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Edited Transcript of ENG.ST earnings conference call or presentation 30-Aug-19 8:00am GMT

Q4 2019 Internationella Engelska Skolan I Sverige Holdings II AB Earnings Call

TABY Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Internationella Engelska Skolan I Sverige Holdings II AB earnings conference call or presentation Friday, August 30, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cecilia Tufvesson Marlow

Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director

* Fredrik Åkerman

Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO

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Conference Call Participants

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* Carina Elmgren

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Victor Forssell

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the Internationella Engelska Skolan Q4 Year-End Report July to June. Today, I am pleased to present Interim CEO, Cecilia Marlow; and CFO, Fredrik Åkerman. (Operator Instructions)

And just to remind you, this conference call is being recorded.

I will now hand you over to our first speaker, Cecilia Marlow. Please go ahead.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [2]

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Thank you. Thank you, everybody, for calling in. We are really happy that so many of you are interested in IES. We're going to go through the fourth quarter, which we released this morning. But before we dive into that, I think it's also good to look at the full year, what has happened, what does it look like on a full year basis.

As you already know, the margin and the growth have increased quite a lot compared to last year. We are opening new schools in Sweden, but we're also growing quite rapidly in Spain. This financial year was the first year when Spain was consolidated also into our accounts. We see lots of opportunities in Spain going forward.

The fact that we can show these strong results and not compromising on quality, which we never do, is to me evidence of a very strong organization that really, really know what -- how we're going to run and operate schools with very high quality and still with high efficiency, but again, never compromising on the quality. It's a pleasure to work in a team like this with all this competence.

With that, let's go into the material that you have in front of you, Page #2, with the headline of Strong Fourth Quarter. As you can see in the blue box, there are some -- we recognized income in different quarters when we compare with last year, and that, of course, adds to the comparison. We had a quarter with very strong growth, both in revenue and profit. We did grow a lot, of course, due to Spain, as I mentioned, but also because we had opened a new school, and we are also growing the number of students in existing schools, especially in schools that were opened a few years ago.

We have a very healthy queue. The queue registrations in Sweden is approaching 200,000, and of course, that is a lot. This quarter as well as the full year, we could see a -- clearly a better balance between the increase in costs, especially in the salaries but also the increase in the school voucher. On top of that, we do have a good cost control. We do use the leverage we have being a large organization in order to be able to be efficient without compromising on quality.

As you can see, the adjusted EBIT margin was almost 8%, which is close to our financial target. And -- or another thing that could affect the salary increase and the cost increase when we compare to last year is that we use to a lesser degree temporary staff.

During the quarter, we announced 5 new schools. And before that, during the financial year, we had announced already one to be opened in the coming year. We have also acquired 2 new schools in Spain during the fourth quarter, 1 in Madrid, 1 northwest of Madrid in a city called Valladolid.

After the year-end, the financial year-end, we sold the 50% we owned in a joint venture in Spain in 1 school, reported gain of -- capital gain of approximately SEK 25 million.

If you then go to the next slide, #3. As I already mentioned, we had a healthy queue. We have -- we are close to 27,000 students in Sweden in our 37 schools. That is a lot more than last year. A few weeks ago, we opened 1 new school with approximately 240 students, and that will, of course, grow over the coming years. And on top of that, as I mentioned before, the number of students is increasing in other schools also.

The 5 new schools that were announced in the last quarter were: Kungsbacka, Göteborg, Upplands Väsby, Vallentuna and Östersund. And previously, we announced Solna. And as you can see, we plan to open them in 1 to 3 years. That is the plan, but it can change.

There are lots of municipalities that are contacting us, and we are in dialogue with a lot of municipalities regarding the opportunity to open a new school. And we are very pleased that there's such great interest and we have very good dialogue. But of course, we always have to look into the reality of the level of the school voucher, which for us is a must that it does reflect the actual cost of -- for that municipality operating their own school.

We also see more and more agreements across some of the boundaries also on the municipality level so that we can ensure a long-term commitment to us as a potential free school operating within the municipality because we need that long-term commitment and we need to be able to foresee and know what will be the sort of the agreement.

Even though we opened 1 new school a few weeks ago, our plan to open 2 to 3 new schools every year as an average remains.

