Ladies and gentlemen, welcome to AcadeMedia Q2 Report 2019/2020. Today, I'm pleased to present CEO, Marcus Strömberg, and CFO, Katarina Wilson. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there'll be a question-and-answer session. I'll now hand the word over to CEO, Marcus Strömberg. Please go ahead.
Thank you very much. Good morning everybody to this presentation of our interim report of the second quarter. I will start, and after that, I will hand over to our CFO, Anna-Katarina Wilson. I will just start to remark that you can look at the front page of our report because we have a very beautiful picture of the best upper secondary teacher in Sweden. We are very proud that we have the best teacher in Sweden, and we also, in fact, have the best math teacher also in Sweden. I think that is a good start to present this report. I will go to slide number three and start with some few remarks. This second quarter, it's a stable quarter from our side. We are very proud that we have a solid growth, and the organic growth is 6%. We think that's a good number.
We have also, as you maybe know, worked a lot with adult education. In this quarter, we see profitability growth in the adult education. What's most important is that we have achieved to handle the situation with the labor market services. That represents now less than 10% of the turnover in this segment. Still, there are problems with this market, and we think that it's an opportunity in the future. We have really managed to take it to just 10%. We have managed also to grow the municipality education. The team of the adult segment has done a fantastic job. We have also increased profitability in vocational training, and that is now a significant part of this segment. We go to compulsory schools.
In fact, we are also very proud of the development because we have increased capacity utilization, we have good quality results, and we have also improved the profitability. We make some small bolt-on acquisition also. We have, during this quarter, acquired a very interesting concept and one school that is called the Pops Academy. It is the leading music school in Stockholm. In the upper secondary segment, we have Rytmus that has started with one school, and in fact, it's the same entrepreneur that has started Pops Academy. We think that this is a starting point to develop also music concept in the compulsory school segment. When it comes to the upper secondary school, we have seen a decline in margin, and we will comment on that further on in this presentation.
The growth is still strong. We have to keep in mind that a lot of things is happening in the municipalities now. The demographic development is very strong. We are preparing to be a very important part of the increase of this market. We invest now in marketing. Last year, we invested in the third quarter. Now we have moved it to the second quarter because now it's very important because now the students make their school choice. We have also made investments in the vocational part of the upper secondary. This has also been a good success because we have better quality results, and we really believe in this part in the future. The margin has declined, and we are investing for the future.
One very important question is also what is happening with the municipality economy and what is happening with the vouchers. Of course, if you follow the development in Sweden, you see that the municipalities has a lot of problem. We have prepared that the increase of the voucher should be lower to 2020 than 2019. The preliminary numbers of the school segments and the preschools in Sweden is 1.8% compared with 2.5% last year. What you have to keep in mind then is that we see also money coming through state substitutes and also in other ways. It's not really correct to just look at this number. What we know is that it will invest preschools in Sweden. When we're looking at the upper secondary, we think that the school voucher is the same as last year.
If we look at the compulsory school, we also see a stable development. The last remark is that we saw this teacher winning on the Teacher of the Year gala, and that was very happy for us. We are very proud of that, as I mentioned in the start of this introduction. I go to page number five, looking at this Q2. The student number have increased by 3.8%. We have started a lot of new units, and we will comment a little bit more about the German development.
To be honest, the development in Germany is really fantastic. We have a great team. We have a lot of opportunities now in Germany. We really want to take that opportunity because it's a window when it comes to the market development now. We will start maybe 15-20 units this year, and maybe in a few years, we think that Germany will be our biggest preschool market. As I mentioned, the organic growth is 6%, and that is, we think, quite good. The EBIT improved because of the development of the compulsory schools and also adult education. The free cash flow is almost in line with last year.
I go to page number 6. We used to comment on the development if we should compare what happened last quarter. I will just go through this again. Maybe I will tell you what I just said, but I take it once more. As we mentioned before in our reports, we have organized the preschool now in one segment. The countries are Sweden, Norway, and Germany. In our previous report, we have mentioned that Norway will be hit and affected by the new staffing regulation. What has happened is that we have compensated that with the development in Sweden, because we have made a lot of efforts to improve the profitability in the Swedish preschools. We also have the development where we grow a lot in Germany. The growth has been 30% in Germany.
