Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Sanoma's First Quarter 2021 Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations at Sanoma. And today, at the webcast studio, we have the President and CEO, Susan Duinhoven; and the CFO and COO, Markus Holm, who will present the result. We had a good start to the year driven by acquisitions and organic growth. And after the presentation, we will have a Q&A session. We will first take questions from the telephone line and then through the chat function of the webcast. And the event will be recorded, and the recording will be available on our website soon after the end of the event. And with this short introduction, I would now like to hand over to the studio for Susan to start the presentation. Please.

Thank you, Kaisa, for this start of first quarter results presentation. A warm welcome also from my end. And as Kaisa indicated, we had a good start of the year. Our net sales grew both on a comparable basis and as a result of acquisitions. And then specifically, the regional news in Finland and the Santillana business in Spain. So net sales came to EUR 210 million, which is, of course, a small amount, a small quarter typically in the first quarter in the Learning business. Our operational EBIT excluding PPA was minus EUR 10 million compared to last year, minus EUR 8 million. The EBIT improved in Media Finland, but with a growing Learning business, you also have a typically more loss-making first and fourth quarter. And that's normal with a growing Learning business. And our acquisition of Santillana therefore added to the loss in the first quarter. The free cash flow improved. And that was driven not as much by the growing Learning business because that decreased the cash flow, but because in the comparable year in 2020, we still owned the media business in the Netherlands, and that has typically, in the first 4 months, a negative cash flow. So therefore, by comparison, an improved free cash flow. The leverage remained stable both compared to last year, the same and quarter end but also towards year-end. In March, we also updated our sustainability strategy that is focused around 6 key themes. And we'll come back to that at the end of the presentation because we will go into a bit more in-depth presentation later in the year. Our outlook for 2021 is unchanged. Now if we go into the Learning business in a bit more detail, it's a small quarter. And that's typical seasonable. But in that small quarter, a very solid performance for the whole of the business. Net sales increased with EUR 10 million to EUR 68 million, and that was due to 2 causes. The one was some orders shifting from the second quarter into the first quarter in some of our larger countries. And then of course, we also added the net sales from Santillana. If we then look at the operational EBIT excluding PPA as explained, that became more loss-making due to the growth of the business with the acquisition of Santillana. And when we now look forward, knowing that in the second and the third quarter, of course, we typically make our revenue and our profits, it is important to realize that with the addition of the Spanish business, the seasonality of our business will be more towards the third quarter so more than we were used to in the past years. And on top of that, we see that in the corona times, the ordering in specifically the Netherlands and Belgium will probably be a bit more piecemeal, and therefore, some shifts from the second to the third quarter are expected there. So that is looking forward on the Learning business, but overall, solid start of the year. If we then look at Media Finland, there, we grew the business to EUR 142 million. And that was the effect of the 2 -- the acquisition of the regional news and the divestment of the Oikotie. So the net effect was that EUR 12 million increase in net sales. But we were overall very happy to see again also this quarter that the subscription sales continue to grow. And Helsingin Sanomat had a particularly good quarter with 6% year-on-year increase in number of subscribers, but also Ruutu+ grew significantly. That nicely compensated the comparable advertising sales decline, that was 4%, which was considerably better than the market, which declined with 9%. And we need to realize that it is actually a pretty okay performance given the fact that we compare against a pre-pandemic start of 2020. So there, if you remember, January, February were particularly strong months and also March where only the second part of March, we got to see impacts from corona. So against that relatively solid comparable quarter, we see that as a good performance and specifically pleased that the gain in market share was in the domestic online market. So growing net sales then also led to improvement in earnings to EUR 11 million this quarter. And that came from a number of effects, some of them compensating each other. The synergies from the regional news business are clearly coming in. We are, of course, still in a corona way of operating. So therefore, some cost mitigations of the lower advertising sales we see in a lower cost base, and we also benefit from some lower paper prices. And that is then partially compensated by some investments that we are doing in both our digital development and in personnel cost to make these product innovations possible. Yesterday, we communicated a rather surprising decision from the Finnish Tax Adjustment Board where they indicated that they have accepted a EUR 20 million claim, and that's EUR 20 million, excluding potential penalties and interest made by the Finnish Tax Ombudsman. Now this concerns our distribution of our magazines, which are typically printed all through Europe in order to find the most cost-efficient way of printing and find the good capacities but then need to be aggregated in one place addressed and then distributed throughout Finland in -- to the households. And for that aggregation, we typically use -- as many in our industry, we use an aggregator. And that aggregator is based in Norway. Now there is some debate with the ombudsman on the treatment of the VAT. We still consider the claim fully unjustified, and we are convinced that we are within all the rules that we're applying at that moment. So we will appeal that decision, and no provisions are made. But we thought it important to let you know because we might decide to pay the amount in 2021 just in order to make sure that we don't have a risk of accumulating interest payments. But for any cash flow dividend calculation, this payment will be excluded. So summarizing Media Finland, good start of the year, benefits from the acquisition of the regional news and a very solid continued growth in subscription sales. If we then look at the outlook for 2021, that is unchanged. We had indicated a wider range accommodating the various scenarios due to corona. We indicate EUR 1.2 billion to EUR 1.3 billion sales, up from EUR 1.1 billion last year; and operational EBIT excluding PPA in the range of 14% to 16%. Now the operating environment has sort of changed, and we can be a little bit more precise after these 3 months that we do see potential impact on the events business from the ongoing restrictions. It will, of course, still very much depend on the vaccination rate and the opening up of society in Finland. But we have structured the business and we've done all the efforts in order to be able to take the decisions on go, no go for an event as late as possible. And we'll do that on an event-by-event basis. And that's from the starting point that we would love to organize these events not only for the participants, for the visitors, but also for the industry as a whole. We are typically having a lineup of Finnish artists and whole industry around -- in each of the locations. So we would love to be able to support that and organize these events. The profitability one way or the other of this events business this year will be significantly lower than last year and loss-making to all estimations. The advertising demand will be weighted towards the second half of the year. We see a slow start but all still very much within the range that we have indicated. And we continue to see the Learning business being not significantly impacted by corona. So with that, in summary, unchanged outlook for 2021 even in this still challenging environment. And with that, I would like to hand over to Markus Holm to give you more on the financial details.

