AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to AcadeMedia Q2 Report 2019/2020. Today, I am pleased to present CEO, Marcus Strömberg; and CFO, Katarina Wilson. [Operator Instructions]I'll now hand the word over to CEO, Marcus Strömberg. Please go ahead.

[Marcus Strömberg, President & CEO]

So thank you very much and good morning, everybody, to this presentation of our interim report of the second quarter. So I will start, and after that, I will hand over to our CFO, Katarina Wilson.So I'll just start to remark that you can look at the front page of our report because we have a very beautiful picture of the best upper secondary teacher in Sweden. So we are very proud that we have the best teacher in Sweden. And we also, in fact, have the best math teacher also in Sweden. So I think that is a good start to present this report.And I will go to Slide #3 and start with some few remarks. And this second quarter, it's a stable quarter from our side. We are very proud that we have a solid growth and the organic growth is 6%. And we think that is very -- that's a good number. And we have also, as you maybe know, worked a lot with Adult Education. And in this quarter, we see profitability growth in the Adult Education. And what is most important is that we have achieved -- handled the situation with the labor market services. And that represents now less than 10% of the turnover in this segment. Still, there are problem with this market, and we think that it's an opportunity in the future, but we have really managed to take it to -- just 10%. And we have managed also to grow the municipality education and the team of the Adult segment has done a fantastic job. And we have also increased profitability in vocational training and that is now a significant part of this segment.And then if we go to compulsory schools. In fact, we are also very proud of the development because we have increased capacity utilization. We have good quality results and we have also improved the profitability. And we make some small bolt-on acquisition also. And we have, during this quarter, acquired a very interesting concept and one school that is called the Pops Academy. It is the leading music school in Stockholm. And in the upper secondary segment, we have Rytmus that has started with one school. And in fact, that it is the same entrepreneur that has started Pops Academy. And we think that this is a starting point to develop also music concept in the compulsory school segment.When it comes to the upper secondary school. We have seen a decline in margin, and we will comment on that further on in this presentation. The growth is still strong. And we have to keep in mind that a lot of things is happening in the municipalities now. The demographic development is very strong. And we are preparing to be a very important part of the increase of this market. So we invest now in marketing.Last year, we invested in the third quarter. Now we have moved it to the second quarter because now it's very important because now the students choose -- make their school choice. And we have also made investments in the vocational part of the upper secondary. And this has also been a good success because we have better quality results and we really believe in this part in the future. But the margin has declined, and we are investing for the future.One very important question is also what is happening with the municipality economy and what is happening with the vouchers. And of course, if you follow the development in Sweden, you see that the municipality has a lot of problem. And we have prepared that the increase of the voucher should be lowered to 2020 than 2019. And the preliminary numbers of the school segments and the preschools in Sweden is 1.8% compared with 2.5% last year. What you have to keep in mind then is that we see also money coming through state subsidies and also in other ways. So it's not really correct to just look at this number. What we know is that it will invest preschools in Sweden. But when we -- looking at the upper secondary, we think that the school voucher is the same as last year. And when -- if we look at the compulsory school, we also see a stable development.And the last remark is that we saw this teacher winning on the teacher of year gala, and that was very, very happy for us. And we are very proud of that, as I mentioned in the start of this introduction.Then I go to Page #5. Looking at this Q2. And then the student number have increased by 3.8%, and we have started a lot of new units. And we will comment a little bit more about the German development, but to be honest, the development in Germany, it's really fantastic and we have a great team. And we have a lot of opportunities now in Germany. And we really want to take that opportunity because it's a window when it comes to the market development now. And we will start maybe 15 to 20 units this year. And maybe in a few years, we think that Germany will be our biggest preschool market.And as I mentioned, the organic growth is 6%. And that is we think good. The EBIT improved because of the development of the upper -- the compulsory schools and also Adult Education. And the free cash flow is almost in line with last year.And then I go to Page #6. And we used to comment on the development, if we should compare what happened last quarter. And I will just go through this again, and maybe I will tell you what I just said but I take it once more. And as we mentioned before in our reports, we have organized the preschool now in one segment, and the countries are Sweden, Norway and Germany. And in our previous report, we had mentioned that the Norway will be hit and affected by the new staffing regulation. But what has happened is that we have compensated that with the development in Sweden because we have made a lot of efforts to improve the profitability in the Swedish preschools. And then we also have the development where we grow a lot in Germany. And the growth has been 30% in Germany. And as I mentioned, we will have a great opportunity. So the Norwegian and Swedish market, mature markets. The German market is really, really growing fast for the moment.Then we go to compulsory. So we have been working with this for maybe 2 years. And it has been focused on developing concepts and to increase the capacity utilization. And we saw the results starting in Q1, and the development is still strong now in Q2.And then we go to upper secondary, which we see quite high decline in profit in this segment. The growth is strong and developing in line with our expectations. And we have decided that we should invest a lot now in the opportunities that we see in this segment. So we invest in digitalization. We have invested in marketing. And it's also a matter of how we -- when we take costs. So last year, we take a lot of cost, as I mentioned, in Q3 that we have taken now in Q2. And we are very convinced that the margin in this segment, in the long term, will be very good. And we also think that we have opportunity now to take market shares. And we have also started a lot of new upper secondary school organically. And we invest a little bit more now, year 1, than we did before because if we invest a lot in year 1, we think that we -- the development in the future will be stronger. And we're also preparing some really great new starts, also in August this year.And as I mentioned Adult Education. So the team has done a fantastic job. And now the municipality education and the vocational programs is developing very good, and good profitability and it's also growing. What you should keep in mind is the development of 2 big contracts. And it will not affect this year. And we have won Gothenburg, and then it was appealed and the municipality decided that they should do this tender process one more time. And now we are giving new offers, new tenders, and we will get the results in the summer and -- before the summer. So -- but that is an important contract, but we have the contract now. And also in Stockholm, we won the contract, but it has also been appealed. So when you have this tender process, it also could affect the development. But for the moment and during this year, the situation in the municipalities is quite stable. And when it comes to this vocational program, we are very proud that we have the biggest market share of all suppliers of that sort of education.So overall, we see positive development in all segments, but the profit is down in the upper secondary, and that is caused by the investment that we have decided to do.And then I turn over to you.

