Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Sanoma's First Half 2021 Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. Today, we have President and CEO, Susan Duinhoven; and CFO and COO, Markus Holm, presenting the results. After the presentation, we will have a Q&A session. [Operator Instructions] The webcast will be recorded, and the recording will be available on our website after the event. And the presentation we will have today is also available on the webcast platform and on the website. So once more welcome. And I will now hand over to Susan to start the presentation. Please.

Thank you, Kaisa. Good morning to you all, and welcome to our first half year results presentation. And it was a good first half of the year. We've seen strong growth, both in net sales and in operational EBIT in both of our businesses. So if we look at the sales growth you see increased to EUR 530 million from EUR 434 million last year. And that was a result of both acquisitions and organic growth. And if we look at Learning, we see the Santillana acquisition contributing and an organic growth of 5%. In Media Finland, it was the regional news acquisition. And then from the organic growth perspective, both on the subscription sales, continued strong growth and a strong recovery of the advertising sales, which of course, had a low comparable last year. So overall, for the group, comparable net sales growth of 7%. The operational EBIT, excluding PPA, improved together with the cash flow in line with the net sales growth. And we see the leverage at the end of the second quarter at 3.1x, which is typically our seasonal peak and was slightly above last year due to the acquisition of Santillana. Overall, when we look for the full year forecast for 2021, outlook is unchanged. If I then go into Learning in a bit more detail. We see that ahead of the high season, which is in Q3, we already saw interesting growth to EUR 270 million coming from EUR 173 million the year before. And out of that, the net sales of Santillana was EUR 35 million, which was roughly comparable to the year before. The comparable growth was 5% in the Learning business, and that was driven partially by preordering in the Netherlands and Poland. If we look at the full year for 2021, the comparable growth in our Learning business is expected to be in line with the long-term target of 2% to 5%. And if we then look at the profitability of the business, we see that earnings increased. An increase was to EUR 29 million coming from EUR 24 million before, and there was in that already a positive contribution from the Santillana business. The earning improvements from the good organic net sales growth was partially offset by the one-off marketing and sales cost increase. That is -- it was compared to a one-off low-cost in last year, because if you remember, the corona pandemic closed the schools and made it almost impossible for our teams to visit the schools and do the teacher events. And therefore, last year was an exceptionally low marketing and sales cost and this year is on a much more normal level. If we then go to Media Finland, also a very solid quarter. Net sales growing to EUR 154 million, and that was coming specifically from the subscription sales that was growing both Helsingin Sanomat and Ruutu+. And Helsingin Sanomat had again a strong quarter growth of 3% year-on-year, and that is particularly impressive, given the fact that last year, with the corona news peak was actually a very strong quarter already for Helsingin Sanomat. So very well done by the teams in Media Finland again. The comparable advertising sales grew, of course, significantly. Last year was the lowest point in the second quarter. So the increase is 33% year-on-year. But maybe more relevant is in comparison to 2019, and there we see that the advertising sales is still 6% below the '19 level. And that was particularly in the second quarter due to the month of April, which -- with all the uncertainty about lockdown or not had quite a low advertising sales still. In the sales, we see the regional news contributing EUR 21 million for the full quarter, which of course, is only EUR 9 million additional when you compare to last year because we acquired the business already end of April. So also last year, May and June, were already in. Offset by the loss of a full quarter of Oikotie, and that was contributing to EUR 5 million loss in sales. So all in all, with acquisitions, strong subscription growth and the recovery of advertising, a very significant growth in sales in Media Finland, and followed by a very good profitability. Operational EBIT, excluding PPA, improved to EUR 19 million, and that was both the sales growth, but also some of the synergies from the regional news business acquisition coming through. The events business made this quarter a small loss. And that as compared to a very strong Q2, which sounds counterintuitive. But last year, if you remember, we booked in the second quarter, the full insurance compensation that we got. So relatively speaking, quite a bit of a change between the years with now an events business making a small loss. Overall, in the business, you see that the operational expenses and specifically the TV content expenses are increasing in line with the recovery of net sales and advertising sales. So all in all, for Media Finland, a strong quarter and great thanks to the team for accomplishing that under not easy conditions. If we then look at the outlook for 2021, that is unchanged. We expect the group's net sales to be between EUR 1.2 billion and EUR 1.3 billion and the operational EBIT margin, excluding PPA, between 14% and 16%. And when we specifically look at the corona impacted businesses, we see that the net sales of the event business will be approximately half what it was in 2019, where it was EUR 35 million. And the profitability of that business will be around breakeven. The advertising demand, we expect to be weighted slightly towards the second half of the year. And the Learning business, overall, will not be impacted by a corona or school closures, like it was last year. So with that, I would like to round off my part of the presentation, and hand over to Markus Holm for more of the financial details.

