Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Sanoma's First Half 2020 Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations at Sanoma. And today here, we have CEO, Susan Duinhoven; and CFO and COO, Markus Holm, who will present the results. This webcast will be recorded, and the recording is available on our website after the event. After the presentation, you have an opportunity to ask questions. We will take questions from the telephone line, and you can also use the chat function on the webcast. With this short introduction, I would now like to hand over to Susan to start the presentation. Please.

Thank you, Kaisa. A warm welcome to all of you for this first half 2020 results presentation, and it was quite a first half and quite exceptional. But all in all, we can say that learning is on track for its full year targets and the corona pandemic impact was limited to the advertising sales. So all in all, if we -- before going into the financial results, if we look at our transformation path, we see that the first half also had quite a bit of activity in acquisitions and divestments. Last week, we announced and completed the Oikotie divestment, our leading -- a classified digital media business in Finland, and we divested that to Schibsted for a total value of EUR 185 million, which represents close to 20x multiple. 20 of April, we divested our Dutch media business to DPG Media for the value of EUR 460 million. And end of April, we acquired the regional news business from Alma Media. So you see a theme through that as consolidation in media, a trend that we see international and that we contributed to both with divestments and with acquisitions. And all in all, that results for Sanoma as a whole in the financial headroom of EUR 400 million to EUR 500 million, and that EUR 400 million to EUR 500 million we will use to grow our learning business further. And we have a strong and active pipeline that we're working on in that field. Overall, we remain fully committed to our long-term financial targets that we have indicated to you end of last year, and we see them as realistic. But then let's go to the first half results. If we look at the net sales, the net sales increased to EUR 434 million, and that came from the acquisitions in learning that we have done last year, the Iddink acquisition and also the itslearning acquisition. And it was, of course, countered with the decrease in sales in our media business in Finland due to the coronavirus pandemic, and that impacted both the advertising business and the events business. If you then look underneath, the comparable net sales growth was minus 8%. If we look at the operational EBIT, that declined to EUR 45 million and that was due to the impact, of course, of the corona pandemic on that media business in Finland and most particularly on the advertising sales, but also in learning, there was a shift in the reported sales from the second to the third quarter due to the Iddink acquisition, and I'll go into a bit of detail on that later on. The free cash flow was negatively impacted by the lower profitability, but also by the divestment of the Dutch media business that is typically cash negative in the first 4 months of the year and that was the period that we still owned that business and, therefore, see it in our free cash flow. The leverage at the quarter end was at 2.6, but with last week's divestment of Oikotie and the incoming cash from that, we are now well within our long-term financial target on leverage. So with that, let me go now into a bit more detail on learning. If we look at the first half in learning, there you see that the net sales increased to EUR 174 million, coming from EUR 137 million last year. And as indicated, EUR 30 million of that was due to the acquisitions of Iddink and itslearning. But also underneath, the comparable sales grew specifically in the Netherlands, where in primary education the mathematics is going through its curriculum reform and that gives an uplift to that business. We saw also a countering effect on the sales. And that -- specifically in the second quarter, we saw that -- an indirect effect you could see from the Iddink acquisition. And let me explain that in a bit of detail. If you look last year, there are Dutch and Belgium media publishing businesses in learning. They sold to Iddink as a distributor. But at that time, Iddink was a third-party, so this was recorded as external sales. This year, however, Iddink is now an owned company. And therefore, this sale is not recorded at this moment because now it is an intercompany sale. And it will only be recorded as external sales in the third quarter when Iddink delivers those books and digital licenses to the schools. So that actually this year represents a EUR 12 million shift from the second quarter to the third, which has no change in business practices, it has no change in any of our operational business. It is just reported sales impact. If we then look at the coronavirus pandemic, that had virtually no impact on our learning business, not on sales and not on EBIT. We saw, of course, some cost increases, for example, in hosting and some cost decreases in travel cost, all sorts of smaller changes. There were some trainings that we were not able to do due to the regulations. But all in all, the impact of corona on the learning business is minimal. If we then look at learning at the profitability development, we see an operational EBIT, excluding EPA, of EUR 23 million, which is slightly below 2019. And this is, of course, a logical consequence from that shift in reported sales that I just explained due to the Iddink acquisition, but we also see an effect within Iddink because specifically in the Dutch market, we see an uptake of the subscription model. And that subscription model has an effect on the reported sales at the distributor. It means that the rental model, which shows a recognition month-by-month of the sales is replaced by a one-off sale of an annual book and a digital license, which again happens in the third quarter. So there, you see lower sales in the first and the second quarter, again, with a stronger peak in the third quarter. So that you can see in our business as a trend that the third quarter is becoming more and more prominent within learning. Now we can, of course, look under the hood of all these changes and all these smaller differences due to the transformation within the business and due to our acquisitions, and we see that we're well on track for the full year 2020 to reach the