Alma Media Oyj (ALMA) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to joint analyst and investor conference of Sanoma and Alma Media about today's Sanoma's acquisition of Alma Media's regional news media business. Today, we will first start the presentation with Sanoma's story. The presenter is our CEO, Susan Duinhoven; and then take questions to Sanoma. After that, we will hand over to Kai Telanne, CEO of Alma Media. And after Kai's presentation, we will take questions to Alma Media. [Operator Instructions] And this event will be recorded, and the recording will be available on both company's websites after the event. With this, I would now like to invite Susan Duinhoven to start the presentation, please.

Thank you very much, Kaisa. Just this morning, we had good news, the acquisition of Alma Media's regional news business and also indicated that we will evaluate the strategic options of the online classifieds business in Finland. But let me start with the acquisition. Sanoma has signed an agreement to acquire Alma Media's regional news business in Finland with a net sales of EUR 94 million and an EBITDA of EUR 20 million in 2019. And that is pro forma figures that are corrected for the outsourcing agreement that was closed in June this year and will have already full impact in 2020. This is a highly synergistic bolt-on acquisition for Sanoma, with an estimated net synergies of around EUR 13 million, and that will be coming into play from 2022 onwards. The agreed enterprise value is EUR 115 million, and that represents then a multiple of 5.8 on the pro forma EBITDA and 3.5 when we also include the synergies. The key driver of this acquisition is growing the digital subscriber base in the Finnish market. And for the digital subscriber base, scale is quite important. The efficiency in the shared operations will create the synergies and will then also create a better return on the digital investments going forward. And those are typically significant in both acquiring the subscriber base but also the digital content. This acquisition then also supports Sanoma Media Finland's long-term profitability target that we communicated in December. And if you remember, we target 12% to 14% operational EBIT margin, excluding PPA. It is a clear acquisition in one of the core focus areas of Media Finland's business, the news & feature. And as a whole, we see this acquisition supporting the sustainable future for independent domestic journalism in Finland. And I think for that, it is also important to realize that -- how we will continue the operation going forward. And that is we see this as a portfolio of 15 titles that will be integrated into the portfolio of news & feature which -- with a number of titles, but each of them will stay completely independent. So each will have their own independent editor-in-chiefs and will continue catering for their local audiences independently. And so if we look into it then, Alma Media Kustannus and, as I said, 2 leading regional newspapers with long histories and 13 smaller papers around the Tampere area and the western and central part of Finland. And also included in this acquisition is Alma Manu, the top-notch printing facility in Tampere that is currently supporting these titles and also the remaining titles that will remain with Alma Media and that will continue going forward. As I said, the acquired business will then be integrated in news & feature. The news & feature unit within Sanoma Media Finland has started on the 1st of October and contains the titles of Helsingin Sanomat, Ilta-Sanomat and 7 magazine titles. If we then look in a bit more detail into Alma Media's regional news business, we see a sales of EUR 94 million, as I indicated, and an EBITDA of EUR 20 million in 2019, as I said, corrected for the outsourcing agreement that has come into effect on the 1st of January. The subscriptions account for roughly 60% of that revenue; the advertising sales, about 40%. And you see that the advertising sales in Alma Media regional business has been quite stable, and that is typical for regional advertising that is more stable and less prone to go online, less alternatives for those advertisers mix that they are more loyal to the regional print business. The total of acquired titles have 190,000 subscribers by the end of 2019, very strong positions in each of their regions, with an overall reach of around 90%. 14% of those subscriptions are already digital only, and that grew very significantly in 2019 by 60%. And if we compare that then to Helsingin Sanomat that has also seen good growth in the last year, with close to 400,000 subscribers and a digital-only share of total subscriptions of 27%. As I already indicated, Alma Manu will be part of this deal, state-of-the-art printing facility, one of the most recent ones in Finland and even in the Nordics, leased with a book value of EUR 41 million. The total business contains around 365 FTE, and those will come, of course, with the business to Sanoma. The shared administrative functions that are at Alma Media, they will stay at Alma Media and not come with. I already made the comparison with the digital development of Helsingin Sanomat, and it's important to realize that this digital transformation is really the core aim of this acquisition. It is that growth in digital subscriber base that we are looking for and that we have learned recently how to make that into a success and how to grow that. And I think Aamulehti is showing exactly the same trend with that 60% increase. So those -- that is the driver. And when I just repeat briefly what we shared with you in December. When you look at the Helsingin Sanomat, the total subscriber base has grown in the last 3 years in a row, and that is largely due to digital. 2/3 of the subscriptions already include digital component. 