Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our Second Deep-dive on the Learning Business. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. In June, we held the first deep dive where we focused on the digitalization in learning. And in this second deep dive, we want to focus on how we create value and growth with learning content. And the reason why we want to focus on the printed and digital content is that, that business actually represents 70% of our top line in learning, and it is the strongest profit contributor of the business. Looking at our agenda today. We have two speakers Rob Kolkman, CEO of Sanoma Learning; and Alex Green, CFO of Sanoma Group. And we have divided the presentation in three main parts. First, Rob will explain the content business in general in more detail, in particular, from the teacher perspective, because for the teacher, the content is a lot more than a textbook and exercises that the students use. Next, we will dive deeper into four major operating countries in our portfolio. We get a lot of questions on country level from investors that on the specifics of each country, how the business works and operates, and we want to give a bit more insight on that today. And then finally, Alex will focus on the financial perspective of this stable and resilient content business. We will also remind you on the temporary headwinds that we see next year due to the current challenging operating environment. After the presentation, we will have a Q&A session. The chat is already open for the questions. So please use that, and we will then answer your questions during that Q&A session. And for the whole event, we expect to end latest at half past noon EET. This event will be recorded. The recording will be available on our website soon after the event. With this, I would like to hand over to Rob to start the presentation. Please?

Thank you very much, Kaisa, and good morning, everybody. Also from my end, a warm welcome to the second deep dive. As Kaisa mentioned, today is all about bringing to life for you what the learning content really means for us, both from a strategic point of view, but also very much how do we help the teachers to ultimately make sure that the students get to that next phase in their education. And that's what we will be focusing on today. Together, of course, with making the link to the financials and also that point around how do we see the longer-term business for us going. But just to start off, let's remind ourselves why we are so enthusiastic about being in that K12 education business. First and foremost, it is a very attractive business, where we see longer-term growth also driven by an increase in public spending. And that's very much highlighting that resilient part. What you will also hear about today is very much the high barriers to entry, that very localized nature really knowing what it's all about for the teachers and the students in the markets. That is difficult to do. And you will hear in some of the examples how far back we go, sometimes even centuries, if you look at Italy and how really well known we are into that local content and into the local business. We're also increasingly benefiting from our scale, and that's what we've highlighted back in June in the deep-dive as well. So a big part of that is around making sure that we scale our digital solutions across the markets. And what you will see today is that the pace in which we do that and what is needed in the market is, of course, different. But underpinning technology really is where we can scale. And on a much smaller scale at the moment, we are also starting to see some early indications of working together across the businesses from a content point of view. So that's also one that we see longer term developing nicely, but very small at the moment. And as I mentioned, this all links to ultimately our growth and our focus on the long term, which is the focus and ambition to become this EUR 2 billion as a group, but then, of course, 75% coming from learning. So also M&A plays an important part in this approach and in this strategy. And you will see today a couple of examples where we see in-market opportunities for that as well. Besides, of course, really growing the business by going into new territories over time as well. Let's now show you where we stand with regard to the learning content, how important it is to us. Kaisa already mentioned that it is the biggest part of our business, about 70%. It's also the most profitable but, where you see margins between 15% and 35%. And Alex, later on, will go a little bit more into detail on that. And you'll also see it's very different margin-wise from our other two parts of the business, which are much smaller around the platforms and the distribution services. Maybe good to highlight here as well that you see the split between primary and secondary education. That is now much more even, and that is a result of the acquisition we did in Italy earlier in the year. And that focus on learning content, both print and digital. We really strongly believe in that combination. That will be the main driver of organic growth and profit also for the future. So let's not bring to life a bit more. When we talk about learning content, what do we actually mean? And on this very colorful slide, you see some examples of that. But it's really focused on us creating the best-in-class printed and digital learning content. In all our markets that you will see today, there is that combination already. It's not just a print market anywhere, it really is already that combination. But how it is combined, that is where the differences are between the markets. And an example that you see on this slide in primary education with Bingel, that really trying to bring in gamification into the learning for the younger kids. But you also see MAX, which is in the secondary education in the Netherlands, where really we are the furthest when it comes down to print and digital, but also helping the teachers giving additional insights into what the students are doing and how we can help them on an individual basis. So lots of different examples here, and that will become more obvious as well, when we do the deep dives into the different countries. And one element to highlight here as well is these are for the teachers very important supporting materials. This is something that they will use for a 4 to 8 years, so really for a long time. And what I would like to show you now is how we look at, how do we do that in the best possible way for the teachers and therefore, also for the students. And we do that by means of what we call learning methods. And let me, first of all, really explain what we mean with a learning method. So for us, that is really a comprehensive workflow tool that really supports the teachers with a plan on how they can, in the best possible way, use our materials. And therefore, also have the reassurance that they really meet the curriculum needs. In other words, they get the student ready for the next phase in their learning life, so to speak. And that's also, of course, important for the students that this helps them to reach their annual learning goals. And we do that, as I mentioned, in that combination of print and digital. But you can only do this if you really truly understand what is needed in that local market. So that means understanding the curriculum, having real teachers insight, but also know what the local market and government needs and requirements are. That's really underpinning all this, that deep insight into the market. And as I mentioned, that goes back centuries in some cases, but really means we have a