Sanoma Oyj (PSON) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to this analyst meeting. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. I think this is the day that many of you and certainly us as well have been waiting already for a while. So we are happy to announce our next acquisition in the learning business and also our strategic growth ambition for 2030. Today, the presentation will be held our CEO, Susan Duinhoven, and it will be followed by a Q&A where Alex Green, our CFO, will also join. [Operator Instructions] And the webcast will be recorded, and the recording will be available on our website soon after the event. And the presentation material is also available there. With this, I would like to hand over to Susan to start the presentation. Please.

Thank you, Kaisa, and a warm welcome also from my end. We're enthusiastic today to be able to announce that we're going to acquire Pearson's K-12 learning business in Italy and in Germany. And we also announced today our strategic growth objective for 2030. What is this acquisition about? Particularly Italy, it's a large European service market that we will now enter. And with that, we also add a very sizable business to our secondary education portfolio. The Italian market is still in an early stage of digitalization, and that will give us the opportunity to utilize our platforms and our learning in that area. We also acquired a small exam preparation and assessment business in Germany. And these 2 businesses together will add EUR 170 million to our group sales. And that will bring the total to 1.4 if you look at the pro forma 2021 basis. And in that mix, it will then be 55% of the revenues that is coming from learning. The acquisition also adds EUR 18 million to our EBIT, excluding PPA, and bring then the total learning EBIT to 70% of the total group, again, pro forma 2021 basis. And then, of course, this business also adds a solid cash flow to the overall group's cash capacity. Now today, we also announced our ambition to grow the group's net sales to over EUR 2 billion by 2030, of which we then aim to have at least 75% coming from learning. So this is, in that sense, not the last of the acquisitions that you will hear about until 2030. If we now look at the Pearson business in Italy, it is the third largest publisher in a still fragmented K-12 learning market, and it has a market share of around 15%. A particular characteristic is that 80% of the sales is coming from secondary education with a leading market position in a number of subjects, among which philosophy and literature, which are big subjects in the Italian market. The total sales in the -- of the Italian business is EUR 104 million, and that then includes part of it as a distribution business where we will continue to distribute Pearson's global English Language Teaching materials, and that amounts to about EUR 12 million out of that EUR 104 million. And if you look at the right-hand side, you see the graph, the EUR 104 million being split up, you see the 80% of secondary, 5% of primary and 11% of that distribution business. Now the business has very strong local brands. And the [ Paravia ] brand, for example, is already in the market for 220 years. And the content is highly regarded by teachers and students. Total company 161 employees, and that sounds maybe small if you compare, for example, to Santillana but that is because in the Italian market, the characteristic is that the sales network is external. So those are external sales agents throughout the country, which has a very positive economic effect that they can also sell all other materials that schools need. And we are very happy to be able to go and work together with a strong, dedicated and experienced management team that is already years and years in the learning business with a very solid growth track record. Now you also see the seasonality of the Italian business, and you will recognize that it is very identical to the other markets that we're operating in. So you see the back-to-school being early September, therefore, generating a peak in sales in the third quarter and the second quarter being a pre-quarter to that, but Q1 and Q4 being very small. So that's the Italian business, very solid business with a strong management team and a strong setup of brands. The Pearson brand will, of course, disappear in the Italian market for our K-12 part of the business and that we will replace with Sanoma. If we then look at the Italian market overall, it is a large -- one of the larger markets in Europe, around EUR 750 million in total K-12 learning materials. But the other aspect is it's a very stable market. Number of students, around 7 million. Market size and governmental expenditure, very stable in the past years also throughout Corona. And this is expected to continue. The interesting element of the Italian market in contrast to some of our other markets is that the content renewal is quite continuous. So it doesn't happen in big peaks with the curriculum change, but the government sets learning outcome targets subject by subject and on a regular basis. And when those targets are changed, then the publishers basically adapt their materials to meet those targets. And that leads to a nice, flat market with a small growth on top of it, but not these big swings that we see in other markets. Digitalization is, as I said, in an early stage. And at the moment, in secondary education, around 35% of the students use hybrid materials. So that is still at the starting point. And that's an attractiveness for us because coming out of highly digitalized countries, we can add them to the development of both the digital content and the digital platforms. In the Italian market, secondary learning materials are paid by parents and then often subsidized when needed, but the parent is the buyer. And that is something that we see in some of our other markets, roughly 50% of the Spanish market has that same mechanism. So we're used to it. But this is in the Italian market for secondary education. The case primary education is paid by the government. So that's the Italian business in a bit more detail. And when we then look at this acquisition, we expect modest synergies of EUR 2 million to EUR 3 million on an annual run rate. And that is expected because it's a market in which we're not yet