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

Good morning all, and welcome to this Q1 webcast with Lumi Gruppen, Presenting today is CEO, Erik Brandt; and CFO, Martin Prytz. [Operator Instructions] Erik and Martin, please go ahead when you are ready.

Thank you, Francheska, and good morning again to all of you, and welcome to this Q1 presentation by Lumi Gruppen. I am Erik Brandt, as operator kindly introduced us, and I'm joined by Martin Prytz, our CFO. As always, we look forward to presenting the results for the first quarter and also to give some market update as we see it now in regards to the autumn intake. And also, we will also answer any questions you might have. Just a brief recap of Lumi Gruppen. You all know Lumi, of course. I think -- there are just a couple of things here to emphasize. I think the most important thing is maybe that ONH continue to score high on the Student Barometer, which is annual student survey. And despite the problems we all had in Sonans, Sonans is still the clear market leader in the private candidate market. And still, we had more than 8,000 students in this quarter. 57% of them are online. I think it's very interesting to see the online share for the ONH students, where we have 74% online students attending ONH this year. So just a brief summary of the quarter. I think the headline summarizes quite well. Cost base reduced and financial position is improved. I think with a lower cost base and a more flexible and scalable operational model, we are well positioned for the future. And in addition, the financial position is improved -- significantly improved following the placement, which gives the company more headroom going forward. I'm not going to go through the financial results. As you can see there because Martin will go through them in more detail later. But some takeaways anyway. ONH is the growth driver in Lumi and continue the positive development and it's also good to see that we have stabilized the cost base, resulting in improved EBIT margin for our higher education business. As expected, the revenues in Sonans are declining because of the post-COVID setback, which affected the student intake this school year. However, we have successfully implemented the cost cut program. And also by the end of the quarter, NTech was launched, targeting its first enrollment for the school year 2023-2024. So before I come to you, Martin will go through the financial results in the quarter in more details.

Thank you, Erik. First of all, just please note in the report that the numbers we refer to is reported and not adjusted. But for comparison, we have, however, included the nonrecurring items and the segment key figures in the quarterly report. We also then included the nonrecurring items identified for Q1 '23, but all numbers are referred to as the reported numbers in this quarterly report. First of all, revenue in Q1, as expected, online revenue share remains about 50%. Total operating revenue was NOK 108 million compared to NOK 133 million last year, which represents a decline of 18.8%. The decline in revenue, as we have spoken about many times now, is driven by the post-COVID market setback for the private candidate business in Sonans. We have, however, no effect of any new commercial terms for online in the first quarter. So the numbers are comparable year-over-year. It's worth a mention that the revenue for Sonans was adjusted by NOK 4.5 million in the quarter as a result of full year contracts for a selection of students that demonstrate a low payment ability, and hence low likelihood for receiving a consideration from them. The full year contract revenue will be recognized when the payment is received. The group expects however, that the effect of this change will still be in line with what was communicated in the fourth quarter, in a total loan of NOK 8 million to NOK 10 million in the first half of 2023. For Oslo Nye Høyskole, we had a strong performance in the first quarter with 13.5% growth, mainly driven then by new study programs offered online. Earnings before interest and tax in the first quarter was NOK 6.1 million compared with NOK 14.3 million last year. The EBIT margin ended at 5.7% compared to 10.8% last year. The decreases in the EBIT and lower margin in the quarter was a result of the decline in revenues, reduced student volumes and lower revenue for Sonans have to large extent, though being offset by the cost program implemented and together with the growth in volumes and revenue for Oslo Nye Høyskole, this has compensated for the significant deviation in revenues. So with the cost programs implemented, we had a total deviation in revenues of NOK 25 million, but that was reduced to only an NOK 8 million impact on EBIT for the quarter with the full effect of the cost programs. And as we can see on the right side, Sonans OpEx declined by NOK 19.1 million in the quarter. Total operating expenses excluding depreciation and impairment losses equaled NOK 45.5 million in the first quarter for Sonans, and this represents a decrease of 29.6% and NOK 19 million compared to last year. We expect further reduction in operating expenses from the second half of 2023 when we are consolidating the Greater Oslo region by closing an additional 3 campuses. Growth in volumes for Sonans will with a new cost base or the sliver and flexible cost base will improve profits going forward. On the right side, we see that the expected savings in Sonans will amount to approximately NOK 70 million, which will lead to a cost base of NOK 164 million, excluding depreciation and amortization. And this is potentially then also higher by fully utilizing and optimizing the channels in Sonans, which is live online and campus. And given this cost base and potentially more than savings, the Sonans business will start to be more profitable already on low growth numbers as we can see on the right side of the presentation. Lumi Gruppen had a total liquidity reserve, including the revolving credit facility of NOK 206 million and net interest-bearing debt of NOK 164 million at the end of the first quarter. We had successfully completed a private placement of NOK 170 million on 7th of March in the quarter. And of the NOK 175 million in proceeds, NOK 130 million was used to reduce the bank debt from NOK 430 million to NOK 300 million. We also launched on 24 April subsequent offering, which will add additional NOK 25 million in proceeds. And together, this will improve the financial position of the group and allow for some more strategic and operational headroom going forward. As previously announced, we agreed on new leverage covenants for the Q1 and Q2 this year, and the covenants were 4 for Q1 and 5 for the second quarter, and actual leverage for this quarter was actually then 1.6. In the new financing agreement with Nordea and with effect from the third quarter of 2023 and onwards, the leverage covenant has been set to 3.5. I think that concludes the financial part of the presentation. And I pass on to Erik.

