Internationella Engelska Skolan 2017/2018 Year-end Report - (1 July – 30 June)

Progress of operations in the fourth quarter (April-June)

• Total operating income increased by 12.6% year on year, mainly due to a larger student base, and amounted to MSEK 611.4 (543.1)
• The number of students in the Swedish operation at the end of the quarter was 23,927 (21,383)
• There were around 190,000 registrations on waiting lists at the end of the quarter, an increase of some 11,000 (6%) on 31 March 2018, and an increase of some 46,000 (32%) on the corresponding point of the previous year
• EBIT for the quarter decreased by 49.7% on the corresponding quarter of the previous year, amounting to MSEK 27.8 (55.3). Accordingly, the EBIT margin was 4.5% (10.2%). MSEK 10.5 of the earnings decrease is due to IES not receiving any central government homework support (Läxhjälp) subsidy, unlike the corresponding quarter of the previous year
• Profit for the quarter was MSEK 19.5 (42.4) and earnings per share were SEK 0.49 (1.06)
• Cash flow from operating activities amounted to MSEK 24.0 (81.5)

Progress of operations in the period (July-June)

• Total operating income increased by 14.9% year on year, and amounted to MSEK 2,347.9 (2,043.3)
• EBIT for the period decreased by 23.1% year on year, to MSEK 152.4 (198.0). Accordingly, the EBIT margin was 6.5% (9.7%)
• Profit for the period was MSEK 116.5 (152.1) and earnings per share were SEK 2.91 (3.80)
• Cash flow from operating activities amounted to MSEK 198.8 (260.8)
• The Board of Directors’ proposal to the Annual General Meeting is that no dividend will be paid for the 2017/18 financial year. The basis for this proposal is the great need for new schools in Sweden in the near future and the potential for further acquisitions in Spain

Significant events after the end of the reporting period 

• On 2 July, the Swedish Schools Inspectorate informed IES that it had approved all the applications IES had filed in early 2018 for permits to start and expand schools
• On 2 July, the Board of Directors’ decided to execute a new share issue, and then immediately repurchase 80,000 class C shares
• IES acquired the remaining 50% of the shares of Spanish holding company International Educational Partnership, S.L. for a maximum and expected purchase consideration of MEUR 12, of which MEUR 9.5 was paid on 9 July

CEO’s comment 
More and more parents are putting their children on the waiting lists for our schools, so they can benefit from IES’s safe and orderly study environment and high academic quality. The number of waiting list registrations grew by another 32% on the corresponding point of the previous year and was 190,000 by the end of June. Meanwhile, most of Sweden’s municipalities are recognizing IES as part of the solution to their challenge to start up new schools and improve the performance of compulsory schools.

We will be focusing on increasing IES’s growth through the coming years to address this substantial demand. We have just started our 36 schools in Sweden for the current semester, with some 25,600 students, as well as our four schools in Spain. In August, we opened two new schools, in Länna and Sundbyberg (both near Stockholm), and at the end of June, we reached an agreement to open a school in Luleå (northern Sweden), which starts up in 2019, and are in far-reaching discussions with the Municipality of Skellefteå (northern Sweden), which has put one of its school buildings at our disposal to open a new school in the same year. We are also in discussions to open schools in locations including Staffanstorp, Österåker, Vallentuna, Solna and Södra Änggården in Gothenburg in 2020 or 2021. However, we have not signed any definitive contracts.

Full year
Total operating income for the full year was up by 14.9% to nearly MSEK 2,348. EBIT for the full year was down by 23.1% to MSEK 152.4, equating to an operating margin of 6.5%. The main explanation for the downturn is us opening four new schools, compared to just one in the previous year, which meant start-up costs, and that our schools are not running at full capacity, and thereby loss-making, during their first year. Other key reasons include IES not receiving any central government subsidy for Läxhjälp for the calendar year 2018, that school voucher funding did not reflect teacher salary increases, and in the fourth quarter, we reported higher other expenses than normal.

A weak fourth quarter
Total operating income for the fourth quarter was up by 12.6% to just over MSEK 611. However, EBIT for the quarter was down by 49.7%, to MSEK 27.8. This decrease, which we regard as temporary, meant that our EBIT margin was 4.5%—considerably below our normal EBIT margin level, and our 8% goal.

Most of the explanation for our narrower EBIT margin is that total revenues per student in the fourth quarter increased by only 0.6% year on year. The main reason is that the increase in school voucher funding from municipalities does not reflect increased teacher salaries on the market. Furthermore, IES did not receive the aforementioned central government subsidy for Läxhjälp, which had a negative impact on total operating income and earnings in the quarter of MSEK 10.5 on the previous year.

