Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Sanoma's First Half 2023 Results Presentation. My name is Kaisa Uurasmaa, heading Investor Relations and Sustainability at Sanoma. During the first half of the year, our net sales grew, operational EBIT was supported by solid learning performance. We have the management here presenting the results; CEO, Susan Duinhoven; and CFO, Alex Green. After the presentation, we will have a Q&A session. We will first take questions from the audience here at Sanoma House, and then handover to the telephone line. As a third option, you can also use the chat function in the webcast platform. After the presentation and the Q&A, we will close the session and the recording of this event will be available on our website. With this, I would like to invite Susan on stage, please.

Thank you so much, Kaisa. And also from my end, a warm welcome to this half year results presentation. And as Kaisa indicated, we had growing net sales and a solid EBIT supported by the learning performance, specifically in the second quarter, but if we look at the first half of the year, we saw the group sales growing, and that was due to the learning business growth and that growth came from the acquisition of Italy and German business, but also a solid 4% organic growth, that more than compensated the lower net sales in Media Finland that we all expected coming from a decline in advertising sales. If we then look at the operational EBIT that was then supported by that solid Q2 performance in learning and impacted of course as well by the declining advertising sales and the cost inflation across all of our businesses. If we look at the free cash flow, there we had a very significant improvement. Of course, the cash flow in any learning-driven business is negative in the first half of the year. But if you think that we also added an Italian and German business that of course typically then picks-up more cash, this better than last year performance is quite exceptional and that comes from a concerted effort in our learning business to take operational actions that can also be repeated in the coming years that saved us EUR 50 million in cash in the typical low point for us, the Q2. So we pulled cash basically from the Q3 into the Q2 by a number of measures and Alex will go into a bit more detail on that. Our leverage was about stable at 3.3, slightly above our long-term target of being below 3 and that is logical following the acquisition of the Italian and German business in the second half of last year. Overall, outlook for '23 is unchanged. We see positive developments on the learning side compared to the start of the year, specifically driven by Spain, but then offsetting also some of the more demanding advertising circumstances in Media Finland. So all-in-all, guiding still very much for the mid of that range. If we then go into Learning; Italian acquisition and the organic growth both made that business grow to EUR 264 million. The sale of Eduarte in the second half of last year took a little step down of EUR 4 million, but the Italian and German business added EUR 42 million in itself to that growth. So then, the other businesses contributed 4% growth and that was literally across all the businesses. So strong growth in Spain and there of course, it was against a weak comparable, because if you remember last year, the curriculum change the LOMLOE law had still to start and therefore caused a bit of delay in the second quarter. So the comparable was low, but overall we're still seeing that in Spain, good solid growth. Also for the full year, we're expecting 10% growth for that business due to the successful implementation of the LOMLOE curriculum renewal. If we then look at the growth in Finland and Belgium that was mainly driven by the successful implementation of higher-than-usual price increases and the start of that was of course already seen in the end of Q2 in those businesses. In the Netherlands, however, we saw that some of the deliveries out of our content business were a bit later. The orders are in, there is going to be a very solid year also in the Netherlands, but the deliveries shifted into Q3. And in Poland, you still see in the first half of the year equal to prior year, but that is because we're ahead of a minor curriculum renewal that will create an uplift as expected in the third quarter and fourth quarter of this year. So all-in-all, Learning, solid growth across all the businesses supported then of course by an acquisition. If we then look at the earnings, we see of course that that growth also supporting the earnings in the second quarter, second quarter being quite strong and stronger than last year, but of course the first quarter was impacted by the typical annual seasonality of the business, but also the impact of inflation and now in the first half for the first time also personnel cost increases in addition to the regular fixed cost inflationary impact. If we then look at the growth, the growth in sales had a positive impact, but that was compensated by the typical cost for marketing and content creation in Poland ahead of that minor curriculum renewal. So all-in-all, solid second quarter, and then for the full first half EUR 15 million of EBIT excluding PPA. If we then look at one of those elements that we have talked about quite a bit in the last year is the price increases in the Learning business. This, of course, was the first moment for us, the first half of this year, was the first moment to introduce price increases following the inflationary impact that already started at the mid of last year. And we have seen now in our sales calls, an impact on