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

So good morning, everybody, and welcome to this presentation that I will have together with Petter Sylvan, and I will make the introductory remark and tell you a little about how the quarter has developed on Page 2. And this third quarter, I must say we're very proud of the quarter. It's a stable quarter. We are improving the growth, the profitability and all our segments is a part of the stronger financial development. And we have also invested in quality and increased teacher qualifications. We have had a lot of efforts to improve reading and maths. And we have also developed the international strategy. And we have set a target that by 2030, should grow in Germany to 200 units and be the leading operator in Germany. And we have also made just after the end of this quarter, 2 important acquisitions, one in the Netherlands that is called Yes! and one in Germany. And this is important steps, and that shows also that we have the possibility to go ahead and achieve our strategy and our targets. And then if we continue to the next slide, we have made efforts to improve the qualification system, and now we are aiming at improving the teacher certificate. And as you see at this slide, we improve it in both our segments. We have a history where we have had other competence in our schools, and we are really now at a positive track, and we have quite easy also to recruit good teachers. And if we should look at the key subjects like maths, we have almost 100% when it comes to these key subjects teacher certification. And as I mentioned, we have this continued journey when it comes to the international development. And for the moment, we just opened our 100 preschool in Germany. And now we are aiming for 200 preschools in Germany. We have around 50 units coming up, and we think that we could grow when it comes to the preschool organically. But if we look at the road map when it comes to the international schools in Germany, we want to be the leading operator. And then we have to double our revenue. And what we did now is a good first step with the acquisition of Potsdam that is a school with more than 1,000 students. And we also have improved our footprint in the Netherlands with more than 20 preschools, and we have now a platform of more than 30 preschools in the Netherlands and 10 schools. So 2 important acquisitions that support our international road map. And if we look at AcadeMedia and the historic development, as you have followed the company, see that we have a strong financial performance with 19% CAGR EBIT development over here, stable year out, year in. And this is a result of the strategy of diversification and growth and also acquisition. And we have now a footprint of more than 40% outside the Swedish school voucher system, and we have a target to reach 50% when it comes to this development. So a strong historical development. And as Petter will show you in a few minutes, we also have a strong balance sheet that will also support that we could make acquisition and go ahead with our plan. So with that introduction, I will hand over to you, Petter, and go through the numbers, and I can take also some questions afterwards.

