Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good afternoon. It is my great pleasure to introduce Sanoma to you today. And to bring to life a bit more what you see here mentioned about us impacting the lives of millions of people every day. And when I say introduce, I'm actually pretty sure that all of you have a fairly good feel for at least part of our business. And that is, of course, a bit around our media side, where we, over many, many years, have played and still are playing a very important role in Finnish society with our newspaper, Helsingin Sanomat, but also with our entertainment or TV, radio and also Ruutu. And that position is, of course, a very strong one and has been so for many years. What you might be slightly less familiar with is the role that we have -- we are playing and increasingly are playing in what we call the European K12 education market, which really are the foundational years of education for any child. So the 6- to 18-year-olds, primary, secondary and also vocational. To give a bit of a feel for that, if you were to now step into a classroom in Europe in the markets we're active, the chances are very high that you see a teacher using material that has actually been developed by Sanoma. So the students are learning with materials developed by us. The teacher is supported by materials that we have developed for them. And all that with the aim to make the life of the teacher as efficient as possible so they can spend as much time as they can with the students to make sure that they can reach their potential. And if I would put that into sort of number percentages for both sides of the business, would actually look like this. So on the media side, we reach 97% of all Finns every week, which is, of course, a phenomenal position to be in and really one also where we can offer a lot of combinations of our products as well, and I'll touch on that in a minute as well. If you look at it from an education point of view, then we serve about 25 million students across Europe every day, as I said, in that primary and secondary and vocational market. Let me now share with you what that means from a financial point of view. And if you look at our 2023 numbers, you see that now actually, more than half of our revenue is coming from the learning part, which has been a transformation we have been going through for quite a few years, but the majority of that has happened over the last 5 to 10 years. And on the profit side, that actually is now almost 80% of the profit coming from our learning business. And you see the key characteristics there for both sides. So on the learning, it is really a leading position in our key markets, which is, of course, here in Finland but also in countries like the Netherlands, Spain, Poland and Italy and more as well. And it's in markets K12, where there are high barriers to entry. And what we mean with that is you really need to know the specifics of the local education market, the local curriculum to be able to provide the right kind of content for the teachers and students. And of course, if you look at the media side, our position there is really that strong position of reaching most of the Finns every week. But also, if you look at it from a subscription point of view, we have subscriptions, over 900,000 of them where there is also a paid-for digital component, which, of course, is a strong position if you think about it from 2.7 million households. And indicating that digital transformation on the media side, actually, by now, print advertising is less than 10% of our net sales. And that is, of course, with the ongoing transformation more towards subscription, and digital is only becoming smaller and smaller. And you see also how that is reflected in our group numbers. And the one I would specifically like to highlight is the free cash flow. And what you see there is that our focus is very much on that and on proving that further. And that also leads to the dividend, which is an important part of our investment story. And our policy there is 40% to 60% of the free cash flow being paid by means of dividend. Let me now zoom in on both parts of the business, starting with media and then going into learning and bringing that to life a little bit more. If you look at our media side, with that 97% reach that we have every week. We actually look at it with 2 distinct areas in mind. That's the news & feature, which has the large audiences for B2B, but also increasingly B2C subscriptions and particularly, of course, Helsingin Sanomat being a very key player in that. On the entertainment side, you see TV and radio, but also a Ruutu -- Ruutu+ playing a very key role there. If you look at the overall picture, you see that we have very strong stand-alone brands with a lot of heritage going back a long way. And over time, we're already seeing that, and it will increasingly be the case, we see a lot of further potential to combine also these products with digital subscriptions in particular. So that's very much the focus we have on the media side, that ongoing digital transformation and more and more seeing our revenues also coming from a subscription base. Let me now look in more detail at the learning part. So we have built over the years now, a leading position in the K12 learning space. So that primary, secondary education. Our focus is very much on the teachers. Supporting the teachers in their day-to-day work with the children to really make sure that children can reach their potential as we call it. And we do that with all kind of different materials. There's the methods, that's the book, but that's also video, audio, online assessments. It's the whole range of things, and I'll touch on that in a minute a bit more. And we actually do that in a part where it's a relatively small part of the total educational spend. But an increasingly important one because in most of our markets, we see a real shortage of teachers. So the more we can help for the teachers that are there to make them more efficient, the more time they have to support the children in their educational journey. And you also see that our learning content supports with a positive impact on the learning outcomes. In other words, it helps the students to get prepared for either their exams or the next stage in their educational journey. Our view on that is very much one of what we call blended learning. And blended learning is trying to find the right combination of print and digital. And that differs market-by-market, school-by-school, even sometimes teacher-by-teacher. But the core idea is that depending on the situation, that could be technology, infrastructure, but also preferences of the school or of the governments around print and digital, that we can offer the right combination. Knowing that, that right combination actually also leads to better