the market that the price increases are well understood by customers. They are accepting those and we will see of course a bit of volume impact as well. It will not translate one on one, but that is very much more in the auxiliary and supplementary parts of the portfolio. So where in Q2, you only see a very small start of that positive impact of price increases, the majority of that impact of course will show in the third quarter. And as said before, the full mitigation of the inflationary impact will take 1 to 2 years from the start, let's say, from July last year onwards. So in some markets, of course, the inflation is a bit less that it's covered in one year, but in most markets quite high inflation that cannot be covered in one year. So that's still coming the next year, but that has also been part of those discussions. All-in-all, these price increases lead us also to believe that we will be on the high-end of our typical long-term growth target to 2% to 5% organic growth, these price increases will bring us for this year on the high end of that. If we then go to Media business, there the advertising sales decreased in line with our expectations. Net sales came to EUR 153 million and the advertising sales decreased with 11% and that development was basically across all media categories. We performed in line with the market in online and radio, but we're a bit below the market in performance in TV and in newsprint. In TV, if you remember from the last years, TV in Q2 always suffers a little bit from the fact that this is the quarter with big sports events like the Ice hockey where the competing channels have those rights. So typically in TV, our market share drops a bit in Q2. In newsprint, we were impacted a bit by the elections that typically favor regional and local papers in their advertising. So the uplift from the elections is typically not going that strongly to the national paper. In this second quarter, we also had an interesting launch. We were in Europe, one of the first to introduce FAST channels, that stands for free ad-supported streaming services, the Pluto TV, which is an interesting phenomenon, I must say, that it is VOD, so you choose channels, but in the channels it is actually linear content, that top-notch content like Frasier, like South Park that is then ongoing run 24/7. So it's a sort of an old-fashioned concept in a new world. So we're connecting it to route. It had already 800,000 starts in the couple of weeks that it was active in June and over 100,000 unique users, which is a nice inflow channel also into our route to service. Subscription sales declined only slightly and most of the decline was from the impact of the divestment of the Supla audiobook business in March. A slight decrease in the other subscription businesses, the volume decreasing a little bit more than the price increases could offset. So that's the tight balance that we all the time trigger for that we of course stay on the plus side there this quarter, we were a little bit on the minus side. Growth in Events, very small business, but I know that you're probably going to ask about that as always in this summer season. The Event, modest growth in visitors, stays around the same revenues and unfortunately also around breakeven business. But a good position with the 13 events that we had. Of course, only very small part was in Q2, but given the fact that we're now at end of July, we oversee the full year and are therefore quite happy with this first year with more normal market I would say. If we then look at the earnings, lower earnings as expected due to decreasing advertising sales and inflation decreased to EUR 9 million, advertising sales being a big part of that decline, and then some positive earnings impact from lower variable cost specifically in this transformation from print to digital and news is beneficial there, but then offset by higher personnel and other fixed costs. If we then look for the full half year, the first half then we see that the EBIT in Media Finland decreased with about half and there it's important to realize that the first half of last year was a very strong comparable because there inflation did not yet impact and if you remember the Q2 last year had still a very strong advertising market. So strong comparable and therefore quite a significant step-down in the earnings. But all that in line with our expectations already at the start of the year. And that then also makes that our outlook for 2023 is unchanged. We expect to have sales between EUR 1.35 billion and EUR 1.4 billion and a Group operational EBIT excluding PPA between EUR 150 million and EUR 180 million. And we have soft guided you before towards that mid-point of that range and we still reiterate that soft guidance. We see that on the media side, we might be performing a bit less than we originally soft guided where we said one-third Media might be lower, that might now be more towards the 40%. Still better than the first half of the year because of the lower comparable, but the learning business will absolutely compensate that strong start and good visibility now for the year. So all-in-all, the outlook unchanged, also the assumptions underneath, we assume that there will be a mild recession in Finland, that was true in the first half of the year and that the advertising market will decline slightly with specific impact in the first half. So, in summary, I think solid performance in Learning, Media Finland as expected operating in a difficult operating environment, and the outlook unchanged for the full year. And with that, I would like to hand over to Alex to go into a bit more detailed on the financials.

