AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the AcadeMedia Q3 report. [Operator Instructions] Today, I am pleased to present CEO, Marcus Strömberg; and CFO, Katarina Wilson. Please begin your meeting.

[Marcus Strömberg, President & CEO]

So good morning, everybody. Marcus Strömberg here, CEO of AcadeMedia; together with Katarina Wilson, our CFO. And I will just start with a short introduction in -- from this rainy Stockholm this morning.And if you look at into our presentation, you can say that you, at the first page, you meet some of our Upper Secondary students that has developed their own Robot Wars carrier. So we have a lot of vocational program with IT profile, and it's really nice to see all these students.And then if we go to Page #2, you can say that this quarter, we continue our stable development. The demand of education of our different programs is still very high. We have a growth of more than 9%. Our organic revenue growth is 7.3%. And it's also very happy to say that we have now started to make bigger acquisitions again. And the Swedish Education Group is now a part of the growth. And we have 2,500 students that contribute to the growth in this quarter. And the operating profit has also increased.What is also to mention in this quarter is that we have continued our campus strategy. And we are very proud and happy to say that we have now announced the biggest campus in Stockholm. It's a big investment for us. It's one of the biggest schools that we will see in Stockholm. Four of our different brands will be in this campus. Around 2,300 students will start in this school 2022. And this campus strategy is very important for us. And we see a great need of new school places, both in Stockholm, Gothenburg, Uppsala, Malmö. And to build this campus with different brands under the same roof is very good for both the students and our employees.We have also continued to develop our digitalization and EdTech strategy. We mentioned in this report that we are really already today the leading online trainer with more than 50,000 students in our different platforms. Of course, we have this situation with the pandemic. It's now 5 quarters that we have been working in this very, very hard situation for all our staff. And the impact in Germany has been quite high. It has developed a number of new starts. But after the summer, we hope that will be more normal.In this quarter, we have also announced our employee survey. And still, we have the situation with the pandemic, we have very positive result. So both our leaders, our different staff and also together with the parents, it has been quite good results.And then we go to Page #3. We'll also give you a short picture of what we do when it comes to digitalization. So -- and we think that we are really now trying to develop AcadeMedia into the future. And it's both an international view of things, and we also have this digitalization and EdTech. And we work in different parts of the digitalization and EdTech market.To start with, we work with marketplaces. So we help students, parents to find the right education. And we just announced that we have made a small acquisition of a company that we call studier.se, and they have around 50,000 different courses in their different programs. And I would think that this could be a good opportunity for us in the future.We have also invested in a company called Hypocampus, and this is a medical programs. And we have also started to move this into France. And to work with an artificial intelligence medical program has been really interesting, and a lot of doctors and training campus that work with medical training program are interested in this.We have also developed educational services, and it's a way to support the teachers and the schools with different sort of services. And for instance, we have where you can take your lessons at home online with service from a teacher. So it's very interesting to see this development.And in fact, also, AcadeMedia also have some digitalization platforms that we have developed ourselves. And for what we have done the recent year, we have been developing this platform for many, many years, but now we have taken them out and given them a name, and that is also a possibility to make new business and to take it into other areas. So EdTech and digitalization is a really great new business opportunity for AcadeMedia.And then I hand over to you to go through the numbers, Katarina.

[Katarina Wilson, Chief Financial Officer]

Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia.Moving on to Page #4, highlights quarter 3 of our financial year. Student numbers grew by 8.1%, including the acquisition of Swedish Education Group that contributed, like Marcus said, with just over 2,500 students. Stockholms Internationella Montessoriskola, Stims, and 3 new preschools in Germany in the quarter also contributed to the growth.Net sales increased by 9.3%, with organic growth in all segments. Swedish Education Group contributed 3.1 percentage points to the growth, and we classified this acquisition as acquired growth. Adjusted for the acquisition and a negative currency translation effect mainly related to Norway of SEK 31 million, the organic growth was 7.3%.Adjusted EBIT increased to SEK 278 million compared to SEK 224 million last year, and the adjusted margin increased to 7.7%. The increase also in this quarter was driven mainly by the Adult Education segment, but all segments showed a positive development.Moving on to Page #5, showing an adjusted EBIT bridge illustrating that all segments are contributing to the growth. Adult Education is the main driver of the increased profit. Again, like we have seen both in quarter 1 and 2, the solid increase in number of students in the Compulsory and Upper Secondary School segments, both through acquisitions but also organic growth, is having a positive impact on the operating profit. And we have also this quarter, due to the pandemic and the restrictions caused by the pandemic, had to cancel and postpone activities, reducing costs by about SEK 15 million in this quarter, mainly in the Upper Secondary School segment but also somewhat in the Compulsory School segment and group function.EBIT adjusted for IFRS 16 amounted to SEK 284 million, and items affecting comparability of SEK 6 million was included in that number. IFRS 16 impacted EBIT with a further SEK 61 million positive, giving an EBIT of SEK 345 million.Moving on to Page #6. Net sales rolling 12 months continues to increase and is getting close now to SEK 13 billion. Adjusted EBIT rolling 12 is at SEK 933 million; and adjusted EBIT margin, 7.2%. And the adjusted EBIT margin has now improved for the eighth consecutive quarter, and we are meeting our financial profitability targets for the second quarter running. Although I would like to remind you that the margin is somewhat inflated due to lower costs as a consequence of restrictions during the pandemic. But of course, the main driver of this improvement is the development in the Adult Education segment.Moving on to Page #9, development in the quarter by segment, starting with the Preschool segment. Despite the pandemic, we successfully opened 3 new units in Germany in the quarter, which gives a total of 270 units in this segment, whereof now 56 units in Germany. In all 3 countries, all preschools have remained opened in the quarter. However, sometimes temporary closures have to be imposed during corona outbreak. The number of children increased by 2.7% driven mainly by Germany, but the growth is slower than planned due to pandemic.Net sales increased by 1.3% compared to last year. And if we adjust for negative currency effects of SEK 31 million, sales grew by 4.5%. Adjusted EBIT and margin increased somewhat to SEK 75 million to SEK 71 million due to positive developments in Sweden and Norway.In Norway, the school voucher increase was 4.4% compared to last year's 3.7%, which means that the staff density norm is now better compensated. And in Sweden, continued focus on efficient staff planning is contributing to the higher earnings. And the average voucher increase in Sweden is 1.9%, which is higher than last year, 1.4%.But in Germany, the situation is still difficult. Our new staffs are delayed. We have, so far this year, started 7 units in Germany, and 2 more are planned in this last quarter of this year, which then gives a total of 9 units. And this is 2 units less than what we previously communicated and significantly less than our initial plan to open 15 to 20 units this financial year.Another consequence of the pandemic in Germany is that we have to follow strict schooling-in rules, allowing only one child at a time, which means that it takes longer to fill our new preschools, which in turn gives us a lower capacity utilization. We believe that this situation will remain for a while and as long as the pandemic is ongoing. But we are positive, and we have a plan for next year to open 15 new units next financial year. Also, next financial year, sales and EBIT in the Preschool segment will be impacted by the termination of a contract that we have with the Oslo municipality to run 2 units with about 310 children in total.Moving on to the next page, Compulsory School, Page 10. All compulsory schools have remained open in the quarter. Only a limited number of schools were forced to implement distance education for shorter periods following significant spread of the coronavirus. We continue to see good growth in this segment. The acquisition of Swedish Education Group and Stims added 4 new units and just over 1,000 children and students. And in total, the number of students increased by 6.7% and sales by 9.5%.Adjusted EBIT amounted to SEK 50 million compared to SEK 40 million last year, and the margin was 5.7%. Good volume growth contributed to the higher earnings. And in addition, canceled and postponed activities due to the pandemic reduced costs somewhat, not that much. The average school voucher increase is 2.6%, which is higher than last year's 2.3%.Moving on to Upper Secondary School, Page 11. The Upper Secondary School have now, for almost 9 months, conducted distance education in part or in full. And the national recommendations on distant education ended on April 1. And from this date, it is now the decision of the principal organizer, [Foreign Language] in Swedish. The acquisition of Swedish Education Group added 4 new units to this segment and about 2,300 students.Student numbers grew in total by 12.3%, where Swedish Education Group contributed with 6.4 percentage points. Net sales increased by 13%, as a result of the acquisition as well as 18 new schools that we have opened over the last 4 years. And the plan, as it stands now, is to open a further 3 schools in the autumn of 2021.Adjusted EBIT and margin was higher at SEK 116 million compared to SEK 98 million last year due to volume growth, including the acquisition as well as lower cost of about SEK 10 million, following canceled and postponed activities caused by pandemic.Items affecting comparability amounted to SEK 6 million, and this was related to retroactive revenue from previous years of SEK 11 million and a restructuring expense of SEK 5 million. And the average voucher increase is 1% in the Upper Secondary School segment, which is lower than last year's 2.3%.Moving on to the next page, Adult Education, Page 12. The pandemic is still requiring education to take place as distance education and when in classrooms in smaller groups. Rising unemployment has continued to create high demand for Adult Education, with continued volume increase and high capacity utilization.Net sales increased by 19% in the quarter, where the acquisition of Swedish Education Group under the brand name [ KYH ] in this segment contributed 5.2 percentage points.EBIT increased to SEK 64 million, and the margin was 13.1%. And all business areas contributed to the improvement. Demand for higher vocational education remains high, and we now also see that dropout rates are lower than normal. AcadeMedia's municipal Adult Education continues to grow, and the contract portfolio covers many of the areas with increased demand.And the Labour Market Services business is also growing, and volumes are now at the same level as before the termination of the loss-making contract, Vocational and Preparatory modules. The Swedish Public Employment Service has initiated the expansion of the new matching service, Rusta och matcha, and we are now preparing to participate in the coming tender process.Moving on to Page #14 and free cash flow and investments. Free cash flow, defined as cash flow before investing in expansion, was SEK 246 million compared to SEK 107 million last year. Changing in -- changes in working capital had a somewhat negative effect on the cash flow in this quarter. This is a normal calendar effect. Total CapEx, to the right on this page, is increasing, but that's mainly due to the recent acquisitions.Moving on to Page 15. Our financial position improved even further. Net debt is significantly lower than last year at about SEK 1.6 billion, and the cash position has improved. And the leverage ratio is lower than last year's 1.2, which is well below our financial target of below 3. Property-related lease liabilities increased. Also, this is mainly through the recent acquisitions.And finally, moving on to the last page, Page 16, the financial performance versus targets. And to conclude, we are, for the second quarter running, meeting all our financial targets, including our profitability targets.And with that, I would like to open up for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Karl-Johan Bonnevier from DNB Markets.