[Katarina Wilson, Chief Financial Officer]

Thank you, Marcus. My name is Katarina Wilson. I'm the new CFO since November last year.Moving on to Page 7. I'm very happy to announce that the net sales 12 months rolling now surpassed SEK 12 billion and that EBIT, adjusted for IFRS 16, 12 months rolling is at an all-time high of SEK 674 million. EBIT margin for the group is also rebounding, thanks to improvements in the Adult Education segment.I will now take you through each segment. Moving on to Page 8. The preschool segment, 6 new units were added in the quarter, 2 in each country. And the number of children increased by 2.1%. And adjusted for the 12 units that were divested or closed in Sweden last year, the organic volume growth was 6.1%. And as you know, we include bolt-on acquisitions and new establishment in our definition of organic growth. In the quarter, we temporarily saw that improvements in Sweden related to lower costs for temporary staff as well as the overview of the Swedish portfolio last year are offsetting higher costs in Norway. We have previously communicated that the new staff density regulation and higher pension cost in Norway is expected to increase costs by around SEK 35 million in the current year. The staff density regulation is on plan, but the new defined contribution pension plan in Norway is expected to increase pension cost by further SEK 5 million this year. This means that the cost increase in Norway is now expected to be around SEK 40 million.We also communicated in the last quarter that the new defined contribution pension plan in Norway would generate a one-off positive impact of around SEK 60 million. This positive one-off has now been revised down to about SEK 40 million due to changes in actuarial assumptions.In Germany, as Marcus mentioned, we are now accelerating our plan to start new units, and we're planning 15 to 20 new units during the next year. And also, as Marcus mentioned, in Sweden, the indication is that the childcare vouchering fees will be lower than last year. But this is something that we have anticipated for some time.Moving on to the next page, compulsory schools. We continue to see good growth in this segment. Pops Academy, a school in Stockholm, was acquired in the quarter. This is a school with an exciting concept, where academic quality is combined with creative activities. The number of students increased by 3.3% and sales by 6.5%. The sales increase is related to increased number of students, the annual school voucher adjustment but also to increased state subsidies.Organic growth is generating a high capacity utilization, which leads to improved margins. And the margin increased to 5.4% in the quarter. We did have some positive effect from delayed hirings and some vacant support positions in the quarter.Moving on to upper secondary school. Student numbers grew by 5.1% and net sales increased by 6%. And this is mainly a result of the 14 new schools that we have opened in total over the last 3 years. However, EBIT decreased considerably in the quarter compared to last year. But half of this decrease is just a timing effect due to the fact that our marketing activities started earlier this year compared to last year. We are marketing 6 new schools for the autumn of 2020. The other half was related to several strategic efforts. For example, our determination to increase quality at Praktiska now showing results.To summarize this segment. Our strategic efforts on new starts, quality enhancements and on digitization to be able to tap the market growth is driving cost. And therefore, we would like to guide you that for the full year, we expect adjusted EBIT to be in line with last year.Moving to Page 11. Adult Education. Net sales increased by 3.9%. And we are happy that this segment is now contributing to the growth of the group for the second quarter running. The segment mix has changed and the loss-making business related to the labor market services now