Our Chief Executive Officer’s report
During 2012 ADvTECH changed its segmental structure and created a third standalone division to hold and manage the Group’s tertiary brands. The Group thus now reports its activities in three divisions namely, Schools, Tertiary and Resourcing. These changes flow naturally from the growth of the Group and enable this report to more accurately reflect the major focus on investment taking place in the Schools division and the way in which the Tertiary division has dealt with the challenges posed by the decline in first year registrations at the beginning of 2012. The Group continued to generate returns well in excess of the cost of capital and succeeded in increasing free operating cash flow while increasing its rate of investment in new projects. Important features of the Group’s performance are the high proportion of returning students and the strength of brands in each area of the business. In continued support of ADvTECH’s reputation for high quality, the value of the Group’s offering was demonstrated once again by excellent delivery against industry benchmarks and through qualifying examination results. This has contributed to an increase in demand for sought after entry points into the Group’s institutions, particularly at grades 0, 1 and 8 and specialist degrees including the newly launched University of the Free State (UFS) distance LLB. These developments have reinforced our strategy of continuing to invest in new education projects. The Group’s outstanding academic results continue to attract prospective students and we have seen a steady increase in non-South African students, who now represent some 15% of our student population. The Resourcing division had a promising first half which continued into the third quarter. However, the widely publicised issues and unrest which arose in South Africa in August and September, severely impacted business confidence, and in turn had a negative impact on the staffing industry. Both employers and staff became more cautious which resulted in fewer candidates and vacancies as well as extended recruitment cycles. These conditions held back the performance of the Resourcing division and inhibited revenue growth for the year as a whole. Despite this, the Division was able to improve its operating profit and increase operating margin.
The Schools division offers quality high end private education from pre-school to matric across four different brands, which in 2012 served 13 000 students at our 31 operational schools across South Africa. The strength of the Division’s annuity revenue is highlighted by the fact that 80% of their enrolments are returning students. The Schools division offers both the State (NSC) and IEB matric exams, with the former being offered at CrawfordSchoolsTM and Abbotts College and the latter at Trinityhouse. Our schools have a strong focus on technology, because technology is at the forefront of a continuing tradition of innovation in our approach to education. This has resulted in the Group working with and being acknowledged by leaders in the field such as Apple and Google. The Schools division ensures that we collectively maintain curricula, standards of education and individual achievement levels at appropriate and internationally accredited levels through regular testing against international benchmarks. The continued success of our matriculants in their subsequent education and careers is valuable corroboration of the standards achieved. Our year end exam results were, as has now come to be expected, excellent. Our 1 301 matric candidates achieved a total of 2 840 subject distinctions. It is very pleasing to report the tremendous results achieved across the cohort as a whole in key subjects such as English (66%) and Mathematics (63%). Our schools were acknowledged by the respective Departments of Education as the top performers in Gauteng and KwaZulu-Natal (KZN) and we were honoured to have senior representation from the Department of Basic Education at the Group’s matriculants Top Achiever Awards function in January 2013.
The Independent Institute of Education (IIE) continues to provide leadership and regulatory guidance to our tertiary brands as they deliver the various curricula and qualifications offered. With 49 accredited higher education programmes, ranging up to Masters level, and 23 sites of delivery, the Group has the largest base of accredited programmes in the independent sector. The IIE’s BCom and BA degrees were launched successfully at Varsity College during the year and first year exam results were very satisfactory with a 70% pass rate and 16% to 25% distinction rates. On the basis of this encouraging progress, these degrees, as well as additional IIE degrees, are being marketed more broadly across the Division. The Group also launched a joint venture with UFS for the provision of the UFS distance LLB programme with full-time tuition and support at Varsity College campuses. The creation of this innovative product offering and partnership has proceeded remarkably well, with enrolments having exceeded expectations. 20 ceremonies were held last year to facilitate the graduation of 3 872 tertiary students. The 2011 final year accountancy class at Varsity College Durban North achieved a 76% pass rate in part one of the SAICA Qualifying Examination held early in 2012. The Career Centres of Rosebank College were directly responsible for finding employment for over a third of their graduates. As testament to the quality of education provided by the Tertiary division, the Group continues to hire its own graduates. 312 are now employed by the Group, representing some 8% of our workforce.
