Sanoma Oyj (SANOMA.HE) Q3 FY2025 Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Sanoma's Third Quarter Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. We had a solid quarter, and it supported our improved operational EBIT for the beginning of the year. And today, President and CEO, Rob Kolkman; and CFO, Alex Green will present you the results. After the presentation, we will have a Q&A session. We will first take questions from the audience here at Sanoma House. Please use the microphone. We will then hand over to the telephone line and you can also use the chat function in the webcast platform. The full event, including the Q&A will be recorded, and the recording will be available on our website shortly after the event. With this, I would like to invite Rob on stage, please.

Thank you very much, Kaisa, and good afternoon, everybody. It's my pleasure to present the quarterly results to you today. And they were indeed solid results. And let me highlight you of the key points first, and then as usual, zoom into the different parts of the business. On the sales side, what really played out in quarter 3 is what we also indicated before, which is on the Learning, the impact of the planned discontinuation of the low-value distribution contracts in the Netherlands was partly offset by the growth in the Learning content sales. And in Media Finland, we saw lower advertising sales, which was also partially offset by the continued growth in digital subscriptions. We're very pleased that for the first 9 months, the operational EBIT improved in both businesses and also our free cash flow continues to improve, and that's driven by those higher earnings and lower financing costs. And Alex will later on go a little bit deeper into that as well. As a result of that, our deleveraging continues to progress well with our leverage now improved to 2.0 compared to 2.4 in same period last year. And there were 2 key decisions that I would like to highlight to you. One is on the Learning side. And there, we decided to not participate in multiyear low-value distribution tenders in the Dutch market. And we took the impairment for that in quarter 3. And this really is a continuation of our view on the Dutch market that it is changing more and more to dealing directly from a publisher with the schools. So that's what's reflected there. And again, Alex will talk a bit more on the technicalities also on the financial side. That does mean that we expect for 2026 to have about EUR 40 million year-on-year less revenue for the distribution part, but with no impact on the earnings. So logically speaking, that also means if you think about it, we're working towards the 23% margin that as a result of the slightly lower top line, but absolute profit expected to be the same, the margin is now going to be clearly in our expectation above 23%. The second one decision that we took difficult, but we think is also an important one is on the Media Finland side, and we already announced that earlier in the quarter, which is the expected closure of the Tampere printing plant, which really supports our well-established practices for these continuous efficiency improvements. And also there, the impairment of EUR 30 million and the restructuring expenses, we took that in quarter 3. And as a result of these solid results, we have also now narrowed our outlook for the year which is now between EUR 1.29 billion and EUR 1.31 billion on the sales and the operational EBIT at the higher end of our original guidance being EUR 180 million to EUR 190 million. And before I do my usual slides on Learning and Media, just something to bring to life to you how important are quarter 3 for us is if you see what's happening across the business. And that really is reflected, I think, quite nicely here. So on the one hand, we continuously look for the longer-term growth profile of our business, how can we improve that further? And I'm very happy with the agreement we closed with Cambridge to have a partnership in the Spanish market to really try to improve English language across the Spanish schools. And that is going to be one of our growth drivers as well in the Spanish market going forward. And in Poland, great example of when we talk about blended learning, what does that mean specifically in this case in Poland. And that is the launch we did there of something called the SMARTbook. It really combines textbook, workbook, notes, exercises, multimedia, all in the one format for the kids in Poland. And that is the start of also a rollout that we will do as part of also the curriculum changes going forward in Poland. The Netherlands, key growth driver for us for many years already and continues to be, also has, of course, continuous new releases when you think about our blended content there. The one I wanted to highlight here is Lijn3, which is really the blended content for early literacy education in the Netherlands. And that is now used at the start fiscal year in about 2,000 schools across the Netherlands, just as one example. And on the media side, very happy to see the continued good growth on Ruutu+ subscriptions, driven by the attractive entertainment package we have there and also the sports content. So just few examples to bring to life what an important quarter it is and how that also drives both the results now, but also sets us up for the growth going forward. Let me now zoom in on learning specifically. Top line further and then profit. So on the top line, you see the point that the growth in our other learning content businesses were actually more than offsetting the last year of the lower cycle in Spain and Poland. The Netherlands, I mentioned it already. We see continued strong growth there in the learning content sales, new product launches, but also continue to improve even further our market position. In Poland, although it's the lower end of the cycle, if you purely think from a curriculum point of view, we continue to see really good momentum around our digital platform sales, particularly also selling directly to parents and students. And again, that is a basis for further growth in the years to come. And then the impact this year of the discontinuation of the low-value distribution contracts in the Netherlands was about EUR 19 million on the top line. So with all that, the result in profit is an improved operational earnings for learning for the first 9 months. And the key elements, as you can see here. So the highest share of learning content sales versus the low-value distribution going down, that has a positive impact on our margins, also slightly more digital sales mix. Solar continues to start to show the impacts in our P&L as well. We already, of course, saw it for some time in the cash, and that is expected to continue. And of course, we also see here the benefits of all the efforts we've done on the paper and printing, and that continues to come down as well. And that results in the picture you see on the right which clearly indicates we're on that trajectory to get towards the 23%. And as I've highlighted before, a big step-up is, of course, in '26 and then also the volumes on the learning content sales are expected to go up significantly. Let me now go to the media side of the business. There, we actually see the trends continuing, which is good growth on the subscription sales and that was driven by what I already mentioned, good growth in Ruutu+. And then we still see a challenging market on the advertising side. And there overall, it was lower advertising sales driven by TV because a big part of that is also around the third-party advertising reselling that stops this year and a bit in the newsprint as well. I'm very pleased to see how Pia Kalsta and the team have continued to manage this business so well that although there is this top line pressure, we do see a further improvement on the profitability and on the margins that is driven, of course, by the growth in digital subscription sales, but it is also this continuous focus on improving the performance of the business overall. So the lower paper printing distribution costs, volume-driven has an impact there, too, and also the lower TV programming cost. So overall, in still a tough advertising market, really solid results on the media side for the quarter. Then just briefly coming back to the outlook. We've narrowed it in line with what I said, which is also reflected here on the slides, on the higher end of the EBIT guidance between EUR 180 million and EUR 190 million now. The underlying assumptions are actually the same, which is the demand for the learning content relatively stable this year across the group's main operating markets. The remaining part, just as a reminder, in quarter 4 is still a bit of uncertainty around returns, particularly in countries like Italy and Spain. And then the advertising market in Finland, relatively stable. So plus or minus a few percentage points. Of course, there, we still see the pressure, but we factor that into our narrow guidance that you see here. So with that said, I would like to hand over to Alex, who can go a bit deeper into the financials.