Thank you, Marcus, and good morning, everyone. Delighted to see that we continue now our international growth. As Marcus outlined, we achieved a good growth of 9.2% with contributions from the acquisitions of Touhula in Finland that amounting to 4.6%. And additionally, our adjusted profit margin increased to 7.2%, and that was to compare last year's 6.9%. And that means that we were reaching SEK 377 million in absolute terms, up from SEK 327 million. If we flip to the next page, the improved adjusted EBIT are evident across all segments. And in the Preschool and International segment, the increase of SEK 13 million is driven by a positive contribution from the acquisition of Touhula. In the Compulsory and Upper Secondary segment, we have a stable situation with an increased efficiency in Upper Secondary. Adult Education continued to report strong results, driven by high unemployment and better utilization rates. Let's look at the quarter development within each segment, and we start then with the Preschool and International segment on Page 12. The number of children increased by 18.3% with growth witnessed across all countries, excluding Sweden. Our growth was primarily driven by the acquisition of Touhula in Finland, along with new preschool openings in Germany. The international operations account for approximately 30% of the group's total sales. Net sales increased by 16.6% compared to last year with organic growth at 6.9%. Adjusted EBIT and margin was slightly reduced compared to the previous year. This year's margin 6.5% was down from last year's 6.7%. Last year's result was positively affected by retroactive revenues amounted to SEK 10 million. If adjusted for the retroactive revenue in the quarter, the margin was improved by 0.4%. The operating profit increased to SEK 121 million compared to last year's SEK 108 million. The improved result was mainly a positive effect from the acquisitions of Touhula, while the rest of the operations remained stable. The 2025 preliminary school voucher increase in Sweden is estimated to be 2.5% or it's confirmed rather. And in Norway, it has been 4.5%. After the end of the reporting period, we completed, as earlier Marcus mentioned, 2 acquisitions. And in April, we acquired Yes! Kinderopvang with 22 preschools. And in May, we acquired the international schools in Germany with 1,250 students. Let's move on to the Compulsory School on Page 13. And we now note a 4.9% increase in student numbers. Net sales rose by 8.2%, driven by increased number of students and the positive impact of the annual school revision. Adjusted EBIT and margin increased slightly compared to the previous years. This year's margin reached 7.2%, which is up from last year's 7.1% and operating profit was SEK 85 million compared to last year's SEK 78 million. The 2025 school voucher increase in Sweden is estimated to 3.1%. Now we move further to Upper Secondary School on Page 14. And here, we observe a 0.6% increase in student number. The sales growth of 3.1% was driven by more students as well as annual voucher revision. The adjusted margin increased this year's 9.1%, which is to be compared with last year's 8.2%. And this was achieved because of good cost control in the quarter and increased retroactive revenues. 2025 preliminary school voucher increase in Sweden is estimated to be 2.6%. If we move on Adult Education on Page 15, there is a 5% increase in sales, which is attributed to a high number of students in particularly higher vocational education. Adjusted EBIT increased to SEK 53 million from previous year's SEK 43 million with a margin of 11.4% compared to 9.7% last year. Let's continue to Page 17, and there we talk about free cash flow and investments. Our free cash flow for the last 12 months was close to last year in absolute terms. The free cash flow as a percentage of EBITDA is as expected around 70% this quarter, a little bit lower. If we then continue to maintenance CapEx -- sorry, if we go to the next slide, Page 18, the financial position. Net debt, excluding IFRS 16, decreased by SEK 250 million -- sorry, SEK 240 million compared to last year, with the leverage ratio, excluding IFRS 16 at 0.7, which, of course, is well below the financial target of less than 3. Even including property-related lease liabilities, the net debt including the net debt is lower. This is due to low indexation, low number of new entry contracts in the quarter and FX effects. After the end of the reporting period, new loan agreements were signed with 3 banks, which is securing financing until 2028 with the possibility to extend until 2030. And securing future financing for a longer horizon is vital for AcadeMedia to be able to execute on its acquisition agenda that Marcus spoke about. And this will be important to lead to our goal that 50% of revenue should be financed from other sources than the Swedish school vouchers. Let's move on to Page 19, our financial performance against targets. Our organic growth, including small bolt-on acquisitions stands at 6.1%, which meets our financial target of 5% to 7%. Our adjusted EBIT margin of 6.6% falls below the target range of 7.8%, but we are slowly improving quarter-by-quarter and rolling 12 and are getting closer to the target. The leverage ratio of 0.7 remains well below the required threshold of 3, leaving further room for acquisitions when opportunities occur. And with these words, I end the presentation, and we open up for questions.

[Operator Instructions] The next question comes from Johan Lönnqvist Sundén from Carnegie.

First one for me is when reading through the CEO comments in the beginning, you highlight, Marcus, the kind of ongoing review of the Swedish school system and that you're analyzing the outcomes and are open to adjust your operations. It would be very useful if you can give some more color on what you see is changing and how you are to kind of adjust your operations for this potential change in the market setting?

When it comes to that comment, first of all we are talking about inquiries. Nothing is really done. Nothing is decided. And this is now going out to let different organization also comment on these different sort of inquiries. But when it comes to this transparency inquiry, we have to increase the way that we take care of e-mails, report, different structures, financial documents to prepare to make it more transparent for media or all public persons and so on. And that is what we are talking about. And that's a quite easy step for us as a big organization, but we really don't know if this will happen yet, but it's about the transparency question.

And have you made some kind of over back of the envelope calculation what it would cost for you so you can have some kind of [indiscernible] or do you think that...

What we see so far, it will not affect us. And as I mentioned, we are talking about something that will happen in 1 or 2 years, and it's not decided yet. That is important. Nothing is decided. But of course, we always prepare. And when it comes to the cost, I think they will be not so -- they will not be high because we have a big organization. So it's more about the sector and how it will affect the sector.