The Resourcing division maintained its strong focus on the key niche markets of Finance, Engineering and Information Technology, while also developing the smaller sectors of Freight and Logistics, Human Resources and Supply Chain Management. The Division’s niche market focus, the specialist industry knowledge of its consultants and the strength of the Group’s operating model stood it in good stead given the difficulties experienced by much of the employment services industry. Consequently, 3 758 candidates were placed in new career positions and the Division maintained a sound return on funds employed.
The Group reported a 5% increase in revenue to R1.7 billion. Operating profit decreased 13% to R200 million at an operating margin of 11.9% (2011: 14.3%). Net interest earned was R4.0 million (2011: R10.8 million). Headline earnings and basic earnings per share for the year declined by 14% to 34.6 cents and 12% to 34.4 cents respectively which compared to a 17% decline in both at the half year. Revenue in the Schools division increased by 12% and operating profit by 20%, as a result of continued strong demand for places against a modest increase in the number of places available. The Tertiary division reported flat revenue and a decline of 64% in operating profit. As reported at half year, this was caused primarily by the shortfall in tertiary enrolments. The impact of this on operating profit was heightened by the degree of operational leverage at the time. Significant corrective action has been taken with one-off costs of approximately R4 million being incurred. As noted at half year, it will take some time for the benefits to flow through to the bottom line. However, progress has already been made with interventions to rearrange capacity and improve efficiencies. Further adjustments to structure and capacity may yet be required and these will be assessed during the coming months. Early indications are that work which has been conducted on the curriculum offering and positioning is starting to show some benefits. The Resourcing division reported an improvement of 2% in revenue and 14% in operating profit. The Division was able to maintain market share and improve margins as a result of continued focus on the Group’s niche market strategy notwithstanding the conditions referred to above. Free operating cash flow before capex per share was 68.4 cents (2011: 66.0 cents) and represents cash conversion of earnings of 198% (2011: 163%). Improved cash conversion was achieved through careful focus on cash outflows and tight control of working capital, especially capex creditors and debtors. The increase in fees received in advance was mainly due to the increased student numbers at Trinityhouse where additional capacity has been added. Sound cash management enabled the Group to fund capital expenditure of R232 million (2011: R188 million), company taxation of R43 million (2011: R118 million) and distributions of R107 million (2011: R93 million). Net asset value per share increased by 5%, while net gearing increased to 8% (2011: 3%) at year end as a result of the capital expansion programme.
Investment and infrastructure and Technology
The Group continued its strategic investments by creating new capacity and expanding its infrastructure during the year. At half year the Group reported R1,1 billion of capital commitments which included the construction of eight new schools. The first phases of two of these schools have been completed, while four additional Trinityhouse projects have been approved by the Board. The approval of additional projects in the last six months has resulted in commitments remaining at R1,1 billion and this now includes ten new or extended schools. These projects are to be rolled out over the next eight to ten years with approximately R319 million of the committed expenditure to be spent over the next two years, and are scheduled to open as shown below:
At the beginning of 2012 new campuses were opened at Trinityhouse Little Falls, Varsity College Midrand and College Campus Auckland Park, although the latter site was a replacement of two existing sites rather than an expansion. Details of new openings will be announced in due course as launch dates are agreed. We continue to focus on technology in education to support sustainable growth and this was stepped up during 2012. Technology is a strategic facilitator for ADvTECH not only due to the need to ensure a flexible yet secure technology infrastructure, but also to allow students to interface directly with their campus, peers and academic staff. As Information Technology plays such an intrinsic role in education today, the additional benefit of offering state-of-the-art technology integrated into the education programmes will help to attract more students, including those from further afield. The System for Academic Management (SAM) was successfully implemented across the Tertiary brands over the last two years and we have now shifted into the optimisation phase under the direction of the IIE. Major benefits of the system include the reduced time it takes to capture student data, fewer academic and financial queries from students as well as a decrease in the volume of manuals and other student material printed, which contributes positively to the Group’s focus on environmental sustainability.
