AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and welcome to the AcadeMedia Q1 2022-2023 Earnings Call. [Operator Instructions] I would now like to turn the conference over to CEO, Marcus Stromberg; and CFO, Katarina Wilson.

[Marcus Strömberg, executive]

Thank you very much. And we say good morning to you all to this presentation of the Q1 result of AcadeMedia. I will make a short introduction and then I will hand over to Katarina. And if we look at this first quarter, we can say that we have started in a good and stable way with a good growth and the demand in the education sector is strong and we believe it will continue to be strong. We have grown a lot. We have grown the preschool segment with more than 8%. And in Germany, that has been a focused market for us. We have grown with more than 20%. In Germany, we have added, according to the plan, 15 new units. And we have also entered a new country, that is the Netherlands. And we have started to acquire a platform of maybe 10 units. We have acquired 5 new units this quarter. And the total revenue growth in the company this quarter was 6.6%, and I think that is quite okay for us in this situation. But as you all know, we have a very specific economical situation with the cost inflation. We have high cost for electricity and food, and that has impacted the quarter a lot. But we have also taken measure to taking down the cost and to reduce the cost and to keep up delivering good quality. And what is important to take when you look at AcadeMedia is that we are inflation proof over time. We can't increase the prices, but we have a high demand, but the statutory school voucher funding model is intended to maintain equal condition, ensuring that AcadeMedia remains inflation proof over time. We think, because this situation is new for all of us, it could take until 2024 until we see the school voucher increasing in the same way as the inflation. If we look at upper secondary, the growth has been really fantastic. We have grown the theoretical program more than 10%, and our new campus has started in a very good way. And now we have 5 campuses in Stockholm with the possibility to increase the number of students with more than 1,000 in next August. If we look at the added education, it has been quite a strange situation because the demand in the municipality program has gone down a lot because of the high need of new -- in the labor market. But we still see a very good growth and profitability in the vocational program. And we think we have good contracts. And we think that this will be back, but it will take some time because we have to handle the situation when it comes to the municipality programs. Over these quite challenging times, AcadeMedia is strong and well positioned to seize opportunities. And we see, as I mentioned in the beginning, quite high demand over time. And then maybe Katarina could take us through the numbers and I can answer questions afterwards.

[Katarina Wilson, executive]

Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia. And moving on to Page 3, highlights quarter one of our new financial year '22, '23. And as Marcus mentioned, the year started well with strong demand in the school segments. The number of children and students grew by 4.8% with increase in all segments and in all geographies. And growth in the preschool segment was as high as 8.1%. Net sales increased by 6.6% with growth in all segments, except in the adult education segment where volumes are continuing to come down, mainly as a result of a very strong labor market. The organic growth, including smaller bolt-on acquisitions, including the Netherlands, was 4.5%. And the acquisition of Sandviks in Norway last year is reported in the preschool segment and that contributed 0.9 percentage points to the growth. Adjusted EBIT was lower than last year at SEK 151 million and the adjusted margin decreased 4.9%. And the main explanation to this decrease are lower volumes in the adult education segment, capacity expansion in the upper secondary school segment that is temporarily reducing the capacity utilization, and in Norway, continued effect from lower pension compensation and increased personnel costs and also general pressure from inflation. EBIT, however, was on par with last year at SEK 157 million and includes items affecting comparability of SEK 6 million, that's insurance compensation related to the fire in 2021. And last year, EBIT was affected by cost of SEK 30 million for that same fire. Free cash flow in the quarter was less negative than last year at minus SEK 64 million. Moving on to Page 5. Net sales rolling 12 months amounts to SEK 14.5 billion, adjusted EBIT stood SEK 958 million and adjusted EBIT margin 6.6%, which is now just below our financial target of 7%. EBIT rolling 12 months is on par with last year at SEK 929 million. So jumping to Page #8, development by quarter and by segment with quarter 1, starting with the preschool segment. 11 units were added to this segment in the quarter, one new start in Sweden, 5 new units opened in Germany and 5 units were acquired in the Netherlands at the very end of the quarter. We now have more than 300 preschools, and to be exact, 303 in 4 countries, whereof 78 in Germany and 7 in the Netherlands. The number of children increased by as much as 8.1% and net sales increased by 18.3% compared to last year. Organic growth was 10.4% adjusted for positive currency development and the acquisition of Sandviks. EBIT and margin was lower than last year, entirely due to continued lower pension compensation and higher salary costs in Norway in total SEK 13 million, also somewhat higher cost due to inflation, specifically electricity cost was going up. The lower pension compensation will also impact the next quarter. And the total 12-month impact from this will then have been SEK 35 million. Also, Germany is seeing the impact of inflation, but this was in the quarter offset by positive vacation effect. And to mitigate the increased inflation, the new start plan in Germany will temporarily be slowed down. And we are now planning to open 12 units in Germany instead of the earlier communicated 15 units. And as I mentioned, we have already this year opened 5 units. Moving on to compulsory schools, Page 9. Continued solid growth in the compulsory school segment, the number of students increased by 2.6% and that is more than 700 students and sales grew by 4.6% and one new school started this autumn with 130 students. Adjusted EBIT was somewhat lower than last year at SEK 51 million and the margin decreased to 6.8%. And the new start, higher electricity costs and inflation in general as well as initiatives to strengthen student health impacted the adjusted EBIT. We have received further insurance compensation related to the fire SEK 6 million. And in total, we have now received SEK 30 million over last year and this year, and this has been reported as items affecting comparability. And as I mentioned, last year in quarter one we reported cost of SEK 30 million related to that same fire. And therefore, EBIT was much above last year at SEK 57 million compared to SEK 24 million last year. Moving on to the upper secondary school, Page 10. Student numbers increased organically by 4.6% and that is nearly 2,000 more students than last year. And the growth is coming from 3 new schools that started this autumn and the previous 21 new schools that have started over the last 6 years. And all in all, they're taking in more than 1,250 additional students. Growth is also coming from expanding capacity in our 2 brand new state of the art campuses in Stockholm opened in August. Net sales increased by 6.3%, driven by volume growth and the annual voucher revision. Adjusted EBIT was lower than last year at SEK 74 million and the margin decreased to 7.2%. Capacity expansion is causing temporarily lower capacity utilization, which decreased to just over 85% compared to 88% last year. And as we have communicated earlier, this effect will remain until the new campuses have reached full capacity utilization in about 2 years' time. Higher electricity prices and generally higher cost levels impacted EBIT also by SEK 7 million. Moving on to adult education, Page 11. And just to remind you, last year, high unemployment created very high demand for adult education with exceptional volumes and high capacity utilization. And by the end of last financial year, the job market improved, which was reflected in lower number of participants in our programs. Over the summer and the autumn, this development has continued and the number of participants have decreased further, especially in the municipal adult education. In total, net sales decreased in this segment by 11.7%. And net sales in the municipal adult education decreased by 28%, resulting in lower capacity utilization and profitability. The SFI operation in Stockholm saw lower volumes already last year and the capacity adjustments that was initiated last year has now been completed. We have now also started to adjust capacity in other parts of this business area. This will be completed in the next quarter. Sales in the labor market services business also declined by 37%, but from a very low level. And this is a conscious decision to reduce exposure to this business area. The volumes in the new matching contract, KROM, are still very low. But on a happier note, demand for higher vocational education remains high and sales continued to increase by 11% with stable margins. And the acquisition of Futuregames, a leading game education provider, is included in this business area and contributed 3 percentage points to the growth. So all in all, adjusted EBIT decreased to SEK 45 million and the margin was 11.9%. Looking ahead in this segment, in the next quarter, we expect the volumes in the municipal business area to continue to be low. And we therefore anticipate the margin in the next quarter to be significantly lower than the range of 9% to 11%. And for the full financial year, we expect the margin in this segment to stay in the lower end of this range. However, the development of the economy can be yet again to higher unemployment as well as the new transition study grant in Swedish, Omstallningsstudiestod, from January can in the longer term lead to higher demand for adult education. Moving on to Page 13, free cash flow and investments. Cash flow is usually negative at the beginning of the school year. This is a normal seasonal effect related to the working capital. Usually, we have higher accounts receivables. And free cash flow was somewhat less negative compared to last year at minus SEK 64 million. And the working capital was positively impacted by a calendar effect, increasing accounts payables. The net effect to the working capital from this calendar effect was about SEK 150 million positive. Maintenance CapEx to the right of this page, as a percentage of sales was 2.2%. Moving on to Page 14. The financial position is still strong. Net debt, excluding IFRS 16, was lower than last year at SEK 1.3 billion. And the leverage ratio was lower than last year at 1x, which is well below the financial target of below 3x. However, if we look at net debt including property-related lease liabilities, that was higher than last year and this is due to expansion in capacity and growth. And with that, I would like to conclude on Page 15, the financial performance versus targets. Organic growth and profitability over rolling 12 months is now just below our financial targets. And I would like now to open up for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Johan Sunden from Carnegie.