competitive advantage there. And we do this together with the teachers. So we have experts creating the content. They are sometimes former teachers or still teachers. And together with the teachers in the field, we make sure it is developed in the best possible way. And all that also helps the teachers to save time. And I think that's very important. On the one hand, because there's, of course, shortage of teachers, but it also gives the teacher more time to focus on the students, which, of course, ultimately is what this is all about. And as I mentioned, all this focus on the localized demands create real high barriers to entry. So let's now look at it from a slightly different perspective, which is, if I'm a teacher, what is my real challenge throughout a school year? And how do I deal with that? And that challenge is, of course, very much aligned. I have about 40 weeks roughly as a teacher to make sure that my students get to the next level in their study life, whatever that exactly means in primary and secondary education. But that's my challenge. I need to do that, and I need to make sure that I do it in a way that I'd also touch on all the curriculum points that are there, which, of course, means I need reassurance that I am doing the right thing. And that's where our offering firmly comes into place, because that's where you see our offering on trying to really give the best-in-class learning solutions to the teacher, really give them additional insights, that combination of print and digital is what it's all about. So yes, that is a textbook and that is exercises. That is additional material online, and that is also additional teaching material in pretty much all the classes across Europe that you can step in, you see that a teacher has additional material that they use throughout their -- the day of teaching. And we underpin that with the platforms that we talked about back in June, which is around, of course, the learning platform for the students, the teaching platform with that additional material as well and also the admin platforms that we have to really support that and make the life of the teacher and the schools more efficient. Of course, we also try to make sure that teacher is supported throughout the year. And that's what you really see with that additional material. And you'll see later on some examples where we also do that in the more advanced digitalized markets with regard to personalized learning. And that's the example of marks that you will see later on. So really, we try in all kind of ways to support the teacher throughout the year. And of course, all that is to get ultimately to the best possible learning outcome, really making sure that the student is ready to move on to the next grade. That's the real goal for the teacher and that's where we try to support. If you then look at what we try to make sure that we do, of course, is that it really leads to higher satisfaction among teachers and has a positive impact on the learning outcomes. And that's what you see here. So on the left-hand side, you see that 95% of the teachers in primary and also a very high percentage in secondary really use the learning methods. So they get that reassurance by using our learning methods. And in the middle part, you see that they are also very happy with that. It really supports them in reaching the curriculum objectives. And it helps them to that point of the 8 hours a week, it helps them to be more efficient in that work. And that last percentage, the 71%, that's the most difficult part in a school and with teachers, which is to make sure that you really engage with the students. And that is where we are very pleased that teachers by and large, also really feel this helps them in that engagement with the student, which is very difficult to do. When you think about the learning methods that I've just talked about, it also has a very logical and very important link to our sustainability strategy. And that's very much around the topics of inclusivity, accessibility and also being able to help students that have different needs. And that's very much what we do, and that's also the link to what we announced this morning. We always try to also get on external recognition for that, either by audits or being listed for that specific kind of focus on accessibility and inclusiveness. And that will continue. So that's very much the link with what I just told you on the learning methods and then also our sustainability. Let's now zoom in more towards our key markets. And as I highlighted so far in all the markets, we really see this focus on our learning methods. And what I would like to do now is bring to life to you or what it is around the key markets, how we do that. But let's first come back into the countries that we serve. So we are active, as we've said before, in 12 countries. Seven of those are really around countries where we have the learning content, the learning methods. And you see them highlighted here. In the other countries, we are also active, but mainly, for example, in Germany with an exam business or in most other cases, with our platforms like Itslearning. And the color coding that you see here is very much around where do we see these countries stand in the digitalization. So if you look at the countries that are more in blue, like Poland, Italy and Spain, they are at early stage of digitalization. That doesn't mean that there is no combination of print and digital. There is already a lot of that going on in those markets. And you'll hear later on what that is as well when we zoom in on a couple of those examples. And you also see in all these markets, we have that #1 or #2 or in the case of Italy #3 position. So we are truly leading and trying to lead the way in those markets where they change in that path digitalization, but it's always that combination of print and digital. And then the group more towards the north of Europe, so Finland, Sweden, Belgium and the Netherlands, they really are further down that trajectory of digitalization. A different way of combining digital content and print. And you will see also an example there with the Netherlands where we will share with you how that is now going into more advanced markets. So these markets have a lot in common, but also, of course, there are differences. And let's now zoom in on the first one that we're going to highlight and that is Poland. So Nowa Era, our brand in the Polish market, is really the leader in K12. And in a minute, you will hear Magda, our Managing Director talk about the Polish market and bring to life to you a bit more what we are doing there and how we are doing it. And one thing I would like to highlight in advance is Magda will talk also a bit more about the subsidy cycle that we see in the Polish market. So as you might recall, we've seen a lot of good growth coming out of Poland in the past few years, which was driven by a real big curriculum change. And now this year, as we also highlighted to you, we are in that lower end of the cycle. Going forward, there will be new subsidies coming into the market, which will drive that growth, again, particularly in '23, '24. So that's what Magda will talk about also to share a bit more with you. And lastly there, before I hand over to her, it is also around a good example. If you think about our strategy, we talk about winning market share, but we also talk about adding value to the students and the teachers. And you see a couple of really nice examples here of additional products for example, in special education needs that we bring to market that help with that adding value. So let's now hear from Magda, our Managing Director from Poland.

