AcadeMedia AB

STO:ACAD

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to AcadeMedia Audiocast with Teleconference Third Quarter 2021 to 2022. [Operator Instructions] And afterwards, there will be a question-and-answer session. Today, I'm pleased to present CEO, Marcus Strömberg; and CFO, Katarina Wilson. Speaker, please begin.

[Marcus Strömberg, executive]

So thank you very much, and good morning. This is Marcus Strömberg and Katarina Wilson, and we will go through with quarter 3 report from AcadeMedia. And I will give you a short introduction first, and then I will hand over to Katarina to go through the numbers.

And AcadeMedia has now gone back to be more normal after the situation with the pandemic, and we have more physical presence at our School. And we are also very happy to see that our Preschool international strategy is going more back to our original plan. And as we have mentioned in the report, we've grown our preschool with 5 -- more than 5%, and we are going back to the normal growth in Germany. And still, we have a lot of capacity that needs to be build up in Germany. And as we have mentioned before, we are also looking at other international opportunities in Germany, both looking to Compulsory School and also Adult Education in Germany.

And we are also very happy that we can enter one more country. So we have made a platform acquisition in the Netherlands. And both in the Netherlands and many other countries in Europe are in great need of preschool places. So now we run preschools in 4 countries, but we still see most of the growth opportunities in Germany.

In Sweden, the need for school places is still high. We have had a good development when it comes to our Compulsory Schools and our Upper Secondary Schools, and now we are working a lot with the school choice after the summer. And we are planning to start out 2 now big campus that will be the biggest in Stockholm. And we have also celebrated the 30-year anniversary when it comes to the independent schools. And there has been a lot of political noise in Sweden, but we think that the situation is more stable because some of the other company -- other parties outside the government is very firm in their support to the independent sector.

When it comes to the Adult Education, we have seen an exceptional demand during the pandemic. We are now going back to the more normal levels, but we are also happy to see that the need of retraining and also vocational training is still high. So with that small remarks, I will hand over to Katarina to go through the numbers, and I will answer questions after her presentation. So please go ahead, Katarina.

[Katarina Wilson, executive]

Thank you, Marcus. My name is Katarina Wilson, and I'm CFO at AcadeMedia. Moving on to Page 3, highlights quarter 3 of our financial year '21-'22. Student numbers grew by 3.8% organically, and the acquisition of Segab and Stims are now included in the comparable period. The organic growth is strong both in the Compulsory and the Upper Secondary School segment, and what is really encouraging is the growth in the Preschool segment with 5.2%, which is higher than what we've seen for quite some time.

Net sales increased by 5.9% with growth in all segments, except in the Adult Education segment, where volumes are coming down to more normal levels from very high levels that we saw last year. Adjusted for a positive currency translation effect of SEK 40 million, the organic growth was 4.7%. Adjusted EBIT decreased to SEK 264 million and the adjusted margin decreased to 6.9%. And the 2 main reasons for this decrease is lower volumes, as expected in the Adult Education segment and increased costs in Norway. And I also would like to point out a minor change to last year's numbers, a restatement related to an accounting change, cloud computing arrangements. The full year effect last year of this restatement is SEK 5 million positive on EBIT, and in the quarter, SEK 1 million positive. And the full restatement and further explanation can be found on Page 22 in our quarterly report.

Moving on to Page 4. Adjusted EBIT in quarter 3 going from last year SEK 279 million, to this year, SEK 264 million, where the decrease mainly relates to volume decline in the Adult Education segment leading to lower profitability. And again, it is worth reiterating that volumes are coming down from very high levels last year to normal levels this year. Also decline in the Preschool segment entirely coming from Norway were a combination of COVID-related costs, higher electricity prices and reduced pension compensation is affecting EBIT. In the Compulsory and Upper Secondary School segments, continued good, solid increase in number of students as well as increased absence, particularly in the beginning of the quarter, resulted in somewhat lower personnel expenses. But all in all, the effect of the pandemic in the Swedish operations were similar to last year, about SEK 15 million positive.

Group cost was lower than last year due to this change in accounting rules that I told you about and related to cloud computing. And this change that we see or this effect will be during the quarter is a onetime effect. We will not see this effect in coming quarters. Items affecting comparability, minus SEK 27 million, includes additional costs related to the fire in Compulsory School in July, SEK 12 million. And we expect to get further insurance compensation in the coming quarters; also restructuring costs, SEK 15 million in the Upper Secondary Schools.

Moving on to Page 5. Net sales rolling 12 months is now, for the first time exceeding, SEK 14 billion at SEK 14.2 billion. Adjusted EBIT, above SEK 1 billion, and the adjusted EBIT margin, still above 7% at 7.1%.