targets that we have indicated to you in December last year. We indicated then that the net sales would be close to EUR 500 million and that the operational EBIT in learning, the margin, excluding PPA, would be around 20%. So we see in learning solid business, growing, no impact from corona. If we then go to media Finland, there, of course, the corona pandemic had a significant impact. And you see that in the net sales that declined to EUR 131 million. But also in Media Finland, we need to recognize that there is a significant part of the business that actually grew. Half of our business is related to subscription sales to consumers, and that part grew in the first -- in the second quarter. And most specifically, I would like to highlight here the development within Helsingin Sanomat that showed 6% year-on-year subscription growth, which is quite exceptional, I think, even on an international scale. The new product, HS Kids, also contributed slightly to that. It will be launched in August, but we also already started preselling that, and we see that taking off quite well in these times that are -- where people are heavily interested in news. Not only news performed well on subscriptions, but also our VOD service Ruutu+ and our audio-on-demand Supla+, which is a new product, started off very well, and both of them contributing, therefore, to that growth on the subscription. So the impact was associated to the other half of our business and most particularly on the festival and events. As you know, the government has forbidden larger aggregations of people. And therefore, we had to cancel our whole festival and events program for the whole of 2020. And that had in the second quarter EUR 14 million sales impact. And then, of course, the other big impact was on the advertising sales, and there we saw in the second quarter 30% decline, which represents around EUR 21 million lower sales than last year. And in the graph, you see quite well what happened. You see there both the market development and our advertising development as we have published on a month-by-month basis, and you see that the significant impact of April and May. In June, you already see some improvement. The other thing that you see is that we outperformed the market as a whole. And for that, I'm very grateful for the excellent performance of our teams who have supported our customers, and for -- I want to thank our customers for their loyalty to us in these difficult times. So all in all, if we then look at the second half of the year for advertising, we expect some recovery but we expect it to go slow. And that uncertainty in how the economic environment will behave and how the Finnish economy will get back on its feet after the summer, but specifically also, if there's a second wave of the corona pandemic that would create regional or national lockdowns, those uncertainties have great impact on that recovery trajectory for our advertising sales. And that's then also the reason why we, at this moment, do not feel comfortable to give an outlook for the full year yet. If we then look at the profitability in Media Finland, there we see a quite modest decrease compared to the impact on the sales side. We see that profitability for the second quarter was EUR 16 million compared to EUR 19 million last year. And that is explained by 2 effects that mitigated part of that decrease in advertising. We saw lower TV program costs. And that was, of course, a conscious decision to move some programs to the second half of the year. Lower advertising sales created less need and demand for programs. And it will, of course, depend now on the advertising pickup in the second half of the year if we will actually spend that TV program cost in the second half or not, but we see it for now as a shift in cost. But quite prominent was also the insurance compensation that we received and accounted for fully in the second quarter for the festival and event business. We are there insured for the situation that the government prohibits these events to take place and therefore, this came to a payout. Even though the payout will be happening spread across Q2 and Q3, we account for the benefit fully in the second quarter. The cost will still partially be coming in the second half of the year. So this gives a little bit of an inflated view on our profitability in the media business. On top of these 2 more one-off effects, we also have, of course, reviewed our cost base in minute detail and taken as much of the cost out without harming the core of our business and the service to our customers. So we have reduced cost on the administration, the marketing, the content production where possible, and that gives a little bit of an uplift together with lower paper and printing costs, partially due to price development and partially due to volume. Now I already indicated our divestment of Oikotie, our online classified business in Finland. We announced that last week -- we also closed last week. We sold the business to Schibsted for a value of EUR 185 million, and that represents roughly a 20x multiple. With that, we concluded our strategic evaluation that we announced on February 11, and we have come to the conclusion that consolidation also in this market creates value for advertisers, for consumers and for the business as a whole. The Finnish market is relatively small and fragmented and to sell to Schibsted who's already an active player in the Finnish market gives the business and the advertiser the benefit of an experienced international player who can bring more innovation and share more of its broad technology base than we would ever be able to do as a single market player. With that, our media business in Finland can then fully focus on news and feature, entertainment and B2B marketing solutions. And Sanoma as a whole has now a EUR 400 million to EUR 500 million headroom for growing primarily its learning business. That Oikotie business will be included in our financial report until the end of this month, until the end of July. And in the third quarter, we will report a noncash capital gain of EUR 163 million. With that, going to the outlook for 2020, which is unchanged. As you know, on March 24, we withdrew our outlook for the year that we had given before because of the significant impact that the corona pandemic has particularly on our media business. And we expect to give you an updated outlook for the full year later this year. With that, I would like to hand over to Markus Holm to lead us through the details of the financials.