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So I think what is really nice to see here is that although we say Poland is, of course, early stage of digitalization. The examples that Magda gave are really great examples how that is now progressing in a market like Poland. And as we always say, we really like to lead the way in that digitalization. And I think this gave some really good examples, both as a new solutions as well as also introducing the print and online combination in markets like primary education as part of the new subsidy cycle. So that's very much the Polish market. And one thing I would finally like to highlight here is the average price per student. That is, if you compare it with the countries you're going to see in a minute, relatively low. And we also see that over time with digitalization that is most likely to increase. Let's now go to the second market, which is one that we've been talking about a lot, of course, after the acquisition, which is Spain, where we see real big curriculum renewals happening. So in many ways, the Spanish and the Polish markets have things in common and especially around the curriculum change is driving the cycles of growth. And I'm very pleased to see that in the Spanish market this year, all of the regions have started that transition to the new LOMLOE. At different speeds, but that also means that if you look both at this year and also next year, there is more growth to come from this reform, this LOMLOE reform. So that's very much what you see in Spain. We are the leader there with Santillana, very much also in primary education. And we see this as a market that is also very fragmented still, and that's partly reflected in the market share, but it's also showing opportunities for further consolidation in years to come, especially we see that in combination with further digitalization that we think we are very well positioned to lead the Spanish market in that too. Another thing I would like to highlight about Spain is the way we create our content. It's a really good example of trying to create scale within the country. So we create the content centrally. First of all, and then we adapted for the local regions, that can either be translation, but that is also a change in curriculum. So again, we really go deep into the knowledge of what is needed for even regions within a country like Spain. So that's very much in a nutshell there. And the amounts that I mentioned here per student, they, of course, also differ a bit depending on the cycle you are in. And at the moment, of course, that's more towards the higher end of the cycle. So let's now go to a third country, which is, of course, our latest addition to our portfolio, which we are very, very pleased about. And that is, of course, Sanoma Italy. Italy is one of the largest markets in Europe from a K12 perspective, roughly EUR 750 million. And in a minute, you will hear our Managing Director, Mario, talk about the market, and he will highlight a few things. Very importantly, we are very focused in this market on secondary education. About 80% of our business is actually in secondary education. And you can see on the right-hand side, that's also a reflection of the fact that, that's where the real market opportunity lies also from a spend per student point of view. Secondly, you see here the key competitors mentioned, but this, again, Mario will highlight it, is still a very fragmented market as well. So also in this market, we see real opportunities for further consolidation in years to come. But let's now first hear from Mario, our MD for Italy.

Good morning, Mario, and thank you for being with us today. I will ask you a few questions for better understanding the situation of the business in Italy. Could you please describe the education market?

The Italian education market is one of the largest in Europe with an estimated value of over EUR 750 million in 2021. We are talking about a learning journey of 13 years, made up of 5 years of primary, 3 years of lower secondary, and 5 years of upper secondary school, almost all of the school are public and the scholastic program is national. The 5 years of primary are paid by the state with the voucher being provided to families for the free acquisition of the books, while families buy the books for secondary school. State assistant is available for low-income families. In 2022, EUR 133 million was provided for this. Paper books must be published along with the digital version and digital materials that are directly related to the textbooks. At the moment, use of digital material is still at a low percentage. However, it has grown in recent years. Textbook selection is carried out by the individual teachers by law. And the choices can be taken for didactic reason each year and are not restricted by curriculum changes. It's therefore important that editors have a constant renewal of content to remain competitive in the market.

What is your position in the market? And what is your offering?

Sanoma Italy is in third place in terms of revenues in the fragmented Italian education market with a 15% of share. The focus of activities is on secondary education with around 80% of revenues coming from this market. Sanoma Italy operates in the market with a series of historical brands that have an extremely long present. For example, the Paravia brand is more than 200 years old. There are many other areas of excellence, especially in the humanities, but not only, and this is proven by market share, for example, 70% in Philosophy, 50% in Italian Literature, 30% in French.

Thank you for your insight. And still focusing on the company, we have just become part of Sanoma. How is the integration process going on?

The Italian team is very happy and enthusiastic about joining the Sanoma world. We can see many common points in the business culture and significant alignment between the activities of the Italian business and the main activities of Sanoma learning. Our Sanoma colleagues have warmly welcomed us and the availability shown regarding collaboration has been exceptional and very motivating for us. The integration into Sanoma has begun well, there is a structural framework and we are in line with all of the main activities. The rebranding from Pearson to Sanoma has started, and we are building synergies with Sanoma Procurement, which will allow us to have benefits from 2023 already.

Thank you, Mario. Thank you so much for your time.

Thank you to you.