only make 9% of the total sales of the segment. And this has come down from last quarter, and -- last quarter it was 12% and last year 17%. And effort to further reduce costs in this area is ongoing.The higher vocational education and municipal education areas are showing profitable growth. And as we earlier communicated, the contracts of Stockholm and Gothenburg have been extended until June 2020. We also communicated that the higher vocational education business, do see a good allocation, which means that area is expected to grow volume by about 7% from the autumn 2020. In the quarter, EBIT increased considerably from last year, and the margin was 7.7%.Moving on to Page 12. Free cash flow. We define free cash flow as cash flow before expansion investments. And AcadeMedia has a strong free cash flow. And in the quarter, it was in line roughly at last year, SEK 260 million. And the swings that we see between years and between quarters are mainly an effect of changes in net working capital as a result of calendar effect. CapEx in the quarter was somewhat higher than last year, mainly due to our 4 recessions in the quarter.Moving on to Page 13. Financial position. Net debt is somewhat higher than last year but decreased compared to last quarter. Leverage ratio improved from previous quarter and is lower than the same period last year and well below AcadeMedia's financial targets. In the period, a dividend was paid out, corresponding to SEK 132 million. And debt related to right-of-use assets amounted to SEK 7.4 billion.And moving then on to Page 14. Financial performance. It's largely in line with targets with improving margins.And with that, I open up for questions.

[Operator]

[Operator Instructions] Our first question is from Carin Elmgren (sic) [ Carina Elmgren ] from Handelsbanken.

[Carina Elmgren, Research Analyst]

This is Carina Elmgren from Handelsbanken. So my first question would be regarding the school voucher growth of 1.8% for 2020. Can you say something about the level of it for the compulsory schools and upper secondary schools and then also for the preschools in Sweden?

[Marcus Strömberg, President & CEO]

You can say that in this report, we announced the preliminary numbers. It was the same last year. And then we send the press release when we have the -- when it's definite how the numbers would look like because we still get reports from the municipalities. But we want to guide you. And this development is, of course, not new for us. We have known this for a long time and you see the situation with the municipality. But if we should give you some sort of guidelines, I would like to say that we expect that the increase in the upper secondary level will be the same as last year. When it comes to the compulsory schools, we think it will be lower than last year. But as Katarina mentioned, we will also get subsidies in other ways. So it will not affect us. We will handle the situation when it comes to compulsory school. And if you follow the media debate also in Sweden, you have heard that the government will also give the municipality a lot of new money. But what we see will be affected this -- the quarter 3 and quarter 4 is the preschools in Sweden. And -- because a lot of municipality is increasing the groups for children, investing less money when it comes to the vouchers, when it comes to preschools. And so that -- we think that the preschools in Sweden will be affected by a lower voucher. But the definite -- the final numbers will be reported in March, I think, in March. I think -- enough to guide you in that way. But it's very important to say that this is the preliminary numbers. And if we look at the numbers that we reported last year, we see that we get a lot of other income, subsidies, so on. So you shouldn't look too much on it. But we want to make you -- we want to be clear on that we think that the voucher, when it comes to preschools in Sweden, it's quite -- it's lower than last year.