Thank you, Susan, and good morning also on my behalf. I will start as usual with a deeper review on the second quarter earnings. The operational EBIT, excluding PPA, for the quarter were down from EUR 60.1 million in 2019 to EUR 53.5 million in 2020. The operational EBIT, excluding PPA, in learning was down by EUR 4.3 million and Media Finland by EUR 3.4 million, somewhat then offset by EUR 1.1 million in other and eliminations. If we review the learning business, here you see the main impacts of this and the single biggest impact was, of course, related to revenue recognition, i.e., how we recognize the sales from the publisher Malmberg to Iddink, and that will then be recognized only upon the sales to the schools in quarter 3. The second also big explanation for this was the higher penetration of the subscription model, which leads to lower share of rental books and a shift in earnings to quarter 3. There were also bonuses related to the High Five development program in the quarter, but that is an adjustment between the lines, you see the positive effect in other. In Media Finland, the single biggest explaining factor was, of course, the advertising sales, clearly negative for the quarter. Then somewhat compensated by TV program costs that shifted from the second quarter to the third quarter and the insurance compensation for the canceled events that we booked in quarter 2. It's good to note that we still have some smaller costs in the second half related to this. The cost mitigation actions also related to corona were positive for the quarter. We also saw a positive effect of lower paper and printing costs. Then looking at the cash flow for the quarter, they were clearly impacted by the corona and Media Netherlands divestment. Free cash flow declined to EUR 65 million (sic) [ negative EUR 65 million ] compared to EUR 41 million negative a year ago, explained by the lower profitability of the continuing business, i.e., Media Finland due to corona, and the second big explanating factor was, of course, the first 4 months of Media Netherlands, where we see a negative cash flow and -- typically in this period. And we also saw higher CapExes in technology, driven by the recent acquisitions in learning. The operating cash flow in learning was driven by the -- was positive and driven by the impact of organic net sales growth in Netherlands and also, to some extent, positive working capital effects. For dividend calculation purposes, it's good to note that we are eliminating or adjusting the divested Media Netherlands business, so that effect is EUR 22 million. And the second dividend installment of EUR 0.25 will be paid in November. Finally, to our net debt, a nice picture on the net debt. It decreased during the quarter after the closing of the Media Netherlands divestment. Net debt now to adjusted EBITDA at 2.6 compared to 3 the previous quarter and equity ratio at 34.4%. Our net financial expenses decreased significantly from EUR 10 million a year ago to EUR 4 million now in the first half 2020, of course, based on the repayment of the EUR 200 million bond that we did in November 2019. And then as a consequence, the lower average interest rate on the funding now at 0.7% compared to 2.7% a year ago. We also saw some minor positive FX translation impacts on a settlement of tax receivable in the first quarter. The leverage will improve even further now than after the divestment of Oikotie, so you will see further improvement in the net debt-to-EBITDA in the third quarter. Finally, a reminder of our third quarter interim report, which will be released on 29th of October. That concludes my part. Thank you.

