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

Welcome to the AcadeMedia Audiocast with Teleconference Q2 2021-2022. [Operator Instructions] Today, I am pleased to present CEO, Marcus Strömberg; and CFO, Katarina Wilson. Speakers, please begin.

So thank you very much, and good morning, everybody. Marcus Strömberg here, and I will just give you a short CEO introduction, and then I will hand over to Katarina, our CFO, that will bring you through our quarter 2 report. So to -- just to sum up this first 6 months of our school year, the development in the company is still very strong, and it's a strong demand. We have a revenue growth of 10%, the number of students increased with 7.5%, and the underlying organic growth was 6%. Of course, this is very good to hear. And we also have a good development when it comes to the adult education and vocational programs. We have had a quarter with high infection among the staff. It has been really a lot of trouble to arrange the school activities. And this, of course, has impacted the operation, and we will update you more how it has impacted operation later on. What we are very happy to see is that the preliminary school voucher in Sweden has increased with 2.6%, and we see that the municipalities in Sweden have invested in school and keep on investing in school. And we see that they invest in compulsory schools, but we also see some improvements when it comes to upper secondary schools. In this quarter, we also have done 2 very interested and small but important investments. We have invested in a company that is called Sandviks in Norway, which are a customer based both in Sweden and in Norway, and this is a company that is focused on educational training for small children. And it's a subscription business model with both physical products, as in books and so on, and also online platforms. And we have also increased our investment in Hypocampus. That is a part of our EdTech and digital strategy. This Hypocampus is a tool that you can work with different artificial intelligence tools to take your study in doctor, and we have very heavy success when it comes to France, and we also try to implement this in other countries. To just sum up, it is a strong, stable quarter, and we continue our development. And we are looking forward now to start some new campuses after the summer and to keep up develop AcadeMedia's new strategy. And then I will take some questions after the presentation that Katarina will give. So please go ahead, Katarina.

Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia. Moving on to Page #3, highlights quarter 2 of our financial year '21-'22. Student numbers grew by 7.5% with the continued strong growth in the Upper Secondary School segment, close to 10%, but also strong growth in Germany through the 3 new unit in the quarter. Net sales increased by 9.8% with organic growth in all segments, except in the Adult Education segment, where our volumes are beginning to return to more normal levels. The acquisition of Swedish Education Group contributed 2.1 percentage points to the growth, and we have now seen a full 12-month impact from that acquisition. In the quarter, we also had some smaller revenue adjustments from several municipalities amounting to SEK 15 million, and that cost related to this were taken in previous periods. Adjusted for the acquisition and the positive currency translation effect of SEK 25 million, the organic growth was 6%. Adjusted EBIT increased to SEK 263 million, and the adjusted margin increased to 7%. Moving on to Page 4 showing adjusted EBIT in quarter 2, going from SEK 224 million last year to SEK 263 million this year. Volume increased both organic and acquired is the main explanation to the EBIT growth as well as lower costs in Sweden in the Swedish school segment, partly due to the pandemic. And we've seen increased levels of absence in the quarter due to sickness and also due to employees staying at home to care for their own sick children, and in Swedish, we call that [Foreign Language]. And so absence in combination with difficulties in recruiting temporary staff, they were also affected by the pandemic, resulted in lower personnel costs. In addition, some activities had to be postponed, so in total, the effect of the pandemic was about SEK 15 million this quarter in lower costs. And to remind you, last year, in the same quarter, we had a similar financial effect from the pandemic. Items affecting comparability of SEK 7 million includes the insurance compensation, SEK 18 million, from the fire in a compulsory school in July and VAT expenses of SEK 11 million related to the Adult Education segment. Moving on to Page 5. Net sales rolling 12 months amount to SEK 13.9 billion and adjusted EBIT now above SEK 1 billion. And the adjusted EBIT margin is still above 7% at 7.3%. So moving on to Page 8, development by segment, and starting with the Preschool segment. In Germany, 3 further units opened in the quarter, which gives a total of 11 units so far this financial year, and we now have 68 units in total in Germany. And the plan to open 15 units in total this financial year remains. Four preschools were acquired in the quarter, 3 in Norway and 1 in Sweden, with a total of 240 children. So the number of children increased by 4.8%, driven mostly by new starts in Germany but also acquisitions in Sweden and Norway. Net sales increased by 10.7% compared to last year and adjusted for a positive currency effect of SEK 25 million sales grew by 7.9%, with the proceeds mostly coming from Germany but also partly from Norway due to higher compensation that we saw last year. EBIT was somewhat higher than last year, SEK 22 million, and higher salary costs in Norway of NOK 10 million, as communicated in the last quarter, was offset by Germany returning to prepandemic capacity utilization and continued efficiencies in Sweden. The pandemic reduced the personnel costs in Sweden by about SEK 5 million, and in Norway, cost for temporary staff increased, so a net-zero financial effect from the pandemic in this segment. Preliminary school voucher increases in Norway for 2022 amounted 2.8% compared to 4.4% last year. And last year's hiring increase reflects the staff density norm that was introduced 2 years earlier in August 2019. And the way the model works in Norway is that any changes in the cost structure will be compensated with a 2-year delay. We will also see changes from January 2022 to the pension part of the compensation in Norway. And this is outside of the school voucher that I just mentioned, and this will decrease revenue with about NOK 35 million annually from January 2022. Moving on to the next page, Compulsory School, Page 9. We continue to see solid growth in this segment. The number of students increased by 6.4%, and sales grew by 10.1%, where the acquisition of Swedish Education Group and the Stockholms Internationella Montessoriskola, as it was called and when we acquired it, contributed 3.9 percentage points to the revenue growth. Several smaller revenue adjustments from municipalities related to previous periods with total SEK 10 million also contributed to the increase. Adjusted EBIT amounted to SEK 74 million, which was significantly higher than last year, and the margin was 7.9%. Volume growth but also lower personnel costs due to absence, as I mentioned earlier, caused by the pandemic and limited access to temporary staff were the key drivers. And we have now, as I mentioned, received the first insurance compensation related to the fire in July, and it amounts to SEK 18 million, and we have reported as items affecting comparability. And we still expect that the full cost of SEK 30 million reported in the last quarter will be covered by the insurance. Moving on to Upper Secondary School, Page 10. Student numbers increased by as much as 9.7%, where Segab acquisition contributed 6.2 percentage points to the growth. And the organic student growth was 3.5% and is mainly coming from the 21 new schools that started over the last 5 years. Net sales increased by 11.9%, driven by volume growth but also to a smaller extent to some revenue adjustments from municipalities, in total SEK 5 million. EBIT was higher than last year at SEK 118 million, and the margin increased to 9.2%. Volume growth, again, and lower cost of about SEK 10 million caused by staff absence and canceled activities were the key drivers. And depending on the development of the pandemic, some of these costs might impact latter parts of the year, but that's too early to say right now. And to remind you, in the same period last year, we also had about SEK 15 million in lower cost due to canceled and postponed activities forced by pandemic. Looking ahead in this segment, the plan, as it stands now, is to open a service 3 schools in the autumn 2022. Also, preparations to move 8 existing schools into our 2 brand new campuses in Stockholm, as Marcus mentioned, are well underway. So 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. But we are now seeing an improved job market and volumes returning to more normal levels. Net sales increased by 2.9%, and the growth was entirely coming from the higher vocational education, where the acquisition of KYH contributed 5.4 percentage points to the growth. Adjusted EBIT declined somewhat to SEK 71 million and the margin to 14.3%. Demand for Higher Vocational Education remains high, and revenue in this business area increased by 31%, both through the acquisition but also organically. And high capacity utilization and few student dropouts had a positive effect on the earnings. VAT on subcontractors amounted to SEK 11 million and was reported as items affecting comparability. This is now being decided that compensation for VAT cost will be paid from January 2022. Good allocation of vocational programs for the autumn '22 start was received when the Swedish Agency for Higher Vocational Education announced allocation in January, and this means that current volumes will be maintained in this business area. So Municipal Adult Education is seeing a decline in number of participants and especially within SFI, Swedish for immigrants, and revenue declined by 9%. And this gave lower capacity utilization and profitability in the quarter. Volumes in the Labour Market Services business are also declining somewhat but from a very low level. This area constitutes only about 10% of the total segment revenue. The transition to the new matching service continues and is expected to be in place by the beginning of 2022. Moving on to Page 13, free cash flow and investments. Free cash flow, and we define that as cash flow before investing in expansion, amounted to SEK 606 million compared to SEK 572 million last year. And rolling 12 months free cash flow amounts to SEK 1.1 billion. Moving on to Page 14. The financial position improved even further. Net debt, excluding IFRS 16, is significantly lower than last year at about SEK 1.2 billion. The leverage ratio is lower than last year's 0.9, which is well below the financial target of below 3. Increases in property-related lease liabilities, mainly due to the recent acquisitions. And finally, moving on to the last page, 15, the financial performance versus targets. And to conclude, we are, for the fifth quarter running, meeting all of our financial targets, including profitability. And so with that, I would like to open up for questions.

[Operator Instructions] And the first question is from Johan Sundén, Carnegie.

So a few questions from my side. The first one is on your EdTech initiatives during the quarter. You mentioned that you have increased your ownership in the Hypocampus venture. Can you -- is it possible that you can comment about the valuation of the venture when you increased your ownership there? And the second one is on the cost level. A lot has changed during the last 2 years. You have cut down your OpEx cost by some SEK 35 million in 2 years' time. How much of this should swing back when the world normalizes? And what will be some long-term efficiency gains from that?

