Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

[Audio Gap] introduction, I would now like to hand over to Susan Duinhoven, President and CEO, to present the acquisition. Susan, please.

Thank you, Kaisa. Good afternoon, ladies and gentlemen. I'm very happy to be standing here and be able to give you some of the background on our acquisition that we announced this morning of Santillana Spain, the leading Spanish learning content provider in K-12. And with this acquisition, we really make a major next step in growing our European Learning business and becoming a leading player in the Spanish market. But let me give a quick summary of the fact. Sanoma has signed this morning agreement to acquire Santillana Spain, as I said, leading Spanish provider of learning content in K-12. This fits very well with the stated Sanoma strategy of growing our Learning business and growing it through acquisitions, both in existing markets and in new markets. The agreed enterprise value is EUR 465 million, which represents 6.3 -- sorry, a 9.3 multiple on the pro forma EBITDA of 2019. As I said, it expands our position in the Spanish market, and it expands it in a very resilient part of learning materials and the content part in K-12. And it offers also us growth opportunities, both through the typical curriculum reforms that generate growth, but also through increasing digitalization, which is still low in the Spanish market, but gives us opportunities to leverage our digital expertise. It is a major step in continuing our European -- our growth of our European Learning business. And with this acquisition, the total share of Learning within the group's earnings will be over 65%. So we're, by then, truly a learning company. And it will increase our available free cash flow and thus create shareholder value also through increasing dividends. But let me now give a bit of background on Santillana Spain as a company itself. As I said, it is the leading provider in learning materials, so in learning content, primarily textbooks in the Spanish market. And it is focused on primary and secondary education. And Santillana operates in all 17 autonomous regions in Spain, and that is quite something special because the 17 regions each have their own curriculum. The net sales of the company last year was EUR 128 million with an EBITDA of EUR 50 million and a stand-alone operational EBIT, excluding PPA, of EUR 43 million. And that, therefore, represents a margin of around 34%, which is really above average also for Sanoma. If you look at the slide on the right-hand side, you see that the buildup of the revenues of Santillana Spain. You see there that K-12 is over 90% of the total revenues. And within K-12, primary and lower secondary education are the majority, so primary education being even close to 2/3 of the total company. So those are typically the most stable parts also within the K-12 learning business. If you then look at the digital sales, that is in 2019 only 2%. And with that, Santillana is still above the average for the Spanish market, but of course, significantly below the typical percentage of digitalization that we see in Sanoma Learning businesses. And that's where we see the opportunity. We are, of course, very used to highly digitalized countries and can now leverage both our expertise, but also our technical platforms towards the Spanish market. The unique value proposition of Santillana Spain is clearly in its commercial teams, very embedded, very much into the veins of the educational community in the 17 autonomous regions, but also their content development teams who have a unique combination of both central and regional teams working together because we need to remind ourselves that, in Spain, the educational materials are published in 6 different languages -- different regional languages within Spain. So the business has strong brands, Santillana, Loqueleo, Richmond, for which Sanoma has obtained the exclusive licenses to use. The growing digital position, I already mentioned, Santillana is growing in digital. It is still small as the market is nondigitized. But clearly, the business is ahead of its direct competitors. Just to give a feel for the size. Total company, 570 employees, 40% working in commerce and 30% working in content development, as I said, both on the central level in Madrid and in the regions. And having visited the team, I can really see a strong, impressive, experienced management team fully committed to the business with years and years of experience in this rather complex market. So all in all, an impressive and strong business with very good prospects. And if we then look at the Spanish market, you see quite a resilient market with hardly any impact from the economic crisis that was there in 2008 to 2013 that took quite a bit of economic impact, but you see that the education market was quite flat. Where you do see the typical ups and downs of the market are with the curriculum development and that is very common in learning markets. We see that in all our other markets as well. And you'll see, for example, in 2008 a peak when new law was introduced. In 2015, 2016, you see a peak. And typically, when there is some hesitation to go into the new curriculum, that means that the market flattens out a bit and that you saw, for example, in the 2012, 2013 area. So all in all, a large market, EUR 600 million in K-12 and very stable and resilient to economic changes. But then, of course, that curriculum change, that does have its typical impact. And there, it is good to note that 2019 was a bit of a peak year. So the numbers that we have indicated before, the EUR 128 million in sales and the EUR 50 million in EBITDA, they are a bit higher than average. If you look over a 4-year