Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Sanoma's First Quarter 2022 Results Presentation. My name is Kaisa Uurasmaa, I'm heading Investor Relations and Sustainability at Sanoma. And today we have the management, CEO Susan Duinhoven; and our new CFO, Alex Green, who will present the results. After the presentation, we will have a Q&A session, and we are lucky, after the 2 years' period of remote and webcasting only, we also have audience here at Sanoma House today. So we will first take questions from here at Sanoma House. [Operator Instructions] The webcast and the Q&A will be recorded, and the recording will be available on our website soon after the event. With this, I would now like to hand over to Susan to start the presentation, please.

Thank you very much Kaisa. A very good morning and a warm welcome also from my end. I'm very happy to see people here at Sanomatalo again after 2 years. We had a good solid start of the year. So, all-in-all, sales being stable at EUR 211 million this quarter, 1% comparable sales growth, same level in both businesses. Operational EBIT excluding PPA at minus EUR 10 million, and that is the same as last year, and it's typical for our Learning business to be loss making in the first quarter, because typically, the revenue comes in with the back-to-school in the Q2 and Q3. The free cash flow improved versus last year at minus EUR 39 million, also seasonally negative, and the leverage improved to 2.6, which is well below our long-term target of being below 3. Our outlook for the full year 2022 remains unchanged. Now, if I go into a bit of detail on the Learning business, there we see a typical small quarter, but a good performance, as net sales EUR 69 million, little bit up from last year. But what we now see in this business is that, in the Netherlands and Finland which are highly digital businesses, we see already some more revenue recognition throughout the year. Because the digital business is then recognized on a month-by-months and not only at the school start. The operational EBIT excluding PPA, stable at minus EUR 20 million, and there we see 2 compensating effects that very much resemble what we later in the year will see on the revenues. We see an increase in marketing and sales cost in Spain, and that is ahead of the new curriculum that is launched in September 2022, and we see a decrease in marketing and sales cost in Poland, where the last curriculum renewal ended in the autumn of last year. So where the revenues we will see the same in Spain going up this year and in Poland going down, and we see the marketing and sales expenses in line with that. We're now well prepared for the high season, which is Q2 and Q3, and particularly I must say Q3, and Spain is there the main new element with the new curriculum starting this autumn. And we now expect that 12 out of the 17 regions will implement a new curriculum in 2022, and that means that the remainder will be done in 2023. Those 12 provinces represent about half of the market volume. This is our latest expectation, and still some decisions need to be taken on that regional level. So we'll update you when more becomes known. If we then look at Media Finland, there are rapid changes in the operating environment, but again, a good solid quarter, good start of the year. Sales stable at EUR 142 million, where we see the subscription sales declining slightly, and that is due to the high that we had during the corona, that is now coming down to a little bit more normal level. But we also saw particularly with Helsingin Sanomat some distribution issues. Heavy winter together with the corona pandemic for distributors and their quarantines regulations, making that there was a shortage of distribution capacity in the start of the year. So that has led to some compensations, and therefore a slight decline in the revenues. But overall, the total number of subscriptions, specifically the digital subscriptions, continuing to grow. Advertising sales for us was stable, and that was a growth in digital, radio, as it was in last couple of year, but TV a bit slower, and that is expected. The Olympics and the heavy news intensity drew viewers away from us. That news intensity was of course due to the war in the Ukraine, and that also had some impact on the advertising demand in March. But we see that as a temporary delay. April and May already show that the recovery is quite complete from the delay in March. So overall, for the full year, we expect advertising market to be stable, certainly in the segments in which we are active. Operational EBIT excluding PPA declined slightly to EUR 10 million, and that was due to some inflationary pressure, some higher personnel cost, some higher pension cost, part of which was the delay of the pension that we could postpone during corona and that now kicks in in 2022 and 2023. But also, the expected paper cost increases came through in the first quarter. Now we're also looking forward to our high season, let's say on the Media side, the high season in events. And I think with us, the whole of Finland is looking forward to that summer full of events. So we're ready for that. We see ticket sales developing quite nicely. So we're hoping for a nice first post-corona summer. If we didn't come to the Ukrainian war. Of course, the world has changed since February 24 and we are shocked with the rest of the world and are appalled by the Russian invasion, the atrocities, all that is happening there, and we stand with the Ukrainian people. If we look at the business impact of the Ukrainian war, that is very limited for us. We had no business in Russia, nor in Ukraine. We had some supplies, for example paper out of Russia. We immediately discontinued that and now get that supply out of Central Europe. We expect some impacts, but more indirect, through the development of the global economy on our operating cost and potentially also on customer demand, but we don't see that yet. So we see the -- both customer demand and advertising demand in Finland continuing as usual and specifically in Learning, completely unimpacted by this. We, of course, support both the people in the Ukraine through the humanitarian aid, through the Red Cross, both Sanoma and our employees, but also through our businesses. And specifically, our Polish business is very active on this. They have one day a week paid leave for volunteer work, both volunteer work at the border, but also volunteer work in schools. And helping 150,000 Ukrainian children that have now entered the Polish education system, helping them settle in and making sure that to the best of the abilities, the children will not miss a year of education. So we're there supporting teachers and schools, and working very closely with the Polish government to make sure that, to a large extent students that don't yet speak Polish, still can get a Ukrainian language education. itslearning, our digital learning platform has translated itself into Ukrainian and Russian, so that it also facilitates remote teaching for refugees. But also in Media Finland, digital news on the war and the global geopolitical situation has been put before the paywall, so free for all readers. And Helsingin Sanomat is one of the 3 Nordic newspapers that has published now a selective number of articles in Russian, in order to provide Russian language, independent high quality news, as long as that is doable for Russians in Russia to access those sites. So we're trying to do our best to mitigate this horrendous situation. But on our business, we see limited impact so far. Therefore, our outlook for 2022, where we in February indicated that we expect another good year with group's reported net sales between EUR 1.25 billion and EUR 1.3 billion, and then operational EBIT margin excluding PPA between 15% and 16%, we expect that outlook to be unchanged and still dependent on, of course, the operating environment, and we see 2 elements there. The coronavirus pandemic, we expect it to continue in some form or shape, but not having any impact on our business anymore, and the advertising market in Finland to be stable. So even in a bit more volatile and uncertain environment, an unchanged outlook for the full year. And with that, I want to conclude my remarks and hand over to Alex Green for his first, more details on the financials, Alex?

