Ladies and gentlemen, hello and welcome to the AcadeMedia Q3 report. Today, I'm pleased to present today's speakers, as CEO, Marcus Strömberg, and CFO, Katarina Wilson. For the first part of this call, all participants are in listen-only mode. Afterwards, there will be a question and answer session. Speakers, please begin.
Good morning, everybody. It's Marcus Strömberg here, and welcome to this presentation of our interim report of our third quarter. I will go to page number three. Of course, these times have been very strange and a lot of work for us because of the corona outbreak. It has had a large impact operational on the organization, but the financial effect has been limited. As a part of the society, our company has been in focus, and we have done a lot of work during this quarter. I'll just give you a short introduction, what has happened in the different segments. If we start with our upper secondary schools, we are the biggest operator in Sweden. Just in the middle of March, the government decided that the upper secondary should go to distance learning.
We moved our 36,000 students and 140 schools to online training in about 48 hours. Of course, it was a lot of work with this, but overall, the transition was quite smooth. We have been running all our schools in the upper secondary level during these times, but in online training. The same situation has happened when it comes to adult education. We are more used to work with online training. In adult education, we are the leading actor in this sector, working with online training. When it comes to vocational programs for immigrants, it has also been a lot of work. Overall, the transition here also has been quite smoothly. When it comes to preschools is very important when these things happen in the society because a lot of people need to have care.
In Sweden, the government decided early that the preschools should be open. I think we have been one of the countries in the world that has had the preschool open. It has been a lot of work, but it has worked out quite well. In Norway and in Germany, they decided to close down the preschools. We have had some preschools open because we have important groups in the society as doctors or nurses. They should have care, and we have had lots of preschools open. What is important to say that in Norway and also in Germany, the society and government decided that we should have full payment even if the preschools was closed. We will mention a little bit about the parental fee. That is the minor effect of corona that has happened to AcadeMedia.
When it comes to compulsory schools in Sweden, they have also been opened, and we have had some online training. We have increased number of sick leaves during this time, but overall, it has been quite stable, and we have managed to have all our schools opened. A lot of things have happened in short time. When troubling things happen, it is also possibility to move forward and do new things. I'd like to say that we have seen an accelerated development when it comes to online training. We have done more in these weeks than it could have happened in online training for years. We have new services. We have all our service to the students online. We have served food with an app online. We have a lot of new things that has been introduced during these weeks.
A few words also about the adult education. Of course, for the moment now, we see a lot of people that will lose their jobs, and the society and the government invest a lot of money now to retrain people. We think that our adult education will be more important than ever. During the summer and the beginning of next year, I think we will see record application to our vocational training programs. We have a very important role to help people to find new competence and to go back to work. The overall picture of AcadeMedia during these times is that the situation is stable. We have a limited financial impact from the corona. We will have an important role now to develop and to increase the adult education. We see a stable growth in our ordinary business.
After that introduction, I give the word to you, Katarina. Please go ahead.
Thank you, Marcus. I'm Katarina Wilson, CFO of AcadeMedia. Moving on to page five, key highlights. Student numbers grew by 3.8%, including three new units in Germany in this quarter. Net sales increased by 4.8% with growth in all segments. We had a negative currency translation effect in the quarter of SEK 18 million, and adjusted for that, sales grew by 5.3%. Moving on to page six. Adjusted EBIT increased to SEK 224 million, and the margin increased to 6.8%, driven by the adult education segment and the compulsory school segment. In the quarter, we had items affecting comparability amounting to SEK 36 million, giving an EBIT adjusted for IFRS 16 of SEK 259 million. Items affecting comparability included a one-time effect from moving to a defined contribution pension plan in Norway.
The upper secondary school segment received a retroactive revenue of SEK 11 million, and we also have taken SEK 11 million in restructuring costs and SEK 17 million in write-down of assets. Moving on to page seven. Net sales 12 months rolling continued to increase and is now well above SEK 12 billion at SEK 12.2 billion. EBIT adjusted for IFRS 16 is also increasing in amount to SEK 703 million. The EBIT margin continues to improve thanks to the adult education segment and is now at 5.8%. I will now take you through each segment, starting with the preschool segment on page eight. This segment includes preschools in Sweden, Norway, and Germany, and in this quarter, three new units opened in Germany, which gives a total of 260 units.
