Lumi Education Group AS (LUMI) Earnings Call Transcript & Summary

Good morning, and welcome to this Q2 webcast with Lumi Gruppen, who is represented by CEO, Erik Brandt; and CFO, Martin Prytz. [Operator Instructions] Erik and Martin, the floor is yours.

Thank you, Justine, and good morning, and thank you all for joining. We look forward to presenting the results over the second quarter. And [indiscernible] also answer any questions you might have by the end of the presentation. I think the key focus on this session will mainly be forward-looking and how Lumi plans to deal with the current sales decline for the full year 2022-2023. I think as sales decline, as you all know, as was reported a couple of weeks ago, of 30% for Sonans is significant and is a result of several market factors, which we will try to explain later in this session. It's important for us to say that we actually committed to mitigate the effect through cost cuts and create a leaner organization and further strengthen the digital platform to succeed in the future. We do expect the education market to start to normalize next year, but we also know that it will take time to fully wash out the COVID effect. There are also several positive points as well. ONH is a market winner with strong growth in applicants and growth in students in multiyear programs driven by the launch of the new programs that we launched last year. Sonans is also strengthening its digital position with a new live product contributing to double-digit sales growth. Even if the current market conditions in the education market are challenging, a strong market position, solid online offering and high student outcome are key to build the future success for the group. Let's go to the executive summary. As I mentioned, the key focus will be focusing on the fact of the current sales trajectory, but it's also important to say that Q2 was in line with our expectation. The revenue in Q2, and that NOK 134 million, which was in line level on Q2 '21 and also Q1 2022. The EBIT ended up NOK 39 million, which is a decline of 19% compared to last year. Martin will come back to the financials in more detail later. There are challenges, but obviously, there are also some positive things about it. We can implement significant cost cuts, and several measures have already been implemented and additional measures will be implemented totaling to NOK 60 million to NOK 65 million to reflect the online shift and decline in campus sales. We also see that the new product line that we have informed the market about previously is expected to offset lost revenue from closed campuses. And we also see double-digit growth in online sale when combining live and online. And in addition, ONH is a market winner when it comes to number of applicants so far in the [ intake ], and we are succeeding in gaining student growth in master and bachelor programs. And this will contribute to drive additional growth in the coming years. Okay. I'll leave it to Martin to go through the financials in more details. Martin?

