Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Sanoma's First Quarter 2023 Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. Today, we have the President and CEO, Susan Duinhoven; and CFO, Alex Green, presenting the results. And after the presentation, we will have a Q&A session. We will first take questions from the people here at Sanoma House. [Operator Instructions] We will then hand over to the telephone line. [Operator Instructions] The full event will be recorded and the recording will be available on our website shortly after the end of the event. With this short introduction, I would like to hand over to Susan to start the presentation, please.

Thank you very much, Kaisa. Good morning to all of you. Also a warm welcome from my end on this result presentation. In the first quarter, we saw sales growing with a slightly lower operational EBIT due to the inflation and the increased seasonality from our acquisitions. The quarter started and the year started fully in line with our expectations. So we saw net sales increasing to EUR 218 million, which was the result of our Italian and German acquisition. And we saw in Media Finland, to our satisfaction, that the sales was stable. If we look in the Learning business, we saw slight organic sales decline, and that came from the typical small quarter --switches of orders between the quarters. If we look at the operational EBIT excluding PPA, that decreased due to the inflation and the increased seasonality from a growing Learning business, but also from a mix in sales in Media Finland, where the advertising sales declined as expected. Now, it's good to realize throughout this whole presentation that the inflation impact is of course particularly strong in the third -- in the first quarter because this is comparing to a 2022 where there was hardly any inflation yet in the first quarter. So in the later quarters that inflation year-on-year effect will be considerably less. If we look then at the free cash flow, that is decreasing for the same reasons. We see a lower result, but we also see the increased working capital from an increasing Learning business. So we call that a seasonally negative operating cash flow that grows through those acquisitions. If we then look at the leverage, 3.2, slightly above our long term target, but very much in line with year end. And that is 2 effect there that, on the one hand, the -- of course increased cash need for the -- funding the working capital, but on the other hand offset by EUR 150 million hybrid bond that we issued in March. And that strengthened our balance sheet, also for strategic purposes. So if we then take the outlook for the full year 2023, that is unchanged and this quarter is fully in line with our expectations. So also the point within that range that we have indicated still very much in place at the same point. So if we then look at Learning, first quarter, always a very small quarter. And in 3 months, we basically do only 10% of our sales. You see a slight increase due to the Italian and German business. And that is partially offset by negative organic net sales. And that is a phasing between the quarters. But also the fact that we divested Eduarte, a small learning platform for vocational education in the Netherlands. We divested that in October '22. So that is in the comparable year still in our numbers. If we then look at the operational EBIT excluding PPA, loss making as you would expect for the Learning business in K12. The growth of that Learning business then makes also the loss larger. And you see that in older learning businesses, the earnings [Audio Gap] also impacted our Learning business. Paper, personnel cost increases you're now start seeing occurring and a slight increase in fixed cost basically threw out all the -- our cost elements that are hit by inflation. Now, as indicated, we have increased our prices and increased our prices significantly at the start of the year. But that positive impact on revenues and on profitability will only show in the third quarter because that's the start of school. So then those new books and platforms will be procured by the schools. So what we're selling at this moment is, of course, still the sales coming from last Q3, and that was a Q3 without significant price increases because those were set in January last year. And therefore, the price increases are according to our expectations. But as we indicated, the full mitigation of the inflationary cost increases, that will take 1 to 2 years in Learning. So a little bit of margin pressure in '23, but then coming back in '24 and '25. So all in all, small quarter, good performance, in line with our expectations and in full preparation for a successful high season. If we then look at Media Finland, there sales were stable, but the earnings decreased for reasons of inflation and the different sales mix, so lower advertising sales. And that advertising sales declined for us with 5%, where the comparable market segments decreased with 1%. We saw 2 balancing elements, online and radio still growing, but a decrease in TV and in print. And it is important also to realize that the market share, for example, in digital advertising, is still very much growing, but the decrease in market share happened in the TV business specifically, and that is because we're quite prudent with our content investments and not everyone in the market operates in the same way. Subscription sales was stable, and that is -- the 2 effects in there is: increase in prices in order to mitigate the cost increases, but then resulting also a little bit lower volume, partly because of price elasticity, but also partially coming down from the peak post-Corona. The growth in other sales then offset the advertising sales. But as you know, the advertising sales is very high margin sales. So it's reflected in our operational EBIT, which decreased to EUR 5 million in this small quarter. Inflationary impact and the different sales mix contributed to that. But here, I remind you again that when we look at the full year, we have indicated before that for Media Finland, we expect 1/3 of the profit decrease. That still very much stands. But this quarter, of course, compares to a very strong comparable quarter in '22 still. So that's Media Finland. All in all, also there good first start of the year. And therefore, our outlook for 2023 is very much unchanged. So we indicate EUR 1.35 billion to EUR 1.4 billion in sales and an operational EBIT, excluding PPA, between EUR 150 million and EUR 180 million. The assumptions underneath this is that we expect that there is a mild recession in most of our operating companies, most particularly in Finland and the advertising market in Finland will decline slightly. And as far as we see now, the economic development is very much in line with these expectations and with our performance. So with that, I would like to hand over to Alex to go into a bit of details on the financials.