In addition to its administrative and communications capability, SAM is capable of providing a platform to deliver academic learning material to students online. Lecturers are able to supplement existing teaching material with other digital sources and provide student support as and when needed. Informal and formal communication between students themselves and between staff and students is enabled through a variety of channels including blogs and chat rooms. Portals are used to upload student assignments for assessment, to communicate information about modules and to provide students with their results. SAM also provides the capability for students to annotate and work interactively with e-manuals. SAM is the largest installation of its kind to date by the USA vendor firm Three Rivers Systems and has demonstrated successfully the Group’s ability to assimilate and implement new technology systems at scale. We acknowledge the need to make regular technology decisions to keep pace with the on going change in this area.
According to the industry, the next version of Microsoft Windows will contain features that will support the ‘Bring Your Own Device’ (BYOD) environment. Increasingly, students and staff are using their own laptops, mobile phones, tablets and other mobile devices as these evolve to interact with their campus and each other. The objective of the Information Technology department is to minimise the complexity of systems used and ensure consistent back office processes across the Group through innovative technology. It is rolling out further initiatives to integrate emerging trends such as cloud computing, virtualisation, mobile technologies, integration of student devices and BYOD, wireless networks and increased broadband access.
The property portfolio, managed by ADvTECH’s Property division, monitors residential property development trends, particularly opportunities to secure land for future campus sites in up and coming residential areas. This team has enabled the Group to establish new campuses in high-growth residential nodes in recent years. The efficient use of space underpins the Group’s productivity and profitability and the Division plays an important role in continually evaluating how space is used in the buildings that accommodate the brands. They do this, taking into account the specific needs of students, optimal occupancy over a 24-hour cycle and synergies between brand operations.
Several infrastructure projects were completed in 2012. With the construction of the Pre-primary school at Trinityhouse Little Falls campus concluded, construction of a preparatory school commenced in April 2012. This second phase includes a pool complex with seating for 600 spectators and uses solar panels and solar geysers to provide a large portion of the heating of the pool and showers. Attention has been paid to other ecological aspects such as harvesting rainwater in a 250 000 litre storage tank and designing courtyards as a climate control measure to create shade in summer and radiate heat in winter while allowing as much natural light as possible into the classrooms. Construction of the Trinityhouse Palm Lakes Pre-primary school began in May 2012. Several energy savvy measures have been included in the design of these buildings which have been orientated to maximise natural light into the classrooms and reduce the need for artificial lighting and electricity. Sliding windows were also installed for safety in passages and the facades of the buildings designed to promote cross ventilation and reduce energy consumption. A 200 000 litre dam is planned which will be fed by a borehole and rainwater. College Campus Auckland Park consolidated the Randburg and Parktown campuses to a new location in the education hub of Auckland Park. Opened in January 2012, it provides tertiary education to more than 290 students and has capacity for returning students from both Randburg and Parktown campuses.
In total, the Property division developed a further 10 800 m2 (2011: 13 200 m2) of education space during the year. The total developed area in the Group is now 236 200 m2 (2011: 225 300 m2).
Legal proceedings against Marina and Andry Welihockyj remain in progress and are moving steadily towards trial. The Group’s legal counsel remains satisfied with the merits of the claims in this matter and that, save for legal costs, the Group has no further exposure.
The people of ADvTECH are passionate about what they do and committed to excellence. Their diverse backgrounds, skills and experience contribute to the strength of the Group. Attracting high quality staff to fill the various positions in education, administration, finance, Information Technology, as well as the other areas, is essential in creating a vibrant Group which serves students, parents, job candidates, clients and investors.