[Karl-Johan Bonnevier]

A question on the EdTech side to start with, as you started off with that. Is it possible to say how much revenue that are driven through this platform at this stage? Or is it just a way of mitigating costs? Or how should we see the, say, the current kind of structure of that business?

[Marcus Strömberg, President & CEO]

So you can see it from 2 different views. If you take the revenue of this EdTech investments that we are doing, they are very small. It's nothing to talk about. But if you talk the revenue online education, for instance, in our Adult Education, it has developed quite well. So it depends on how you look at it. But hopefully, the EdTech revenue, the coming years will increase, of course. But as I mentioned, it's very important, if you look at the EdTech industry, it's a lot -- much talking but not so much revenue if you look at the different companies that exist in this market.But if you look at AcadeMedia, we have really developed an online platform that we train our students on today. And if you look at the Adult Education, if you're a student there, you can learn wherever you are, wherever you want. If you are a student in our schools in Upper Secondary, you can now study where you -- wherever you are, but you have to follow the lessons. So it's a very, very interesting development, and we have developed these sort of platforms in many, many years. You have to keep in mind that Hermods has existed in 100 years.

[Karl-Johan Bonnevier]

So if you look at it from practical reason, you can say that basically all students you have in Upper Secondary and Adult Education programs in some way come in contact with your digital platforms?