Thank you, Susan, and good morning, everyone. Let's start by looking at the second quarter results. Earnings in the quarter grew nicely in line with net sales. In Learning, we saw an improvement of EUR 9.7 million in the quarter, and that is mainly explained by the acquisition of Santillana. We also saw organic net sales growth contributing positively. And then as a negative in the quarter, the fact that higher marketing and sales costs were -- we had higher marketing and sales cost compared to the corona savings in the second quarter 2020. In Media Finland, we saw EUR 3.2 million improvement, that's due to the organic net sales growth and synergies also of the regional news media acquisition. Then as a negative, overall operational expenses including TV programming costs that are growing in line with the recovering net sales, as we've indicated earlier. We saw a small loss in the events business, compared then to second quarter 2020, we had a positive from the insurance compensation that we received. In other, it was a negative EUR 1.9 million there, mainly explained by a positive provision -- incentive provision reversal that we had in the second quarter 2020, also some timing of costs between the quarters explaining this. Then looking at free cash flow, that improved to negative EUR 51 million. The negative free cash flow of the divested Media Netherlands in the comparison period is, of course, the main change -- positive change now, but also improved EBITDA and working capital in Media Finland. We then have to remember also, we have the seasonally negative cash flow in Learning, including now also then the impact of Santillana. As a separate note, I want to highlight here that we paid taxes, penalties and interest of EUR 25 million related to the VAT claim in the magazines distribution for the years 2015 and 2018. That was paid on the 1st of July. And we paid it to avoid further penalties and interests on this amount. We still consider the claims completely unjustified, and we have appealed the decisions, so no provisions have been made on this. The amount paid will be reported as a receivable in the third quarter financial reporting. And for the group's free cash flow for dividend purposes, we are eliminating this impact. Looking at the balance sheet and leverage, the net debt to adjusted EBITDA increased to 3.1x, having been 2.6x a year ago. Equity ratio at 32.9% compared to 34.4% a year ago. And net financial expenses, they decreased to minus EUR 3 million compared to minus EUR 4 million a year ago. The improvement was due to foreign currency translation loss in the comparison period and also then lower financial expenses of external loans during the quarter. The average interest rate of external loans increased to 1.1% from 0.7% in the previous year. That's at the end of June, as a result of the 3-year EUR 200 million bond issued in March. Then just finally, as a reminder, our financial reporting for the third quarter, we will publish the third quarter interim report on the 27th of October. Thank you.

Thank you, Markus. Thank you, Susan. And this was our presentation about the first half results, and we will now start the Q&A session. I would like to hand over to the operator at the telephone line, please.

[Operator Instructions] Our first question is from Sami Sarkamies from Nordea Markets.

I have 2 questions. Firstly, on the Learning business, we see quite soft operating leverage in Q2, and you're explaining that sales and marketing costs were at abnormally low level in Q2 last year due to coronavirus. How will that be the case in the second half of the year? Did you have, let's say, a more normalized cost base during our third or fourth quarter? Or will it be the same thing going in the second half of the year?

Yes. Maybe I start answering from an operational perspective. It's, of course, good to remind that in Learning, you have an annual cycle. So the -- most of the marketing and sales is actually done at the end of the first quarter and the start of the second quarter. So that was exactly when we were, I would say, hit by the corona pandemic. So that was one of the areas where we saw some savings last year. But I'll remind you that we also had some losses of revenue, for example, last year in that same period when you think about trainings that are paid for by teachers. So it is a mixed bag. So I would not put too much of attention to that. In the second half of the year, typically, marketing and sales costs are less significant. Our Polish business does still do some sales effort just before the high season. But this is an annual cycle and the comparability, of course, with corona pandemic is a bit complex.

