Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Sanoma's Full Year 2020 Results Conference. My name is Kaisa Uurasmaa. I'm heading Investor Relations at Sanoma. And today here, we have President and CEO, Susan Duinhoven; and CFO and COO, Markus Holm, presenting the results. This event will be recorded, and the recording will be available on our website after the event. After the presentation, we will have a Q&A session. [Operator Instructions] And with this brief introduction, I would now like to hand over to Susan to start the presentation. Susan, please.

Thank you very much, Kaisa. And welcome also from my end to this full year 2020 results presentation, and it was quite an exceptional year. And we're very happy that we ended the year with a strong operational EBIT margin and a strongly increased sales. But even more important for us was that this year, we also managed to accelerate our transformation into a Learning company further. But let me first summarize the financial results. If we look at the net sales, we landed on EUR 1.062 billion compared to EUR 913 million the year before. And that net sales growth came from Learning with close to 50% growth, most of it due to the result of the Iddink acquisition, but very importantly, also with an underlying comparable sales growth of 5%. In Media Finland, of course, due to the corona pandemic, the net sales declined. The operational EBIT came to EUR 157 million compared to EUR 138 million the year before. And that improvement was coming from Learning. But the Media Finland business did very well in keeping its EBIT stable. The operational EBIT margin then came to 14.7%, which was very close to the 15.1% in 2019. So we're happy with that solid result. The free cash flow declined to EUR 95 million, and that was due to the divestment of the media business in the Netherlands that we had until April in our results. The leverage was very low during the year and then increased at year-end to 2.6x, and that was due to the acquisition -- the closing of the acquisition of Santillana in Spain. The Board proposes a dividend of EUR 0.52 per share. And the outlook for 2021 will be a reported net sales expected to be between EUR 1.2 billion and EUR 1.3 billion, so a continued increase from the EUR 1.1 billion in 2020 And an operational EBIT margin, excluding PPA, between 14% and 16%. And that wider range reflects the uncertainties that the corona pandemic still holds in our business. But as I said, even more important was the continued transformation that we managed to do during 2020. And if we look at that, we see that in 2019, if you remember, we did 4 acquisitions in Learning, Iddink, by far, the largest; but itslearning, a digital platform throughout Europe; Clickedu, a digital platform in the Spanish market; and Essener, a specialist publisher in the Dutch market. And during 2020, we spent, of course, considerable time in integrating those businesses into our European learning business. Then at year-end, in October, we announced and by December 31, we already closed the Santillana acquisition in Spain, and Santillana being the leading provider of K-12 learning content in the Spanish market. So very happy that, that went even faster than we anticipated when we announced. If we look at the media business, there was significant transformation as well. We divested the media business in the Netherlands and divested also the classified online business, Oikotie in Finland, and we acquired in Finland, the regional news business. And we spent during 2020, considerable effort on integrating that business into our subscription, news & future business. So if you now look at Sanoma, you see 2 focused and leading businesses each and their own field with a very solid profitability and cash flow. And we have a EUR 300 million to EUR 400 million headroom that we intend to use to grow our K-12 learning business even further. So all in all, successful transformation and specifically focused on the learning business. And that -- let me go into that into a bit more detail there now. If we look at Learning, you'll see a strong net sales growth from the EUR 336 million last year to EUR 500 million this year. And that was driven by acquisitions, predominantly the largest one, the Iddink acquisition that was closed in September of 2019 and was now, for the first time, full year into our results. But as important, the underlying comparable sales growth was 5%, and that is on the higher end of our long-term range. And that was driven by the curriculum renewals, both in Poland and in the Netherlands. Now the corona pandemic did have slight impact on the sales in the Learning. And that was mostly due to the impossibility of doing on-site trainings. That was, of course, quite logical that we couldn't do that in Q2. But we had, during the year, the hope that in Q4, we could regain that. But due to the school closures and the large extent of remote teaching, that was not possible either in Q4. And if we then take that net sales growth, you also see that the profitability, of course, increased significantly. The full year increased 27% to EUR 96 million coming from EUR 76 million in the year before. The margin decreased to 19.2%, and that was expected because we added now both Iddink and itslearning for the first time for the full year into our results. And those businesses are typically lower-margin businesses than our publishing learning businesses. So the EBIT improvement followed the sales improvement due to the acquisitions and the strong comparable sales growth in Poland and the Netherlands. And we saw in our cost