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

Welcome to the AcadeMedia Q3 Report 2023. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Marcus Stromberg; and CFO, Katarina Wilson. Please go ahead.

Good morning, everybody, to this presentation of AcadeMedia's Quarter 3 Results. We have a very good morning here in Stockholm and it's me, Marcus Stromberg, CEO; and Katarina Wilson, CFO. And I will just start with a short introduction and Katarina will go through the numbers. And this quarter is the first quarter where we have full impact of the inflation and the cost in AcadeMedia's result and it's about the lease contracts and other costs that also of course has increased. But due to good preparations, cost reductions mainly at administrative costs, we have managed to have a quite stable result this quarter and we also see very good growth numbers. The revenue is growing with more than 10% and we also have a student increase and children increase of more than 6%. We are also very pleased to see the International Preschool segment growth where the revenue is growing more than 20% and the number of children is up with 15%. And we still see a huge demand of new preschool places mainly in Germany. We're also very happy to see the interest when it comes to vocational training. This is an area where AcadeMedia has invested, developed, worked every year and now we see the result of these investments. And the interest of vocational training now in Sweden is quite high and our brand Praktiska is very popular among the people that is applying for Upper Secondary School this August. We have also continued to work with our campuses, that's also very important part of our strategy, and we see now a quite high interest to work on and to apply to our campuses. When it comes to Norway where we run preschool, we have been struggling a bit and now we see an increase of the voucher with around 9% and this is caused by the model that we are working with in Germany where the voucher is increasing 2 years after the cost. And we are very pleased to see that we now can have a more stable development in Norway. So the overall view when it comes to this quarter is stable and we will continue now to develop AcadeMedia with the strategy that we have been working with the recent years.

Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia. Moving on to Page 3 highlights quarter 3 of our financial year '22-'23. And as Marcus just mentioned, continued good demand in the school segments. The number of children and students grew by 6.4% with growth in all segments and in all geographies. Growth in the preschool segment was as high as 14.9% where we're also including the acquisition from last quarter FAWZ in Germany with about 1,800 children. Net sales increased by 10.3% 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 as well as growth in the Netherlands was 7.5%. The acquisition of Sandviks in Norway in quarter 4 last year as well as the acquisition of FAWZ in this quarter contributed 2.8 percentage points to the growth. Changes in currency had no effect in the quarter. Adjusted EBIT was higher than last year at SEK 277 million and adjusted margin decreased to 6.6%. And also as Marcus was saying, in this quarter we are seeing the full effect of inflation including increased rent cost. Rent in Sweden increased from January 1 by 10.85% due to indexation and we are estimating that cost for electricity, school meals and rent altogether increased by almost SEK 60 million in this quarter. And the annual school voucher revisions also from January are partially offsetting this cost increase. In the quarter, the negative impact from lower volumes in parts of the adult education segment is declining due to cost cutting measures that are now in place. And in the Upper Secondary School segment where we have invested in capacity expansion, campuses and new schools; the profitability is temporarily reduced due to lower capacity utilization. Items affecting comparability minus SEK 6 million in the quarter is related to fire at a Compulsory School in January this year and we will receive insurance compensation in the coming quarters. Higher free cash flow in the quarter to some extent due to higher operating profit, but mainly due to less negative working capital, a calendar effect from previous quarters. So moving on to Page 5. Net sales rolling 12 months continued to increase and now exceeds SEK 15 billion. Adjusted EBIT is just above SEK 900 million and adjusted EBIT margin is 6%. So let's jump ahead to Page 8 and development Q3 by segment and starting with the Preschool segment. The number of children increased by nearly 15% with growth in all countries also including last quarter's acquisition FAWZ with 1,800 children. Net sales increased by nearly 23% compared to last year and the organic growth was 5.5% adjusted for the acquisitions, FAWZ and Sandviks. And currency, as I mentioned, had no impact in this quarter. Adjusted EBIT was higher than last year, but the margin decreased. And higher cost in all countries due to inflation were somewhat offset by the annual school voucher revision as well as increased capacity utilization in Sweden and in Norway. The school voucher increase in Sweden was 5.3%. In Norway, the voucher increased by 9% and this is reflecting the municipality's higher cost in 2021 during the pandemic so we have a 2-year lag. In Germany, we estimate that it will take up to a year before the preschool operators are fully compensated for inflation. Our growth plans remain unchanged and we plan to open 15 new units in Germany for next year. So moving on to Compulsory School, Page 9. The number of students increased by 2.7% and that is 750 students and sales grew by 7.2%. One new school with 130 students started this autumn and 1 school with 230 children was acquired this quarter. The annual school voucher revision was 5.3% compared to last year's revision 3.1% to reflect inflation. Adjusted EBIT was higher than last year at SEK 69 million and the margin remained stable. Inflation continued to impact operating cost. Energy, school meals and rents increased by about SEK 20 million compared to last year. Also continued initiatives to strengthen student health impacted profit. And as I mentioned, items affecting comparability is related to a fire in January and we will receive insurance compensation later on. Moving on to Upper Secondary School, Page 10. Student numbers increased by 4.3% and net sales increased by 8.2%. And I mentioned this many times, growth is coming from the 3 new schools that started this autumn and 21 schools that have started over the last 6 years and those schools are now adding 1,250 additional students compared to last year. Growth is also coming from capacity expansion with 2 new campuses that opened in Stockholm last autumn. Revenue increased and it's also coming from the annual school voucher revision that was 3.9% compared to last year's increase of 2.2%. Capacity expansion continues to temporarily lower capacity utilization, which decreased by 2.9 percentage points to 83.9% and this effect will remain until the campuses and the new schools have reached full capacity utilization. Inflation continued to impact operating cost. Energy, school meals and rent increased by about SEK 30 million compared to last year. So to summarize this segment, adjusted EBIT was on par with last year SEK 116 million and the margin decreased to 8.4%. So moving on to Adult Education, Page 11. Volumes continue to come down and sales decreased by 7.8% mainly due to continued contracting volumes in the Municipal Adult Education where in this business area, sales decreased by 24%. Capacity adjustments in this business area and cost cutting measures are now showing an effect. And the margin in this business area increased somewhat and we believe that the volume decrease in this business area is now stabilized. Sales in the labor market services business also declined 7%, but from a very low level and this is a conscious decision to reduce exposure in this business area. The volume decrease is coming from the STOM contract and the Vocational Swedish contract that are now fully closed. And the volumes in the new matching contract KROM are increasing, but are still below the Swedish Public Employment Services own forecast. Demand for higher vocational education remained high and revenue increased by 8%. Capacity utilization is slightly lower than last year in this business area and this is somewhat affecting the margin. Last year the capacity utilization was very high in light of the pandemic. In total, adjusted EBIT in this segment decreased to SEK 33 million and the margin was 8%. Looking ahead in this segment, we expect that the volumes in the Municipal business area has stabilized and we anticipate the margin in the next quarter will remain below the range 9% to 11%, but as always the development of the economy can lead to higher unemployment and increase demand for adult education. Free cash flow and investments, moving on to Page 13. Free cash flow in the quarter was higher than last year mainly due to a calendar effect from last quarter as well as higher operating profit. And maintenance CapEx as a percentage of sales was stable at 2.2%. Moving on to Page 14. The financial position still very strong. Net debt excluding IFRS 16 was lower than last year at SEK 1.2 billion. Leverage ratio excluding IFRS 16 was on par with last year 0.9x, 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. Lease liabilities has increased from the last quarter with just over SEK 400 million due to indexation of rental agreements and, as I mentioned, existing contracts increased by 10.85% from January. And with that, I would like to conclude Page 15, financial performance versus target. Organic growth rolling 12 months 5% is now back on target, profitability at 6% is below target while the target on capital structure is met. And so with that, I would like to open up for questions.

