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Edited Transcript of ACAD.ST earnings conference call or presentation 29-Aug-19 7:30am GMT

Full Year 2019 AcadeMedia AB Earnings Call

STOCKHOLM Oct 1, 2019 (Thomson StreetEvents) -- Edited Transcript of AcadeMedia AB earnings conference call or presentation Thursday, August 29, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eola Änggård Runsten

AcadeMedia AB (publ) - CFO

* Marcus Strömberg

AcadeMedia AB (publ) - President & CEO

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Conference Call Participants

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* Carina Elmgren

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Carolina Elvind

Danske Bank Markets Equity Research - Analyst

* Erik Bertilsson

Lancelot Asset Management AB - Portfolio Manager

* Johan Sundén

Carnegie Investment Bank AB, Research Division - Research Analyst

* Karl-Johan Bonnevier

DNB Markets, Research Division - Analyst

* Victor Forssell

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [1]

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Good morning, and welcome to AcadeMedia's Q4 conference call to start with and following Capital Markets Day. My name is Karl-Johan Bonnevier. I work for DNB Markets and will assist with moderating at least the second part of the day.

But first of all, I would like to give the floor to Marcus and Eola to go through the Q4 report.

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [2]

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Thank you, Karl-Johan, and good morning, everybody, and very welcome to AcadeMedia.

The start of the school year is really a fantastic time in AcadeMedia, we have all these children, students', parents' expectation of a new school year. And today, we will spend some time together. So welcome to our head office. This is AcadeMedia. We meet our principals. We meet our teachers. We have education program at this floor, and this room is called the [Pressco Area].

And yesterday, I got a notice at Facebook, on the table, you have this little book and it's for the smaller children and maybe, it's somebody in the audience or it's somebody out there that has small children. And one parent that just had started our preschool said that, "My child don't like to look in books, but he is looking in this book every evening. He can't stop looking at this book" and that is so great to hear what we do for families and for children.

And we will introduce you now and tell you more about our quarter 4 report, Eola and I will do it together, and we will also talk about the full year because the school year has now ended. And then we will have a short break, and then we will introduce you to such a fantastic and exciting market. And we will talk about the preschools in Europe and the Nordic model. So I hope that you look forward to this day, and you will be able to ask questions at the questions sections that we will have after this first presentation and also later on this morning.

And to start with our quarter 4 report. And I think that we can summarize a quite stable development of AcadeMedia, and the result in quarter 4 really is aligned with the management expectation. Of course, we would hope that the Adult Education would improve in a faster pace, but we think that the overall development is stable and good.

And we have had a strong finish, when it comes to Pre- and Compulsory Schools in Sweden. We have had focus on capacity utilization to improve the number of children and students at existing school. And we think also that the organic growth at more than 5% is quite good. And also that we have seen margin improvement, when we look at the upper secondary schools.

Of course, we had had some issues when it comes to Adult Education, and I understand that you, as an investor, can have a lot of questions about this development. But first of all, the problem is isolated to the employment service agency. And we have 2 other parts that is really developing good for the moment. And we also, we will see a development now in Sweden, that the new government will focus on private actors working together with employment agency from 2020 and 2021.

And we have also developed our structure and organization and organized the preschools in 1 segment. And it's -- maybe it's a small step for us, but it's a big step for mankind. We'll try to focus more at the pre-schools, and we have also had questions how we will take the opportunities to grow in Germany, and that's why we have reorganized our organizations.

The Board also decided yesterday to suggest a dividend of SEK 1.25, and this is the first time that we give dividend of AcadeMedia. And so far, the investors have invested into AcadeMedia, and it's really time for us to give something back to the investors. So the Board has suggested to the annual meeting in November, that they will give dividend and, of course, it's up to the Annual Meeting to take that decision.

And then we have continued to look at AcadeMedia and what I really love to talk about is the AcadeMedia way. The AcadeMedia way that we work through the whole education ladder that we are a broad organization, but we are also specialized with our multi-brand strategy. And this idea has really moved AcadeMedia to the leading education company in Europe, but now we are focused in 3 countries. But I think, in fact, that we are the leading organization in Europe for the moment.

