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AcadeMedia AB
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Ladies and gentlemen, welcome to the AcadeMedia Q2 Results Presentation. Today, I am pleased to present CFO, Eola Anggard Runsten. For the first part of this call, all participants are in listen-only mode. And afterwards, there will be an Q&A session. Speakers, please begin.
Yes, good morning, everyone, and welcome to this presentation and AcadeMedia's Q2 results. Marcus Strömberg is on the line. However, he is actually accompanying a family member at hospital this morning, and therefore, we have decided that I will run through the presentation and he will be available both for questions at the end of the call.So with that, I will start the presentation on Page 3. Just giving you a high-level summary of what's happened in the quarter, we've continued very much along the lines of the first quarter with solid sales and profit growth and student numbers are increasing. Obviously, the acquisition of Vindora has impacted this quarter in several ways in the financials. Another important point that we want to make in this quarter is the transition of the Adult Education contract portfolio from the basic modules into the new contract is delayed in comparison to what we had expected. This transition will now be taking place during the first half of 2018, that is in our Q3 and Q4. As you also know, we completed the rights issue which was oversubscribed and that has also impacted our balance sheet.I also want to mention a piece of news that we usually give at this time of year, and that's relating to the voucher increases. So at the 1st of January, the voucher sizes are revised in Sweden and Norway. And at this time, we have a preliminary view on what impact that will have. In Sweden, the vouchers are expected to increase with 2.5% on average for the 2 schooling segments. And in Norway, the vouchers are expected to increase with 2.9% on average. I also should mention that the government proposed a revised regulation of how premises costs are calculated in the voucher. And at this time, it's unclear what impact that will have. But this new regulation will come into force as of March 1. So we have yet to see what impact that will have.Okay, we move then to Page 4. Again just reminding you high level about AcadeMedia's business. We continue our work to be the largest independent education provider in Northern Europe with a comprehensive educational offering and also multi-brand strategy. And as of this quarter, we've also added a number of new brands, most notably the Praktiska brand in the Upper Secondary segments.Let's move on then to what has been happening in the quarter and we flip to Page 5. So key highlights of the second quarter of our business here. One is main event of course is the acquisition of Vindora and that has impacted all our financials and also our student numbers. So student numbers increased in the total of 11%. And we've had several acquisitions, but Vindora was the most -- was the largest.Also continued high volumes in the Adult Education segments. A minor negative impact of FX on total sales. Looking at our EBIT levels, we've had an increased EBIT with about SEK 25 million, where SEK 21 million came from Vindora, and our EBIT margin is somewhat higher than the corresponding period last year. The underlying business one can say, excluding Vindora, very much is along the same lines as during the first quarter.Moving on then to Page 6. Looking at the first half of our fiscal year, so the Q2 combined with our Q1 which is a relatively small quarter really corresponds to very much the same kind of message: strong volume and sales increases following the acquisitions. Obviously, Vindora didn't have as such a large impact being included on the 2 out of 6 months for the first, but nevertheless also having an impact on the first half of the year.And also the volumes in the Adult Education have been high throughout this first half year, although we initially had expected them to start tapering off during this last quarter. It's been busy with very many sort of new entities from both acquisitions and some new openings. And in total, our EBIT increased with some SEK 37 million and margin was up somewhat in comparison to last year.Moving on then to Page 7. This is obviously a fun page to show, our rolling 12-month figures because at top of the slide is rolling 12 month's net sales of SEK 10 billion exactly, so that's a nice number and a nice milestone for AcadeMedia to achieve. Then you can also see that we are now running at an EBIT margin somewhat higher than last year, but I will also remind you that this is due to the strong margins we have been experiencing in the Adult Education segments.And with that, I thought I would move onto commenting the each segments in a little more detail, and we are now on Page 8. So looking then at the Pre- and Compulsory Schools segment, this is the segment where we are experiencing some headwind, mainly on the margins, and it's mainly due to our staff costs which are increasing more than revenues basically. This is a combination of wage inflation, but also focused first on increasing staff density on some of our units where we have challenges and need to focus on some additional efforts.But nevertheless, volumes, student numbers are increasing. We made one compulsory school acquisition in the period and a couple of smaller preschools. So overall, student numbers are growing 2.5% and net sales 5.9%. Looking at the first half, very much the same picture. Solid volume growth and net sales growth but margins are under pressure. I can also mention that excluding we did the close a couple of units at the beginning of the term and excluding the closures, the underlying growth was 2.7% for the first half. That's the volume numbers. So student numbers increased 2.7% excluding closures.And with that, we leave the Pre- and Compulsory Schools segments and move onto the Upper Secondary School segment on Page 9. The Upper Secondary School segment is the business segment that is most impacted by the Vindora acquisition because the Praktiska and Hagströmska brands, a total of 33 schools, were added -- 36 units were added here and total of 6,200 students. On an average basis, it's -- we have included about 4,000 students in our numbers, but the total number of students that have actually been come under our wing are 6,000, a little more than 6,000.So Vindora has the major impact obviously, and