Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Sanoma's First Half 2024 Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. Our first half of the year was strong and earnings improved in both Learning and media. And today, our President and CEO, Rob Kolkman, and CFO, Alex Green will tell you more about that. After the presentation, we will have a Q&A session. We will first take questions from the audience here at Sanoma House. [Operator Instructions]. The full event, including the Q&A, is recorded, and the recording will be available on our website shortly after the event. With this, I would like to invite Rob to start the presentation, please?

Thank you, Kaisa, and good morning, everyone. It's my pleasure to present the half year results to you today, and we've had a good first 6 months of the year. And that's reflected in pretty much all of the metrics that you see here. And I will talk you through that and then as usual, also go specifically into the 2 business areas. If you look at the sales side, that grew in Learning; that was driven by the Netherlands and Spain, in particular, and that was overall stable in Media Finland. That helped, of course, with a strong operational EBIT improvement, where on top of what happened on the top-line, we also saw lower operating expenses. And that flowed through as well to the free cash flow, which improved again by both the higher earnings, but also the lower investments. And I think all this really contributes to the core focus areas that we highlighted during the Capital Markets Day, and those are, of course, around improving the profitability in both and in media, improving also the organic growth, particularly in Learning also together with in-market consolidations. And that third point I would like to highlight is, of course, the deleveraging of the balance sheet. That's the third key focus area. And if you purely look back now 1 year, then you see that also in action on our balance sheet with a reduction in the net debt and also our leverage improved to 2.9 below the 3.0 that we have as our target. And Alex, later on, will talk a bit more about that as well. Also pleased to report that the program, Solar or efficiency program within Learning is on track, and I'll touch on that more specifically in a minute as well. So, we're very happy with the results for the first half of the year; good results. It is always good to realize in our type of business that, of course, we have a very big H2 ahead of us. That is true, very much in Learning when you think about the school start of the year and also, of course, a lot, particularly on the advertising revenue in Media Finland. And that is also, in essence, and I'll touch on it in a bit more detail, why we are keeping the outlook unchanged. Let me now zoom in on both parts of the business, starting with Learning and starting with the top-line on the Learning side. So the net sales grew 3%. And actually, organically, we grew 5%, keeping in mind, of course, that we had the divestment of Stark, now really impacting the numbers by about EUR 5 million on the top-line. So the Learning content sales grew in the Netherlands, Spain and Poland, and that was partly offset by Finland and Belgium. And we see that as the phasing effects that I also mentioned in the previous quarter that does happen, particularly, of course, in Spain, good to realize that last year, we were still in finalizing some of the content, getting the books ready and then selling them in quarter 3. What you now see is, of course, there is no change in books anymore. So we have more available to already deliver in quarter 2. And that's partly why you still see Spain being ahead at the half-year point. But of course, as I also highlight here, for the full year, the Spanish lower curriculum will have a significant impact on lower revenues for the full year. And besides the lower curriculum taking effect in Spain in quarter 3, there is also the discontinuation of the low-value Dutch distribution contracts. Again, something we already highlighted before, but of course, that is also happening more in quarter 3 and not so far in the year. Clearly, the positive revenue growth flew through to our margins, which is highlighted here with the net sales growth having a positive impact, but also the first effect of Solar, especially in Spain, you can start to see that also in lower personnel costs. Clearly, the majority, as we've mentioned, is actually happening initially as less investments, therefore, on the balance sheet and then ultimately lower depreciation, that is still true, but of course, there are also some impacts that you can already see in the P&L as well. And again, Alex will highlight a couple of points there, too. And in Learning, although less than in media at this point in time, we also see lower paper and printing costs. In Learning, you will see more of that happening again in the second half of the year when, of course, we sell more of the books in quarter 3. Keeping in mind the 2 key areas within Learning with regard to the lower curriculum cycle in Spain and the discontinuation of the low-value contracts, we still think that the margin, everything considered, will be relatively stable for the full year compared to the 18.7% that it was at the end of Q4 last year. Let me now say a few words about program, Solar. So pleased to say that Solar is very much on track. The key way we are currently measuring that is unchanged, which is around all the decisions that we are taking to get to those run rate savings for 2026. And by the end of the year, we will have taken 80% vast majority of those decisions that will then flow through via the balance sheet and then also into the results fully into 2026. So we're still slightly ahead there. And for the full year, we expect to at least be on schedule there with the 80%. And again, to bring that to life for you a bit, it is really across all these segments that you see here. I already mentioned Spain and the organizational optimization there post the curriculum having an impact. And that will continue to be the case, and we are also still taking more steps in that area. Same was true for Poland, and we're doing it in a couple of the other operating countries as well, but Spain being the main one there. We also continue to improve operational processes. That is partly also introducing new ways of working and benefiting really