AcadeMedia AB (publ) (ACAD) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the AcadeMedia Q4 report. Today, I am pleased to present speakers CEO Marcus Strömberg and CFO Katarina Wilson. [Operator Instructions] Speakers, please begin your meeting.

So good morning, everybody, and welcome to this year-end presentation of AcadeMedia's result and also the Q4 result. And myself, Marcus Strömberg; and Katarina Wilson, our CFO, will make this presentation together, and I will soon hand over to Katarina to give you all the numbers and the details. This time of the year, if we go to the CEO introduction page, it's really a great time for AcadeMedia. We start a lot of new schools, we had a lot of new students coming to our schools, and behind that, we have very special times where all our upper secondary students and adult students have been working online. And now they are really longing to go back to school, and we have seen some fantastic pictures that students that maybe don't usually like the schools really love to go to school. So it's a great time for AcadeMedia, and we can sum up a year that has been quite strange for us. But a lot of people have done great work. And if we look at this situation that we have had, the COVID-19 situation has had a continued, large operational impact but limited financial effect on the organization. And we have prepared ourselves well. We have invested a lot in digitalization and our digital infrastructure. So it has worked out quite well. But a lot of employees, teachers, leaders have done a fantastic work. And if we just make a short outlook of the situation right now, in Norway, as a lot of people know -- you know, the schools, the preschools were closed, but they are now back in normal, and they try to start up the year as normal as possible. In Germany, maybe we have had the toughest situation, a lot of regulations, a lot of different rules in different Bundeslander and different municipality. And in Germany, we have also seen the financial effect on AcadeMedia. But we have tried to support our fantastic team and the employees as much as we had possible to do. And they have also done a fantastic work, and we are taking step by step back to normal. But the underlying situation in Germany is still very strong. The demand of preschool is really high, and we are still planning to start a lot of new preschools in Germany, and we have a great team that is preparing this. But maybe some of the new starts will take a little longer time. If we take in Sweden our preschools and our compulsory schools, they have been trying to -- they have been open during all this time. It has been a lot of work, of course, but we have handled the situation as good as we possibly had. And Upper Secondary and Adult Education has worked with online, and we also see a huge demand for online training. And maybe you don't know that -- all of you that AcadeMedia has really the biggest and the greatest online platform in Sweden. So the investment that we have done, we really now see the result of that. If we look at the operating profit, it has improved, but the really driver behind this is the Adult Education. And I also would like to say thank you for your patience. We have been working a lot with this, but I must tell you also that the team and -- we have done a great work when it comes to Adult Education. And the position that we have now is better than ever. So -- and now we have an important task to help the society to bring people back to work, and that is really what the Adult Education is all about. And as I mentioned, the underlying demand is very high of AcadeMedia's educational service. We see revenue growth and organic growth that is over 5%, and the margin has also improved mainly due to the result of the Adult Education. So we have a good year behind us, a very special year behind us, and the demand of AcadeMedia's service is great. And I will pass over now to Katarina to go through the numbers. Thank you.