operational, so the synergies come from sharing the support functions and some scale advantages in procurement. It will take 18 to 24 months because there is a complex separation and integration to be done. We have a good well-tuned and well-exercised playbook for that, a very similar case in that sense to the Santillana case that we're now rounding off. But this separation is maybe even a little bit more complex because we both separate the business from Pearson HQ, but also from some of the smaller business in Italy, where the -- where Pearson continues to be active. In addition, if we then look at that separation and integration cost, we see around EUR 14 million in cost that will be booked in as IACs during 2022 and 2023. In addition, because this is now secondary education and the Italian business creates quite a bit of scale in secondary, we see this as an opportunity to invest EUR 10 million in the development of digital learning platforms and learning content for specifically that part of the educational portfolio. Typically, in the other countries, these are smaller and, therefore, did not have the scale to make such an investment. Now with the Italian business, we can make that investment and, therefore, get that to the next level. And we then can, of course, benefit from that both in Italy and in other countries. All in all, the transaction is expected to be finalized in Q3. We have no business in Italy, so we do not need to file for any antitrust, but there is a foreign directive investment regime that might apply to us. And if that were the case, then that will take a couple of weeks. Approximately EUR 3 million of the transaction cost will be booked as IACs into the Q2 result and then the remaining about EUR 5 million will be booked at closing, so in the third quarter. But then the business also contains an interesting small German niche business in exam preparation and assessment. The pro forma sales of that business in 2021 were EUR 13 million. And -- I'm losing my slides. So if you think where is the pause coming from, that's coming from that? But the business is EUR 13 million. It's the leading player in exam preparation and assessment market, and it has a particularly strong brand, Stark. So that's the brand that it operates on and will now continue to operate under. And it's recognized for high-quality editorial content, provides over 1,400 titles and is active in almost all German provinces. It has a 40-year history in the German market and a total size of the organization of 90 employees. So an interesting niche business for us and now post signing, we will be spending quite a bit of time with the German management to examine that in further detail. The valuation of this business, we paid EUR 190 million for. It is fair in our mind. And we will fund it fully with debt. If we look at the EUR 190 million, if we look at that as a multiple of the EBITDA pro forma for 2021, it's a 6.4. But when we then add the cost for the separation integration and the additional digital investments, then the multiple becomes 7.2. We have funded this through debt, and we're very grateful for the support of 3 of our key lenders: Nordea, OP and SEB that have provided an underwritten 4-year term loan facility. After this acquisition, we will then be active in 12 countries in Europe and serve over 25 million K-12 students. So we are truly one of the global leaders in K-12 education. And in all these markets, we have the same proposition to teachers and schools that we provide them as our primary customers with both the printed and the digital learning content, digital learning platforms and content distribution services. And the Italian market fits that profile exactly. All these 3 services are delivered there. But as I said at the start, we are not intending this to be the last of our acquisitions. And we have balanced funding for that ambitious growth target that I already stated. We want to grow the group to over EUR 2 billion in 2030 with at least 75% coming from learning. And where is that growth then going to come from? An important part is, of course, the organic growth, in line with our long-term target of 2% to 5% annually. And the Italian business fits exactly in that growth profile historically. Then we still have -- even after this acquisition, we still have a very attractive pipeline of potential targets. And we gain, of course, every time experience as an acquirer with a strong playbook also for the more complex separations and integrations. And we will be looking for acquisitions, both in the markets in which we're active as well as expanding our geographic footprint in Europe and beyond. And the funding sources for that growth, while paying an increasing dividend per share, we see as, of course, the solid cash flow generation by both the media and the learning business. That is, of course, the basis that through solid profitability we generate our own cash to do these acquisitions. Then the increasing size will also expand our debt capacity, while we aim to keep our leverage within the long-term target of below 3. And then we see further growth opportunities also being funded through equity, and we can consider that if it creates value for all shareholders. So it's that balanced funding that will enable us to continue to grow while we're keeping our long-term targets unchanged, meaning a leverage below 3, an equity ratio 35% to 45% and most importantly, increasing dividend equal to 40% to 60% of the then increasing free cash flow. But also our sustainability targets stay fully in place: carbon neutral by 2030, an employee experience index over 7.5% and a management gender balance of 50-50. So with that, in summary, we're entering the Italian market, one of the largest learning markets in Europe. It adds a sizable scale to our secondary education portfolio. And we see Italy as an attractive market because the digitalization is still in an early stage. We also acquired a small niche business in Germany, and this adds about EUR 170 million to our group sales and EUR 18 million to our EBIT, excluding PPA, and a solid free cash flow. And at the same time, we show our ambition by indicating that the group net sales will be over EUR 2 billion by 2030, of which at least 75% is from learning. So with that, I would like to conclude and open the floor for Q&A.

