Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Thank you very much. A warm welcome also from my side to this rather exceptional AGM this year. We have prepared for you a short presentation on the year 2019 because it was an important year for Sanoma, a year of transformation. If we look at the transformation, then it is, of course, something that we have set in motion already years before. But last year, 2019, was really a gathering of events that signaled that transformation to reach its completeness. If we look at the learning business, growth through 4 acquisitions, the Iddink acquisition, clearly, the most sizable one of those. But I think the major part of this transformation was the divestment of media business in the Netherlands that have had, of course, been preceded by the divestment of the TV business, SBS, and the Belgium magazines the year before. But this is now rounding off the divestment and stepping out of the media business in the Dutch market. We announced that in December of last year. And even though, strictly speaking, it is an event that took place in 2020, I also here want to mention the acquisition of Alma Media's regional news business. Because though announced in February 2020, a lot of the work by the team has, of course, been done in 2019. And that acquisition signals the strengthening of our media business in Finland. So with that, we have now 2 strong businesses: a learning business, a European growing learning business; and a strong cross-media business in Finland, both of them ready for future growth. And with the divestment of the Dutch media business, we gained EUR 400 million of financial headroom for mergers and acquisitions. And that also allowed us -- this simplicity and strength in these 2 businesses allowed us to indicate in December the long-term targets for each of these business units individually, both on the comparable sales growth and on the profitability. But 2019 was also a strong financial year. And if we look at the key figures, and of course, we're stating here the figures from the 2 continuing business, that you see a net sales of EUR 913 million, a growth from the EUR 891 million the year before. And that growth was a result of acquisitions. The comparable net sales, the underlying sales declined slightly with 1%, but that was already better than it was in 2018. And more significantly even, an increase also in profitability. The operational EBIT, excluding PPA, increased to EUR 135 million, and that profitability was driven by the learning business. Half of that came from the acquisitions, but the other half came from the business development program, High Five. Given the increase in profitability, of course, the EBIT margin then also increased to 14.8%, while the operational EPS stayed stable because the increase in profitability was compensated by one-off costs in our IT infrastructure and in preparing for the acquisitions as well as a slight increase in financial cost. The result for the period, and that is, of course, accounting also the discontinued operations, decreased to EUR 13 million. And that decrease comes from the capital loss of EUR 105 million from the divestment of the Dutch media business. The free cash flow increased significantly, and all of that was due to the IFRS 16 new way of accounting. And of course, the acquisitions, you also see it reflected in the increase in our number of employees by year-end, 4,000 in our continuing businesses, up from 3,400 the year before. So you see a strong year with growth in net sales and a growth in profitability. I'll now go into a little bit more detail, and I'll do that shortly, but I'd still take the time to go in a bit more detail on our 2 businesses. If we start with learning, 2019, as indicated, profitability improved and the net sales grew through the acquisitions. Net sales up to EUR 337 million through 4 acquisitions: Iddink, the Dutch, Belgium and Spanish business, focused on digital platforms and services in education; itslearning that we acquired in December of last year, which is active in 10 countries in Europe and provides a digital platform for education and centered with its headquarters in Bergen in Norway. Specifically now in this corona crisis, I would say, itslearning is for many schools and institutions receiving application that enables them to teach at a distance. The other 2 acquisitions, smaller acquisitions, Essener, a small publishing business in the Netherlands focused on social sciences methods for secondary and vocational education; and Clickedu, a Spanish digital business focused on teaching platforms for administration and the teaching in the classroom, Spanish business focused on Catalonia at the moment. So in total, those 4 acquisitions will add this year EUR 180 million to our top line and bring, therefore, the learning business close to EUR 500 million in net sales this year. If we then look apart from the acquisitions to the comparable net sales, there, you see that was stable and that was mixed over the countries: growth in Belgium and Poland due to the curriculum renewals there; stable in the Netherlands; and in Finland, slightly decreasing for a logical reason that there, the reforms ended in 2018, meaning that 2019, the schools just had bought all their new materials, and that's typically a smaller year following a renewal. And on top of that, we see in Finland a very positive trend of increasing digital sales. But that means that, that growth, where the revenue in digital is recognized on a monthly basis, part of that growth, therefore, flows into 2020. Operational EBIT in the learning business improved significantly with 15% to EUR 73 million. And as indicated, half of that is due to the acquisition of Iddink, which added EUR 5 million to our results in the fourth quarter. But the other half is due to the High Five business development program, an important program that was already in motion for a number of years and contributed well to the business and will also continue contributing in the years to come. But I think that the transformation in the learning business is most clearly depicted by the graph that you see here on the right hand of the slide. Because there, you see that the number of users on our digital platforms by year-end increased to 15 million, coming from 6 million the year before. And you see that 8 million of that is due to acquisitions, mostly from itslearning that added 6 million users to our digital platforms, but also the organic growth. The Bingel and the campus platforms that were already in place in our businesses grew their number of users with over 1 million. So that's, I think, the transformation of Sanoma as a group towards learning, but also within learning and increasing use of digital platforms in the classroom. If we then go to Media Finland, 2019, a good year, solid net sales and a stable profitability as well. And that is for the media business, in this day and age, a very good performance. That