Thank you, Marcus. My name is Katarina Wilson, CFO of AcadeMedia. And moving on to Page #3, highlights quarter 4. Student numbers grew by 3.8%, including 2 new units in Germany and the acquisition of a compulsory school in Stockholm with just over 500 students. Net sales increased by 2.1% with organic growth in all segments. We had a negative currency translation effect in the quarter of SEK 57 million, and adjusted for that, sales grew by 3.9%. Adjusted EBIT increased to SEK 279 million, and the margin increased to 8.6% driven by the Adult Education segment and the Upper Secondary School segment. And moving on to Page #4. This is what the graph is showing, no item projecting comparability in the quarter. That's EBIT adjusted for IFRS 16 amounted to SEK 279 million compared to SEK 218 million last year, which is an increase of 28%. Moving on to Page #5, highlights for the full financial year. It is very positive to remind ourselves that we have in total added 26 new units during this year, 20 new starts and 6 acquisitions. We started the year with opening 4 new upper secondary schools, and during the year, we started 13 new preschools in Germany. This gave a solid growth in the number of students of 3.7%, and net sales increased by 4.7% with growth in all segments. And adjusted for negative currency, the organic growth was 5.4%, which concludes that we are meeting our financial targets when it comes to organic growth. Moving on to Page #6. Adjusted EBIT increased to SEK 728 million, and the margin increased to 5.9%. This was driven mainly by the strong improvement in the Adult Education segment, where both the Higher Vocational Education and the Municipal Adult Education delivered profitable growth. But also, the Compulsory School segment contributed to the improved results due to more students and higher capacity utilization. In the Upper Secondary School segment, work on quality, digitalization and new units continued which impacted the results. The Preschool segment was affected mainly by higher personnel expenses in Norway, about SEK 40 million, as we previously communicated, related to the new staff density regulation and higher pension costs. COVID-19 also impacted Germany temporarily through lower parental fees, with a net EBIT effect of minus SEK 8 million. Items affecting comparability for the full year amounted to SEK 36 million positive, and this is from quarter 3, when we had a onetime effect of moving to defined contribution pension plan in Norway. And EBIT amounted to SEK 763 million compared to SEK 635 million last year, an increase of 20%. Moving on to the development in quarter 4 by segment, starting with the Preschool segment, Page #9. This segment includes preschools in Sweden, Norway and Germany. And in the fourth quarter, 2 new units opened in Germany, which gave a total of 262 units. The preschools in Norway and Germany closed back in March due to COVID-19 and opened again during spring. In Germany, some preschools still have somewhat reduced opening hours to manage the pandemic. In Sweden, all preschools have remained open during this pandemic. The number of children increased by 0.4%. But if we adjust for the 12 units in Sweden that were divested or closed last year, the organic volume growth was 4.2%. And as you know, we include bolt-on acquisitions and new establishments in our definition of organic growth. Net sales decreased by 4.5%, but adjusted for the negative currency, sales grew by 1.1%. Sales was also impacted negatively SEK 12 million in Germany due to lower parental fees during the closed COVID-19 period. The impact for the full year was SEK 15 million on sales. Adjusted EBIT and margin declined as a result of increased costs in Norway due to the new staff density regulation as well as higher pension costs. Some of the loss of revenue in Germany was compensated by somewhat lower costs, for example, food as well as some staff being furloughed, giving a negative EBIT impact of SEK 5 million. Our plan in Germany to start new units have been revised down somewhat, as Marcus mentioned, due to the pandemic and now stands at 10 to 15 units during the new financial year. I would like to say that this is truly a delay. We still have the same strong pipeline going forward. Moving on to Compulsory Schools, Page 10. We continue to see good growth in this segment. We have in total made 2 acquisitions in the year, 1 in quarter 2 and 1 in this last quarter 4. And this last acquisition counts actually as 2 units because it includes an integrated preschool as well as [ compulsory school ]. The number of students increased by 5% and sales by 3.7%. And the sales increase is related to an increased number of students and the annual school voucher adjustment. Organic growth is generating a high-capacity utilization leading to an improved margin, and the adjusted EBIT margin increased to 9.3% in the quarter. And we had no financial impact from COVID-19 in this segment. Moving on then to Upper Secondary Schools, Page 11. Student numbers grew by 5%, and net sales increased by 6% as a result of the 14 new schools that in total have opened in the last 3 years, of which 4 opened 1 year ago. Adjusted EBIT was higher than last year at SEK 121 million, and as we indicated earlier, mainly because we took marketing expenses earlier this year compared to last year but also due to somewhat lower costs as a result of distance education during the pandemic. Again, I would like to emphasize that our strategic efforts in this segment on quality enhancements, digitalization and new starts are driving costs. But because we have the technical infrastructure in place, distance education works well. And we are happy to announce that an additional 4 new schools have just opened for the autumn 2020, and that classroom teaching has been resumed. Moving then on to the Adult Education, Page 12. Also in this segment, all teaching in the quarter just came through distance education. Net sales increased by 6%, which is an increase now compared to last year for the fourth quarter running. Increase is primarily within the Higher Vocational Education but also in the Municipal Adult Education. The Labour Market Services now account for 10% of the segment's total sales compared to 16% last year. EBIT increased to SEK 35 million, and the margin increased to 8.6%, and all business areas contributed to this increase. Quality-enhancing measures in the Higher Vocational Education also resulted in fewer dropouts and improved profitability. The volume-sensitive contract with the Swedish Public Employment Service will be terminated in the second quarter of this financial year, which is very positive for us. Contracts for the Adult Municipal Education with the City of Stockholm have now been signed after the appeal was rejected. The new signed contract will run for up to 4 years starting in January 2021, and it will give us continued stable revenues and maintain market-leading position. AcadeMedia's Higher Vocational Education was awarded about 1,500 additional education places, which means that we are taking market share in this area. And the number of applicants for the autumn starts are also at a record high. Going forward, we think that rising unemployment will create an even higher demand for Adult Education. However, it's important to remember that the financial impact for AcadeMedia will not happen until we have recruited students to our programs, and in some instances, it's not until the students have completed their education. I would also like to remind you that the first quarter of our financial year is a seasonally weaker quarter with less number of educational sales, which you can see if you look at the diagram on Page 12. Moving on then to Page 14, free cash flow and investments. Free cash flow is defined as cash flow before investing in the expansion. And as you know, by now, AcadeMedia have a strong free cash flow; in the quarter was SEK 560 million compared to SEK 362 million last year. And for the full year, the free cash flow amounted to SEK 805 million compared to SEK 356 million last year. But I want to remind you that swings between years and between quarters can happen, and there may be an effect of changes in net working capital as a result of calendar effects. CapEx is lower than last year, both in the quarter and for the full year, mainly due to lower investments in property in Norway. Moving on to Page 15. The financial position continues to improve. Net debt is lower than last year, and the cash position is unchanged. The leverage ratio is lower than last year at 1.7, which is well below the financial target of below 3. A property in Oslo was sold in the quarter, and the cash flow will impact the first quarter of this new financial year. And finally, moving on to the last page, Page 16, the financial performance versus targets. We are meeting the growth targets, while profitability is still below target, even if it is increasing for the now 6 quarter running. And leverage, as I said, at 1.7, is well meeting the target of below 3. And the Board has proposed a dividend of SEK 1.5 per share, which corresponds to 29% of net profit adjusted for IFRS 16. And with that, I would like to open up for questions.