If we just go into the numbers and look at quarter 4. We have seen a stable growth. Of course, that we just bring in new children and students in August, but the development from the recent quarters has continued in quarter 4. And as I mentioned, we are very happy to see that the development in our preschools and our compulsory school has continued in a good way. When it comes to Upper Secondary, we have made some investments in digitalization and quality. And I will just mention it on the next slide.

So when it comes to what has happened between last year and this year, we have tried to use this slide. We hope that that will help you to navigate when you look at the development of AcadeMedia. We compare the EBIT last year, the adjusted EBIT last year in the quarter with the EBIT of this year. And you can see at this picture that we have developed and strengthened our economy and margin when it comes to compulsory schools, and that is the result of focus on utilization and bringing more children into existing schools.

When it comes to the last quarter, as I mentioned, we had invested some when it comes to Upper Secondary schools in digitalization, marketing and also in quality in our vocational program.

When it comes to Adult Education, we have seen an improvement, but we also have seasonal development between different quarters. If you compare with the temporary employee section, it's not so many days in June and some of that, that we can charge the employment agency and our other clients. So the underlying development of vocational training and municipality program is still very strong when it comes to the Adult Education.

And then when you look at the Preschool, the year-end was very good and stable. And if we look at the overall year, or we just take it in a few minutes, we have invested in Germany. That has affected the result.

And then we have some items that are affecting the comparability. And Eola will go through that a little later on. And as I mentioned, we end up this year now, and it's -- I think it's a good idea that AcadeMedia follows the school year, and it's more natural to understand the growth and how different things develop. It's a little problem because the municipality, they work with the usual annual year, but we have the school year.

And as I mentioned, we have had a stable growth in number of students. The overall result has affected by the Adult Education, but the organic growth and the development, and we have also strengthened the financial stability of the company. And maybe we should just have a look at also this slide, when you compare the overall year result.

You can see that we have strengthened the result when it comes to Compulsory Schools. And as I mentioned before, it's really a result of the end of the year.

And when it comes to upper secondary year -- Upper Secondary school, I must say that we are really, really proud. We have improved our quality results. This has been a fantastic growth development, and we are really going to take part of the growth that we now see in the demographic development, and we have a strong position that almost every 10th student go to an AcadeMedia school. So we have a really strong position. And you can see on this picture that the Adult Education, of course, has affected the result of the full year. We have done a fantastic job to adapt to the problem that the employment agency have had, and we are very well positioned to now take a part of the new market that will start to grow again, 2020 and '21.

And when it comes to Preschool, we have had focus on to have stability on the Swedish and the Norway market and to take part of the growth in Germany. And we will tell you much more about that during this day.

And now, Eola, I will leave the rest of the presentation to you.

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [3]

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Thank you, Marcus. So this slide just summarizes the items affecting comparability that we've had for the full year and for the quarter. And I think what is characteristic this year is that we have had very substantial retroactive revenues relating to some of our legal processes to ensure the equal terms, i.e., that the municipalities are obliged to pay us a fair voucher based on the resources they themselves spend on their students. And this has resulted in substantial retroactive revenues for the year, and which is a good sign. So the hard work has paid off there.

We've also had restructuring expenses of about the same amount. So for the year as a whole, our items affecting comparability are sort of quite small.

And with that, I'd like to go through a little more in depth, the development of each segment and the quarter on each segment, and then I'll summarize everything for the full year. So starting off with the Pre- and Compulsory Schools segment. This is a segment which we are actually quite happy with the development of. They've had a very solid organic growth, especially in the Compulsory Schools which has helped them.

And as you know, it's very important for us, we have a high operating leverage, so as we fill up our schools, we have a very good effect on margins. And this is what's happened really in the Compulsory Schools. We've been able to add students to our existing units and see a good margin effect of that. And this shows in the quarter. So both EBIT margin and adjusted EBIT margin have improved in this quarter for the Pre- and Compulsory Schools segment.