base, also some impact from the corona pandemic, some pluses and some minuses. The higher cost was in the warehousing with high complexity, of course, in that peak summer period, but also higher hosting costs due to the strong increase in usage of our platforms. That was mostly offset by the typical lower cost that we have throughout the business in lower travel, lower office costs that compensated these increases. But while we had an increase over the full year, we had a decrease in profitability in Q4. The loss there was EUR 18 million compared to EUR 10 million the year before. And this is a logical effect of a growing learning business. Because, as you know, strong seasonality in Learning, mix that to -- with the growth of the business, the Q2 and the Q3 increase, but of course, then the losses in Q1 and Q4 also increased. So that is a logical consequence. And that we will also see, therefore, in 2021 and in the coming years. There was a bit of a one-off effect as well in 2020. And that was due to the fact that both the sales and the margin of Iddink declined in Q4 due to this faster shift from renting books to selling books. And here, it is good to remember that when you sell a book, the cost of that book are fully taken into the P&L as cost of goods sold. Where if you rent out a book, typically a more expensive book. But when you rent that out, you capitalize it and you write-off in depreciation over a number of years. So that's where the margin itself is directly impacted by this shift. And the acceleration of that shift created a margin impact that was now booked in Q4. Going forward, in the coming years, we will make sure that, that actual margin is booked throughout the year. And even with the peak in Q3, we will make sure that the true-up also happens within the quarters. Overall, that shift from renting to selling is a favorable shift throughout the whole of the business chain. We see that schools like it because it gives a better learning result for the students. Students like it because they can keep the book at the year-end. It is an annual book. They can write in it. It is their property. They can keep it. And the publishers like it because, combined with the digital license, it forms this interesting subscription-based proposition and also the distributor likes it because it takes away the high logistic cost of this expensive and complex return flow of rented books that need to be refurbished and repackaged all during a very high peak season in the summer. So all in all, a positive trend impacting the Q4 in 2020 a bit more significantly. But Q4 was also important for us as a quarter in which we closed the Santillana acquisition. And that closing happened on the 31st of December, much faster than we had initially anticipated, a very positive speeding up for us and now allowing us to already successfully start the integration of that business. Just to remind you, the Santillana business is the leading provider of learning materials, primarily primary education and secondary education in Spain. Their sales for 2020 was EUR 106 million with a strong operational EBIT of EUR 29 million, representing a 27% margin, so an above-average for Sanoma Learning and above-average margin. Digitalization in Spain is also increasing and you see that it is now 3% of Santillana's total sales. But of course, it shows that even though it's increasing, it's still at a start in the Spanish market. If you compare the 2020 sales with the 2019 sales, you'll see that we are on the downward slope of the curriculum change that will continue in 2021. So we -- sales expected to be of a similar level as will be the EBIT. And that is because we are preparing now for the introduction of the new law and the curriculum change that will kick in, in 2022 and 2023. Another reminder is that the seasonality in the Santillana business is even a bit stronger than in our other learning businesses. You see a very strong business focus in Q3. And that is logical because, in the Spanish market, the holiday season is more in August. And therefore, the school starts are in September, leading to a late Q3 peak. Therefore, to be expected, adding the -- adding of Santillana will add to the loss of the learning business in Q1 and Q4 next year. We did see in the Spanish market, some impact of the very severe lockdown measures that had to be taken in that market and the school closures. So the pandemic did have some impact in the Spanish business. And if the pandemic continues to be a factor to count within 2021, we might see a similar effect occurring also during this year. So with that, I will close the summary of the learning business by saying strong business, very strong growth, both in sales and in margin during 2020. If we then look at Media Finland, there, the net sales was, of course, impacted by the corona pandemic. The comparable net sales declined with 10%. The regional news business added EUR 54 million, but the divestment of the Oikotie business subtracted EUR 11 million from the net sales. So the overall total net sales was helped by the acquisitions, but the underlying business did decline. And that was, of course, due to the advertising and the events. But the subscription sales did very well again, I would say, this year. Helsingin Sanomat, with the digital subscription growth, solidly above 400,000 subscribers and now for the fourth year in a row with year-on-year growth in total subscriber base, truly an excellent performance by the team. But also the video-on-demand, the entertainment platform, Ruutu+, increased very significantly during this corona year with 