Thank you, Susan. And great to be with you here today and to see lots of people in person as well. And so let's go into the financials, starting off with the operational EBIT for Q2 specifically, which was stable. You see here on the right-hand side, EUR 54 million of operational EBIT, which was helped by a strong Learning performance with the growth in Spain driven by the LOMLOE curriculum change. And as you heard, you remember the last year there was a significant delay which meant that this year being on-track gives us that upside. We also see the impact of the acquired Italian and German businesses in there and all this more than offsetting the challenge of the inflation coming in on paper, personnel coming in now in Q2, which will see more of in the second part of the year and on the fixed costs. So this was offsetting the lower advertising sales in Media Finland which see flow through to EBIT with also with higher personnel and other fixed costs, but across both businesses, a lot of thoughtful cost management was in place to kind of mitigate these and to optimize our position, but those 2 things the high Learning and compensating for Media Finland gave us a stable earnings Q2 at EUR 54 million. Looking at the free cash flow situation, you see on the right-hand side with the uptake on the purple line, the impact of the successful operating measures we took and particularly in Q2 to improve the position. As Susan said, both with the increase in seasonality coming from the acquired business, particularly in Italy, so a lot more cash needed in the first half and coming in in the second plus in an environment of high cost of capital, high interest rates, it's extremely important to us to try and mitigate this as much as we could and so we put in place across the company a number of measures to bring forward and improve the cash inflows in H1 rather than H2. So a couple of examples of this; we put in place a mechanism to bring in prepayments from schools as opposed to having full invoicing done sort of around about now and later and having the money in the second half of the year. So e got a lot of prepayments in, this was well accommodated by the schools and we got a lot of money in H1. We also invoiced our digital subscriptions, slightly earlier than we otherwise would have. Normally that comes in sort of the beginning of Q3 and we brought the invoicing forward a month and then therefore were able to chase the cash and get that in as well. And as well as focusing on collections across the company, also looking at inventory levels, looking at timing of orders, and in a high cost of capital world, you can sometimes -- it makes more sense to make different decisions around those things to optimize our cash position. So, all that together gave us the significant upside taking us to an improved position versus last year even with the acquisition. An important factor here is that a lot of these measures are structurally in place and will happen again next year and in future years as well. So we've brought forward our sort of cash flow generation and sort of smoothed the position. As I say, well, what I'm saying it's timing, it's bringing forward from H2 to H1. So for 2023 overall, our underlying cash flow is expected to remain relatively stable as we communicated before. And as a reminder of our dividend we paid the first instalment of EUR 0.13 a share in April, second instalment in September in the third will be in November. The strong cash position in H1 has sort of reduced the increase in net debt to just EUR 792 million. Otherwise would have been clearly higher versus the end of March. Now, clearly, it does increase with the seasonality of Learning business, but this took our net debt over adjusted EBITDA to a stable position of 3.3 versus 3.2 last year. It's still slightly ahead of our long-term target of 3 with the acquisition last year expected to be round about on the 3 mark by the end of the year. Equity ratio at 35.4% is within the long-term target of 35% to 45%. Our net financial items have increased with the increased interest rates and also the slightly higher debt levels versus last year with the average interest rate of round about 3% versus 1% this time last year. And as a reminder, the hybrid bond interest is not included in net financial items. As it's a hybrid bond, the accounting treatment means we take the -- it is deducted directly from equity. So they are my 3 financial slides I have. I also now want to announce, we do have a Capital Markets Day on November, 22, 2023. So we look forward to inviting you here for that. This is an in-person meeting. Yes, you can also join virtually but important to us to have that in-person meeting and so, we very much look forward to seeing many of you there for that event. And with that, I'll invite my colleagues back on stage for the Q&A.