People are our most important asset. In recognising this and as part of the Group’s strategy to nurture and develop our people, we launched ADvTALENT in 2010. The programme offers a structure for talent management within ADvTECH and promotes a nurturing but high performance culture which encourages natural achievers and leaders to draw on each other for inspiration. During 2012 the six critical performance areas of the talent management process, namely; talent creation, calibration, cultivation, leverage, caring and coaching, were formalised. ADvTALENT plays a valuable role in helping to achieve our staffing goals by fostering a productive and positive working environment. Most importantly, ADvTALENT positions the Group as a long-term career destination by providing professional development and career visibility within our portfolio of education and resourcing brands. As part of ADvTALENT, a number of promising potential leaders were identified during 2012 for particular support and impetus. As a result, 178 high performing employees were invited to participate in the ADvTECH Transformation forum which was held in September 2012. A key focus area was ‘Developing Leaders for Tomorrow at ADvTECH’.
During the year the Group continued with its Management Development Programme (MDP) which has been expanded since its founding in 2006. 195 members of staff have participated in the MDP itself and other similar programmes and a total of 90 mentors have now been trained. Mentorship has proved to be valuable and, during the year, 20 of our people received formal and structured mentoring.
2012 was ADvTECH’s fifth year of participation in the Deloitte’s “Best Company to work for” survey. The Group was once again recognised as having achieved a level of excellence as an employer. The survey measures the responses of staff to evaluative questions based on a set of criteria which has been shown to influence employee’s preferred choice of employer. The most highly rated criteria are issues such as leadership, communication and remuneration. Our objective is to be the employer of choice in the education and resourcing sector and the progress made towards achieving this goal is most rewarding. We are committed to continually striving to ensure that ADvTECH is a sought after place to work and to retaining expertise within the Group.
In line with this, Long Service Awards are presented to staff on each fifth anniversary of employment with the Group and in 2012, 243 (2011: 338) Long Service Awards were presented. It is worth noting that 32% of staff have been employed with us for ten years or more.
During the year our staff complement increased to 4 037 (2011: 3 984). The Group maintained steady progress in its black staff complement as a whole (now at 41%) as well as in its senior management structures. Our academic staff set a quality benchmark in private education and, as at December 2012, the Group’s employees held a total of 2 002 degrees including 639 honours degrees, 273 masters degrees and 26 doctorates, collectively representing a significant body of intellectual capacity and academic leadership. The increase in qualified staff is greater than the growth in our workforce, demonstrating our success in “Growing our own timber” through investment in the further education of our employees.
The Schools division has demonstrated an ability to sustain its growth and investment trajectory in the years ahead. While the opening of new schools can be expected to deliver overall growth, this is expected to have an impact on margins in the short term as the newly created capacity is filled. Waiting lists for sought after school entry points have grown.
As highlighted at half year, resolving the enrolment shortfall in Tertiary will take some time. Second year student numbers for 2013 were down, as expected, and while progress with first year enrolments for 2013 to date has been fair, it is expected that the Tertiary division will not immediately regain its former profit contribution. That said, the benefit of restructuring and other corrective actions will be felt in the year ahead.
The Resourcing division continues to provide a steady contribution to the Group even in a difficult employment market and will remain focused on its key niche markets for high demand scarce skills.
The further increase in investment plans bears testimony to the directors’ confidence in the Group’s positioning, strategy and long-term success. The directors expect ADvTECH to deliver strong cash flow conversion of earnings and return on investments across the portfolio as a whole.
I wish to thank our Chairman and Board members for their consistent input and commitment. The fact that the Group has thrived and remained focused on growth in a tough economic environment while maintaining excellent academic results would not have been possible without the continued commitment of every member of the ADvTECH team.I extend my heartfelt gratitude to all my colleagues including all full time staff, independent contractors, consultants and associates for their ongoing loyalty and efforts during the year.