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Edited Transcript of ENG.ST earnings conference call or presentation 21-Nov-19 9:00am GMT

Q1 2020 Internationella Engelska Skolan I Sverige Holdings II AB Earnings Call

TABY Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Internationella Engelska Skolan I Sverige Holdings II AB earnings conference call or presentation Thursday, November 21, 2019 at 9:00:00am 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

* Emma Rheborg

Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Head of Communication & IR

* 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

* Carolina Elvind

Danske Bank Markets Equity Research - Analyst

* Stefan Knutsson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to Internationella Engelska Skolan's call. (Operator Instructions) Just to remind you, this conference call is being recorded.

Today, I am pleased to present Interim CEO, Cecilia Marlow; and CFO, Fredrik Åkerman. Please go ahead with your meeting.

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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, and welcome to this presentation of our first quarter in the financial year of '19, '20. We will start on Page 2 in the presentation with the headline, good start to the year.

The first quarter meant that we continued to grow both organically but also through acquisitions. Registrations in queue in Sweden are now above 200,000, which is quite a milestone. During the quarter, we also sold the remaining 50% that we owned in one of our Spanish schools, which means that we now have a much clearer structure of the schools we run and operate there. That also meant a capital gain of almost SEK 25 million.

In Sweden, there has been a solid development during the first quarter. However, in Spain, we see negative result due to the season. The first quarter is always weaker in Spain since children start in school around mid-September, and that is approximately when we also start seeing the fees coming into our P&L. So the first quarter in Spain will always be weak, and the more schools we have, the more dramatic it will be in the first quarter. We will get back to how we see the lookout for the full year in Spain.

After the quarter, we also received a permission to -- from the Swedish School Inspectorate to offer international school in Skellefteå, which we are very excited about. We have also announced 2 new schools in addition to the ones we previously have informed about. 2 new are going to open in Sigtuna and Värmdö. And also, unfortunately, our CFO, Fredrik Åkerman, has decided to leave IES. He will leave the company sometime after the next quarterly report.

If we then go to the next page about Sweden, and the number of students continue to grow. As I said, we have a very healthy queue to our schools in Sweden. Once the school year started, we had a little bit more than 26,800 students in our 37 schools, that is approximately 1,300 more than last year. And we also opened 1 new school in Skellefteå, with approximately 240 students. Expansion in other schools increased the numbers also by approximately 1,160.

As I mentioned, we have received a license to offer international school in Skellefteå, and that is an internationally recognized education, it's the Cambridge curriculum. That is important for the municipality of Skellefteå since it will make it possible for staff coming from other countries with children in international school to continue their education. This international school offering will be located in our existing schools and also coordinated with the Swedish school, so to speak.

There are lots of new municipalities that are contacting us, and that's are -- we are in dialogue with about to open a new school in their area. And of course, we look very carefully at the school voucher levels to make sure that we can have a healthy operation when it comes to the finances. And it's clear that municipalities do need independent partners to be able to offer more school places as the year groups that go into school is growing very rapidly.

When we look ahead in Sweden, we have a very healthy pipeline of scheduled new schools that you see on Page 4. Next year, 2020, we plan to open 2 new schools in Östersund and in Upplands Väsby. The year after, there are 4 new schools planned. And after that, 2022, there is one school planned. We have previously announced Vallentuna to be open in 2020, but that has been delayed due to ongoing negotiations about how big a school that municipality really needs and where it will be located. And our overall plan to, as an average, open 2 to 3 new schools every year remains.

Fredrik?

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

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Yes. So then, good morning, everybody. If we then move to Page 5 to look at -- start to look at the numbers. We start with the segments. And when it comes to the segments, we don't apply IFRS 16 on the segment numbers, which makes it maybe a bit easier to do the comparisons with the previous year. And if we then look at the Swedish numbers, we've -- also this quarter, have had a better balance between the increase in school voucher levels and the teacher salaries. So the total revenue per student increased by 3.4% while the personnel cost per student increased by only 2.7%. So the development in previous 2 quarters continued in the first quarter.

If you look at the total costs per student, that increased a little bit more than the personnel cost per student. And we've had this quarter some costs connected to the planning for new schools or the planning for new potential schools. As many as these projects are about building new schools, it requires a bit more of initiatives and planning from our side, and that drives some costs. So that's the main reason for that.

In total, operating income in Sweden increased by 8.6%, and that is of the organic, to SEK 573.3 million. And the operating profit increased to SEK 34.3 million, and that meant a margin of 6%.

If we then move to next page and look at the Spanish development. We had this quarter a development according to plan. But it's important to understand the very strong seasonality in the Spanish business, and the first quarter is a very weak quarter from that point of view. In total, we have 2,500 students now in the 5 fully owned Spanish schools. And in the beginning of this quarter, we finalized the sale of Colegio IALE or the 50% part that we had. And that meant the simplification of ownership that we have been working with for a year, that was finalized. And it also gave us a capital gain of almost SEK 25 million.