Thank you, Alex. Thank you, Susan. And now we would like to start the Q&A session from here at Sanoma House. So we have several hands up. So let's please wait for the microphone before you start.

It's Sanna Perala from Nordea. I have a few questions regarding Media Finland. First, the advertising sales, how do you see the sales developing in H2?

Yes, the sales development, it's a bit difficult to indicate that because, of course, the comparable is quite different H1 versus H2. But we think that our advertising level stays at the same level and therefore compared to the comparable, the decrease will be less, but we don't see the advertising market still already pulling, let's say, pulling much stronger. So we do think that there will still be a decline also versus a weak comparable last year.

Then on the Group level, will the growth in fixed costs, for example, in personnel and other fixed costs continue in H2 as well.

Yes. They will.

It will and if we think about the main areas, so the paper and print costs we see them sort of stabilizing. So not increasing having peaked. And so in the second half of the year that will give us a little bit of benefit on the Media Finland side but on the learning side with all the printing largely done, that will help us next year. On the people costs related things, the salary increases that started in Q2 because they generally happen sort of March and April on average, but we'll see more of that in H2, but that's fully included in our estimates and our guidance and the soft guidance, the midpoint of that guidance has all that in there, we don't expect surprises there.

And the next one. Please.

Yes, it's Kimmo Stenvall from OP Markets. Couple of question on the Media business. First of all on maybe just kind of a long-term strategic business question on the media. We know that we are facing the big troubles in the Nordic and in Europe and also Telia is announcing major restructuring in the Media business. Does this give you any thoughts on the future of the Media business in Finland, at least in the TV because real base is sub-licensing maybe some of the sports content, so is there any possibility for you to operate in that market?

Yes. Viaplay is of course quite a different business, let's say, from our TV business. If I just highlight a couple of these differences, big part, as we understand of the free-to-air TV business exposure in Viaplay to the Swedish market, but of course only in Finland in free-to-air TV. Swedish market has had quite a boom in past years, very high price level, and therefore not surprising that with a little bit of recession, the decline there is much heavier than the decline in the Finnish market. So I think that's one of those key comparables. The other thing is that Viaplay has a B2C proposition with premium sports as you indicate and we have had the experience with premium sports a couple of years ago and was not a happy one in all honesty, I mean that is a business that is very difficult to make profits on and typically the winner of the auction is the one who is going to struggle to make a profit out of that. So in that sense, we're not surprised that it is very difficult, both for Telia and for Viaplay to make money out of those sports rights and I would not like to go back into that field unless it's of course at a very different price level and a price level where we could make a profit, and we are absolutely open to it, but the price levels that have been paid for those rights in my mind have been exactly what is underneath the issue and that is an issue, I would not like to take on my shoulders, we've had our share, let's say it that way.

And then maybe on the same topic. So do you see that somehow make Netherlands all the more interesting to add some CapEx or content investment there or are you happy at the levels that you are having at the moment?

We are making a very conscious choice not to overspend in content. If the advertising market isn't there and the price levels aren't there, we are quite hesitant to overspend. And we see in the Finnish market still significant over-spending. I hope that all the talk about it will at some point create that the market players relook at their investment levels, but I would be keen not to follow, let's say, the wrong example there and to go in that flow. Now, there is always a little bit of that we have now introduced Pluto TV as I indicated, and I see that as a very interesting way to actually digital advertising it's in a linear way, it is high-quality content, but we don't really pay for it. We do a little bit of a rough share on this, but we don't need to do the cash outlay. So that is for us a creative way to still gain position. I mean, 800,000 video starts, it's quite a number of minutes that you create in the market, but you do it in a very cost-efficient and very pay-for-performance type of way. So that is the bit of path we're choosing and we hope that the rest of the market will follow.