[Carina Elmgren, Research Analyst]

Okay. And can you say something about Germany?

[Marcus Strömberg, President & CEO]

The German is another situation because it's very local. And when you have this high demands, the voucher level is not really a problem. And we gave you some numbers in Norway. And in Norway, it's also preliminary. So -- but we see now that the voucher is increasing a little bit, and it should -- of course, the municipalities has started to increase their stock. And this is a little result of that. So the numbers in Norway is 3.7% compared with 3.4% last year.

[Carina Elmgren, Research Analyst]

Okay. Yes. Okay. Then just a clarification questions on the negative impact in Norway from the changes in pension plans and staffing regulations. The new net impact on this year. Can you say that?

[Katarina Wilson, Chief Financial Officer]

Yes. We expect the cost to increase further by SEK 5 million this year and on an annual basis, about SEK 10 million. And this is when we now move from the defined benefit plan to a defined contribution plan. And also, I mentioned that this one-off positive effect that we talked about in the last quarter is -- has now reduced from SEK 60 million to SEK 40 million. And that's purely because of new actuarial assumptions.

[Marcus Strömberg, President & CEO]

But what is important to mention is now that we will -- the pension situation has been a very problem for us. But now 8 -- more than 80% of the stock will have this defined benefit system -- so pension system. So it is the same in Sweden. So I think it's positive now that we -- even if the cost is a little higher, it's more under control, and we think that is positive for us. Because if we go back a few years, this has been a problem for us to handle.

[Operator]

[Operator Instructions] Our next question is from KJ Bonnevier from DNB Markets.

[Karl-Johan Bonnevier]

Just coming back to the voucher amount, the 1.8%. When I listen how do you talk about this market, it sounds like you feel that, that is in better balance with what the kind of cost inflation you see out there in salaries and general costs, if you add then the extra revenue sources that you have on top of it. Is that the good way of looking at it?

[Marcus Strömberg, President & CEO]

Yes, for sure. We had this problem. That is a good question because we didn't mention that because we had a salary inflation when it comes to the teacher. And the situation now is much more stable. So that is an important remark. But you have to keep in mind that the economy situation with the municipality is a really problem when it comes to elderly care schools, everything. So they have stopped to invest in new school places in many municipalities. And I think this is -- this will also be a very great opportunity for us to increase our market shares. But we have to be effective. We have to invest in digitalization. We have our staff production system. Everything that we have been working with many, many years. So -- but in the upper secondary and the compulsory school, I think we will be able to handle the situation in a very good way. The problem, the coming 6 to 8 months is the preschools in Sweden. But I also think that we will have a debate around that because a lot of municipalities is doing bad things now for the moment. So I think it's also a possibility that they will not be able to handle, and then they will have to pay us afterwards. So -- but what we see now, we have the increase of the voucher. When it comes to preschool, it's low.

[Karl-Johan Bonnevier]

Yes, I tried to sort of interpret it when you discussed the preschool segment in Sweden as well that was thinking in local municipalities about basically changing the, say, student -- let's say, kids and children-to-teacher ratio, in the end having bigger than -- bigger groups, so to say. Is that something that you will be allowed to do as well if the municipalities do those kind of things in their own units?

[Marcus Strömberg, President & CEO]

Absolutely, absolutely. But it has not been so much debate about it because they -- as it is now in Sweden, they want to -- it -- they wanted to look like that they invest in compulsory schools and upper secondary school. And then they try to save money on preschool. I don't think that this is the right decision, but that is what we see for the moment. But we have no staff regulation in Sweden as they have in Norway and in Finland also for -- but we don't have any staff regulation in Sweden.

[Karl-Johan Bonnevier]

But there is a regulation on maximum sizes of groups, isn't it, or something like that?

[Marcus Strömberg, President & CEO]

Oh, no, no, it's a -- it's more like a recommendation. And of course, it's important because it's quality towards the parent. And -- but we want to be, also long term, we have very good quality. So we look at this in a long-term perspective. So we think that this will change. It will be a debate. And they will be forced to increase the voucher levels.

