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

Good morning all, and welcome to this Q4 webcast with Lumi Group. With us today is CEO, Erik Brandt; and CFO, Martin Prytz. Please use the written Q&A function if you have any questions, and these will be answered after the presentation. Erik and Martin, please go ahead when you're ready.

Thank you, Justine. And good morning, everybody. I hope you're all feeling great this morning. Obviously, we look forward to presenting the results of the fourth quarter for you guys, and we will also be available to answer any questions you might have by the end of the presentation. I think just a quick summary of Lumi, first. We are a leading education provider in Norway, and we have currently, but we are waiting on third. 2 operating segments, Sonans and Oslo Nye Høyskole, ONH. But we look forward to have the third segment NTech to the group this year. Both schools have strong market positions and have strengthened the online position over the last couple of years. Combined, we have now more than 9,000 students and 57% of the students are attending digital programs. The share of online students is expected to further increase, securing Lumi as one of the leading provider of online education in Norway. First, a summary of the quarter before Martin will go through the financials in more details. I think with a lower cost base now and a more flexible and scalable operational model in combination with our market position, we are well positioned to benefit from a likely market recovery in 2023 and also different growth opportunities. But back to the quarter. In the quarter, we saw a solid development in ONH with continued growth. The cost cut plan in ONH has been successfully implemented, contributing to improved financial performance in the quarter. Sonans has achieved NOK 7 million in savings in the quarter, a significant result, which positively affects the P&L in the quarter. I'm also pleased to inform you that NTech, Norwegian School of Technology received its first accreditation and is preparing a launch in 2023. NTech will be a new growth area in Lumi Gruppen addressing the increased demand for tech competence in the society. On the slide to the right, you will see the financial headlines for the quarter and for 2022. We are pleased that we maintained the adjusted EBIT for the quarter in line with Q4 2021 at NOK 23.1 million. Thank you. Martin will go through the financial results in more details now before I continue with the operational and more strategic part of the presentation. Martin?

Thank you, Erik. So to the financials. First of all, looking at the revenue, the revenue was NOK 126 million in Q4, representing a decline of 5.7%. Like previous quarters, this is driven by the post-COVID market setback for Sonans. At the same time, as Erik mentioned, we see strong growth and a record high revenue in the fourth quarter for ONH with 18% growth versus last year. Sonans reported higher online revenues like in Q3. This is the result of what we have announced previously, the change in commercial terms, leading to a different accrual of revenue. It's important to say that this is revenue from recurring educational services and active students and not changes in the accounting principles. The adjusted EBIT ended at SEK 23.1 million in Q4, and the margin was actually slightly higher compared to last year, fourth quarter. The margin is held up by the cost programs successfully implemented, strong ONH revenue growth and higher online revenue in Sonans. However, the EBIT was negatively impacted by an additional bad debt accrual of NOK 6 million for Sonans and ONH. Measures were implemented to deal with the situation in Q4, and I'm now confident that we have a process in place to deal with this situation. And we have received updated credit scores for our portfolio from our service partner, Intrum, that shows that the portfolio is improving with respect to bad debt. However, it will take some time before this yields full impact in the P&L. Looking more closely, especially at Sonans, we are very happy to see that the cost program is developing as expected. In previous quarters, we announced NOK 60 million in savings for Sonans for the school year '22/'23. And together with closing additional 3 campuses, consolidating the Greater Oslo region, we will exceed savings about NOK 70 million annually. Together with the cost program in ONH, the group is now sets for a strong performance given unlikely market recovery. It's also positive. We are also pleased to see that the cash flow is now also starting to improve now as the restructuring cost is more or less out of the P&L. The liquidity reserve of NOK 29 million is satisfactory at the year-end with the knowledge that we have a strong cash flow in Q1 with prepayments of the tuition fees for the semester -- spring semester. The leverage using GAAP EBITDA as measured ended at 3.4% with 25% adjustment compared to allowed level of 30%, so slightly below. We believe that there is still sufficient headroom for the Q1 and Q2 covenant in line with the updated agreement with Nordea. To conclude the financial part of this presentation, we would like to highlight the 6 areas of importance going forward. We will, for the coming periods, continue to work with value per student, unified pricing as one of our priorities. We will maintain strong cost control and continue optimizing the cost base. We want to have focus on credit quality still and cash conversion from student contracts, leveraging from structural OpEx reductions. Starting now the process with securing a new long-term financing for the group as the facilities mature in February 2024. And also when it comes to earnings quality, as we have put up as one of the items there as well is that now as the restructuring cost is complete, more or less, there should be more limited need for adjusting the numbers to present the underlying performance of the group from 2023 and onwards. So I think that was the financial part of the presentation and happy to receive questions after the presentation in the Q&A.