Thanks, Erik. We will, as Erik said, we will focus mostly on the forward-looking today, but shortly then through the financials. And as Erik said as well, Q2 is the last quarter in this school -- in the school year '21, '22. And as a result as well, the numbers are not that different from Q1 and the development we saw already back in Q3, Q4 as well. First of all, the revenues, as Erik said, for the second quarter ended at NOK 134 million for this quarter, in line with the same quarter of last year. We see that the development in the revenue, we see that online for both ONH and Sonans shows strong growth, but it is the campus sales that has continued to decline. First of all, sales in Q3 and Q4 last year and then continued into Q1, Q2 this year as well. And as we announced in the trading update for around 2 weeks ago, we see that this development for campus is continuing, but we see that the online platforms still show strong growth for strong growth Sonans. And we have also made adjustment to the online model as well, implemented price increases for Sonans that is fully implemented for the school year '22, '23. And so far, we see that, that has not had any negative impact on the online for Sonans. When we look at the EBIT, we see a decline there as well. And the challenges we see is that we have the decline in revenue for Sonans and not fully offset by the revenue growth by ONH in the same period. And the development is in line with Q1, but we see we have an additional holiday pay effect in Q2 that boost the margin compared to Q1 when we compare the quarters. We see have some challenges in the Q2 quarter for Sonans related to bad debt expenses. We have taken significant measures to reduce these challenges with the bad debt. But in the quarter, we ended up with NOK 3 million higher expenses compared to last year. And there are also some explanation compared to last year related to the implementation of IFRS and certain IFRS adjustments that is commented in the report in more detail. And we have also taken significant measures to mitigate the effect of higher bad debt expenses but we can say that per Q2, the losses has been taken, the invoice has been written off and the remaining parts have been sold as well. So we are kind of a clean start from Q3 this year on the bad debt on that one. We will look then more into Sonans. We see that we, as said, have a strong growth for the online platform, but we have the decline for the campus. And it's both higher volumes for online, but also the effect of the changes we made in the commercial terms for online from January 1, 2022. As I said, we have, all in all, an increase in the operating expenses been explained by the bad debt, but we have also had a higher run rate for marketing for the previous school year. And also then, as we announced, we announced savings as well for Sonans. For this quarter, we have a saving of NOK 4.7 million for personnel expenses in the quarter. And in total, the total savings for Sonans is NOK 7.3 million. On the right side, we have just tried to also explain the effects of this bad debt expenses and high run rate of market expenses to better reflect the underlying performance of Sonans for this quarter. And when we look at kind of what we call the clean EBIT for Q2 '22, we see that it's slightly more positive underlying performance when we adjust for the effects of the higher run rate for marketing expenses and the bad debt expenses. So when we compare [ merging ] underlying performance, the EBIT is in the area of 28 compared to 32, while we report 35 -- 23 for this quarter compared to 35 in the adjusted numbers. And so it's more to give you an understanding of the underlying performance of the business this quarter. And as we can confirm as well, we are also making the savings as planned for both Q1 and Q2 in the total of NOK 7.3 million for Sonans. For ONH, we continue to see growth for ONH, both for online and for campus. We have an additional admission in the spring. So online has a strong growth compared to campus. That only has one admission during the year. We have, as also announced and showed, a ramp up cost for ONH for the new programs. But this is slightly lower for this quarter as we have fully implemented the holiday pay effect for ONH as well in this Q2 that leads to a stronger margin for ONH. And we have an expansion, the EBIT margin from 28% to 33.4% in this quarter. So all in all, continued growth for ONH and slightly better performance on EBIT for ONH. And then I think we're -- leave it to you again. Sorry, Erik, we have the last slide of the financial focus. So I think all in all, as we started with, Q2 is, for us, as expected. It's in line with Q1, and it's the last quarter of the school year. So it's not that big changes from the previous quarters. However, we are now focusing fully on the next and the coming school year. And as we announced, we see that there is a continued decline for campus, and we're now executing on the extended cost reduction program to mitigate the effects of the decline in the revenue for the school year '22, '23. And our current target is in the area of NOK 60 million to NOK 65 million in operating expenses. We will later on show that there -- we believe that there are more costs to be taken out of the business, but we [ wanted ] today, at least to announce that we have identified at least NOK 60 million, NOK 65 million while our target is -- and additionally, NOK 20 million to NOK 25 million in cost measures in addition to the NOK 60 million, NOK 65 million. And as we said, more measures are in the pipeline. On ONH, it's important for us to have cost control and margin protection for the second half of 2022. And of course, we have still some to go to complete the intake for this year. And also that we have some contingency to offset any risk that are -- is in the remaining period of the intake for ONH as well. Okay that [indiscernible], yes?