then both sales EBIT and margins have increased following that. I can also say that the underlying development excluding Vindora is much the same as during Q1. For the first half, again somewhat left in absolute terms the impact from the Vindora, but nevertheless also a substantial impact from Vindora in looking at the first half of this year all together. Then we -- obviously the Upper Secondary School segment is also being impacted by the fact that we started 7 new schools at the beginning of the fall term.Also with regard to the Upper Secondary School segment, those of you who are acquainted with the application and selection process in Sweden, we are now in the final stages of marketing for fall openings 2018. And we have 7 potential new entities currently being marketed to students. I don't think we will open all of them, but that's the maximum number that could be added as of the fall of 2018.And with that, we'll leave the Upper Secondary School segment and move ahead to the Adult Education segment on Page 10. As I mentioned at the start of the presentation, the Adult Education segment is in a sort of transitionary stage. We have one of the most profitable contracts, the basic modules contract, which will be closed for admissions at the end of January. And the segment has been preparing for this transition to the new contract, which we were awarded, vocational and preparatory modules.However, this contract is appealed and we have not yet received notions from the court as to their ruling. And therefore this transition is expected to be delayed. So the National Employment Agency obviously has lots of participants who need these forms of training and they've been admitting as many as they can to the various contracts that are available on the market up until the end of January. But as of the end of January, these volumes will be tapering off.So the effect is basically that the contract transition that we expected during Q2 has been delayed at least one quarter, and the margins have remained fairly high during this quarter. The Adult Education segment has also been impacted by the Movant business from Vindora, quite small part but nevertheless they have -- the Movant business has been consolidated into the Adult Education segment as of November 1 i.e., 2 out of 3 months.Looking then at the first half of the fiscal year 2017-'18, basically volumes and sales volumes and EBIT margin has remained at a very high level. And while we still have a good view and good expectations on, we hope there will be a positive ruling on the vocational preparatory modules contract and we do also know, as communicated earlier, that as this transition takes place, we will have lower margins in the business segments albeit depending volumes.That concludes my commentary to the Adult Education segment and we move on then to Preschools International. So this is a combination of our business in Norway, which currently has some 100 units and our German business. And as you remember, we acquired the Stepke business in April last year. So this is still impacting the comparable numbers, in addition to the continuous growth that we are doing. So we opened 1 new preschool in Germany and 4 preschools units were acquired in Norway during the last quarter.And this results in a strong volume growth of 14.7% and sales growth of 8.7%. There was this minor negative impact of FX as we see, and EBIT is largely -- and EBIT margins is largely at the same level as last year. In Norway, this is typically the first half is quite low activity as you see in our seasonality charts and Germany is very much focusing on growth.So looking at the first half of the year, it's basically the same picture. This is the weaker half of the year. We expect more sort of normal numbers during the second half of the year. And yes, we continue to have a high activity with regards to opening new units and including the one that Germany has started already this year, there will be another 8. So a total of 9 new preschools we expect to open in Germany during the calendar year of 2018.With that, I thought we leave the income statement and move to commenting the financial position, and we are then on Page 12. As you can understand, we've had several activities that have impacted our balance sheet and financial position. We've had several acquisitions, most notably the Vindora acquisition. And also we have concluded a rights issue, which partially financed the Vindora acquisition, but the Vindora acquisition and the others were also financed with other funds. So this has meant that our net debt in absolute terms has increased somewhat, but our leverage ratio remains at a fairly stable level of 2.6x following both these sort of transactions.Yes. I think we'll move on then in the presentation. Page 13 shows our seasonality slide, the red line illustrating this year's development, and I think there's not really much more to say, you can see the development and I've talked several times before about how seasonality varies between our different segments and also to be cautious about Q1 on a margin basis because it's our smallest quarter.Flipping page then to number 14, just summarizing then our status versus the financial goals we have. Growth, we continue to do well on growth and are surpassing our target of 5% to 7% sales growth including bolt-on acquisitions. Our margins, we are still striving to achieve the 7% to 8% adjusted EBIT margin. And our current level of 6.8% is also impacted by the Adult Education segment being at a very high level. Capital structure, I just mentioned 2.6x versus the maximum level of 3x we've set for ourselves, and when it comes to use of free cash flow and dividends, you are probably also aware that there was no dividend paid for '16-'17 but we have a fairly flexible dividend policy as has been stated to the market.Finally on Page 15, just to remind you about the business case for AcadeMedia. This is basically a fairly sustainable and predictable business model mainly in the schooling segment where we have very stable volume development and mostly also price development. We have many sources of growth as I think we've also been able to demonstrate in the activity so far this year and this is a business with inherently strong cash flow generation, which enables us to fund organic growth in terms of new openings and minor acquisitions through our own cash flow.And with that, I've come to the end of the presentation. And I think we're ready to open up for questions.