Moving on to Page 8, development by segment, and starting with the Preschool segment. In Germany, 4 further units opened in the quarter, which gives us a total of 15 units so far this financial year, and in total in Germany, 72 units. And the plan is to open one further unit in Germany in the next quarter, which will give us a total of 16 units this year. In total, in this segment, we now have 289 units in 3 countries. And as Marcus was saying, from next quarter, we will also welcome 2 new units in the Netherlands.

The number of children increased by 5.2%, driven mostly by new starts in Germany, but also acquisitions in Sweden and Norway. Net sales increased by 10.6% compared to last year, and adjusted for a positive currency effect of SEK 40 million, sales grew by 6.4%. And the growth is mainly coming from Germany. And EBIT margin was lower than last year, as I said, entirely due to changes in Norway. Lower pension compensation and higher salary costs as well as high cost to temporary staff during the pandemic and higher electricity prices all in all had an effective EBIT by about SEK 20 million.

Year-to-date salary cost is SEK 15 million higher than last year, and the full year effect is estimated about SEK 20 million. The expected impact from lower pension compensation is estimated to SEK 17 million this financial year, and of course, this means that we will see increased costs also in the next quarter. But high cost in Norway was somewhat offset by return to normal operations in Germany and lower personnel expenses in Sweden. School voucher increases in Norway for 2022 was on average 2.8%, and this should be compared to last year's 4.4%. And last year, the higher increase affected the staff density norm that was introduced 2 years earlier. In Sweden, the school voucher also increased by 2.8%, and this should be compared to last year's 1.9%.

Moving on to the Compulsory School at Page 9. We continue to see good solid organic growth in the Compulsory School segment. The number of students increased by 3.4% and sales grew by 7.2%, while the acquisition of Swedish Education, Stims, now are included in the comparable numbers, so no longer impact comparison. The annual voucher addition was 3.1% from January 1 compared to last year's attribution of 2.6%, so higher voucher increase this year. Adjusted EBIT amounted to SEK 63 million, which was higher than last year, and the margin was 6.7%. And volume growth is the main reason for this increase, but, also to some extent, low personnel costs due to continued absence mainly in the beginning of the quarter caused by the pandemic. Additional costs related to the fire in July, SEK 12 million, was reported as items affecting comparability. And as I said, we expect to see further insurance compensation in the coming months.

Moving on to the next page, Upper Secondary School, at Page 10. Student numbers increased organically by 3.3%, while the acquisition of Segab will impact the comparison. And the student growth is mainly coming from the 21 new schools that started over the last 5 years. Net sales increased by 6.5%, driven by volume growth. And the annual voucher revision was 2.3% from January, which is higher than last year, only 1% increase. EBIT was in line with last year at SEK 115 million, and the margin decreased to 9%. And also in this segment, volume growth is the main driver to the results, but also somewhat lower personnel cost of SEK 5 million caused by absence. In comparison, last year the pandemic reduced costs by about SEK 10 million. So we had a bit of a higher effect last year.

The spend activities in previous quarters due to the pandemic are similar to last year, expected to take place to some extent in the next quarter, which can impact costs. Looking ahead, the plan is still to open key service schools in the autumn of '22 and also preparations to move 8 existing schools into our 2 new -- brand new campuses in Stockholm are well underway. And the investments in the campuses will, similar to a new start, have a negative impact on the margin for 2 years.

Moving on to Adult Education, Page 11. Last year, high unemployment created very high demand for adult education with exceptional volumes and high capacity utilization in our program. And we're now seeing an improved job market as well as lower immigration, and this is reflected in a lower number of participants in our programs. And net sales decreased by 7.8%. Demand for high vocational education remains high, and sales in this business area increased by 18% organically. The acquisition of KYH last year is no longer affecting the comparability.

Continued hike as the utilization had a positive effect on earnings. VAT on subcontractors is now fully reimbursed from January. The number of participants in the Municipal Adult Education continued to decrease from normal levels and net sales decreased by 17%. And this, of course, is [ resuming ] the work after utilization and the profitability, especially in the SFI-operations, where we're now adjusting capacity to this lower demand. And this adjustment is expected to be completed at the beginning of the next financial year. Sales in the Labour Market Services business also declined by 40% but from a very low level. And this area now only accounts for 8% of the segment's total sales. The transition to the new matching service was completed in the quarter and volumes in the new contract is expected to grow going forward.

All in all, adjusted EBIT in the Adult Education segment decreased to SEK 40 million and the margin was 8.9%. And I also would like to point out that the Adult Education segment is taking a small, but very strategic important step to grow internationally and by starting an apprenticeship programme in the U.K. in the autumn of '22 with [ Game Development ].