Thank you, Martin. I will proceed. Let me just find the right button here. Okay. I think this section will contain the following highlights with focus on the 3 segments, now 3, I said too early, but now it's going to be 3 segments in Lumi Gruppen. First Sonans. And the highlights from Sonans is that we have completed the turnaround strategy and reduced the cost base as also Martin said. And I also want to say that underlying market fundamentals with increased importance of education is still strong. And we know the drivers that led to the market decline last year in the power candidate market. And the same drivers should positively affect the market when they revert back to normal. And we will also cover some more information regarding the admission committee. And the reason for that is that [indiscernible] consultation process is now in place with the deadline 9th of March. And it's important for you also to know that Lumi has taken a leading role in the sector -- in the education sector in the consultation process. And for ONH, strong track record of growth and performed a very strong spring intake with 17% growth in students for this spring. I think the college is well positioned for the autumn intake and also awaits the final approval of -- approval of a new bachelor degree, which will add to an already strong portfolio of programs. I think it's fair to say that ONH might be a medium player in the higher education market, but has a solid old-line position, attracting students but also more flexible and convenient offering customized to different life situation. And well for NTech, we are obviously excited to launch NTech in the market. We held a pre-sounding in the market this week actually at the student fair in Oslo, where all the young students go and see what are we going to do next year. And I think it was a success. The website and marketing campaign will be launched in Q1 and priority now is to secure a successful launch, recruit students obviously, and then deliver a high-quality offering from the autumn. However, it is important now also to say that new programs and courses will be developed, that's our priority to expand offering and growing student volume in the coming years. So it's fair to say that this is not a sprint. It's marathon. And it's -- yes, it's several years from now, we are going to have a huge vocational school in the group. So a little bit more of Sonans first. The first phase of the turnaround is completed, as I say, and the next phase is closing all 3 small campuses around Oslo region and consolidate the total student volume in the region in the Oslo campus from next school year. And this will create a more effective and profitable operation and contribute to rebuilding the student volume in the Oslo campus. Life has been a success the first year of the launch and will be an important tool for reaching more students across geographies with fewer campuses. And it's also lot important to notice that the price level is similar to campus courses. And as Martin showed, the inflation has affected the campus cost base and prices will be adjusted to compensate for this. The spring intake is a supplementary intake for school year '22, '23. And the market conditions, as expected, remain the same throughout the school year. The total sales ended down by 31%, in line with the auto intake. As a result -- as Martin said, as a result of increased number of bad payers, we started to credit check online students this whole. And obviously, this resulted in a decline in online sales since a portion of students were denied admission, but the credit quality now of the sale will be improved going forward. And a key question for Sonans is how the market will develop going forward, and we believe a market recovery is likely already from the school year '23, '24. And the main reason for this is that the underlying market fundamentals are still strong and the market drivers that led to declines should also lead to increased demand and the high school exams are we introduced and probably the labor market also softens. Over to the admission committee. The admission Committee published their recommendation December 1, 2022, as you probably are all aware of and they suggested several changes to the admission system. And the most controversial suggestion is their removal of the opportunity to improve grades from high schools. And I think it's fair to say that the Norwegian system of intake to higher education has always been based on the principle that everybody should have a chance to enter regardless of whether they were successful in high schools or not. And one of the key tools to secure a second chance is the private candidate arrangement, which allows students to gain steady competence, take new subjects or improve grades to qualify for higher education. And around 60,000 students use this opportunity every year. And in the school year, '21, '22, more than 120,000 exams