[Marcus Strömberg, President & CEO]

When it comes to Adult Education, I would like to say most of them have some sort of contact with this sort of platform. Then not all of them are in totally online training. But if you look at the Upper Secondary, when it comes to the last year, all of the students has had some sort of online training.

[Karl-Johan Bonnevier]

Excellent, excellent. When I look at this Rusta och matcha opportunity of matching services under the Adult Education, is that a big business or a big operation already now for you? Or this is a new service that you will add to the platform, so to say?

[Marcus Strömberg, President & CEO]

That's a very good question because we have developed -- or the management team when it comes to Adult Education has really made a turnaround. So for the moment, the services from the employment agency is a very small part of the Adult Education. So now we are working with vocation programs and the municipality training program. And this has really -- it has been a great success for us.But the coming 2 to 5 years, the employment services will open up a new market. That is Rusta och matcha. And here, we are a very good player in this market, but there is no revenue for the moment. So this is a market that we will enter the coming years.

[Karl-Johan Bonnevier]

And when I look ahead to the next school year '21, '22, I see that the demographic support seems to be helping you in all age groups going into the next year. Have you any idea about, say, how the demand will look for you going into the next year looking at, say, preliminary listings with your different schools and so on?

[Marcus Strömberg, President & CEO]

So we have -- one of the main -- if you look at AcadeMedia that we have this recurring revenue and we have this foresight. Of course, we have -- this recruitment process is moving on very -- as we are speaking, but we cannot announce it. We announce it after the summer. But if we talk about the overall market, I would like to say that the demographic development is very positive. The need of new school places in the bigger cities is very high, and the municipalities, they don't create so many new school places for the moment.And if you also look at the penetration of the private player, I think that we see that the private operators take market shares also. That is at least what I see when I look how the market develop. And for the moment, we have 384,000 children and students in private schools in Sweden, and that is all-time high for the moment. And I think we will see all-time high after the summer also, if you -- but if you look at AcadeMedia because I can't say anything about AcadeMedia, but if we look at the overall market.

[Karl-Johan Bonnevier]

And when you look at the new openings that you are now doing for the next school year, are those in existing facilities? Or are you taking on a lot of new property assets in that expansion?

[Marcus Strömberg, President & CEO]

So we make some new starts after the summer, but I would like to say that the main driver is that we have increased the capacity at existing schools and that we have made new starts. But what is very interesting is what will happen 2022 because then we open 2 big new campuses in Stockholm, and we also create new campuses and develop new campuses in other cities.So this August, we start a new campus in Örebro, and I think that is a very good strategy. We will see how it will develop. We started a campus in Uppsala, and I must say it's really the development when it comes to the brands that exist in this campus has been fantastic so far. So I really believe in this strategy. It's positive for the students. It's good for the employees. It's very good for the city because we create good places at a lower cost. And so that is the main driver that will help us into the future.

[Karl-Johan Bonnevier]

Excellent. And just 2 questions on Norway and Germany. Looking at the contract that you -- that the Oslo municipality is taking back now, looks to be an extremely profitable contract. Is there -- was there something special with that contract? Or...

[Marcus Strömberg, President & CEO]

It is -- when you look at -- if this sort of contract that -- when you drive it in your -- as we do in Sweden, we run both. We have our own buildings. We have rental contracts and so on. In this contract, it was just running the schools because we didn't pay any rent and so on in these schools because it was part of the -- how we did it with Oslo. So you can say that it was profitable contracts.

[Karl-Johan Bonnevier]

Excellent. And when I look at the rollout plan for Germany, you seem to -- as I understood it, for the next fiscal year, you had a slightly more ambitious plan for rollout. Is there anything happening in the marketplace that they are -- let's say, so earlier, I think you suggested that it would be a catch-up of units, that you wouldn't be able to open this year during next year. But now that seems to be postponed.

[Marcus Strömberg, President & CEO]

It has been postponed. And what we say now about the future is 15 new starts. And to be honest and clear about Germany, the demand of new school places is higher than ever, but it has been very tough. It's difficult for us to understand in Sweden how tough it has been in Germany. And the parents, they are waiting because if you don't go to work, you don't need any school place, you don't want to pay the extra food. And so I think we have to wait until after the summer. But I'm convinced that the positive development and need of preschool places will be very high. And how many new starts we can start, it's very difficult to answer, but our best view for the moment is 15.