Just skip to the next -- thank you. I think the first thing is to explain to you a little bit about the market situation. I think the private candidate market has been directed -- disruptive this year because of COVID-19, and we see the full extent of this in this intake for Sonans. I think an important market driver for Lumi is obviously the number of applicants to higher education. And the applicants -- number of applicants to higher education has seen an annual growth of around 2% to 3% since [ 2000 ] to 2019. 2020, the numbers increased by 12%. It was driven by COVID and remained high with 2% growth in 2021. And in this year, we saw the decline of 12.6%. That was 19,000 less applicants to higher education than the previous year. However, this -- we knew this already in late April when we saw the figures. And by our estimate, the market could potentially decline between 10% and 20%. And we also reported a sales decline for Sonans of 18% in Q1 when it comes to the impact for the '22, '23 school year. And I also think that I know that the most important effect of fewer applicants to higher education is the 43% decline in student without a study program offer from [indiscernible]. And this was published late July. And the total number of students without an admission place went from 27,000 last year to 15,000 in '22. And obviously, these students are part of Sonans core markets in the most important sales period from 20th of July to the end of August. And obviously, this market change hit our most important sales period. And also, I mean we have been talking about this before as well, but we also expect that fewer high school students will fail because they have canceled high school exams 3 years in a row. And this also [ occurred ] to reduce the demand for private candidate courses. And finally, I think this year is the first year after COVID where everything is normal. We have a strong labor market, in addition to the opportunity for young people to travel abroad after COVID. So this is actually the first year. And in combination, all these drivers reduces the private candidate market this year and the demand for education services short-term. When I look at our response, obviously, we have seen this, and our response to the sales drop has been to immediately implement significant cost cuts. And we started this already last school year and we did a lot of things during the June, and we are doing additional measures now. So we have tools in our toolbox to mitigate the effect of the lower revenues. But also, we need to protect our market position and competitive advantage, and be prepared when the market eventually normalizes. I think an important part of this is to continue the digital transformation and strengthen our online position. But I think despite a solid decline in the campus segment, we still see a sales growth for our digital products, live and online. Oslo Nye Høyskole is a part of the same education market, but despite a decline in applicants to higher relocation, ONH has performed well this cycle. This is important to say. However, I think when you look at the market for additional sales students without a public admission place after 20th of July, this could also affect ONH -- the intake for the rest of the period. Despite the difficult market conditions, ONH has growth in bachelor and master students. And this is a result of the new programs that we launched. And we will continue to focus on new programs in the coming years to secure growth in shifting market conditions for our higher education business. I think accelerate digitalization and strengthened leading online position. I think our key response to the decline in sales, obviously, is to execute on the cost cut program and we need to create a more lean and more effective organization. And we are doing that right now. As you can see on the graph on the right, we have illustrated the development in cost base from NOK 274 million in the school year '21 to '22 to target NOK 198 million in LTM cost base in 2022, '23. That was what you talk about, Martin?

Yes. And as we illustrate here, we have announced NOK 60 million to NOK 65 million already now, and we are targeting and now we're showing the cost base for Sonans only. I think we're targeting additional cost measures in the size of NOK 50 million to come below NOK 200 million. And as you see in the first bullet, we ended around NOK 349 million in revenues for the previous school year. And then we are expecting a 30% decline in line -- compared to that number. So that means that we are targeting a cost base below NOK 200 million to still deliver a strong result for Sonans the coming school. However, this will be then on the adjusted basis.