So thank you very much. I will take the first question, and maybe then you can take the other one. And if you take this Hypocampus, this is a digital platform that you can use as a self-study tool to learn different subjects. And the main focus now is to train doctors. If you go to the doctor program in Sweden, for instance, you can use this tool to help you to go through your studies, and it has been very popular in Sweden, and we have translated it into French. And so we have a lot of subscripters now in France. And we are planning to take it also, I can't mention the countries, but we are planning to go to other countries. And what we have done now -- I can't comment on the valuation, but we have taken different owner parts in step when it comes to this investment. So we started at a very low level. But for the moment, some of the EdTech companies are high value. We hope and think that this will be a very valuable company. So what we have done is that we have invested into the company, both to increase our owner part but also to give the money -- give the company money to expand in new countries. So we think this is a very interesting platform, and we think that we also can take this into other areas. Now we have focused on these doctor programs. We think that we can look at the lower sector and also other segments where it's very important for the students to have a good tool to train inside the program. So if you take, for instance, in France, you have to take a specific exam after your doctor program. And this exam in France is very, very important for you when it comes to your future career. And that's why this tool has been so important because it helps the student to handle this exam test in a very good way. So we own now 36% of Hypocampus. And we hope that this could be an important tool both inside our own company but also as a part of our international expansion.

Yes, and I would try to answer your second question related to the cost structure. And I agree with you, Johan, it's difficult to really analysis the cost structure right now. And we're trying to call out the specific pandemic effect to you to make it easier, but of course, we are working continuously with efficiencies. We have in Sweden, in the Preschool segment, works on efficient staff planning. We are looking at our units, looking at units that are -- a couple of years ago, we were just telling you that we had a handful of units that weren't contributing. And I would also like to point out that our support functions are working continuously with efficiencies and trying to use digitization in that work. So I would say that some of this effect is pandemic, but a big part of it is also continued efficiency.

And if I may, with follow-up to you, Marcus, on the Hypocampus venture, is it possible to give any comments on revenue from the EdTech portfolio at this point? Or where are we there? So we can have something to do some calculations on.

So we can say that we are working on that to give you more information. And one key KPI that we use and all the other companies use is the number of subscripters. So we have some thoughts how we could report this in a better way to give you more information. And for the moment, we don't just have with Hypocampus. We have a small portfolio with 5, 6 different platforms, and maybe the most profitable platform for the moment is the one that we use inside our Adult Education, and that is called Omniway, and this is a really fantastic tool. So we don't just have Hypocampus, but we will give you more information. We will give you the total portfolio that we work with when it comes to our EdTech tools and try to give you as much information as possible.

And the next question is from Karl-Johan Bonnevier at DNB Markets.

First of all, congrats to a fantastic development in the quarter, and good to hear that you're looking to maybe expose the EdTech operations little more, say, ambitiously towards us as well. So I think that would be a key event. And on that, obviously, you added educational products now also in the third quarter, going after this Norwegian company. Could you elaborate a little on what your ambitions are in education and material? Is that -- is this a stand-alone thing? Will you report it separately? Is there a lot of other opportunities for you to, say, consolidate this market and make it more of a, say, larger business units for you?

You can say that we have worked just with the Preschool operation for a long time. But we have a lot of pedagogical stuff that has developed pedagogical tools, and for instance, we work with something that we call [ forska abeka ] that is a sort of science program for small children, which they can use inside our preschools. And we also have our own in Norway. We call it Espira-parken that is a sort of math center to help children to do math. And one other key area is reading that we also have worked a lot with. And we have thought that could we develop some educational pedagogical tools that can help the children and the family to train reading, science and so on at home. And we first worked with one company. I can't mention the name now, but then we filed with Sandviks. And they have the same vision that they want to help small children to start to read early, and they have a subscription program where you can have books that is related to a different age stage. They have some today pedagogical digital tools. They help families in different ways, and they have 40,000 subscripters, both in Sweden and in Norway. They also said -- they have an e-commerce business, and they sell some small part also to Finland. And our idea is to take what we have done inside our own company and to sell it through this e-commerce platform. And the overall vision is to start the development progress when it comes to children at the early stage. And for the moment now, this is just a company with a turnover of NOK 100 million, but it has a good profitable -- profit. And it's just private money. It's paid by families and parents that want to invest in this. But we see potential to take new ideas and concept into this platform. And we also have ideas to take the platforms also to other countries. So that is the idea. But for the moment, it's small, but it's -- I think we also made this acquisition at a good level. And we see potential to develop it into the future.