And as Marcus explained, we are planning -- we've made a reorganization as of 1st of seventh. And therefore, I also comment a bit on the development of the compulsory school separately, and it's actually the compulsory school that has performed better in the quarter and in the full year.

Something that we've also spoken about earlier is that in the Swedish preschools, we've made an effort to restructure the portfolio. So we've reviewed our portfolio, seen that some of the units are in municipalities where we feel they don't really have a fair chance of performing well. We -- neither with regard to quality or with regard to margins.

And therefore, we've decided to divest 9 and close 3 preschools in Sweden. So our portfolio will actually decrease in size at the end of this year. But we think this is a healthy development going forward so that we can focus on municipalities where the opportunities are better. And we've also mentioned the strategic decision to form the Preschool segment. We'll come back to that later.

So overall, we felt that the Pre- and Compulsory Schools segment actually had a good year and a strong finish to this year with good margin improvements.

Moving then on to Upper Secondary School. Overall, as Marcus mentioned, this is a very strong year for the upper secondary school. They have a very high growth level, both from -- partly from acquisitions, but also from organic growth. The new starts that were performed in the fall of 2017 and '18 as these schools fill up, that provides good organic growth.

We also made a small bolt-on acquisition in the quarter.

And as Marcus explained, we've also made some strategic operational expenditure in the quarter with regard to digitalization, marketing and also adding resources and boosting resources in the Praktiska schools. These are the schools that we acquired with Vindora and that we already, at the acquisition, knew had quality issues. And we have also been clear in our communication that we will need to add resources here, and that's now what we're doing.

So these are really strategic efforts to improve the quality of the business going forward and also to improve the growth potential going forward. But it has also meant that in the quarter, the margin has actually declined in the quarter. But overall, a strong year for Upper Secondary School.

Moving on then to the Adult Education segment. The Adult Education segment sort of, as a whole, I would say that it's sort of status quo as compared to the last quarter, i.e., we have our municipality business, our business towards the higher vocational education, which is doing very well and is outperforming compared to last year. However, we are still struggling with low volumes, actually too low volumes in the business relating to the public employment agency.

And this has resulted in sort of very small EBIT, albeit an improvement compared to last year. So a small improvement in the quarter. But obviously, for the year as a whole, it's a large loss compared to -- or decrease compared to last year. And I think it's fair to say that all of the drop in revenue that we see in Adult Education compared to last year is fully related to the public employment agency.

If we look at the graph, we can see, however, that the -- on a full year basis and rolling 12-month basis, the EBIT actually is improving, although at a very small level.

One final thing that I think is important to point out and remember, sort of, there is actually a seasonality in the Adult Education segment. Previously, we have spoken about that the overriding sort of effect is that of the portfolio and the market, in general. However, there is also some seasonality relating to the number of billable days. In Q4, is a bit slower. And also, Q1 is relatively fewer billing days compared to the other quarters. So that's something to remember going forward.

So then we move on to the Preschool International segment. This is the business segment which has the highest organic growth. And it's especially Germany that's growing very fast. Also, in this quarter, we opened 2 new preschools in Germany, and we made a small bolt-on acquisition in Norway. And we've had a very healthy increase in both student numbers of 8% and sales of about 10%. And we had an improvement in adjusted EBIT and adjusted EBIT margin for the quarter, and this was rendered both in Germany and Norway.

Looking forward, we do want to provide you with a bit of guidance regarding the profit development going forward. As you know, we've spoken about the new staffing regulation in Norway, which the main part of that -- it's partially come into effect, but the main part of that comes into effect as of August 1, now.

In addition, we have had changes in the actuarial assumptions of our defined benefit pension plans in Norway. And this will render higher accounting revenues -- accounting expenses for pension in next year, based on the sort of IFRS standards.