Thank you, Rob, and great to be here again with you. Let's start off as usual with the Q3 operational EBIT. So you can see here an improvement in operational EBIT year-on-year, driven by Media Finland. In the Learning business, we have stable operating EBIT with the lower net sales being offset by a higher -- the impact of a higher proportion of learning content and also the lower expenses around paper and printing. But the Media Finland, the -- as Rob just said, the growing digital subscription sales and the lower programming costs, the lower costs as well offsetting the -- offset slightly by the declining advertising sales, but netting to a positive EUR 2 million. Moving to the key income statement-related items. You can see here that the improved performance leads to a higher operational EPS but on the overall EBIT and in the IACs, you can see the impacts of our 2 recent strategic decisions in terms of the impairments. So first, in terms of the Dutch distribution market, the EUR 48 million impairment. If you remember this time last year, we booked a EUR 27 million impairment. At that point, although we were still participating in tenders, our expectation of winning those tenders had come down and therefore, reduced our expected revenue streams leading to that EUR 27 million impairment. This year, we've made that recent decision not to participate in the multiyear distribution contracts, tenders rather. And that significantly further reduces the revenue expectations, as Rob said, going down EUR 40 million from this year to next, and leading to a EUR 48 million impairment booked in Q3. This leaves no material remaining intangible assets connected to the Dutch distribution business. Looking further down on the net financial items, that came down again in Q3, so lower average interest rates, as you can see there, 3.7% versus 4.9% and also lower net debt, helping us in this line. And we can see that lower net debt here on the next slide in terms of deleveraging. So EUR 536 million versus the EUR 615 million last year, taking our leverage to 2 versus 2.4. And as you can see on the usual trend going into Q4, it will come down a little bit more from here. And our equity ratio at the high end of our range, up to 43.1%. And the free cash flow improved, as Rob mentioned earlier, EUR 86 million, so up following the higher -- primarily the higher earnings and also the lower financing costs, offset slightly by some further investments in TV and the Media Finland business and some working capital movements. And as you can see there, with the 12-month rolling line going upwards, which supports the view that we've said that we expect '25 cash flow to be increased further from the '24 total of EUR 145 million. With that, I'll make a quick mention of the Capital Markets Day, whilst welcoming my colleagues back to the stage on Tuesday, 25th of November. We welcome you all to that event, and Kaisa will talk more about that at the end.