[Johan Sundén, analyst]

One or a few questions on the margin profile I have here. Can you please share with us a little bit more color on your own kind of planning assumptions for the new fiscal year regarding margin? And how big of a negative impact is kind of inflation impact could have? You have historically been quite good at offsetting cost pressure from making cost savings, et cetera. Just to -- it would be very helpful if you can give some more color on the kind of magnitude under pressure.

[Katarina Wilson, executive]

I mean, this is a very difficult question to answer. I mean, this really depends on the school voucher levels from the 1st of January. But I mean, we saw in this first quarter about SEK 10 million impact from inflation and I don't see that will disappear. So right now, Johan, I think that's a really, really hard question to answer. As we've mentioned, we are now working on programs to reduce capacity, et cetera. So I don't know.

[Marcus Strömberg, executive]

Maybe if you look at the different countries, Johan, if you look in Sweden, for instance, we don't so far have a wage inflation. The salaries is according to plan this year. And also when we look at next year, I think the unions and -- is negotiating in a good way. So we see that the risk for wage inflation in Sweden is quite low. Then of course, we have cost inflation when it comes to food, electricity and also the rent cost that is according to index. But the municipalities, they have the same situation, but we don't use to see this sort of high cost development during a year that has happened now. So the problem now for the municipalities that they have cost developments in all parts of the different areas of the municipality and how should they handle the situation. That's why we also take cost programs because we are safe to inflation over time. But it's important to see that in Sweden, that is our biggest market, it's not a problem with the wages. If you look in the Norway, we have a component in the school voucher that is related to the inflation. So hopefully, we will have a positive development when it comes to the school voucher in Norway. In Germany, it's a little different situation, because in Germany, we also have wage inflation. I think you have seen the different European countries that increased the wages because they have some parts of the labor market that is -- that has quite low wages. So -- but we have a system in Germany that is also that we get the same cost as the municipalities have, the same way in Sweden, but we think in Germany it could take some time. And you have all seen the problem with the gas prices in Germany, and that's why we try to postpone some of the new starts. But if you look at the market in Germany, it's very important to understand that the underlying demand is still very high and the regulation that the municipality has to pay a fee if they don't arrange school places is still in place. So demand is high, but we have to handle the situation in the short-term. But in the long-term, we look very positive at the development in Germany. And we also take, as Katarina mentioned, a very interesting step now also in other markets in Germany with compulsory schools and adult education that we think is very interesting if we look at Germany in the future.

[Johan Sundén, analyst]

And if we -- just to come back to your comment, Marcus, on the union negotiations and potential salary increases for next year, what is your current kind of expectation when you make your own budgets for next year on salary increases?

