AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the AcadeMedia Q3 2017-2018 report. Today, I am pleased to present CEO Marcus Strömberg and CFO Eola Änggård Runsten.[Operator Instructions] Speakers, please begin your meeting.

[Marcus Strömberg, Chief Executive Officer]

So good morning, everybody. Marcus Strömberg here, CEO of the company AcadeMedia. And I will, together with Eola, give you an update about our quarter 3 report.And we will talk about how this year has started, but in fact we are in the end of the school year, so we have fantastic meeting with our schools, planning for the exam this summer and will come very soon. And as you can see, the third quarter has had several positive events, but we've also seen a lot of challenges mainly in the Adult Education. We see a strong volume and sales growth. And also, we have this contract transition in the Adult segment, and that has led to a decline in the operating profit. What we have been proud of is that we see a continuous high employee satisfaction. It is a competition among the teacher. And this is never important for us, that we still have stable and high result in the sort of employee satisfaction service.We have a stable development in the school segments. And we have this contractual deficit in the Hermods SFI in Malmö, and it's an ongoing dispute on amount. And we can answer some questions about that, if you have any, further on. And then I go to Page #4 -- excuse me, Page #5 and talk a little bit about this quarter. And as I mentioned, the sales is -- this quarter were quite strong. It is a growth in the sales in 17%. We see an organic growth of 6%, and that is the result of both more students and children in our schools and also an effect of bolt-on acquisitions. We also see that number of students is, in fact, up with 15% in the quarter, and that is also really a high number. You can also see that the operating profit have increased by 7.2%.And we have also worked a lot with the International Pre-school segment, and now we see that we are moving into a organic growing phase mainly in Germany. We have started a lot of new preschools, and we will start a lot of new preschools. And this has been a small part of AcadeMedia, but it's moving up and it's bigger for each quarter that we move ahead. And as you can see, the total quarter result has affected by the Adult Education. And that is a result that we have -- as we have reported before, we are in a transition phase among the contracts. We have won a lot of new contracts, and we are now taking down some of the old ones. And that is why the profit is going down, and we will work a lot with this also the coming quarters.And then if I go to next page, Page #6, and this is the result for the 3 quarters. And as you can see, the volume is up in all of our segments. And the growth is, of course, affected of this big acquisition of Vindora. And we are really exaggerated about this because we are now moving into new segments with a lot of new possibilities to work with vocational training and also this on-the-job training program that also Vindora has brought us. But this has been affected also negative by the development of the Adult segment in the quarter 3 of this transition that we are talking about. And we can also answer your question, if you have any, about that.If we see, the development is at the segments and at the secondary schools and the preschool segments, that result has -- the model has declined sustainably. And in Adult Education we see this result that we have talked about. So that is if we talk a little bit about the 3 quarters. And now we will move into the different segments, and Eola will tell you a little bit more about that.

[Eola Änggård Runsten, Chief Financial Officer]

