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

Welcome to the AcadeMedia Q2 2024 Report. [Operator Instructions] Now I will hand the conference over to the speakers: Acting CEO, Katarina Wilson; and acting CFO, Hanna Clausen. Please go ahead.

Hello, and welcome to our second quarter reporting. I'm Katarina Wilson. I'm acting CEO. And today, I have Hanna Clausen, acting CFO, with me. And she is a colleague of mine since many years. Before I start presenting the quarter, I would like to tell you that Marcus is sending his best regards. He's now recovering from his scheduled surgery, and the plan is that he will be back within a few weeks, as we have already communicated. Quarter 2, another strong quarter. Net sales increased by 9.7%, and what is really encouraging is that the Adult Education segment for the second quarter running is showing improved earnings and profitability. In total, AcadeMedia's adjusted EBIT was in line with last year, SEK 204 million, and this is despite continued inflation as well as the full effect of the annual salary revision of 4.1%. And we were already indicating in the last quarter that the annual school voucher adjustment in January 2024 would compensate for the high cost. The school voucher should be inflation safe. It should reflect the cost development in society over time. The school voucher increases for 2024 are still preliminary. We have not yet received decisions from all the municipalities, but the preliminary calculations are showing an average increase of just over 4% in Sweden. And this should be compared to 4.6% last year. And for Compulsory and Upper Secondary School, the percentage increases are in line with last year. And in the Swedish Preschool, it is somewhat below last year. But the inflation is coming down in Sweden, and the forecast is that this will continue to come down. We know that index-related rent increases in Sweden from January '24 will be 6.5%, which is a lower increase than 1 year ago. That was 10.9%. So overall, our conclusion is that the school voucher on average is and continues to be inflation safe over time. Of course, one major exception to this statement is the school voucher increase in the Greater Stockholm area last year, meaning 2023, that was 1.8%. In November, the Swedish National Agency for Education, Skolverket, published statistics showing that discrepancies between national tests and grades have decreased more in AcadeMedia's compulsory schools than in Sweden as a whole. Also, discrepancies in upper secondary schools decreased more in AcadeMedia's schools than in Sweden as a whole. And this is showing that our dedicated focus on equal assessment and grading has made a difference, and the work will continue. We have many quality initiatives in AcadeMedia. We work with quality every day in every classroom in every school. And on top of that, our compulsory schools have launched a quality program that will run for several years. And this program is focusing on early support in reading, writing and mathematics, especially for those children and students who need support the most. Looking ahead, it is encouraging that many of our schools have seen record numbers of visitors to open houses and fairs, and what is also encouraging is the allocation of vocational education places for the autumn '24 start. AcadeMedia's Adult Education received 30% more places than in last year's allocation and is gaining market share. Our strategy to grow internationally remains, and our longer-term goal is that revenue outside of Sweden should grow from today's 25% to 50%. So moving on to Page 3, highlights in quarter 2. As I said, solid growth, number of children and students grew by 3.6% and sales by 9.7% and with growth in all segments, including the Adult Education segment. Adjusted EBIT was in line with last year, SEK 204 million, and EBIT and EBIT margin was higher than last year. Free cash flow was also higher than last year. So moving on briefly to Page 4. And I really just want to especially point out the increased group overhead cost, which is a normal consequence of growth. Some of our staff functions are adding extra resources as we grow. We have also had a somewhat higher activity level in the quarter. But you will see a somewhat higher group overhead cost going forward. But as a percentage of sales, it should remain stable. Moving on to Page 5. Rolling 12 months net sales now exceeds SEK 16 billion, SEK 16.3 billion. Adjusted EBIT, stable at SEK 966 million, and adjusted EBIT margin of 5.9% and again, a very positive free cash flow development. And with that, I would like to hand over to Hanna, who will now take you through our segments.