The number of children increased by 1.6%, and adjusted for the 12 units that were divested or closed in Sweden last year, the organic growth was 5.6%. As you know, we include bolt-on acquisitions and new establishments in our definition of organic growth. Net sales increased by 3.4%, and adjusted for the negative currency translation effect, sales grew by 5.4%. When the German preschools closed mid-March, a decision was made by AcadeMedia not to charge the parental fees for this time the preschools were closed, and this impacted earnings with about SEK 3 million in the quarter. For the next quarter, our quarter four, we estimate that this will impact earnings with about SEK 10 million if the preschools remain closed in Germany. Some of the loss of revenue will be compensated by, for example, lower food costs.
We do expect that the preschools in Germany will gradually open up and be fully opened after the summer. Also, as previously communicated, costs will increase in Norway by about SEK 40 million this year due to the new staff density regulation as well as higher pension costs. As I mentioned earlier, the new defined contribution pension plan in Norway has generated a positive one-time effect of SEK 53 million, reported as an item affecting comparability. Our plan in Germany is still to start about 15 to 20 new units next year, but of course, these new starts could be delayed if the corona outbreak is prolonged. I would like to remind you also that the childcare voucher increase in Sweden for 2020 will be lower than last year at 1.4%, compared to last year's increase of 2%.
In Norway, the increase will be 3.7%, compared to last year's 3.9%. Moving on to compulsory schools, page nine. We continue to see good growth in this segment. Last quarter, we acquired Pops Academy, a school in Stockholm, and after we closed this quarter three, we have also acquired a small compulsory school, another small school. The number of students increased by 3.8% and sales by 5.4%. The sales increase is related to an increased number of students, the annual school voucher adjustment, but also to increased state subsidies. Organic growth is generating a high capacity utilization, which leads to improved margin, and the margin increased to 5% in the quarter. In this segment, the compulsory school segment, we've had no financial impact from the corona outbreak. Moving on to the upper secondary school segment, page 10.
Student numbers grew by 5.2%, net sales increased by 5.8% as a result of the 14 new schools that have opened over the last three years. Adjusted EBIT was somewhat lower than last year, mainly as a result of our continued effort to increase quality at Praktiska. This work has now resulted in all school inspectorate cases being closed. Last year in quarter three, we received a retroactive compensation of SEK 7 million that was reported in adjusted EBIT. To summarize this segment, our strategic efforts on quality enhancement and digitization is driving costs. The segment had no financial impact from the corona outbreak, but of course, a massive impact on the operations when moving to distance education. I would say that the dedicated efforts to invest in digitization has helped us a great deal with this shift.
The guidance we gave in the last quarter is still valid, meaning that we still expect adjusted EBIT for the full year to be in line with last year. We are also marketing five new schools for the autumn of 2020, we're seeing a great interest from prospective students. Moving on to the adult education segment, page 11. Net sales increased by 4.6%, which is an increase for the third quarter running, which is very good. EBIT increased to SEK 43 million, the margin increased to 10.5%, this is a level that we really haven't seen for the last two years in this segment. The previous loss-making business related to the labor market services was also contributing, generating a small but positive result in the quarter. The Swedish Public Employment Service has made it possible now to terminate the contract for vocational and preparatory modules from October 2020.
The main contributors to the higher earnings in this segment were the higher vocational education and the municipal adult education, with continued high demand and increased volume. Quality enhancing efforts in the higher vocational education has resulted in fewer dropouts and improved profitability. As we have communicated earlier, procurement processes for the contracts with Stockholm and Gothenburg are ongoing, both processes are partially appealed. To ensure continuity during the appeal process, temporary agreements have been or will be signed, meaning for us, for AcadeMedia, that we have stability in this business until December 2020. Stockholm has preliminarily awarded AcadeMedia good allocation on new contracts, which would mean maintained sales. Preliminary allocations in Gothenburg means reduced turnover but maintained margin.
Finally, I would like to remind you that the third quarter for the adult education segment is a seasonally strong quarter with many days of education, especially when you compare to the next quarter four. You can also see this if you look at the red curve at the bottom of page 11. Just keep that in mind for the next quarter. Moving on to page 12, free cash flow and investments. Free cash flow is defined as cash flow before investing in expansion and property. AcadeMedia has a strong free cash flow that in this quarter was higher than last year at SEK 107 million, you can see these figures on page 19 in our report. Swings between years and between quarters are mainly explained by changes in net working capital as a result of calendar effects.