Thank you, Susan, and good morning, everyone. I will then give you a brief summary on our first quarter results. As we know, the first quarter is typically quite small one. However, we had a quite good start of the year. In Learning, we saw the result down by roughly 4 -- or EUR 5 million. That is explained with a positive of comparable net sales growth with some orders shifting from Q2 to Q1. And then we had a seasonally negative result of Santillana. And as you know, in the Learning business, typically, the first quarter and the fourth quarter are negative. In the media business, we saw an improvement of EUR 1.7 million in the quarter, positive from synergies related to the acquisition of the regional news media business, also continued cost mitigation actions there and lower paper prices affecting positively this. We saw some higher digital development and personnel costs. In other, a positive roughly EUR 1 million improvement. There, we saw positive from costs related to long-term incentives that we moved from other to the SBUs on our overall level in a neutral effect. Also some positive from cost containment related to travel, office, marketing costs. If we look on the free cash flow, we saw an improvement from minus EUR 60 million to minus EUR 48 million. The negative free cash flow is explained -- or there was the negative effect in the prior year from the Media Netherlands, and that explains the difference now to this year. We saw positive from the improved EBITDA and also working capital in Media Finland. And then as mentioned, the seasonally negative free cash flow from Santillana there. Looking on the leverage, we had a fairly stable leverage. Net debt to EBITDA improved to 2.8 compared to 3 a year ago, and equity ratio improved significantly to 37.9%. Our net financial expenses increased to minus EUR 4 million. Here, it's good to remember that in the comparison period, the net financial expenses included some positive foreign exchange translation impacts and also onetime interest income. The interest expenses increased slightly in the first quarter as the maturity of our external loans were extended. We completed the funding of the Santillana acquisition successfully with the issuance of a EUR 200 million bond. This has a maturity of 3 years and a fixed interest rate of 0.625%. This was then used to pay down the bridge loan of EUR 200 million that we had taken ahead of the acquisition. The average interest rate of our external loans is 1.1% in the first quarter compared to 0.7% a year ago. And you are all warmly welcome to our Sustainability Day. That will be arranged on the 8th of June. It's a 1.5-hour event for investors and analysts. And the extended management team will -- the executive management team, sorry, will introduce our 6 sustainability themes, the targets and KPIs as well as our road map towards those targets. Invitations will be sent out in due course. Finally, as a reminder, our reporting calendar, so on the 20th of July, we publish the half year report and 27th October, the third quarter report. I will then hand over to Kaisa. Thank you on my behalf.