As I mentioned, we will have a great opportunity. The Norwegian and Swedish market, mature market, the German market is really growing fast for the moment. We go to compulsory. We have been working with this for maybe 2 years. It has been focused on developing concepts and to increase the capacity utilization. We saw the results starting in Q1. The development is still strong now in Q2. We go to upper secondary, which we see quite a high decline in profit in this segment. The growth is strong and developing in line with our expectations. We have decided that we should invest a lot now in the opportunities that we see in this segment. We invest in digitalization. We have invested in marketing. It's also a matter of when we take costs.
Last year, we take a lot of cost, as I mentioned in Q3, that we are taking now in Q2. We are very convinced that the margin in this segment in the long term will be very good. We also think that we have opportunity now to take market shares. We have also started a lot of new upper secondary school organically. We invest a little bit more now, year one, than we did before, because if we invest a lot in year one, we think that the development in the future will be stronger. We're also preparing some really great new starts also in August this year. As I mentioned, adult education, the team has done a fantastic job. Now the municipality education and the vocational programs is developing very good and good profitability, and it's also growing.
What you should keep in mind is the development of 2 big contracts. It will not affect this year. We have won Gothenburg. Then it was appealed, and the municipality decided that they should do this tender process one more time. Now we are giving new offers, new tenders. We will get the results before the summer. That is an important contract. We have the contract now. Also in Stockholm, we won the contract, but it has also been appealed. When you have this tender process, it also could affect the development. For the moment and during this year, the situation in the municipalities is quite stable. When it comes to this vocational program, we are very proud that we have the biggest market share of all suppliers of that sort of education.
Overall, we see positive development in all segments, the profit is down in the upper secondary, that is caused by the investment that we have decided to do. I turn over to you.
Thank you, Marcus. My name is Katarina Wilson. I am the new CFO since November last year. I am moving on to page seven. I am very happy to announce that the net sales 12 months rolling now surpasses SEK 12 billion, EBIT adjusted for IFRS 16, 12 months rolling, is at an all-time high of SEK 674 million. EBIT margin for the group is also rebounding, thanks to improvements in the adult education segment. I will now take you through each segment, moving on to page eight. The preschool segment, six new units were added in the quarter, two in each country, the number of children increased by 2.1%. Adjusted for the 12 units that were divested or closed in Sweden last year, the organic volume growth was 6.1%. As you know, we include bolt-on acquisitions and new establishments in our definition of organic growth.
In the quarter, we temporarily saw that improvements in Sweden related to lower cost for temporary staff, as well as the overview of the Swedish portfolio last year are offsetting higher costs in Norway. We have previously communicated that the new Statutory pupil-to-teacher ratio and higher pension costs in Norway is expected to increase costs by around SEK 35 million in the current year. The Statutory pupil-to-teacher ratio is on plan, the new defined contribution pension plan in Norway is expected to increase pension costs by a further SEK 5 million this year. This means that the cost increase in Norway is now expected to be around SEK 40 million. We also communicated in the last quarter that the new defined contribution pension plan in Norway would generate a one-off positive impact of around SEK 60 million.
This positive one-off has now been revised down to about SEK 40 million due to changes in actuarial assumptions. In Germany, as Marcus mentioned, we are now accelerating our plan to start new units, we are planning 15 to 20 new units during the next year. Also, as Marcus mentioned, in Sweden, the indication is that the childcare voucher increase will be lower than last year, this is something that we have anticipated for some time. Moving on to the next page, compulsory school. We continue to see good growth in this segment. Pops Academy, a school in Stockholm, was acquired in the quarter. This is a school with an exciting concept, where academic quality is combined with creative activities. The number of students increased by 3.3% and sales by 6.5%.
The sales increase is related to increased number of students, the annual school voucher adjustment. Also to increased state subsidies. Organic growth is generating a high capacity utilization, which leads to improved margins. The margin increased to 5.4% in the quarter. We did have some positive effect from delayed hiring and some vacant support positions in the quarter. Moving on to upper secondary school. Student numbers grew by 5.1%. Net sales increased by 6%. This is mainly a result of the 14 new schools that we have opened in total over the last three years. However, EBIT decreased considerably in the quarter compared to last year. Half of this decrease is just a timing effect due to the fact that some marketing activities started earlier this year compared to last year. We are marketing six new schools for the autumn of 2020.
The other half was related to several strategic efforts. For example, our determination to increase quality at Praktiska is showing results. To summarize this segment, our strategic efforts on new starts, quality enhancements, and on digitization to be able to capture market growth is driving costs. Therefore, we would like to guide you that for the full year, we expect adjusted EBIT to be in line with last year. Moving to page 11, adult education. Net sales increased by 3.9%. We are happy that this segment is now contributing to the growth of the group for the second quarter running. The segment mix has changed. The loss-making business related to the labor market services now only make 9% of the total sales of the segment. This has come down from last quarter. Last quarter was 12%, and last year, 17%.