So I think that really great to see Mario presenting the Italian business in this way. And it's also, as he highlighted, we are very, very pleased with having that team, that fantastic team being a partner of the Sanoma Learning family. One last point I would like to highlight here is how this market works from a content renewal point of view. So unlike the Polish and the Spanish market, here you don't see big kind of curriculum changes. This is more of an ongoing continuous change, and Alex will highlight that also in financial terms a little bit later on. So there, you see continuous change really focusing on what is needed by the government or also from a teacher perspective. So that's very much different from what we saw in Poland and Spain so far. So these three are all in that sort of early stage of digitalization. And hopefully, you get the feel as well, that doesn't mean there is nothing going on digitally. There's a lot going on, but it's still in that sort of first phase. The last country to do a deep dive in is the Netherlands. And there, of course, you see us already having made that step to a fully hybrid model in the Dutch market. And there's a couple of things to highlight here before I share with you an example, which is the MAX product that we have in secondary education. So the Dutch market has all the characteristics to really have the full digital offering. And what we see is that the best learning outcomes happen there in that combination of print and digital. And that's very much what is happening in the Dutch market. And you will also see on the right-hand side that the average spend per student is quite significantly higher than some of the other markets that we highlighted. As a very logical consequence from that move to digital, we've also seen the business model move more and more to subscription, which is now roughly at about 65%. And the reason for that is that, that really is a good and proven reflection and model. When you think about the value within the content, not so much in whether you do it in print or online, it's that combination that really works. And we've also seen growth in market share over the years. Unlike some of the other markets that I just highlighted, this market is much more fully already in its final stage, so to see, but a couple of really key big players like ourselves and a couple of others in that market. So let's now bring to life for you what it looks like to be a student in the Dutch market in secondary by looking at our MAX solution. [Presentation]

So I think a really good example to see how you can -- if you have the right infrastructure in place like in a country in the Netherlands, that optimum combination of print and online and are really also supporting the teachers with that additional insights that you saw in this little video as well. So let's look at how we then -- coming back to the methods and how we think we can have the biggest impact on learning across the markets we operate in, that really is trying to find the best learning outcomes by combining print and digital. And that has a few real advantages. There is, of course, that it's really appreciated by the students and teachers. It helps with an engagement that I talked about earlier. Things like videos really help with that as well. That is very engaging. It helps the kids to learn. Gamification, the example I gave at the start, about Bingel, you really see that's, of course, helping with the motivation as well. And it also helps because we can roll that out at the right time across the different markets that we're active in. And again, at the heart of it all is, of course, a very strong understanding of the pedagogy that you need for that. So not just games for the sake of it, it really is part of the learning method, learning process. It also has benefit for us, which is around creating that scale around digitalization. Not so much the specific solutions in the market, like Magda was talking about in Poland, they can be really specific and need to be because of the different needs. But the underpinning technology is what really brings that together, and that is what we can use across the different markets and are increasingly doing so. So that's very much also from our perspective. And of course, the way you saw this well in the Netherlands, it is evening out both the investments as well as also the revenues by moving more towards that subscription model over time. So what I've tried to do is give you a feel for how we look at that learning content, how we use it in learning methods and also what it means to our teachers, students on a day-to-day basis in the different countries that we're active in. And I will now hand over to Alex, who will bring that into context from both the strategy point of view and also our financials. Alex?