average, which you see here in the chart, then you see that you're looking at the business of around EUR 120 million in revenues and EUR 46 million to EUR 48 million in EBITDA. That is over the cycle. Now 2020 and 2021 are expected to be typically a bit on the low end of the cycle coming from 2019 and leading up to the 2022-2023 curriculum reform that is currently in parliament under discussion, but is quite certain to be impacting the market in 2022 and 2023. So in those years, leading up to that, the results will probably be more alike 2018 than they will be liking -- alike from 2019. Now if we look at the EBIT margin, you see, as I said before, an above-average EBIT margin in this business through very good operational performance. And if you take there the average over the cycle, then that is around 30% EBIT margin, excluding PPA. If we then look now at Sanoma Learning and you'll see the countries that you know, #1, #2 positions, and now also in Spain building towards a #1 position through this acquisition of Santillana. And Spanish market with 6.4 million students, a large market, where we now have both content, the teaching platforms from last year's acquisition of Clickedu and Iddink. These 2 businesses together are smaller, of course, are focused on Catalonia where Santillana is really over the whole of the Spanish market. And then if we then look at the group, as I said before, now at this moment, Learning represents already more than half of the earnings, the EBIT, excluding PPA, from -- for the whole of the group. But after this acquisition, it will be more than 65%. And with that, we can truly say that Sanoma has transformed into a growing European learning company with a strong cross-media business in Finland. We think we have a very fair valuation for a leading player in such a large and stable market. The enterprise value is EUR 465 million, and that includes EUR 53 million of net debt at the end of June 2020. As I said, it indicates 9.3 multiple over a pro forma adjusted EBITDA of 2019. And if we take that over the average of the cycle, it is closer to the 9.7, 9.8. There is a locked box mechanism in place, which means that from June 30, 2020, all the cumulative free cash flow will be deducted from the purchase price. The estimated synergies will be around EUR 4 million, quite modest, that will be expected to fully realize in 2023. And it comes from the typical things: procurement, the technical platforms that we can do together and shared operational and support functions that Santillana Spain currently shares with Santillana Global, the Latin American business of Santillana. But now -- in the future, we'll share with Sanoma. Funding of this acquisition will be fully with debt. We are glad to have an agreed committed funding, bridge funding facility of EUR 480 million with Nordea and OP Bank, and that will, over time, be converted into long-term funding. EUR 2 million of transaction costs will be booked as an IAC, as an item affecting comparability, in the Q4 results of Sanoma Learning and the remaining EUR 4 million will be recognized at closing. The transaction is still subject to a number of conditions. This divestment is, of course, for Prisa, quite a sizable divestment and therefore, requires formal approval by the General Meeting of Shareholders of Prisa, but already fully supported by the Board of Directors where 48% of the Prisa shares are represented. In addition, the approval of the lenders of Prisa needs to be obtained. But there, already 75% of the lenders have given consent and approval for this divestment. In addition, we will go into discussions with Spanish Competition Authorities. But there, it is good to realize that we are, of course, acquiring a content business in educational materials in a market in which we're not yet present in Spain. The expected closing is during the first half of 2021. And logically, this business will then be reported as part of the Sanoma Learning SBU. And just for clarity, this acquisition has no impact on our long-term strategy, our financial targets nor on our dividend policy. All remain unchanged, and we remain committed to growing our dividends going forward. And with that, we see a very clear step-wise transformation of Sanoma Learning starting more than 20 years ago through acquisitions, having grown in 2019 a number of acquisitions of which Iddink was the largest, which actually was the first one bringing us into Spain, and now the next step with Santillana Spain expecting to be closed in 2021. So in summary, we're growing our European learning business and become a leading player in the Spanish educational market in the K-12 market. We're expanding our offering and we're seeing growth opportunity both in the curriculum renewals, but also in digitalization of the Spanish education market. We're making a significant next step in our transformation of becoming a growing European learning company. And with this step, the total earnings of the group will be more than 65% already earnings coming out of learning, and that, creating shareholder value through increasing our free cash flow and increasing our dividends. So that fits very well into the overall Sanoma learn -- Sanoma equity story: 2 strong businesses, focused on growth and dividends, 2 businesses being a growing European Learning business with a strong digital footprint and a Finnish cross-media business with a leading position in the Finnish market, aiming to continue our growth also through M&A and increasing our dividend equal to 40% to 60% of our annual free cash flow. And with that, I would like to conclude my presentation and invite Markus Holm to join me and answer any questions that you would have. We hand over to the telephone line for questions.