Our efforts to further reduce cost in this area is ongoing. The higher vocational education and municipal education areas are showing profitable growth. As we earlier communicated, the contracts of Stockholm and Gothenburg have been extended until June 2020. We also communicated that the higher vocational education business received a good allocation, which means that this area is expected to grow volume by about 7% from the autumn 2020. In the quarter, EBIT increased considerably from last year. The margin was 7.7%. Moving on to page 12, free cash flow. We define free cash flow as cash flow before expansion investments. AcadeMedia has a strong free cash flow. In the quarter it was in line roughly as last year, SEK 260 million.
The swings that we see between years and between quarters are mainly an effect of changes in net working capital as a result of calendar effects. CapEx in the quarter was somewhat higher than last year, mainly due to our four acquisitions in the quarter. Moving on to page 13, financial position. Net debt is somewhat higher than last year. Decreased compared to last quarter. Leverage ratio improved from previous quarter and is lower than the same period last year. Well below AcadeMedia's financial target. In the period, a dividend was paid out corresponding to SEK 232 million. Debt related to right-of-use assets amounted to SEK 7.4 billion. Moving then on to page 14, financial performance. It's largely in line with targets with improving margins. With that, I open up for questions.
Thank you. If you would like to ask a question, please press 01 on your telephone keypad now. If you wish to withdraw a question, you may do so by pressing 02 to cancel. That is 01 if you would like to ask a question. Our first question is from Carina Almgren from Handelsbanken. Please go ahead. Your line is open.
Hello, this is Carina Almgren from Handelsbanken.
Hello.
Am I on the line?
Yes.
Yes.
Okay. Yeah. My first question would be regarding the school voucher growth of 1.8% for 2020. Can you say something about the level of it for the compulsory schools and upper secondary schools and then also for the preschools in Sweden?
You can say that in this report, we announced the preliminary numbers. It was the same last year. We send the press release when it's definite how the numbers will look like, because we still get reports from the municipalities, but we want to guide you. This development is of course not new for us. We have known this for a long time, and you see the situation with the municipalities. If we should give you some sort of guidelines, I would like to say that we expect that the increase in the upper secondary level will be the same as last year. When it comes to the compulsory schools, we think it will be lower than last year. As Katarina mentioned, we will also get subsidies in other ways, so it will not affect us.
We will handle the situation when it comes to compulsory school. If you follow the media debate also in Sweden, you have heard that the government will also give the municipality a lot of new money. What we see will be affected this quarter 3 and quarter 4 is the preschools in Sweden. Because a lot of municipality is increasing the groups for children, investing less money when it comes to the vouchers in it comes to preschools. We think that the preschools in Sweden will be affected by a lower voucher. The definite, the final numbers will be reported in March, I think.
Okay.
I think was that enough to guide you in that way?
Yes.
It's very important to say that this is the preliminary numbers.
Yeah.
If we look at the numbers that we reported last year, we see that we get a lot of other income, subsidies, so on.
You shouldn't look too much on it. We want to be clear on that we think that the voucher, when it comes to preschools in Sweden, it's lower than last year.
Okay, can you say something about Germany?
The German is another situation because it's very local, when you have these high demands, the voucher level is not really a problem. We gave you some numbers in Norway, in Norway it's also preliminary. We see now that the voucher is increasing a little bit, it should because the municipalities have started to increase their staff, this is a little result of that. The numbers in Norway is 3.7 compared with 3.4 last year.
Yeah. Okay, just clarification questions on the negative impact in Norway from the changes in pension plans and staffing regulations. The new net impact on this year, can you say that?
Yes. We expect the cost to increase further by SEK 5 million this year. On an annual basis, about SEK 10 million. This is when we now move from the defined benefit plan to a defined contribution plan. Also, I mentioned that this one-off positive effect that we talked about in the last quarter has now reduced from SEK 60 million to SEK 40 million, and that's purely because of new actuarial assumptions.
Okay, great. Thank you.
What is important to mention is now that the pension situation has been a very problem for us. Now more than 80% of the stock will have this defined benefit system, pension system. It's the same in Sweden. I think it's positive now that even if the cost is a little higher, it's more under control, and we think that is positive for us. If we go back a few years, this has been a problem for us to handle.
Okay.
Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question is from KJ Bonnevier from DNB Markets. Please go ahead, your line is open.