Thank you very much, Rob, and wonderful to be here with you for this second learning deep-dive. So let's start off looking at the pillars of our strategy. So we have three growth levers. We have growing market share, increasing value per student and our M&A strategy that drives us towards our long-term performance -- our long-term goals. And learning content is key to all of these three growth areas -- growth levers. And as a reminder, our long-term financial targets, organic growth of between 2% to 5% each year and a margin, which in the long term, will be above 23% for learning. And we also announced this year our ambition. To have, at a group level, net sales over $2 billion by 2030 with at least 3/4 coming from the learning business. But let's dig into that organic growth number. So curriculum renewals and the changes in each market helped contribute to that long-term growth. Now if you look at this chart on the right, on the dotted lines, we put the K12 publishing market values for each of our major markets, index back to 2020. So you can see there on the top one, Spain, with its large increase in the year '22/'23, which reflects the LOMLOE reform and it coming down afterwards once that is over. On the bottom, you can see the fluctuating line of Poland, which moves driven by the primary subsidy cycle that Magda talked about in the video earlier. In the middle, you can see a very steady line for the Netherlands. Now the Netherlands, a highly digitalized country, a lot of revenue coming in now on subscription, and that increase there is driven by the value per student increases. And again, we've added Italian market here, which is a sizable market and also because of its relative stability that Mario talked about, the continual change helps to stabilize the overall line. That takes us to the big thick line in the middle, which is Sanoma learning's content net sales, indexed again back to 2020. So this is a growing -- a long-term growing revenue line, which is much more stable than the fluctuations beneath, and that's because the growth is being driven by the individual markets. So independent of the particular swings, we're getting relatively stable longer-term growth. So that's the organic growth in the long term. Let's focus a little bit on the short term and recap what we talked about in the Q3 earnings release, but focusing on the Sanoma learning business. So as referred to in Q3, profitability and learning will be temporarily affected by the challenging operational environment. Now we will provide guidance for 2023 in February as normal. But here, we wanted to recap a little bit what we told you back in October. So let me go through the lines. First of all, the solid growth in the learning content business will provide growth at the high end of the 2% to 5% range. And this is due to price increases, which will include part of the inflationary pressures that we've been seeing. Now as we've mentioned before, the inflation which has increased through the year, we can only put it in over a 2-year period. So the first phase goes in, in 2023 and then in 2024 to ensure that the market can deal with the price rises. So that has a positive impact on our EBIT. Secondly, we have the impact of our recent acquisitions. So we closed the deal for Italy and Stark in end of August 2022. So we only had September to December in our numbers last year. So in 2023, we will have the full year impact, and that clearly adds to our EBIT. Next, we talked a lot about our Dutch distribution business and the challenging situation in terms of profitability there, and that came from increasing inflation where the contracts were set at the beginning of the year, so it didn't include that, which turned them negative in a lot of cases, so loss-making. The personnel challenges in the middle of the year including inflated costs with them, but the shortage of personnel and then also some late deliveries from publishers, which meant that we had to do multiple deliveries out to customers. So that created a negative EBIT impact in 2022. Now those are temporary measures, but they won't all be fixed by 2023. In particular, where we have multiple year contracts without inflation clauses, we will continue to have challenges there. However, we will set a high bar on the contracts we do take up. So we will make sure that the contracts we do operate on will have the level of profitability that Rob showed earlier. So that will though reduce the sales because we will be more picky and more will set a higher bar in terms of what we do. But that will improve our EBIT. It will be less of a loss than in 2022, which has a positive impact here. And then on the final line, we've talked about a number of times, the significant inflationary impacts and across our cost lines, but particularly in paper and print and our personnel expenses. We also will have an impact on our free cash flow in 2023 versus 2022 for a number of specific reasons. The timing of the Italian acquisition is part of that. Now we bought, as I said, at the back end of 2022, the Italian business, which, therefore, had high working capital, a large number of receivables because it's at the end of the high season in Italy. In 2023, we will have the business for the whole year, and therefore, we have the ins and outs of the cash flow. So that one-off impact won't be there in 2023, reducing our comparative free cash flow. In addition, we will continue to invest in the business development, including in our platform harmonization and also as Mario talked about in the video, we will ramp up our integration of the Italian business, our separation and integration in 2023, which has an impact on our cash. Also at a group level, we have increased financing costs. The interest rates are much higher than they were before, and that will show and have an impact on our cash. So that's a recap of what we said in Q3, but focusing on the learning business, which is a strong and resilient business, but clearly not immune to the outside impacts that we are seeing. Now at a group level, we also have our Media Finland business, which is also impacted by these challenges, external challenges. And in particular, the Media Finland business is very susceptible to movements in the advertising market in Finland. So as I said, we will provide guidance for 2023 in February. Here, we just wanted to recap what we said in Q3, focusing very particularly on the learning business. Let's move back to the country level profitability. So Rob showed on an earlier slide that in learning content, the margins by market can vary between 15% to 35%. There's a couple of key impacts as to why the markets are different in terms of their margin, and we show them here. So on the right-hand side, we've taken our four major markets, Netherlands, Spain, Poland and Italy and put the others in other and have split it between primary, secondary, vocational and other. And in this case, other is mainly kindergarten and some special needs. But you can see here, prior to our Italy acquisition, we had quite a leaning towards primary versus secondary. And our Italian acquisition, and Mario talked about it earlier, highly focused on secondary because primary is controlled by the government. So the opportunity there is in secondary. And bringing the Italian business in balances us out nicely between the two. However, as we mentioned before, primary education is typically more profitable. Secondary has more subjects, more complexity in those subjects and also typically have smaller class sizes in each individual subject, which means smaller package deliveries for the books. And so secondary, less profitable than primary. And so where a country is in that relationship, primary and secondary impacts their margin. Also, the degree of digitalization. So where a country is on its digitalization journey has a big impact on the profitability. Because as a country digitalizes, it generally gets more stable revenue streams and more opportunities for increasing the revenue per student. We get the possibility to have -- to launch new products and help teachers manage their classes better. Also, it tends to smooth the phasing between quarters and also between years. So the fluctuations you saw before over time will -- over quite a bit of time will sort of smooth out. But that also helps us optimize our cost base because the business is more smooth. And that also offers better scalability and the synergies of using platforms across different countries. So all that helps -- impacts the profitability by country. So Rob has joined me back on stage. Rob, how would you summarize what we've talked about?

Yes. Thanks, Alex. I think couple of points before we go into the Q&A. So what you've heard us talk about today is very much around how important for us the printed and digital learning content is and how we really look at that with the learning methods that I explained earlier. And that, of course, drives that real supporting to teachers to help with the learning outcomes and also creates those competitive advantages that I highlighted before, especially also because it's so sticky to use these methods for 4 to 8 years and beyond. And as Alex has highlighted, it is, in the longer term, a very stable and resilient business with that underlying growth driven also by increased spending by the government. But we are not immune to the challenges in the outside world, and that's what Alex just highlighted as well with regard to the impact that we see in '23, which was really reiterating what we pointed out back in the Q3 earnings release. So with that said, I think we can go to the Q&A.