Yes. Yes, absolutely. Thank you. And I also think that you can see on the graph on the right, as of week 31, the online sales increased from NOK 31 million in 2020 to NOK 46 million in '21 and NOK 52 million in '22. I think this demonstrates that the key focus for Sonans is to continue to develop the online offering. And we are transforming the business into a more scalable model, which reduces the risk going forward. The offering will be adapted to change market conditions. Due to the market conditions, as we all know, the Sonans sales is down 30%. We have said that before, so we do not have to say it again. But the campus sale is actually down 43% whilst online and live combined is up 14%. So the plan now is also to further downsize in the campus structure with additional three campuses next year. And by doing so, it is important for us to protect the market position and also transfer students to digital platform or other campuses. We will strengthen the larger campuses, by reducing the smaller satellites and at the same time, strengthen online penetration. It is also very important for us to secure the teaching quality and capacity going forward. As you can see on the sales chart on the right, there are still some major sales weeks ahead, and we still don't have full visibility for their complete autumn intake. In our estimates, we have concluded that the current trajectory will continue throughout the cycle. I think it's also fair to say now that we will notify the market when the cycle is completed and we have full visibility of sales and revenues for the second half of 2022. And the intake should be completed by mid-September. Yes, we are establishing a leaner and more effective organization. Our new operating model is in the process. The key is the [ opel ] and strengthen sales and marketing excellence. This is very important for us. In addition, the model is becoming more digital by reducing number of campuses and transfer students to online platform, and focusing on larger campuses with significant volume. But I think when it comes to transfer students to online platform, we have succeeded by doing that this year because we almost fully offset the sale from the three campuses that we have closed to the live product. And obviously, we are doing [ actually ] merging classes, and we also have subjects with limited student volume on small campuses will be offered digitally only. The more centralization is planned to take out full synergies, and we also need to become more effective in our marketing campaigns to reduce marketing costs. Yes. Well, let's go to ONH. I think as you all know, the investment cost of establishing new programs have hit the P&L short-term. But we see that the new program enable us to grow the number of bachelor and master students in 2022 and thus securing future growth. And this is despite the decline that we see in higher education. So ONH has performed strongly with 11% growth in applicants so far in the cycle. And the growth has resulted in a strong growth of bachelor and master's students. However, when we include single subject students, which are students that only buy one subject and do that online, the total number of signed contracts when including them, has declined 6%. When looking at the graph, we see that the last year contracts for new programs was 75 and we have received 204 new contract this year. This is a growth of 172%. So it's actually the new programs that enable us to grow in a challenging market for the higher education sector. ONH has two important [ sales weeks ] during the cycle. It's up to 15th of April, which is the deadline for the public universities, and is after 20th of July, when students know if they are admitted to public universities or not. So far, as of week 31, around 70% of the intake is completed. The key market now or the segments now that we're working with is all the students applying for online programs and students that have not been admitted to universities looking for other options. And leading market indicators that we follow all the time when it comes to number of applicants, number of things that we look at the website visit and everything is positive, but we still had some uncertainty for the remaining period due to the decline in students without an admission place in higher education, in public education, as I explained earlier. On the chart on the right, we have illustrated the intake cycle for ONH, where you see two major tops, one leading up to 15th of April and the second in July and into August. August is also the month where we traditionally received most signed contracts that students finally decide. And as a result, we still don't have [ true ] visibility of this year's intake. But so far, we are happy, [indiscernible] with the performance in a declining market. And as I said previously, we will also inform when the intake is over for ONH. One of the key factors for continued success is a broad and attractive portfolio of bachelor programs, which is the core offering of every university college. Bachelor students attend the school for 3 years, and those are the most obviously valuable students. Because of this, we have doubled the number of bachelor programs in addition to our master program since we acquired ONH in 2019. It is a key priority to increase the number of multiyear students, and this intake shows that we have succeeded. And this will drive growth for many years ahead. ONH is ranked as the [ college ] in Norway with most satisfied online students and to strengthen the digital offering is a clear priority going forward. The growth in online students makes a more effective and scalable business model. So ONH will continue to develop new programs with strong market potential. So we should go to the outlook.

Yes. And I think to kind of then conclude our presentation for today before we open up for questions. I think it's, for us, to summarize what we said so far then on the autumn part is that we -- as we see the challenging market conditions, Lumi Gruppen will [ allow ] accelerate the ongoing efficiency programs during the second half of 2022. And as I said, when completed, the annualized operating cost base for the coming school year '22, '23 will be reduced by NOK 60 million to NOK 65 million for Sonans. We have though a target to identify an additional NOK 20 million to NOK 25 million in savings to offset most of the decline in revenues for the coming school year, and that includes all part of the organization. And as Erik has mentioned and described for us as well, it's really key for us now to accelerate on digitalization journey and strengthen the leading position that we have in online segment for private candidates. And also, we believe that the market will normalize as we see that the numbers for this year as such a large decline and expectedly, a large decline that we believe from all the market indicators that there will be a more normalization next year. But still, of course, too early to conclude. But we believe that the fundamentals of the education market is not that changed. However, as a consequence of this, we see that there is a risk for breach of the bank covenants. We have constructive and positive discussion with our bank. I think when you look at this business, when we're making the necessary adjustments of the cost base, it's a healthy business. It's not too high leverage in the business. The financing is appropriate. However, we will have some challenges when it comes to having an instant decline in the incoming payments due to the decline in revenues while we will still have restructuring costs during the second half of 2022. And that will put pressure on the leverage on the liquidity of the business, but we believe at the end state of this is that we still are a healthy business with a lower cost base with still a strong profitability and strong margins of the business. But there will be a challenging period ahead, as we said, challenging quarters ahead, and we are now working with our bank to come to a good solution to give us the necessary kind of headroom throughout this restructuring. But not the least, I think too much again it's a transformation for Lumi Gruppen as well, not only restructuring, but we are -- our target as well is to come out of this situation as well as in a better position with a slimmer cost base and more and strong competitive edge in the education market for next year. So I think that's to conclude our presentation, and then we can open up for questions.