CapEx rolling 12 is lower than last year, mainly due to lower investments in property. Moving on to page 13, financial position. Net debt is lower than last year, and the leverage ratio is lower than last year at 2.3, which is well below the financial target of below three. Finally, moving on to the last page 14, the financial performance versus targets. We are meeting the growth targets while profitability is still below target, even if it's increasing for the fourth quarter running. Leverage, as I said, at 2.3, is meeting the target of below three. With that, I would like to open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. If you change your mind and decide to withdraw your question, simply key 02. The first question we have is from the line of Carolina Alm from Danske Bank. Please go ahead.
Hi. Good morning. You say the plan to open your preschools in Germany is still on for 2020, but might be delayed. How flexible are you in moving around those new openings? Are you fully flexible on costs?
As I would like to say that we are flexible on cost. We have a lot of new starts, some of them will happen in the coming year, so to say. I don't would like to say that will affect the costs now, of course, the new starts cost will come later on.
Okay. Thank you.
Thank you. The next question we have, I believe, is from the line of Thomas Gole from Handelsbanken. Please go ahead
Hi, everyone. Thanks for taking my call. Just a quick question first regarding the adult education segment. When do you think we will see an increase from the unemployment rate rising and so on? When do you expect that to kick in? Any plans on that would be great.
You can say that the adult education is three different parts in AcadeMedia. It is the municipality program, it is the vocational government program, and it is the unemployment services. When it comes to the vocational program, the time when you should apply is in the middle of May, and they start after the summer. We already now see a lot of new people applying for vocational training. That is public numbers. You have also seen the application to universities that ended in the middle of April. That was also all-time high. I think we will see a lot of people applying to vocational programs now. When it comes to municipality program, I think that will be after the summer, because the time between application and when you start the education is shorter when it comes to municipality program.
When it comes to the Unemployment Services, we still have a lot of contracts, but they don't use it. I think that is a question for the Unemployment Services. They have had a lot of problems in the recent years, and they are not so important for us. I think that they will start new programs, but it will take, I think, a few months into after the summer, I would like to say. I think the government will be very tough to the Unemployment Services that they have to start programs. So far we see the same situation as before.
Okay, thank you. One more question, just I'm curious about the latest school investigation that was recently announced, and you also had an article about that. How do you think corona will affect that investigation? Any comment on that? Will it be delayed? If you could give some flavor, it would be great. Thank you.
The Education Minister, Anna Ekström, was saying that this will take some time. I think it will be delayed. Of course, there are some parts in that investigation that is very important for us, that we have also had a lot of dialogue, both with the investigation and also with all of the different political parties around this investigation. When it comes to this question about how you should apply to compulsory school, we think that the system that is today is not the best system. We are a supporter to change the system. It is important to say that this investigation say that they want a public open choice for all parents in Sweden. Hopefully the same thing will happen that happened in the upper secondary. We have 30% in upper secondary going to private schools.
In compulsory, it is 15%, hopefully this decision will make the penetration even higher when it comes to compulsory schools. When it comes to the voucher system, it is very important for us to understand if it is any important changes. We don't think there is any political support to change this equal voucher system that we have now in Sweden. We will follow the investigation, and we will see how things develop. So far, I think the same situation that we have here today will continue. That is the latest news.
Okay. Thank you for that.
Thank you. The next question you have is from Johan Hansten, I think from Carnegie. Carnegie, please go ahead.
Hi, Johan from Carnegie here. Thank you for taking my question. A few ones from me as well. First one on the extraordinary items. Can you please give some more flavor on what the restructuring of SEK 80 million are related to and the write-downs of SEK 17 million?
Yes. The restructuring cost is we have looked at our overhead costs, and we've done some reorganization. We've moved some central staff functions really into the segments. The write-off, we've looked at some of our projects, and we've reviewed them and also some investing in other properties. It's just a part of the normal overview, really.
Okay. Nothing with any kind of goodwill from any acquisitions, something like that?
No. Not at all.
Great. Then also, just to clarify the international preschool segment
You mentioned this SEK 10 million in lower revenue in Germany, also you repeated this guidance of SEK 40 million in increased costs from the Norwegian staff density regulation. It seems like this should be very heavily into the last quarter of the year, shouldn't it be any easier to handle this staff that when the unit in Norway are closed during the full of April almost?
No, as you can see, quarter four is our really strong quarter in the preschool segment. You would see most of that SEK 40 million in the next quarter.
Okay. Great. Yes, that was all from my side. Thank you.
Thank you. The next question we have is from Karl-Johan Bonnevier, Analyst, DNB Markets. Please go ahead, sir.