Fredrik?

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Fredrik Åkerman, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO [3]

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Yes. Good morning, everyone. I will take you through from Page 4 onwards some detailed numbers, and we will start then with the segment Sweden. And first of all, I want to remind you about the effect between quarters that you can see in the blue square up to the left, which makes it a bit difficult when you compare Q4 with Q4. But for the full year numbers, it's nothing that is affected.

So if we look at the full year, operating income increased by 11.1% in the Swedish segment, and all of that was organic. No acquisition in Sweden. In those numbers, we had SEK 32.1 million from the new state subsidy, the so-called equality grant. And that was also then matched by costs. So that will show up both on the revenue side and on the cost side.

This year, we did not get any homework support grant. We did get that in the calendar year of 2017, which means that in the last financial year, we had SEK 10.5 million in the numbers. The operating profit increased to SEK 191.9 million, which meant an EBIT margin of 7.4% in the Swedish business.

If you look at the quarter then, the growth was even stronger. If you adjust for the SEK 10.6 million IFRS 15 effect, the increase was SEK 12.5 million. So it was still a strong quarter. And operating profit was also very strong, 6 -- 0 point -- compared to last year. So then the EBIT margin of 9.3%.

If we then look at the table to the right on Page 4 with the revenue and cost per student numbers, you can see that Q4, we had a strong increase in the revenue per student, 7.1%. And if you adjust for the IFRS 15 effect, it's still over 5%. And on the cost side, we can see that the -- a result on the calmer market for -- especially for recruiting teachers where the salary surge we could see 12 months ago, well, 12 to 18 months ago now has gone down. That was 2.2% in the quarter. And total costs were even lower then at 1.5% increase. So we have had some effect of using our economies of scale in the organization on that.

If we look at the full year, the total revenue per student increase was 4% compared to personnel cost per student of 3.9% and total cost of 3%. So there was a 1% gap there, which contributed, obviously, to the improved results.

So with that, if we then move to Page 5 and the Spanish business, and this was then the first year where we consolidated the numbers in Spain after the acquisition the 2nd of July 2018 of the majority of the Spanish business. And the operating income was SEK 174.3 million, and the EBIT was SEK 17.7 million.

And if we look at the EBITA where we then add the amortization of the intangible assets except client relations that was SEK 3.9 million for the year, we ended even higher then with an EBITA margin of 12.4% while the EBIT margin was 10.2%. And at the end of the period, we had 2,000 -- a little bit more than 2,500 students in Spain.

If we look at the quarter as such, the operating income was SEK 58.3 million; the operating profit, SEK 6.8 million, which meant a margin of 11.7%. And do remember then when it comes to the Spanish business, we have quite some seasonality in the numbers. So the first quarter is very weak because we are not running the schools in a big part of July, the whole of August, while the other 3 quarters are quite alike when it comes to revenue and profit.

And as Cecilia mentioned, we opened 2 new schools and sold our remaining 50% share in Colegio IALE with a healthy capital gain. So we look forward to the second year for the Spanish business where we are growing and we see a lot of opportunities.

So Cecilia, if you maybe go through the targets and where we are. Oh, sorry, we have the -- we have some more page before that and actually if you look at yours, okay?

Yes. Page 6 first, which is the simplified reconciliation where we look at where the increase in operating income and profit contribution come from. So if we look at the income side, SEK 154 million of the growth came from more students in Sweden and SEK 92 million from the school voucher increase in Sweden. SEK 13 million from increase in other income where we, among others, have this equality grant. So if you adjust for that, it's actually a decrease when it comes to other income. And that's because we didn't get the homework support grant but also because we see lower compensation for when we have to have student assistance with special needs. And then we have SEK 174 million coming from the acquisitions in Spain or from the Spanish business.

If you look at the profit side and start with the SEK 152 million that we had last year, the -- SEK 11 million of the growth came from more students in Sweden, SEK 28 million from the better balance between total revenue per student and cost per student, and then SEK 18 million from the Spanish business. That gave us the SEK 209 million.

And then we move to Page 7, a little bit about the financial position. We had investments in operations this quarter of SEK 8 million in Q4. The majority was from the Swedish business. And in total for the full year, we have SEK 76.7 million compared to SEK 88.6 million last year. And the reason why the last -- we had higher investments last year was that we opened more schools, 4 new schools, last year.