Yes. We can just briefly mention on Page 7 that we are still running at a very high level on EBIT and net sales. And we still have 4 relatively strong quarters with us in the Adult Education segment, but on the margin side, we are beginning to see the effect, compared to '16, '17, on this quarter's margin decline in the Adult Education segment.So moving then to Page 8 and starting to comment then on the Pre- and Compulsory School. Here the development is stable. We have child numbers who -- which have increased some 3.8%, taking us to a net sales growth of almost 7%. And this is basically the result of adding students, opening some new units and also the bolt-on acquisitions that we have made as well as the annual voucher revisions. However, we are continuing to face some headwind on the margin side, so the margin is lower than last year. And this is not only due to the salary inflation that we've spoken about before but also that we have a handful of units in the Pre- and Compulsory segment, mainly compulsory schools, which have quite a challenging situation where we've needed to add extra resources, mainly staff, in order to secure the continued quality of these units.Looking at 9 months, again stable volume growth, almost 3%; and net sales slightly ahead above 6%; and margins, as mentioned previously, somewhat under pressure.Turning then to the upper secondary schools. This is where we see substantial EBIT improvement. And obviously, in Q3, this is heavily impacted by the Vindora acquisition as well as the 7 new units we started this fall. So overall student numbers increased 27%, and net sales increased 38%. And also, the EBIT margin has improved. This is partly the result of the Vindora units being -- running at a higher margin than the other AcadeMedia units, but it is also a result of efficiency gains in the overall portfolio.So in aggregate, over the 9 months so far this year, we start to see increasing effect from the new starts and the Vindora acquisition and also improved margins there. And Vindora has now, over the 9 months, been with us 5 out of those months.So turning then to Page 10 and the Adult Education segment. And as Marcus already has mentioned, this is the area where we have seen some decline in this quarter. And this is where the volatility that we've spoken about earlier in this segment is starting to show its effects. So while we are increasing volumes, partly due to the fact that we have some Vindora business also in the Adult Education segment, we've seen a fairly substantial drop in EBIT and EBIT margin. And this is due to the several ongoing contract transitions. And we've spoken a lot about the transition from the old, high-margin contract, basic modules, to the new contracts, which we abbreviate YSM, yrkes- och studieförberedande moduler. This is now resulting in a gap in sales and will also have an effect of the ramp-down or ramp-up, but what is largely impacting the Q3 results is the fact that the [Foreign Language], vocational Swedish, contract is in its ramp-up phase running at lower volumes than expected. So that's what's impacting Q3 results and also to some extent the 9 months results. Then going ahead, we will have a continued transition and challenge of -- as these 2 large new contracts move into new sales. Yes, so also as these -- these effects are also affecting the 9-month figures. I think I'll leave it at that and come back with some more comments about this later on.Looking then at the Pre-school International segment. This, we've also -- here, we've also seen some quite interesting developments. And then we have made a small acquisition in the quarter, KTS, a small preschool business in the Munich area with 6 preschools and also fairly strong pipeline. So we've added 5 new units in Germany as a result of this. And we've also made one bolt-on acquisition in Norway during the third quarter. And as a result, our child numbers have increased more than 18%, and sales 17%. And we also see an improvement in EBIT and EBIT margin as a result of economies of scale in Germany and -- mainly.And in aggregate over 9 months, we've added some 17 units to the Norwegian and German business. And it's mainly in Germany, where we're now really entering in a fairly sort of quick growth phase. We will have at least 7 new preschools estimated to be open before the end of the calendar year 2018.And we'll turn page to Page 12 and a few words on the financial position. I think there's really not a whole lot of news to say here. We have a stable financial position. And I think this very clearly demonstrates that, despite the fact that we've made a number of bolt-on and smaller acquisitions in the quarter, we are managing to maintain a stable financial position. So that being said, it means that our organic growth and bolt-on acquisitions and smaller acquisitions can be funded with existing cash flow.Turning then to Page 13. And this is the regular seasonality chart which we've shown you every quarter until now. And obviously what I want to talk about here is that you can see again the stability that we have in the school segments. It's fairly easy to predict. There's a stable seasonality, where that we -- as we have mentioned in the past, the Adult segment doesn't really have any seasonality. There is more of a regular just cyclicality, although it's not sort of a macroeconomic cyclicality. And this is now where we see the effects of 2 major contract transitions. It's the vocational Swedish contracts going from old contract which ended in December to new contract now where we're currently at lower-than-expected volumes and which is meaning that the business is running with overcapacity and [ too weak ] margins. And then there's the other contract transition from the basic module contract which ended at the end of January, where we now have a gap due to the appeal process. And we are expecting the new contracts to be signed during this quarter, Q4; and that the educations will start running in the end of this quarter.So we will have a gap between old basic modules and the new YSM contract. And we will also have the normal ramp-down and ramp-up effects where we're running at less-than-optimal business structure.So just to remind you again of some of the points on this chart that's showing the seasonality in the Adult Education. We had a similar phase in the middle of 2015, where we also had a similar kind of contract transition. You can see that this is, yes, the kind of territory that we might be moving into.