Next one in the middle, please.

Pia Rosqvist from Carnegie. Few question questions on the Learning business. So reading your report, I'm trying to figure out now the shift between quarters in Learning and if Netherlands were a bit on the low side then Belgium and Finland may be supported with some shift. So would it be fair to say we have a net-net effect or do we see a slight positive or negative?

I think that if you look at the slide that we had in the presentation where you see the pluses and minuses. So you're absolutely right that the Netherlands is a bit in the minus, but keep in mind that the overall organic growth is plus 4%. So it's not balancing each other out. The balance is net plus and the shift element of that not that big. So the shift in the Netherlands I would say, the shift in Spain was last year. So when you now compare to last year, it's a bit difficult, but the Belgium and Finland I would say, as we indicated that is truly because of higher-than-average prices and they have sales part and deliveries that are already a little bit earlier where the other markets are typically only fully in Q3. But I'm not envying your job to try to figure this out between shift.

Then the Learning price hikes you said you had seen some maybe volume impact in the supplementary part. What kind of services, products are we talking about here?

It's supplementary, it can be an extra workbook for students that are excelling, so they are not must-haves, but if schools have the room in their budget, they typically like to spend a bit on that. Other things are some methods do not always require a full method, take for example social sciences. Social sciences is typically a subject where some schools use full method, others only take workbooks or some digital materials and some support and others do it completely themselves with some newspaper articles and just an enthusiastic social sciences teacher. So there is a bit of that mix, and what we expect we don't know yet, because a lot of this a little bit non-core, non-must-have is often bought in Q3 and even in Q4, then the school sees how many students do I have, what is my budget, what do I have left for the year. I mean if they have, for example, had a vacancy for 6 months, they have some budget left and then they might spend it on these type of extras. And the question now is have the price increases and their other cost increases taken up that budget or will it still be there at the end of Q3. But the good thing is that as a core publisher, we are living-off the must-have subjects and the more auxiliary products are typically coming from small suppliers here and there typically switching and those type of things. So this is where -- it's also the question how much will we see of that in our sales versus what the market will see.

Then I'm well aware that you are not guiding or commenting on 2024, but now adding the pieces from the puzzle in your report, you talk about efficiency improvements given that there are changes in the curriculum in Spain next year. So you are looking for cost improvement measures I believe and then combining the price hikes. So can you give any color on the margin in learning for 2024?

No, we're not going to do that. You expect that answer already, but you're picking out elements that are in place, then the question is, are there counterbalances to that we also have curriculum. The reason why we reduce our staff, let's say, to build for new curriculum is also that the curriculum then is a little bit at its end. Take for example Poland, not a lot to be expected next year. In Spain, one province left to go onto the new curriculum. So that's much more limited than this year. So the compensating effects of that we also still need to fully digest this year's trends and then extrapolate to next year.

And then finally, do you have any plans regarding the EUR 200 million bond that is maturing early next year?

So that matures at the end of March, as you say next year. We're working on that and so we'll come back and talk about the plans for that in likely the Q3 results presentation, but given the situation and given the cost, given the world that we're in, we're looking at all the different options and going at it very closely to make sure that we find the right solution and we get the right funding. I must say also, we have great relationships with a lot of our banks -- all our banks, in fact, we have great relationships and so not worried about the opportunities, just a question of picking the right path.

Please.

Yes, Maria Wikstrom from SEB. Little bit continue on Pia's question. Thinking about the Learning, I mean more of the sales terms for next year, given that the curriculum change renewal is over in Spain and Poland. And then on the other hand, you have these pricing increases. So if we look at on the sales line, so we don't even go to the more difficult part, so how should we look at the 2024?