[Operator Instructions] Our first question comes from the line of Thomas Graf of Handelsbanken.

Just wanted to get some more highlight of the voucher impact that you're referring to in the report. You mentioned that your -- some are discussing smaller school voucher increases than would have been implemented. Could you just explain who are this? And -- or just what have you heard about that, and that you still -- your assessment is that the municipalities will not be able to cut costs. Could you just explain some of that? It would be great.

So it's Marcus here. Of course, we understand now that the situation for many of the municipalities is very tough, but we also see that the government in Sweden is preparing that they will give the municipalities a lot of money, and they will announce that in the budget process coming. So they announced SEK 100 billion that will be extra invested in the budget. So I think a lot of this money will go to the municipalities. And that is -- that's why it's a little bit difficult to really talk about this because we don't know what will happen. But what we think that we don't see that the costs among the municipality is that they will go down. So the municipalities, they don't do a lot of cost-effective programs and so on. And the schools, that is really important for the society, and that's why we still believe that the municipality has to increase the voucher. Then of course, it's some signals from some municipalities that they will have lower budget next year, but it's a little bit too early to say. But when it comes to our situation, I would like to say that we are very well prepared. So we have worked a lot to digitalize and also effective -- make the organization more effective. So we are prepared to follow the development of the municipalities. And as you all know, it's a clear law in Sweden that say that it should be equal terms, and we also follow this very closely. So this is -- we follow it, but it's difficult to say so much more about it for the moment.

All right. All right. Moving ahead now for the autumn now, as you've -- in the upper secondary schools now have been doing online education. And would it be possible to continue some of that into autumn? Or will you go back to normal? Will you experiment some of that from the changes in early spring?

So you can say that in Upper Secondary, we are going back to normal. That is the overview point. But the government has also opened up a regulation that we can, in specific situation, use online education. So we have decided that we added up to each principal to have some of their education online, and all the systems are in place. So before, it was 100%, now maybe it will be between 10% or 20%. But it will be different in different schools. And of course, we will follow also development when it comes to the pandemic situation, and we can very, very fast move into total online education. But the students, they really want to go back to school. So that's why it's very good that we now can open also our upper secondary schools. But the answer is that we will continue to work online, maybe 10% to 20%.

And our next question comes from the line of Stefan Knutsson of ABG.

First up, for the Compulsory Schools, I might have missed this explanation, but I saw that the number of children is growing faster than the revenues, and I'm wondering why is that the case.