Thank you, Markus. Thank you, Susan. And this concludes the presentation, and we will now open the floor for questions. And I would like to hand over to the telephone line. We start from there.

[Operator Instructions] First question comes from Pete from SEB.

This is Pete-Veikko Kujala calling from SEB. Do you hear me okay?

Yes. We hear you.

Yes.

Great. If we start with Media Finland or actually your guidance, you're talking about the advertising market being more H2 weighted. Can you tell a little bit about the expectations here? Because at least if we look at the year-over-year comparisons, the Q2 is by far the easiest comparable figure in last year. So how should we think about this?

Yes. The -- you're absolutely right that the comparison to Q2 will, of course, be heavily impacted by the minus 40% in last year's development. But what we see is that we are now on a more normal year but still with a sizable step down, let's say. So I think that is where I would take -- the relative values coming out of '19, I would take those for the typical quarterly development and then take into account that the second quarter will still be heavily impacted by corona. Of course, not as heavy as last year but where in the second half of the year, you will see that the comparable was actually quite strong. And there, we take then a more optimistic way of comparing again to 2019. But I think -- I understand the questions, and the visibility on advertising is still very short. So in that sense, anything I say will be just sort of an estimate of what we now know seeing vaccination rate and opening up of society. But I think the key thing to keep in mind is what we now see is included in the outlook 2021. So we have taken -- these trends that we're now seeing, we have taken that in when we say our outlook is unchanged.

Yes. I understand. Then about the festivals, I understand it's still quite uncertain whether it's possible to hold any events. But have you made any plans to trying to move festivals, for example, from Q2 to later in the year? Is this even possible or an attractive alternative for you?

It's one of those things, one of the scenarios that we have investigated. And I can say that there are tens of scenarios how to handle this. But there are limitations both from a business perspective but also from a consumer interest perspective, conflicting events. So there is quite a bit that comes about in making that planning. So we will do our utmost, but do not take that as a very significant trend that we will be able to implement in the business. So basically, you're sort of stuck with the timing of the events. And then the question is, how many visitors can we have? How can we sort of accommodate the safety in such a way that we can still do a sizable and a breakeven type of event?

Yes. I understand. And as a follow-up to that, is it -- if we think about profitability, I understand that if there are full cancellations, we're talking about some single million EBIT loss for the year. But is it actually possible that EBIT loss would be larger if you hold the events with some kind of limitations or restrictions?

Yes. But that is something that we will, of course -- we will put some limits to. So we need to see how that will go, but I think you can keep as that assumption that it will not be more than a couple of millions of loss that we will make in that business because at some point, we, of course, also need to say, yes, we will not organize events and then have massive losses because of them. That's in no one's interest. So we will organize the events as much as possible because we think there is an enormous interest and demand, not in the last place in our own team, but it needs to be financially healthy.

Yes. I understand. And moving on to Learning, if we look at the Santillana business from last year, is -- that seasonality between the quarters, is that a good proxy for also the seasonality in 2021, so this year?

Yes. As far as we know, and this is also where just like we see in the other countries, there is typically some changes in seasonality because the quarter end has nothing to do with the school start. So that's where an order 1 week earlier or 1 week later doesn't mean anything for a distributor or for a school. So as we know the business, this will go with the same seasonality but also with the same shifts between the quarters that I am typically boring you with for at least 2 or 3 quarters a year.

Yes. Then if we continue with the Spanish market, there are these reforms taking place in 2022 to '23. Can you go through a bit on your strategy for those reform years? And what different assets does this include? Are we also talking about Clickedu or Bingel when you were trying to expand your business during those years?

Yes. We definitely will look at the full portfolio. And that's the benefit, of course, that we have some time to prepare for 2022, and the team is already fully into that preparation. But I -- in the interest of sort of our own success and competitiveness, I will not go into too much detail on how we exactly plan to do that. And the team is, of course, now working on -- working with the schools, with their distributors in order to come up with the best possible strategy for 2022 and 2023, which in Spain is also very much a regional play because there are 17 provinces. And in each of those provinces, they take their own decisions of how and when to implement these curriculum changes. So it's not one strategy. It is actually 17 strategies that the team is working through. And then of course, now with an increased asset base to a certain extent and actually set of tools that they have through the merger of our businesses.