[Operator Instructions] The next question comes from Stefan Knutsson from ABG.

Just a question regarding Germany first. Can you talk a little bit more about the compensation cost balance that you currently experience and how you think it will play out in the coming quarters?

It's little bit too early to actually say. We don't yet know how this will pan out in the next year, but we do believe that we will have a time lag like we've had in Norway. But we are pretty certain that we will have compensation within the next 12 months.

Maybe I should mention that the demand is still very high and we fill up these units very fast. So it's not a matter of capacity utilization. So it's more about that the model should work in an inflation environment. So we really believe in the model, but it's not adapted to this inflationary environment and we are also better in Sweden to negotiate salaries. We have this system now in 2 years quite stable and in Germany, it's more volatile you could say.

And how about do you face any bottlenecks in terms of getting hold of preschool teachers there in Germany because of the rapid expansion?

So you can say in the north part where the main part of our expansion is, we don't have this sort of problem. But in [ Beijum ] there is still a lack of staff. But we started our expansion in [ Beijum ], but the main of the new starts are in the north parts of Germany and there we don't see any lack of staff.

Okay. And then also a follow up on inflation here. You said that we saw full impact of inflation here in Q3, but I'm just curious how you think about salary increases year-over-year because I think they will be higher than they were last year starting from Q4? So just a comment on how you see those effects and if you see any offsetting effects to fight that?

It depends if I understand the question right. And when it comes to adult education, the salary increase will be before the summer, but the teacher increase will happen after summer. And when it comes to the big number of staff and that is the teachers, it's not totally clear how high the increase in salary will be. But my guess is that they will follow the model in Sweden with 4.1% this year and 3.7% the coming year. But to be honest if we look at what we hear now from the negotiations with the municipalities, they don't want to spend 4.1%. So we will see what will happen, but we are planning for 4.1% and then 3.7%. And I think that in an environment that we are in Europe is quite good. And you know also that we have already received the school voucher this year and of course if we see a raise in salaries of 4%, the school voucher will continue to increase next year. It's also the question in a good way, Katarina says it was okay so then it's okay. We have a good situation in Sweden when it comes to salaries. I think we should really be proud of what we have done, what the different parties in Sweden have negotiated. So if we see the situation in Europe, it's much more difficult in France for instance as well.

The next question comes from Karl-Johan Magnus Bonnevier from DNB Markets.

But coming back to the expansion of the franchise, looking at the inflationary environment and everything, how do you see new openings say coming this autumn and going into the next couple of years? Are you more reluctant doing organic new openings in this kind of environment than you were before?

So I think we will continue our planned growth in Germany the coming year and of course we are looking very closely what happened with the cost development and the increase of the voucher. But in Germany, more than 50% of the preschool sector is private so they have to change the model and we are totally convinced that the compensation will be there. And when it comes to Sweden, we have created capacity the recent years when it comes to our campuses, our investment in vocational schools. So we will continue to fill up existing schools. Maybe we will do some new starts, but the main of the growth will be organic and will be to fill up capacity.