[Marcus Strömberg, Chief Executive Officer]

It is part of the [ normal seasonality ].

[Eola Änggård Runsten, Chief Financial Officer]

It's part of the normal seasonality.So then one more slide to sum up a little bit, Page 14. We are still sort of running at the same kind of level in relation to our financial targets. We are on target for growth. We are still seeing some headwind in the margin level, and I think we've spoken about this before. Capital structure looks fairly sound. And yes, use of free cash flow, I mentioned that we have primarily reinvested it in the quarter and we'll see how we do going ahead.

[Marcus Strömberg, Chief Executive Officer]

So that was all. We will be happy to answer some questions, if you have any. So please.

[Operator]

[Operator Instructions] And the first question is from the line of Carl Mellerby from Nordea.

[Carl Mellerby, Analyst of Healthcare]

My first one relates to the Adult Education segment. You mentioned that the ongoing contract transition, where that's all been weaker and at least for the coming quarters. Is it possible to quantify this more in detail? And also, regarding the dispute on Hermods in Malmö, can you provide any guidance on when you expect this issue to be resolved?

[Eola Änggård Runsten, Chief Financial Officer]

Firstly, on the first question, when it comes to quantifying the effects of this contract transition, I think the closest I can come to quantifying is pointing at the seasonality chart that I just showed you, that this is a kind of territory that we're moving into. So if you look back on historical development -- these are difficult transitions to manage. And obviously, we're doing our utmost, but it's not only dependent on managing transitions. It's also dependent on what are the actual flows coming being allocated on a daily basis from the local employment agencies.

[Marcus Strömberg, Chief Executive Officer]

And also we -- maybe we should mention that, since we won the contract, they were appealed. And then it was delayed. And now we are entering also the summer, so that is also a difficult part of now where we're going to try to build up the contracts. And then if we then move to the next question, talking about Malmö, I think that we will have some more information in the last quarter 4 report and maybe during the coming months, but it's also possible that this will be a long-term process that we will take in differ sort of courts and so on in the future. But I think we will have some more information during the next quarter.

[Operator]

And next question is from the line of Lovisa Runge from DNB Markets.

[Lovisa Runge, Analyst]

I just have one question regarding the International Pre-school segment. And there was a positive effect from expense timing in Norway affecting margin. Could you maybe quantify that or give some color to that?

[Marcus Strömberg, Chief Executive Officer]

Sorry. It was a bit difficult to hear the question. Can you please repeat it?

[Lovisa Runge, Analyst]

All right. It's regarding the International Pre-school segment. And there's a positive effect on margins from expense timing in Norway. Is it possible to quantify that?

[Eola Änggård Runsten, Chief Financial Officer]

No. I think this is really fairly minor, the cost, the effect, really.

[Marcus Strömberg, Chief Executive Officer]

What was the question?

[Eola Änggård Runsten, Chief Financial Officer]

Costs, [ a bit of CIN ] I think there's -- they're fairly minor and from a full year perspective, we don't really see any substantial effects. It's had some effect in between the quarters that the timing of costs has been somewhat different this year compared to last year, but we don't expect it to have any impact on the full year.

[Lovisa Runge, Analyst]

All right, perfect. So most of it's [indiscernible] from the German.

[Eola Änggård Runsten, Chief Financial Officer]

Yes, yes.

[Marcus Strömberg, Chief Executive Officer]

Absolutely.

[Operator]

[Operator Instructions] And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.

[Marcus Strömberg, Chief Executive Officer]

So that was it. Thank you for your attention, and we wish you all a good day. So thank you all.

[Eola Änggård Runsten, Chief Financial Officer]

Thank you. Bye.

[Operator]

And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.