Thank you very much, Susan, and it's wonderful to be here for my first quarter end release. As you know, my name is Alex Green, and I joined Sanoma as CFO on the 1st of March this year. And I came from eBay where I spent 16 years, the last 9 of which I was the CFO of eBay's Classifieds Group. I've got 3 slides to take you through the more details of the financials. And so, we will start off with operational EBIT excluding PPA. As you saw before, a solid overall profitability performance you can see on the slide there. So roughly EUR 10 million negative seasonal numbers. And -- but we do see some movements between the business units. So you see on the Learning side we have slightly higher EBIT, mainly because the marketing expense we have in Spain is -- versus the expense we had in Poland last year, the different curriculums, nets to a slightly lower level, so a slightly higher EBIT. In Media Finland, you see lower EBIT this year versus last year, mainly due to the printing cost we talked about, and somewhat higher personnel inflation and pension issues -- cost, rather, and some slightly lower TV productions cost due to phasing -- offsetting that. At the group level, we see a decrease in personnel costs largely due to LTI provision changes, but the main thing there is lower technology costs phasing. So, across the -- we still expect this line to be roughly the same as last year on a full year level, but we just have some phasing within the quarters showing here, netting to a roughly similar EBITDA to last year. If I move on to free cash flow, you can see on the chart on the right-hand side, for reminder, we do have a seasonally negative free cash flow due to the nature of our business, our investments and our revenue orders. It's actually a lot lower or lower negative number than last year, mainly due to working capital and so timing issues. So lower working capital in Media Finland with some lower payables there, also some positive income tax movements and are offset a little bit by the higher capital expenditures we are starting. So pretty much timing and phasing issues there. As you can see on the line, our line is trending and improving up to EUR 149 million, that's the 12-month rolling free cash flow numbers is going in the right direction. And as a reminder, we paid our first installment dividend this month earlier EUR 0.27 cents a share, and we'll pay the second amount for the '21 dividend in November. All this adds up to a healthy balance sheet with headroom for M&A, as you see here on the slide. So well within our covenants. Net debt over adjusted EBITDA is 2.6. Our equity ratio is bang in the middle of the range, so in a good place. So, to summarize, solid performance Q1. We feel good about where we are, healthy balance sheet, and ready for the rest of the year. Well placed. One more item I'd like to talk about is a save the date for you. So to mention, we are having an event on the 9th of June. This is the first of a short series of deep dives on our Learning business. For the first one, we will talk about leveraging our digital learning. I will host this along with Rob Kolkman, the CEO of the Learning at the Sanoma Learning business. This is a virtual presentation. There will be an opportunity to ask questions. So, very much looking forward to seeing you there -- many of you there online at that event, as I say on the 9th of June. That concludes what I will say. So I will hand back to Kaisa who will help facilitate or facilitate the Q&A session.

