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

Good morning, and welcome to the AcadeMedia Q2 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Marcus Stromberg, CEO. Please go ahead.

So thank you very much, and good morning, everybody. And I will just give you some short introduction and then hand over to Katarina Wilson, and she will go through the quarter 2 report of AcadeMedia. So if we look at Page #2 and look at AcadeMedia. So we have started this new year in a very good way. The demand is very high. We are now approaching 100,000 children in our schools, and we have had a continued strong demand. The number of students are up almost 6%. And if we look at the preschools, it's around 13%. And we are now running schools in 4 countries, and we have developed also the Compulsory Schools and the Upper Secondary in Germany through the acquisition of FAWZ. And what is very important also in this quarter that we also announced the school voucher for 2023. This is, of course, very important. And we -- when we look in Sweden and we look at the different municipality, it's very important that they still continue to invest in school. School is important, and they try to handle the inflation. So the voucher increase is about 4% in Sweden, and that should be compared with last year, 2.6%. But in the quarter 2, we haven't had this school voucher. So of course, the inflation has affected the result with around SEK 20 million. And then if we look at the Adult Education, we also have seen a continued strong demand when we look at the vocational program, we are now really the market leader, and we have also increased the market share when it comes to what we call [indiscernible]. The challenge is the municipality training program because the unemployment rate is still low. In January, the number of people that could be unemployed has increased with 3x. So we are prepared. We have the contracts. We have the possibilities, but we haven't seen the students yet. If we look at the Upper Secondary, this is an important period of our marketing and information, and we have seen a lot of interest of our schools according to the start in August. And when we look at our campuses, we are in all-time high. So with that, I would like to hand over to Katarina as she will give a deeper presentation of the results.

Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia. Moving on to Page 3, highlights, quarter 2 of our financial year '22/'23. Continued good demand in the school segment, the number of children and students grew by 5.9% with increase in all segments and in all geographies. Growth in the Preschool segment was as high as 13%, where we are now including the acquisition of FAWZ in Germany with about 1,800 children. Net sales increased by 7.1%, with growth in all segments, except in the Adult Education segment, where volumes are continuing to come down in the municipal business area. Organic growth, including smaller bolt-on acquisitions, including the Netherlands, was 4.3%. The acquisition of Sandviks in Norway last year as well as the acquisition of FAWZ [ is ] reducing capacity utilization. General cost increase, as Marcus was saying from inflation, mainly higher electricity costs also impacted, and we estimate that inflation increased costs in this quarter by about SEK 20 million. Items affecting comparability of minus SEK 21 million includes additional insurance compensation related to the fire we had in 2021, SEK 3 million, transaction costs related to the acquisition of FAWZ, SEK 11 million, and restructuring expenses in the Compulsory School segment, SEK 13 million. Free cash flow in the quarter was lower than last year, mainly due to working capital effect related to last quarter when we saw unusually high accounts payables about SEK 200 million, but also due to, of course, lower operating income. Moving on to Page 5. Net sales rolling 12-month continues to increase and now amounts to SEK 14.8 billion. Adjusted EBIT is decreasing to just below SEK 900 million and adjusted EBIT margin to 6.1%. And jumping to Page 8, development quarter 2 by segment and starting with the Preschool segment. The number of children increased by 13% with growth in all countries, and the acquisition of FAWZ is now included in the Preschool segment. Net sales increased by 18.1% compared to last year and the organic growth was 8.1%, adjusted for the acquisitions, including, of course, Sandviks from last year and a positive currency development of SEK 37 million. Adjusted EBIT was higher than last year and margin remained stable. Continued low pension compensation in Norway and in general, high cost due to inflation in all countries were offset by increased capacity utilization in Sweden and in Norway and reduced costs for temporary staff in Norway, which last year was high due to the pandemic. The acquisition contributed SEK 4 million in the quarter. Lower pension compensation in Norway has now impacted 4 quarters with SEK 35 million in total. And items affecting comparability minus SEK 11 million is related to the acquisition of FAWZ. And preliminary school voucher increase in Norway for 2023 amounts to 9% compared to last year's increase of 2.8%, and this increase is reflecting the actual costs in the municipalities 2 years ago. And the way the model in Norway works, any changes in the cost structure are compensated with a 2-year delay. Moving on to Compulsory School, Page 9. Number of students increased by 2.3% and sales grew by 5.2% and 1 new school started this autumn with 130 students. Adjusted EBIT was lower than last year at SEK 63 million and the margin decreased to 6.4%. Inflation increased costs, mainly electricity and school meals by in total SEK 7 million, continued initiatives to strengthen student health also impacted profit. The new school that opened this autumn and schools that have extended their capacity will temporarily lower capacity utilization, which is still well above 90%, but this is impacting the margin temporarily. We have received further insurance compensation related to the fire last year, SEK 3 million reported as items affecting comparability, and in total, we have now received SEK 33 million. We have also taken a restructuring cost in the quarter of SEK 13 million. Last year, in quarter 2, we reported insurance compensation of plus SEK 18 million related to the fire. And therefore -- EBIT was therefore much below last year at SEK 53 million compared to SEK 92 million last year. Moving on to the Upper Secondary School segment, Page 10. Student numbers increased by 4.5% and net sales increased by 6.3% (sic) [ 6.5% ]. And the growth is coming from the 3 new schools that started this autumn and 21 schools that have started over the last 6 years, taking in a total of 1,250 additional students compared to last year. Growth is also coming from capacity expansion with our 2 new campuses that opened in Stockholm this autumn. And I've said this many times, capacity expansion is causing temporarily lower capacity utilization, and this decreased capacity utilization by 2.7 percentage points to [ 84.9% ]. And this effect will remain until the new campuses have filled up in about 2 years' time. Inflation increased cost by about SEK 6 million in the quarter. Adjusted EBIT was lower than last year at SEK 107 million, and the margin decreased to 7.9%. Moving on to Page 11, Adult Education, volumes continue to come down and sales decreased by 12%. And as you recall, a year ago, high unemployment created very high demand for Adult Education, and by the end of the last financial year, in the spring of 2022, the job market improved, which was reflected in lower number of participants. And this development has continued over the summer and also into the autumn and winter, especially in the municipal business area. Net sales in the Municipal Adult Education decreased by 28%, which is the main reason for the decreased EBIT in this segment. Efforts to adjust capacity in the business area is continuing and should be completed in the fourth quarter this financial year. Sales in the Labor Market Services business also declined 25%, but from a very low level, and this is a conscious decision to reduce exposure to this business area. The STOM contract and the Vocational Swedish contracts are now fully closed. And the volume in the new matching contracts, KROM, are increasing but are still much below the Swedish Public Employment Service's own forecasts. Demand for Higher Vocational Education remains high and sales continued to increase by 15% with stable margins. Higher Vocational Education is now actually the largest business area in this segment. All in all, adjusted EBIT in this segment decreased [ 28% ] and the margin was 6.4%. And looking ahead in the Adult Education segment, we expect to see continued lower volumes in the municipal business area, and we anticipate the margin in the next quarter to stay significantly lower than the range, 9% to 11%. However, the development of the economy can lead to higher unemployment and increased demand for Adult Education. Moving on to Page 13, free cash flow and investments. Free cash flow in the quarter was lower than last year. And as I mentioned, mainly due to calendar effect from the last quarter, accounts payables were unusually high about SEK 200 million, but also due to lower operating income. Maintenance CapEx as a percentage of sales, stable at 2.2%. Moving on to Page 14. The financial position is still strong. Net debt, excluding IFRS 16 was somewhat higher than last year at SEK 1.3 billion. Leverage ratio, excluding IFRS 16 was slightly above last year at 1x, which is well below the financial target of less than 3x. Net debt including property-related lease liabilities was higher than last year due to expansion in capacity and growth. And leverage, including lease liabilities, was [ 3.4x ]. It can be noted that lease liabilities are expected to increase by about SEK 500 million in the next quarter due to indexation of rental agreements. Rent on existing contracts will increase by 10.9% from January [ the 1st ]. And debt ratio defined as net debt divided by total assets, excluding cash, remained stable, including and excluding lease liabilities. And with that, I would like to conclude on Page 15, financial performance versus targets. Organic growth and profitability rolling 12 months are both below target, while the target on capital structure, as mentioned, is met. And with that, I would like to open up for questions.