On the other hand, personnel expenses per student increased by 6.8%, mainly due to the teacher shortage. In addition, the costs of providing for students with special needs were higher than normal. Only a minority of the expenses for these resources were covered by supplements from municipalities, which we’re working to address. The teacher shortage also compelled us to appoint teachers from staffing agencies in a few cases, generating temporary additional costs of MSEK 3. Additionally, the costs of mother tongue teaching increased, while revenues in the quarter were low.

In the fourth quarter, we also continued to invest in IES’s organization to create the potential for growth, at head office and school leadership level, which affected earnings. Overall, this means that we are putting a temporarily poor financial quarter behind us.

In 2018/19, we expect to return to higher profitability by gaining more leverage on economies of scale, combined with more students joining the schools we started last year, so they become profitable. Furthermore, according to a grant framework agreement we are in line to be allotted central government subsidies totaling MSEK 10.8 to improve equal opportunities and skills development in our schools during the second half of 2018. The subsidy is being paid to finance costs including those for extra teaching resources, strengthened student health, more teaching tools and other initiatives which improve equal opportunities and skills development in schools. We will request the payment of the 2018 contribution in September 2018 and expect to receive the full amount before the end of the calendar year. The National Agency for Education has also set the framework for state grants expected during 2019. The proposed funding framework for IES totals just over MSEK 42.5. Preparatory work to claim the 2019 contribution will begin towards the end of 2018.

Principle of equal terms
Sweden’s legislated principle of equal terms (lika villkorsprincipen) for school voucher funding of municipal and independent schools is decisive for enabling us to offer schooling on the same terms as the municipalities. Friskolornas Riksförbund, the Swedish Association of Independent Schools, recently appointed audit firm Deloitte to conduct an independent review of 20 municipalities to determine how thoroughly they are applying the principle of equal terms. Briefly, we can conclude that interpretations of the principle differ between municipalities, who apply differing models for allocating resources and school voucher funding decisions, lack procedures for monitoring deficits in their operations, and are not applying accounting and auditing practice standards to municipal schools. In effect, this means that free schools are not receiving equal terms, and that there is a high risk that we will not receive the same compensation as municipal schools. The report is available on Friskolornas Riksförbund’s website.

Next step in Spain
At the beginning of July, we took another step in our expansion in Spain by acquiring the remaining 50% of the shares of the joint venture incorporated in May 2018, International Education Partnership. This makes English School of Asturias and two of Grupo Educativo Elians’s three school operators in Spain, located in Castellon and La Nucia, wholly owned subsidiaries. The acquisition gives us full control of our operations and is a good foundation for continued improvement and expansion in Spain. Our fourth school, located in Valencia, is still 50:50 jointly owned by IES and our collaborative partner, the Monzonis family.

The future
We are now in the midst of a change process, both in the Swedish school market, and within IES. Short-term profitability is under pressure from internal and external factors, but in time, we see good potential for long-term profitable growth on an expanding market. The rapid expansion of the child and youth population is accentuating the demand on municipalities to build more schools through the coming years, and we are preparing to be part of the solution, by ensuring the quality of schools and by offering more places. There is an acute need for new schools in Sweden in the near future. IES wants to help solve this problem by opening more schools in Sweden. We also see potential for further acquisitions in Spain. It is against this background the Board of Directors proposes to the Annual General Meeting that no dividend will be paid for the 2017/18 financial year.

Annette Brodin Rampe 
CEO

For more information, please contact:
Johan Hähnel, Investor Relations, tel. +46 (0)70 605 6334, Annette Brodin Rampe, CEO, tel. +46 (0)73 852 4231.

Teleconference in connection with publication of the quarterly report:
Today, Wednesday 29 August, Annette Brodin Rampe, CEO, will hold a conference call for the publication of the quarterly report at 10:30 a.m. CET. The call will be held in English. To participate, please call the following number: +46 (0)8 566 42651 and enter the code: 74862998#. The presentation is available at IES’s website: http://corporate.engelska.se/financial-information/reports-and-presentations. 

Reporting schedule 
Annual Report 2017/18 – 22 October 2018
Interim Report Q1 2018/19 – 20 November 2018
Annual General Meeting 2017/18 – 20 November 2018
Interim Report Q2 2018/19 – 21 February 2019
Interim Report Q3 2018/19 – 17 May 2019

Internationella Engelska Skolan i Sverige Holdings II AB (publ) discloses the information provided herein pursuant to the EU’s Market Abuse Regulation. The information was submitted for publication, through the agency of the above contacts, on 29 August 2018 at 08:00 a.m. CET.

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