[Karl-Johan Bonnevier]

But if you look at the pipeline, you used to have, say, where you were quite specific on where you were opening units and so on. You haven't lost any of those. It's more like they are in the wait-and-see mode, so to say. When do you think it's logical to drive them?

[Marcus Strömberg, President & CEO]

That's correct. The construction workers hasn't been able to work in Germany. It has been very tough for the people. And what is -- what I think is positive that we have started 3 new units this quarter. So they are working very, very, very hard. And Step Group is -- they are the best preschool management team we have ever met. So they will take all opportunities, but it has been a tough situation in Germany. And it will take some time.

[Operator]

The next question comes from the line of Johan Sundén from Carnegie.

[Johan Sundén, Research Analyst]

Yes. I think Karl-Johan asked a lot of good questions before me, so many of my questions have already been answered. But I think we can start a bit on the Rusta och matcha part. I think that is pretty interesting. Can you give some more milestone, kind of time line, how the tender process will work and kind of the market potential?

[Marcus Strömberg, President & CEO]

This is -- it will be $1 billion -- not dollar, SEK 1 billion market, so it will be a big market. But we don't really trust in the development because sometimes, when it comes to employment services, it's one step put forward and then it's 2 step backwards and 1 step aside. So -- but it is a big SEK 1 billion market that will be opened. And it's not that sort of tender price process. It's more that you get a license to act on the market. And we really already had this sort of license. And if you see on our history, we are really good in taking care of these sort of services because a lot of the people that will enter this market is people that will be very far from the labor market. So I think it will be a good opportunity for us.We will also enter this market with a more digital view. In the -- for a few years, we had to have physical places in different cities in Sweden. So now we will have smaller offices. We will use our existing buildings and have a more digital online approach when we enter this market. And that is a way also to be more flexible because we know that the labor market program is more volatile.

[Johan Sundén, Research Analyst]

So just so I heard right, SEK 1 billion?

[Marcus Strömberg, President & CEO]

More than SEK 1 billion. So they say SEK 5 billion, they mentioned that number, but I would take it a little bit careful, to be honest. But they talk quite high numbers, quite high numbers. And if we just take 10% of that market, it will be a lot of money. But we don't want to talk so very much about it because we have seen in the history that it changed a lot. But it is opportunity for AcadeMedia in the future.But what is very important when you look at the Adult Education, that we have a fantastic development both in municipality programs and vocational program. And the contract portfolio is, for the moment, perfect.

[Johan Sundén, Research Analyst]

Great. Another question on the EdTech side from me as well. It's maybe a bit visionary. But how do you see it? What kind of efficiency improvement to that lead to for your own operations maybe, say, in a 3 to 5 years' time? You're now in the middle of your margin corridor -- margin target corridor, maybe a bit high margin in the adult business for -- compared to normalized level. But if you could speak really of kind of the potential there.

[Marcus Strömberg, President & CEO]

What I -- what we hope for is that we will give the students more opportunity to move between physical learning and online learning because today, all schools are mainly focused on the physical learning, where you are on a present school. And -- but we have now shown that you can take online learning everywhere. And the next step, I hope, will be that we could confine these 2 models because the meeting with the teachers to be at the schools, that is very important.And maybe in the future, this is from one of the municipality managers, he said that maybe in the future, we can have schools with place for 400 students, but we run them with 600 students because some of them are online. And I think that is what we will see in the future, that it's the possibility to have more students at the same schools. I don't think that the schools will disappear. We need to have this physical meeting between teachers and students. So that is what we hope.And if you compare the Adult Education with the Upper Secondary training, you can say that the cost is a factor 1 to 10. And that is very easy to understand because if you run a course online, it's much more effective. But of course, you can't use that full potential. It's not possible to implement, but that shows the potential. But I would also say that the main driver for us is also the quality part of this because we have to develop the quality. It will be a lack of teachers. This is also a way to develop the quality and the educational program and give the students better courses and better training programs.