Yes, good morning. Thank you for taking my question. Just coming back to the voucher amount, the 1.8%. When I listen to you talk about it, Marcus, it sounds like you feel that that is in better balance with what the kind of cost inflation you see out there on salaries and general costs if you add them, the extra revenue sources that you have on top of it. Is that the good way of looking at it?
Yes. That is a good question because we didn't mention that because we had a salary inflation when it comes to the teacher, and the situation now is much more stable. That is an important remark. You have to keep in mind that the economy situation with the municipality is really a problem when it comes to elderly care, schools, everything. They have stopped to invest in new school places in many municipalities. I think this will also be a very great opportunity for us to increase our market shares. We have to be effective. We have to invest in digitalization. We have our staff production system, everything that we have been working with many years. In the upper secondary, in the compulsory school, I think we will be able to handle the situation in a very good way.
The problem the coming six to eight months is the preschools in Sweden. I also think that we will have a debate around that because a lot of municipalities is doing bad things now for the moment. I think it's also a possibility that they will not be able to handle and then they will have to pay us afterwards. What we see now, we have the increase of the voucher when it comes to preschool is low.
Interpreted when you discussed the preschool segment in Sweden as well, that there was thinking in local municipalities about basically changing the, let's say, children to teacher ratio in there and having bigger groups, so to say. Is that something that you will be allowed to do as well if the municipalities-
Absolutely
do those kind of things in their own units?
Absolutely. It has not been so much debate about it because, as it is now in Sweden, they want it to look like that they invest in compulsory schools and upper secondary school, and then they try to save money on preschool. I don't think that this is the right decision, but that is what we see for the moment. We have no staff regulation in Sweden, as they have in Norway and in Finland also. We don't have any staff regulation in Sweden.
There is a regulation on maximum sizes of groups, isn't it? Something like that?
No. It's more like a recommendation.
Okay.
It's important because it's quality towards the parent. We want to be also long-term. We have very good quality, so we look at it in a long-term perspective. We think that this will change. It will be a debate, and they will be forced to increase the voucher levels.
I saw in the report that you are increasing your, say, ambition for new openings of units in Germany going into the next fiscal year to 15-20 from 10-15. Do you have those kind of extra units already sourced? You have the list there, or is it an early ambition?
No. We have new examples all the time and new cases. We had a board meeting, as we always have the day before this report, and we will announce the number of units after this weekend. It's a lot of new starts. We have a great team, and what is also positive is that it just take 1-2 years to fill up the unit. We want to grow with quality, but we think that this ambition is absolutely possible for us to reach, and we have already a lot of new cases coming.
Looking what you're indicating in the upper secondary school segment, first of all, I saw that you indicated that the school inspectorate had basically closed most of their cases on the way on what you inherited when you acquired Praktiska. What has the outcome been on that? Is everything fine? Everything is operational and, or what has happened?
If you take this vocational training, we think that this will be a very important market for us in the future. We see that the municipality, they leave this segment. The need of this sort of people in the workforce is big. Now we have been working with the quality. This investment will be permanent. Now it's a matter of us to grow the business because we have the possibility to grow this a lot in the future. That is our focus.
You basically have signed off from the school inspectorate that you are now delivering the product you are supposed to do?
I think we have one or two schools left, or three schools, Katarina. I was almost correct there.
Almost correct. If that was a big question mark at the time of the acquisition, I guess that has now been cleared, basically.
Absolutely. That is how we look at it. We made a review at the board yesterday, and it has been a good acquisition for us so far. One part of this that we haven't discussed so much is that when we acquired Praktiska, it was also an adult part that is called Movant, working with vocational training. They have totally outperformed our business case, and they win a lot of contracts. That part has really developed very well so far. We have two, both the adult part of Praktiska and the upper secondary part of Praktiska.
Excellent. One final question on upper secondary. Now, when you are going for growth again, slightly more in this segment than taking the investment and cost for it, do you still see that mature units basically mature on the same kind of profit margin as they have done historically? Has there been any change to the underlying business model?
No.
Excellent. Thank you very much.
That is also an important question because when you take the next step in growth, you have to have focus on the mature units. That is also important when you're looking at the German development, because the underlying unit level of profitability is still high, but you have to have higher overhead costs, and you have some startup costs. You have to keep this eye on the mature units. They are still performing well when it comes to upper secondary. Where we see this problem the coming quarters is the preschools in Sweden, and also the effect that Katarina has mentioned in Norway.