were conducted. According to Statistics Norway, 75% of the private candidates are first-time candidates, which means they have not taken the subject previously whilst 25% improved the grades. The [indiscernible] suggestion is related to improvement of grades, not the first time candidates. So in worst case, the suggestion could affect 25% of the private candidate market. First it is also important to underscore that any potential changes will not affect ONH or NTech and only a part of the Sonans business. Secondly, the suggestion does not change anything of the underlying problems that the supply of attractive study program is limited and managed students will still have poor grades and will need assistance. Services to help students qualify will still be in higher demand, and Lumi is well positioned to prepare students for a potential entrance test and assist students in high school to be successful on their exams since it will become more important to be successful at first try. Third, we are now in a consultation process, which will be finalized on March 9. Our target and our communication plan is obviously to maintain the possibility to improve rates and we have been active meeting politicians and other organizations and provide them with analysis and data points supporting our view. And fourth, it will take several years before this comes into effect, and opinion so far is not consistent, which suggests that the outcome will or could be somewhat different than the suggestion is. Either way, Lumi will have time to adjust the business and develop new services, helping students to qualify. We also included something on the right slide here, a figures from a survey showing that more than 60% of respondents are positive to the private candidate scheme, 25% on YouTube and only 11% are negative. The admission Committee recommendation is not in line with the public opinion. Secondly, one of the key premises for the recommendation was that Norwegian students are too old when they start studying. But figures from OSD shows that the [indiscernible] students on average start when they are 22 in line with OSD average. In the Nordics, however, the average age is 24 to 25, as you can see on the top there. And then I think it is rather inconsistent that they look to Sweden for inspiration for the new model to recommend when the age is way higher than in Norway. Yes, I think that's conclude the OpEx [indiscernible]. Over to ONH, continued to outperform market for higher education, 17% growth in the spring intake as said. And on ONH they had a separate spring intake for online programs only, though campus programs start in spring and 17% growth compared to last year. And last year, we had 16% growth. So we continue to grow in the spring. Based on the current market drivers, especially increased demand for online programs in higher education, the college is well positioned for the autumn intake. And when you look forward, the first important milestone for this intake is 15th of April, which is the deadline for public universities. But ONH will obviously continue its intake through the summer with an important sales period in July as well. ONH has developed a solid portfolio of programs, Master, Bachelor, annual units, half year program, single subjects, both online and on campus. And this platform is a solid foundation for additional growth and development. And as I said previously, our new bachelor program is in process and will be launched pending [indiscernible] accreditation. In addition, new programs will be developed, and we are also currently exploring new opportunities for the B2B market and new international opportunities through collaboration with partners. I think ONH is on the right track, and we expect another strong year for the college. Several growth opportunities do we have in pipeline to continue the growth rate that we have seen over the last couple of years. So 504 new students this spring compared to 432 students last year. A little bit about NTech, a long process has been completed, and Lumi is finally ready to launch the new school, NTech in the market. And as I said, we have been at the student fair. The website will be launched early March and [indiscernible]. And the key now is obviously to recruit students and launch a high-quality offering for the first students. NTech will be located at campus, Oslo [indiscernible] Oslo, but it also have a footprint in the Rebel House in downtown Oslo center. Close collaboration with the tech industry is key to successfully make the student ready for a job after 2 years. And I also think this is a part of what gives NTech a competitive advantage compared to other tools. The 2-year program is offered through time with shorter courses for upskilling and reskilling will also be offered in addition to developing new programs going forward. Yes. I think that concludes the [indiscernible]. You want to go through the outlook, Martin?