[Johan Sundén, Research Analyst]

And as you mentioned, many of these platforms you have developed by yourself during the last few years. If you compare kind of your platform and to your competitors, both public and other private actors, how do that differ? Is this a new kind of competitive advantage for you? And will this kind of -- because the voucher will -- system, I think, should be the same. So it will be more about how much more efficient you can be than your competitors.

[Marcus Strömberg, President & CEO]

That's correct. And I must say that we have looked at a lot of different platforms. And I must say that our -- the platforms that we have developed when it comes to Adult Education, Omniway and Novo, they have really good quality. And what is good with this platform is that they really have focus to help the students into the next step. So they are really fantastic.And then when -- if we look at this Cortexio platform that we also have developed in -- we just own, I think, it's 25% or 30% of that company. And that is a way to make the books to be more -- to adapt to the students. And we have -- the medical program, we have made a book on that. And now we also have for the nurseries, and we have looked for other programs. So we have a lot of interesting platforms.And what is so interesting, I think, that our team, they have developed services at a quite low cost. And I think they could compete in a good way with companies that had invested a lot of money in their platforms. And that is maybe -- this is the time where you can take this step into digitalization maybe at a lower cost.If you take this instance for this service that we have developed called SnackaomLäxan, it's a sort of [ doktor.se ], but as a teacher, I give home lessons to my students after schools. Maybe they've invested SEK 500,000. It's nothing. And the service is working quite well. So I think it will be a very interesting development for AcadeMedia in the coming year. We have 2 different departments that work with this. We have one department that we call AcadeMedia Digital, and we have one department that we call AcadeMedia EdTech, which has a more focus on investment to see opportunities in outside AcadeMedia. So I hope that we will talk more about this in the future.

[Johan Sundén, Research Analyst]

And just one final question from my side. I think it's likely most -- better asked to Katarina. But it's related to these temporary cost savings. You now reported some SEK 50 million in temporary cost savings this quarter. Now when the Upper Secondary Schools should return more to fiscal education during your Q4, how should we think about this? Should this remain at this level? Or should they go back to a normal run rate level? Or...

[Katarina Wilson, Chief Financial Officer]

I would say that you should assume that we now go back to normal levels. I mean, that's what we're hoping. We're really hoping that we also can catch up with some of these activities. So I don't think you should assume a lot further cost savings.

[Johan Sundén, Research Analyst]

Good. And just one final question on the Upper Secondary side. You mentioned a few new openings coming up. You'll have the campus in Örebro and a few openings in Stockholm from '22 as well. Kind of the margin profile, how should we think there? Is it -- I get this year is very special, but if you take out kind of the short-term cost savings, should we expect that the margin take a hit during the coming 2 years on that as well?

[Katarina Wilson, Chief Financial Officer]

Yes, that's correct. I think you should see our campus, so the Malmö, as a new start. It will be a margin impact from that. I think it's too early to actually say exactly how much. We're not talking about a lot, but you should take that into account.

[Marcus Strömberg, President & CEO]

So you can also say that when we made new starts a few years ago, we were really up and running much faster. And now we invest a little bit more year 1 because we want to make a solid new start. And what we see is that the accelerated development is much faster after that first year if we invest a little bit more year 1. And that is what we have seen now in Uppsala, for instance, that we -- if we invest in the buildings. And you can see a fact that we have a movie now that shows this campus, the Malmö. You can see that we really, really invest a lot. And because if we can create a school with 2,300 students, it will be a fantastic for AcadeMedia the coming 50 years. So that is our focus when it comes to these new starts to invest a little bit more in the beginning. But to be clear, the main impact will be seen from '22 and the coming 2 years from the Södermalm project.

[Katarina Wilson, Chief Financial Officer]

Yes, yes. Exactly. Correct.

[Operator]

[Operator Instructions] We have no further questions, so I will pass back for any closing comments.

[Marcus Strömberg, President & CEO]

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

[Katarina Wilson, Chief Financial Officer]

Thank you.

[Operator]

Thank you for attending. You may now disconnect your lines.