Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good afternoon. Thank you very much for the opportunity to introduce and expand a bit on what Sanoma stands for. And Sanoma is by now the leading K-12 learning company, and we're operating in a very attractive global market on education. And in that market, we have quite an ambitious growth strategy. And quite recently, we have also disclosed our target for that, where we see our group net sales is going to be over EUR 2 billion by 2030. And out of that EUR 2 billion, 75% will come from Learning, and that is when you compare to today's numbers of EUR 1.3 billion. First of all, quite a significant -- good growth, and that growth is going to come from the Learning business. So overall, already now, we're one of the global leaders in K-12, serving around 25 million students. And that we do through producing inclusive learning materials and platforms that have as an aim to equal all learning opportunities for all pupils and students. You know us, of course, very well also as the #1 cross-media company in Finland, with a weekly reach of nearly all fits, 97%. And you know us for our trusted finished journalism and our inspiring entertainment. In that business, we're on a very successful track on digital transformation. And at the same time, increasing our B2C sales year-over-year, which creates sustainable future opportunities. But overall, as a company, we're growing not only autonomously, but also through M&A. And we do that while paying an increasing dividend. So that growth in Learning is coming off the base of a solid balance sheet. But at the same time, we see it as a very important part of our equity story, that our dividend increases and creates for our shareholders a very attractive yield. And that while we invest not only in M&A, but also in furthering our digital growth and enhancing the opportunities for our people, our own teams. You can see us as a very purpose-driven company. The center of our business is Learning and Media, and with those 2 businesses, we aim to have a positive impact on the lives of millions of people every day. But let me now go into a bit more detail on our Learning business. If we look, already now, we're the #1 learning business in Europe. And when we say K-12, that might not be known to all of you as an abbreviation, but that means the first 12 years of formal education, so primary, secondary and vocational. So basically teaching everything to students in the age of 6 to 18 years old. Already more than 25 million students in 12 European countries are serviced by us. And we have a market share of only 16%. And I'm saying only 16% because that shows that even though we're the #1 in Europe, there's still a lot of growth opportunity for us. If you look into our business model, you see that teachers and schools are our primary customers. So we're primarily delivering a business to institution type of sales. Teachers are the key decision takers when it comes to learning content. And in our operating companies -- countries, we have the positive situation that on those learning materials, it is only around 3% of the total spend. So that also means when you're considering sort of impact of potential savings that governments would like to do, it's very unlikely that, that is on that small part of the total portfolio. And learning services provide, you could say, everything a teacher needs to teach in the classroom. So it is both printed and digital learning content, so the methods that they use to teach their subjects. Those methods match the local curriculum and are, therefore, very localized. They're very different between the 12 countries. But we also do the digital learning platforms. And those are more similar between the countries. And that is also where we see our scale benefits where we benefit from the fact that we are such a large player. And then we're also in content distribution services, so distributing the books and the digital materials, and that is specialized service in some countries. We know our content has a positive impact on learning outcomes. Inclusive learning opportunities promote equal opportunities and support diversity and differentiation. And at the same time, it makes sure that teachers can spend all their time with the students in the classroom because they are more efficient working with our methods. That #1 position doesn't prohibit us, as I indicated, from growing further and leading the way in a consolidating market. The K-12 market in itself is stable and resilient. Overall, you can think that in Europe, there are 75 million students, of which we serve basically 1/3 in a market size of 4 billion to 5 billion. Public spending on education is increasing, the spend per student increases in general, and it varies quite a bit in absolute terms between countries. So there are countries where it's still very low and increasing to higher levels. One of the attractions of the K-12 market is its stability and its predictability. And that comes from the fact that the teacher typically doesn't want to change their learning materials on a very regular basis, only once every 4 to 8 years. So that gives that stability that once you have sold a product to a group of teachers, they stick with it for a longer period of time. At the same time, we are delivering digital platforms with a large footprint coming out of highly digitalized countries like Finland, the Netherlands, Belgium. We see that we have a USP versus more local competitors in other countries. And