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

Welcome to the AcadeMedia Q4 Report 2022/2023. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Marcus Strömberg; and Deputy CEO, Katarina Wilson. Please go ahead.

So good morning, everybody, and welcome to this presentation of our full year result. And I will just give a short introduction, and then I will hand over to Katarina that will go through the numbers. Now, first of all, we are very happy to start a new school year and, in fact, we are starting this school year with all-time high record when it comes to number of students. The number of students is up 5%, and we think that is a good start of the new year. And that is a result of the investment that we have done in vocational, training and also in our campuses, and also, of course, the growth in the international markets. If you look at the revenue now in AcadeMedia, 25% of the revenue is outside of Sweden, 33% is outside the Swedish school voucher system. And to have a balance in our revenue is very important for us because we think that, that is more safe for the students, and that is also something that will bring us into the future. If we look at the last quarter, we had a good growth when it comes to the revenue of 9%, and also the students' number is up 6.4%. So we ended the school year and our full year in a very good and positive way. We have seen an improved development in Norway. That is something that we have struggled a bit with. But it's also very positive to see that the quality effort that we have done in Norway is also showing a result because the children's number is up and the capacity rate is also improving. And then if we look at the adult segment, it is of course good for Sweden that we have low numbers when it comes to unemployment rate. But that has affected the municipality training programs. But if we look at the vocational part of the Adult Education, it's really fantastic to see what we have achieved. We have made a total turnover of the Adult Education, and the profitability and the growth and the things that we are doing to help companies to secure workforce is very positive from our side. So the total overview of the year is good in a tough environment, and we are starting the new school year in a very good way. So please continue, Katarina, and go through the numbers.

