanding cost-wise because there are a lot of additional costs in connection with the recruiting and equipping the schools and getting everything in order and da da da. So the main negative impact on margins is during the first 6 months, I would say. But I mean, it's fantastic to be able to fill up these units sort of basically within a couple of months.

[Karl-Johan Bonnevier]

[indiscernible] of your concept, I guess.

[Marcus Strömberg, President & CEO]

Yes, yes. And also, we have developed the processes. And if you look in the north part of Germany when it comes to Nordrhein-Westfahlen and it's that -- it's a lot of -- the demand is very, very high for the moment and that's why we have the possibility to have the full capacity almost at once, but so far so good. And we have new business cases all the time. So we have a busy work for the moment.

[Karl-Johan Bonnevier]

Excellent. And then on Adult Education, obviously, very good to see that you have managed to get cost efficiency through there, but with the labor part of the contract now being down to 12%, is that -- can you say that you have neutralized the losses that those contracts have incurred for you during last year that is now more or less breakeven or that is still a cost challenge for you?

[Eola Änggård Runsten, Chief Financial Officer]

I think it's somewhat of a cost challenge, but we are on the right track. And I think the -- what will happen in the next quarter where we leave some of the contracts -- as you know, we're leaving about half of the contracts at the end of October that will really -- we'll see how we do then. But I mean, we do feel that we have taken the measures that we need in this area.

[Karl-Johan Bonnevier]

And Marcus, when you indicate that you have better and bigger hopes now for, say, not the next quarter in Adult Education but then after that, is that you believe that also Adult -- the unemployment part will start to contribute rather than being a burden?

[Marcus Strömberg, President & CEO]

I think if it comes to this year, you should look at it, that it still be -- it's a matter of taking a breakeven view of that part. But what is important to say that this is now a small part because we have done 2 -- or 3 things, you can say, when it comes Adult Education. We have taken down costs. We have tried to make the labor market a small part of the total revenue, and now it's quite small and try to develop the other parts. So I think you should also have focus on the 2 other parts because when it comes to this vocational training, we have seen a growth of 30% when it comes to number of students, and it's now 24% of the total revenue. And when it comes to municipality contract, both Stockholm and Gothenburg will have their contracts renewed this full year. So the municipality and the vocational programs will continue to develop well all this year. And when it comes to labor market program, I think we will have focus to have breakeven, but things will start to happen next year when it comes to this market. The question is how? What has been important for us is to take down the cost and make it to affect the result as little as possible.

[Karl-Johan Bonnevier]

Excellent. And one final question on that. When you're looking at those tenders that has been going on in Stockholm and Gothenburg, obviously your old contract was now extended. How does it look for the next contract period with your -- from your point of view?

[Marcus Strömberg, President & CEO]

It's a tender process. It will start again now and it will continue during the coming months. And we have a very strong position. But when it comes to tenders, you never knew -- you never know. We have a strong position, and we used to be in a lot of contracts, but it's a tender process. You don't know what will happen. But I think we have the best position of all competitors.

[Operator]

Okay. So our next question is over the line of Carina Elmgren at Handelsbanken.

[Carina Elmgren, Research Analyst]

I have 2 questions. The one is related to the tender process -- processes that you have in Gothenburg and Stockholm. How big are those contracts together approximately? And also maybe related to Adult Education. When you talk about improvement in the employment services next year, are you talking about the calendar year 2020 or your financial year? That's my 2 questions.

[Marcus Strömberg, President & CEO]

When it comes to how much Stockholm and Gothenburg is, I don't think we have mentioned that number. But you understand that, that is big municipalities and, of course, they also invest a lot in municipality programs. But when it comes to the last question, I would think that our focus is, as I said, to make this part of the Adult Education to be breakeven. And I think the labor market agency, they will start to try new models and start to build up the new market. I think it will happen after next summer. But I think that the contracts that we have will also be used more. That is at least what we think about the next year. But when it comes to the new market, I don't think we will see it until after the summer next year.

[Carina Elmgren, Research Analyst]

Okay. And now when you're exiting some contracts and soon with the international employment agency, should we view that as a positive thing for your cost?

[Eola Änggård Runsten, Chief Financial Officer]

Yes, I think -- I mean, these -- we're obviously terminating those contracts which have lowest volumes and are most loss-making. But I think it's also -- it depends on the volumes also that we have. And I think you also need to be aware that in our business we also have start-ups of other contracts then -- the same way as when we started preschool, as we start up other contracts that might also have an impact. But I think the overall message to take home when it comes to Adult is that the situation has stabilized, we've had several positive events in this quarter with the extension of the Gothenburg and Stockholm contracts, the very large increase in higher vocational training. Overall, the sort of both revenue and earnings increase in the municipality and higher vocational training. So really, the public employment agency is a marginal part of this business segment at the moment. So focus more on the other part, I think, is the take-home message. And as you see also, the margins in the segment as a whole are sort of trending in the right direction.

[Carina Elmgren, Research Analyst]

Okay. One last question from me. You talked about the increased group overhead cost due to digitalization and the new payroll system? Was this something that cost you external in this quarter or is it a permanent cost increase?

[Eola Änggård Runsten, Chief Financial Officer]

I think that it depends on which line we're talking about there. So I would say that the increase in group overheads in this quarter as compared to the quarter last year is really 50-50 on these 2 reasons. One is the additional resources that we've had to spend during the implementation phase of the new payroll system. This has been more resource demanding than we expected and this will taper off during the coming months. So this is not a permanent effect. It should rather improve efficiency in the long-term. When it comes to the new digitalization organization, we have appointed a new head -- a new CDO as of July 1, and this team has a mandate, as Marcus explained, and this is a permanent capital -- operational expenditure investment, if you will, in securing digitalization of AcadeMedia for the long term.

[Marcus Strömberg, President & CEO]

Because it's important to say that we will see a lack of teacher in the coming years, and this is also because we have changed the Adult Education as really a EdTech segment already, and now we're trying to develop also the system. And when it comes to upper secondary because I think it will be more important to have very quality-based online training and the Upper Secondary segment way of making education will change a lot in the coming 5 years.

[Operator]

Our next question is over the line of Stefan Knutsson at SAB (sic) [ ABG ].

[Stefan Knutsson, Research Analyst]

From ABG, not SAB. But yes, I have a follow-up question on the Preschool segment in Germany. You mentioned that the heaviest cost park was during the first 6 months. Can you define a range? Are we talking, for example, negative 10% EBIT margin or is it more than that?

[Eola Änggård Runsten, Chief Financial Officer]

No, we can't really define a range there.

[Stefan Knutsson, Research Analyst]

Okay. And also on the compulsory schools and upper secondary, the vacation effect you were talking about positive SEK 5 million. Just to be clear, is that expected to be 0 come the end of the year or is it...

[Eola Änggård Runsten, Chief Financial Officer]

So full year effect, 0. That's what we're trying to say.

[Stefan Knutsson, Research Analyst]

Yes. Perfect. Well, I think all my other questions already have been answered by the other analysts.

[Operator]

[Operator Instructions] As there are no further, I want to know if I could pass it back to you for any closing comments at this stage.

[Marcus Strömberg, President & CEO]

Okay, let me say, thank you very much for your interest, and we wish you all a very good day.

[Eola Änggård Runsten, Chief Financial Officer]

Thank you.

[Marcus Strömberg, President & CEO]

Bye-bye. Thank you.

[Operator]

Thank you all very much for attending, and you can now disconnect.