Thank you, Susan, and welcome from my side as well. It's wonderful to be with you here today. So digging into the financials a little bit, and I'll start with operational EBIT. And as you heard, operational EBIT impacted by both seasonality with the addition of our new businesses and also to [ today ] -- with the fact that Q1 last year was a pre-inflation quarter versus where we are now. So when we look at our overall results, and we do look at analyst reports and compare with consensus, we do see that whereas obviously, the full year is in line with guidance, we do see that the Q1 and Q3, particularly, is not quite reflecting exactly what -- our expectations because as we say, we are entirely on track in terms of our expectations and we see in the consensus that Q3 and Q1 are slightly differently laid out. Now I do appreciate it is hard to judge with the information, but just wanted to make that key point that we see that Q1 and Q3 to be switched, and we are very much on track in terms of our expectations. And if I look -- dig into the details on the Learning side with that EUR 14 million versus last year, the acquired businesses, that's about EUR 5 million of that total. And then the rest is to do with both the inflation impact on paper, personnel and fixed costs, and also some timing of investments in terms of the curriculum changes in a number of markets this year versus the timing of investments last year, so as we ramp up to deliver on the high season. Also in there is, as reported, a slightly lower comparable net sales versus last year, does have an impact as well. So the timing between quarters does impact this as well slightly. In terms of Media Finland, the 2 key reasons there. So the inflation impact versus a low inflation or no inflation quarter last year and plus the lower margin sales mix with the less high-margin advertising sales in there is impacting our operational EBIT as well in this small quarter. And on the final line, other eliminations, we have a small change there, which is a more normalized personnel and technology expense this quarter versus lower levels last year. When I think about that line for the full year, we do expect the full year in this line to be higher than last year because of more normal, regular bonus provisions levels versus the last year that we talked about in the full year presentation. So that's overall operational EBIT. So very much on track, impacted by seasonal and the extra businesses and the comparison with the quarter with no inflation. I move on to the balance sheet side and the leverage and the impact of the hybrid bond is very much seen here. So our net debt decreased to EUR 757 million from the year-end levels. And there are 2 things happening here. So we have the investment, which creates the negative cash flow in Q1, which is more than compensated by the funds coming in from the hybrid bond that we issued in March. The net debt over adjusted EBITDA ratio at 3.2, slightly above our long-term target, but sort of flat versus year-end because of those 2 impacts offsetting. So using the hybrid bond funds to partly net-net, that reduces the debt on our balance sheet. Our equity ratio at 40.6% is well within long-term target range of 35% to 45%. And our net financial items, which was EUR 7 million in Q1 this year versus EUR 3 million last year is mainly due to the higher levels of debt with the acquisition and also the significantly increased interest rates. You can see there that the average interest rates of external loans is roughly 3% versus 1% last year. And just a reminder, the interest expense relating to the hybrid bond are not included in the net financial items or in the P&L, but they're recognized directly in equity because the net -- the hybrid bond is booked as equity, and so interest just sort of is a flip between the balance sheet line. So it goes directly to equity. So talking about the hybrid bond. I just wanted to redo the basic facts here. So EUR 150 million hybrid bond was issued in March, and we saw this as the best way to strengthen the balance sheet in order to increase or give us the financial flexibility to execute on our strategy at all times of the year. As you know, our Learning business is highly cyclical. And as we grow it through acquisitions and organically, we get that more extreme working capital needs in the different parts of the year. So a lot of cash out in the first half coming in, in the second. In order to execute on our strategy at all times of the year, we needed the financial flexibility, examined all the options, and this was the best way to do, is to strengthen our balance sheet. It's treated as equity in the consolidated financial statements, and therefore, is not included in the net debt or leverage calculations. The fixed coupon interest rate is at 8%, which is tax deductible. And so therefore, net cost to us is lower than that. The reset date is 16th of March 2026. And finally on the free cash flow. So the free cash flow is lower than the prior year due to that increased seasonality that we're talking about, the addition of the Italian and German Learning businesses. We're adding their investments for the high season on to that as well, which bring this down. It's a big part of the change, but also the lower results in the SBUs, which is partly timing and then the phasing of the investments in TV and Media Finland as well. So difference between quarters, the phasing there is impacting these numbers as well as the higher interest paid that I just talked about. And this is all offset a little bit by some lower taxes paid due to the results. For the full year 2023, we're expecting the free cash flow to temporarily decline versus the absolute last year. I remember the absolute last year did have a one-off impact of the acquisition of the Italian and [ stock ] businesses, which as we bought them at the back end of the year when all the capital comes in, that gave us a one-off impact in our cash flow. We now will see more normalized cash flow of an Italian business sort of through the year. As Susan mentioned, our expectations in Media Finland to be 1/3 lower in terms of operational EBIT. That will impact our cash. And in addition, we continue to invest both in integrating our new acquisitions and in -- also in developing our digital platforms and our platform harmonization. And this, together with the significantly higher financial expenses means that overall, the cash flow will be temporarily lower in 2023. So that concludes the presentation. But here, you see the timing of our financial reporting. And with that, I'll invite Kaisa and Susan back to the stage, [ so ] we go to our Q&A.