[Operator Instructions] We will take our first question.

Pete-Veikko Kujala calling from SEB. Can you call me -- can you hear me okay?

Yes, we can hear you.

All right. A couple of questions from my side. First of all, you already have 2 assets placed in Spain, mostly in the Catalonia area, Iddink and Clickedu. Do you think that you can leverage these businesses now with the -- to other parts of Spain as well?

Yes. The 2 -- the Iddink, Clickedu business will stay separate from the Santillana business. So in that sense, there will be 2 businesses in Spain. The reason for that is also that Iddink, of course, serves, just like in the Dutch market and the Belgian market, serves all publishers and therefore, keeps a stand-alone status there. But it is definitely true that the growth of those businesses outside the Catalonian area will be helped by the fact that Santillana Spain has, of course, entry points into all educational institutions in the whole of Spain. So it will definitely help their growth path, but it is important to realize that the businesses themselves will stay as separate businesses in the market.

All right. And continuing on that note, is Santillana's business quite evenly distributed across Spain? Or do you have some certain like focus areas geographically?

No. It is evenly distributed. But there are, of course, areas where they're stronger and areas where they're weaker. So out of the 17 areas, there is, of course, a mix. But overall, it is truly a player that is through the whole of the market.

All right. And lastly from me, can you open up a little bit how do you see that -- why is Santillana able to produce these types of margins even if we kind of take into consideration that 2019 was probably a peak year, but still we are looking at EBIT margins that are clearly above the other learning business? Any comments on this?

Yes. I mean this has been, of course, our key interest also in looking into the business. And what is very clear is that the Santillana team has been able, through very clever operations, to still have all the benefits of the scale of the Spanish market, which is a EUR 600 million market, but have been able to manage the complexity of 17 regions with each their own curriculum and 6 languages, have managed that complexity in a very intelligent way. So that they have not lost, let's say, the economies of scale. So that is a combination and that's truly very, very solid management. And then also on the operations side of it, a strong team, long experience in the market, real focus on growth and on profitability. So I think it really reflects the quality of the team and then helped with the size of the market.

All right. Congrats on the deal.

We'll now take next question.

Sorry, Pia Rosqvist from Carnegie. Can you hear me?

Pia, we can hear you well.

Good. Excellent. Congratulations on the exciting deal. So we talked about the excellent margins already, but can you please open up about the operational cash flow? You show a number of EUR 27 million for 2019. Can you explain what happens between EBITDA and operational cash flow?

Yes. I won't be able to split up that in detail, but that is the right level to assume over the cycle in this business.

All right. Then to digitalization. You talked about 2% of the Santillana Spain sales coming from digital products. What -- do you know about the technical readiness for -- or the technical readiness for digitalization in schools in Spain overall? And in discussions with Santillana, how have they projected development of digitalization in their market?

I think we see a lot of similarity in the discussions that we had so far, a lot of similarity between the situation in Spain, and for example, in Poland, which we, of course, know well. And we see still a very low digitalization in the schools in Spain. So where, just like in Poland, at home, children are very much used to Internet and online access, the schools still not providing that access. If we now look at the investment programs that the government has made, they are very much focused exactly on that: on digitalization in schools. So we see a good opportunity there. And of course, made further -- the necessity, let's say, made further clear by the COVID pandemic of the last 6 to 9 months. So we see a low level at this moment. We see a clear indication that there is a willingness to increase that. And we see that the Santillana team themselves have, therefore, well -- sort of tuned themselves to be ahead of the rest of the market, but not too far ahead to start spending a lot of money when the schools are not yet ready. So very similar, I would say, to our Polish team sort of with a clever pacing themselves with the market. But the readiness from the team and from having explored and tested different options, mental readiness, let's say in the team, that is very high. Specifically now, that we will be able to add platforms, let's say, without any further cost by rolling them out, we think that there will be further opportunities to help the market along. But also here, I caution for too high expectations because it is no use to go ahead of the market. So we will -- also there, we will help the market along. We will offer the opportunities. But this is where you will see that only over time will those digital platforms actually start adding significantly to the sales.

Okay. And one final question. I'm sorry if I missed this in Pete-Veikko Kujala's last question. But with regards to Iddink and in any overlapping business, so how are Santillana's textbooks currently distributed in the market?

They are distributed through all the regular distributors, including Iddink. But in the Spanish market, in the different regions, you have different ways in which they're distributed, often bought at the bookstore, so I would say almost just like in Finland, bought by the parents at the bookstore and then either reimbursed by the government or done through subsidies for lower-income parents. But it is also done through large distributors and through schools. So very different ways in which it operated. And in that sense, you can really see the Spanish market as 17 different markets, each with their own characteristics on how to run the education system, including the distribution of the materials.

[Operator Instructions] It appears there are no further questions over the phone. We can now move to the web questions.

Thank you. And I think that the web questions are also already answered, and we have also answered them in writing in the webcast platform. So if there are any further -- if there are not any further questions, we are actually ready to conclude the event. I would like to thank Susan for the presentation and thank all the participants online. And as a final reminder and a kind of prewarning to all here, we will be hosting a Virtual Capital Markets Day on 8th December. So please have that penciled in your calendars. We will then elaborate even more on strategy going forward. With that, I would like to conclude the event, and thank you for participation. We will be back online next week with the third quarter results. Thank you.

Good afternoon.