Yes, good morning. Marcus, first coming back to the adult education area. I see that you mentioned the presentation, and you talked in the way that you can terminate volume-sensitive contracts from the 31st of October. But if you're looking at the world now, at least the Swedish situation where we're going from record employment to record unemployment in a very short time, are you really considering terminating these kind of contracts? Is it better to not just wait and see what comes out of the labor part of it, particularly as you have balanced the cost side of it as it's now a contributor again, as I understand it?
Of course we will wait and see. We do not have to do it now. We have this possibility. Some parts in this contract, they are not so good. If the unemployment service, it is possible to negotiate them again, maybe we could keep them. For the moment, our view is to take these contracts away. We have other contracts that is better both for us and I think for the unemployment services.
If you look at into 2020, 2021, the next fiscal year for adult education, is there anything saying that this should not be a record year for that kind of operation, given the unprecedented demand you should see?
I think it will be a record year for vocational training, as it is called through the government. I think it will be a record year also for the municipality training program. We are a big supplier both in Stockholm, Gothenburg, and Malmö. When it comes to the education through the unemployment agency, I think it is how will they manage to make tenders? Will they have the right competence to work with this sort of program? They have been not so good at this the recent years. We are their best supplier, so if they invest in education, we will take a part of that market. The next question is what will happen with this new idea to change the unemployment services? Will it take more time? Will it not take more time?
We follow it very closely, but we think that the main growth will be the municipality program and the vocational training programs.
Excellent. Looking at the preschool segment, I need to come back to that SEK 10 million you're highlighting for Germany in Q4, as well as the parental fees. As I understand, the charging of parental fees is really for extracurricular services, the kind of over base services, the things they are not compensated from the authorities in that respect. As I understand it before, you should have been quite able to basically, if you're not open, you could say, you shouldn't incur the cost for those extra services either. How does that work in reality for you? Are you deciding to keep structures in place for the short term so you can quickly ramp them up again, or what's happening there?
If we look in Norway, I don't think you had any question about Norway. It was Germany, wasn't it?
It was Germany. We can come back to Norway.
Yes. Germany. Yes. If we can say Norway, we have some different sort of relationships and with the municipalities. In the north and in some parts in the south, it's more like the Swedish Norway system, and there the government has give us full compensation, you can say. We have one concept in the south of Germany, where the parental fee is a little higher. We are compensated here also, but there we see this effect. The demand in Germany is still very high, so it's very important for us to keep the staff and to keep up the reputation of the Kita group. Therefore, we have decided to take away the parental fee directly because it's positive to the parents. Of course, the demand is there, and they will come back to the preschool and be very positive.
We think it's a minor effect, and we take out, of course, food costs, some other cost that is not necessary to run the preschool. We do as much as we can, but it will have a small effect, mostly in the south of Germany. It's temporary, and I think it's the right decision. We also decided Some of our competitors decided to do layoffs at once. We waited a little bit longer. It has been very positive among the staff. They really like to be a part of AcadeMedia. Hopefully, and that is what I think, that we will be a winner after this because the demand is still there, and you have to handle this sort of situation in a very good way.
I think that the team in Germany has done the right things, and I think that we have supported them in a good way.
Excellent. It sounds logical, sir. Looking at the upper secondary school segment in Sweden, you say that you have great interest going into the new fiscal year. I know you don't want to quantify that at this early stage, but if you're looking at the challenges that you must have had with the COVID pandemic and so on, and marketing these kinds of service. I know you normally have trade fairs and all these kind of things going on during the spring, but I guess most of those have probably been canceled as it looks. How have you been able to create the demand, so to say, and secure that you are getting your part of the growth going into next year?
That was a very good question because I didn't mention that in the introduction. I must say, I'm so proud of the team that has been working with this because usually we just have open houses and presentations at the schools. The parents and their youngsters go to the school and visit to meet the principal and the teachers. Now we have moved into digital open houses, and I will really recommend you to go into some of these digital open houses. I've been to 15 myself. They have been really fantastic. The principal is running the digital open house. Everything is recorded, so you can go back and look at it afterwards. It's also possible to go a digital tour during the school. You can meet the teachers, you can get presentations from other students. We do this in all our 145 upper secondary schools.
If I had told them one year ago that they should do this, everybody had said it's not possible. Now they have done it in three weeks. I can send you a link if you want. You can watch it yourself. I think it's really, really fantastic. What's the best of it, we are using Facebook to stream this service, and it's also possible to look at it afterwards. We have also developed our CRM system where we have a little dialogue with all the different students. A lot of things have happened in the digital world during these weeks. Of course, you never know. One important thing that we also see, and that is quite naturally, is that the churn is not so high as it's moving. What when the students and staff don't want to change in these times.