And are they kind of topics raised in this review regarding forbidding paying a dividend? During the first few years, there was also discussions about looking over the kind of voucher system, the kind of initial take from your side on those 2 topics potentially impacting your business?

You can say the voucher system is not presented yet. So there has been a lot of discussion around it. So it's difficult to comment on that. And our view is and our report says that we are undercompensated and has been that under many, many years, so -- but we will see what will be the outcome of that. But when it comes to the dividend question, we don't take dividend from units that we have started because it will take us 3, 4 years to make it profitable. So that's not an important question. Then when it comes to the dividend, if we make acquisition, that is not really an important question either. But I think that there will be changes from this inquiry because I think they understand that to talk about many years is a long time. So hopefully, it will be a shorter time, and it's about making trust among the public organizations. So the dividend, we don't think that, that's the right thing to do if you want to regulate the sector. But if they have to do it, it will be, of course, more complicated for us, but we will handle it.

And there's a time frame, best guess from today to implement into a new kind of set of market structure. How long time are we talking?

We are talking first about the period of inquiry and discussion between the political party, and that will be -- maybe this will be on the parliament's table just before the election, but I'm not sure. So -- and then when they decide about it, it will take maybe 1 to 1.5 years to implement it. So -- but it's important to understand that nothing is decided, nothing is decided. So it will be up to discussions. And even if things will be decided, it will be decided maybe just before the election next year and implemented '27, '28.

Very clear. My second topic I wanted to discuss is margin expectation in the Adult Education business, which has performed well recently. And you highlighted in the report that there are -- the Swedish government are investing into Adult Education. So if we assume that volumes hold up or even grow in the coming year, do you think it would be possible for you to maintain the kind of margin levels seen this year? Or should we still expect margins to kind of come down to, say, long-term average?

We believe that as long as unemployment rate stays at the level that it is now, that's the fundamental for continuous demand. And the current forecast supporting that to some degree, but I mean, that's public data, so that's up to everyone to make the estimation. And that should normally mean that we should be in the higher part of the interval of the 9% to 11% or even exceeding that, that we might do currently trading. And that's how it has looked historically also. So the main reason if we wouldn't be able to achieve such high margin going forward is if there is a change in unemployment rate, if the unemployment rate is starting to fall. And of course, sooner or later, that will happen, but we don't know. No one knows when it will happen.

Excellent. And final question from my side. It's on the cost levels on the compulsory side. I note there was a little bit of a pickup in cost here in Q3. How kind of temporary or how temporary are the pickup here?

The cost of Compulsory School, one should view it for a longer period year-to-date or so, I would say. But having said that, the margin is stable. As you see, we are increasing with 1 percentage point. And while the reason why it's not increasing, but it's staying stable is fundamentally that in Compulsory School is where we're investing most in quality initiatives and quality initiatives correlate a high degree of more specialists in supporting skills of teaching mathematics and Swedish. So we don't expect a margin reduction, but we don't expect any major margin improvement from where we are...

Great. And just one final question. It's on the retroactive revenue part, which is where we are quite in the dark for forecasting. How should we expect that to impact your profitability in coming quarters? Any extraordinary that we should be aware of that are to come?

So it's a little bit difficult question to answer. The way we -- just to give a little bit more flavor, we always have retroactive revenues. It's part of the compensation system that compensation is done afterwards when it's calculated in the municipalities that if we look for Sweden, for instance, but it's similar in the other countries that they had higher cost than they had anticipated in the budget. So there always is a delay of compensation. And the key question is, is there any major changes in the period compared to the other period for comparative reasons. So we have -- that's what we try to explain in the reporting if there is a significant deviation for comparison reasons. But having said that, and just to explain for this quarter, for instance, if we look at the Preschool segment, in the Preschool segment and International, we had last year, and you can read that in the report, there we expressed that we had SEK 10-more million in retroactive revenue, while we had no retroactive revenue this quarter. So on the other hand, we had more retroactive revenue in Q2 in the Preschool segment. If you look at it year-to-date, the Preschool and International segment, there is a margin improvement and a higher degree of that margin improvement is in the International business than the Swedish part of the Preschool segment. So rather long answer too, we are a little bit in the dark ourselves. For a particular quarter, it could happen that there is a deviation that we didn't really forecast it would happen in that quarter because we don't really know when they come. But seen over a couple of quarters, this typically even out compared to the -- when you compare the years.

