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

Dear ladies and gentlemen, welcome to the AcadeMedia Q2 Report. [Operator Instructions] Today, I'm pleased to present CEO, Marcus Stromberg; and CFO, Katarina Wilson. Speakers, please begin.

So thank you very much, Marcus Strömberg here from snowy Stockholm. And we have a lot of very happy children at our preschools and schools that are enjoying all the snow that there are for the moment. So welcome to this presentation of our Q2 report. And I will just start making short introduction and then hand over to Katarina Wilson. She's sitting next to me. And I think this report is very stable, and we see a positive development now in almost all of AcadeMedia's different segments. What we very happy to see is that we have an organic revenue growth of more than 7%. And that is a result of all our good schools, good quality schools, and, of course, also the development in the Adult Education. And I must say that we see a demand in the Adult Education that we maybe never have seen before. And of course, it's driven by a lot of people that want to retrain. But we see also development there, a lot of students go into online training. And maybe you think of AcadeMedia as a traditional education company. But in fact, AcadeMedia is really a EdTech company. We train more people online than any other operator. So driven by Adult Education, we see improving results. We see very stable and improving and good results. And of course, we also have this pandemic situation in the whole organization. And this has been for a long time. We have a lot of our upper secondary schools that is taking care of the students now online, but they are starting to go back to the schools again. But we have developed a model that is working very, very well. But of course, it's a lot of work for the staff. And I also want to mention that in Sweden, that there has been a lot of government inquiries going on. And we are quite positive to a lot of these sort of different inquiries. When we look at the development when it comes to compulsory schools, the question is that to make the school show is more open for all people. And the penetration in upper secondary school is very high in Sweden. Every 10 students go to AcadeMedia school and in the biggest cities, 50% go to an independent school. And if we see that the school choice even in compulsory school will open up in a better way, I think the market shares that we got in the attendant schools also will increase. We also, when it comes to Q2, we report the preliminary school voucher increasement and we have mentioned before that we see a little lower than before. Now we report the preliminary number is 1.7%. And it should be compared with 2.1% last year. And -- but we will also see that the state will invest some extra money that will go into the different school operators during the year. And I can come back later on and answer your questions, but I will leave over now to Katarina to go through the results.