means that the digitalization that has taken place has not impacted the net sales overall, and that stayed at EUR 577 million. And we are particularly proud of our news businesses, I must say, and that's Helsingin Sanomat showing now for the third year in a row an increase in absolute number of subscriptions and the subscription sales being even at an all-time high last year. That really shows that through the increase of digital subscribers, which we also know add more profitability, every incremental digital subscriber more profitability than an incremental print, really adds to the viability and the long-term sustainability of that news business. And that is also exactly the reason for us to be so keen on acquiring the Alma Media regional news business because that adds a large subscriber base to our existing news subscription. And that allows us to use the back end and the technical infrastructure, but also gains additional lessons learned on how to convert from print to digital in a good and interesting way for our readers. So those learnings can now be applied on an even larger platform. Even though announced in February of this year, we have now already obtained unconditional approval by the Finnish authorities, the FCCA, and closing is expected by the end of April. But it's not only the subscription business that we're proud of. It's also Ilta-Sanomat who are month-after-month reaching all-time highs. And if you look at the 42 million unique weekly visits that are made to that platform, then you see that Ilta-Sanomat is truly a news platform for all Finns every day. If we then look at the advertising side of the business, there, we see that the digital advertising last year grew with 6%, slightly above market of our -- of the local players. And the total advertising declined slightly with 1%, which was in line with the market development. Overall, Media Finland operational EBIT, excluding PPA, at EUR 69 million, stable versus the year before. So all in all, a good year for Media Finland. And that led us then also in December to give the long-term targets for both businesses individually. Learning business, we clearly indicate a growth in the coming years, autonomous growth, so the comparable net sales to increase with 2% to 5%. And if we then look at the operational EBIT margin, excluding PPA, for the learning business, we estimate that as a long-term target to be between 20% and 22%. And if you then look at 2019, you see 21.7%. And you may ask yourself, is that then strong enough an objective? Is that challenging enough, an objective to indicate 20% to 22%? But there, we need to realize that we are adding the Iddink business to our numbers and where, in 2019, this was only Q4. For 2020, it will be the whole year. And typically, the distribution and platform business has a slightly lower margin than our content business. So therefore, we're taking in 1/3 of the business at a slightly lower margin, and the remaining of the business, therefore, in our expectation, will continue on the good improvement path that it has been on in the last year, and that then overall will lead to 20% to 22% target for that business. If we look at Media Finland, there, we think that the revenue, we target that to be stable, plus or minus 2% in the longer term, but profitability to increase. And there, we're targeting 12% to 14% profitability in the longer term. And of course, the acquisition of Alma region -- Alma region's (sic) [Alma Media's ] news business will definitely help in that as that is a highly synergetic acquisition. But this overview of the year would not be complete if I did not also touch on our Dutch media business. Because even though it has now been excluded from the numbers, of course, the team did an excellent job and met all the expectations that we had for last year. But the divestments that we indicated to DPG Media in December is an important step in our transformation. The enterprise value for that divested business is EUR 460 million, which represents an EBITDA multiple of 6.5. And just to remind you that the Dutch media business had, of course, has a different composition as the Finnish media business. The Dutch media business is centered around magazines, women's magazines, home deco magazines also in Belgium, Donald Duck as big titles. And most prominently, also a pure-play online news platform, the largest online platform in the Netherlands, NU.nl. Total sales in 2019, close to EUR 370 million with EUR 70 million EBITDA, excluding PPA. But we're very happy that we have found in DPG Media such a good new owner for this business and such a good home for our excellent team. And I think this is also the place for me to indicate that the gratitude and the slight uncomfortableness that we will lose thousands of our very valued colleagues, the fact that we have had such a good business with that media business in the Netherlands makes us sad to say goodbye, but therefore, even more glad to make sure that they have in DPG Media an excellent new owner, the largest cross-media and news and media company in the Netherlands and Belgium. So we're thanking our teams who have created strong value for Sanoma in the years that Sanoma was the owner, and we wish them all the best in an absolute great future as part of the largest cross-media company. For Sanoma, it means that our exposure to the print magazine business that we have found hard as a stand-alone business to digitize, where we see in Finland good opportunities because of the combination with news, with radio, with TV, but for Sanoma, it therefore means that we reduce our exposure to printed magazines. That divest is subject to the regulatory -- the customary closing conditions, the regulatory approval being the most important one of those. And we have indicated yesterday that we expect the closing to be in Q2 of this year, so before the summer. The divestment of the media business in the Netherlands does impact our key financial ratios, of course, because the divestment was announced and the business was taken out of our figures in 2019 where the closing and, therefore, the cash will only show in 2020. And therefore, you see that our leverage, our net debt over EBITDA is slightly up 2.7 at year-end, which is slightly above our long-term target. And the equity ratio was at 30.5%, slightly below our long-term target. Those will immediately come back into the long-term range once the divestment is closed. The dividend payout is also for this year 58%, which is on the high end of the range of the 40% to 60% of free cash flow that we indicate. And let me be a bit more specific on the dividend. It is later on in the agenda. The Board proposes a dividend of EUR 0.50 for 2019 to be paid in 2 equal installments, the first one in April and the second one estimated to be happening in November. The dividend policy, Sanoma aims to pay an increasing dividend equal to 40% to 60% of our annual free cash flow. And if we look at that from