Okay So we'll -- let me see. Okay. So we'll start on the top. So the first question is, how has the pricing strategy changed this year compared to previous years as campus prices have been cut are similar -- as campus prices have been cut are similar to online prices? I think the pricing strategy has not changed significantly, but we made changes to the online pricing as we believe the product has a -- due to the value of the product, we believe it could have a higher pricing, and we adjusted the prices by 10%. Campus prices is on the same level, just adjusted by 3.5%. And we launched the live concept to the platform with the same pricing on par with campus. And so far, indication is that there is a willingness in line with the campus product to pay the same price for live and campus. So I don't think it's been a significant change in the strategy, but it's been adjustment of the prices more to better reflect the value of the products and the product [indiscernible]. So the next question is what we expect on EBIT levels? I think we're -- currently, we have given, I think, already indications in the presentation for Sonans when we're looking at expected revenue and also the expected cost base. I think we will be more specific on this when the intake is completed, and we will present more the effect on revenues and the overall P&L for the business. So the question is when we expect to reach the cost base of NOK 200 million, will cost cuts evolve throughout the coming school year? It's both yes and no. Some is already done, implemented, like we closed the campuses that will yield effect already for the second half. We implemented our saving plan of NOK 12 million this year that is in place and already working, but there will be some -- we will continue to have the restructuring costs during the second half of 2022. So it will be some months now still with restructuring cost of the business. And at least we can say that Q1 will be the kind of the first clean -- fully clean quarter. I think it's correct to say. So then we have the next question.

[indiscernible].

Yes. My question, expansion of the market when it comes to the [ vocational ] subjects and the possible [ vocational ] school offer. Have you carried out acquisitions that will strengthen such a venture?

No. We have not doing that. And I also just say what one thing because you asked a question about vocational obviously NTECH, the Norwegian School of Technology. We have not said anything about that. But we can say here that we know that this will go through the [ NUCAS ] system this autumn, and it will be -- we will have a final answer by the end of Q4 -- by the end of Q4 probably. So we will come back to the market when we have that script [indiscernible].

So on the market share development, I think, first of all, when we look at the numbers of different players in this market, it's a financial year report, which is a combination of two different school years. So it doesn't give a clear view over of the market share. But I think we will -- eventually, when the numbers for this year is published, we will see how Sonans develops. What we can say at this, I think we believe that this is kind of a market development rather than as Sonans segment, so to say. So we, at least believe that we are in line with the previous market share range that we have been previously -- or we are maintaining the market share. There is a question on cost savings so far this year on an annualized basis, more than NOK 7 million. I think on annual basis as -- the cost savings we reported so far is not annualized. It's -- we reported around NOK 7 million for Sonans, and that's for the first half this year. And that will continue into the second half of this year as well. So as we -- when we [ mention ] savings for Sonans compared to last year, that will continue in line with the initial plan that we had for Sonans and will continue throughout the year. And the next question is, will the bank typically accept the [ one-offs ] when calculating the covenant? Yes, there are some headroom in the calculations when it comes to calculating the covenant, but there are some limitations there as well. And I think that is one also the things we need to discuss with the bank. But most likely, the adjustments will be slightly higher than what's normally accepted in a financing agreement. And then status on the NTECH. I guess you said we Erik, we expected answers in Q4?