Thank you, Susan, for the presentation. Thank you, Alex, also for joining. And we have a few questions already in the chat. So I would like to start with them. And these mainly come from Jutta Rahikainen from SEB and Sanna Perälä from Nordea. I will combine them a bit. So please bear with me so that you hear that -- I think everything will be answered during the session. Maybe we'll start with the Italian business. How is the Italian K-12 market growing in the coming years compared to our other operating markets in learning?

Yes. We see a similar growth pattern in Italy as we see in the other markets. So we're -- of course, with some inflationary price increases that might be a little bit higher, but typically, it is between the 2% and the 3% growth annually. And that's also historically even a little bit higher than that. So the Italian market is just like our other markets, low single-digit growth market.

Okay. Thank you. And then if you look our -- the acquired business, what is the digitalization rate day?

Yes. The digitalization in the whole of the Italian market is still low. We don't record the digitalization as it's not sold as a separate product. But you see that 35% of the students, and that is the same for our portfolio is using digital. But the critical thing will be that teachers start getting more and more comfortable with using and elaborating on the digital layers. And this is where you find in the Italian market. Of course, Corona has helped, but also the sales network is a very good tool in actually elaborating with teachers not only once a year when you sell, but also during the year to keep contact and to help them with using the digital tools. So we see that as a strength that will actually help that Italian market up.

Okay. And on Italy, why Italy now, in particular? It's a new market. So -- and how do you see that versus expanding in current markets in terms of M&A and the kind of how appealing is it?

Yes. I think that the Italian market is a large market with what I explained a stable pattern, quite attractive. So this is, I would say, attractive acquisition for us and something that we looked forward to for quite a while. It doesn't mean that, therefore, in-market acquisitions would be less attractive. They are very attractive of all. Have a different pattern because, there, if you do an in-market acquisition, you have more direct synergies because you can, for example, combine the commercial network or you can combine the editorial content production. This is, of course, for us a new market. So similar to our acquisition of Santillana in Spain, you have done modest synergies, but at the same time, it opens up a whole new market for growth. You've seen primary education being small in our portfolio and in the whole of the Italian market, but there are potentially growth opportunities there for us.

Okay. And then if we move to Germany, there is a question that -- was this kind of all the business that was for sale by Pearson in Germany? Or would they have been kind of more a larger?

This was the business for sale. And we bought it all, let's say.

Okay. Okay. That's clear. And then if we move a bit to the financing of the acquisition. So what are the details of the bank financing that you now have? What is the price? Was it easy to obtain?

Thank you. Well, we're very happy and we're very grateful for our 3 of our key relationship banks: Nordea, OP and SEB for providing the financing for us. It is a 4-year term loan, EUR 250 million, and those are the details that we are disclosing today.

Okay. Thank you. And then maybe the kind of going beyond this acquisition. First of all, about the headroom, how much do we have left after this one?

Yes. The headroom is, of course, something that we build up every year. The cash flow generation from the business adds to it. We have indicated in the past EUR 300 million to EUR 400 million headroom, EUR 200 million give or take being taken at this moment. So that is simple math. But then this year, also the Italian business will already add to that cash flow generation. So this is something that constantly develops, and that's where we have indicated sort of the balanced funding opportunities that we have for further acquisitions.

Okay. And then to reach the 2030 growth ambition, -- does that mean that you need -- we need to acquire companies also in new markets from now on as well, not only in the current operating markets?

Yes, most likely, that's what it means. Because as you saw from the chart that I presented in many of the markets, we are already #1. So there is not always a lot of opportunity in the markets. We have indicated when we bought Santillana that, there, we are the #1, but still only 20% market share. So there, there is still growth also for in-market acquisitions. But in smaller markets, that might be limited. So yes, it will be a mix of in-market acquisition in the larger markets or where we are not yet in the #1 position and then new markets to add to it.

Okay. And then what does the 2030 ambition mean for Media Finland? Are you planning to divest something?

No, no, not at all. It means that Media Finland stays as successful as it is. And it's, of course, always when you do ambition statements that you look for a bit of a round numbers. But it's very much, as we have indicated that for the Media Finland business, we're expecting a plus a minus 2%. So a stable business with slightly increasing profitability.

Okay. Good. And we already talked a bit about cash. And there is a question about the cash generation of the acquired business. This comes from Inderes, Petri Gostowski. Looking at the numbers that we have now provided on the acquired business, the cash conversion seems a bit lower than in our existing learning business. Could you explain that a bit?