Thank you. Yes, I'm Katarina Wilson. I will start presenting the fourth quarter and then I will move on to summarize the financial year '22/'23. And the results that we are presenting today are in line with the preliminary numbers that we communicated on July '19. So let's move on to Page 3 with highlights quarter 4. Good growth in number of students, 6.1%, with growth in all segments and in all geographies. Net sales increased by 9% with growth in all segments except in the Adult Education segment, where volumes in the municipal business area was still below last year. Organic growth including smaller bolt-on acquisitions as well as growth in the Netherlands was 7.2%. The acquisition of Sandviks in Norway in quarter 4 last year as well as the acquisition of FAWZ in Germany this year contributed 2% to the growth. And changes in currency had a limited negative effect of 0.2% in the quarter. Adjusted EBIT was higher than last year, SEK 333 million, and adjusted margin increased to 7.9%. And as of last quarter, we're now seeing the full effect of inflation, including increased rental costs. Rent in Sweden increased from January 1 by 10.9% due to indexation, and we are estimating that costs for electricity, school meals and rents altogether increased by about SEK 50 million in the quarter compared to last year. The annual school voucher revision from January 1 are partially offsetting this cost increase, and profitability in Norway increased due to the voucher revision, which is the compensation for previous year's cost increases. Good cost control in the Compulsory and Upper Secondary School segments in particular also contributed. Items affecting comparability, minus SEK 23 million, is related to restructuring in the Upper Secondary School segment. And free cash flow in the quarter was higher than last year at SEK 406 million. So let's jump on to Page 7, development quarter 4 by segment, and starting with the Preschool segment. The number of children increased by 12.7%, with growth in all countries. And the growth was mainly driven by acquisitions and new starts in Germany and in the Netherlands. In total, we opened 9 new units in Germany during the full year, and this was lower than what we initially communicated, 15. But as we also communicated during the release, that this was a temporary revised plan to mitigate increased inflation. No further units opened in the fourth quarter. The acquisition in quarter 2 of FAWZ in Germany contributed with 1,800 children. Net sales increased by 17.3% compared to last year, and the organic growth was 11.5% adjusted for the acquisitions of FAWZ and Sandviks. Currency had a small negative impact of 0.8%. Adjusted EBIT and margin were higher than last year. Higher cost in all countries due to inflation, about SEK 15 million in total, were offset somewhat by the annual school voucher revision as well as increased capacity utilization in Sweden and in Norway. And the acquisition of FAWZ in Germany also contributed. For the next financial year '23/'24, we will return to our plan to open 15 new units in Germany, of which 6 actually already in the first quarter. In Sweden, 3 units will close with about 200 children, and also the acquisition, Winford College, with about 600 students will be included in the Preschool segment, as well as MediaDesign Academy from August. Moving on to Compulsory School, Page 8. The number of students increased by 3.1%, which is 859 students, and sales grew by 7.9%. One new school with 130 students started last autumn and one school with 230 children was acquired in the third quarter. Several units have also increased capacity, invested in increased capacity. The annual school voucher revision from January was 5.3%. Net sales were also positively impacted by retroactive school vouchers and subsidies of SEK 5 million in the quarter. And last year, we had a similar effect of about SEK 10 million in the fourth quarter. Adjusted EBIT was higher than last year at SEK 88 million, and the margin increased to 8.6%. Inflation continued to impact operating costs. Energy, school meals and rents increased by about SEK 15 million in total compared to last year, somewhat offset by good cost control. Continued initiatives to strengthen student health also impacted profit, and we had no significant effect from vacation in this quarter compared to last year. Moving on to Upper Secondary School, Page 9. Student numbers increased by 4.3%, which is over 1,800 students. And net sales increased by 7.7%. Growth is coming from the 24 units that have opened since 2017 as well as from capacity expansion, including 2 new campuses that opened in Stockholm last autumn. Revenue increase is also coming from the annual school voucher revision, that was 3.9%, and about SEK 10 million in retroactive school voucher adjustment in quarter 4. Capacity expansion continues to temporarily lower capacity utilization, which decreased by about 2.9 percentage points to 82.9%. And I've said this before, but this effect will remain until the campuses and the new starts have reached full capacity utilization. Inflation continued to impact operating costs. Energy, school meals and rents increased by about SEK 20 million in total compared to last year, and this was somewhat offset by good cost control. Adjusted EBIT was higher than last year, SEK 160 million, and the margin increased to 11.6%. And as I mentioned, we had items affecting comparability: SEK 23 million related to restructuring, 4 schools will gradually close and 3 schools will merge with sister schools in the same location. And we actually also opened one school this autumn 2023. Moving on to Adult Education, Page 10. Sales decreased by 7.5%, and this is entirely due to continued lower volumes in the Municipal Adult Education, where sales decreased by 22%, but volumes were stable compared to last quarter. Capacity adjustments in this business area and cost-cutting measures are now fully implemented. Sales in the Labor Market Services business increased by 25% but from a very low level, which is a conscious decision to reduce exposure to this business area. The volume in the matching contracts are still well below the Swedish Public Employment Service's own forecast. Demand for Higher Vocational Education remains high and revenue increased by 7%. Capacity utilization is slightly lower than the last year, affecting EBIT and margin somewhat. Also, inflation had a negative impact on the Adult Education business. In total, adjusted EBIT in this segment decreased to SEK 20 million and the margin was 5%. And if you're looking ahead, the expectation for the next quarter is that the volumes in the municipal business area will continue to stay low, but volumes in the vocational business will increase. And as always, the development of the economy can lead to higher unemployment and increased demand for Adult Education. Free cash flow, moving on to Page 12. AcadeMedia has a very strong free cash flow, and in the quarter it was somewhat higher than last year at SEK 406 million. Maintenance CapEx, to the right of this page, as a percentage of sales was 1.8%, which is back to the level 2 years ago. And if you recall, last year, we saw higher maintenance CapEx related to our 2 new campuses in Stockholm. Moving on to Page 13. We still have a very strong financial position. Net debt excluding IFRS 16 was lower than last year at SEK 825 million, and leverage ratio excluding IFRS 16, 0.6, was lower than last year and well below the financial target of less than 3. Net debt including property-related lease liabilities was higher than last year due to expansion in capacity and growth, and lease liabilities also increased in the third quarter with just over SEK 400 million due to indexation of rental contracts. Leverage, including lease liabilities, was 3.1, which is in line with last year. And then to summarize the financial year 2022/'23 with some highlights, Page 14. The number of children and students grew by 5.8%. 27 new units were added, mostly outside of Sweden, and the international business grew and accounted for 23% of total net sales. Net sales increased 8.4% and exceeded SEK 15.5 billion. Adjusted EBIT was SEK 964 million and adjusted EBIT margin, 6.2%, despite high inflation and declining volumes in the Adult Education business. Free cash flow was SEK 792 million. AcadeMedia also took the first step to expand Compulsory and Upper Secondary Schools internationally with the acquisition of FAWZ in the second quarter. And we also further strengthened our position in game education through the acquisition of Futuregames in Sweden. And our 2 new campuses that opened last autumn has proven to be very attractive to students. And with that, I would like to conclude, Page 16, financial performance versus targets. Organic growth was 6%, which is within our target. Adjusted EBIT margin, 6.2%, which is below target but the trend turned in the last quarter. And the target on capital structure is met. And the Board is proposing a dividend of SEK 1.75 per share, which is unchanged from last year. And so with that, I would like to open up for questions.

[Operator Instructions] The next question comes from Karl-Johan Bonnevier from DNB Markets.

Sorry for the background noise, but I'm in quite an exceptional place for the moment. But looking at your Q4, congratulations to solid results and continued good development. And you obviously ended this year now with an exceptional strong balance sheet. So what are your considerations about that going forward and also looking at the opportunity to maybe redeploy a bigger part of that internationally?

So that is a very positive position that we have now with a very strong balance sheet, and we also have the balance in different international and local segments and a good cash flow. And this gives us the opportunity to continue this strategy that, for the moment, 33% of the revenue is outside the school voucher system in Sweden, and our target is that it should be 50%. So I think this gives us possibility to continue to grow through acquisitions. And we started now with acquisition in the Netherlands, and that is -- that now we are running the full education ladder both in Germany and in the Netherlands. And hopefully, we can continue this development.

And will you now also add what I would call more private finance markets and voucher finance markets? Is there any additional considerations, looking at the profitability perspective of these market opportunities? Or something else we should have at the back of our minds?