27% is digital only, but the hybrid is, of course, a combination of digital and print. And we see that the digital experience is specifically interesting for that younger audience that is more demanding on the way they get the news. So in order to attract that younger audience over time, we will need to continue that digital growth. And that is then also the aim with the acquired titles, currently a share of 14% and strong growth. We remind ourselves of the fact that the financial returns -- by increasing the scale, the financial returns on the investments that we inevitably need to do in that digital development will be higher. And of course, there is also the payback from that because we see that every incremental digital subscriber is more profitable than the incremental print subscriber. As we have discussed before, the success in digital requires scale. And it is those investments in the digital infrastructure and architecture that benefits from a larger scale that this acquisition will then also bring. Summarized, the key rationale for the deal: increase in subscription news benefits for all the stakeholders, the readers, the advertisers, the employees and shareholders. I already touched on a number of these points, increasing efficiency. The bolt-on synergistic acquisition, EUR 13 million of estimated synergies, half of them in the shared overhead functions that we will not take over from Alma, the other half in operational efficiencies and in procurement, in technology and, to a much lesser extent, in the content; expected to be fully realized by 2022; and improving the returns on the, yes, increasing investments in digital development. Sharing the successes between the teams because we think that we're at the start of this development path. We're definitely not fully there, continuing the joint investments and the developments and the learnings out of that; and sharing the pool of international, national, feature content as well as technology and talent; and increased focus on the B2B sales. That's an area that is relatively new to Sanoma and that, of course, is Alma Media's bread and butter, I would say, that is the advertising sales that is their strength. And for our employees, extending the opportunities of a broader business, the opportunities for professional development. I repeat here one more time, and you'll -- and mention how important that is, specifically also for our internal audiences, that the news titles will be kept independently. And I think that is not only internal but also to the readers market that is essential. Editorial independent editors-in-chief will continue to determine what is published in their titles. The engaging, high-quality regional and national journalism will be, therefore, secured for the readers in the future. It will give our teams the ability to fully focus, with all their attention, fully focus on the independent high-quality journalism and for the generations to come. So we think this is a true support for that sustainable future of independent domestic journalism in Finland. And it is -- of course, in the Finnish market, it's a big thing. There's a lot of discussion around it. If we take the step back and look at the international markets, then you see -- and we have indicated here the market shares of the 2 largest players in each of the market. You see that many of the Western European countries are already much more consolidated, much more than Finland is. And we have seen recent deals, for example, in Sweden but also in the Netherlands and Belgium. This is very much the type of deal that has happened before. And I think for those who sometimes worry that this might reduce the diversity of the media landscape in Finland, I'll just remind everyone there that there are 160 titles. And then I'm only counting the titles that have a consumer-paid element to it, so not the freesheets, 160 titles in Finland. And that number does not reduce due to this acquisition. This will -- each of the titles will stay independently. So all in all, we think that the diversity is very much guaranteed. And coming back to the deal itself. We think that the valuation of EUR 115 million, including the EUR 42 million of debt, is an attractive valuation for this highly synergetic bolt-on acquisition. As indicated, EUR 5 million is attributed, on top of the pro forma, to the delivery outsourcing agreement that was previously signed and has gone into effect on the 1st of January. And then on top of it, we will have EUR 13 million of net synergies. And that will impact the financial results from 2022 onwards. As I indicated, half of it coming from not taking over the overhead, the support functions out of Alma, so being able to leverage Sanoma's overhead and on a group level and on a Media Finland level. And the other half comes from sharing operational efficiencies, procurement and specifically the technological infrastructure. So all in all, funding will be financed from the existing debt facilities. And there will be transaction costs and one-off integration costs that will amount to around EUR 6 million, will be booked as IACs in Sanoma Media Finland's 2020 results. The timing of that, of course, will depend on when the closing will eventually take place. The transaction is subject to all the normal closing conditions and most pronouncedly depending on the approval of the Finnish authorities, the FCCA. And we expect that approval to come during 2020. And after the closing, as you would expect, the business will report into the strategic business unit of Sanoma Media Finland. So with that, I would then like to touch base on the other message this morning, and that is our evaluation of the strategic options for Sanoma's online classifieds business. We've decided to evaluate the different options. As you know, the classifieds business in Finland is also still relatively fragmented. And we will see if our online classifieds, both in recruiting and in housing, with some add-on services in construction and renovation and in the electricity comparison -- how they can go forward in that strategic field. You see in the graph a nicely developing business growth also last year after several years of good growth and EUR 26 million of sales, EUR 10 million of EBITDA, 94 employees. And this evaluation is very much in line with our indicated focus on news and feature, entertainment and B2B marketing solutions in Finland. The divestment of the business is only one of the potential outcomes of this investigation. And we will let you, of course, know as soon as there are clearer views on where this investigation will lead. And with that, let me summarize. Highly synergetic acquisition aims to support the growth in digital news subscriptions in Finland. So growing our digital subscriber base is key. That's the driver of this deal. Efficiency in the operations, creating better returns on those digital investments. It supports our long-term profitability target of 12% to 14% EBIT margin, excluding PPA. It strengthens Media Finland in its core business area, news & feature. And overall, we think this will create a sustainable future for independent domestic journalism in Finland. So with that, I would like to conclude my part and take any questions that you might have on more the Sanoma part of the...