digitalization in education is accelerating. It already did that before COVID, but definitely COVID has further helped that along. And that digitalization is positive for us because that drives market consolidation. And that gives opportunities for growth also in the markets in which we're in. And that's also the reason why we're very keen with our latest acquisitions in Spain and in Italy, because those are still low digitalized countries that can benefit from the experience that we have had out of, for example, Finland and the Netherlands. So it's the digitalization that offers us the scalability and supports our M&A strategy. Now in Learning, we have already a successful track record, and we have grown the company -- as you see in this slide, grown the company over the last 20 years when we started out in 20 years to a business of close to EUR 700 million. And this year, we will even go over that with our latest acquisition. But you also see that the autonomous growth is at a very attractive level of 6% to 7% last year, even over our long-term target. And the margin in this business is typically high because it also needs to support significant investments in content creation. Our M&A has accelerated over the last year. 2019, we did 4 acquisitions, also smaller ones. 2020, end of 2020, we did Santillana in Spain. And now this year, last month, we closed the acquisition of Pearson in Italy. And you see, therefore, our long-term targets are 2% to 5% autonomous growth, over 23% margin, and we see that growth coming from 3 key things: growth in market share in the markets in which we're increasing the value per student. And then as the third one, M&A. Of course, M&A gets a lot of the attention. But I think for us, those first 2 levers are, of course, very productive levers that we have been able to showcase very clearly in the last couple of years. If we then talk a bit about the Media business in Finland, better known maybe to you all, you know us for our independent and trusted media that is essential for an open and democratic society. We reach all Fins and there we're also offering a very attractive advertising platform for our customers and enhancing with that the Finnish economy. Our strategy focused on 3 pillars: News and feature, entertainment with TV and radio, and B2B marketing solutions, which includes the advertising sales for all the media types. We will always consider also in the Media business to see if there are opportunities for synergetic bolt-on acquisitions, but that will be of much smaller magnitude than in the Learning business. So the Finnish Media business is truly autonomously growing business. Our business is converting step-by-step into more digital B2C, and we see that through the conversion and the growth in our news and feature business. And at this moment, it's already 55% of all sales. The digital transformation in all the media types is supporting that growth in margin that we're aiming for. So solid, stable earnings and cash flow, and the chart clearly shows that. You see nearly stable revenues last year, a step-up coming out of COVID, but particularly also very stable revenues, particularly well done by the team also in the Media business. And that is coming from this well-spread portfolio of both digital and print, both B2C and B2B. And that's also a necessity. That growth and that scale that we have with 1.4 million subscriptions, over 55% of those already paying for a digital component is key for our future success in digital. So all in all, Media business in Finland aiming to be about stable in its revenue and then slightly improving its margins to 12% to 14%. Now I already indicated in the opening that this is a sustainable company. Our sustainability strategy is very clear and centered around the core of our business: inclusive learning and sustainable media. But we also have 4 supportive pillars that we see as important for the sustainability of our company: valued people, vital environment, responsible business practice and specifically also trustworthy data. And we have put very clear targets in place for each one of those pillars. And that then has delivered also a very strong improvement in our indices with the different rating companies. And you can see us now already being one of the most sustainable rated companies in our industry. But as said, a solid dividend for our shareholders is an important part of our equity story. So yes, we want to grow through M&A, we want to invest in our digital and in our people, but dividend and growing dividend for our shareholders is important. This year, the dividend will be EUR 0.45, up from EUR 0.52 -- sorry, EUR 0.54, up from EUR 0.52 last year, representing about EUR 88 million in total, and then typically paid into 2 parts for the reason of accommodating our seasonal cash flow in the business. Our dividend policy has been the same over the last couple of years. 40% to 60% of the annual free cash flow will be paid as dividend. And that resulted last year 4% yield. So all in all, if you look at Sanoma, you see an ambitious growth strategy, a business focused on K-12 learning. So education business, already the market leader in Europe and growing globally. We're the #1 cross-media company in Finland with a reach of all Fins on a weekly basis, successful in its digital transformation, and an important part of our equity story is a growing dividend for our shareholders. A clear ambition and a clear purpose as a company. So with that, I would like to round off my introduction.

