Internationella Engelska Skolan 2016/2017

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Internationella Engelska Skola (STO:ENG)

Interim Report - first quarter (1 July - 30 September 2016)

Progress of operations in the quarter

• The number of students in the Swedish operation as of 30 September was 21,463 (19,789)
• There were around 122,000 registrations of students to the school queues at the end of the quarter, an increase of about 10,000 registrations (9%) compared to June 30th 2016
• Total income per student increased by 2.8% compared to the corresponding quarter of the previous year. As the grant for Lärarlönelyftet, a government initiative to boost teacher salaries introduced on 1 July, first half of 2016/17 has not been decided and will not be paid until the second quarter no grant revenues have been recognised during the first quarter
• Total operating expenses excluding items affecting comparability per student were up by 2.5% on the corresponding quarter of the previous year. Personnel expenses represented the highest cost increase, mainly due to the implementation of Lärarlönelyftet and continued wage creepage on teacher salaries in Sweden
• A new school, IES Älvsjö, opened in August with 12 classes and some 360 students

Financial performance in the quarter

• Total operating income increased by 11.4% on the corresponding quarter of the previous year, mainly due to increased student numbers, amounting to SEK 414.4 (371.8) m
• Operating earnings (EBIT) adjusted for items affecting comparability for the period increased by 15.0% on the corresponding quarter of the previous year, to SEK 36.1 (31.4) m. The adjusted operating margin was 8.7% (8.4%)
• Profit for the period was SEK 23.0 (23.1) m
• Earnings per share were SEK 0.58 (non-comparable)
• Investments in operations were SEK 38.4 (40.8) m
• Cash flow from operating activities amounted to SEK 87.8 (47.4) m
• The equity/assets ratio at the end of the quarter was 67.1% (56.6)

CEO’s statement

In August, IES opened its doors to 21,400 students, an increase of 8% compared to the previous year. This occurred simultaneously with preparing for our listing on Nasdaq Stockholm, which was completed on 29 September.

During the ownership changes we’ve made, it has been particularly reassuring to know that our operations are founded on solid values, with a focus on quality as a growth driver, and schools that achieve high academic results in a Swedish context. Step by step, we’re all contributing to the progress of our Swedish schools, which parents and students both appreciate. As of 30 September 2016, the waiting lists for a place at one of our schools in coming years had 122,000 prospective students for our 29 grade 1-9 schools.

Our financial performance in the first quarter was in line with IES’s financial targets. Total operating income increased by 11.4% to SEK 414.4 m on the corresponding period of the previous year, and adjusted EBIT increased by 15% to SEK 36.1 m. This corresponds to an adjusted EBIT margin of 8.7%. Items affecting comparability resulting from our listing and the acquisition of Elians in Spain reduced profit for the period by 0.4% to SEK 23.0 m. We invested SEK 38.4 m in IES’s operations in the period, and are pleased to conclude that around half of our highly qualified teachers will benefit from the Lärarlönelyftet government initiative to boost teacher salaries, effective 1 July.

Stable growth

We started a total of 51 new classes in August, opened a new school in Älvsjö for students in years 4-9 with 12 new classes, and are planning to open a further four schools in Årsta, Landskrona, Södertälje and Helsingborg in August 2017 as well as a school in Huddinge (Länna) and one in Sundbyberg in August 2018. We’ve also decided to extend our school in Sundsvall, and are considering relocating our school in Borås.

Expansion outside Sweden presents IES with another opportunity on markets where bilingual education is in demand, with English being one of the languages apart from the local language. The acquisition of 50% of the shares of the three Spanish school companies constituting Grupo Educativo Elians secured regulatory approval after the end of the quarter.

This means that we’ve taken a small but significant step onto the promising Spanish market for bilingual education.

Over the last three years, we’ve successfully rationalized IES’s central administration, limiting the need for expanding it further despite opening 11 schools in the period. However, our current and future growth means that we’ve now reached a point where we will need to strengthen some central functions so we can manage our continued growth.

Equal terms are key

A public inquiry into school costs published in the quarter (Skolkostnadsutredningen) offered a great deal of important information and clarification. One of its key conclusions emphasized the principle of equal terms for free schools and municipal schools, which we welcome. This means that the long-term potential is assured. In line with the already published public inquiry into school ownership (Ägarutredningen), the report also concluded that profitability is an important factor, and that there is a clear and direct link between long-term quality and operations that generate a surplus.