I think that opens up the situation quite well. And then I have also one question on the media business. You were quite positive on the second half outlook after the first quarter. Now I think you were saying that you expect second half advertising media sales to be somewhat stronger than for the first half of the year. But I mean, if you think about the outlook for third quarter, you will probably show sales growth. But do you think that will also be the case in the fourth quarter, thinking of the comparables from last year?

Yes, you're absolutely right. The second half of the year, of course, last year was already quite good. And that's where we are comparing ourselves much more towards 2019, which was more of a normal year. So the comparables towards 2020, let's be careful with those because there were some peaks and valleys there. We're comparing towards '19. We do see that the first half of the year still had some corona impact. So it will now, again, be quite dependent on how does this go forward. We still expect also in the second half of the year, some impacts from corona. But let's see how we all come back from the holiday season. The visibility on our advertising revenues is still extremely short.

But I guess, the outlook is quite strong still for the third quarter, but then maybe some caution needs to be applied when thinking of Q4?

Your estimate.

And our next question is from Panu Laitinmäki from Danske Bank.

I have several questions, maybe starting from advertising and continuing on Sami's question. I assume you won't give any kind of forecast for '22. But if I ask it this way that, can you remind us what is the split in your advertising revenue in terms of print, online and so on after all this M&A? I'm just thinking that what's your longer-term view on the advertising revenue outlook after we are kind of done with the recovery post the pandemic? Do you think this is a growing business? Or is it something that's less growing than the other areas?

Yes. The -- I will come back to you on the exact split because that, of course, depends on what year you look at. Last year, very hard to give that split when you look further forward. Typically, we're not giving that far out. I mean if the next quarter is already difficult, let alone 2022. But overall, I think you can see that in the advertising market if you look at the different segments, you see that typically, print advertising is declining, digital advertising, for us, very strongly increasing, also above-market growth there, what we're very happy with. And you see, of course, that the digital advertising is already becoming a larger and larger part of that total mix. And therefore, that growth is already compensating the print decline to a large extent. Then we have TV and radio, and those are markets that are very dependent on the viewing trends and the viewing market shares. So there, we really need to look year-by-year and follow that. So that gives maybe a little bit of flavor, and I would otherwise say that when we look back at the full year, that is typically a good moment to then also look at the next year and look at the details of this mix, because during the year, you also see some fluctuations in that mix.

And secondly, continuing on Media Finland. Can you comment on the trends that you see in single copy sales and subscriptions? I mean single copy sales was up 2% and subs by 11% in Q2, but that included probably some impact from the M&A. So how do you see this kind of continuing? Do you think that Helsingin Sanomat can continue at good levels that they have seen? And what about the single copy sales?

Yes. We definitely are very positive on the prospects of Helsingin Sanomat. You see that digital product, creating a lot of growth. Of course, also the opportunity to go outside the Uusimaa area, outside the Southern Finland area with the digital product, much more easily than with the printed product. So we definitely see good prospects for Helsingin Sanomat. Overall, it's, of course, good to remind that in the subscription business in Media Finland, it's not only Helsingin Sanomat, it's also Ruutu+. And Ruutu+ shows also a very strong development in the last years already. So that contributes to that subscription business. If you look at single copy, has been impacted last year by the low traffic in the retail with the lockdowns and the teleworking. So that makes that also the comparable year might be impacting a bit of that growth. But we, overall, see that specifically Ilta-Sanomat and the magazines have had good performance also in single copy.

I would also have a couple of questions on Learning, if that's okay. Maybe starting with the organic growth, which was skewed in Q2, and you said it will be in the range of 2% to 5% this year. How does this split to the -- to kind of materials and then to the systems and the digital products that you are providing?

Yes. We don't give that split in midyear. We can come back to that also when we look at the full year because then we see a more balanced mix because, of course, now you see some products already being sold and others, not -- digital, of course, being recognized through the year and the Q3 being particularly strong, of course, for printed products. So I would say, let's come back to that maybe after Q3, but probably best after Q4.