So going forward, will you look to be reporting this as a separate unit? Or it will be -- will it be in some sort of other function in your accounting or in your reporting towards us?

You can see for the moment, we have 2 business units that, of course, we follow up inside the company, and that is AcadeMedia EdTech, and now we have this AcadeMedia educational services. And AcadeMedia EdTech is reported in the Adult segment. And our idea when it comes to AcadeMedia educational service is to report it in the Preschool segment. But hopefully, this will be their own segment in the future. But I think when it's so small, I think this is a good starting point. And maybe that we could help you to give you some KPIs to give you a view how this is developing, and one very important KPI is, of course, the number of subscripters, and that is also key when it came -- comes to these platforms -- EdTech platforms. So that is one idea that we have to give you information about the number of subscripters.

Excellent. Yes, that sounds like a good idea if you highlight to us maybe, on an annual basis, what the size are on the operation or something like that, so we can see the development over time. And looking at your investment in the quarter, you acquired some more preschools in Norway. And if you just could, say, elaborate a little on the investment case going after Norway for the moment, right, it seems to be that the submarket where you have the highest wage pressure and the lowest compensation levels coming through from authorities. How do you, say, work that together?

You can say that the Norway investment will -- has been much smaller, and we will be also much smaller in the future. And we have a very professional organization. We have a strong concept. And that is really the base where we take a lot of things that we want to develop into other countries. We take it from Norway. So I think you will not see that sort of investment in Norway in the coming year. But I think when I talked about the Sandviks and maybe bring this into other markets, into Germany and so on, we have a lot of confidence in the Norwegian business. So we will try to use it in that development instead. So when we -- when making our acquisitions, we will do it in Sweden. If we see very good investments, we will do it in Sweden. But our main focus is to be more international. And as we mentioned before, we have now a map of the different countries in Europe, and we have a lot of contact and discussion about how the education market is developing in Europe and what -- where we could be apart.

Good. And Katarina, maybe you could explain to me the NOK 35 million in additional pension costs you see in Norway. You talked about it as a revenue impact. What is the profitability impact of it? And why should that maybe be different?

Yes. It's too early to say how big the EBIT impact will be, but obviously, it will impact EBIT. We are working, as we have done for quite some time, in Norway to reduce costs, and that will continue. We did that very successfully when we introduced the staff density norm, so I'm sure we can do that. But right now, it's too early to say. But I think you have to take into account that, that will -- this will impact the results.

And when you look at the normal compensation system in Norway, you're getting compensated basically index for the first 2 years and then on budget in year 3 then. Is this amount something that should come back in '24-'25? Or how will it work?

You mean the pension...

Yes, both the pension and the wage inflation you see for the moment.

The wage inflation, yes, absolutely. The model was, like I explained, that you have increased cost and then we will be compensated with a 2-year delay. Now the pension, that's not a change in the cost structure. That's a change in the revenue model. So that will not change.

So if you see -- if you compare with Sweden, for instance, we have this -- we have a lot of costs now when it comes to the absence of staff and sick -- people being sick, and we have been -- we have some compensation in Sweden. And you also have this problem now in Norway where the municipalities have a better situation in Norway than they have in Sweden. And that will be -- I think that will be compensated, but it will take this 2-year problem. But they also have changed the overall model. And one part of the model is this pension cost, and there are also other components. And the problem is that -- the problem is how will the other components develop. And that is the key question for the moment now. We have been aware of this discussion when it comes to the pensions cost. But as you see, this is the [indiscernible]. We were compensated last year, and it's a case that this year also.

And one final for me. You highlight these 1,100 students that have been enrolled in the 21 schools in the upper secondary segments that you've started in the last 5 years. How has capacity utilization been built up in these units? And is there still a lot of [indiscernible] capacity to -- that you could grow into, so to say, in that part?

When it comes to upper secondary?

Exactly.

We took a good step last August. I think if you go back 2 years, we have a decline in capacity utilization because we start -- we took a lot of new schools, but they were not full -- they had a full capacity. So it was a big step last year. But now this August, we will take a very big step again. And we start with new campuses, and we have also some ideas in Gothenburg. And what we have seen is that the municipalities, they don't create so many school places because they don't have money, they don't want to invest, they have problem to make it in a -- as an acceptance with investment. And we have developed a good relationship with different landlords. And I think we will create a lot of new school places, both in Stockholm and in Gothenburg and in Malmö the coming year. So for the moment, we have increased the capacity utilization. I think in August, it will a little bit be decline because of this big campus. But why I think that it will be a very good development in the coming year because this will be really high-class schools in the center of Stockholm and Gothenburg.

And there are no further questions at this point, so I hand back to the speakers.

So thank you very much. And just give us a call if you have any more questions. So thank you very much, and goodbye.

Thank you. Bye-bye.