Moving on to Page 13, free cash flow and investments. Free cash flow, defined as cash flow before investing in expansion, was lower than last year and amounted to SEK 19 million. And I want to reassure you, apart from the lower EBIT, this is entirely a calendar effect. The main reason is that the working capital in Norway last year was unusually favorable. Our municipalities paid out in March instead of in April due to Easter, and what we see now is a normal working capital movements. Rolling 12 months free cash flow amounts to SEK 867 million.

Moving on to Page 14. Continued strong financial position. Net debt, excluding IFRS 16, again significantly lower than last year's SEK 1.3 billion. And leverage is lower than last year, [ 8.9% ], which is well below the financial target of below 3.

And finally, moving on to the last page, Page 15, the financial performance versus targets. And to conclude, we are now for the sixth quarter, on a 12-month running basis, meeting all of our financial targets. And with that, I would like to open up for questions.

[Operator]

Our first question is from Stefan, ABG.

[Stefan Knutsson, analyst]

My first -- my question is regarding the Adult Education segment, which we saw a normalization in the quarter, maybe a bit faster than we anticipated. But can you just comment on where you are in the cycle now? I mean, is the -- have you seen the drop that you expect from municipality education? Or are we still heading south? And also on the VAT reimbursement, you took it as an item affecting comparability when you have the costs. But I can't see that you adjust the numbers for it now.

[Marcus Strömberg, executive]

I think I can comment on the VAT. But if you take Adult Education, I think we have mentioned for a few quarters now that we believe that we will go back to our target level and a more normal level when it comes to Adult Education. And that is what we have seen now in the quarter. And what is happening now is that the labour market is trying to recruit a lot of people that before the former quarters was going in our municipality training program. And we also had a lower demand when it comes to SFI, the immigration education. And I think that we will see that we will be at these levels. We have -- we will be in our target range, but we will in the next quarter finalize the closing of some units when it comes to the municipality program. And then we go back to a more stable level in quarter 1 after the summer.

So this is regarding to the municipality programs. When it comes to the vocational program in the quarter, we've seen a growing and still high demand. But of course, you have to keep in mind that the labour market for the moment is quite strong. But we still believe that this positive development will continue, but it will reflect the labour market. But you also have to keep in mind is that the Adult Education is contracyclical. So who knows what will happen in the coming quarters and coming years? And so the situation in Sweden could change a lot. And we should also keep in mind that there are still 7% unemployment, and we have a lot of people that needs to go back to the labour market. So we still have a lot of opportunities. And the labour market authorities are also working hard to launch new programs related to this growth. And then maybe you can comment on the VAT.

[Katarina Wilson, executive]

Yes. So the reason why we reported VAT last quarter as an item was that we didn't have compensation. And this -- VAT came into place from August. Now we know for certain that we get reimbursement compensation and it's included in our compensation. So right now we have the VAT cost, but we also get reimbursed for it. And so that's what we see going forward. So last quarter, it was an outstanding item.

[Operator]

Next question, you have Karl from DNB.

[Karl-Johan Bonnevier, analyst]

Marcus, looking at -- say, you described the political turbulence and noise in the market, and you're obviously into the important part of the year where you are attracting, say, new students and children for what's going to happen in the autumn, so to say. And looking at that process, do you feel that the political noise is making it more difficult for you to attract students and maybe also qualified teachers at this stage?

[Marcus Strömberg, executive]

So you can say that we have a long history of [ moments ] around these questions. And usually it's the opposite. It's a little bit strange, but the more the media people write about schools, the more important it is for parents to show some good school. So we have not seen any effect of the political noise when it comes to the operation. And if you look in Compulsory Schools, it's more important than ever for parents to show some good school for their children. So I would like to say that the opposite. And when we talk about the political situation, it's also important to mention now that the former alliance -- the right-wing parties and the naturalistic parties [indiscernible], has been very clear that they will move down the suggestions that is coming from the government. So they have been very clear when it comes to the school vouchers and school choice and so on. So I think it will continue, political noise. It will not affect the operation. And I think that nothing in practice will happen before the election.

[Karl-Johan Bonnevier, analyst]

And when you look at the motivation level, so to say, in your -- among your employees, has it -- have you done something extra to meet this internally, so to say, to keep the spirit high? Or how are you working with it?

[Marcus Strömberg, executive]

So we have got the survey from our -- we make the survey every year. And during the pandemic last year, it was an extraordinary positive result. But now we are above the results 2 years ago. So I would say that the attractiveness among the employees and the student is still very high, and we really outperformed the public school when it comes to these questions. And what is very important and that is really crucial when it comes to developing a good quality company, it also comes to leadership where we still have outstanding and very good results.

[Karl-Johan Bonnevier, analyst]

And when you look at, say, principals at your school and teachers, you haven't seen any say change to, say, the personal turnover or anything like that in this process?

