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

So good morning, everybody, to this presentation of AcadeMedia reporting the full year from July 2021 to June 2022 and Q4 result. And with me today is Katarina Wilson, the CEO (sic) [ CFO ]. My name is Marcus Strömberg, I'm the CEO of AcadeMedia. And this year is a year where we had invested a lot in Swedish Education. I think we have never invested so much in Swedish Education as in this year. We have started 2 new campuses with over 4,000 places in central Stockholm, which we believe will be a road mark in Stockholm for many, many years ahead. We have also invested a lot in vocational training and also in some Compulsory School with over 1,000 students each. So the year we have behind has been a fantastic year with a lot of investment. And we also see the results because we have never seen such an interest in our school as we have seen this year. The number of students is up 5%, and we are over 95,000 children and students in our different schools. This year, we have also continued to develop the International Preschool segment with 16 new starts in Germany, even if we have had this pandemic situation. And we think that is a very good result. We have also entered a new country, the Netherlands, with a platform investment, and we plan to continue to develop our position when it comes to International Preschools. We have also had seen the development in Adult Education going back to normal levels. We have a positive development in the economy, and therefore, we have some more normal students level when it comes to Adult Education. But the overall picture is very positive. We have maybe the best year ever when it comes to the AcadeMedia financial position, and we have a strong position to continue to invest in education and we also see the results when it comes to interest from our students. The Board also proposed a dividend this year of the same level as last year, SEK 1.75. And it's also very positive that we can continue to pay back to the professional owners that we have, and that has also supported us to continue to invest in education in Sweden. And now I will hand over to Katarina, and she will go through the numbers. And then we will answer some questions in a few minutes.

Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia. Moving on to Page 3, highlights quarter 4 of our financial year '21-'22. And I would like to start by confirming that the results in this report are in line with the preliminary results for the fourth quarter that we published on July 20. And to summarize the quarter, student numbers grew by 3.6% with solid growth in the Compulsory and the Upper Secondary School segment. Growth in the Preschool segment was as high as 6.2% due to new starts in Germany as well as the acquisition of 2 preschools in the Netherlands. And we're now running preschools in 4 countries. Net sales increased by 4.9% with growth in all segments, except in the Adult Education segment where volumes are continuing to come down to more normal levels after the pandemic. Adjusted for a positive currency translation effect of SEK 27 million, and the acquisition of Sandviks at the organic growth, including smaller bolt-on acquisitions, was 3.7%. Adjusted EBIT was in line with previous year at SEK 279 million, and the adjusted margin decreased to 7.2%. And the main reasons for the lower margin is really the same reasons as in the last quarter, lower volumes in parts of the Adult Education segment and lower profitability in Norway. Items affecting comparability, minus SEK 14 million includes further insurance compensation, SEK 6 million related to the fire in a Compulsory School in July last year and provision for loss-making units in Norway, minus SEK 21 million. Free cash flow in the quarter increased to SEK 397 million due to a strong cash flow from operating activities. And jumping to Page #7, development quarter 4 by segment and starting with the Preschool segment. As I said, another country was added to the Preschool segment with the acquisition of 2 preschools in the Netherlands with 233 children. In Germany, 1 further unit opened in the quarter, which gives a total of 16 openings this financial year, and in total, 73 units in Germany. And in total, in the Preschool segment, we now have 292 units in 4 countries. The number of children increased by as much as 6.2%, and net sales increased by 10.9% compared to last year. We have some voices that perhaps you can mute those. Organic growth was 6.7% -- so we can still hear some voices. I think that would be good if you could mute those. Organic growth was 6.7%, adjusted for a positive currency effect of SEK 27 million and the acquisition of Sandviks, diversification into educational services. EBIT and margin was lower than last year, mainly due to changes in Norway. Lower pension compensation and higher salary costs as well as higher cost of temporary staff and electricity, all in all, had a negative effect on EBIT in the quarter by about SEK 20 million. And the way the model works in Norway, any changes to the cost structure that is also incurred by the municipalities as this is a pandemic effect mostly will be compensated with a 2-year delay. We have identified loss-making units in Norway. And we have made a provision of SEK 21 million, and this is reported as items affecting comparability. In Germany, the capacity utilization was somewhat lower in the fourth quarter due to this year's new openings starting later in the year and, therefore, have not had the possibility to reach full capacity. This was offset by lower personnel expenses in Sweden. And for the new financial year, 15 new units are planned to open in Germany and 1 new unit will open in Sweden. Moving on to the next page, Compulsory School, Page 8. Continued solid organic growth in the Compulsory Schools segment. The number of students increased by 2.5% and sales grew by 7.4%. Retroactive school voucher compensation and subsidies in total SEK 10 million in the quarter contributed to the increase. Adjusted EBIT increased to SEK 80 million, and the margin increased to 8.4%. Volume growth was the main reason for the increase as well as the retroactive revenue with costs taken in previous quarters as well as somewhat lower personnel expenses due to a high degree of employee vacation compared to last year. We have received further insurance compensation related to the fire, SEK 6 million, and we still expect to see further compensation in the coming months. And this is reported as items affecting comparability. And for the August school start, 1 new Vittra school has just opened. Moving on to Upper Secondary School, Page 9. Student numbers increased organically by 3%, and the growth was mainly coming from the 21 new schools that have started over the last 5 years. Net sales increased by 5%, driven by volume growth and the annual voucher revision. EBIT was higher than last year at SEK 130 million, and the margin increased to 10.1%. Volume growth is the main driver, but also, to some extent, lower personnel costs of about SEK 10 million related to [ volume growth ] compared to last year. The fourth quarter also included cost of SEK 5 million related to the new campuses. Last year, in the fourth quarter, cost increased when postponed activities early in the year could be resumed in the last quarter. And we do not see that same pattern of increased cost in the fourth quarter this year. Our brand-new state-of-the-art campuses in Stockholm opened in August, and this will have a slight negative impact on the margin during the next 2 years until they have reached full capacity utilization in these new larger premises. Three further new schools also opened this autumn. Moving on to Adult Education, Page 10. And again, to remind you, last year, high unemployment created very high demand for Adult Education with exceptional volumes and high capacity utilization. And we have for a few quarters now seeing improved job market as well as lower immigration, and this is reflected in lower number of participants in our programs. Net sales decreased in the quarter by 12.8%. However, demand for higher vocational education remains high, and sales in this business area increased by 15% organically. Continued high capacity utilization in this business area, but student dropout rates are rising in effect of the stronger labor market. The number of participants in the Municipal Adult Education continued to decrease to more normal levels, and net sales in this area decreased by 19%. And of course, this resulted in lower capacity utilization and profitability, especially in the SFI operation, where we're continuing to see -- to adjust capacity to this lower demand. And we expect that this adjustment will be completed now at the beginning of the financial year. Sales in the Labour Market Services business declined by as much as 55%, but from a low level. And this is also a conscious decision to reduce exposure to this business area. The transition to the new matching services has been completed, but volumes in the new contracts are still low. All in all, adjusted EBIT decreased to 37% and the margin was 8.6%. Looking ahead, increased inflation can lead to higher unemployment, which, again, would lead to high demand for Adult Education. And after the reporting period, AcadeMedia has agreed to acquire Futuregames ranked as one of the leading game education providers in the world. Moving on to Page 12, free cash flow and investments. And we define free cash flow as investing free cash flow before investing in expansion. And this was for the full year, slightly lower than last year but still very strong and amounted to SEK 922 million. The main reason for the slightly lower free cash flow was a less favorable working capital. And I said this many times, usually the working capital is affected by calendar effects, and this is also the case this time. But we also had somewhat higher maintenance CapEx investments in existing operations that amounted to SEK 300 million -- just over SEK 300 million this year compared to SEK 241 million last year. And this increase is mainly, as Marcus said, investments in our new campuses, which in the fourth quarter amounted to SEK 44 million. Moving on to Page 13, continued strong financial position. Net debt, excluding IFRS16, was significantly lower than last year, now below SEK 1 billion. And the leverage ratio was lower than last year at 0.7, which is well below the financial target of below 3. Increased property-related lease liabilities is mainly due to recent acquisitions and to the new campuses that are adding about SEK 600 million to the lease liabilities. And as earlier communicated, a new loan agreement has been signed until 2025 with the possibility to extend for another 2 years. And with that, I would like to summarize the full year '21-'22. Moving on to Page 14. Very strong good student numbers, it grew by 5.4%. In total, 20 new units were added, 18 new starts whereas 16 in Germany. Sales increased by 7.5% and amounted to SEK 14.3 billion with growth in all segments, except in the Adult Education segment. Adjusted operating profit increased to SEK 1 billion, and the margin remained at 7%. Strong free cash flow at SEK 922 million. Diversification into educational services through the acquisition of Sandviks. A fourth preschool country was added with the platform acquisition in the Netherlands. And large investments in campuses strengthened the position in Upper Secondary School. And also, a new loan agreement was signed. And I would like to say all of this was achieved despite another year of the pandemic with, at times, high levels of absence and sick leave. Finally, moving on to the last page, 16, the financial performance versus targets. And to conclude, all of our financial targets were met in the year '21-'22, and the Board is proposing a dividend, same as last year at SEK 1.75 per share. And with that, I would like to open up for questions.

Hello. We will open up for questions. First question is from Karl-Johan Bonnevier, DNB Bank.