In contrast to the school costs enquiry, the Reepalu inquiry, which was presented after the end of the quarter, appears to be ideologically motivated. Its view on profit contrasts sharply with those put forward in the two aforementioned enquiries. We can only re-emphasize the long-term view we take compared to the time horizon of the political debate. Our undertakings in the form of rental agreements for properties in many cases span up to 20 years. It’s important that our equity/assets ratio provides the right conditions to meet them.

Focus on quality

We endeavor to offer our students the opportunity of a good education and character building for life in a school environment characterized by good order, discipline, hard work and safety. We endeavor for 100% of our students to feel safe at school, and that all students who graduate from grade 9 should qualify for upper secondary school. In this context, it’s pleasing to see that of all the students who graduated from year 9 in IES’s schools in the spring of 2016, 98% qualified for onward education in upper secondary schools.

Alongside all our Principals we continue work to improve quality further. Last year, our efforts were focused on assuring the quality of grading. Our annual quality conference at the beginning of September adopted the theme of "Back to Basics,” aimed at delivering a safe and orderly school environment across all our schools within the framework of an international English school culture that encompasses all students regardless of background, and which is characterized by high expectations for all students.

As part of the Swedish Schools Inspectorate’s regular reviews, we expect all our schools to be inspected in the calendar year 2017.

Future challenges

IES is helping to counter housing segregation in Sweden. Many of our new schools are located in areas that are usually classified as ‘non-privileged.’ Of the 3,000 students that completed year 9 in spring 2016, 33% had a foreign background, compared to 22% in municipal schools. 70% of students in some of our more recently established schools have a foreign background.

Many families that have immigrated to Sweden harbor very high ambitions for their children. IES’s focus on a structured school environment and adults with clear values are a big factor in them achieving optimal outcomes, despite their circumstances.

Our major challenge looking ahead is to keep finding and nurturing skilled teachers, and attracting the best professionals in a market subject to teacher shortages. Although our well-established international recruitment processes remain an asset, we’re also continuing to sharpen and improve our recruitment of qualified Swedish teachers.

Access to attractive school premises in growth regions is another challenge. Success in this requires close and fruitful partnership with municipalities that perceive the unique value of establishing quality schools of international character. The construction of our new school in Landskrona is an excellent example of such a collaboration.

Overall, IES is in a phase where we’re confidently anticipating continued growth with clear values and a focus on quality. Recent research and experience clearly corroborate the viability of the foundations that IES has been building on from the start.

Ralph Riber

CEO

1 July – 30 September 2016

Total operating income and operating earnings

Total operating income increased by 11.4% to SEK 414.4 (371.8) m. The growth is due to the new school IES Älvsjö starting up, and a higher number of classes in existing schools compared to the previous year. The total number of classes increased to 711 (660). At the end of the quarter, there were 21,463 (19,789) students.

Total income per student increased by 2.8%. The income includes SEK 1.8 m in government subsidies for homework support.

Personnel expenses per student increased by 6.5% on the previous year. Personnel expenses include SEK 8.4 m for costs associated with the Lärarlönelyftet government initiative to boost teacher salaries. The government subsidy due under this initiative in the first half-year 2016/17 will not be determined and paid out until the second quarter, which means that no subsidies were posted to income in the first quarter. We estimate that close to 90% of the costs associated with Lärarlönelyftet will be covered by the government subsidy. The supply of qualified teachers on the Swedish schools market is currently below demand, contributing to higher wage creepage on the market. Additionally, the discount on social security expenses for younger staff was abolished on 1 June 2016.

In the first quarter, IES items affecting comparability relating to the costs associated with listing on NASDAQ and the Spanish acquisition totaled SEK 6.1 (-) m. Total costs per student adjusted for items affecting comparability increased by only 2.5% as a result of improved purchasing agreements and economies of scale achieved due to the rapid growth of the number of schools and classes.

EBIT operating earnings decreased by 4.5%, amounting to SEK 30.0 (31.4) m.

EBIT operating earnings adjusted for items affecting comparability increased by 15.0%, to SEK 36.1 (31.4) m. Adjusted operating margin EBIT amounted to 8.7% (8.4%)

Total operating income in Sweden was SEK 414.2 (371.5) m, and EBIT operating earnings were SEK 30.1 (31.4) m.