I think that is what we have been discussing, in all the discussions where that was appropriate and we have been indicating also to schools and governments that it will be a 2-step that the fact that we cannot recover everything in year one means that there will be a second step. So that is where we are targeting that next year there will be again an above market or above normal, let's say, price increase on the learning side. The question remains even for this year, what is then the full year impact of that. That of course creates then your net growth and there we need to take first the learnings of this year fully in, which we don't have yet. As I indicated, a lot of these auxiliary sales are done in Q3, Q4. Once we have seen that, then we can also estimate more closely what will happen next year. So in that sense even on the more simple topline, I need to stay -- but also operationally it's not something that I don't want to say it, but this is something that we will experience with the market, but that we are looking at it quite positively. I think you can pick-up from the note.

Thank you. And then on the balance sheet as you now indicate that the free cash flow should be more or less the same as last year and I think you referred to the EUR 65 million in free cash flow. And then if you look at the dividend payout from last year, I think that was totally EUR 60 million. So my question is that, as you are now above your own long-term target that, I mean, when does the deleveraging come?

So the leverage target. So we are at 3.2 at the moment, expect to be pretty much 3.3. Sorry. Expect to much on close to the 3 at the end of the year and yes, I mean that was due to -- so when we have an acquisition, it sort of lifts up, and then generally the normal operations and with the cash flow and with improving margins, it will generally start. We expect to still stay within that long-term margins or get close to it and stay within it until the next acquisition sort of gives us that lift again.

Maybe you can continuation of that though, given that, I mean the dividend payout equals the free cash flow that you guide for last year's dividend payout equal to free cash flow you are guiding from this year. I mean, the strategy before, I mean, this year was growing the Learning business with acquisitions and even at the end of the year, you will be at the high end of your own leverage target. When should we expect you to be able to basically get back to the strategy that you have had before?

I think our strategy is still in place and it's the same. We always knew that you do an acquisition and then you build down. The building down and I just remind you on the multiple that we paid for that Italian and German business, that was quite low. At that moment, it always creates quite a bit of enthusiasm, but already at that point, we indicated that there is a very significant separation and integration project and you should actually and we did that also when we communicated the multiple, you should actually take that as almost acquisition cost, but the unfortunate thing is that it looks of course, as if it is coming out of operational cash flow. So your free cash flow is impacted by that. But therefore the fact that we don't deleverage this year is expected unforeseen because we are actually part of the acquisition money is the integration project that we're running, that's a sizable sum. So we are at the tail end of the Spanish one and we are now at the height of the Italian project. So that is also explaining a little bit why that is so little left over I would say, free cash flow that is part of that still that historic acquisition and then to your point of when do we come back, we assume that if there are attractive opportunities, we can go to the market. That equity market depends of course a bit, but that if there are attractive opportunities for consolidation in K-12 with strong synergies with good case that there is the ability to then pull the money. And that is the strategy, we always knew that we could not do large acquisition after large acquisition because we of course knew that the balance sheet has its limitations.

Maybe then finally on the acquisition market that, I mean, what you're seeing there today that has prices of the targets come down and is there more or less targets currently available?

There is, at this moment, in the learning space, not a lot of activity. There is quite a bit of activity in companies that are the ed-tech companies that are struggling, that are loss-making, that has started up and now that the cost of capital goes up, can't support those losses anymore. Those are companies that we always will look, but we're not that keen on. We are focusing our view at this moment as we indicated before in market acquisitions with high synergies. We see some of these targets coming to market, but not a large quantity. Larger acquisitions, we have not seen, we have seen of course in France, Editis, but that was part of a much bigger group, let's say, which had to be sold as one package. So that was not for us. But so there are things coming to market, the price level of which is too few and far between, let's say, to really talk about the trends and very different business propositions, then that you could really say has the price now come down, that I would not say. We are always judging on DCF. So for us, the acquisition is always the same. But of course, now the depreciation has -- the WACC has seriously gone up, so the prices will be lower that we can offer.

Petri Gostowski from Inderes. Just a few more questions on the subscription business in Media Finland. What are your thoughts on your pricing level. Do you see room to hike prices still, just thinking about what are we seeing on the market?