Good luck with the technology. It's difficult to get things started today, so I'm sure you've already discussed this earlier. But if you look at the new student growth that you saw during this year, could you elaborate a little on -- looking at, say, for the school year starting this year, how you see that 16,000 in the year 1 students comparing to previous years and then also how you see the momentum in the different countries and the different segments, please?

Yes. So we communicated about 5% student increase all in all, and we have not yet disclosed how that is spread amongst the different segments. But we are very pleased to see more than 16,000 students coming into our Upper Secondary Schools, and that is the most number of students we've ever seen in year 1 in the Upper Secondary School. So it's very promising. And we've also seen really high demand coming into our campuses. So very promising. And of course, these numbers are preliminary. It's a big turn for the next few weeks when students move. So I just would like to say it's still preliminary.

And when you look at the political turmoil, obviously, it's -- an election coming up here in a couple of days' time. Have you seen that affecting your way of attracting new students in any way?

No. No, we have not seen that. I mean, as we said, this is all time high. So no.

We used to say that the more of the debate is the more students we get because it's very important for families to have the best goals and to have an option for maybe the municipality schools. So that is what the history says, and that is also what we see this August.

We have the next question from Johan Sundén, Carnegie.

A few questions from mine as well. First one is related to new campuses that you referred to that give rise to about SEK 5 million extra cost in this quarter. Is this just a onetime effect? Or can they pop up more kind of start-up costs related to this? Or how should we view that item?

No, this is a one-time effect. You will not see this going forward. But as I said in the call, it will take us perhaps 2 years now to fully fill these new, much larger premises. So you will see a somewhat effect on the margin because of lower capacity utilization, but not related to additional costs.

Clear. Then if we go to the preschool business and the business in Norway, we've seen a margin weakness recently, and it is persisting. How should it be for the coming year with the -- what's happening on energy markets where, I guess, the kind of bottlenecks for recruiting preschool teacher isn't easening. How worried are you?

I think when it comes to Norway, we've seen higher electricity costs already this last year. So I don't expect that to rise further. I think we're expecting to see a slight improvement in Norway. The lower pension compensation, we only saw half year effect of that last year, so that will impact us for the first 2 quarters in the new year. But as Marcus mentioned, we have programs now to try and see what we can do. And of course, higher inflation is on our agenda when it comes to Sweden as well. But you know how the revenue works, we will get compensated. But in Norway, unfortunately, there's a 2-year lag for when the compensation will come.

But what you should have in mind when it comes to Norway is that 50% of the market is private, and the private operator is very important in Norway. And sometimes in the history, systems are changed, and then you have to adapt. And that is what happens now in Norway. And we always aim to come out better on the other side when they do these sort of changes. And we also have seen the same in the health care sector. So sometimes you have changes in regulation. Now we've seen that in Norway. And I think that we will come out very strong on the other side. And in fact, we also have the number of children is up, so we are very popular. And I think we have -- we are the leading quality concept in Norway, and that will also bring us into the future.

Great. And my last question is related to this vacation effect that has been a little bit lumpy over the last 2, 3 years. If we summarize this year, how much of a boost do you see in full year numbers from low -- higher vacation takeout? And have you any kind of feeling or insight for how it could play out next year?

Well, Johan, I can only agree with you. It's been lumpy, and this is never easy to forecast. Obviously, I can't forecast how our employees will use the vacation. But if I sum up the full year, we've had a somewhat positive effect. It's not that great, perhaps SEK 10 million, SEK 15 million. We saw last year in the quarter 1, a positive effect. And I think that was a negative effect in the quarter 2 and 3, and then we had again a positive effect of about SEK 15 million in the last quarter. I can't predict the future. I don't know how next year will look.

But the kind of positive full year effect that we basically appeared in Q4 now, was it more or less the same that was more negative last year than it theoretically should be, if that will be natural?

More or less, yes.

Next question is from Stefan Knutsson, ABG.

Two questions from me. First, on the loss provision in Norway. Maybe I missed the part when you presented it, but can you just clarify because I think that -- isn't that part of running business that you see rising electricity costs and cost to -- for the pension, and that it will affect the first 2 quarters of next year because as I see it, the IAC that you booked was exactly the same as the extra cost that you referred to in the quarter. Is that sort of the level that you expect going forward as well?

So this is really related to lease obligations that we have. So the reporting or the accounting that you have to provide for that, we have lease obligations. And this is our estimate of that obligation until we will have full compensation for cost.

And the cost compensation will then start in 2023 with higher voucher increase.

Correct, correct.

Okay. Perfect. And then going on to the Adult Education segment regarding the Labour Market Services, which saw a huge drop in the quarter. I just want to hear what's your view on the Labour Market Services long term? Is there a future? Or will you try to exit the market altogether now with this development?