Thank you, Marcus. I'm Katrina Wilson, CFO of AcadeMedia. Moving on to Page #3 highlights, quarter 2. Student numbers grew by 4.4%, including 3 new preschools that opened in Germany in the quarter. Net sales increased by 5.5%, with organic growth in all segments. We had also this quarter negative currency translation effect, mainly related to Norway of SEK 54 million. And adjusted for that, sales grew by 7.3%, and this is what we refer to as organic growth. I would like to point out that the acquisition of Swedish Education Group in late December is not yet included in the numbers and not in the number of students or in the P&L, and that will be included as of the next quarter 3. Adjusted EBIT increased to SEK 224 million compared to SEK 150 million last year, and the adjusted margin increased to 6.5%. The increase also in this quarter was driven mainly by the Adult Education segment, but also the Compulsory and Upper Secondary School segment contributed. The Preschool segment was affected negatively in Germany by the pandemic. Moving on to Page #4, showing an adjusted EBIT bridge, illustrating that the Adult Education segment is the main driver of the profit growth. And again, like last quarter, the solid increase in number of students is also having a positive impact in the Compulsory and Upper Secondary School segments. We have, due to the pandemic and the restrictions caused by the pandemic, had to cancel and postpone activities which reduced cost by about SEK 20 million in this quarter, and this is mainly affecting the Upper Secondary School segment but also the Compulsory School and the group functions. EBIT adjusted for IFRS 16 at SEK 214 million includes items affecting comparability of minus SEK 9 million related to the acquisition of Swedish Education Group. And IFRS 16 impacted EBIT with a further SEK 59 million, positive, giving an EBIT of SEK 273 million. Moving on to Page #5. Net sales rolling 12 months continues to increase and now amount to SEK 12.6 billion, adjusted EBIT to SEK 878 million and the adjusted EBIT margin to 7%, which means that we are now reaching our financial profitability target of 7% to 8%. Although, it must be reiterated that the margin is somewhat inflated due to the pandemic and the lower costs that we have seen in this quarter. Moving on to Page #8, development in the quarter by segment, starting with the Preschool segment. This segment includes preschools in Sweden, Norway and Germany. And in this second quarter, despite the pandemic, 3 new units opened in Germany, which gives a total of 267 units in the segment. In all 3 countries, all preschools have remained opened in the quarter, but recommendations in December from authorities in Germany was to keep children at home whenever possible. The number of children increased by 1.4% and is impacted by slower growth in Germany as a direct result of the pandemic and there are really 3 reasons for this slowdown. Firstly, the pandemic has delayed our new starts, and we've talked about this before. The plan is unchanged from the last quarter, which is to open 11 units in total this financial year. We opened 1 unit in the first quarter and 3 units in this second quarter and 2 further units opened in January, which means that another 5 units will open during the spring. Also during the pandemic, we are experiencing that it's more difficult to recruit staff, which means that we cannot run at full capacity. And the last reason to this lower capacity utilization is that parents and carers are delaying preschool starts now during the pandemic. Net sales in this segment declined compared to last year, but adjusted for negative currency effects. Sales grew by 3.3%. Adjusted EBIT and margin decreased entirely related to Germany due to the low capacity utilization, as I just explained, caused by pandemic. And moving on to Compulsory Schools, Page 9. All compulsory schools have remained open this quarter. We've had only limited number of schools implementing distance education for shorter periods following the spread of the virus. We continue to see good growth in the segment, the number of students increased by 4.8%, and adjusted for the 2 acquisitions at the end of the last year, the growth was 1.9% and sales increased by 6.2%. Good volume growth contributed to the increased adjusted EBIT and margin in the quarter. And in addition, canceled and postponed activities due to the pandemic reduced cost by about SEK 3 million in the quarter. Adjusted EBIT amounted to SEK 52 million, and the margin was 6.1%. We have launched new educational profile. And after the quarter, we acquired Stockholms Internationella Montessoriskola, one of Sweden's leading montessori schools with about 800 children and students, and this will strengthen our montessori profile. Moving on to the Upper Secondary School, Page #10. During the quarter, as the second wave of the pandemic intensified, more and more schools transitioned to distance education. And in December, this was the recommended form for all Upper Secondary Schools in Sweden. Student numbers grew by 5.8% and net sales by 6.5% as a result of the now 18 new schools that in total have opened over the last 4 years, of which 4 opened at the start of this year. The plan, as it stands now, is to open a further 2 or 3 schools in the autumn of 2021. Adjusted EBIT margin was higher at SEK 97 million compared to SEK 76 million last year due to volume growth as well as lower cost of about SEK 14 million following canceled and postponed activities caused by the polemic. The acquisition of Swedish Education Group was completed in December and will impact the numbers from next quarter. And just to remind you, the Swedish Education Group had a turnover last year of about SEK 360 million and EBITDA of about SEK 35 million. And this acquisition will mainly strengthen the Upper Secondary School segment, but also the Compulsory School and the Adult Education segment. Moving on to the next page, Adult Education, Page 11. Also in this segment, the pandemic impacted the operations and teaching to place both in classrooms in smaller groups, but also as distance education. Pricing and employment has continued to create high demand for Adult Education with continued volume increase. And net sales increased by just over 20% in the quarter with growth in all business areas. In the high vocational education, student numbers grew by 30% and, as we announced a couple of weeks ago, we have also been awarded a record number of training programs for the autumn 2021 start, and we are gaining market share in this area. In the labor market services business, the number of participants grew even though we now have actually terminated the previously loss-making contract, vocational and preparatory modules. And we are seeing a shift from this contract to other contracts with the Swedish Public Employment Service. EBIT increased from SEK 31 million to SEK 75 million, and the margin increased to 15.5%. And this very high margin is caused by the large volume growth driven by high unemployment during the pandemic, which in turn has increased our capacity utilization. But I would like to reiterate that we still believe that over a longer period, this segment will have a margin of around 9% to 11%. Moving on to Page #13, free cash flow and investments. The free cash flow in the quarter was SEK 572 million compared to SEK 260 million last year. And as you know, free cash flow is defined as cash flow before investing in expansion. The strong operating profit in the quarter and favorable working capital explained the increase. And working capital was impacted by higher trade payables, which was a calendar effect. The acquisition of Swedish Education Group was impacting the total cash flow with SEK 171 million. Moving on to the next page, Page 14. The financial position continues to improve even further. Net debt is significantly lower than last year, and the cash position has improved, and the leverage ratio is lower than last year at 1.4, which is well below our financial target of below 3. Air property related lease liabilities increased by SEK 273 million through the acquisition of Swedish Education Group. And finally, moving on to the last page, Page 15. The financial performance versus targets. And just to conclude, we are now meeting all our financial targets, including our profitability targets, but we must remember that we are experiencing an unprecedented situation right now caused by pandemic. And with that, I would like to open up for questions.

[Operator Instructions] And we appreciate the first question. It is from Stefan Knutsson's of ABG.