[Karl-Johan Bonnevier]

I saw in the report that you are increasing your, let's say, ambition for new openings of units in Germany going into the next fiscal year to 15 to 20 from 10 to 15. Is that -- do you have those kind of extra units already sourced? So you have the list there? Or is it an early ambition?

[Marcus Strömberg, President & CEO]

No, no, we have new examples of it all the time in new cases. So we had a Board meeting as always we have the day before this report. And we will announce the number of units after this week. And so it's a lot of new starts. We have a great team. And what is also positive is that it just takes 1 to 2 years to fill up the units. So -- but we want to grow with quality. But we think that this ambition is absolutely possible for us to reach. And we have already a lot of new cases coming.

[Karl-Johan Bonnevier]

Looking at what you are indicating in the upper secondary school segment. First of all, I saw that you indicated that the School Inspectorate, it has basically closed more so, their case -- on the way -- what you inherited when you acquired Praktiska. What has the outcome been on that? Is everything fine? Everything is operational and/or what has happened?

[Marcus Strömberg, President & CEO]

No. If you take this vocational training, we think that this will be a very important market for us in the future. We see that the municipality, they leave this segment. The need of this sort of people in the workforce is big. And now we have been working with the quality. This investment will be permanent. So now it's a matter of us to grow the business to -- because we have the possibility to grow this a lot in the future. So that is our focus.

[Karl-Johan Bonnevier]

And you basically have signed off from the School Inspectorate that you are now delivering the product you're supposed to do?

[Marcus Strömberg, President & CEO]

I think we have 1 or 2 schools left -- or 3 schools, Katarina says. I was almost correct there.

[Karl-Johan Bonnevier]

Almost correct. No, but if that was a big question mark at the time of the acquisition, I guess, that has now been cleared basically?

[Marcus Strömberg, President & CEO]

Absolutely. That is our -- that is how we look at it. And we made a year review at the Board yesterday, and this has been a good acquisition for us so far. And one part of this that we haven't discussed so much is that when we acquired Praktiska, it was too -- it was also an adult part that is called Movant, working with vocational training. And they have totally outperformed our business case. And they win a lot of contracts. And so that part has really developed very well so far. So we had 2, both the adult part of Praktiska and upper secondary part of Praktiska.

[Karl-Johan Bonnevier]

Excellent. And one final question on upper secondary. Now when you're, say, going for growth again, slightly more in this segment and taking the investment and cost for it, do you still see that mature units basically mature on the same kind of profit margin as they have done historically? Or has there been any change to the underlying business model?

[Marcus Strömberg, President & CEO]

No, no. So -- but that is also an important question because you have to -- when you have this, when you take the next step in growth, you have to have focus on the mature units. And that is also important when you look at the German development because the underlying unit level of profitability is still high. But you have to have higher overhead costs and you have some start-up costs. So you have to keep this eye on the mature units. So they are still performing well when it comes to upper secondary. Where we see this problem the coming quarters is the preschools in Sweden. And also the fact that Katarina has mentioned in Norway.

[Operator]

[Operator Instructions] Our next question is from Johan Sundén from Carnegie.

[Johan Sundén, Research Analyst]

Two questions from my side as well. First, a bit of a follow-up on the preschool segment. You mentioned this additional cost in Norway. But how should we think about the net effect due to these efficiency gains we have seen in the Swedish segment during the first half of the year? Should we think that maybe those could offset these additional SEK 5 million from the -- in pension cost? Or -- what's your take on that?

[Marcus Strömberg, President & CEO]

It's difficult for us to guide you. So we don't give that sort of forecast. And Katarina mentioned the numbers in Norway. We want to be clear on that. And what we have seen in the first 2 quarters is that the Swedish development of the margin has been very good. We have made a lot of effort to improve the profitability. We left some municipalities. And this effort has really made a good result. But it's easy to take that as a ground for that. The development in Sweden will continue the next quarters, so that's why we mention now that we have this situation with the voucher. So we can't count on the Swedish preschool to compensate the Norwegian development in the coming quarters. That is what we are trying to say.

[Katarina Wilson, Chief Financial Officer]

And if I can add to that, we're also saying -- using the word temporarily. In the quarter, we temporarily saw that improvements in Sweden are offsetting costs.