[Marcus Strömberg, executive]

So you can say that, if you take the next autumn this year, it will not be a problem this year for us, it's from August to next summer, our fiscal year. It's not a problem because we have already settled the negotiations this year. Next year, in all Sweden, this is an open question. And as it works in Sweden, it is the industry union that takes the first step. But if you read in the paper of what they say, they understand the situation. And I think that the Swedish Union will not act in the same way as they do in Europe. So what I'm saying is that the wage inflation is not the real problem. And when it comes to the other costs, we are -- we have a platform, we have a standardized purchase department. We can negotiate with the landlords in a different way, the municipalities, they have the same situation or even, to be honest, a worse situation than we have for the moment. So that's why I say that we are inflation safe over time, but the problem is what will the municipalities do in the short-term. And they will not do anything this year. 1st of January, the first step will be taken. And we think that they really understand the full situation for the 1st of January, 2024. So our focus is now to take care of the demand, to fill up existing places, to take central cost programs because we want to keep the quality in the organization very high and to be the best supplier of education over this year. And we are totally convinced that we will leave this situation in a stronger position because we have the best position in the education market in the Northern Europe. And I think we will leave the situation in a very good way. And if we look at the adult education, we have really left the labor market programs. And if we look at this, that is called [ Eriksdalsskolan ], the numbers of the profitability is high. The growth is high. The students are still there. But something has happened in the municipality program because the people that go to municipality program, they are now going into the labor market force. And of course, that is positive. But we also see now that a lot of companies also take action to take out people from their businesses. So we think that this part will also grow, and we have contracts until 2024. So we have to handle this for maybe 3, 4, 5 months. And then we think that more of the demand will be back. And the bottom of adult education, we have the vocational program and they are still performing very good. And I'm very happy that we have made this change in the adult education because we have now a market share of 18% to 19% of the vocational markets.

[Operator]

[Operator Instructions] The next question comes from the line of KJ Bonnevier from DNB Markets.

[Karl-Johan Bonnevier, analyst]

I also need to come back to this for the inflationary pressure. You indicated, Katarina, about SEK 10 million in the quarter. And if you take the full impact of how it looked at towards the end of the quarter and take it forward, is that a hugely escalating number going into your Q2 and into the early part of next year?

[Katarina Wilson, executive]

No, I wouldn't see it that way. But obviously, our quarter one is the smallest quarter and it's been over the summer. So I mean, you have to have a realistic view on that. But as Marcus mentioned, we are working really, really hard with our central purchasing department now to really try and negotiate better deals. So...

[Marcus Strömberg, executive]

So you can say, to be clear on this, if you see the food cost, we have seen a lot of the cost impact already. And so we have our own catering group and we also buy some catering. So -- and that is what is in our own control and also some of the things that we are purchasing is also in our own control. A little problem for us now is the electricity, the power costs. And we use a lot of power in our school's electricity. And we have made some saving programs to take down the usage of electricity, but it's very difficult to understand how will this affect us in Q2 and Q3, because if you look in October, the costs were lower than we expected. But if you look at the forecast now for January and February, it's still high and we have hedged some of our costs. It could be positive. But to be honest, in September, it was negative to be hedged because the underlying cost was now lower. So that is a key question for us. And the other key question that you will all understand when you read the financing press in Sweden is that the land -- the cost for the lease contracts, it's going to go up. Not all contracts, but a lot of them will increase with around 10%. And that is of course a problem. But we also take discussions with the different landlords to find the situation to handle this. But if you look in the municipalities, they will have the same situation, but it could take longer time until that affect the school voucher. So we have a quite good picture, but it's some uncertain points that is out of our control and we try to do the best. But what you have to keep in mind and that is very important is that the underlying demand is very strong. And to have this sort of centralized organization that we have developed is also very positive. And we have a lot of capacity to take in new students in August 2024 because nobody will increase capacity now. The municipality is postponing a lot of building of new schools because of the cost situation. So I'd like to say that we have 2023-2024, a unique position in the education market.

[Karl-Johan Bonnevier, analyst]

I fully appreciate the fluidity of the situation you need to manage. But if you look at it, I guess, voucher prices for 2023 is going to -- I guess, it's negotiated in a lot of the municipalities for the moment with new political constellations and these kind of things after the election and so on. But if you take -- your perspective of this, what kind -- to get fully compensated, how much would you expect vouchers to need to go up even though it might not happen this year?