Thank you, Katarina, and good morning, everyone. Let's continue to Page 8, development in the quarter and starting with the Preschool and International segment. The number of children increased by 6.5%, and we continue to see growth in all countries, except Sweden, where 2 preschools have closed in the quarter. Growth was driven by acquisitions and new openings in the Netherlands and Germany. The first 6 months, 8 new units have opened in Germany, and the full year plan is to start 15 new preschool is unchanged. Net sales increased by 14% compared to last year, and the organic growth was 10.1%. The acquisitions, Winford and FAWZ, contributed 5.4%. Currency development had a negative effect of 1.5%. Adjusted EBIT improved, and the margin was stable compared to last year, this despite the higher operating cost in all countries due to inflation. Also, we had in this quarter higher costs for temporary staff due to higher sickness rates of about SEK 5 million. All in all, cost increases were offset by the annual school voucher revision and lower energy costs, and acquisitions contributed SEK 5 million. And before talking about the preliminary school voucher figures, I would like to stress that they are preliminary and that they are subject to change when all decisions have been received. A more precise figure for 2024 is to be communicated in the interim report for the third quarter. So the average school voucher increase for AcadeMedia's preschool in Sweden is estimated to be just over 4%. For 2023, the increase was 5.3%. And in Norway, the preliminary school voucher increase, including parental fees, amounts to an average of 5.5%. We continue to Page 9, the Compulsory School segment. The number of students increased by 2.6%, positively affected by the acquisition of 2 units with 600 students completed in the first quarter. Adjusted for restructuring units, the number of students increased by 3.5%. Net sales increased 10.6%, positively impacted by the annual school voucher revision and student growth. Adjusted EBIT was in line with last year, SEK 65 million. And despite this, despite inflation, the margin, however, decreased to 6%. Inflation continued to impact operating costs, and rent increased by about SEK 10 million compared to last year due to indexation. The annual salary revision of 4.1% as of September affected the quarter by SEK 5 million, and increased capacity utilization and the acquisition contributed about SEK 10 million, mitigating the inflation effect. The preliminary school voucher increase for AcadeMedia's compulsory schools in Sweden 2024 is estimated to be just over 5%, which is in line with last year. We continue to Page 10, the Upper Secondary School segment. Student numbers increased by 2.7%. The growth is mainly due to 5 units opened in the last 3 years, adding 550 students as well as capacity expansion. The 2 campuses opened last autumn saw a 13% year-on-year increase in the student numbers. Overall, capacity utilization in this segment increased to 86.5%. Net sales increased 5.9%. And in addition to more students, the growth is also coming from the annual school voucher revision. Adjusted EBIT and margin decreased compared to last year due to higher operating cost caused by inflation. And as Katarina mentioned, this is the first quarter with the full impact from inflation on all costs. Rent increased by SEK 20 million, and this annual salary revision from September affected the quarter by SEK 15 million. And let me reiterate what we highlighted in last investor call in October and what Katarina also highlighted is that about 30% of the schools in the Upper Secondary School segment in Sweden are located in Greater Stockholm area, where the school voucher increase for 2023 was 1.8%. And this increase is not compensating for the current inflation, including the annual salary revision. The preliminary school voucher increase for the upper secondary schools in Sweden for 2024 is estimated to be close to 4%, which is in line with last year. We continue to Page 11 and the Adult Education segment. Sales increased 8% to SEK 473 million due to more students in higher vocational education and the acquisition of Berghs. Demand for higher vocational education remains high, and the quarter was positively affected by short vocational education courses run in this quarter. Year-over-year, revenue increased by 13% and profitability increased. In the municipality business, capacity adjustment and cost-cutting measures implemented last year continued to show a positive effect, and profitability increased. The acquisition of Berghs contributed SEK 5 million. In total, adjusted EBIT increased to SEK 46 million, and the margin increased to 9.7%. But please be aware that the quarter is temporarily strong as short vocational education courses finished in December. And in addition, Berghs has almost all earnings in this quarter. The assessment is that the EBIT margin for the full year will be in the lower range of 9% to 11%. We continue to Page 13, free cash flow and investments. Free cash flow in the quarter was higher than last year, SEK 537 million. This is due to higher profit and a more positive effect from net working capital development. The net working capital in the comparable quarter was negatively affected by the restoration of accounts payable after calendar effect, about SEK 200 million. Maintenance CapEx as a percentage of sales remained stable at 1.8%. We continue to Page 14, financial position. Net debt, excluding IFRS 16, was lower than last year, SEK 1.5 billion. And leverage ratio, excluding IFRS 16, was lower than last year, 0.7, 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, indexation and growth. And leverage, including lease liabilities, was 3.2, somewhat lower than last year. Last but not the least, we continue to Page 15, financial performance versus target. Organic growth, including small bolt-on acquisitions, was 7.6%, which is above our financial target of 5% to 7% growth. Adjusted EBIT margin, 5.9%, is below target, and the target on capital structure is net 0.7. And with that, I hand back to Katarina for some comments on the voluntary share redemption program.