This seasonality, it comes from the fact that the students don't go to school in July and August, so we first get the fees in the beginning of September while we have costs for our staff during this full period, all 3 months. And as we are growing now, we have 2 more schools, the impact of the seasonality increased this year. In addition, we also decided not to do any summer schools in our 3 old schools that we have owned for a year. As we could -- when we evaluated the summer school, we could see that the resources we needed to put on that was more than the benefits we got, so that's why we haven't had any summer school this year.

When it comes to the schools that we acquired in the fourth quarter last year, we have started to work with improvements. And it's only gone a few months so the increase in number of students is yet to come. But we have started according to the plan we had when we did the acquisition, so that's running according to plan as well. We are also looking at more acquisitions in Spain, and we can say that there is quite a good pipeline when it comes to potential acquisitions going forward.

If we then go to Page 7 and look a little bit on the numbers. So at the first -- in the first quarter, we had operating income of SEK 27.5 million, slightly lower than last year even though we had the acquisitions, and that is because we didn't do the summer school. The operating profit was SEK 2 million including the capital gain, and minus SEK 22.7 million excluding the capital gain and this is, once again, because of the seasonality. In the EBIT and EBITDA result, we also have amortization of intangible assets, customer relations of SEK 1.7 million in the quarter.

If we then look at the full year and the plan we have for the full year in Spain with the seasonality, the plan is that we will achieve operating income of EUR 21.6 million and an EBITDA of EUR 3.9 million and an EBIT of EUR 2.2 million. And the development in the Q1 is according to the plan, so we are on the plan so far. And we give this guidance as it's a bit difficult to understand the seasonality as we are acquiring new companies all the time. And we did the similar guidance last year in the Q1.

So if we then move to next page, Page 8. You have a simplified summary of the development in Q1 this year compared to the same period last year, excluding IFRS 16 implications. So if you look at the operating income, most of the growth comes from more students in Sweden but we also have a healthy growth from increased school vouchers. And now you can see also the effects of no summer school and the acquisitions in Spain.

On the EBIT side, we have a good effect of the more -- that we have more students in Sweden, and a little bit more coming from the better balance between total revenue per student and cost per student. We also have the capital gain and then the lower result in the Spanish operations this year because of the strong seasonality and increased operation in Spain. So those are the main reasons for the changes compared to last year.

If we then move on to Page 9 and look at the financial position of the company. We have invested in the first quarter SEK 51.7 million in the operations, mainly coming from Sweden. We opened this year only 1 new school, but we also have a major expansion in our school in Sundbyberg. So the investments in that school is as high as if it had been an entirely new school. We only opened with a few classes last year, so it's about the same level as last year.

If we look at the cash flow, it was -- excluding IFRS 16, it was SEK 36.4 million from the operating activities. Last year, we had a higher number, but then we had a lot of impact from the acquisitions in Spain in July 2018 where we had -- we went from a joint venture to fully owned operations. And that meant that a lot of receivables and liabilities went from being external to internal, and that affected that number quite significantly.

When it comes to the net debt position, we are still having a negative net debt, which means we have a net cash position of SEK 59.1 million, if you exclude IFRS 16. But with the IFRS 16 effect, it looks totally different as we don't have to include the lease liabilities in that number. And we gave -- in the report, we gave numbers with and without IFRS 16 in the -- in Note 10. So I think it's good to look through that note quite in some detail to understand the effects of IFRS 16. This is the first time we show them, and we are still learning ourselves. And I think U.S. investors need to look at it a couple of quarters to -- before understanding exactly how things are working.

Finally, then, we continue to have a strong equity-to-asset ratio at 61.7% compared to 59.2% last year. And also on this side with the IFRS 16 effect, it becomes quite different and amounted to 21.8%.

And with that, I will leave it 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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So thank you, Fredrik. We now move on to Page 10 where we have our financial targets that we have previously displayed. They are, as you can see and as you know, excluding effects from IFRS 16. That means that I have -- will have an iteration in order to communicate new financial targets, including the effects of IFRS 16, but that will come in a couple of quarters.

So without IFRS 16, our growth target is to reach at least 10% annual growth organically. During the first quarter, we came up to a bit more than 8%. Profitability, the goal is to reach an operating margin -- EBIT margin of at least 8%. During the first quarter, we reached 5%, the adjusted number is 2.2%. When it comes to the capital structure, we are well above the target, as you can see. And of course, with regards to dividend policy, it's a bit early days for this financial year. Again, the profitability for the first quarter, affected by the Spanish operations because of the seasonality there.

And with that, we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Carolina Elvind from Danske Bank.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [2]

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So I have 2 questions. The first one is about the financial operations. So what is the occupancy like there? And do you find it easy to fill up the schools? And how do you work with marketing there? And the second one is...

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

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Excuse me, could you repeat the first question because I couldn't quite hear?

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [4]

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Yes. Do you hear me better now?