a yield perspective and take the share price at the year-end of 2019, we see a dividend yield of 5.3%. And that is also the intention for us as management and from the Board to pay solid dividend. And that growth, you also see in the curve over the last couple of years, where the last 2 years, the payout ratio has been at 58%. For 2020, this is the executive management team. It will consist of 4 members. And you see familiar faces that you saw last year as well. Rob Kolkman, I would like to highlight here, has taken on the role of CEO of our learning business from the 1st of January 2020 onwards and now combines this for the time being with his CEO role in the Media Netherlands business, of course, until that business is closed and divested. He succeeds in that learning role John Martin, who had already previously indicated that he would want to leave the company by 2020 when he had been 10 years in Sanoma in strong growth. And I would like to take this opportunity to thank John very much for his energy and his dedication and commitment in driving that business. And under his leadership, the business -- the learning business in Sanoma has doubled in size. And this would normally be the moment where I reconfirm the outlook for the full year 2020. But this is where I need to indicate that yesterday, we have, through a stock market release, indicated that we need to withdraw our outlook for 2020 temporarily, and that is due to the coronavirus outbreak. We know that this outbreak and the consequences for our economies will have significant impact on our business. But it is too early to tell at this moment with any reliability and specificity what the impact exactly will be. And therefore, we have chosen to withdraw the outlook. We expect during the year to be able to give a more precise outlook for the year and to specify that again as usual, but that is too early at this moment. But what I do want to indicate is that before the crisis really hit our markets, the business was doing well and was fully performing according to expectations. And the other thing that is important to realize is that in the core of our business, our learning business and our media business in Finland, the core of these businesses are not going to be impacted in the long term. But how that in between period exactly will go, that, I think, is for all of us very dependent on how this outbreak will go forward through our markets. And I think I want to be also a bit more specific on where we see the impact to be taking place. The learning business is not affected in a material way. We will see some higher costs because our teams are, at this moment, assisting schools free of charge to go onto the digital platforms without charging anything. That will take some effort, and that will take infrastructure cost. But we also think that in the second half of the year, when the schools need to decide for the new school year, that this will create some opportunities to also sell some of those licenses. So we think that overall, the learning business will be balancing out and not significantly impacted. In the media business in Finland, we see that the subscription business is also quite stable. And with the strong focus that we have on digital, we see that both Ruutu+ but also Helsingin Sanomat might have even some opportunity for additional digital subscription sales. But where the real impact is, is of course in the B2B advertising sales. That is a business that in 2019 was around EUR 250 million, so a sizable business. And our customers are struggling in this crisis to determine what to advertise if still able to advertise. And therefore, we see that the worst-impacted industries are, of course, already reducing their advertising spend. And we expect that to continue and flow through into other industries as well. This is why we do expect significant impact. But depending especially on how long this crisis will last, it is very hard at this moment to make an estimation. We have given as a slight reference, even though, of course, the nature of the crisis was very different that in the 2008-2009 financial crisis, the Finnish market, advertising market showed a 17% decline and so did Sanoma's advertising sales. So that gives some reference. But as I say, the nature of this crisis is very different. The other impacted business is the events business, and that's a EUR 35 million business, so smaller. And there, it's even more difficult to estimate the exact impact as these events take place in June, July, August and that we don't know yet in what state we will be if those events can be held or not. It is good to have for you in the back of your mind that if the government prohibits these events to take place at all, then we have an insurance for. But if, of course, the events can take place but draw a smaller attendance, that is at our risk. But I want to restate here that the longer-term perspective of our business, we have no hesitation that we think that the core of our business is strong. Our balance sheet is strong. So we look at this as a temporary decline of the business. And the length of that, of course, at this moment, still uncertain. But this is also a moment that I would like to think very specifically our teams working through this crisis now already deep into the second week of working from home, which is not easy when you're producing high-quality news with 2 small children running around the house because they cannot go to school. So the challenges for our teams are large. But I really admire and want to thank them in all the aspects of the business, be it entertainment, be it sales and the learning teams helping teachers and schools to teach from a distance, all these aspects of our business, thank them for their dedication to our customers. And that brings me to the close of my presentation, but not without having indicated that we see this -- in these more difficult circumstances, you see that even more clearly, we get the energy from the role that we have also in society, both in our learning business and in our media business. It is an important role. And that's where I want also to thank you as our shareholders in making this possible and thank our customers for making this transformation with us and specifically now in these difficult times for all our customers to know for sure that we will be fully supportive and fully focused on supporting you through this period as well. And I wish everyone in all facilities good health and hope with you for a speedy return to a vibrant and prosperous society. So with that, I would like to close my presentation and indicate that normally, I would, of course, gladly open the floor for questions. But that can be now done online through e-mail to our Investor Relations department, and we will answer those questions immediately. And tomorrow, at the end of the day, the questions and the answers will be posted on our website. With that, I hand back to the Chairperson.