Internationella Engelska Skolan - Interim Report (1 July - 31 December 2016)

Progress of operations in quarter 2 (October-December) 

• Total operating income was up by 15.6% on the corresponding quarter of the previous year, mainly due to increased student numbers, and central government subsidies for the Lärarlönelyftet (teacher salary boost) and Läxhjälp (homework support) programs, and amounted to MSEK 544.4 (471.0)
• The number of students in the Swedish operation at the end of the autumn term was 21,407 (19,795)
• There were around 133,000 registrations on waiting lists at the end of the quarter, an increase of some 11,000 registrations, (9%) compared to 30 September 2016
• Operating profit (EBIT) for the period increased by 22.4% on the corresponding quarter of the previous year, amounting to MSEK 55.2 (45.1). Accordingly, the operating margin was 10.1% (9.6%)
• Profit for the quarter was MSEK 42.6 (34.2)
• Earnings per share were SEK 1.06 (0.85)
• Cash flow from operating activities amounted to MSEK 114.5 (72.3)
• The acquisition of 50% of the shares of three Spanish school operators, which together form Grupo Educativo Elians, was completed on 9 November, for a purchase price of MEUR 5. These three schools have sales of MEUR 12.4, and approximately 1,600 students

Financial performance in the period (July-December) 

• Total operating income increased by 13.8% on the corresponding period of the previous year, amounting to MSEK 958.7 (842.8)
• Operating profit (EBIT) adjusted for items affecting comparability for the period increased by 19.3% on the corresponding period of the previous year, to MSEK 91.2 (76.5). The adjusted operating margin was 9.5% (9.1%)
• Profit for the period was MSEK 65.6 (57.3)
• Earnings per share were SEK 1.64 (1.43)
• Cash flow from operating activities amounted to MSEK 202.3 (119.7)

 
CEO’s statement

In the second quarter, we measured IES’s contribution to raise student performance for three years of senior school for the first time. This measure was obtained by comparing results in national tests in 2016 (grade 9) against 2013 (grade 6). IES’s contribution in grades 6-9, what we term the “school effect”, are demonstrably significant and above the national average—regardless of the student body’s socioeconomic background.

IES does not select its students, its schools are mainly located in “low status” areas, and the share of students with a foreign background is above the Swedish average. Thus our measurements of school effect shows that the same students improve more in IES schools compared to municipal schools. This demonstrates that learning, competence, culture and leadership, as well as other soft factors, determine the outcomes of education—rather than teacher density, type of ownership or other frequently cited features in the debate.

In the quarter, we completed our Spanish acquisition. Our collaboration has got off to a great start, and in January, we located our yearly principals’ conference in our Spanish schools, to create a dialogue and an international outlook.

In the coming half-year, our focus in Spain will be on enhancing quality systems and financial controls. In autumn 2017, we expect to continue our acquisition-based growth in Spain.

Strong results—uncertain future
In the quarter, IES’s growth and profitability were consistent with our estimates. Total operating income increased year on year, by 15.6% to MSEK 544.4. Total revenues per student increased by 6.9%. Revenues include MSEK 5.5 of central government subsidies for Läxhjälp (homework support) and MSEK 15.1 of central government subsidies for Lärarlönelyftet (teacher salary boost). Excluding both these subsidies, total revenue per student was up by 3.0%. Operating profit (EBIT) increased by 22.4% to MSEK 55.2, equating to an operating margin of 10.1%.

Our earnings are strong. But we also view developments with some concern, both in terms of central government decisions that affect us, as well as regarding municipal compensation in relation to teacher wage creepage.

In the autumn, we perceived a significant risk that VAT reimbursement for privately delivered welfare services would be cut from 6 to 5%. We note that no amendment was implemented. However, there is still some concern that a proposal will be forthcoming.

In the calendar year 2016, IES was granted additional funding for homework support corresponding to some MSEK 18. It is uncertain whether this central government subsidy will have the same structure in 2017.

The single biggest challenge is the shortage of teachers, and rising salaries that are not being compensated through increased school vouchers.

The increase of school vouchers for the calendar year 2017 is down by some 0.5 percentage points on the previous year. This equates to some MSEK 10 in the current operation. This, and the fact that teacher wage creepage is still high, creates some increased pressure on the profitability of our operations.

We look to compensate for this through increased efficiencies within non-staff related expenses, as a result the cost per student for premises and administration in the first half-year, adjusted for items affecting comparability, remain in line with the previous year. When we plan and execute efficiency measures, we are careful to avoid them adversely affecting the education quality we deliver for our students.

Municipal compensation per student includes compensation corresponding to the municipal cost of premises for school operations. In this context, we are concerned that certain municipalities have started not to recognize the true cost for their premises, by taking away return requirements on their school properties. This in turn, reduces the voucher increase.