[Operator Instructions] We have a first question from Mr. Daniel Thorsson from ABG.
Daniel from ABG. I can start with 2 questions. The first one, in what areas do you see highest potential for improved utilization during the year, Pre- and Compulsory or Upper Secondary School segment? And then the second question on the Vindora margin, you said that it was up year-over-year in Q2. How was it the second half of the year, i.e. the spring that we are entering now? Was that strong last year for Vindora or how was it?
When it comes to the potential for improved company capacity utilization, I think in general the potential is strong in both the Upper Secondary School segment and Compulsory School segment. Where we're going to achieve that improvement I think it's premature to say. But as you've seen earlier and as we've stated earlier, these are the 2, so the Compulsory Schools and the Upper Secondary Schools. There we still have potential to improve capacity utilization. When it comes to margin for Vindora over the year, I think we'd like to sort of keep a very cautious approach and just see how things develop outside. As we stated in connection with the acquisition, we need to get to know Vindora, how their business is compared to ours. It's a somewhat different business model with these apprenticeship programs and lot of collaboration with companies. So it's too early to sort of give you any projections of how that's going to develop over the year.
And you can't comment anything on if Q2 was specifically a strong margin quarter for Vindora historically or not?
Vindora has, as we commented in connection with the announcement, had a strong development over the last couple of years. So they're doing well. And I think it's fair to say also which we say in the report that some of the margin improvement that we see in the Upper Secondary School segment is due to Vindora coming in. They are running at a somewhat higher margin with their business than the rest of the Upper Secondary School segment.
And just a final one on Adult Education. What do you expect in terms of volumes going into the next 2 quarters given the delay you are talking about?
Well, as I said, they've been sort of filling up activity as of January, but it will start tapering off. And since there are no other -- the new contractors in place, we do to a certain extent expect that this thing sort of, students will need to be filled into other programs. So we think that the existing contracts will be able to take some of the volumes in the market, but given the fact that the replacement contract isn't in place, I don't think we can fully maintain volume during the second half.
Next question from Mr. Karl-Johan Bonnevier from DNB Market.
Coming back first to Vindora, obviously a great impact as you said from it in this quarter. Could you give us a little more clarity on how, say, those SEK 21 million in profit did come through in the Upper Secondary School segment and the Adult Education? Is there an even split between them or ...
No, I think as I stated the impact is much larger in the Upper Secondary School segment. We haven't given an exact split and don't plan to do so either, but it's -- I mean Praktiska and Hagströmska with the 36 units, that's the most substantial part.
But it's fair to assume that the Movant operation is as profitable as those Upper Secondary School units?
Sorry, I didn't quite get that. It was being...
Yes. Is it fair to assume that the Adult Education part that's coming with Vindora is as profitable at least as the, say, as the Upper Secondary School unit? So is there a big lag there because obviously you have a quite different kind of profitability profile if you compare those 2 business units?
Yes. I mean I think we don't really want to comment on that, but I could say that as you're saying AcadeMedia is actually doing very well. So yes, AcadeMedia's Adult Education is very well and it's not sort of your general benchmark in the market.
And if I look at, say, your old Upper Secondary School unit so to say, excluding Vindora from it, I understood your comment from the call that the profitability level on the legacy operation so to say is as good Q2 this year as in Q2 last year.
Yes. What I said was that they are continuing along the same route as Q1 basically, so still sort of performing at that, at a good level.
Then looking at these voucher increases that you talked about 2.5% in Sweden, I understand that you are also saying that that is not enough to cover the wage cost inflation you see. But if you're trying to split that 2.5% up, do you feel that this is a companywide problem that it's not matching it or is this certain regions within Sweden where you're feeling that you have a bigger problem and need to focus more on this or how is it evolving when you start to look at say the nitty-gritty of it?
Well, I mean this is actually a very sort of complex and comprehensive calculation. We have students from I think -- I mean very many municipality, so it's more than 100 municipalities probably. Yes, more than 100 municipalities I would say in the calculation and each school has students from several municipalities. So it's -- and as I think we've said before, the picture is very varying. One municipality might actually lower the actual level one year and another might increase it sort of by 5% to 7%. And there're various factors behind these matters. But on average for us as a large operation across many geographies and municipalities, we achieve a fairly sort of stable level of voucher increases, but it can impact one school or one region very, very much.