Total operating income in the UK was SEK 0.1 (0.3) m, and EBIT operating earnings were SEK -0.1 (0.0) m.

Net financial income/expense

Net financial income/expense was SEK -0.1 (-1.6) m.

Tax

The tax expense for the period was SEK 6.9 (6.7) m, corresponding to an effective tax rate of 23.0% (22.4).

Profit for the period and earnings per share

Profit for the period was SEK 23.0 (23.1) m, and the margin was 5.6% (6.2). Earnings per share were SEK 0.58 (non-comparable).

Cash flow

Cash flow from operating activities was SEK 87.8 (47.4) m. The strong cash flow for the quarter is due to lower working capital partly resulting from the transfer of funds from companies’ tax accounts to bank accounts. Assets in tax accounts are recognized as other receivables in the Consolidated Statement of Financial Position.

Financial position, cash and cash equivalents

Equity at the end of the quarter was SEK 735.2 (626.3) m and the group’s total assets were SEK 1,122.5 (1,106.5) m. The equity/assets ratio increased to 67.1% (56.6).

Cash and cash equivalents amounted to SEK 167.3 (178.2) m.

Investments

Investments, which are seasonally high in the first quarter, amounted to SEK 38.4 (40.8) m.

Human resources

The average number of full-time employees (FTE) was 2,010 (1,809) in the period. At the end of the quarter, employee headcount was 2,327 (2,224).

Shares

The number of shares registered is 40,050,000.

Risks and uncertainty factors

Significant operating, external and financial risks and uncertainty factors are described in detail in Internationella Engelska Skolan i Sverige Holdings II AB’s annual accounts for 2015/16, in the Directors’ Report and note 17. IES does not consider that any significant risks additional to those described in the Annual Report have arisen.

Operational risks include fluctuations in demand and student numbers, risks related to supply of staff and salary expenses, risks related to quality shortcomings, IES’s reputation and brand, permits and liability and property risk. External risks include risks related to school voucher funding and economic cycles, political risks, changes to legislation and regulatory frameworks and dependence on national authorities in the field of education. Political risks include the introduction of changes to standard VAT rates in school voucher funding or any form of restrictions on profit and dividends. The various political proposals share the common feature that processes are often lengthy and that the proposals need to be formulated in legally viable terms that are then subject to parliamentary votes.

Event after the end of the period

On 9 November, IES completed the acquisition of 50% of the shares in the three Spanish companies constituting Grupo Educativo Elians for a purchase price of EUR 5 m. The three schools have a turnover of EUR 12.4 m and have some 1,600 students.

Future prospects

IES does not issue forecasts.

Related party transactions

No transactions with related parties were executed in the period that materially affected the financial position or results of operations.

IES

On occasion, Internationella Engelska Skolan i Sverige Holdings II AB is referred to as Internationella Engelska Skolan or IES. In this Report, such references are to IES’s consolidated financial statements, unless clearly stated otherwise.

Finance

The group is partly funded by a bank loan from Handelsbanken, which amounted to SEK 80 m at the end of the period. The loan is subject to quarterly repayments, and will be fully repaid in November 2017. See note 4, page 17.

Seasonality

IES’s total operating income and profitability are affected by the nature of operations, and accordingly, its cycle. Sales and profitability decrease in the first quarter due to schools’ summer recess.

Parent company

In 2014/15, parent company Internationella Engelska Skolan i Sverige Holdings II AB did not conduct operating activities. In August 2015/2016, the parent company arranged a loan from Handelsbanken, and issued intragroup loans to subsidiaries. Effective April 2016, the parent company has started billing management services to subsidiaries, and from July 2016 management services to Elians in Spain. The parent company also issued a loan of EUR 2.1 m in working capital to Elians in July 2016.

This report has not been subject to review by the company’s auditors.

Stockholm, Sweden, 18 November 2016

Teleconference in connection with publication of the quarterly report:

On Monday 21 November at 10:00 a.m., 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 8 5059 6306 and enter the code: 57929371#. 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 Q2 2016/17 – 23 February 2017

Interim Report Q3 2016/17 – 18 May 2017

Financial Statement 2016/17 – 23 August 2017

This information is information that Internationella Engelska Skolan i Sverige Holdings II AB is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact persons set out above, at 08.15 am CET on 21 November 2016.

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