Yes. This is coming -- I mean the margin of the acquired business is a little bit lower than our traditional learning businesses in Europe, but there's a number of reasons for this. First of all, if you look at the numbers we've provided, then you need to unpack it a little bit. So within that, we have the German business that Susan talked about, which is EUR 13 million of net sales and roughly breakeven. So that's one part. We've also have the English Language Teaching revenues in there, which are $12 million, which is for a distribution business is typically relatively low margin. And so the remaining core Italian learning business has a slightly higher margin, has a bit more margin than that, but it's also structurally different because the Italian learning businesses focuses on secondary education, secondary education typically more complicated, more subjects, more in depth. So secondary education is a slightly lower margin than primary education. So that's a part of the structural profitability. We also have government capping of certain prices within the market and certain rules around what you can price between digital and physical print. So the Italian market is structurally slightly lower margin than our averages, but still a successful solid stable business generating very decent cash.

Okay. And you actually already touched a bit the follow-up question, which is that how much potential is there to improve the margin?

Well, indeed. So we've identified -- as we talked about, we've identified synergies in terms of in the relatively short term as we separate and integrate the business and also investments to improve our offering in the secondary market, which will benefit Italy and also other markets around Europe. So there are ways that we will continue to work to improve the business with the excellent local management team.

Okay. And one more follow-up. Are there any kind of extraordinary items included in the '20 or '21 numbers that are now published of the business? I don't think so.

No, there's nothing that needs to be that we've disclosed what we need to disclose.

Okay, very good. Then on Italy -- and yes, that one actually exactly the same, sorry. And maybe I think that at this point, we can move to the telephone line and take questions from there. You can also continue to use the chat. We will come back on it later on. So operator, please. Operator, do you have anyone on the telephone line? Maybe if there is a -- obviously, there is a technical issue. So we can't, unfortunately, at the moment here. The telephone line, we will solve that. In between, we will continue with the chat questions. Still on the margin potential, if you think that the latest acquisition in Santillana, quite a lot higher margin compared now to this acquisition. What kind of relative margin potential do we see between Italy and Spain?

When you say relative market potential, you mean synergies between the...

Yes, relative margin potential. I don't know if -- the question comes from Anton Brink. So if you can still clarify a bit that would maybe help us further.

Yes.

I can otherwise give -- I might think of what is intended here that if you compare, so if you look relatively between Spain and Italy, what those margins are. And I think that is what Alex just said that the primary and secondary education, that's one of those differences. And in Spain, there is no regulation around pricing of the products. And in Italy, there is. So that makes the Italian market as a market structurally a bit less profitable. Then there is one additional element, possibly. And that is that constant renewal that I indicated that is happening in the Italian market, also means that you actually, every year, look at some investments. And that makes that there is a continuous investment in content of always some methods. In Spain, when we published the figures there, for example, we showed a year of peak profitability. And that was a year where it was just after a curriculum change where all the costs have been taken, and then big revenues were generated. So you're comparing Italy, let's say, on an average of the cycle and Santillana and the acquisition was a bit at the peak of its profitability. So those are maybe comparisons between the Santillana business and the Italian business. Most of them market related because we have been quite impressed with the way the Italian team is doing their operations editorially and the cost efficiency throughout that organization.

Thank you. I think that gives an answer to the question. And if not, then naturally, we can continue after the webcast. Then we have a few questions from Sami Sarkamies from Danske Bank. First of all, a question on the kind of the asset quality and fit into our strategy. Now 80% of the acquired business in Italy is secondary education. And first of all, how does it fit to our current portfolio? And secondly, does it mean that we actually continue to look for more growth, especially in the secondary?

Yes. Yes. I think the -- this fits perfectly in our portfolio and perfectly in our strategy. When we say K-12, we do not say primary education. We say primary, secondary and vocational. So secondary education is a very important part of our overall portfolio. But it is true that our most recent acquisition, Santillana, was more focused on primary education. And this business is and actually the Italian market because if you look back at that slide where we show the total market around EUR 750 million, you see that the primary education is only around 10% of that. So in Italy, primary education is a much smaller market than we see in other European markets. So that's a phenomenon. And this business, therefore, fits very well, and we're actually quite happy that now with the scale of the Italian business, our overall scale in secondary education increases, and that shows the fact that we can then now also invest more into coming up with digital solutions, specifically for secondary education.

Okay. And still continuing kind of on the margin improvement potential in Italy. Is it possible to reach kind of the -- our current learning segment average margin? Or is that too ambitious?