Thank you, Alex. Thank you, Susan. And we have now -- we are now about to start the Q&A session. So first, the audience here at Sanoma House, please.

Pia Rosqvist from Carnegie. A question regarding the advertising market in Finland. So you declined also more than the market in the first quarter. So what is happening? Who is gaining market share? And is this something we should be worried about?

No. I would say worries are not needed. The key thing, as indicated, is the TV market. So this is where the smaller players in the TV market and MTV are the ones that are gaining a bit of market share and we're losing a bit of market share. But those are sort of choices that you, at some point, make when you do your content investments, how many big shows do you acquire. And that is very much a return on investment type of decision that you make. And everyone makes there a little bit different decisions. So we're seeing a declining advertising market and, therefore, are careful with heavy content investments. So that carefulness then also reflects that you lose a bit of share. But the benefit of that is that you are then sold out and that you -- everything that you have bought, you're using to the maximum effect.

Then to the online part of the advertising market. So there, you are gaining market shares. And what's behind this? Are you fighting with aggressive prices? Or what's behind this?

Yes. I hear that some people are thinking that and sometimes making those statements, but that's not the case. So we are having a good price level because that is what we know is our long-term perspective in the market. What you see is that our total media set, so both on the VOD -- the advertising-based VOD but also -- and more specifically, Ilta-Sanomat are performing very well, not only with regular digital ads, but also with video developments. So a lot of audience, and then very efficient and good propositions for advertisers that makes that we're gaining step by step. But definitely not we have heard those rumors as well that we would be in. And that, of course, is always something that we also check in our teams because that would not be a good development. But this is real market share growth just by good actions.

Then on the subscription sales, the good balance now between price increases and unexpected volume declines. So should we expect this to persist for the remainder of the year? What is the outlook?

The outlook, it depends, of course, a little bit on sort of how the economy will develop. So we will be quite agile in this. We also do constantly re-productizing, so offering different type of subscriptions and those types of things. So we'll stay very closely on track, but this is where we expect potentially a little bit lower B2C revenues. All in all, that was our expectation for the full year. And yes, let's see if that also comes out. First quarter started well.

And then still on Media Finland, you said that growth in lower margin sales compensated the decline in ad sales. So what is happening in this other row in other sales?

Yes. That is -- you -- we do, for example, quite a bit of printing services and distribution services for other newspapers, for other publications. Those increase in price because paper increases in price, energy, everything. So this is where we translate, of course, those cost increases very directly into the price increases, and that makes it grow. In addition, you also see that, of course, with our printing facilities that we have, the team is doing a good job in making good offers for people who might have their own printing plans, but now decide to come to us and to go into that total volume. So this is a bit of volume increase, but quite a significant part of that is also just straightforward inflationary costs that are translated into prices.

Then a few on Learning. So the investments and integration road map maybe in Italy and Germany, can you shed some light on how that is going and where your focus is right now?

It's going very well. We have a great -- we've added a great team to Sanoma, and we're connecting very well, particularly on the technology side of plugging them into the business and looking at the synergies, working with procurement to make the most of the pricing power that we have. In numerical terms, we talked about a EUR 14 million investment in integrations. We will see the bulk of that coming in, in 2023, about EUR 10 million of that because there was a little bit last year and a little bit going into 2024. But overall, going very well, very pleased to have them on board and every day, they're becoming more and more part of Sanoma.