So the combined effect of these 2 things will render an earnings effect of about minus SEK 35 million in next year. And again, I'll remind you that the effect relating to the staffing regulation is a temporary effect, as it takes 2 years, in Norway, for the costs of the staffing regulation in the municipalities to filter through to increased voucher levels. So increased voucher levels will filter through to our revenue successively as we come to 2021 and forward. So a little bit of guidance, and I hope that's helpful to you going forward.

This is also, of course, a very exciting segment that we're going to talk more about and later today.

Trying to summarize then, the full year for the segments. So the Pre- and Compulsory Schools segment, we feel has done very good. It's the organic growth filling up students in the existing entities in the compulsory schools, which has really boosted capacity utilization and the margins. This, in combination actually, with the reduced staff turnover has also rendered a much more stable salary inflation. So that's really subsided, which is good. So -- and we have seen -- we've improved the margins in this segment.

Upper Secondary School, also a record year and a very strong sort of growth outlook that we're now sort of investing into.

Adult Education still struggling, still in a little bit of a transition period, but now we feel we should have pulled through the worst of this. And I want to remind you that there are important parts of this segment that also are doing very well. And now we've really contracted substantially the nonprofitable parts.

International Preschool also doing well with strong organic growth in -- mainly in Germany, which is improving margins.

So looking then briefly at what this does to our financial position. Our financial position is strong at the end of the year. We have a seasonal effect in our cash flow, which also affects our net debt position and our leverage ratio as we go through the year. And here, you can see that our leverage ratio now is at 2.4x, which is the same level as at the end of last year, despite growth. And so this is a stable and good position, and we have our own financial target of a maximum of 3x, but our debt covenants are substantially higher than that. So there's a lot of headroom there.

And to try and summarize then the financial part of this presentation, a look back at our financial targets for the year. On growth, we are at 4.4% revenue growth for the full year. And this would, obviously, have been substantially higher if we haven't had the effect of almost SEK 200 million of revenue drop in the Adult Education segment. So just considering that, we feel that this is still a good growth level.

When it comes to EBIT margin, this is obviously also affected by Adult Education, which is sort of a very poor margin at this stage, but 5.4%. We've seen good development in some of our segments moving in the right direction here. So we feel confident that we will continue to move in the right direction.

Capital structure, I just mentioned, our leverage ratio is well within our target range. And it's very nice to be able to also present to you that the Board has decided to propose a dividend of SEK 1.25 to the Annual Meeting in November.

And with that, we've concluded the financial review of the presentation, and we have a couple of other topics that we'd like to address in this section. And it relates partly to the effect of IFRS 16, the bringing on balance sheet of operating leases and also the organizational change. And I'll just start with saying a little bit about the effects of the operational leases. And then I'll hand over to you, Marcus.

So as you know, AcadeMedia has the majority of its premises via operational leases, rented contracts, and I'm sure you're all aware of IFRS 16 and what this means. We need to bring these operating rental contracts onto our balance sheet as if they were fully debt financed. And this, we have done these calculations based on our existing portfolio as per July 1, and this is what comes on to our balance sheet then as of July 1. The existing portfolio. And we show that this will be about SEK 7 million (sic) [SEK 7 billion]. So in the outset, the debt and the asset will be the same size, and that will be about -- around SEK 7 million.

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [4]

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Billion.

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [5]

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SEK 7 billion, sorry. Thank you. And as you know, in EBIT, we need to eliminate the rental expense and add back the depreciation of these assets, and this will have an impact of around SEK 200 million positive on our EBIT.

And then we have the financial net, which will be impacted with rental expenses of around SEK 350 million.

So all in all, this will have a negative impact on our earnings before tax and after tax, to a lesser extent. And it's important to remember that this is -- these numbers are based on the current portfolio. And as you know, we are a growth company. We have growth plans, mainly organic growth plans in the Upper Secondary School segment and the German market. These 2 are expected to grow, and we will be taking on new lease contracts as we secure that growth going forward and this will obviously change these numbers.