I think the situation now is also more stable. Of course, the key question is what will happen in August. I think that we are the number 1 in presentation of our upper secondary schools in a good way.
Excellent. Coming back to the, you talked about the opportunity in the online segment for the upper secondary. Have you got any feedback from the authorities that this might become more of a new norm, that you can use these kind of things and not get in problem with the supposed old way of doing it with, say, classroom-based education?
I think we have to take one step at a time. Now they made this change in 24 hours that they didn't want to do and didn't have the possibilities to do for many, many years. I think they had to evaluate this. What is the positive part? What is the negative parts? I'm convinced that we will take some parts from this with us into the future because the transition has been so smooth, both in our schools, but I also think in the bigger municipality schools. The problem has been with the smaller municipalities that don't have this platform and infrastructure. That is the same as with the digital open houses. If I had told all our teachers that you should have online education in front of your students through Google Meet one year ago, then I should have had a helmet.
I think people are open-minded, and we have seen things that we didn't see before, and they really try to move things to the next level. I've seen fantastic vocational lessons when they are learning the kids to very things that wasn't possible to do through online training. Of course, we will take us with us into the future. I think we have to give the authorities some time to evaluate this, and we are there to help them with it.
Excellent. Katarina, one final question. Looking at the IFRS 16 impact in the report, I see that all the gross numbers seems to be growing quite a lot compared to the previous quarter, even if the net impact is not that big a difference. What is happening underlying that is driving this?
Well, with IFRS 16, you will see a lumpy curve, really. I don't think you should draw too many conclusions from that. As we learn more about IFRS 16, I can give you maybe a better answer. There's nothing that has happened.
Excellent. The best guidance for going forward is that basically just using how it looked in Q3 and applying that to forecast?
Yes.
Excellent.
Yes.
Fantastic. Thank you very much.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. There will be a short pause while we wait for any final questions. Currently, we have no questions. Oops, sorry. We've got a follow-up question from Karl. Karl-Johan, please go ahead.
Yes, sorry. I noticed I had one more question here. When you're looking at the voucher increases that you indicated for the next fiscal year, do you see that you can balance your cost picture within that, or is that going to be a challenge?
What we said in quarter two was that our main concern is really the preschools in Sweden, but we have known about this lower increase for quite some time, so we're planning for that. For the other segments, we don't see that it will impact us that much.
In Sweden preschool, you feel that you can balance the challenge, so to say, with the lower voucher price increases looking at the next year?
I think we have mentioned that will affect the preschools in Sweden. We restructured this part. We closed a lot of preschools that we thought that we couldn't run, and that has affected the preschool division in Sweden very positive. We will see a less positive effect because of the increase of the voucher when it comes to preschools in Sweden. We think that that is the area that is most wrong when it comes to how the voucher system is working. I don't know if you mentioned it, Katarina, about the municipalities when it comes to upper secondary compulsory, they pay us a lot of money. This quarter was SEK 11 million that the one municipality paid us because of deficit 2018. They also made deficit 2016 and 2017, I think. We will see what will happen there.
When it comes to preschool, it has been quite difficult to talk with the municipality because it's very regional. It could be very different parts of the municipality that count out the voucher price. I think that is the segment where we have the most potential if we can find a better way how the voucher should be counted out.
Could you shed some light on the SEK 11 million that you now got retroactively in the upper secondary school, which municipalities that came from?
No. It's one municipality in Sweden, we don't mention that.
It's the same municipalities that you still have a challenge for when it comes to, say, getting upfront compensation, you'd need to go through these kind of more extended processes, or has there been a change to that?
I think we have to take these extended processes. It's very important also for us to have a good dialogue with the municipalities. They have a lot of problem now. We have to take responsibility and to talk with them in a positive way. We have a professional department working with this, we have to take it little bit more careful and have a good dialogue with the municipalities. The important thing is that all children should have the same voucher. That is a very important principle in the Swedish system. What we can see is that a lot of municipalities, they don't follow that. That is the key, and that is also potential for us as an organization.
Excellent. Thank you. Stay well.
Perfect. Thank you very much.
Thank you.
Let me say thank you to you all, and you can email us or you can call us if you have any more questions. Thank you very much that you listened to this presentation, and I wish you a good day and take care.
Thank you very much.
Thank you, ladies and gentlemen. That concludes your call for today. We thank you very much for joining and ask you to stay to the line. Have a great day ahead.