27% of subscriber increase. So all in all, clear that the subscription sales is continuing on its growth path. The advertising sales declined, and that was, of course, logical. And you see in the graph that in the period, the Q2 and the start of Q3, that was, in the whole of the market, a very strong decline. But I think the team did a very good job in focusing on the customer, and therefore, outperforming the market, both in TV, online and radio advertising. And while the market decreased with 17%, the Sanoma Media Finland business decreased with only 9%. Now as you know, the impact on the events business was complete. There were no events held during 2020. And we, therefore, showed a decrease of EUR 35 million in that part of the business. The uncertainty that we had during 2020 is continuing in 2021. The development of the advertising market and the ability to do events is still uncertain. And that is a fact of life that we will live with. And you see that also reflected in the wider range of the outlook that I will come to. But I think the strong performance of the Finnish media team is shown specifically also in the fact that they managed to keep the profitability stable even with decreasing sales. The EBIT, excluding PPA, was EUR 67 million, coming from EUR 69 million the year before, with a margin of 11.8%. The active cost mitigations that the team did during the year across all cost categories basically managed to offset the lower advertising sales. Now these savings are also largely connected to the change in operating environment due to corona. So therefore, we also need to be careful that when the corona pandemic disappears, these savings, to a large extent, will disappear as well. The other positive effect that we had in the business was that even though we had to cancel all the events, we were insured for that and therefore, that business, even without sales, still contributed slightly positively to the total result. The change in portfolio during the year in 2020 did not have an impact on the net earnings. So the additional earnings from the regional news media business were taken out by the divestment of the online classified business, Oikotie. If we then look at 2021, there we expect that the structural changes in the business, so the addition of the regional news business and the divestment of the Oikotie business, deliver net a slight positive result, where the increase and the hopeful return of the advertising sales and the events business will be taken up mostly by increases in cost, both fixed and cost of sales in addition to the digital growth initiatives that we have planned for our subscription business. So all in all, for Media Finland, if you look towards 2021, then you look at, hopefully, with the disappearing corona impact, an increase in sales also due to the structural changes in the business, but the profitability will be slightly up but relatively flat. If we then turn to dividend. The Board proposes a dividend of EUR 0.52 per share, and that is an increasing dividend coming from EUR 0.50 the year before. And that represents a total cash out of EUR 85 million. This will be paid in 2 parts, 2 equal parts, EUR 0.26 on April 22 with a record date of April 15 and the second part, EUR 0.26 in November. The dividend policy is unchanged. Sanoma aims to pay an increasing dividend equal to 40% to 60% of the annual free cash flow. And if we then look at our performance against the long-term targets that we have stated before and updated in December. There, you see, if I take out a couple of these, that the leverage, the net debt over adjusted EBITDA, ended on the year at 2.6x, well within the updated target of below 3x. And if you look at the 2 business units, you see that in Learning, the comparable net sales development and long-term target is 2% to 5%. And this year, we were on the higher end of that with 5%. And the operational EBIT margin, excluding PPA, we increased that target to quite an ambitious level of above 23% compared to this year, a 19.2%. It shows both ambition but, of course, also the fact that we took in the acquisition of Santillana, which on average, adds 1 percentage point to our Learning profitability margin. If we look at Media Finland, there, you see that we -- our long-term target is to have a stable business from a revenue perspective, plus or minus 2%. This year, of course, with the corona impact, that was below that with minus 10%, but an EBIT margin of 12% to 14% where this year was 11.8%. And there, of course, it is good to remember that this is also still a long-term and ambitious target because the divestment of the Oikotie business typically reduces our profitability. If we then turn to the outlook. 2021, we expect to have a reported net sales between EUR 1.2 billion and EUR 1.3 billion compared to 2020, EUR 1.1 billion, so continued growth for the business. And the operational EBIT margin, excluding PPA, is expected to be between 14% and 16%. And this is a slightly wider range that we think will cover the various scenarios on the corona pandemic impact on our business. But to guide a bit further, we indicate that the midpoint of these 2 ranges are based on the assumption that the advertising market in Finland will be relatively stable compared to 2020 and that there will be no major restrictions to the events business. The learning business is then expected to be not significantly impacted by the prolonged school closures in the main operating companies. So with that, I would like to round off my part of the presentation and hand over to Markus Holm for more details on the financials.