And then I was reflecting upon the divestment of Eduarte, and I think that was discussed already in Q4.

Yes.

But regarding this German business you acquired with the Pearson acquisition, is that really core for Sanoma?

Yes. It is definitely a business. It's a small business that is a little bit on the side of what we have. It is so small that we have now first -- sort of, the first task is to separate it out of Pearson and to make it stand-alone. That's the first element. And then we will work with the team to sort of see through how that can develop and if we might need to consider other options.

And then next question is from Sanoma House, please.

Sanna Perala from Nordea. Continuing on the other sales in Media Finland, you mentioned that there were price increases that impacted to the growth. How should we look at the development going forward? When were the price increases implemented? And what kind of growth rates should we expect?

Yes. Well, I think that, that is -- what we're doing there is these are typical printing contracts, let's say, for people who want folders printed or anything. These are not very lengthy contracts, so that can be 3 months or 6 months contract. And we translate the prices that these have. Very clear clauses on inflation correction. So it depends a bit on what the inflation will be and what the cost increases will be in the different categories, and most pronouncedly, what the cost increase in paper is. So it's hard for us to forecast that going forward.

Then in general, on the price increases you mentioned that you have implemented, are they mainly in Learning or in Media Finland? And are you happy with the results so far?

Yes. They are in both businesses. So in every part of the business we are increasing the prices. The way you increase prices is a bit different between Learning and Media. So in the Learning business, there is a once-a-year pricing moment that is typically at the start of the year in January when you produce your price list, and schools then can know what the books will cost. We're very satisfied with the way we have been able to price and also with the response from the schools because you can, of course, always increase your prices. You can also increase them much more. But then you know that you have a massive risk on your volume. So we have very good cooperation also with schools, with governments, with municipalities. We have discussed these increases, and that's where we have indicated that on the Learning side it will take a bit longer. On the Media side, you're, of course, selling to consumers. And therefore, the pricing analysis is a very different one because that is more you try in a bit of research, you try to see what the response will be. And based on that, you then make your estimations, which increases are still value-creating and which increases would be value-destructing. So there are very different mechanism. But in both businesses, we, of course, do to the max. But what is important for us is that we are in here for the long term. So we want to make sure that we're not just for 1 year or 1 quarter optimizing our prices, but that we optimize in such a way that we meet our long-term growth targets, take the Learning business, the 2% to 5% and the 23% margin, that, that long-term target stays in play. The same for the Media business that we will be stable and 12% to 14% margin. That's -- those long-term targets we put quite central. And then we accept that, that will be a bit of margin pressure in 2023, but then that needs to come back in '24, '25.

Then lastly, I have to ask, there have been discussions about the impact of AI on your peers recently. How do you see this discussion? And is there any threat to Sanoma's Learning business?

I think -- let me upfront say we don't see a threat to Sanoma's business and let me explain why there is such a difference. It started out with [ Check ] in the U.S. as a company that is focused on higher education, and within that segment more on tutoring and add-on content. If you do the comparison to Sanoma, then you see higher education for [ Check ] K-12, so 6 to 18-year olds in Sanoma. It's very different for a 6-year old versus a 26-year old in how they will use ChatGPT. So that's one big difference. Then the fact is it B2C, like in the case of [ Check ], we're selling to schools and teachers. And what we're selling is not content. It is a workflow tool that helps a teacher bring a student from one level to the next. And each content element is not unique. I mean 1 and 1 is 2. And you can get that out of AI, and you can get that out of our books. And that's always the same thing. But what we are helping a teacher is not with that fact, but we're helping them to teach in 40 weeks, 4 hours a week to help children how to do math. So that is such a different mechanism than for the university grade student providing answers on tutoring. So I think the business is very different. And of course, we will be constantly following. Are there opportunities in it, are there threats in it, we will be following it, but we don't see any immediate impact on our business. So I think business is quite different as the [ code ] is.

Thank you. If no further questions from Sanoma House, I would like to remind our audience that the chat function is also available for questions. But now I would like to hand over for the telephone line, please.

[Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank.

I have 2 questions. Firstly on Learning, can you provide color on the country-specific growth outlooks for this year? And have there been any changes to that during Q1?

If we talk about the learning countries, no changes that we have seen in Q1 other than sort of the reassuring information, that all the markets are doing well and are going according to expectations. The most prominent that your question might be around is Spain. And I think in Spain, we see, of course -- and with the experience of last year, that some of the decisions come in quite late. But at the same time, we see in Spain good growth for this year according to what we now see as decisions being taken. But will it be a very good year? Or will something still move into the next year? That we will probably only learn closer to the summer break.