So what does this mean for us? Are we going to change our strategy? I think it's very important to remember that this is an accounting change. There is no commercial impact whatsoever, not in relation to the real estate owners, not in relation to our lenders, and it's basically an accounting change.

I can also mention that our loan covenants agree -- are on a frozen GAAP basis, i.e., they still apply. And as we have discussed, we don't see any reason to change our lease contract strategy as a result of this accounting change. We have a very clear lease contract strategy, which is based on the stability and outlook of the underlying business. And it's on that basis, we take the decision on whether to take on a contract and whether it to be short term, long term or whatever. So that's the basis for our decision.

And that is what we're going to say about leasing at this stage, and there is information to this effect in the report. And as you understand, when we come to Q1, there will be more information.

And with that, I think, perhaps if you would like to present the new organization, Marcus.

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [6]

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Yes, I will just update you to the changes that we have done in the organization. And the idea is to focus on International Preschool and to give you -- give us a clear focus and give you a clear understanding.

So now we have preschool and we have 3 country managers working with that, and that is our Preschool segment. And then we have our Compulsory Schools and Upper Secondary schools, and as you can see, we have the same manager in these both segments. And the idea behind that is that we should use our fantastic marketing program that we have developed in the Upper Secondary and to move it into the Compulsory Schools. And it's Jens Eriksson and he's with us here today. So Jens will be the manager of these 2 segments, and we will keep up to report Adult Education as 1 segment and Christer Hammar is the manager of that segment.

And as you can see, I will be the segment manager of the Preschool, and I've been working a lot with this. I've been traveling and met a lot of different preschools in different countries in Europe. And this is a very important area for AcadeMedia in the future. That's why I'm working with it, but we will recruit a new manager during 2020. And we will also give you very clear information on how this will affect our numbers. And it's quite easy, in fact, because we are just moving one part from one part of the organization to the other part of the organization.

And we have tried to illustrate this in this way. And now you can see this is Preschool International today with Norway and Germany, and this is Pre- and Compulsory Schools in Sweden today. And what we are then doing is that we are going to move the preschools in Sweden to this part, up here, like this, and this will be our new Preschool segment. So we will just take out that part, and this will just be the Compulsory Schools. So we will hope that this will be very clear for you. And you will understand the numbers and how it will develop over the years.

And with that, I think that we wrap up and we can answer also questions, if you have any.

Please, Karl-Johan.

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Questions and Answers

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [1]

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I'll join you and I'll kick off here with 1 or 2 questions, then open up for the floor. And then, hopefully, we also have some coming through on the telephone conference for you.

First of all, obviously, this new Preschool kind of things, we're going to discuss more later today, but just on the Norway -- Norwegian guidance of this minus SEK 35 million. I think a lot of people had the feeling that this number was going to be SEK 50 million to SEK 80 million. What have you been able to do to mitigate that kind of huge impact that looked to be coming?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [2]

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Well, I mean, we have -- they've been working for a year on various types of mitigating effects. And it's -- there are some temporary cost savings that we can make until the revenues filter through, but there are also some other changes. And one aspect is also sort of how do we actually count and record staffing.

Previously, we haven't had to do this in the same way. Now we need to sort of really consider which staff are pedagogical staff and which are not. So it's also sort of perhaps making certain staff categories partly pedagogical staff. That's one way of mitigating the effects.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [3]

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So we're clear on this. Your internal efforts that is realizing this lowers the impact.

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [4]

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Yes, yes.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [5]

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It's not that you're hoping for any payment from -- early payment from the state or anything?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [6]

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No, I mean, they have stated that they will compensate for this gap. However, the politicians seem to have decided that these compensations mainly should to go to smaller preschool operators. And we qualify in a very small extent.

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [7]

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But they are still discussing it. What you have to keep in mind that sometimes you see these sort of regulation changes in different countries. We saw it in Upper Secondary, 6, 7 years when they changed the voucher prices in the system. And AcadeMedia is very good at adapting this sort of new principle.