Yes. And I think to try to summarize this presentation I think that we are of the opinion that the market recovery is possible as early as next school year starting from the autumn, yes. It's obvious that a more favorable situation for -- market situation for Sonans will quickly improve the financial performance given the completed restructuring process and the significant leverage of the business. We see continued growth for all nation spring intake, and we are now ready for a further volume expansion for the current program portfolio, but also adding an additional bachelor program. And we are -- as Erik said, we are very happy to launch NTech, a new growth opportunity for the group. And as Erik also presented, we are now closely following the process on the recommendations published by the admission committee and also delivering our answers in that hearing run as well. I think for the guiding part in this -- for this coming first half of '23, we then based on this spring intake for ONH and for Sonans, we estimate revenues to end around NOK 205 million to SEK 210 million for first half '23. I think that concludes our presentation, Erik, and then we are happy to answer questions through the Q&A.

Yes. So the first question was about -- we have provided our revenue guidance for the first half, and we obviously have a good overview of the cost development as well. I think that as the numbers for the first second half of '22 in the first half -- first part of the school year is on an adjusted basis, I think that shows just the level of operating expenses in Sonans and what should be expected for the spring. There are some uncertainty related to the OpEx for the spring due to this bad debt situation, but we believe that the bad debt expenses will decrease during the spring from the measures taken. We don't expect additional savings above the levels we are presenting now for Sonans during the first half of '23, but there will be additional savings from the campuses that we will close by end of this school year that annually will lead to additional cost reduction in structural OpEx by approximately SEK 10 million. So approximately then SEK 5 million to come into the P&L in the second half of 2023. So I think that's what we can share on the cost base. So Q3, Q4 on an adjusted basis, representing the current level of Sonans, potentially some few additional savings during the first half of '23, but then more significant savings from closing the 3 campuses in the second half of '23. Next question is, can you say anything about the size of student capacity in the NTech launch? Maybe, Erik, you could say anything about that.

Yes, yes, absolutely. I think it's a little bit difficult to say, but I think somewhere between 50 and 100 students, it's something that we should be able to process the first year. I think it's extremely important for us to be successful in the first year since this is the first launch, and it's the first time we actually do it with new students. So it's very important for us to maintain the quality and deliver as best as we can. So we get happy students, and then we can increase the student numbers the year after when we have the second intake.

Yes. Next one is with the larger geographical reach for Sonans. Are we doing any specific marketing action in remote places. I think the answer to that is yes, basically. We are now serving students in outside larger cities throughout the live concept and the online platform. So it's obvious that we will target those students in different ways than we have done traditionally through the campus sales and focusing obviously in the markets we have campus with specific marketing for those students as well. So we will obviously adapt our marketing growth towards the new structure of Sonans. The next question is about FTEs as Sonans going forward. I think we have written something about that in the report, stating that we were around 106 FTEs at the end of the year, and we expect to be around 95 FTEs at midyear '23 with the closing of the 3 campuses in the Oslo region. And the next question of how confident we are of an improvement in adjusted EBITDA actually in the coming year or this year compared to last year. I think it's a bit early to say. It's -- I think that's based on the cost measures we have taken, that will be persistent over time given that a lot of the customer share are of structural nature, means that we are able to improve the performance of the group given a market -- likely market recovery. But it's, again, the student let volumes that decides how the result will be for this year. But we are positive currently on the market development, but still too early to conclude whether that will improve the EBIT for '23. And then additional question on the OpEx developing into first half of this year given the cost cut progress. I think, as I said, we have reported on an adjusted basis for OpEx showing the underlying performance given the measures taken. And as we presented, we have reduced cost in Sonans by NOK 34.8 million in the first -- or sorry, the second half of 2022. And we are now at the level we announced around SEK 60 million for the year. And then additionally, SEK 10 million will come on top of that from the closing down 3 campuses -- additional 3 campuses. We don't expect additional savings on top of that, but we will have a positive impact of closing down the 3 campuses at the second half of 2023. And a question on the working capital effect in Q4? And what drives this? I think in general, I think that as we have the bad debt situation, it means that we have a weaker development for accounts receivables as well, meaning that the balance of accounts receivable is much higher relatively to sales that it should be compared to previous periods, meaning that the bad debt percentage is much higher, resulting is in lower cash inflow as well from students. No more questions?

It seems no more questions at this point.

Okay. Thanks for joining the presentation.

Yes. Thank you, all.

You are welcome to send an e-mail to us if there are any more questions and we will be happy to answer.

Yes, absolutely.

Thank you.

Thanks.

Okay. Thank you.

Thank you. Have a nice day. Bye.