[Marcus Strömberg, President & CEO]

But if we, for a moment, think that the voucher would be at a better level, then we will have a very good development of the preschools in Sweden. But we don't see that right now. So -- but I hope for that in the future because, as I mentioned before, I think they have to invest more in preschool. And the cost level at the municipalities are high. And they are making deficit also in their own reports.

[Johan Sundén, Research Analyst]

Okay. Perfect. That was a bit clearer. And then I also have another follow-up question on the compulsory segment. There also you're using the word temporary about this positive effect on delayed hirings and vacant position at central support functions. How big part of the profit growth in that segment is related to those temporary effects? And what should we expect -- we shouldn't expect that this should come in the second half of the year?

[Katarina Wilson, Chief Financial Officer]

Well, I don't think we want to quantify that, really. But it's just important to keep that in mind that we will have to fill these vacant positions.

[Marcus Strömberg, President & CEO]

When you see this margin improvement as we see now in compulsory, of course, we are very happy for that. It's a result of the hard work that we have done. We just want to make you clear that you shouldn't just take the margin to the sky and be a little bit more careful. But we are very positive when we are looking at the development when it comes to compulsory school. But if the margin will be 1.1% higher for the full year, that -- we don't think that, that is what we are saying. So be a little bit more careful when you make your forecast. But we are positive to the development. The situation that we have now is the same that we will have the rest of the year. And the voucher, even if the voucher is a little bit lower than last year, we will have other money coming from the municipality and through the state vouchers. So we are positive to this development of the compulsory schools.

[Johan Sundén, Research Analyst]

Great. Just one quick question also I have. You mentioned in Q1 report, these effects from vacation. I haven't find any comments about that during this quarter. That's your communication from the Q1 report, it remains that there would be -- there should be a negative effect of that during the second half of the year? Or how should we -- do you want to add something on that?

[Katarina Wilson, Chief Financial Officer]

Yes, that's correct. We don't change that. It's harder to quantify that effect, but that still remains [indiscernible] in this quarter. So...

[Operator]

And our next question is from Stefan Knutsson from ABG.

[Stefan Knutsson, Research Analyst]

I have a question regarding the political landscape. You give the impression that the voucher levels are challenging in Sweden. But at the same time that the government has talked about granting extra money in the spring budget. How will that play out if there -- if extra money granted for you?

[Marcus Strömberg, President & CEO]

It's very difficult because that we are saying that this is preliminary. But it is, of course, positive. If you go, for instance, to Nacka, it's close to Stockholm, they know what SEK 7.5 billion will mean for the school budget, but they are very professional organization. I don't think that the other municipalities are prepared and know about it. But I think it is positive. And the law in Sweden is if they give money, extra money as they should, when they get this money, to their municipality school, they are obliged by law to give it also to the private operator. So I think, yes, what we can say is that it is positive. But how much, we don't know.

[Stefan Knutsson, Research Analyst]

But will it be an adjustment, for example, after half a year? Or -- do you have any knowledge of how it can be compensated?

[Marcus Strömberg, President & CEO]

They should do it in the same way as they do with the municipality schools. And my guess is that they will give the municipality schools money for the full year because the municipalities, they work with the budget year that's same as the fiscal year. So they will give the schools money from the 1st of January. But we don't know. But more money will come into the system. That is what we know. And this is the number that we have given here. It's now the preliminary numbers. We have still some municipalities that -- they haven't given us their vouchers for 2020 yet. So that's why we have this report in March, where we give the exact numbers.

[Stefan Knutsson, Research Analyst]

Yes. Okay. Perfect. And also an additional question on the preschool segment. You mentioned that you have lower costs for temporary staff. Is that because of lower employee turnover and a long-term effect? Or is it more short term?

[Katarina Wilson, Chief Financial Officer]

No. We work very focused on reducing this cost by implementing systems around how we hire temporary staff. So this is a long-term effect.

[Operator]

And as there are no further questions, I will hand the word back to the speakers for any final comments.

[Marcus Strömberg, President & CEO]

So thank you very much for your questions, and we wish you all a good day. Thank you very much.