If you look at the cash flow from operating activities, we had a strong quarter in Q4. The difference was the increased profit but also some government contributions and municipal compensations that was paid in April instead of March, which -- we received it in March the previous year, so that's why the Q4 had very strong cash flow compared to last year.

If we look at the net debt situation, we are still at a net cash position. So minus SEK 49.3 million means a net cash position of SEK 49.3 million. And we had that at the end of last year as well. But taking into consideration the acquisitions in Spain, it's very good that we had adopted a net cash position.

The equity/asset ratio is 61.9%, a bit lower then because of the acquisitions in Spain but still very strong.

And then finally there, we have a dividend proposal in line with the policy taken by the Board, 30% of the net profit in the group. And that means a dividend proposal of SEK 1.16 per share, and that means approximately a 2% dividend yield.

So with that, we go back to Cecilia.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [4]

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Thank you. So if we'll now move to Page 8 and look at the financial targets that we have set up. We can see that we clearly are above our growth targets for the last -- for the previous financial year, also are close to meeting our target when it comes to profitability if we look at the full year.

We have a capital structure that is also well above target. And as Fredrik mentioned, we are -- the Board has now decided to propose to the AGM a dividend to be in line with the dividend policy. Of course, the financial targets, we have to look into those given the effects of IFRS 16 that will be implemented.

And with that, I leave back to Fredrik.

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Fredrik Åkerman, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO [5]

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Yes. So if we then move to Page 9 in the presentation.

As in -- and we also have in the report on Page 19 in Note 1, you have the same information regarding the implementation of IFRS 16. So as we have a financial year that goes from 1st of July to 30th of June, we implement IFRS 16 from 1st of July 2019. And this information is then meant to sort of prepare you for the implementation that will take place then in Q1.

And if we look at the implementation and the effects, we have a significant amount of rental agreements. So we will be significantly affected by the new standard. We have about 100 rental agreements in Sweden and Spain, the vast majority in Sweden, of course. And they will now be recalculated with a discount rate and be taken up as a right-of-use asset on the asset side and lease liability on the equity and debt side of the balance sheet.

Yes, we have calculated the leases. We have been looking at the various geographical locations where we have our schools and estimated the discount rate or the incremental loan rates for those sites. And that means that we have an interest rate that varies between 2.9% and 4.5% depending on geographical location. And a low interest rate is obviously then used for the big cities like Stockholm and a higher one for smaller locations a bit more remote. The average discounting rate for all our 100 lease agreements is 4.0%.

If we then look at the table to the right on Page 9, you can see that the commitment for operating lease agreements on properties by June 30 was a little bit a little bit more than SEK 6 billion. About SEK 1.7 billion of that is agreements that will not start until later, until 2020 or 2021. So they are not taken into the balance sheet before they start, but they are shown here so you're aware of that commitment, and they will be shown in a note in the annual report. And then we have the effect of the discount rate. So the right-to-use assets that we will have in the balance sheet will be SEK 3.4 billion from 1st of July.

You can also see below in the table how this will affect the profit and loss. So we will have a large increase in EBITDA because the lease costs will go away and we -- will be then substituted by depreciations on the right-of-use assets and financial costs. So the EBITDA will go up significantly, also the EBITA and EBIT, while the net profit will go down. And of course, the net debt will increase substantially from this net cash position to a high net debt position. And a KPI like net debt-to-adjusted EBITDA will grow up to 5 in this case, and the equity-to-asset ratio will go down significantly.

We will, during the coming quarters, show both the result with the new standard. That will be in our sort of normal tables. But we will also show the result of key -- KPIs as the one with a sort of the previous standard where we didn't have -- implemented IFRS 16 so you can all see how things are affected by the implementation of the new standard.

And on Page 10, you have more details around this that you can look at, and it's also in the report, as I mentioned. There will be discussion in the Board about new financial targets, but the Board has decided to wait a few quarters to know a little bit more how things will be affected, and there's expected to be new decisions around Q3.