Yes. Thank you, Hanna. The AGM in November decided on a voluntary share redemption program. And today, we have no additional information. But I would like to remind you that this program will be launched in this quarter, this third quarter. And also, the 2 parameters that have been set in this program are the maximum amount that will be repaid to the shareholders, SEK 275 million, and the redemption amount per share will be set with a premium of maximum 30% of the share price. Very shortly and I would say late February, we will be providing all the details and the exact conditions of the program. And so with that, I would like to open up for questions.

[Operator Instructions] The next question comes from Beltran Palazuelo from DLTV Europe.

I have 2 questions, if I may. Regarding the vouchers, of course, it's preliminary. But with this level of vouchers, can you more or less confirm that margins will be at least this fiscal year as last fiscal year? And then my second question is regarding M&A. I remember Marcus on the last conference call saying that maybe this year, you will be a little bit more active regarding M&A. So if you could give us maybe a little bit of highlights what operations you're analyzing? Is there opportunities? Are multiples going down due to higher interest rates, if you could give us a little color? Thank you for your outlook.

Thank you, Beltran. Yes, I can confirm and as I said that the voucher increase will reflect inflation. So yes, the margin should not be affected. But -- and I really would like to state that it's still preliminary. I don't see that we will have major changes to these numbers, but it might still change somewhat. But yes, it should be stable. M&A, and we also wrote about this in the report that this is something we are looking at all the time. Of course, the pandemic, maybe it's harder to continue with some discussions that we've had. But yes, this is very high on our agenda. So absolutely, yes.

Perfect. And maybe I'll catch up, if I may, Katarina, regarding margins in the long term and the stated target, seeing that maybe your lower margins on preschool and international and I suppose by your comments, maybe the lower margins on your international business, let's say. What measures are you taking to more or less bring that segment to where you want to take it?

Yes. I mean, if we're looking at the margin in the preschool and international segment, you really need to look into each country because we have different measures in each country. But we've spoken about Norway for a long time that we have a lag. So the school voucher takes about 2 years to reflect the actual cost increases that we have, and we have a similar pattern in Germany. So that's a major reason why the margin isn't really picking up. But that will come because we have this lag in the voucher increase. And also, we spoke about in the quarter that we have higher sick rate. And especially, the preschool is very sensitive to sick rates. We had -- in the quarter, we had -- I think the flu season came earlier than last year. We had in Sweden and in Norway and in Germany a lot of sick leave, especially in October, November. So that is impacting the preschool. But hopefully, we will not be sick for the full year. So those are the main reasons.

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

Yes. Katarina and Hanna, just following up also on your ambition of growing the international revenues from 25% to 50%. How much of that do you think you can source through more of organic initiatives, starting new schools and similar things? And what do you think would be then the logical follow-on to previous question and answer, the M&A part of it?

We'll, for sure, see organic growth. I mean, we will continue with growing our preschools in Germany. The plan this year is 15 new units. That is, for sure, our strategy. We're also looking at growing organically with preschools in the Netherlands. But to really meet the target of 50%, you will also see acquisitions, for sure, absolutely. So both, of course.

But in that kind of statement, would you say that you would expect the Swedish footprint to basically be unchanged, so to say, there is no idea of, say, decreasing the Swedish operations?

No, that's not the plan.

There's a question to grow into it, basically. So that's good.

Absolutely.

And when you look at the continued very, very strong cash flow you represent and you highlighted now the voluntary share redemption program coming, looking at, say, a similar strong cash flow going forward, should we start to expect that these kind of voluntary programs may be becoming an annual event? Or should we see this as a one-off?

That's not a question for me. So I think you have to ask the AGM or the Board that question. But for sure, and I agree with you, Karl-Johan, our cash flow is very strong. And that gives us a lot of opportunities both to invest in our existing operations, and we do that, but also to grow organically and through acquisitions. So it gives us a very good position. It's a good position to be in.

[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 listening in today, and I wish you a very good day. Thank you. Bye-bye.