Yes. I understand. Then last one from me relating to M&A. If there -- can you comment a little bit on to what level can you push your leverage in the short term if you see opportunities in the market? Basically, to what level can you increase your leverage if we are still talking about a relatively -- what you can see is -- see in the future, the time where you can reach your long-term target?

Yes. I think what we have, of course, in our business is there is a seasonal pattern and therefore also a seasonal pattern in our leverage during the year. So what we typically will aim for is that we are back on our long-term target. That means below 3 on the leverage by the year-end. So the year-end is the point for us. If we do an acquisition like we, for example, did with Santillana at year-end, if you do an acquisition, then it means that during the first 2 quarters, the leverage goes up. So the leverage might end slightly above 3, but then our target will be that by the year-end, it is back to below -- at 3 or below 3. And this is not a precision level of 0.1, but that's the concept of where we want to stay.

Our next question comes from Sami Sarkamies from Nordea.

I have a couple of questions left. Starting from the Learning business, just curious, you are flagging that due to COVID-19, we might be in for timing shifts from second quarter into third quarter. Can you talk about the magnitude? Could it be similar to what happened now in Q1 or bigger?

It is roughly that magnitude of, say, around EUR 5 million or so of sales.

Okay. And then moving on to Media Finland, we did discuss the advertising media outlook already earlier but still trying to understand what to think of Q2. Would it be a good way to think that -- I think in March, you were -- or the advertising media market was about 15% below the 2019 level. Would that be a good estimate going into Q2 that -- where sort of the current demand level is in comparison to 2019 level?

Yes. I think the complexity increases even if you take the full market and try to make those estimates. I think I'm going to be careful there and not to be evasive, but we saw, for example, that in April, there was quite a bit of impact from this uncertainty that came about of, are we going to go in further lockdown? Are there going to be more restrictions? And the first thing that happens in a matter of uncertainty is that advertisers say, "Let me hold back my budget because once society opens up, I want to have the full ability to benefit and to compete and to draw consumers in." So we see that that's holding back. Now if we have another one of those moves or scares, which can easily happen, that could create another month. So at this moment, it is going to be highly uncertain, short visibility. The only thing that we think is that after summer, seeing the vaccination rates as they are going at the moment, seeing that, that after summer, we expect at this moment a further opening up. And therefore, actually, there could, of course, be quite a bit of advertising market. And that's the one thing that I at least feel comfortable of guiding you on. Where exactly we're going to be in Q2, it is going to be quite uncertain. So I think the only thing we can jointly do is watch the Kantar months-by-months on this.

Okay. And then finally, on events that we also discussed earlier, I think Finnish government is planning some support for the events that will be canceled. When you were sort of talking about loss-making events business this year, were you assuming that you will get that support that has been discussed?

We have not seen the full text of that, so therefore, we have not yet taken that into account. We're also not knowing if we then -- if that package is defined, if we will apply or will be invited to apply. So that uncertainty is still there. When we're giving off these estimates at this moment, this is as far as we know it and also where we think as a business, it makes sense to organize these events.

Our next question comes from Panu Laitinmäki from Danske Bank.

I have 2 questions. Firstly, on the events business and the insurance compensation. Can you remind us what was it last year and which quarter was it booked? And is it so that you are not getting it this year if it looks like that most of the events will be canceled?

If I recall, it was split in -- between the quarters last year, so the second and third quarter. And roughly a magnitude, that was at EUR 6 million, EUR 7 million or so. And this year, we are not having that insurance compensation.

Okay. So it's like EUR 3 million for each quarter.

Recall that, that was roughly the impact.

Okay. Second question also on Media Finland. On the synergies related to the Alma Media acquisition, can you give an update like what was the number? Or how much did they contribute in Q1? How much is still left? And what is the timing? So will you see a full amount this year or something left even for the next?