They are more profitable but, of course, they are also more expensive. So you have to pay a little bit more for them. But I think it's also positive for us to learn new markets, new segments and new school structure. For instance, we have a lot of discussion around the grades in Sweden. Now when we have looked into the Netherlands system, where the grades is everything when it comes -- the test is everything when it comes to grades. So we can also learn between different school systems. But the overall picture is, of course, that private paid education is more profitable and also more expensive. But that is how it looks like in the Netherlands and France and U.K. and some parts of Spain also. What is positive, if you look in the Netherlands, they also have a very good independent school system with a lot of free schools, so to say. So we are learning more about these schools and taking steps all the time.

And willing to go outside voucher-based systems, would that add -- you have highlighted a number of markets where you have investigated opportunities historically. Would that add any new markets to that list?

Yes, absolutely. You have it in all countries. But we are a little bit careful. We have to understand -- and when you look at the semi-private paid system or private paid system, it's another base of parents that go to these schools. So we have to learn the system, work together with local management teams. And to be honest, we love the Swedish system where everybody could choose schools. And if we look, for instance, in Germany, it started preschool with private paid schools, but now they have the same system as in Sweden. So who knows what will happen. But this is a first step for us and we are learning.

And finally for me, when you look at the new legislation that the educational authorities are suggesting, so to say, how will that impact you? And is a big part of your operations that would be noncompliant if you are looking at it? Or how would it play out?

The overall picture when you look at AcadeMedia in Sweden is that we are compliant. I follow this all the time. And if you look at the school inspections, result of their -- when they look at our different schools, it's quite positive, to be honest. So that I'm not so concerned around. But when you look at this investigation, we will see what the result of this will be, if there's a lot of different sort of regulations, and maybe one regulation on top of another regulation. So it will be a little bit hard to work out the legal part. But we think that it is very important that the politicians in Sweden and how developed the system and the long-term regulation of this sector, that is the most important thing. And if it will affect us, I think it's more positive that the regulation is long term.

The next question comes from Beltran Palazuelo from DLTV.

I have a couple of questions, if I may. First of all, regarding margins for next year, I know there will be a question mark due to the vouchers coming. But seeing how inflation is developing, where would you expect margins going forward in the next 12 months? And then I have other 3 questions. I don't know, should I ask them now or after you answer the first one?

Yes. You're right when you're saying that the school voucher, of course, is important. And we don't know what that will be for the next year so it's very hard to answer that question. But we're very happy that we are finishing last year on a really strong position. So I'm not too worried. But also when it comes to the Adult Education, it really, really now depends on the unemployment rates in Sweden and how that will turn out. So it's hard to be exact on that question.

Okay. And maybe my second question, in M&A. Exactly what we're seeing here are extremely strong balance sheet. If we take the [ first ] half, what would the M&A budget -- if the good opportunities arise, how can you structure your balance sheet in order to execute the good opportunities? So when you see the opportunities that are in front, how much would AcadeMedia will be able to invest in good opportunities for the long term?

If we have good opportunities, as you see when you look at our balance sheet, we have a lot of potential in the balance sheet. But the environment is also a little bit different now with quite high interest rates. So maybe we don't have the potential that we have in our target with 3x EBITDA. But if we have the right opportunity, I think that we could use our balance sheet to make the company stronger. And we are looking mainly at added education investments and also in the different international markets.

Okay. And maybe my 2 last questions is maybe you could clarify more about your dividend policy. It seems that it has been a good year, and your dividend is the same and no buybacks. So if you could clarify your dividend policy. And then maybe another question from my side is regarding free cash flow. If you could define exactly, what do you define by free cash flow? And then if, I guess, your net debt from last year ex leases, and from this year and if I add everything that's there, it's quite confusing. So maybe for next time, you could put out a statement of cash flow ex IFRS because it's very, very complex to add it.

Maybe Katarina could call you and explain that. So that is her really expertise. But if we take the other questions around dividend, it's very important to understand that the overall environment is still quite tough when it comes to inflation. So we really have to keep our feet on solid ground. And as I said before, our key priority is to deliver good quality to all our students and to continue to invest in vocational training and campuses and so on. But we also want to invest more in acquisition in an international strategy that I mentioned. So that's why the dividend is in that way. And so we want to keep a strong position and to continue the strategy that the Board has decided. And hopefully, you will see some news around this the coming year.

And just to touch on the free cash flow definition, you have a table on Page 6 in the report. But the easy definition of free cash flow is cash flow after we have -- after investing in our existing business, so after maintenance CapEx, so what is left to pay dividend, to amortize and also financing costs. But Beltran, I'm very happy to talk you through this in detail.

Okay. And in this free cash flow, then we would need to pay the leases because it seems -- well, it seems quite high when I see your -- when I see your CapEx and when I see your depreciation ex IFRS. It's -- or we can talk...

Yes, free cash flow is not impacted by leases. So free cash flow in our definition is the same with or without IFRS 16. It is the real free cash flow after we paid rents.

Okay. All the support from my side, and congratulations for the strong results.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

So thank you very much for your question. We wish you all a good day. Thank you, and goodbye.

Thank you. Bye-bye.