Thank you, Alex. Thank you, Susan. And now we will start the Q&A session. As said, first questions from here at Sanoma House. [Operator Instructions]

Sami Sarkamies, Danske Bank. I have couple of questions. Firstly, starting from the Learning business where you reported high digital sales in Q1. Is this something that is additional sales, or is it then away from the typical sort of seasonal high second or third quarter sales?

Yes, it is -- it's taking a little bit away from that, because we are selling, as you know, a package -- a hybrid, both print and digital. When it gets more digital, more of the revenue gets recognized throughout the year. So the total of the year is still the same, but the spread is a bit different.

And then, as a general question, can you elaborate on the impact of this digital transformation on your top line and margins at Learning? So how will these behave going forward when the transformation progresses also in other countries?

Yes. I think the progression is a slow progression, as in Learning, we have an annual sales cycle. And what we have indicated the long-term target, 2% to 5% autonomous growth, and that is in the mix, so both digital and print because we're not making that distinction. We're selling it as a hybrid package. And we're indicating that the margin will be above 23%, where it's now trending around 21%. So we do expect that the combination of digitalization and scale will improve margins. So that's the indication that we're giving, and that we see sort of year-after-year playing out.

And then moving on to Media Finland. First question would be on the subscription sales trend, that has been pointing downward since third quarter last year. Can you open up trends within sort of printed subscriptions and then digital subscriptions, are both experiencing weakness?

Yes. The digital subscriptions grow and continue to grow. The -- I would say a little bit explosive growth in the corona period and certainly in the start of the corona period that is no longer there. So it's a continuous growth on the digital subscriptions. Then, the other -- we are roughly a 1/3 to 1/3 to 1/3. The other 1/3 is hybrid, so that is digital plus print. And then a 1/3 is print. The print component, during corona actually went up a bit, because people were working from home, and therefore -- and that's our rationalization of it why we saw actually an increased attention to print -- where at home, and therefore, enjoyed reading the paper in the morning again. But that also is normalizing. So we see that the print subscriptions are declining. They have declined throughout the years, and I've always been the compensated and more than compensated by the digital. So that trend is continuing. But the print has had, for example, in Helsingin Sanomat, has had a bit of a contraction now with the long winter and the COVID issues on the distribution. So we've had issues in distribution. You don't see it that much in the number of subscribers, but you do see it a bit in the revenue, because we then compensate people. If they don't get delivered, they get a longer period for free. So that is what you see then in the revenues. That's a temporary effect. It's unfortunate, but can't be helped. So that's on the Helsingin Sanomat, which is of course a key component. Regional news performing well, Ruutu too performing well. And actually there we would have expected quite a bit of shrinkage post corona, but that continues quite nicely to grow.

Then, regarding the advertising media market, just wanted to confirm that, was your message that if we think about advertising sales in April and May, we are back to sort of the trend you experienced in January, February, that there's basically no sort of impact from the situation in Ukraine?

No. that is what we see now. As you know, visibility on advertising sales is always horribly short. So we can't see full of May, but the first weeks of May look good. But April definitely looked good. So we see that, as we saw with corona that, when such an event happens, particularly on TV, people pull back their campaigns, because the campaigns themselves, from a content perspective, are also not appropriate. It's not appropriate to have big fun and party type of video or content when you have just seen the news. So this is where you typically see then a little bit of holding back, and that has now been released again.

Then my final question would be on the TV business. Quite recently, Netflix announced that they may introduce sort of partially advertising funded subscription sort of models. Are you concerned that this could sort of eat into sort of the market shares of the local TV programs?