[Operator Instructions] Your first question comes from Stefan Knutsson from ABG.

Marcus and Katarina, first question regarding the school voucher, do you deem that it will be enough to offset the inflationary pressure? And can you also break it down on segments in Sweden a bit more since we saw some headlines in the Stockholm region for Upper Secondary being lower than other regions?

If we look at this, we haven't divided it in different segments because we are still waiting for some of the municipality to report their numbers. The first question, will this be enough? I think we would have needed some more, but I think with our own efficiency program, we think that this is still a positive signal and some of the municipality has at the right level. You can say that we just have one problem, and that is the biggest center of Stockholm that they are still in Upper Secondary, they are still at a low level. So we have a discussion with them, and I think in the future, it will change. But that will, of course, affect us in the short term. But on the other hand, we have a very high demand of new Upper Secondary students in Stockholm. So I think it's no logic in this decision, but the decision is still there. So the overall picture is that this looks quite good, except for the area of Stockholm.

Perfect. And then also a follow-up on the Adult Education segment. Can you give some more details on the profitability in the different segments, given the rapid change in mix from Municipality Education to Higher Vocational, how are the 2, yes, lining up in terms of profitability?

It's difficult for us to give you the exact number. But if you look at this from this perspective, if we look at the vocational program that is called [indiscernible]. We have a big market share now. We are increasing the market share. The number of students are very stable. The profitability is also very stable. And I would like to say that the profitability is high and stable. The problem for us now is the municipality program because we have the contracts, we have everything in place, but the unemployment rate is still low. So we have to keep the contract. We have to keep the buildings and some of the staff, but we are working on it. But this municipality program is affecting the Adult Education very much at the moment -- at this moment. And the unemployment program, the labor market program, that is a small part of the total revenue and the profitability so far is okay. But this is not so important for us. But the key problem for us is the municipality program. But we should really keep in mind that we have transformed the Adult Education and the number of upper sec -- the number of vocational programs and profitability that is profitable is very high. So I think we have a good position, but the problem is the municipality program.

Just a follow-up. Is it a conscious decision to keep the municipality readiness, so to say, as you might expect a weaker job market and also that this new restructuring or that you talked about the new?

That is what we are thinking of a lot. We are thinking of that because we have taken down costs during Q2, but the question now, what it should be the next step, should we wait for the market to grow or should we take the next step, and that is what we are working with right now. Hopefully, I think that we could help a lot of people that will be unemployed because you have seen what has happened in January now. And so we think that they will come, the question is when. And we are very good at helping people to new jobs and improving the possibility to take a new job. So that is the key question for us in the short term.

The next question is from Johan Sunden from Carnegie.

I think we touched upon my question, but it was on the voucher. And when you write 4% for the Swedish segment, have you -- are this, the Stockholm region included in those numbers or are those in the missing 30%, just to get that clear?

They are included in that because if we didn't have that, it would be higher.

Excellent. So maybe when you summarize everything, it could be higher than 4% then?

I think we -- I think that Stockholm will be on 1.8% of this -- 1.9% that they have decided. But the question -- it will be impossible for them to keep this level over time. So the question is, will they have to pay us when they have made deficit or will they change? But for the moment, we think that it will be this 1.9%. And if you put it into the total numbers, we are a little bit above 4%. But it's also public information to see what has Malmo announced, what has Uppsala announced, what has Gothenburg announced. So it's quite easy to look at that number and they are at total other levels than Stockholm.

Your next question comes from KJ Bonnevier from DNB Markets.