Thank you, Susan, for the presentation. Please join us here at the [ table ].

Yes. Sure.

Welcome. So Sanoma's Chief Executive, Susan Duinhoven. Let's continue the discussion about Sanoma's Learning business. So you aim to operate in markets where there are high barriers to entry, right? So could you define some of the trades of this kind of market?

Yes. The key thing to that barrier to entry is the fact that, as I indicated, a teacher does not choose a method on a regular basis. So the teacher chooses, let's say, 6 to 8 years that they choose as a group. And if you now imagine that you have to go into that market from scratch, you see that it takes every school, every teacher group 6 to 8 years before they come up to a decision again. So your growth into a market is very slow. And that is the major -- the essence of the barrier to entry. The curricula are local. So you cannot come into Europe, and sometimes, we wish, of course, that it was true that you could come in from one market and then just roll out over the other markets. But that's not doable. Everything needs to be adapted to the local curricula. So that makes it stable, attractive and defendable markets.

At this point, I would like to remind you about audience questions. [Foreign Language]. And I guess we have one question here, please. Why Sanoma bought Alma's local printed papers? You are still in a digital transformation path and still buying local papers. Why is that?

Yes. Yes, I can imagine that question. But I think it is very much from the fact that you need excellent content in order to go to digital. In digital, you need a certain scale. The regional newspapers provide a very interesting audience and content that is highly attractive, not only in print but also in digital. So in that digitalization, we love to take also those regional papers to digital, and that provides them that subscriber base and scale that adds also to the digital. So we have not just bought the printed papers, we bought the whole of the business, and the content is the essence.

All right. I understand. One more about the M&A strategy. What are the most interesting countries in Europe right now in that sense, in limitations?

Yes, those questions I get a lot, because everyone tries to find out sort of what's the next target. I think that most of the European, the Western European countries, are quite attractive. The way we judge attractiveness of our market is exactly as we just discussed, sort of how defendable, how sizable, profitable and stable the market is. And that stability also comes from the government committed to continue investing and expanding that investment in education. And you see that throughout Europe. We realized that if we want to be -- have top-notch workforces, we need to educate them top notch. So therefore, governments need to invest. And that realization is quite clear. So I would say most of the European markets are quite interesting for us.

Okay. Maybe one more question. Let's go back to printed media. How many years will Finnish print media still be alive?

As long as there are readers that are interested in printed media. For us, as I say, the content is central. And from that unique content, and that's interesting, trustworthy publishing content, that is what you then use the media types, the distribution, let's say, whatever the consumer is. So if people want to have, and we saw that, for example, during COVID, everyone working from home, being at home, they preferred the newspaper. And now everyone goes back to their offices, you see that turning back a bit. So we will flex with where the demand is. So we're customer-focused in that sense and not focused, let's say, from our own perspective. We have the printing plants, we have excellent teams running them, so why not produce printed newspapers?

All right. Let's continue the discussion on your strategy on mergers and acquisitions. So you aim to have EUR 2 billion [ latest ] by 2030, and mergers and acquisition play a big part in this goal. But what if businesses are not sold at reasonable prices?

Yes, then we will not buy. That's very simple. I mean, we're in business. We're not in meeting targets. We want to do business. We think it makes a lot of sense to grow through M&A because of the scale of our digital platforms, because of being able to then consolidate also in those new countries. But if that comes at too high a price, then it doesn't make good business sense. So then we will not do it. So we have all the time said, we're not -- said that we want to grow. We want to do an acquisition every year, as a matter of speaking, but not if it's not for the right price or not the right target.

Right. So most of the learning businesses sales come from public sector. Do you have any plans maybe to expand your business to private sector?

Yes. In many of our businesses, there is already a little bit of B2C. Typically, we sell a little bit of extra materials or extra books. So there is a little bit of that. But the core for our proposition is that we want to help the teacher get the maximum out of every student. So our audience in that sense, our customer is the teacher. And if that helps the teacher, that there are more materials available, that the kids can do a little bit more at home, we'll do it. But we typically provide that through the platforms that the teacher uses as well.

Right. Let's talk a little bit about risk. So what do you think are biggest risks in your M&A strategy besides the valuation?

Yes. I think M&A has intrinsically always risks because you're buying something that was not yours. So you don't know it, you can do as good a due diligence as you want to do, but there is always some risk. So we're very careful. We have a strong playbook. We are not rushed, so we don't feel forced. But there is always that does the culture fit, are -- is the market going to continue to behave as we think it is. If you go into a new market, yes, there are always smaller and bigger surprises. But generally speaking, I would also say that the growth of our portfolio increases the stability overall. One market might end a little bit of 1 year. The next year, it's another market, it catches up. So it helps for investors. That growth in portfolio helps further stabilize this business.

Right. Let's discuss a little bit more about the Media business. So M&A is a big part in your Learning business. But what role does it play in Media?

Yes, much smaller. I think we just discussed the regional newspapers. That was for us an opportunity to make a big step into expanding the subscriber base, which we considered quite helpful for our digitalization. But the next step will always be smaller. In Finland, we already are of a certain size. But sometimes we do small acquisitions, Videolle is a small video production company, very nicely fitting, very helpful for our advertising, very good company. Yes, it's small. It's not something that hits all our stock market releases, but it just helps improve the Finnish team as a team business. So that's definitely part of the we going forward, but it will not be big acquisitions.

Right. So how has the inflation affected Sanoma's businesses?

Yes. I think like everyone that you probably have -- has sit in this seat, you have asked this question, and everyone will have said, it effects. You see it in your cost. You have to translate it into your prices. So it is impacting. It's part of our decision-taking that is ongoing. We have paper price increases that have been quite significant in the past year. But we all see inflation in personnel cost, in energy, in all of that. But of course, as a source of materials, we are not exposed to a lot of raw materials other than paper. But yes, it's part of doing business. So we need to change gear, I think. And we do that as a whole industry and as an economy. We change gear and now get from zero or negative interest rates to positive interest rates. Yes, you need to adapt.

All right. I think our time is running out now. So thank you very much for your interview. Thank you, Susan, and what's next?

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