Yes. It is a bit early days, I'll be honest. Because we don't know if that is going to be directed at maybe African or Asian markets, or also in more Western European markets. So we don't know where that that's going to be. But we have a pretty solid digital proposition, both in our news and in our entertainment, a good data, of course underneath it. So we would not see ourselves being heavily disadvantaged. But of course, you know, anyone entering that market, preferably not.

And then the next questions please. Maria?

Maria Wikstrom from SEB. I mean, first of all -- I mean, it's quite clear quarter. So thanks for that. So just a few questions, which -- one is for the paper cost. And you announced then, Q4, you said the inflation you are looking at this EUR 5 million to EUR 10 million. Now, of course, you need it to reroute, I mean some of your sourcing outside Russia, which I would think I mean, increases the costs somewhat. So is this still the guidance, the EUR 5 million to EUR 10 million you are looking for? How should we think about that?

Yes. What we indicated was around EUR 10 million, and then EUR 5 million in Learning and EUR 5 million in Media Finland. And you're absolutely correct in your analysis that, that will be exceeded slightly, because at the end of the year we did not foresee Of course, February 24. But we also see that we are economizing in clever ways, that the business is finding cost innovations in other areas, but also in efficiency and paper use. We have indicated, and that is still very much our view on it, that these inflationary cost effects, they will have a temporary effect on the margin and '22, because the price increases that normally coincide with these cost increases, they take a bit of time to kick in. We're active in consumer markets, so you can't make these steps in big steps. But in smaller steps we will, of course, adapt pricing both in Learning and in Media Finland to the new cost levels.

And then a very detailed question, but I would like to learn more about the printing of -- in Learning, so in the school books. And, I mean, where is that currently done? And is there any, like, any issues that now we have some problems of -– like -- mainly in China with this COVID virus and all the transportation and logistics? So, maybe if you can a little bit educate me on that subject, please.

Yes. We're printing –- most of our usage of the books is in Europe, so we're always taking logistics cost and printing cost as one element. We're printing some further away when it concerns for example large runs of very special products that can only be produced in certain printing plants. So we have a widespread sourcing across Europe, and even you could say, a bit across the world. The procurement team is constantly tuning in on these changes. And China has, of course, been on and off and with very high logistics cost already last year. So we have pulled back from that area already quite significantly. So this is a dynamic sourcing. But the interesting thing, of course with Learning is that you have quite a peak. So -- and that's a peak that is not identical to for example peaks in reading books, in normal books. So we're using also a little bit of the free capacity here and there, that's there. And so this is an active field where you're constantly optimizing, and the books -- only very limited set of books have very specific specifications. You can imagine in primary education, the first classes there it needs -- things need to pop out of the paper and it needs to be exciting and -- so there, you have very specific printing plans, but the rest is quite common.

And then, maybe a bit of an update on the M&A. I mean that was clearly stated, that I mean still in the agenda and the EUR 300 million to EUR 400 million. But maybe then -- I mean now when you meet with the potential targets and talk with the owners that -- has there been any kind of change, I mean -- since, I mean the negotiations that they were before the February 24.

No. We have -- of course, we have a full pipeline in different stages of discussions. And, of course, the war is a key phenomenon in the whole of the world. But I would not say that that has changed our M&A outlook or the discussions ongoing on our pipeline in a material way. No.

And what about the pricing? Is there any feeling that if -- because stock market has of course sold down, that if there is any change in the pricing that you are looking at?

Not yet visible, but we're always looking of course for decreasing pricing. But this is not a market, let's say, with hundreds of targets. So that's where we also in all honesty don't have the statistics to say if there are up or downward trends. These are very individual discussions that we're having.

And then my final question relates to -- I mean you set up a new local editorial team in Turku. So I think this is kind of a alternative of making an acquisition in the area. That I mean you kind of like strengthened your position with adding the local content to Helsingin Sanomat. So is this kind of a pilot in your testing, and if it's successful, you take it further out to the other cities as well? Or how would you think about this?