And one problem that we have in Norway, that we have a lot of municipality where the voucher's very low because they have very low staff. And now they are forced to improve the staff. So we hope that in the long term, it will be a more stable and positive voucher development in Norway. And we have been working this for a long time, and we have a very good management team. So in the long term, we are very positive.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [8]

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On the voucher size, you seem to now have a regular flow of this retroactive payment. Is this -- now you're getting paid basically for the wage inflation you saw on teacher salaries, 2, 3 years back or is this relating to something else?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [9]

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No, I think it's important to remember that these will continue to be lumpy. Those retroactive payments that we report under items affecting comparability, they refer to legal cases in certain municipalities several years back. And they -- if you look back at how we reported, they do tend to be a bit lumpy. I think we've had a very good year this year. I think we will continue to have these type of payments, but it's important to understand that this is a bit lumpy and depends on when these cases fall through.

What is positive is that we also have retroactive payments, which are of the type that they self-correct. And this is an issue we've been driving quite hard, is because the Swedish vouchers are based on a budget, they need to do their accounting when the year has finished and say, okay, what should we have paid, and to compensate us. More and more municipalities are doing that. And this, we report as part of our operating earnings. And this, we see in a positive development.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [10]

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Excellent. One final for me, before I open up the floor. On Adult Education, obviously, you're struggling still with the Swedish Employment Agency. With the kind of changes you now indicate for October onwards, how much of the problem are you able to mitigate that has hit during the last 2 years?

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [11]

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I would like to say that the worst part of the -- this part of the Adult Education is behind us. But still, you see the discussion in media, they have a problem with the internal organization, they don't increase the number of students. But this will be a much smaller part of AcadeMedia.

And now the discussion really has started at what is the next step of the employment agency service. And they have been very clear that the private part will increase. But still, it is organization that is not working fully. And we are now -- this is a small part of us. And the other part is developing in a good way.

So I think we will continue to see problem with the number of students in -- during the quarter 1 also. But if you look a little bit ahead, I think this will be an important market for AcadeMedia.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [12]

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Excellent. I think we have questions in the room. I think you should wait for a microphone is coming to you. So please.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [13]

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Carolina from Danske Bank. So you invest in quality in Praktiska. Do you still have to invest more going forward? Or is it enough that you did this quarter?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [14]

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This is a matter of adding resources to the schools, which have been lacking. So I would say this is an ongoing need. We need to sort of -- our margins in the Praktiska schools have probably been a bit too good. We need to step up resources there. And yes, so that's an ongoing need.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [15]

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So you will have to add more from Q4, in Q1?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [16]

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During next year, we will add -- we will add resources substantially to the Praktiska schools.

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Erik Bertilsson, Lancelot Asset Management AB - Portfolio Manager [17]

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Erik Bertilsson from Lancelot. Can you talk a little bit more about the dividend and how you're thinking about how that will evolve in the coming years? And whether we should think about that as a sort of growing dividend? Or can you elaborate a little bit more on that?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [18]

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Well, I mean, this is obviously, for the Board to decide. And ultimately, the AGM, of course, but I think it's a healthy thinking that the dividend should be stable and possibly grow. That would be an ambition, I would say.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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Carina Elmgren from Handelsbanken. Regarding Norway, how much of the costs that you expect for next year is related to the regulations? And how much is due to the pension costs? Yes, that is my first question.

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [20]

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Well, as you can see, we've chosen to sort of put these 2 together. However, I think it's fair to say that roughly 50-50.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [21]

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Okay. And then also, could you maybe quantify a little bit the seasonal effect in Adult Education because I thought the seasonal effect would have been smaller in school segments? So how large is that?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [22]

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I think if you look at the trend in quarter-on-quarter, not quarter compared to prior year, but 1 quarter after another, you can see perhaps the dip from Q3 to Q4 has largely a seasonal effect.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [23]

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Victor Forssell from ABG. Can you please elaborate a bit more on sort of the underlying staff turnover in the Swedish preschools? If you sort of exclude that you have increased teachers in certain of these schools, sort of the underlying trend that you see currently?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [24]

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I think we -- what we've shown in the report is the overall staff turnover in Sweden, and that's actually come down substantially from 26-something to 22-something. So a very -- and that in -- we measure staff turnover as number of leavers. And as you know, we have had wanted leavers in the Adult Education segment. So this is a strong improvement.