Thank you, Martin. Just go on. I think this section will contain some highlights from each of the segments in Lumi and now we also have included NTech here. I think, first of all, some highlights on for Sonans, the turnaround process has been completed. And the cost program has been successfully completed as Martin also showed in the figures. We also included some figures from -- reported back by NUCAS and also what kind of effect that should have on Sonans. So I think the underlying demand for education is still strong, and we also see some potential for some more normalized market going forward this year. And we also included some information about the admission committee and the process there. And we also expect the results to be somewhat modified based on the current results from the consultation program. ONH is on a good steam. I continue to strengthen its position and have a strong start of the '23-'24 intake, and we also have new programs in pipeline also awaiting approval from NOKUT, but also some programs that we are going to launch within our own portfolio this year. So I mean, based on the current African numbers, online shows strong development in ONH, while campus is basically more or less flat, in line with the overall market. And NTech, we have got -- we have received approval, as you all know, and we also launched it in late Q4 -- late Q1, sorry. I think we go through the private candidates segment first. As you all know, the market has been hit by post-COVID as it has been previously informed, 3 years without high school exams, resulting in better grades, strong labor market, which led to a major decline in applicants to higher education and these are the key factors for the market's decline. And the question now is how will the market develop going forward. And the market KPI so far, we will say, is more or less neutral because that's related to the number of applicants to higher education, and we see that has been a small growth in a number of applicants to higher education in Norway. So in addition, we see that the labor market is still strong, even if there are some signals that the unemployment rate might start to increase. And we also know that the exams in high schools will go as planned, which should indicate maybe a more normal market going forward. So we say that the market recovery is likely, but it will take time and probably driven by the reintroduction of exam and a softer, more normal and softer labor markets. So over to the update when it comes to the sale for school year '23, '24. Just to give you an explanation first, the first sales cycle for the school year, the coming school year is completed around week 37, which is the deadline for signing up for private candidate exams, the autumn. But Sonans continues to set courses after that as well for the spring, and that sale will also add to the total revenues and total school year sales for that school year. So this year, we have signed up students with a total value of NOK 36 million, that's a 36% decline compared to last year. But to say this early in the year has historically varied a lot, as you can see there, and doesn't give too much visibility in the final result. In 2020, which was the best year in period, the sale was NOK 52 million at this time. And in 2022, which was the worst year, the sale was NOK 56 million at this time. So the level in '23 is in line with the sales in '17 and '18. And the sale, the remaining weeks, as we have said before, the summer is the most important period. We have seen a huge variation from NOK 153 million last year to NOK 271 million in 2020. And in '17 and '18, which is comparable with the sale we have now, the remaining period was NOK 216 million and NOK 241 million, respectively. So -- last year, we experienced a solid sales decline during the summer, but I think a more normalized market during the summer because of the reintroduction exam and other factors could indicate an improvement of the remaining sale in 2023 compared to 2022. But it is important for us to online that is too early to predict outcome, and we have so far limited visibility. And I think the main uncertainty for Lumi and the key swing factor for the financial development in the group is this long say. And as Martin also showed small growth would significantly improve profit because we have a much lower cost base in the same way as the decline will reduce profit. Let's look at Admission Committee just a little bit, not going to repeat everything, they have come up with. So what we are informing about is some new information after the hearing process. And the hearing process was completed this quarter, March 9. And it has been very interesting to see their responders and how they are reacting to the suggestion. So basically, I have personally been through all 134 respondents and considering their view on the case of removing the opportunity to retake subjects. So we have put up this graph, as you can see on the right hand, see where the different respondents stands on the matter of retake subjects or not. And we see that 34% of all respondents support Sonans and support the opinion of continued opportunity to retake subjects, which means that they disagree with the Admission Committee. 24% are negative to retake subjects, which means they support Admission Committee but the largest group, 42% didn't mention their issue or they are mixed, which means that they suggest more analyzing the consequences before making a decision. So I think based on this analysis, it's not an ambiguously support of the [indiscernible] proposal, and the government will probably take all considerations into account when they deliver a proposal to the Parliament. So I think the single base so far on the public hearings indicate that the changes might be more moderate than originally proposed. And it's also interesting to look at the time line for it, it will take time and the department confirmed that it will take time to process the proposal from the Admission Committee. And I think as I said, it will take at least a year before something is sent to the parliament for approval and the process in the parliament to take at least long term, and then there should be a transition period of 3 years as we have heard previously before something comes into effect. So based on our estimate, potential changes should not be implemented earlier than school year '28, '29. I think we are prepared for all changes, and we will also have sufficient time to adapt the business to have a potential outcome. But it's also important to say that the Committee's proposal will regardless not have any direct effect on the private candidate business in the next 3 to 4 years at least. So let's go over to ONH. Continue to outperform the market as we also did last year. The application date on 15th of April is an important date for ONH. Even if ONH doesn't operate with a deadline, but have an ongoing enrollment until the semester starts, and the enrollment start status of the 15th of April is an important milestone and give us an indication of how the enrollment will end, but it is still early in the cycle. And historically, we have achieved around 50% of the total number of applicants at this stage. I also have a very good news for you, that we have hired a new director. We had a director previously, which has been there for more than 10 years. Obviously, we have a managing director as well [ in Martin, ] but we were able to hire someone -- he was previously a Vice Chancellor at Kristiania and has been central in building of the offering and the quality and the whole academic offering in Kristiania. So we're very pleased for [indiscernible] to start in ONH, and he will be crucial in developing the offering further for ONH and strengthening its position. When it comes to the number of applicants so far, we have 20% growth in number of applicants, which is strong. The NUCAS number show growth of less than 1%. So ONH continued to outperform the market with double-digit growth. But it is the online programs that are driving the growth. We see 41% growth in online applicants, while the campus -- up against for campus programs are in line with last year. So it's a flat development. So -- but I think with a strong portfolio of online programs, ONH is taking a lion's share of the increased demand for flexible programs. You can look right there, you can see the difference in the different -- in the different master, bachelors, so we see there is a strong growth, both in master and bachelors, 36% for master, 22% for bachelor, 11% for annual units, 35% of the senior subject, and other courses form very long volume, 554. So we see that we grow in every area that we are offering programs. Okay. Let's have a quick look. I think the loan process has been completed, as you all know. And you also can see some clips there from the web page and also from some advertising. We have finally launched it. We launched it last week of the quarter last week in March, and we have started building awareness in the market. I think the campaign will focus more on conversion in the next phase to generate more leads and applicants. So it's still too early to give an estimate on how many students the school will achieve. But I think this is a long-term investment aiming at building a substantial business unit within the group over time. So this year, we will offer a loan program in Oslo, the WebApp development and design. In addition, we plan to offer shorter courses for upskill and reskill. And we are collaborating with the industry, including Rebel leading tech hub in Oslo. So we will continue to offer -- continue to develop the offering over time, new programs, both campus and online, but I think we will see that the volume over time will be online. So already from '24 and broader portfolio will be offered. It is important for us to be able to start the school and deliver quality from day 1 and then we can increase our market reach and improve word of mouth going forward. It takes time to launch a brand new school and to build up a reputation, but Lumi, we are in this market for the long, long haul. Yes, I think that concludes it Martin. Can we look at that outlook?