[Marcus Strömberg, executive]

It's a little bit difficult to answer that, to be honest. But I think I've said that if we get 3%, I will be very happy. I think we will not be fully compensated then, but 3% is what I hope for from 1st of January and then they will understand some more and hopefully it will be higher in 2024. But the question is what will happen. Is this an inflation high position that will go down or will it continue? That is of course a key question, because you have to understand that the municipalities, they have a tough situation also. So I think they will also take some actions for to take cost reduction or at least try to take cost reductions. So I hope for 3%. That will not fully compensate us, but we have other programs that will compensate for the cost development.

[Karl-Johan Bonnevier, analyst]

That's a very good addition to it. And when you look at the challenges you see in the municipality related to adult education programs, how much more -- how difficult is it for you to adjust capacity in that segment? Are you free to do that in the agreements you have with the municipalities or are you stuck with certain costs that you can't get out, so to say, in this kind of environment?

[Marcus Strömberg, executive]

So what we -- this is, to be honest, to adapt adult education, that is core of our business. The problem is that we have seen a unique going down in this market. And some of the people that have been working for this for many, many years has not seen so much. It's around 25% down in this market. And what has happened is that you had the pandemic situation and then everybody wanted to re-train and re-educate and they entered the municipality programs. Now they have gone into jobs. And you see that in Stockholm and Gothenburg and Mellby. It is really a lot of people going back to jobs. And that is positive for the society, but it has affected us. And what is the situation now that we want to keep the contract because we think that the demand will be back in 2023 so we can take down some of the costs, but we can't take it all the way down because we want to keep some of the contracts. And that's why we see that we will have -- the vocational program will continue very good in Q2 when it comes to adult education, but the municipality will have a weak quarter in quarter 2. And then we will have taken out all the costs in 1st of January 2023. And then I think that we will see increasing volumes. And we know from the history when it comes to adult education that if you get back to the demand and you are at a low cost position, it will develop very well. So that is the strategy for the moment to keep the contract, take down as much cost as you can and then take the demand that we think will come in 2023.

[Karl-Johan Bonnevier, analyst]

And on the labor market service side, have you been able to downsize that operation to where the volume is for the moment or is that still also an excess capacity that you need to balance?

[Marcus Strömberg, executive]

In Q1, it's quite profitable, to be honest. So it's developing quite well. But we think that the new government, to be honest, they don't like labor market programs. So that's why we have prepared for this. And now it's 10%, 12% of the total revenue, 8% -- Katarina, that is 8% of the total revenue. And so I think we have a good position now. So the big market when it comes to adult education will be Eriksdalsskolan. We have the best position. And then it will be the municipality market, and it's divided in 2 parts. It's the vocational program that is also part of the municipality market, and we have a very good position and strong brands there. And then we have this more learning math in Swedish and taking upper secondary grades. That is also part of the municipality. That will come when the unemployment rate goes up. But then it's very interesting to see what will happen now with the labor market program because I think they could be moved into Eriksdalsskolan. So I'm very happy that we have this position for the moment. And then we also have this new market that will be created in Sweden that is negotiated with the union. That is possible if, for instance, I as an employee, I want to re-train to teacher, it could be a good idea for me to be a teacher, then I could be paid by the municipality to re-train. And this is SEK 1 billion market that is opening now. And I think we have very interesting brands to take a good position in this market. And I believe that a lot of people who will take the time to re-train during 2023 and 2024.

[Karl-Johan Bonnevier, analyst]

Looking at the school segment, just could you give us a flavor of the experience you have had about opening this kind of huge new campuses in Stockholm? Have it been well received? Is that -- so you are able to say cater for growth in the market in the way you described?