The structural nature of the businesses that we talk about make that unlikely, and so -- but not a problem for us in terms of our strategy and what we're trying to do. As we said, stable successful cash-generating business. But because of the focus on secondary, because of the way the market is run, it will always be at a different sort of profitability model.

Good. And then still one question about the financing provided. Do we publish the interest rate level of that arrangement?

No, we don't. We talk about the size and the term and that's what we've disclosed.

Very good. And then the question is from Sami Sarkamies from Danske, continue. Can you talk a bit about the acquisition process? How was it? How long was it? Were there several bidders? And how did it go?

Yes. Yes, we can disclose a bit on that. The properties were put under strategic review in March last year. And from that moment and even a little bit before, we have been in contact and we have indicated our interest. And that has -- process has taken first some time for Pearson to identify what these businesses would look like on a more stand-alone basis, what parts of the business would be up for sale and which part is not and therefore also what the separation process would look like. And that's where -- at some point in time, there was -- an auction process started once these figures and these facts were more clear. An auction process started, and that has led to this successful acquisition.

Very good. And then one more question from Sami. It's about the long-term EBIT level of these acquired assets. So taking into account kind of the synergy potential of EUR 2 million to EUR 3 million, while then we do the additional EUR 10 million investments into digital development. Then, of course, on top also the IACs of EUR 8 million of the transaction cost and EUR 14 million of separation costs. So is it the right way exactly to look at it so that the kind of the investments, transaction costs, separation and integration costs, they are more of one-off type of items and not impacting kind of the longer-term EBIT potential.

Absolutely there. As you said, there are one-term items that enable us to run the business in the way we want to generate value in the future.

Very good. And then we have a few questions from Pia Rosqvist at Carnegie. First one, do we see further growth potential in M&A in the Italian market?

It's always hard to say when we haven't closed the first one to already look at more acquisitions. But we do see that there is still quite a number of smaller players in the market and that there might also be for those players with increasing digitalization that there might be opportunity for them to join Sanoma. So we definitely keep a close eye out, and we'll be very interested to do so, but I'm typically not going into any promises on that.

Okay. Very good. And regarding the businesses that Pearson now had under strategic review, were we interested in any other assets? And if not, why not?

Yes, yes. We have looked, of course, at all the assets, and we felt that for the Italian and German business, we could be a very good owner. The other business is less so. Not that we were not interested in those markets, but more -- the asset didn't completely fit with us. So that is where we focused on these 2 assets.

And then what about the market share of Pearson in Italy in secondary education in particular? How large is it?

Yes. That is -- I would need to do the math a bit on sort of within secondary, but I don't think it deviates that much from the total market because if you think that 5% of our business was primary and it's 10% after the market, so that it means that it is a little bit higher market share than the 15% overall.

Although in some topics, it may...

In some topics, absolutely. If you -- and that's also explaining the stability of the business that you have, just like we have in other of our markets that even if it's 15%, it still means in the subjects in which we're active, we are having a very high market share. So that's where I indicated literature, philosophy. Those are 2 of the subjects where we have a very strong market share. And that gives stability to the business and also profitability.

Yes. Thank you. And then we have a further question from Petri Gostowski from Inderes. You mentioned that we could also consider equity funding for further growth. Should we -- should this be interpreted so that we are more confident about accelerating our growth through M&A going forward?

Yes, you can say more confident. I don't think we lacked confidence before, but it definitely this balanced a funding opportunity. It means that we can go out in the market and look at the assets that really fit and do not feel the need to bind ourselves too much to the exact debt capacity at one moment in time. So this gives great comfort, but the basis of it all, I always want to stress, is our own cash flow generation and looking for targets that really fit with the business because it's not a growth target that it is growth just for the sake of growth. It needs to be a growth target for improving our business, gaining scale and, therefore, being able to utilize our digital heritage in more and more learning markets.

Okay. Very good. Unfortunately, there is some kind of -- or continues to be some kind of technical issues with the telephone line. So please continue to use the chat for any further questions, which at the moment now, we have tackled, I think, all that we have received so far. So now if you are very quick, you still have the time to post some.

But otherwise, we will be available.

Absolutely. Yes. So if not, then we can conclude the conference and the Q&A. And what I would like to do is I would like to remind you of our virtual deep dive event that will be held on Thursday this week at 11 EET, and we will focus in that, in particular on how we leverage digital learning, not only in Italy but also across Sanoma Learning. And we will have CEO of Sanoma Learning, Rob Kolkman and Alex, presenting and discussing around the topic. So I hope you can join that event as well. And there will be a recording available of that as well as from this conference afterwards. And as said, we will continue to be available at IR. So please feel free to contact us with any further questions you may have. Thank you for joining, and have a good day.

Thank you.