learning outcomes. So yes, there is the print book with the digital version, but there is also the online assessment, the online exercises and other kind of materials as well, and video playing an important role there, too. And we have a lot of materials as well to support the teachers in their day-to-day work there and how to use blended learning. So wide scale of opportunities there and of materials that we share with them. Let me now zoom in on two other aspects that I think are relevant when you think about Sanoma in the current context. One is around AI and particularly generative AI and the other one is around sustainability. Let's start with AI. So we see a lot of opportunities when it comes down to generative AI, but also new ways of working. And it's also fair to say this is very early days, of course, in the development of generative AI in both media as well as learning. Both parts of the business, there are 2 elements that are important to mention, and you see them reflected here. So when we think about our editorial processes, they really genuinely are already becoming more efficient as a result of AI. And that's happening in learning and in media. And we also feel it's very important that there are clear guidelines and processes for the -- what we call the ethical use of AI. That's important with the independence of media in mind, but also with really giving old children an honest chance to develop themselves further. AI can help, but you need to do it in the right way. And you see some examples mentioned here for both parts of our business. And I think many more will come over time as well. So on the media side, there are the new summaries, which is especially also effective when we think about tailoring the news to different younger audiences, in particular, but also to increase the time spent on an article. In other words, to really make people want to learn and understand more then. There's also elements around headline analytics that you can see here, suggestions to the editors and on the advertising, it supports it very much, too. And something like text-to-speech is, of course, also a very practical way of using AI. On the learning side, there are many, many potential use cases. Besides the whole editorial process becoming more efficient, you see something like an immersive reader, which is already integrated in our learning platforms. There's also personalized learning, so really making it more and more specific for a child, and the teacher can then really be supported there. But also in the day-to-day work of the teacher all the way from the moment he or she starts the school day until in the evening with like preparing for the following day lessons or also the marking of assessments, et cetera. And then there is, of course, around the curriculum, new skills to teach and learn very much as well. So just to give you a feel for what is happening around generative AI. As I say, a lot of opportunities for us, and also fundamental change in our way of working. Then sustainability. I think we can genuinely say that at Sanoma, we have a unique sustainability profile. And that has to do with the intrinsic positive impact both our businesses have in the lives of people. So that's true for the media side, but also for learning and particularly in learning around the inclusive learning opportunities. Meaning trying to do the right thing for as many children as possible so that they can really learn in the best possible way and reach their potential. And we have clear commitments there and also ambitious targets that you can see reflected here. And that is also, of course, focused on the science-based targets initiative. So anything we can do there as well to make real progress. From a financial point of view, it is also linked to our revolving credit facility. Just to have the sustainability targets linked there too. And on the right-hand side here, you can see the core elements that we are then focused on. Quite a lot of different metrics, but all increasingly are supporting that transition and that unique sustainability profile that we have. Let me now link it to our financial targets and then the key takeaways. If you look at our financial targets, our focus very much is around the learning side, making our scale work. We have the ambition to continue to grow on the learning side, but also the scale we have now created to make sure that we really benefit from that. And that's also what you see on the 3 elements on the left: increasing profitability; that also results in improving our cash flow generation; and as a result of that, strengthening the balance sheet, which gives us more opportunity for growth as well. And in learning, you see growth in 2 ways: organic growth, 2% to 5%; and also growth by means of M&A, and I'll touch on that in a minute as well. And that making our scale work also results in learning in an improved profitability to over 23% from 2026 onwards, and we have a lot of different initiatives ongoing to make that happen. On the media side, it is not so much about top line growth. It is about that real transformation -- digital transformation that we see happening in the business. And that means more and more towards subscription, and more and more towards digital. And that also longer term means moving towards a 12% to 14% operational EBIT. And then you see the core Sanoma group metrics there as well. Net debt over adjusted EBITDA below 3% and also the equity ratio between 35% and 45%. And last but not least here, the dividend policy that I mentioned before, where we really are focused on paying out 40% to 60% of our annual free cash flow there. So let me round it off with some key takeaways. First of all, if you look at our business. We really have a strong purpose to have a positive impact on the lives of millions of people every day. Both in media, with our independent journalism or entertainment and all the elements around that. And also in learning when you think about the teachers and the children and help for them to reach their potential. It's our aim to keep growing the group particularly with a focus on growth in learning, both organically, as I mentioned, but also M&A. In the short term, that focus on M&A is mainly in markets that we are already active to consolidate those markets. In the longer term, also with an improved balance sheet. We were also focused on growth there outside of the markets we're currently in, but always with a key focus on K12. Learning, we see that long-term profitability target being reached by 2026. That is very much supported by that increased scale. And as I mentioned, the dividend continues to be an important part of the equity story with that payout ratio of 40% to 60% of free cash flow. So with that, I would like to conclude my overview of where we now stand at Sanoma. Thank you very much.