[Marcus Strömberg, executive]

To be honest, of course, I'm a part of this. So maybe you should listen to the teachers and the students. But it has been fantastic. And we have been here many times. We have been there with the unions. We have been there with politicians. We have been there with investors. I think this is the best thing that we have ever done. And it's -- you should go there and look for yourself. And one of them is fully capacity for the moment, Campus Vasastan. And if you look at Campus [indiscernible], we still have possibility to grow 700 or 800 more students, and it has been a very positive start from the student. They are very satisfied. And I think this is the best schools in Stockholm for the moment.

And we also have our campus in Nacka that is performing quite well. We have our campus in Solna, in [ Trolleborgen ], and we also have a campus in [indiscernible] that is the other part of Sodermalm. We also have a campus at [indiscernible]. Then we have a campus now also in Uppsala and in Gothenburg and in Malmo. I think this campus strategy is a very good step for AcadeMedia, and we'll also continue to keep this position that we have in the upper secondary school market.

[Karl-Johan Bonnevier, analyst]

But if you look then, say, maybe 3 to 5 years forward, how many cities in Sweden could, say, cater for a campus strategy?

[Marcus Strömberg, executive]

I think the biggest is our focus. And what is -- so we still have a possibility in Norrkoping. We can do more in Linkoping, maybe Jonkoping and also in [indiscernible] So we could continue this strategy. And what is so good with this way that we could keep our different brands. So as a student, you can follow your dream and go to the right brand, but you will be a part of a bigger school and we can be more effective because we can use our central organization in a better way to support the school. So it is an effective way to be a small school, but also big school at the same place. And we have also another strategy that we have developed is to have these campuses in the central parts of the city, but we can also have it close to the university campus, and that is what we have tried now in Uppsala. And it has been very, very good to be close to the universities. So in Uppsala, we have a campus, maybe just a few hundred meters from the central part of the university. And then you have the good transportation possibilities and you can use some of their facilities also. So -- and that is also we have some schools that we are trying to do the same in Gothenburg. So that is also something that could be an important part of this strategy when you move into other cities.

[Karl-Johan Bonnevier, analyst]

Just on that theme, we have seen things coming out of Sweden that schools has been basically closed down at the start of this fiscal year, this education year, so to say, because there has been lack of teacher or qualified teacher. Have you been impacted in that by some way or have you been able to cater for the openings you have done in a good way and the accessibility to qualify personnel?

[Marcus Strömberg, executive]

Absolutely. So this has been in Kiruna. The union talks a lot about this. But in fact, we had a board meeting yesterday. And one of the topics was to go through all the teachers and how many teachers that has exams so far. So, so far so good. And if you're a teacher and if you want to work somewhere, I think a lot of teachers will work in our campuses. It's a good environment. You have good possibilities as a teacher. You get good support, good food, a lot of -- so I think the campus strategy is also a way to recruit good teachers.

[Karl-Johan Bonnevier, analyst]

One final for me. I noticed from the notes that the board is sending out inviting to the AGM that you finally are looking to at least have share buybacks as a proposal to the AGM. But I also note that was a proposal from one of the shareholders rather than from the board and the board hasn't communicated it stands on the idea of share buybacks. How should we view that? Are the board not on top of this or are they actively working against it or given this kind of writing in the invitation?

[Marcus Strömberg, executive]

So the situation is that one of the biggest shareholders has made a proposal to this AGM. And now the board will give their view in time they have. I think it should be 3 or 4 weeks before the AGM. So the board will give their view on the situation in the company on this proposal 3, 4 weeks before the AGM.

[Karl-Johan Bonnevier, analyst]

So we have to wait and see for that part of it, but at least good to see that it is on the agenda for the AGM. It's going to be an interesting discussion to follow.

[Operator]

This concludes our question and answer session. I would now like to turn the conference back over to AcadeMedia for any closing remarks.

[Marcus Strömberg, executive]

Yes. Thank you very much. Then we say thank you very much for that you listened, and we wish you all a good day.

[Katarina Wilson, executive]

Thank you. Bye, bye.

[Marcus Strömberg, executive]

Bye, bye.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.