Thank you, Markus. Thank you, Susan. I would now like to hand over to the operator for the Q&A session, please.

[Operator Instructions] Our first question comes from the line of Pete Kujala from SEB.

Pete-Veikko Kujala from SEB. If we start with the Media Finland business and for example, the festivals, how big is the cost savings effect that you saw in Q2 from the fact that the festivals didn't take place? Because looking at our estimates and the consensus, the EBIT was, of course, quite significant in the segment. So how much of this is due to the fact that there just simply were no festivals to have?

The effect on the second quarter in festivals was clearly positive on an EBIT level. And there, it's, of course, as said, good to remember then that there are some costs still to come in the second half related to the next year's festival season. So...

All right. So basically, in a typical year, whatever variable costs that you have relating to these festivals like buying hot dogs and whatnot for the festivals. So you typically have these costs come in -- already in Q2 for both Q2 and Q3. So the fact that you don't have any festivals this year, you basically had cost savings come in fully in Q2 already for both of the quarters.

Well, you could say, yes, to some extent, but the variable cost, of course, also relate to the timing of the events as such. So of course, there are also variable costs in -- typically in the third quarter.

And I would not like to suggest that we're selling old hot dogs at our festivals coming out of Q2.

Yes. Well, that was just my poor wording. Then on subscription sales and perhaps more specifically, Helsingin Sanomat, have you seen any kind of differences? I imagine that the coronavirus has increased people's interest in news, and thus, kind of we can see the rising in subscriptions. But have you seen any kind of differences in behavior now that kind of focus on the virus is kind of less panicky, if you might say?

Yes. I think that you do see, of course, that the enormous peak that we saw in, for example, online traffic and specifically around all the press conferences from government officials that, that enormous peak has now declined. And people -- it's now more part of normal. But what you do still see is that the need for solid reliable curated news, people have now fully realized how important is this to be well informed and also not to go on the next hype that might be going on in social media. So this is where we see an underlying positive trend, but you're absolutely right that enormous spike that we saw in March, April, that has now calmed down and is at a more normal level.

All right. And then relating to the learning business and perhaps your M&A pipeline, you now have, as you stated, the EUR 400 million to EUR 500 million to use in acquisitions. Just discussing about the size of the potential candidates, are we looking at like multiple smaller deals? Or is it possible to kind of have a -- are there targets large enough for you to basically spend all of this or realistic candidates for you to spend all of this or most of this money on single deal?

Yes. Both options are possible. There are companies definitely of this size. There are, of course, also smaller companies where you then would look for multiple deals. So both options are open. And as you understand, I will not go into much more detail of what that pipeline looks like.

And the next question comes from the line of Panu Laitinmäki from Danske Bank.

I just wanted to ask about the cost base of Media Finland, which was obviously much better than expected. How do you see the kind of TV programming costs developing? What was the benefit that you got in Q2 from the lower TV programming and kind of how much temporary costs did you save in Q2? And will this kind of prevail in the second half?

Well, we are not disclosing the exact amounts on the savings as such, but it is related to the programming that now is more for the second half. And therefore, we have shifted some of the programming costs to the second half.

So as I indicated, we see it, at this moment, predominantly as a shift, but it could lead to a further postponement if the advertising market would not recover, so that this would not be needed to be broadcasted.

So you have the opportunity to adjust second half...

Exactly. Exactly.

If that [indiscernible].

This is a little bit of agility. Of course, you cannot go -- have channels go on black. So you have, of course, to broadcast. But some of the more high-profile and, therefore, also more expensive programs there that are conscious decisions when to start and when to broadcast.