[Marcus Strömberg, executive]

No, no.

[Karl-Johan Bonnevier, analyst]

Good to hear, good to hear.

[Marcus Strömberg, executive]

But perhaps [indiscernible] it was a normal low, but we have not seen anything like that.

[Karl-Johan Bonnevier, analyst]

And coming back to also then the Adult Education area and the normalization, as you say. When you look at the normal mix here in this area, say, in -- where -- how do you see the different kind of -- the split between the different subsegments then, sir?

[Marcus Strömberg, executive]

So for the moment, we have really 3 big sectors. We have unemployment agency, we have the municipalities and we have the vocational training. And for the moment, the labour market agency is at a very low level and it has been for many, many years. I think that we will see that the government will launch new programs when it comes to this segment, and they are very firm to continue development to privatize that. The labour market agency, so here, we will have a lot of opportunities in the future. When it comes to the municipality program, we are back on, I would like to say, more normal level if you compare 2 years ago. What is important to say that we saw extraordinary levels last year when it comes to the municipality program because a lot of people just wanted to go to good university, and they wanted to retrain. So I think it is still a great need of municipality. And the contract portfolio where customers started programs is still very strong, but we will see more normal levels.

And then when it comes to the vocational program, we are really the market leader. We are almost close to 20% of the total market. And when we see -- when we look at the quarter, we are on a higher level than last quarter and the profitability is good. And but -- so we are really a strong position, but it's difficult to talk about the future because, of course, some of these people are really also attractive for the labour market. But we hope that they will finalize their education because then we will get an exam and then even more attractive at the market, But we have a strong program and we haven't seen any effect so far.

[Karl-Johan Bonnevier, analyst]

Good to hear. And I remember prior to the last election, you saw a very, very strong business. I guess the Democrats put a lot of extra money into Adult education coming up for the last election to get the unemployment rates down. And then suddenly after the election, all that money was gone. Have you seen the same kind of thing this time around, that there is a lot of money on the table prior to the election and the risk for money going off the table after?

[Marcus Strömberg, executive]

No, I don't think so, because now the focus of the government has been the pandemic situation. And now we have a strong labour market. It's a gap between the people that are employed and the need in the labour market. So that's sort of retraining is important and that's why we had this very good position when it comes to vocational program. But the problem after the election, so I don't think any money will disappear. And -- but after the election, it will be a key question, what will happen with unemployment? And I think you can analyze the situation quite the same as I can. And I think that we will see in the coming years a higher unemployment rate, and we had this very good position that the government really has to solve the problem with the people that has been unemployed for such a long time. So I think they will send in more money when it comes to these sort of programs.

[Karl-Johan Bonnevier, analyst]

Excellent. Good to hear. And just to finalize, on Adult Education, this move into the U.K. market sounds very interesting. What should that become in size over time if it turns out the right for you?

[Marcus Strömberg, executive]

So for the moment, it's a small unit. But I think we mentioned we have 2 strategic strategies when it comes to the Adult Education. It's to develop the education when it comes to game developer, and that is what we have started in U.K., and we are also looking to start other units or maybe make acquisitions in that sector in Europe. So that could be -- that is one important part. And then we have the other very important part of this, the EdTech. That is also part of the Adult Education. But to talk about numbers now, it's a little bit too early. But so far, so good. And what is interesting when it comes to U.K., that they had a system that is quite similar to how our [indiscernible] schools are. And that is for the [indiscernible], something like that. And so I think we have got a lot of opportunities when it comes to Adult Education. And we have also made a lot of market service when it comes to this sector, both in Germany and in Spain and in the Netherlands.

[Karl-Johan Bonnevier, analyst]

And if you're looking at the total market in these segments, could you give us some idea about, say, the size of the market in the U.K. for this or Germany or something like that, so we can have an idea comparing it to maybe to Sweden?

[Marcus Strömberg, executive]

I think it's too early to talk about that, but Sweden is a very small country, and the need to retrain and to have a good Adult Education is very high in Germany and both in the U.K. So -- but I think it's a little bit too early to talk about the market levels. But we can take that question with us, and maybe we could talk more about that. And we will also give you more numbers when it comes to the EdTech development. As I mentioned this morning -- so we also work a lot in France for the moment, but that is just the digital presence. And so EdTech segment in -- the business unit in Adult Education is also developing quite well and has a lot of opportunities coming ahead. .

[Operator]

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers. .

[Marcus Strömberg, executive]

So well, we say thank you very much. You have a fantastic sunny day at Stockholm, and we wish you all a good day. Thank you very much.

[Katarina Wilson, executive]

Bye-bye.

[Marcus Strömberg, executive]

Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.