We haven't shown -- obviously, internally, we have figures down to the unit level, but we see a positive trend in staff turnover in all our 3 schooling segments. So staff turnover has really come down. And the most substantial effect we see on that is in the Compulsory School segment, where we also see sort of a subsiding wage inflation, as I said, because this is -- the staff turnover really has been driving wage inflation.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [25]

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So still sort of a margin squeeze for the preschools in Sweden, you would say, assuming?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [26]

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I think one thing that you might want to remember about the preschools in Sweden is that they had a very low voucher increase this year. So while the compulsory schools had, on average in Sweden, a voucher increase of 3.5%, the voucher increase for preschools was less than 2%, which is very low, much lower than the underlying cost increase. And while we're stepping up our efforts to sort of push the municipalities for them to ensure equal terms in the vouchers, it is much more difficult in the preschool area.

But as you've seen, I think, we're really stepping up our efforts here, both on a municipality basis on a policy level, and this is really paying off. So I think we will see further benefits of this work that our legal department is doing.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [27]

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Should we check the telephone conference?

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Operator [28]

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(Operator Instructions) We do have one question coming through, that's from the line of Johan Sundén of Carnegie.

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Johan Sundén, Carnegie Investment Bank AB, Research Division - Research Analyst [29]

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I have 1 question regarding Adult Education. You write in the report that there is an upcoming procurement in the city of Stockholm, where the prices declined. Could you please elaborate a bit on that part?

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [30]

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If you look at Adult Education, you -- it's divided in 3 parts. It's the employment services to the employment agency, the public employment agency, it's the municipality programs, and it's what we call vocational training program. And when it comes to the municipality program, it is a tender process where you have to give tenders. And then if you win or you lose.

And now it's -- we will -- it's a tender process in Stockholm and in Gothenburg, and this is coming every fourth year. And what we see now is that the prices that they have, it's a fixed price model when it comes to Stockholm, and they have taken down the prices a little bit.

But this is a process. We have left our tender this summer, and we will have the decision from the municipality I think in November, December. And usually, it's quite a long-term process, but because a lot of this tender process is applied by competitors, and it takes a lot of time, you can say.

We had a situation, the same situation in Gothenburg, where we are a big supplier. And we won the new tender process even more than we have today, but it was appealed, and then they are moving the process a little bit ahead. So now we will work with the old programs for 1 more year. So the situation in Stockholm is that it's a new tender process and that they have taken down the prices a little bit.

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Johan Sundén, Carnegie Investment Bank AB, Research Division - Research Analyst [31]

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How much is it, just to get a feeling? Is it a big cut?

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [32]

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It's very difficult because you have maybe 25 different parts and different program and different vocational program. But the overall picture is that they are taking down the prices.

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Johan Sundén, Carnegie Investment Bank AB, Research Division - Research Analyst [33]

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How large part of the portfolio is the Stockholm contract?

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [34]

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I don't think that we have mentioned that, but Stockholm is a big part of Sweden. So it's a big part of the municipality program also. And we are a big supplier, both in Gothenburg and in Stockholm and really, a leading supplier. So it's a very important contract, of course. And -- but it's not just 1 contract, it's divided in a lot of different small contracts also.

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Operator [35]

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(Operator Instructions) Okay. No one else has come forward at this time.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [36]

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Excellent. So I'll take a chance to ask 1 or more 2 more questions, and then give you a chance to get in the room and then I guess it's time to wrap up as well.