Thank you, Susan. Good morning, everyone. I will start with a summary on the fourth quarter earnings. In Learning, we saw a decline of EUR 8.2 million in the operational EBIT, excluding PPA. Majority of this was explained by the accelerated shift from renting to selling books in Iddink, as explained by Susan. I want to also highlight here that both in the fourth quarter and in the coming first quarter, we will see, of course, an increasing impact of the learning business that is negative in the first and fourth quarter of the year. Also in 2020, we saw an impact of the lower-margin businesses, itslearning and Iddink, on the overall margin on the learning business. Then to Media Finland. We saw positive EUR 2.6 million operational EBIT, excluding PPA, improvement. And this is mainly explained by the higher net sales and also continued cost mitigation actions across cost categories. Then in our other items, we saw a reversal of accruals related to the divestment of Media Netherlands. Looking at cash flow. We had a fairly good development in the cash flow. Cash flow of continuing operations grew by 16% in 2020. The reported cash flow, however, declined to EUR 95 million. Majority of this is explained by the free cash flow impact of Media Netherlands, that was EUR 22 million in 2020, as we only had the negative first 4 months in our results. Also, the are other factors explaining the cash flow, we saw, of course, a positive effect of the acquisitions and comparable net sales growth in learning. In Media Finland, a negative effect of lower profitability due to the corona and in Learning, higher investments in digital platform development. Also significant transaction and integration costs, for instance, related to the Oikotie divestment, Media Netherlands divestment as well as the integration costs related to regional media in Finland. For our dividend calculation purposes, we'll eliminate that EUR 22 million negative impact of the Media Netherlands divestment. Our net debt increased at the end of the year due to the earlier-than-expected closing of Santillana Spain acquisition that happened on the 31st of December. Our net debt then was EUR 661 million compared to EUR 795 million a year ago. Our net debt to adjusted EBITDA, however, was relatively stable at 2.6x. And the equity ratio improved to 37.4%, having been 30.5% a year ago. And that is due to the capital gain that we booked related to the Oikotie divestment. Our net financial expenses decreased to EUR 9 million, having been EUR 22 million a year ago. And this significant reduction is due to lower interest net interest-bearing debt and also the repayment of the EUR 200 million bond that had a relatively high interest rate. Here's a picture of our debt structure. Currently, we have external interest-bearing debt of EUR 583 million. The acquisition of Santillana Spain was financed by a bridge loan. And then in December, we signed a EUR 200 million term loan. The remaining part of the bridge, we will convert into long-term financing, and we currently foresee this to happen now in winter, springtime. The average interest rate of the external loans was on a good level of 0.8%, down from 2.3% a year earlier. Then as a short reminder of our financial reporting in 2021, week 10, we will publish our annual report and on the 30th of April, we publish the first quarter interim report. That concludes my part. Thank you.