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

Just to continue on the last answer, Petter. When you look at the retroactive payments in this quarter compared to the similar quarter last year, on the ones you detailed, it sounded like it was basically the same level that was affecting you this year as last year? Or was there a different interpretation I should make to it?

Yes. If you look at particularly this quarter and if you pick the values that we write in the report, in total, it's relatively similar retroactive revenues between years, as you said. And then there is a variation in Preschool and International, there is less than last year's quarter. In the Upper Secondary School, it's more. And roughly, they even out.

Yes. On group level, it's basically unchanged when you're looking at it. But then as you said, you're not detailing all of what is coming in as retroactive.

But what is important to understand the deviation, that's what we write out. And also, I clarify again that -- and you may already have understood that, but typically, if you look for full year and compare the retroactive revenues in total makes typically very little difference between the years. It's normally phased...

Exactly. No, no, I appreciate that you detail it on to understand the quarterly variability on margins and similar kind of things. And looking at also your comment about Adult Education and what kind of momentum do you see in the business going into the second half -- into Q4 and slightly more high season in this kind of thing?

Q4 is always, as you know, the smallest quarter with the lowest revenue. And we expect the same pattern this year. There is no change. We typically have shorter courses in that quarter, and there's also part of the vacation and so the start there. So no change in expectations from a phasing perspective.

And going into -- sorry, should I phrased it other way. But going into the next high season, if I mean like that, have you added a lot of new programs to keep it going, so to say, on the current growth level as well?

We don't -- we have good amount of programs. We have good demand, and there is an underlying need there in the labor market. So you can complement also, Marcus, if you know. But from what I've seen in the labor market, there is still expectations for the full 2025 of high unemploymentship. So based on that such data, if that continue, we continue -- we would estimate that the coming year -- we have the fundamentals for that after the summer we'll continue to be strong. I think the key question is what will happen after that with the unemployment rate.

And then you have the election year 2026, and the ordinary pattern is that the politician and the parliament invest more in education and election year. And this year, we also have unemployment. And I think they will continue to invest more when it comes to what we call [ yrkeshögskolan ]. So the market will grow and our -- what we want to achieve is, of course, to grow with the market and maybe even try to take some market share. So if it follows the ordinary pattern, we should have a good season in the coming 1.5 years.

And looking at the school voucher indications that you now give in the report, how do you see those playing out when it comes to the cost inflation that you see?

Yes. As you know, we had low indexations of rents, 1.6% about, which is good. Of course, it comes down to the salary -- expected salary increases and the major revisions we have in Sweden are in September. But generally speaking, we consider this to be neutral and the cost compensated-wise.

And I guess looking at Norway, we're also looking at slightly higher probably wage negotiations than we do in Sweden. So should you see balance in Norway as well?

Yes. But we have also higher voucher increase over there. So we expect to be in balance.

Good to hear. And just pick your brain a little as well on the margin target given of the 7% to 8%, given that you're now going for more of an international growth, you're targeting that 50% target. Do you still feel the 7%, 8% is a valid target? Or is that something that probably is going to be slightly more delayed due to the international expansion and maybe the focus on that being in, say, lower-margin preschools?

No, we still see that margin 7% to 8% to be valid. And part of the -- while, of course, that segment in general has a lower margin than the other segments, we can, one, conclude that we're already within that margin target in the Swedish preschool operation. And that is the operation which we have been able to develop for the longest time, of course, and learn how to optimize. We see that there is further possibilities to further improve our margins and operational efficiencies in International Operation. And while we want to grow internationally, we also spend the resources to improve the efficiency.

Yes, maybe just a short remark on the acquisitions that we make, they are on the target level.

Yes, that's good.

So when we make this sort of acquisition international, they will, of course, support the target.

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 time, and we wish you all a good day. Thank you.