This is problematic, because a lot of new school builds will be required in future. For example, Stockholm needs to build 40 new schools. We are contributing to reducing municipal investment needs through our close partnerships with real estate companies. Not revealing the true cost to taxpayers, as some municipalities are now doing, we believe is directly counterproductive.

High number of new start-ups
We completed the appointment of principals for our new schools in Årsta, Landskrona, Södertälje and Helsingborg in the quarter, which will open in autumn 2017. We also started introducing principals, including planning for recruitment and enrolment in our new schools. Based on the high interest we see for our schools, we feel confident that the number of classes and students will reach satisfactory levels.

We previously reported that in 2018, IES will open schools in Sundbyberg and Huddinge (Länna). After the end of the quarter, we filed five applications with the Swedish Inspectorate of Schools to establish and conduct preschool and compulsory school operations, F-9, in Huddinge (Länna), with scheduled start in 2018, as well as Österåker, Östersund, Skellefteå and the Municipality of Ekerö, with earliest scheduled starts in 2019. We are also filing an application to expand our current compulsory school operation with F-3 at Halmstad and Huddinge (Flemingsberg), with earliest scheduled start in 2019. We also have eight permits for new schools that we have not yet used. We have permits for Malmö, Stockholm (Mariehäll), Stockholm (Spånga) and Sollentuna, for F-9, and Haninge, Karlskrona, Luleå and Växjö, for 4-9. In addition we have approved permits to extend the year levels for our existing schools in Borås and Linköping, for F-3, Järfälla, for 4-5 and Sundsvall, where an expansion of the school building is in progress, for year 3.

Scheduled inspections
The Swedish Schools Inspectorate scheduled inspections of IES have commenced, and will continue from February to May. All our school units will be inspected. We are well prepared for this, but assume that such extensive scrutiny will result in a number of observations by the Inspectorate. This is a natural part of the Swedish regulatory system, which inspects for non-compliance. Accordingly, these inspections will not result in any comprehensive statement of opinion on the quality of our operations.

An assault on free enterprise
The Reepalu Inquiry has attracted major media attention in Sweden. This Inquiry is an attempt to crudely demolish freedom of choice and initiative, and prevent enterprise, all disguised as an earnings cap.

IES was founded on the idea of enriching and increasing educational diversity, and is founded on the philosophy of a calm and safe working environment where students can focus on learning and teachers can teach. We provide a multicultural environment, with a high proportion of students with foreign backgrounds, where we ensure that everyone can realize their potential. Up to half of our education is conducted in English; our students learn to command the English language, the key to the world. Some 700 teachers have been hired from other countries, to educate students in our schools in subjects where it is difficult to find qualified teachers in Sweden, such as mathematics and science. This is a significant contribution to the supply of teachers, in a situation of severe teacher shortage in Sweden.

These ideas have borne fruit since our inception 24 years ago, thanks to one woman who resigned from her job, and created something without any capital to make a real difference, which has now become Sweden’s fourth-largest and most successful compulsory schools operator.

By becoming a genuine alternative, our achievements include helping break down the negative effects of the prevailing housing segregation on schools in Sweden. Daily support and help with homework is provided in all our schools. We also offer our students the possibility of comparing their capabilities with other schools around the world, through our collaboration with Cambridge.

The Reepalu proposal intends to throw this away by creating confusion, uncertainty, eradicating diversity and freedom of choice, while eliminating and diminishing entrepreneurship and personal commitment.

A school for everyone
We at IES continue our work to provide one of the best schools in Sweden, taking a very long-term perspective. We put great emphasis on identifying, hiring, retaining and developing skilled leaders, teachers, and other staff. We are here to ensure that IES remains a respected part of compulsory and upper secondary schooling, and that young people in Sweden get the opportunity to fulfill their potential, whatever their background.

Ralph Riber
CEO
 

For more information, please contact:
Johan Hähnel, Investor Relations, tel. +46 (0)70 605 6334, Ralph Riber, CEO, tel. +46 (0)70 875 6689 or Fredrik Åkerman, CFO, tel. +46 (0)70 415 2365.

Teleconference in connection with publication of the quarterly report:
On Thursday 23 February at 10:00 a.m. CET, Ralph Riber, CEO and Fredrik Åkerman, CFO will hold a conference call for the publication of the quarterly report. The call will be held in English. To participate, please call the following number: 46 (0)8 505 96306 and enter the code: 59035777#. The presentation will be uploaded to IES’s website before the conference call, at: http://corporate.engelska.se/financial-information/reports-and-presentations. 

Reporting schedule
Interim Report Q3 2016/17 – 18 May 2017
Financial Statement 2016/17 – 23 August 2017

Internationella Engelska Skolan i Sverige Holdings II AB discloses the information provided herein pursuant to the EU’s Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the above contacts, on 23 February 2017 at 08:00 a.m. CET.

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