Yes. But my question was more if we compare that to the wage cost inflation you see where is it -- is it the companywide problem that you can't really get compensation for the wage cost or if it is a regional problem that you need to focus?
Yes, yes. This is the -- no, this is a national and industry problem and this is a problem that we share with our independent school colleagues and something that's been raised at various industry sort of collaborations as well. This is a problem for the industry as a whole that the vouchers have not at all reflected the wage increases that we've seen in the market for the last 3 or so years.
And I understand from your comment as well that is too early to have a firm view on what these new calculations of the voucher would mean looking at these premises cost. But could you just elaborate a little on how the suggestion look so to say to understand what the big changes is because I'm afraid I had missed it myself?
This is the area of voucher calculation that has been the most unclear already historically. And I think it's fair to say that it has not become more clear with this, it's become less clear. So I think it's really too early to say and because we don't know which municipalities will pick up on this, how will they calculate, it's too early to say.
So you can't even elaborate what the changes is?
What the change is is that and you can -- what the change is that they have suggested that the municipalities should be allowed to exclude newer schools from the calculation of premises costs in the voucher. So the premises cost component in the vouchers and there the municipality should be allowed to exclude their newer buildings, newer school buildings which because the municipalities are expecting to need to make a lot of expansion investments.
Sounds like a promising field for a lot of interesting interpretations going forward, no doubt.
Yes.
And just finally, did I understand you right that in the average calculations on Upper Secondary Schools you have included 4,000 of the 6,000 Vindora students in this quarter?
Yes.
We don't have any more questions for the moment. [Operator Instructions] We have a new question from Mr. Daniel Thorsson from ABG.
Yes, I can have another one and -- so regarding the teacher salaries in the market, what is actually driving it to the largest extent? Is it the higher turnover of personnel? Is it the lack of teachers in general or is it just like the teacher consortium pushing their value add trying to drive up salaries? What is the main thing that has happened in the last couple of years?
The main issue is that we have a lack of teachers. And this in combination with an effort from both sort of state and other effort to improve the status of teachers and you see in a lot of the directed subsidies being directed towards the increase in teachers' salaries to improve the status of teachers. And this is driving the sort of turnover which means that the actual cost for FTE is exceeding the negotiated salary increases. So but it's -- the fundamental fact is that we have a lack of teachers in Sweden, that's the fundamental structural issue which will remain. I think, however, we have come a fair way to closing the gap between the teaching profession and other sort of corresponding professions. So hopefully, we've come to a stage where at least teachers are not leaving their profession to go elsewhere.
On average, do you have higher or lower salaries for the same employee compared to municipality schools in the same regions?
Our ambition is to have competitive salaries, but we can't be sort of leading on compensation because it's the municipalities who set the market price for teachers and we get compensated based on their levels or that's what we should be compensated for. So we -- and our aim is to be competitive sort of on par, but to be more attractive as the employer with other measures such as more influence in the workplace, better leadership, et cetera.
And just a final one on the Adult Education with the delay that we have. You have already being quite open with the margin development once the new contracts will be in place. Given the delay now, how will that effect Q3 short-term wise compared to what we expected like 2-3 months ago?
Well, I think I'll just to sort of reiterate, the volumes, it continue to sort of push participants into this contract up until January. But as of January, the end of January now, the volumes, these students will be sort of perhaps fully active during this quarter but then the volumes will start tapering off. So as I said, it's during this first half of calendar year 2018 that we will see this transition.
And you still expect the same changes in the margin as you have said before the 1 to 3 percentage points? That has not changed because of this?
Yes. That has not changed but -- and B) it is as the whole contract has been transferred from the old contract to the new contract on an annual basis.
Should we ask if Marcus has any complimentary comments?
So I think you've answered well, Eola. Thank you very much for that. And maybe it's important to keep in mind that it's a transition period now for the Adult Education and that is what is making more complicated to comment on whether the short-term margin effect, but I think you explained it in a good ways. If you don't have any questions for me, so and it's good for me. Thank you.
Okay. I think we have one more question out there.
Yes, we have one more question from Carina Elmgren from Handelsbanken.
Yes, I was just thinking about the Adult Education segment going forward maybe a year from now or so. How is the underlying demand developing? And can you see reduced demand due to less immigrants or is it compensated by more demand from other parts of your Adult Education?
Maybe I should comment on that because I think the market is still very strong. And what you see now, the figures, when it comes to refugee development, we still haven't seen the full impact from the refugees come into Sweden 2015. So we believe that the overall market will be quite strong even during this full year.
We don't have any more question for the moment. [Operator Instructions] We have no more question for the moment.
Okay. Well, thank you everyone for dialing into this call and look forward to speaking to you again.
Thank you very much.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.