Thank you, Alex. Thank you, Rob. And we are now ready to take questions. As agreed, we will start from here at Sanoma House. So if we can have a microphone first to Sami.

I have 2 questions. Starting from the guidance, the midpoint suggests EUR 5 million higher EBIT for the full year. You're EUR 8 million ahead after first 3 quarters. So what's your thinking on Q4? Why would Q4 be below last year level?

Yes. I think the biggest uncertainty remains the advertising market for us in quarter 4. So that's, of course, where also the visibility is still the most limited, right? If you compare it, particularly to learning, where we have a really good to feel, of course, it's the advertising side that makes us be also on this kind of range now for the outlook.

Anything else than the advertising media market?

No. There is always -- I think I briefly mentioned, there's always, of course, the returns in Italy and Spain that -- but that's in the order of magnitude of maybe a couple of million, but that's normal business, I would say. It's the advertising, does the Finnish market now improve, yes or no? That's the key uncertainty.

But you're expecting Q4 to be somewhat below last year level?

If you go to the higher end of this, it's somewhat similar. So it's that pressure that we still see. It's not like we see at the moment in quarter 4, an improvement in the advertising market.

Okay. Then secondly, a bit of a housekeeping question. If we think about Iddink, you did now EUR 48 million impairment. What is kind of the cumulative number on impairments front you have done on Iddink over the years?

Well, I mentioned the 2. So the EUR 27 million plus the EUR 48 million is EUR 75 million. There were some smaller amounts earlier to do with the rental books business in the previous years, which were EUR 4 million, EUR 5 million in that sort of range. But as mentioned, there's no remaining intangible assets connected to that business now.

So maybe about 1/3 of the acquisition has been written down so far. What is the business -- remaining business left? I mean if we think about next year, you will have EUR 40 million lower distribution revenues. So what will be the size of Iddink next year?

So we're expecting this year to be roughly EUR 50 million, and we're talking the learning materials business, right? So -- and that's going down by EUR 40 million so roughly EUR 10 million. We also -- within that original acquisition, we had the -- what we now call Schoologica, the business that contains Mahisto, which is doing well and also a small business in Spain as well, which is profitable.

And will you still need to do impairments next year related to the business coming down by EUR 40 million? Or was that done?

No, that -- so what we've done now is based on the projections of future revenues as we did last year, but the projections of future revenues last year, we were expecting to win some tenders. But now we're not expecting to win the tenders. So the balance sheet test is effectively what's the future value that would support the balance sheet intangible assets. So that's all done now.

So you think you don't have to revisit anymore the book values of...

Now as I said, the intangible assets are now gone. The goodwill related to that acquisition is part of the overall goodwill of Sanoma Learning and that gets tested for impairment. That's not amortized, that gets tested for impairment annually based on the overall results of Sanoma Learning, and there is sizable headroom there. So no concerns there.

Thank you, Sami. And Nikko, please.

This is Nikko Ruokangas from SEB. I have also 2 questions, and I'll continue with the Netherlands. And you said that you should now be able to reach the 23% margin target next year following this decision to not participate in tenders. So is it still the case that you would be able to -- or you believe that you will be able to reach that even without this decision?

I can take this. So what we are trying to say is the fact that the sales comes down with EUR 40 million year-on-year has no impact on the absolute profit we already predicted. And then logically, of course, and Alex can go into more detail, logically, then that means that where we already had the target of 23% margin that effectively, of course, on a lower revenue base means that the percentage goes up somewhat. And that's what we're trying to indicate. So no impact on the bottom line, although it's coming down on the top line. Alex, anything?

Yes, just to reemphasize right, we would hit the 23% irrespective of Iddink and the Iddink drop with no profit actually lifts it above. So the target of hitting 23% by 2026 is achieved without that Iddink drop.

Yes. Good. So that you don't need that decision to reach.

No, that wasn't part of it.

Okay. Then on your decision to close the printing facilities in Tampere. Can you a bit more open kind of comprehensively the profitability impacts to you from that decision?

Yes. I mean we -- and just to clear the process around that is still not yet get completed. So however, we expect the savings, if you like, to be roughly in the form of EUR 5 million of Media Finland on an annual basis.

All right. And then cost side.

So that -- I mean that's the cost savings of around that for the annually related to the lower costs needed of running 1 plant versus 2.

And the provision for the one-off cost is booked now in Q3.

So yes, the IAC provision is reflecting primarily the amortization of these future lease liabilities for the equipment and the plant that's already being booked and together with estimate of reorganization costs as well.

Thank you, Nikko. And over to Pia, please.