And then on Santillana, is it performing better than you were expecting, if it was flat year-on-year, while I understood it, it was expected to be lower this year?

We're very happy with the overall, with the integration and with the performance of the business. So overall, we're very happy with the Santillana business. I wouldn't put too much on the exact numbers at this moment because we never know -- it can be 1 order that is a little bit earlier or later. So the split between the quarters always make that difficult. So again, sorry for that. But again, the -- this is better looked at after the high season.

In line with the expectation.

And just the final question about Learning, your comment on a political risk again in Poland. It's mentioned in the annual report as well. Can you remind us what's it all about?

Yes. In all the Learning businesses, we always have a dependency, of course, on the curriculum and the curriculum is set by the government. And therefore, requirements that are put on the materials by the respective government is a risk that we always have as a business. And with governments in more or less flux, you see, therefore, more or less risks. So that is part of the Learning business. We're not particularly worried by that. We have strong teams in each of the countries locally embedded. So -- but it is -- and it is good to keep that always in the back of the mind that local governments set the educational environment. And that is the environment that we have to operate in.

[Operator Instructions] Our next question is from Pete-Veikko Kujala from SEB.

Pete-Veikko Kujala calling from SEB, couple of questions. If we start with Learning. In Q1, you mentioned or highlighted already that there might be some shifting of sales from Q2 to Q3. But now it seems that that didn't take place at least to the degree that you were expecting. So is it so that there was actually some kind of like pulling demand forward from the Q3 into Q2? Or is there some kind of shifting that we should now take into consideration when we're looking at the next quarter?

Correct. We saw somewhat higher preordering in Learning, especially in Netherlands, in the second quarter than we had expected. So that shift is smaller than we anticipated. It's roughly now than half of what we had indicated earlier that we see going to the third quarter.

But this is still -- if we look at Q3, we are still looking at basically a net positive effect for that quarter?

Yes. Yes.

Then on Media Finland, if we talk a little bit about festival business. You mentioned a small loss in Q2, but was it so that you held 1 festival in Q2, and that was at 50% capacity, was this correct?

Yes, that's correct.

And now that you mentioned with your guidance or the kind of the commentary with the guidance that sales is expected to be half of the 2019 and roughly breakeven. So is that performance for the full year? Is that now going to come fully from basically the Q3 quarter?

Almost fully, you could say. The sales -- the 1 festival, it's a sizable festival, but is 1 festival and 10 in the third quarter. But we, sort of, could foresee that there would otherwise be a lot of questions around the events business, so that's where we've chosen now to be quite specific on this guidance, let's say, as part of the outlook to help steer this.

And lastly on the Alma Media acquisition, the synergies. Could you give some kind of comment, where do you see yourself currently or let's say at the end of the year given what kind of run rate from synergies are you expecting?

Yes, we have indicated at the acquisition that we're expecting EUR 13 million of total synergies from the Alma acquisition, and that is throughout the whole of the business. And we're well on track. Most of those synergies are already in, but of course, some of the longer impact hits then only the P&L for the full effect next year, because anything that is happening now during the year, you will only see the benefits for a part of the year. On track, and very good progress there.

[Operator Instructions] Our next question is from Pia Rosqvist from Carnegie.

Yes, hello. It's Pia Rosqvist from Carnegie here. 2 smaller questions, and one with regards to Media Finland and the nonrecurring items you booked in Q2. You referred to some strategic business development in that unit. What kind of business development are we talking about here?

Yes. As you know, we are doing quite also a number of new products ranging from the kids news in Helsingin Sanomat, the Visio, the Supla+, so quite some new product developments. And those have, of course, also some associated costs. They're doing well. They're going very well according to our expectations. But that's what we're referring to when we say strategic developments.

I'm just trying to draw the line here. I mean to me, it sounds more like a very normal business as usual, so that's why they kind of raised my eyebrows?

Yes. Sorry, I think your answer was on -- or question was on the items affecting comparability. And there, of course, we still have some tails related to the Alma regions acquisition as well this year.