This is Stefan from ABG. It's regarding the Adult Education segment. First, congrats on a good report. But obviously, you're trading at or posting better margins than you expect long term. On the other hand, you see a rapid increase in digital education following the pandemic. How do you view that shift long term? And shouldn't that be also a positive thing for the margin development going forward?

So hopefully -- we hope for that. And what we see now is that some parts of the vocational training is also operated online. But what we see now when it comes to Adult Education is that we have improved our market share when it comes to municipality training and also vocational training. And on top of that, we have our online platforms. So we have a very good situation, and we have a positive development and good demand. But if you look also in the future, we will see that the labor market programs will also be open for us. We see that the regulation of the employment services will be a new market for us where we can enter and improve the profit and our market shares. So the Adult Education has a lot of opportunities in the future. And also, the new regulations when it comes to how the labor market should work has also one part where the different companies has to invest in education. So if we look at the segment when it comes to AcadeMedia, we operate at a very good level for the moment. And that is driven by online training, but also by a lot of different contracts. This is not the long-term level, as Katarina had mentioned, but we see a lot of opportunities when it comes to the future of Adult Education also. And we are really the true market leader here in Sweden.

And just a follow-up. You saw an increased activity from the Swedish Employment Agency now in the quarter. How long do you expect that peak to continue, so to say?

I wouldn't mention that to be a peak. I think they are moving from a small numbers. So I think that will continue, but that is still a very small part of our Adult Education. But what I'm talking about when you look maybe 6 or 12 months ahead, we will see that the new service, the regulation of the labor market service will be a new market where some of the employment services will be run by private operators. And this market will be a big market. It will be a reality for us, but then we maybe have to then wait 12 months or something like that, 12 to 18 months maybe. So for the moment, we operate at a very good level and we see a lot of opportunities also in the future.

Okay. Perfect. And just lastly, on the 2 acquisitions that you announced, are they consolidated from 1st of January or did you mention that?

Yes, that's correct. And that's good that you asked for that because that is maybe a little bit -- we have been working a lot with organic growth in AcadeMedia the recent quarters. But this is really -- this is big acquisitions. It will improve the number of students with up 4% or something like that. So it's quite interesting that we do this sort of acquisition again.

The next question is from Johan Sunden of Carnegie.

This is Johan from Carnegie. First, a few questions from my side. First one are regarding the voucher increases. You touched upon it during the presentation, but I think it'd be good if you clarify. Do you think that this 1.7% in voucher increase will be enough to compensate for the standard inflation for the next year?

We think so. If you also take the part that the state will invest in different subsidies directly to the operators. But it's a little different between the different segments, and we will report that more in detail when we have all the numbers.

Then we can say also, these are preliminary numbers. We haven't received all the increases yet, and we are analyzing this continuously. So as soon as we know more, we will let you know.

Perfect. And then other question regarding these kind of temporary cost savings in the Upper Secondary and Compulsory segment. You mentioned SEK 17 million being of somewhat temporary effect or canceled or will be postponed. How much of that do you think should come back in the second half of this year or how should we think about those costs?

Well, I think we can only really speculate here. I think as long as we have the pandemic, we are forced to cancel activities as we all are, but of course, we're hoping that we will be able to go back to a normal way of operating with the conferences and travel, but we can only speculate about that. But if the pandemic continues as it is right now, we will see lower costs even in the next quarter. But as I say, we can only speculate.

But those kind of costs are related to conferences and travel and so on. There's not kind of marketing that you postponed and then this will come in Q4. So there's been some --

No. Exactly. No.

Good. And another follow-up on the Swedish Employment Agency. You previous -- I don't know if Marcus touched upon this. So have you come to this far with the public employment agency that this new market of putting out new -- more services to private companies, has that been agreed upon now? So we should expect that this kind of new markets will open within the next 6 and 12 months?

I don't -- that decision is short time. Sorry, if I wasn't really clear on that. But what is happening is that the traditional training program that the unemployment agency runs, they had increased but from a low level. And we are not so depending on that part because we are running other vocational program and municipality program. That is really driving the profitability for the moment. But this market -- this new market will open up. And it has started in a very small-scale for the moment, and we are running some programs there now. And -- but if we look some years ahead, this will be a big market. Of course, it would not just be AcadeMedia that are on this market, but it is a big market, and we are really a good operator, and that is opportunity for us in the coming, I would like to say 12 to 18 months.

Okay. That's a good clarification. Yes, that was all from my side.

The next question is from Karl-Johan Bonnevier of DNB Markets.

First of all, congratulations to another fantastic quarter. Just to come back to the previous question about these canceled and delayed effects. Katarina, is it fair to say that you would expect these kind of costs to, say, not sure come again in the similar quarter next year rather than something that should impact this year. Is that -- how to interpretate your answer?