Yes. Thanks, Erik. I think on the last 2 slides, I think we try to summarize this kind of big state of the business and the outlook as well. I think, first of all, I think we have been presenting for several quarters now that we've done a lot of measures on the cost side and reducing costs in especially Sonans and transformed kind of the business model. Meaning that I think now, at least Sonans is a more flexible and scalable business model with a relatively lower share of fixed cost. . We see that a number of applicants to higher education is more a neutral [ singer ] for now at least; however, as Erik presented, we see strong growth still for ONH with their online programs. And also, as Erik said, I think the private candidate business is obviously the most important swing factor, more short term for Lumi. And -- but as we see that the visibility into the volume trend for Lumi is still limit as we are early in the sale cycles and for Sonans, for instance, there is still 20 weeks left of the sales before we can kind of conclude on the expected volumes for the coming school year. We're happy to see the continued growth for ONH, and we are also there ready for further volume expansion for the current program portfolio, and we will also launch new programs there as well. Launch of NTech as Erik said, the first year, we have kind of moderate expectations on the student volumes. However, I think it's important to launch NTech now and get started and we see strong opportunities within the vocational market. We see from student -- NTech and [ Sonans tech, ] there is strong growth for vocational market as well, still a large -- on the same size as the higher education market, but still vocational schools are becoming a major part of the education system in Norway. We are also following closely the Admission Committee. We were more uncertain, I think, when we presented the Q4 report. But as Erik said, on reviewing all the hearing during the consultation process that has been received, we see there is likely to be modified the proposal. We obviously expect some changes as the Committee has several proposals, but it seems like they could be more modified based on the opinions in particular, the retake matter. When it comes to revenues, we are not making any changes to the estimates that we presented in the Q4 report. So we are saying around NOK 205 million to NOK 210 million for the second half or -- sorry, the first half of 2023. I think with that, that concludes our presentation, and we are open up now for questions in the Q&A.

Yes. no questions at the moment. So please go ahead.

Give 1 more minute and then we will close the webcast. We have actually 1 question, Erik.

Yes, we have not commented on that in the report yet. We have some interest, but it's limited numbers so far. So we need to -- because we have started to build awareness and now we have gone more into conversion. Also we haven't really communicated that yet, but we are planning to start the [ group based on them. ]

We can also add that there is no specific deadline.