That makes sense. Then another question with regards to Learning. Again, it seems like the second quarter, you've been successful with -- in itslearning in Germany. Can you shed some light on what's going on overall? Is it just success following success or I saw that Schleswig-Holstein was at least the last -- one of the last announcements you made where itslearning, again, has conquered some new areas. So are you -- I assume that you are happy with how itslearning is advancing and is it even advancing better than you forecasted?

Yes. I think success succeeds, so that is a very good saying. But it would be unfair to the team who has accomplished this to just say that this is an automatic thing. This is their very hard work, and I think, specifically, the German team has done an excellent job in accomplishing this growth. And then it is, of course, one of the areas where the corona pandemic in the German market, which was low digitalized, has created that realization that these platforms are super helpful in teaching at a distance and also actually teaching in the classroom. So itslearning has fully benefited from that, but I think it is the sales skills of that team that has really brought that about. Now there is one aspect of it that also in other territories there are good progress on itslearning. But the German market has this phenomenon that they buy the contract by states or by city. And therefore, these contracts get a certain size that make them, I would say, publishable. And that is maybe less so in Norway or in Finland or in France, so -- where it goes school by school. So that's may be a little bit an element why you see so much about Germany, but we're very happy with the development of itslearning.

And our next question is from Panu Laitinmäki from Danske Bank.

I still have 2 on Learning if we have time. Firstly, again, asking about '22, but do you see anything that would prevent from growing in the 2% to 5% range next year. I mean in terms of negative curriculum changes or something like that?

We are giving a guidance, let's say, on our long-term growth target. And there, we say it is 2% to 5%. So long-term growth means that it might not be every year. But if we look specifically forward, then next year is, of course, the year with the curriculum change in Spain. So that is actually a large market for us. So a good growth opportunity from there. Counter to that is that in Poland, where we have had years of curriculum change. Next year will be a year without any impact from -- of any positive backwind, let's say, from curriculum change. So you see these fluctuations. So therefore, it is good to have in the back of your mind, we see autonomous growth in Learning. And that is with these fluctuations that can -- but that is not reflecting the strength of the business, strength of the business is reflected in the 2% to 5% long-term comparable growth.

And the second question is on the Learning margin target of more than 23%. I think you will land around 20% this year. What are the main drivers for getting to 23%? And what do you think is the time line for getting there?

Yes. For the profitability target, we have clearly indicated that this is a long-term target. And this is -- we're really talking then a 4, 5, 6-year long-term target to hit the 23%. If you look last year we were around 19%, we then indicated that with the Santillana acquisition that would lift us up typically a percentage point by itself. And then the next steps come from that benefiting from the increasing scale, but also increasing digitalization, which has a positive profit impact. And those will go step-wise. It will go with the growth in the market and development, so that is where we see us growing towards the 23%.

And we currently have no further audio questions. So I will hand the word back to the speakers.

Thank you for all the questions from the telephone line. And we have 1 more from the chat. And that comes from Petri Gostowski from Inderes, so about Learning. Has the pandemic impacted on digital sales in Learning going into a new school year in an environment that is impacted by corona?

Yes. Let me take that question. What is good to remind yourself is that the –- the sales we typically do is a hybrid package. So what we offer a teacher and what we offer a school is a full package consisting of a printed book, typically a teachers' materials, whiteboard materials, digital text application, digital exercise platforms, so there is a full package. So even if the usage might twist slightly more towards digital, it does not directly impact our sales because we are selling an overall package. Then, of course, you have the digital platforms like we already just discussed itslearning where they're only selling digital and there you see a slight positive impact, but we need to remind that is a smaller part of the business. The larger part of the business is actually our content business where these hybrid methods are sold, and therefore not directly impacted by higher usage of digital. It does, of courses, play into our strength, coming out of highly digitalized countries with the long digital experience, we of course see that we have benefits in the market of a strong established digital position. But that is not something in a Learning market that you see immediately back into the numbers, for example for this year sales.

Thank you, Susan. And we don't have any further questions. So I would like to thank everyone participating. And thanks for asking questions very actively. And of course, we continue to be available at Investor Relations and happy to continue the discussions after this event. And thank you again on behalf of the whole team. And have a nice day. Thank you. Bye-bye.

Thank you.

Thank you.