Thank you, Susan. We now have also CFO and COO Markus Holm from Sanoma here for the Q&A session. We will first now take questions from here at Sanomatalo. Please wait for the microphone before your question. Please.

Okay. Sami Sarkamies, Nordea Markets. Are you planning other similar acquisitions in regional media in order to consolidate the landscape in Finland even further?

I'm always surprised by the speed that we have hardly spoken the last word and we're already looking at the next steps. As you know and as you are used from us, we cannot make any statements on that.

Then I would ask on the synergy potential, EUR 13 million that you have earmarked. Can you elaborate on this just a bit further? For example, are you planning to do revisions in your existing printing facilities? Or will this somehow influence the distribution strategy you've been having in place?

Yes. No, there are no big elements, let's say, that constitute that EUR 13 million. The EUR 13 million really comes from the overheads. That's sort of half. So the overheads that we will leverage that we already have in place given the fact that we're very much in a similar business. We can reuse a lot of both technology and platforms. And the other part comes from the larger scale creating the efficiencies in the business. And I think very specifically to say that the 3 printing plants are full at night. So 3 printing plants is also what is needed for this portfolio. So no changes there. The distribution part, we are very much used to the type of distribution that is currently moved into by Alma Media. So we'll be having a similar type of structure and supplier there. So there, also no change to be expected. And I think most importantly, on the content side, we will see some sharing of contents most likely, just as there is now within Alma Media and now within Sanoma. So once part of one portfolio if there is something, but that is not the driver of this deal. So that is not where the majority of the synergies are thought of.

Okay. And then moving on to online classifieds. I was a bit surprised you're announcing this review. Can you somehow try to justify why it makes sense for Sanoma shareholders to sell this part of your business? And why don't you believe in your capability to take it further yourself?

Yes. I think we have not come to that point yet. So we have not come to the point that it will make sense to divest it. So let's be honest. But why does the thought cross our mind? I think you see in the Finnish market a quite exceptional situation that there are 4 players in that market. And typically, in classifieds markets, if you look internationally, then you see that there are maybe 1 or 2. So the thought crosses your mind to say does that -- in a smaller market that the Finnish market is, does that make sense going forward? So that is what sparks this evaluation. And then to look at it, we will, of course, then look at the valuation perspective and at all the different aspects to decide if this makes sense, to divest or maybe even to invest.

Yes. And then finally, should we assume that the destiny of your online classifieds is somehow tied to this deal? I mean are we talking about some packaged deal [ with Alma Media ]?