I mean -- I think that when we acquired the regional news business from Alma, that, of course, was an acquisition in itself, but also getting to know how the regional journalism works and how that interaction works with Helsingin Sanomat. And we are very happy with how that works. So we see that there are very interesting articles coming out of the Satakunta area, out of the Pirkanmaa area, out of Tampere, coming into also Helsingin Sanomat. So that's where there is a clear and digital -– we can, of course, exactly follow what is read, how much its read. So how interesting that is. So we see very good readership from that. And then, once your -- you see that, then you also see that it therefore makes sense in an important city and an important area like the Turku area to have local journalists on the ground there as well. So that's more the consequence of it. And when there are other areas, it's good economic activity, then we might consider to do the same thing. We'll now experience this, let's say, in Turku, and then we'll take it from there. But we're very clear that this is coming out of the good experiences from the regional news reporting and that integration into Helsingin Sanomat.

Then we have Petri here for next questions, please.

I think we're looking at a very good season for the first quarter business. So can you just remind us of what should we expect in terms of profitability? It's been 2.5 year.

Yes. We've indicated that this is a business that pre-Corona did EUR 30 million to EUR 35 million in sales with an about average profit ability that you also see in Media Finland. So that is still what we expect. And then, of course, we are hoping for exuberance, audience and weather, because the weather is not to be mistaken elements still in a festival season. So that is a bit what you can expect.

Then just to clarify on the higher personnel cost. Is this just wage inflation and no growth in headcount?

Yes. It is -- it's mostly wage inflation. The headcount changes are just normal headcount changes, and even a little bit of what we are all experiencing, a little bit of shortage of personnel, so temporary vacancies.

And if we don't have further questions from the audience, I would like to hand over to the operator for the telephone line, please?

[Operator Instructions] Currently we have one question lined up so far, that's from Pia Rosqvist of Carnegie.

So a few questions. One with regards to the group costs. You say low level in Q1 was partly explained by a phasing between quarters. So I'm just trying to understand the changes during the year. Should we now expect Q2 and maybe particularly Q3 to see higher costs as revenues also are higher?

As I said, full year we expect that the group costs you see there to be in line with last year. So we start off a little bit behind, as I said, due to the phasing of the tech cost. So yes, we will see an acceleration in that line as we go into Q2 an in Q3. Yes.

Then a detailed question on the income taxes. They were positive. Can you please just open up, what's behind this deferred tax asset in Learning?

Yes, this is – so that deferred tax asset relates to the Santillana in Spain, and it was not booked at this time last year in Q1 2021. It was booked slightly after, and so is therefore showing in the comparison, giving us a benefit in that comparison for this computer. Then, yes, I think you're quite clearly saying now that you're ready to move on with the acquisition. So is there anything specific you can share in terms of the M&A market in Learning currently? Do you feel it is becoming harder to close deals compared to say 2 years ago, and are there any news on your focus areas? Are you still tilted towards content, or are you also looking for acquisitions in say EdTech?

Let me start with the last one. Our focus is very clear. K-12, and within K-12, we feel well equipped from a platform perspective. So the focus will be on content. So no changes there. And also, I must say that in the environment, not anything recent in changes. We do see a quite active market and quite a good pipeline with good opportunities of different magnitude. So, we're continuing on this path, but M&A, it's like a good wine. It takes a bit of time to ripen to the right level. It's always a pity if you try to open the bottle too quickly.

And there are currently no further questions from the phone at this time.

And we have 2 questions on the chat. And the first one is about free cash flow. And for the quarter, it was slightly better than last year, although negative. But how do you see now the full year cash flow?

Good question. So full year, we expect the cash flow to be little bit lower than we saw last year because we are investing quite a significant amount into our digital platforms this year connected with our strategy, and what Susan has been talking about. So lower full year free cash flow despite being better positioned in Q1.

And then I think the final question also to you, Alex. You have now been here 2 months. What are the first thoughts and expressions you would like to share?

That's a good question. It feels fantastic to be here. I have had a very intense, but, in a positive way 2 months. I've learned a hell of a lot. I've met a lot of people, and they've been incredibly friendly and helpful to me. So I call out my predecessor Markus Holm who has been --. who has been very generous with his So I feel pretty good about where we are. And then as a CFO, coming into a situation where we have a healthy balance sheet, we have headroom for M&A, strong team and a great opportunity, and now lurked and really excited to be here and to be on this journey with Susan and the team.

Thank you. And thank you to the audience also for listening and for active questions. We, of course, continue to be available for further discussions and questions. And then, as a final reminder, I would like to remind of the 9th of June, when we host the virtual learning deep dive, and the invitations will be sent out shortly. So stay tuned with that. And have a nice weekend. Thank you.

Thank you.

Thank you.