It's Pia Rosqvist from DNB Carnegie. A question regarding Netherlands. If I looked at the numbers correctly, sales declined by only EUR 6 million in the third quarter, and this is despite you discontinuing, I think you said EUR 490 million. So what's happening, underlying growth is really strong. What is driving? Is it primary? Is it secondary? Anything specific?

We are very happy with the learning content sales in the Netherlands. And we have a strong position there, and that is both in primary and secondary showing really good growth. And it's partly also why you see of course, our mix changing so much, therefore, also the profitability margin, right? So that's all, of course, less visible as you highlight on the overviews because of the decline of the low-value part. But the underlying core business of content methods K1 is really strong. And we, of course, see that as one of our key growth drivers also going forward.

And if I continue, maybe on the distribution contracts still. So just to be very clear, so do you have any distribution business left in the Netherlands?

Yes. So we're not participating in the future multiyear contracts, but these are multiyear contracts. And so the ones we've had before are still ongoing for the next year or 2. So as I say, we're going from a EUR 50 million business this year to down by EUR 40 million next year, and then those contracts will eventually...

And maybe just to add to that, of course, the students are still getting their books, but the way that then goes is more directly from publishers, including our own publishing to the schools. So it's a different way of delivering it.

And is this -- are you the only one doing this? Or is this a broader trend in the market?

The market has been, of course, difficult in this area for quite a number of years. There's a few other players there. and they need to make their own decisions on this.

All right. Then maybe to Media Finland, if I can continue on the solid performance in Ruutu+, so the subscription revenue growth, is this driven by price increases? Or are volumes also growing?

Volumes are also growing. And I think what is very encouraging to see there is that the offering we have, that combination that I mentioned of entertainment and the sport packages, the right kind of mix there is also driving the growth. So it's both that and of course, also the value in the way of pricing.

And then you mentioned lower TV programming cost supporting profitability. Was this kind of isolated in Q3? Should we expect them to be lower in the future or normalize in Q4 and...

This is -- the level we have is actually -- the reason it's lower, it's lower year-on-year. We actually had slightly higher costs the previous year due to some timing of some write-offs of TV programming. So the actual amount we have this year is a more normal level.

Thank you, Pia. Any further questions from the audience? If not, do we have any questions on the telephone line? We have one. So I would like...

[Operator Instructions] The next question comes from Sanna Perälä from Nordea.

I have a couple of quite detailed questions. Sorry, if I missed this, if you mentioned this earlier, but these contracts you chose not to apply for or participate in tenders. So did I interpret correctly that you have been the chosen distributor for those deliveries before? And for how long have you delivered this? How long have these been part of your revenue, if so?

The contracts that we are talking about tend to be a mix of what we already did and also sometimes from our competitors. But the impact for us is the impact that we highlighted around EUR 40 million year-on-year on the top line with no impact on earnings.

All right. Then perhaps touching learning a little bit more, how did the digital platform sales in Poland developed during Q3? I know there was a lower cycle otherwise in Poland, but what was the magnitude of the digital platform sales?

Yes, we don't disclose the exact amount there, but it continues to grow well. You saw that in the smaller quarter 2 already and effectively, that continued in quarter 3 as well. So it's a really good base also for future growth. And then as you also highlighted correctly, of course, because of the lower cycle, that growth in itself is less visible in quarter 3, but it's still there and continues to be really good.

All right. Then how much did EBITDA contribute to Q3 growth, meaning like what was the organic growth in Learning or perhaps in Finland, if you like to mention that?

So we don't -- I mean, we're not disclosing the individual details of that within the Finnish learning content business, but safe to say that, that was a sort of minor acquisition that's been integrated well, is doing fine and is contributing considerating decently to the growth in that market.

All right. Then my question about the Media Finland subscription sales was already asked. So I have no further questions at this stage.

Thank you, Sanna. And if there are no further questions at the telephone line, there are actually no questions on the chat this time. So we have quite a big audience at Sanoma House. So I think that's one of the reasons. So before we conclude, as I said, Capital Markets Day will be held on the 25th of November. We will start in the morning. You are mostly welcome live in Helsinki. And in addition to Rob and Alex and then of course, Pia Kalsta, CEO of Media Finland. We also have several members of the Learning and Media Finland management teams participating the event. And next week, we will be sending the actual invitations and the registration will start. And in the event, we will elaborate more on the growth path, especially on the learning side with the upcoming curriculum renewals and the growth outlook for '26, '30. So we are looking forward to seeing many of you there. And this concludes the presentation. Thank you all, and we will be happy to be in touch with -- at IR in the afternoon with any further questions. Thank you.