Thank you, Rob. Thank you, Alex, and welcome to the Q&A. Thank you to the audience as well. We have several questions online already. And I would -- as a reminder, please continue using the chat function for questions. If I start with a question on the content, because we combine printed and digital learning content into that 70% of our business. What is the split there? Or can you make a split? And does it actually impact the decisions made in the business?

Yes, we get that question a lot. And the way I like to look at it is that it's not so meaningful to make that split between print and digital and try to have some kind of artificial saying it's that digital and that print. And the reason for that is because the markets are really moving where it's the combination that really matters. And that's where you get the best learning outcomes. So from that point of view, yes, we could, like we do highlight some specifics around the digital platforms, but really the core strength is in combining print and digital. And that's also why we do not make that split across the business.

Good. And maybe on that, you mentioned the digital platforms now. And we also showed the margin of that being significantly lower compared to the content business. So maybe a question that why is it that much lower?

I mean, I can jump in there. So I mean, worth reminding that, that part of our sales base is platform sales only, whereas it is the combination of content and the technology content and the platform, which creates the value for the teacher and the student and enables them to manage their lessons well. So selling the platform only does have value but at a much more structurally lower margin because it doesn't create the value with the content.

Maybe to add from the point of view on how we increasingly use the technology that I highlighted earlier. So there is some really great solutions in, for example, in Itslearning platform, around the planner for the teachers, which is technology that we are also rolling out more broadly. So it's also very much the capabilities and the technology that we use and try to scale across the businesses.

Very good. And if we then talk about pricing, in this current inflationary environment, one would expect that we are going to increase prices quite a lot, while we see 10-plus percent inflation in certain operating countries. Could you, Rob, please explain a bit how does the pricing model kind of work? And how much price increases can we actually bring into the table at one go?

Yes. Maybe first of all, about how it works in a practical way. So we set our prices pretty much at the start of the year ahead, of course, of the -- at the start of the school year in August. So it is absolutely true that if you look at our prices that we are setting for next year, they are at the higher end, much higher than we have seen before in the way of the price increase. So that is happening. But there are several factors in play, why -- Alex was referring to the fact that overall, we see ourselves at the higher end of that 2% to 5%, but not for example, as you mentioned, to the 10%. One part of that is that you indeed see it takes time to factor in the increases in price. So that is, as Alex highlighted, more towards '23 and '24 as well. But there are also a couple of other things in play that if you look at the overall business, it's not about increase, but it's actually decreased, and that was around the distribution business. So you do see the trend and really the higher price increases happening in that way I just explained in the learning methods and the learning content side, but there are other factors at play that make that go down. And one last thing to mention is, of course, we are also seeing in some markets if there is an economic sort of pressure that sometimes the level of secondhand books goes up slightly as well. But it's really those elements that I just mentioned that are the key ones.

Okay. And if we talk a bit more on the profitability, Alex, you mentioned that the profitability in primary is typically higher than in secondary. Is that linked under the average spend per student? Or is it more linked to the cost structure?

Great question. It is linked to the -- well, I mean, it's part of both, right. So in terms of the cost structure, the secondary education has more complexity, right? And so you have more subjects, you have more complicated content in there. And because you have smaller classes, you end up creating more in the environment. So you do have a cost element to it. So it is a big part of it is due to the cost structure. But the -- what I was getting at is that the spend per student in a market also dictates where the opportunity is, right? And so in some markets, you see that spend being very different, and it's sort of pushes you to sort of understand where to focus your sort of efforts in terms of that market.

And maybe also good to highlight that although there is that difference, also secondary education in the markets we're active in is a very profitable business to be in, right?

And varying between countries where we may not be being different.

Exactly.

Okay. Then there is a question on the kind of monetary terms between subjects. So are there big differences in terms of money spent or profitability per subject? If we now, for example, I would assume, talk about secondary education in particular.

Maybe I shall take that one, you can add. So I think Alex explained very well the point that if you think about secondary education and you go a little bit deeper, you see lower and upper secondary education. And just to relate to everybody's own life, when you get ready for going to university, you're in an upper secondary case, you have really specific subjects and then you do also see smaller class groups basically. So the total revenue in those subjects is lower. The average price sometimes is actually higher for those books because, of course, it is more niche and more specialized. And therefore, people are also prepared to pay a bit more for it. Lower secondary is more aligned to primary education, where you, of course, see the bigger class sizes and therefore, also see the higher volumes in total.

Good. And then a continuing question on that. Is digital content more present in some subjects versus more kind of not yet present in others, also in digitalized countries?

You see different usages. And yes, it's more the difference in the countries that we highlighted, right? But if you were to step into -- like, I'd like do a lot into classrooms in the different countries, you see that the teachers by and large, no matter where you are, they have additional materials on their laptops. Sometimes they have to interact with white board and that's pretty much for all subjects. But of course, how they do it is different per subject. If you are upper secondary specialist teacher, you might have a lot more additional material, as well, if you're a primary math, you really want to make sure you get the students to the required level of the curriculum.

Yes, exactly. I think that math and languages, for example, are the obvious examples where what people have in mind of more use of digital content.