Thank you, Markus. Thank you, Susan. And I would now like to ask Susan back to the stage for the Q&A. [Operator Instructions] And now first, I would like to hand over to the operator for questions over the telephone line, please.

[Operator Instructions] And our first question comes from Sami Sarkamies from Nordea Markets.

I have a couple of questions. Let's start from Learning. I think you were opening up this adjustment that was made in Q4. First question would be that is the risk that continued migration from renting to purchase of books will further erode the results and beat Iddink in the coming years? And if that's the case, how much downside from this could we be looking at in total?

Yes. Let me start with answering that question. This conversion from renting books to selling books is a trend that we foresee to continue in the coming years. And as we -- as you know, with the publishing part of our business, we're also very much counting on that increase in subscription sales. So this is a trend that continues, and it is important to realize that, of course, though the margin is impacted, the cash flow is much less impacted. And specifically, once we can start reducing the fixed infrastructure on the logistics, which is in the hybrid period, of course, you need both systems, but longer term, you will scale down on the logistics and, therefore, reduce those logistics costs. So we see this long-term as a positive trend that we are actively working towards and that we also see for the whole of the business and the business chain in the market as a positive trend. So yes, this impact on the margin is something that continues and was also taken into account when we did the acquisition. I mean that it was already going on last year as well.

Okay. So no regrets in hindsight after having completed the acquisition?

The only thing you see now is an acceleration. And the exact speed of the market uptake of this sort of transformation, that's always a bit hard to forecast. So there, we see that it went faster, specifically also during a corona year when the closeness to the market is a little bit less. So the foresight on it was a little bit less than we would otherwise have had. But the intrinsic trend is both desired and speeding it up helps in the overall transformation.

Okay. Then my second question would be on targets for Learning that were raised in early December at the CMD. Were you aware of this adjustment at the time? Or does it, in a way, add to the challenge of these new targets?

Now what you see is it's a long-term target. And in the long term, as we have discussed in the CMD extensively, in the long term, we see this subscription model in the Learning market. So long term, we have always assumed that this transformation continues. So as I said in December, the target is a challenging and ambitious target, but we see that both in our publishing businesses, the adding of the Santillana business that these are major steps. But I do want to stress again, as the statements in the chart, say, it's a long-term target, and there is a certain amount of ambition and challenge in there. But this is where we think the business can go to, to above 23% margin.

Okay. And then finally, on this matter, I mean you already emphasized that you've been improving processes and so on, not to see this happening in the future, but I mean, if someone benefits from the fact that you showed unwarranted results after third quarter.

Not at all. I think -- absolutely not, and we need to stress also that there is an enormous peak in sales that you have in the third quarter. And it is quite normal in the business to do the true-ups. When you count the inventory, when you have, for example, also with publishers, you look at the full year results, you do a true-up on their -- the discounts. So that is in a distribution business, is a very normal mechanism, and specifically in a distribution business with such a peak, very normal to do these true-ups. It has always been part of the business. It's always been part of those -- the practices. But now with this accelerated shift, you, of course, now see it more clearly. And that's the reason why we say we will go forward and install now the practices to basically measure the inventory on a monthly basis, which is no one's pleasure to do. But yes, that's the only way to get around this. As I say, a normal practice in the distribution business is to measure inventory at year-end.

Okay. And then I would have one more question regarding guidance for this year. The 15% midpoint looks maybe a bit cautious given that you were at 14.7% last year and you will benefit from Iddink acquisition. You did already discuss assumptions for the midpoint, but maybe you could help us understand the assumptions for you to arrive at lower and upper end of the guidance range, please.

Yes. But I think the range is, I think, quite clear. If you take, for example, the sales range, if you take the midpoint as EUR 1.25 billion and EUR 50 million plus or minus, the events business in itself is around EUR 30 million, EUR 35 million business. So if the events happen or not makes quite a bit of a difference. So the EUR 20 million decrease in advertising, if we are wildly optimistic and say the advertising market comes fully back to 2019 level, you have all at once, a major uplift. So that's where we say there are pluses and minuses possible. At the midpoint, we indicate, we honestly don't think that we are only prudent. We think this is a realistic guidance and the best possible that we can give at this moment in time. You know us. We're not going wild. But at the same time, I think in the past year, you have also seen that during a corona pandemic, forecasting is hard but we have been quite realistic in those estimates as well. As we think at this moment, we should, of course, also say...

And we typically do a few scenarios. And this range, we believe, covers those scenarios fairly well.

Our next question comes from Pete Kujala from SEB.

It's Pete-Veikko Kujala calling from SEB. Can you hear me okay?

Yes.

Yes.