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [5]

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Yes. Thank you.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [6]

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Okay. So in the Spanish operations, what is the occupancy like there? And do you find it easy to fill up the schools? So -- and how do you work with marketing there? And my second question is about recruiting. So if you could update on how you view the recruitment situation in both Sweden and Spain right now of new teacher assignment.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [7]

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If we begin by Spain on how we were -- start with marketing. Is it easy or difficult to fill the schools? We acquire existing schools, so there is an existing student body. And what we do is we try to understand how the school works. We are not making drastic changes initially, but we like to buy a school so that we own the school from the beginning of the calendar year, giving us a 6-month period of learning, understanding and also planning for the coming school year, which includes marketing, which includes clarifying what the school stands for when it comes to being bilingual and other things that are relevant to that specific area. There is a very big demand in Spain for bilingual schools. Parents want their children to really command the English language and see that as a great advantage later in life. So it's a very good market for us. We have not had difficulties at all to recruit teachers or leaders to our school. What we can see on a general notice that we have very high quality.

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

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You had a question also about the occupancy rate of our schools in Spain. And as we have previously -- in all our Spanish schools, there is good room to increase number of students without having to add buildings. So if we should mention a number, I think 80% is maybe the occupancy rate in average for our 5 schools. With that said, it's important to understand that changing schools in Spain is not as easy as changing schools in Sweden where it is quite common. And as we're talking about private schools, it's a bigger decision to change school in Spain and, therefore, it's not as common as in Sweden. But of course, it happens. But then it normally happens between the school years.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [9]

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Okay. And just on the recruiting in Sweden as well.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [10]

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We see that we have recruited what we need for this school year. We can see a slight downturn in the turnover of teachers, which we are very happy about. And it's a rather stable situation now compared to a couple of years ago when there were very high increases in salaries and teachers could really benefit from changing employer in order to get a much higher salary. That has calmed down a lot. And we also, as you know, recruit teachers from other countries, qualified teachers. And that is also ongoing or we did that for this school year as we have done before, and that also went well.

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Operator [11]

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And our next question is from Carina Elmgren from Handelsbanken.

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Carina Elmgren, Handelsbanken Capital Markets AB, Research Division - Research Analyst [12]

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I have one question regarding the higher costs for planning new schools that you mentioned. Is that something you expect to continue at a slightly higher level? Or was it more related just to this quarter?

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

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I think it is a little bit of a new reality because what we see now is almost in all instances the need to actually build brand-new schools. So we're not moving into an existing school when we evaluate new openings. With that, it does require quite a lot from us also in order to work through the prerequisites already before we make a decision whether to continue the process and eventually sign a contract or not to continue. So we can expect that we need to have those types of efforts for the -- going forward.

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Operator [14]

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(Operator Instructions) Our next question is from Stefan Knutsson from ABG.

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Stefan Knutsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [15]

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My first question is regarding Vallentuna and the postponement there. Is it still planned for a 4-9 school?

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Emma Rheborg, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Head of Communication & IR [16]

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It's -- Emma here. It's a plan for F-9 school, so we had a 6-9 school, I think, planned for Vallentuna. So it was quite a small school initially but the municipality has indicated that they are in need for an F-9 school, but that is yet to be negotiated and finalized. So that's why we can't say the start date for that school at this point. But we will come back to that.

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Stefan Knutsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [17]

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Okay. Okay, perfect. And then I also wonder about the international school that you have been granted permission in Skellefteå. So will it affect the amount of classes in Skellefteå? And how many do you see an interest in as of right now?

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [18]

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No. It will not affect the number of classes. The way it will work is that schools enrolled into the international curriculum will be part of the normal classes, so to speak. Partaking in the education there, as you know, it is partly in English, will, in addition to that, have lessons in the core subjects that you need to have if you follow the Cambridge curriculum. So the core subject, the additional lessons is something we will organize on top of the normal Swedish curriculum to get to the international curriculum. So it's a rather -- it's a very flexible solution, meaning that we don't need separate classes of international curriculum students.

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Stefan Knutsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [19]

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Okay. And my last question is regarding Spain. You talked a bit about it, that you have a potential to increase the occupancy rate. As of right now, you have an EBIT margin of around 10%. Is that also the long-term target? Or do you see a potential to -- for it to increase over time?

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Fredrik Åkerman, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - CFO [20]

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I think -- I mean you have a full school, obviously, you can have a higher EBIT margin. But we are acquiring schools in different situations, and -- so there will be a mix of schools that have -- that for a time that can be full and other schools that are not full, and that takes time to increase. I don't think we want to give a number, but a full private school in Spain can have higher margins, that's for sure.

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Operator [21]

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(Operator Instructions) And as there are no further questions, I will hand the word back to the speakers for any final comments.

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Cecilia Tufvesson Marlow, Internationella Engelska Skolan i Sverige Holdings II AB (publ) - Interim CEO & Director [22]

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Thank you very much for listening in and for all the good questions.

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Operator [23]

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