That's correct.

And then finally, is it possible to expand to new subjects in existing geographies? So do we have kind of white spots where we would like to go?

Yes, we do. And we also, Magda, I think, mentioned one small example. So sometimes curriculum changes and new subjects come on. I think it was business management in Poland. And that's, of course, what we then definitely do. And we are constantly also looking for, are there other sort of additional products or solutions that we can bring to the market. That's not always a new subjects itself, but can, for example, the exam training in certain areas where that has become more important. And again, I think Magda mentioned an example there as well.

Okay. And maybe a bit connecting to that, assuming that the number of students in the countries where we operate is relatively stable. So what is the underlying growth driver in this type of markets?

Well, I think there's a few, and then Alex can maybe from a financial point of view add to that. We do see, of course, that the government spending per student is on that strategy up that you saw as an underpinning one. The second part of our strategy is all about finding new added value, new solutions for the students. And examples there, of course, also add towards that personalized learning, helping really the teachers and the schools with additional insights. So from a -- yes, product solution point of view, that's also where the additional points come from.

Yes. And it's all connected to those growth levers that we talked about. And in addition to growing market share through new products and growing spend per students through new products, also as part of our M&A strategy, it's not just potentially moving into new markets and learning content, but also existing markets where potentially we have an opportunity to increase the number of subjects we cover as well.

And continuing on the growth topic, and in particular, the kind of estimated growth curves that we see in different markets, always of interest to the audience. So looking at that chart that we have now shown, it seems that there is a slightly declining market in '24, '25. Do you think that we can gain enough market share in order to maintain slightly positive organic growth also on that type of situation?

Well, of course, we do our utmost to make that happen. Let's start with that. But I think we also have to be realistic if we look at the current situation, and '25 is at that lower end. And I think that's what we are trying to highlight here. We deliberately didn't show '26, '27 onwards, where you would see the curves probably go up again a bit. However, I would like to highlight, that's, of course, quite far out also from a political point of view. So a lot of things can happen. So we are cautious when we show this to also not overpromise, but of course, we really do our utmost to really gain that market share and also those additional solutions to the market, which will help with sort of covering that gap that you see there.

Very good. Then, Alex, maybe a question to you then on the longer term, again, and on the long-term profitability target in particular of the above 23%. With the current headwinds and everything that we have ongoing, how far in the future do you see achievement of that target potentially?

Well, we haven't set a time for that particular target. We have the building blocks and we will move towards it. And as you say, the temporary challenging environment, which is temporary, may affect that a little bit, but it doesn't change the ultimate multiple goal. And the ultimate goal is to get to those profitability levels through the scale and our ability to use our platform technology across multiple markets, which means we're not reinventing the wheel and we can service more students, more teachers in a cost-efficient manner. And that's the strategy. That hasn't changed at all, and that will -- and we have the building blocks, and we're working towards that.

Very good. We have a few questions focusing on digitalization. So let's go into that topic now. The first one starts with Itslearning in particular, what are the synergies between Itslearning and Sanoma Learning as a whole? And are there kind of growth prospects assuming it's a lower-margin business? Can you talk about that a bit?

Yes, I think it's worthwhile highlighting a couple of things there. So if you look at Itslearning, it really is a very robust platform with really good kind of specific solutions, especially for the teacher. I already mentioned the planner for the teacher, which is used a lot in the Itslearning platform, which is also something that we are rolling out in our other solutions as well. So using that same technology to also support and make our products better for example, in primary and secondary education. So that's definitely happening. We also see that the Itslearning platform is really there to support our main focus, which is around the learning content platform. So that's also happening. And there are some specific examples that I could mention around us trying to combine the offering of Itslearning with our offering, for example, in the Spanish market with a small product we have, that Clickedu. So we are also looking at from that point of view, but that technology is really of benefit for us as well in the other solutions.

And maybe just to bring Itslearning into context, it's a EUR 25 million top line business approximately. Can we talk about?

Yes, for us, it's really about the technology that helps the other parts, the much bigger part that we talk about to become better.

Exactly. And another question on digitalization and related localization, how much of localization and development is required in order to provide the digital offering, in particular, in the markets that are early in digital development?

Yes. Well, that's where I see the most of the opportunity, really. So yes, the solutions that you build are specific to that market, but you use the technology that we already have. We like to call them modules. So really combining the right modules to come up with the solution. For example, Magda mentioned the new solution that we will have in primary education in Poland that is using technology that we already have, but make it specific to the Polish market. So yes, this is one of those areas where it's really great to see that longer-term prospect of, if a market is ready for it, we have the right type of solutions that we can bring to that market.

So I think that already actually answers the next question already on the examples that we have in place, and there will be more to come when we go forward with that road map.

And actually also to mention others, I mean, it's also in Spain with the new curriculum. Yes, it's still very early days digitalization, but we have rolled out elements of the Bingel platform that we talked about earlier also in the Spanish market to help with that sort of starting the combination of print and digital.

And then a margin question on the platform harmonization, Alex, how much margin benefit can that bring? This is a very specific question.