Excellent. Thank you.
Just as a final reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. Our next question is from Johan Sundén from Carnegie. Please go ahead. Your line is open.
Good morning. Two questions from my side as well. First, a bit of a follow-up on the preschool segment. You mentioned this additional cost in Norway. How should we think about the net effect due to this efficiency gains we've seen in the Swedish segment during the first half of the year? Should we think that maybe those could offset this additional SEK 5 million from the intention cost? What's your take on that?
It is difficult for us to guide you, so we don't give that sort of forecast. Katarina mentioned the numbers in Norway. We want to be clear on that. What we have seen the first two quarters is that the Swedish development of the margin has been very good. We have made a lot of effort to improve the profitability. We left some municipalities, and this effort has really made good results. It is easy to take that as a grant for that the development in Sweden will continue the next quarters. That is why we mention now that we have this situation with the voucher. We can't count on the Swedish preschool to compensate the Norwegian development in the coming quarters. That is what we are trying to say.
If I can add to that, we are also using the word temporarily. In the quarter, we temporarily saw that improvements in Sweden are offsetting costs.
If we, for a moment, think that the voucher would be at a better level, then we will have a very good development of the preschools in Sweden. We don't see that right now. I hope for that in the future, because as I mentioned before, I think they have to invest more in preschool. The cost level at the municipalities are high. They are making deficit also in their own reports.
Okay, perfect. Thank you. That was a bit clearer. Then I also have another follow-up question on the compulsory segment. There also you are using the word temporary about this cost effect from delayed hirings on vacant position at central support functions. How big part of the profit growth in that segment is related to those temporary effects? We shouldn't expect that this should come in the second half of the year?
Well, I don't think we want to quantify that really. It's just important to keep that in mind that we will have to fill these vacant positions.
When you see this margin improvement, as we see now in compulsory, of course, we are very happy for that. It's a result of the hard work that we have done. We just want to make you clear that you shouldn't just take the margin to the sky and be a little bit more careful. We are very positive when we are looking at the development when it comes to compulsory school. If the margin will be 1.1 higher for the full year, we don't think that is what we are saying. Be a little bit more careful when you make your forecast. We are positive to the development. The situation that we have now is the same that we will have the rest of the year.
Even if the voucher is a little lower than last year, we will have other money coming from the municipality and through the state vouchers. We are positive to this development of the compulsory schools.
Great. Thank you. Just one quick question also I have. You mentioned in Q1 report this effects from vacation. I haven't find any comments about that during this quarter. Your communication from the Q1 report remains that there should be a negative effect of that during the second half of the year? Do you want to add something on that?
Yes, that's correct. We don't change that. It's harder to quantify that effect, but that still remains.
No impact yet.
In this quarter.
Great. That was my question. Thank you.
Our next question is from Stefan Knutsson from ABG. Please go ahead. Your line is open.
Hi. Thank you for the presentation. I have a question regarding the political landscape. You give the impression that the voucher levels are challenging in Sweden, at the same time that the government has talked about granting extra money in the spring budget. How will that play out if extra money granted for you?
It's very difficult because that we are saying that this is preliminary. It is of course positive. If you go, for instance, to Nacka, it's close to Stockholm. They know what SEK 7.5 billion will mean for the school budget, but they are very professional organization. I don't think that the other municipalities are prepared and know about it, but I think it is positive. The law in Sweden is if they give money, extra money, as they should when they get this money to their municipality school, they are obliged by law to give it also to the private operator. I think what we can say is that it is positive, but how much we don't know.
Will it be an adjustment, for example, after half a year? Do you have any knowledge of how it can be compensated?
They should do in the same way as they do with the municipality schools. My guess is that they will give the municipality schools money for the full year because the municipalities, they work with the budget year the same as the fiscal year. They will give the schools money from the 1st of January. We don't know. More money will come into the system. That is what we know. This is the numbers that we have given here is now the preliminary numbers. We have still some municipalities that they haven't given us their vouchers for 2020 yet. That's why we have this report in March where we give the exact numbers.
Yeah. Okay, perfect. Thank you. Also, an additional question on the preschool segment. You mentioned that you have lower cost for temporary staff. Is that because of lower employee turnover and the long-term effect, or is it more short-term?
We work very focused on reducing this cost by implementing systems around how we hire temporary staff. This is a long-term effect.
Okay, perfect. That was my questions.
As there are no further questions, I will hand the word back to the speakers for any final comments.
Thank you very much for your questions, and we wish you all a good day. Thank you very much.