And with that then, I leave back to Cecilia.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [6]

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So if we summarize, we had a good year financially but also quality-wise. IES is a company that started more than 25 years ago. We know how to run schools in a good way, good way for children and good way for making sure that children actually get the knowledge that they're supposed to get in their school year. Going forward, we need to really maintain focus on quality and making sure that we don't compromise on that. We'll also, of course, need to continue to be a highly appreciated employer in order to attract and retain the best possible school leaders and teachers and other staff that work with our children in our schools. And as we already had mentioned, we are in dialogue regarding new opportunities in Sweden but also in Spain, and we can see a very positive development there.

And as you know from IES, we try to create really high aspirations in our students so that they really can develop to their best potential in the future, and that will remain the same.

So with that, we thank you for listening to us talking about these slides, and we hand over to the operator, who will handle the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Victor Forssell from ABG.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [2]

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Congratulations to a solid year. And I'll start with a question regarding Spain. Any thoughts on how to look at both student growth and price increase in the upcoming year, and the same thing looking at the margin development compared to this year?

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [3]

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Well, we don't give any forecast to begin with. As both Fredrik and I have emphasized, we see Spain as a country with many opportunities for us in acquiring schools and also developing those schools. As you know, the Spanish schools that we run and operate are fee based. So the fees are paid by the parents, which means that we are not dependent on the school voucher decisions. Having said that, it's also very important that the fee level is a good level for parents and families.

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Fredrik Åkerman, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO [4]

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I think we can add that in all our schools, we have the possibility to take in more students in the current buildings. So there is sort of room for more students. If we can manage that, that will have a positive effect.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [5]

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Okay. And on the margin side, do you feel that there is a room for improvement in terms of efficiencies in the current 5 schools that you are running in Spain already in the short term, so to say?

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Fredrik Åkerman, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO [6]

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I think we believe we have a lot of competence from our experience in the Swedish business that can be transferred to Spain. So that will be a focus. And the competence we have in Sweden should be able to be at least like transferred and so on.

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Victor Forssell, ABG Sundal Collier Holding ASA, Research Division - Analyst [7]

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Okay. And next one, could you perhaps explain the mechanics here in you being able to keep the other costs per student lower than last year, is what I assume? And so the mechanics around that and also the 5% revenue growth per student when excluding the IFRS effect.

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Fredrik Åkerman, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO [8]

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Okay. Well, when it comes to the other costs, we have economies of scale when it comes to administration when we add more students. So that's one thing. I would also say that last year, we had -- as we admitted more substitutes and we had more agency teachers, which is normally quite costly, now we could solve things with permanent staff, which is -- which gives lower costs. The agency teachers, they come up under other [in-office] personnel, so that's why it affects others.

And then I think we have been an organization where many decisions have been taken out at the schools. We have been working in trying to coordinate purchases in various areas. And we sort of take one area at a time, and we normally get cost reductions when we can organize the purchases in a better way. And that normally does not affect quality at all, rather the opposite, I would say, that you can get better served at lower cost if you centralize the purchases in those areas. So that's the main reason for this.

And your second question was around the revenue per student growth in the quarter as such. I think what we've seen in the quarter is that during the spring, municipalities take decisions. Some are a bit late in their decisions, and we want to get retroactive compensation for deficits. They were not material in the quarter, but there were some. And we had some healthy growth from some specific municipalities. But I think you can't count with a 5% for the remaining 2 quarters of this year. There are some effects specifically in the quarter.

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Operator [9]

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(Operator Instructions) Our next question comes from the line of Carina Elmgren from Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [10]

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Yes. Most of my questions were asked already, but if looking a little bit more into Spain, do you see opportunities to grow organically? Or is your strategy still to acquire schools? Or can you open like greenfield schools as well?

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [11]

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Well, as mentioned, we see clear opportunities in growing the number of students in the schools that we have acquired. And that is, of course, organic growth. We -- today, we see a lot of good opportunities in acquiring existing schools. We prefer that at the moment to opening greenfield. Opening greenfields would involve a higher investment and more risk.

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Operator [12]

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Thank you. And as there are no questions registered at the moment, I will hand the word back to the speakers for closing comments. Please go ahead.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [13]

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Well, again, thank you for calling in, and thank you for listening and asking questions. And looking forward to speaking to you again in a few months. Have a nice weekend.

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Operator [14]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.