It's a very specific question, and I won't have a very specific answer. I just said that is a big contribution to getting to our long-term margin target. So as I said before, this involves redoing how we produce our products in a sort of more modular form so that they can be reused across markets in a very cost-efficient manner. So the local language, local content can be put in, and that creates a fantastic cost-efficient way to manage our growth and improve our margin.

Good. And then Rob, you showed some insight on how the teachers see our materials. We do annual research on that and have continuous discussions and the satisfaction in secondary school teachers using learning methods was 79%. First of all, are you happy with that? And if not, what are we going to do?

I would always like more. I would always like more. I think that's the fair answer to it. What you see in secondary education is that that's also the market where the changes are happening towards that digitalization. You conduct also more often. So we do need to also make sure that we develop quick enough with the market. But it is a very good percentage if you look at how we really support the teachers, because teachers in secondary education, that's not an easy job as a lot of people know. So from that point of view, to get that engagement and as well that we talked about is really hard work, but we are supporting in the best possible way we can, but we always would like to do better. That's what we strive for.

Okay. Very good. And as a reminder, you can still post questions to the webcast platform. But now I have at the moment the final question that relates to the M&A. Where would the focus of the future M&A most likely be on? Is it in-market acquisitions or new geographies like we see, so Italy now?

So we would like to see both over time, right? And I think with regard to the in-market one, I have gave a few examples where we feel that markets are still very fragmented, particularly also in Italy and Spain. But of course, if you look at our ambition to grow that also very much comes with going into new territories. So it will, in an ideal world, of course, be the combination of the two.

And there are opportunities in both?

There are opportunities in both. Of course, also there, it's about timing. And we've also highlighted, I think, before we are really focused now also to make sure that the integration of Italy that Mario talked about earlier, really goes well in the next months as well.

And just to add to that, just to reiterate, focused on K12 -- when I think about new markets, focused on K12, sort of #1 to #3 in the market, opportunities for synergies, a stable country with investment in education. These are the factors that we think about. And as Rob says, there are opportunities out there. And it's a key part of our achieving our ambition.

Yes. Got it. Then a specific question on the Dutch market. There is an ongoing change from the rental to the kind of purchasing model of books or then the subscription, in particular, in the secondary education. How does that impact our business model financials in the long term, if you start.

I'll start and then hand over to Alex for some more specific. So what you see is that the focus over time goes more towards us providing services to the secondary schools. So that means less focus on that distribution itself, but really the added value services that we can bring. The effect of that is higher profitability but also most likely lower revenue. So that's the impact, and Alex can talk a bit more about that, but that's what we see happening and changing in that market.

I think you said it right, we were adapting to the new way that it works. And in some cases like this, you're getting a lower sales but higher margin business, which fits in with what's actually going on the market is the value for the direction to go and where we will have a hit to our sales. It generally will be the way to create more value.

And is it correct to say that this is what the -- that the market wants to have a kind of this is serving the needs of the teachers and students?

Yes. And also, in Essener, it's been moving in that way for a fair while, but very slowly. And we now see that momentum picking up, which we are absolutely fine with, but that also means that we then adapt our model like I just mentioned.

Okay. And one more question on the platform harmonization. The difficult part, most likely is the sunset -- to sunset, the legacy systems in order to continue saving. How quickly are we able to do that?

Yes. I think that's a very good and valid point. Of course, we would like to go always quicker, but the reality is that this is education, and we are servicing the teachers and the students like I highlighted earlier. So this will need to be done when you see either changes in the curriculum or when you see changes in sort of our offering or just a normal cycle of renewing the content and therefore, also the platforms. So we are doing that on an ongoing basis. We have a multiyear plan, and you see us bringing down the number of legacy systems as quickly as we can, but we need to take into consideration the real market and teacher needs.

Very good. It seems that these were the questions on the webcast platform. One more. Yes. Apologies. What are the biggest risks that we see in a few years' time that could affect the business?

That's always the broader question, right? I think, of course, when I explained the sort of strength of our business and the resilience that is assuming that the government spending in education will continue to grow. And I don't see that necessarily as a big risk, but that's, of course, really underpinning our strategy, so to speak. The other thing, of course, is that markets need to continue to be operating in stable environments. And if you take the example, of course, what's happening in the world now, we do see some impact in the Polish market as well with the Ukrainian students coming in, that could go either way. It's also an increase in student, but it, of course, is also unrest. And so it's the political stability that is, of course, very important for us as well in the European market. But we feel in the markets we operate in, that risk is relatively limited.

Yes. I mean, I would add that, that one of the reasons why we have that 2% to 5% organic growth range is because we can see political actions or decisions in versus markets shift the opportunities for us into different years. And so clearly, that is a bit uncertain. And so that can impact the timing of our growth or the timing of our income, but over time, as we said, it's a very resilient business and is funding, we will see their funding increase. So although they are sort of short-term challenges that over time, it -- we believe that getting to our ambition, our goal is still very much.

Very good. I think we will now wrap up. So thank you to the audience for participating for the questions. Thank you, Rob. Thank you, Alex. And if you continue to have any questions, please contact us at IR, and we are happy to continue the discussions. So thanks for joining us today, and have a nice rest of the day.

Thank you.