And that's what I reported, and that's correct. We had some retroactive revenue in quarter 4 last year, which makes that number look a little odd. But yes, that's correct.

And then moving on to the Upper Secondary School. Can you just elaborate a little bit on the decrease in new openings? I know that you said in Q2 that you marketed 6 new schools for this school year, but now 4 will open. I just want to hear your reason why this has decreased.

To be honest, we had some problem with the school buildings in some of the cities, so we have proposed it to next year. So we have opened now 4 schools, 1 big new school in our campus in Malmö, 1 new building in Nacka, and we have also opened a new campus in Uppsala. And we must say that this campus strategy that we have has been really, really great and a lot of interest from the students. And so that is also a strategy that we would continue to work with. And we also have one more new start in other place that I just don't -- I have everything in my head, but I forgot that one. Maybe you remember it, Katarina. It's one more. It's one more. So 4 starts this year.

Okay, but that's perfect. And then my last question is on the margin development in the Adult Education segment. Obviously, you had a strong recovery here in this fiscal year. But how should we view the development going into next year? Because you also said that you will exit the contract with the public service agency. And will that have a material effect on the margin going forward?

In this quarter, we have had some help from the employment services. We had struggled with that a lot. You can see the key driver in Q4 is also the online training. And as I mentioned, maybe you don't know about it because we have so many physical schools, but we are really leading the online education. And a lot of student is now moving into online training, and they really like it. So I think that will also continue to drive the margin. But when we look ahead, it's difficult to talk so much about it because we don't give any forecast in Adult Education. But what we can say is that the demand is strong, and of course, that we now leave this contract will also help us because this has diluted the margin a lot during this year that we leave behind us now.

And perhaps I can add to that. We have previously said that we believe that the margin in Adult Education should be between 9% and 11%. And that's still our target. That's pretty true.

And our next question comes from the line of Karl-Johan Bonnevier of DNB.

Yes. First of all, congratulation to an excellent development. Looking at the physical segment, I wonder if you could give us some more color to the underlying profitability across the countries, given that there are so many moving items looking at COVID-19, and you already detailed the labor cost in Norway and so on.

The margin between -- we don't leave that numbers between the different countries. That is maybe important that we keep what we officially report. But what we should keep in mind that we have struggled a lot in Norway and in Sweden. In Sweden, we have had the schools opened, and in Norway, they have been closed. And maybe the overlying in the report that the financial effect of what has happened in Norway and Sweden is very low, but we have worked hard. But when it comes to Germany, we have seen an effect, and that's because, in Germany, we have more private [ pay ] than we have in Norway and in Sweden. In Germany, we have some of our brands where the parents pay a parental fee that is higher, and of course, they don't pay that when the schools are closed. And in Germany also, we have supported our staff. The regulation when it comes to support the staff, we have -- it's important for us to keep up the move when it comes to the staff. So we have also taken some costs because it's a key question for us to keep the staff. That is the key resource in Munich. It's very difficult to report and recruit the staff. So we have made some investments that we think will pay in the long term when it comes to the situation in maybe Munich.

Sounds reasonable. Looking at Germany, you are still making -- I guess even on these kind of market conditions, making a profit in the German operation during last year or during the fiscal year you just ended.

Yes.

Excellent.

But the overhead costs are higher than it is in Norway and in Sweden. That is because we start 15 to 20 new schools. And over time, we think that the overhead cost will be almost the same in the different countries. But for the moment, we invest in new starts. And what is, of course, so good in Germany is that the preschools, they are full in year 1, and they don't cost so much in CapEx to start. So financially, the situation in Germany is very good. And the backside is that you have to take long-term contracts when it comes to the school buildings. But the market situation is very favorable.

Excellent. Looking at what's going on in the Adult Education area with the Swedish Unemployment Agency, was that a loss-making contract for you, the one you're going away from now, if you're looking at the impact on the full fiscal year last -- that you just ended?

Yes, they were. They were. They were -- it was a very specific situation when we won this contract because it was a condition that was promised from the labor market agency, and they didn't fulfill their promises. So it has been a lot of different locations with low capacity utilization. So it has not been a good contract when it comes to the situation. And we have some other contracts, and we hope that the labor market units -- agency will use these contracts now.

And out of the 10% that I think I heard Katarina saying related to the unemployment agency of the volumes during last year. How big is this contract that you're now walking away from? Because I guess it's not all of the volumes.