So looking at the now extra investment you indicate in the upper secondary, both for quality, marketing and digitalization. I know you normally don't want to comment about this, as you come with the student intake numbers at a later stage, but do you feel that you're already getting a payback on that kind of investment, looking at the new school year that's starting now with record order and record student intake?

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [37]

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If we don't look at our numbers, but we look at the overall market. So is -- the overall market is developing very well. We have a very strong demographic development when it comes to upper secondary. And I think we are the best -- we have the best position.

And there is also a lack of capacity when it comes to upper secondary schools in the bigger cities because you also have an urbanization trend. But as we report all the time, we report the numbers when we have counted everything and have control of all the numbers, and we will give very clear information how we have performed and developed this year. But of course, our ambition is to have a good organic strong growth.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [38]

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It's a good market. And hopefully, you keep your market share.

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [39]

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That's exactly what we hope for and work for.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [40]

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Excellent. Eola, you didn't want to speak more about IFRS 16, but I need to at least get your thinking about how will this impact your financial targets. Because, obviously, at least 2 of your 4 targets are directly impacted by it.

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [41]

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Yes. Well, we have discussed this internally and with the Board, and we've decided that we will stick to our current financial targets. And obviously, we will ensure that we have reporting numbers that align with them. And then, when we see everyone's understanding of our new numbers, together with the Board, we will evaluate resetting new targets. But as many other companies have done, I envisage that some of our key ratios will actually remain with the same definition as previously.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [42]

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Excellent. And you showed us that the net debt-to-EBITDA still remains at 2.4x, but I also see that you have done substantial property investments during this year. How do you see that playing out in the future? Is that going to be what is really keeping the gearing level up, rather than us seeing the degearing that the business creates?

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [43]

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Well, yes, I mean, some -- as you know, in Norway, it's very financially attractive to build and own the premises because we get full debt financing from the Norwegian house bank at very attractive levels, and this is what has driven up our property investment. If we exclude the property, we see actually our gearing dropping even more. So I would say the leverage on the operations, excluding real estate, is actually improving more.

And I think at this time, with the changes in Norway, perhaps, we are not going to be building very many new preschools or at least not at the same pace as during the last years.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [44]

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And when you look at other uses of the cash flow, you indicated in the report, I saw that you had found 2 acquisitions. Obviously, they are of the smaller size. And if you compare to it the larger transactions that you have done a couple of, quite a few of, historically, how do you see that flow of transactions or possibility for those transactions going forward?

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [45]

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I'd like to say that the development over some years, we have done mergers and some parts of AcadeMedia's development, we have made a lot of bolt-on acquisition. I'd like to say that for the moment, the situation is that we are focused on a little bit more on organic growth, both in Germany and also to take parts of the organic development when it comes to upper secondary.

But nothing happens on the market without we know about it. So we know all the competitors. We know all the possibilities, both in Sweden, Norway, Finland, France, Germany, so we will be contacted. But for the moment, we are focused on organic growth. And if we have this possibility to take great buildings in Stockholm, or in Uppsala and start upper secondary schools with full capacity, it will be really value accretive.

And also that we have brought the Nordic preschool model to Germany, that is also a really key success for us that we have done this and managed to create organic growth. But we are always open to make acquisition also.

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Eola Änggård Runsten, AcadeMedia AB (publ) - CFO [46]

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And if I just comment a little bit on your question from a financial perspective. AcadeMedia has very strong cash flow. And obviously, we look at how can we use this cash flow over the year. And you've seen that we've been able to delever, we are now also paying a dividend, but there is still room for both organic growth and bolt-on acquisitions and maybe at least partial financing of something else.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [47]

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Excellent. I'm not sure if you have any finishing questions here. But otherwise, I guess, we should start to look forward to the next session of the day.

Thank you very much.

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Marcus Strömberg, AcadeMedia AB (publ) - President & CEO [48]

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So thank you very much, and see you all again 10:45, and then we start in here. So coffee outside. Take some break. Take some talk. You can ask us also questions. So thank you very much for your time.