Yes -- no, no, no. I'll leave that also to Kai to reconfirm, but no, it's not, then you would have seen, of course, quite a different messaging. And it is more that with our stated focus on news and feature, entertainment and B2B marketing solutions, we are now strengthening our news & feature. And we do then also take a look at our portfolio also from a perspective of, for example, headroom for growth in learning. We do look then at the perspective and say are there additional areas where we can increase that focus even more.

Yes. Pete-Veikko Kujala from SEB. A few questions. First, about the digital subscription growth. Can you explain a bit more how this transaction is going to boost digital subscriptions in the businesses versus being separate entities?

Yes. Yes. Yes, of course, this is more a matter of learning together and seeing what works in one title, see how that can influence another title and spark those ideas. As I said, we are very much at the start of this curve. And we see that with the -- let's say, the star articles leading us through the digital table, that, that is a matter of learning which articles do the trick. We have seen, as we discussed in December, that for example, feature articles are quite effective in that. Now sharing those feature articles and making that accessible and available for all titles, like we have now done for the Sanoma titles, that would be one of those potential ideas. If that works, I don't know. We will need to find that out and learn together, but we do think that with the technology and the thought process behind both the subscription management and the content, that doing that on a larger scale with teams fully focused on it, that that will spark that, those best practices and will create that growth.

Yes. And then another one regarding Oikotie. Does this include Netwheels, your ownership of that business?

It's -- it could be part. It could be part, but it is not as stated at this moment as being part of this deal. Logically, you would then also evaluate the options how to go forward on Netwheels.

Further questions from Sanomatalo, please?

I would like to ask you about the acquisition and how do you think that the Finnish, the domestic news market will develop after this acquisition, also the market growth. And do you think that this acquisition will have some kind of impact on the markets?

Yes, I think that if you look at -- when the markets, we need to define then which market. If we look at readers markets, then we think that the digital subscription growth will definitely create and have a benefit from this, will create further growth. We're also very much aiming towards that younger audience that is more demanding, let's say, in their digital consumption to make sure that we can satisfy them. And it will be helped by these joint investments in digital architecture and digital user interface. So on the readers markets, we definitely would hope that this creates a sort of a continuation of the change that we're seeing. If we're looking at the advertising market, we think that, that is pretty much to complementary products. So I don't expect there are a lot of change. If you look at the diversity, let's say, of the Finnish journalism and the media landscape, then we very much believe that this deal will not make that much of a change because the titles will stay independent. The teams will stay reporting into their own editors-in-chief. So I don't see there a lot of change happening.

Thank you. Further questions from Sanomatalo? Please.

Petri Aho, Inderes. About the competition authorities, will you -- you showed us the international comparison. But have you had any sort of preliminary discussions with the competition authorities?

Yes, we have had initial discussions. These things work with a notification that will be done, that can only be done once the publicity is -- once it's out in the open. So that will be done shortly as is the normal process. And then the authorities will take their opinion on the various markets. And we have, of course, considered this carefully. I mean it's not a new phenomenon. It is in the international markets. It is well known and many precedents. So we look at that with comfort.

So as you probably know well the international markets examples, can you say anything about what kind of restrictions have the competitive authorities given to these companies there?

Yes. Well, the closest, of course, I know is on the Dutch market when a similar deal happened 5, 6 years ago. I was then the CEO of the regional newspaper company that actually merged in a similar deal. And restrictions were in that situation a little bit centered around printing, but that had very specific background in the Dutch market. A further no restrictions. In Sweden, you saw this very recently being approved very fast. We don't expect it to go that fast given the fact that it's the first time of this magnitude here. So many examples, always a little bit but no significant mitigations, let's say, no significant issues.

Okay. Then one question to CFO about the sort of cash flow generation of this new business. Can we assume that this EV/EBITDA multiple is pretty much the sort of cash flow-based multiple as well so that this deal would generate the cash flow back in 5 to 6 years?

Yes, pretty much so, yes. [indiscernible] -- sorry. The microphone as well. So pretty much so, yes, it is quite equal to -- the EBITDA quite equal to the cash EBITDA.