No. It's not all of the volumes, but it's small.

Excellent.

If you look at Adult Education now, the labor market programs, they are quite low. The key driver now is the municipality program and also the vocational training programs. And we have never seen such numbers when it comes to wanted to start this sort of program. So we have really turned around the total adult education. And if we see some volumes when it comes to the labor market programs, of course, we will take a part of it, but we are not depending on that.

And you discussed this opportunity of using distance learning also in the Upper Secondary, maybe having 10% to 20% of things being done online going forward. Could you elaborate a little of what that means for the financial model within this segment? Because, obviously, that must be an opportunity for you if you can either increase the school classes or, say, maybe over time, decrease the size of the units you need, or -- how should we look at that?

I think in the short term, we will have the same cost because we keep up the classes the same way. The teacher take the lessons according to the [ theme ] and so on. So in the short term, we don't see any margin effects of that. But in the long terms, as you've mentioned, of course, it's a lot of opportunities we think to both improve quality, what is the most important to develop the quality and education but also to improve the profit. And we see this when we compare to the Adult Education because we have the same training programs when it comes to young people in Upper Secondary and when it comes to Adult Education. And the cost when it comes to Adult Education is much, much, much lower. But for the moment, you should not count in any profitability margin improvement because of this because we have the same infrastructure.

Excellent. But I guess it would strengthen your market position compared to, say, municipality schools that may not have the same opportunity.

I think they also try to do it. But now the students really want to go back to school and meet their teacher. So that is also very important because to meet this teacher that can inspire them and so on, that is very important and not the least when it comes to the first grade students. So that is very important that they can meet their teachers. But we have invested a lot in this infrastructure. And as I mentioned before, it has worked out so fantastic, well, better than I ever could think. And I think that this will, in the long term, affect the Upper Secondary education, not because I'm saying it, but because the teachers want to change the way they educate.

Excellent. Looking at the new school year that just started, and I know you don't want to elaborate on what kind of student intakes you have had that already at this stage, but given that we are seeing, say, positive demographics across all the age groups for the school year, is there any reason to believe that you are not going to be at least getting that kind of benefit through your system during this school year start?

As you mentioned, we don't give that sort of numbers, but I think you talked about it in a good way.

Excellent. And Katarina, just on the financial side. Looking at working capital, as you mentioned, there was a good boost in the quarter. Is there a lot of temporary effect in that? Or was this a normal quarterly end? Or how should we see that?

It followed a normal trend, actually, if you look back historically, so...

But you can say in Upper Secondary, we had some -- we took some costs before. So if you compare the year before when it comes to Upper Secondary.

Excellent. And finally, the Oslo property that you are now selling and getting the benefit from in Q1 from a cash flow perspective, do you have a lot of those kind of things? It sounds like a fantastic asset that you disposed of.

No. No. To be -- no, we don't have a lot of that sort of building.

So that was a special situation?

Yes, yes. It was. It was.

And our next question comes from the line of Johan Sundén of Carnegie.

There's been a lot of questions ahead of me, and many of my questions have been covered. But if I just could add something on the International Preschool business, there's been a lot of talk about the incident in Norway this year, and I guess that the pandemic and lower pressure on volumes from units has helped to cope with that. Should we -- how should we think about next year? Could there be some kind of backlash during the later part of next year? Because, as I understand, the voucher hasn't fully compensated yet for the cost. There should be 1 more year of lagging there. Am I correct?

That's correct. So as we mentioned, the quality and the situation among the preschools in Norway and in Sweden is very stable. We have developed fantastic concept, good quality, stable situation when it comes to the school, but the growth will come in Germany. So we are using our concept in Sweden and Norway and our knowledge to develop our preschools in Germany. So we will struggle 1 more year in Norway. But I must say also that the management and the team has did a fantastic work even if we had this very difficult situation. So they have handled it in a better way than we could expect. And we have very attractive preschools in Norway. But of course, the situation will affect the margin.

[Operator Instructions] Okay. There seems to be no further questions at this time, so I'll hand back to our speakers for the closing comments.

So then we would say thank you very much. We have a fantastic day now in Stockholm, and we have a lot of meetings this day, Katarina and I. So -- but wish you all a good day. Thank you very much for your questions. Bye-bye.

Thank you very much. Bye-bye.