Yes. If you recall, when we announced that acquisition, we indicated EUR 13 million as total synergies, and we're well underway in that and confirm that amount of total synergies. The split in those synergies is half of that is coming from sharing systems and sharing support functions. So that is roughly half, and that was accomplished and the transitional service agreement was ended in December last year. So that part of the synergies we will have for the full year and is, of course, allocated with the revenues of that business over the quarters. So that is one. The other half is coming from more working process improvements, further integrations and product developments. And that is something that will be coming in during 2021. And we have indicated that only the full synergies will be there by 2022. Very happy with how the synergies are coming about and how the integration of the business -- it's a very nice business, and the team is doing a truly great job. So we're very happy with it.

[Operator Instructions] Our next question comes from Pia Rosqvist.

It's Pia from Carnegie. I have a question regarding your guidance. So I understand we are only 3 months into this year, but you still keep your guidance unchanged at this point. And I'm trying to understand now, it sounds like you are a tad more cautious than when releasing the Q4 results. Or am I wrong here? I'm trying now to understand the levers for you reaching the upper end of that guided range.

Yes. I think when we announced the outlook, we clearly indicated what the midpoint was without saying that, that is the midpoint that is the most realistic scenario. But we have indicated that in that midpoint, for example, we assumed that the events would be coming into play with only modest restrictions. They are quite -- on that events business, we now see 3 months in that the vaccination and the opening up is a bit slower than we had anticipated. And therefore, we might have more impact on that events business than we -- than the midpoint indicated. So that, I think, is fair to say. Overall, I must say that I'm still thinking that the range is a good range and that there are -- of course, there are downside opportunities. There are upside opportunities. Going forward, the visibility is still -- yes, still limited. There is no other way of saying it, specifically also on the advertising. But I would not say that I'm in any way less optimistic or less positive about the business as a whole because you can also look at it and say, we had a good first quarter. That's already 3 months under the belt in changing times. So I'm -- actually with an increase in subscription sales compensating a decrease in advertising sales, I'm quite okay. So that's how -- it might feel a little bit -- because we're, of course, focusing quite a bit on that, but let's also say, it is only a couple of million of potential loss in an events business on a company our size, with 70% of the contribution coming from Learning.

Okay, okay. Then just a technical question if I may. The depreciation level now for Q1, is that representative for the remainder of this year?

Sorry, I didn't quite get your question now.

Depreciation.

Yes, yes, sorry. So depreciation levels. For the depreciation in Q1, is that representative of a quarterly or for the full year?

Yes, yes. I don't see a bigger change there necessarily. We have some, say, prepublications, for instance, that we then typically can start capitalizing then towards the sales season. And then it starts from that. So it could be some pickup related to capitalization of prepublications, for instance. But I don't see a significant kind of change there.

There appears to be no further questions registered. So I'll now give it back to the speakers.

Okay. Thank you for all the questions from the telephone line, and we continue with a few from the chat. And the first one actually related to the seasonality of Santillana and in particular the importance of the third quarter. And there, I actually already replied in writing that in 2020, the third quarter net sales represented 60% of the full year. So that gives a guideline for this year as well. But as Susan mentioned, years are not always completely even with each other. And then still on the events business. On the decisions on canceling the events and have you made any particular decisions already? And there, also, no, we are not there yet, but -- and they will be made event-by-event basis closer to the dates of the events but well in advance. And on the EBIT of the event business that the question is that, what is the difference between our best- and worst-case scenario on the EBIT level?

Yes. We are now giving off sort of worst-case scenario, and it could go up a little bit. But there, I want to warn a bit for overly optimistic because the number of visitors need to go significantly up before something really comes as sizable profits. So this is now a realistic estimate. If some events might be -- some later events might, for example, have a bit more visitors and the earlier ones a bit less, that's all going to be a bit of a wash. It would require now a real speeding up of vaccination and freedom to organize large-scale events for this to really make a sizable difference for me to stand here in July and to say those worries after first quarter were unfounded. So I think this is where the difference between good scenarios and worse scenarios, they're not that big, realistically speaking.

Okay. Thank you. And that actually concludes the questions from the chat as well. And thank you, all participants, for questions. And naturally, also after the webcast, we are happy to help you at Investor Relations. So be -- please be in touch. And virtually, we will next time meet in June in the Sanoma Sustainability Day and then in July with the first half year results. Thank you all, and enjoy the weekend. Bye-bye.

Thank you.