there from the scale, also some software that will help us further reduce and optimize, for example, inventory levels. And you see that already happening now, but we expect that to continue and improve even further, which is important as well, if you think about the next high seasons coming up in particularly also '26. And on the harmonization of the digital platforms, the key element there is unchanged, which is to focus on building and growing our tech hubs, and particularly in Poland and also in Spain. And that will help us and our customers to deliver more features and functionalities and digital solutions, but also at a lower cost because effectively, it is moving very expensive development costs from some of our countries to lower-cost countries like Poland and Spain. And then there is a wide range of other optimizations as well across the business also to make sure that we really benefit from our scale in HR, in finance, and all those areas. So that's with regard to Learning and so they are very much on track and a very good first 6 months of the year for Learning. Let me now switch to Media Finland. There, you saw overall stable net sales, and I would characterize it as really a continuation of the core trends that we've seen for a while, which is on growth on the subscription side, very good development in Ruutu+ and overall, the subscription sales grew year-on-year by 6%. And that's also a continued solid performance there on the news driven by digital. The advertising sales still sees that growth on digital, also on TV and the decline on the print advertising. So again, that is what makes up the 1% overall. And then this time, we see always a popular topic, of course, the events. So I think there's a few things to highlight here for events. So, the event sales overall is slightly lower, and that is a combination of no Rockfest, which we, of course, did have in quarter 2 last year, and we now will organize again in 2025, but that was partly mitigated by 2 events that were last year in quarter 3 and are now in quarter 2. So there is some phasing, particularly with an impact on the top-line happening there. If you look through that and you look at the ticket sales, then overall, the ticket sales are in line with expectations, and that also means more or less in line with last year, so no major changes there. Obviously, event-by-event, it can be different, but overall, that's what we see on the event side. And most of the events, of course, now have happened in the year. And also here, good to realize the impact of the portfolio changes in the quarter, EUR 2 million and for the half year, EUR 5 million. If we then look at the earnings within Media Finland, there, we saw good growth in the operational EBIT, going to EUR 14 million compared to EUR 9 million last year. Same trends, of course, contributing here, growth in digital advertising, subscription sales, also the lower paper cost, so very significant here as well. And again, Alex will touch on it in a bit more detail. And the events phasing I also mentioned here as well. Then just to be very clear on where do we now see this go for the second half of the year? So what we expect for the full year is that the plus that we see year-to-date of roughly EUR 8 million that, that is there to stay. And that for the second half of the year, the profit will be more or less similar to the second half of last year. So, that's about an EUR 8 million year-on-year improvement then on the results, if you look at it from a full year perspective. And why is that the case? We do see a continuation of a slightly declining overall advertising market. We also have stronger prior year comparables for both advertising, subscription sales and the lower paper costs are still there, but at less significant than they were in the first half of the year. And this expectation of being similar to last year for the second half of the year, that does mean that it can still be difference between quarter 3 and quarter 4. And for example, if you take in quarter 3, we have the Olympics that always leads to some slight changes in advertising spend, which we then see happening more, for example, again in quarter 4. So overall, similar performance in the second half of the year expected. So, all these points lead to an unchanged outlook for the key reasons I mentioned and also the same operating environment underlying expectations that we have set at the start of the year, which is the advertising market in Finland declining slightly and more or less stable economies in all of our operating countries. So with that said, I would like to hand over to Alex to talk us through some more of the financials.

Thank you, and welcome here to -- from me as well to this H1 presentation. So with the financials, let's start with our operational EBIT for Q2, with good development in both businesses, going from EUR 54 million to EUR 61 million operational EBIT for Q2. On the Learning side, an increase of 2 million coming from some sales mix impacts, but also then lower operating costs, particularly in paper, where we have a full year in paper for Learning about a EUR 5 million drop of which the bulk of that will come in Q3, but there's about EUR 2 million for the first half of the year and about EUR 1 million in a year, but as I said, adding to a EUR 2 million increase. In Media Finland, as we've just seen, a EUR 5 million increase year-on-year in operational EBIT with the growth in digital subscriptions and advertising sales. Again, lower paper costs for Media Finland, a EUR 10 million year impact with about 6 million year-to-date, 3 in Q1, 3 in Q2, and then the rest evenly spread. So in H2, less of an impact because the paper prices were already coming down in H2 last year. In addition to that, the events change with more in Q2 than Q3 improved the profitability. And then we also had some lower external printing sales, which tends to happen when the price comes down automatically as well. But that all led to a EUR 5 million increase year-on-year. The other and elimination line is relatively stable. And for that line, the full-year estimate is it to be similar levels to 2023. Moving to our relatively new slide on income statement items now, we showed this for the first time in Q1. Here in Q2, we're putting both Q2 and H1 in the table here. I'm going to focus on the Q2 numbers for the comments. So in terms of Q2 IACs, EUR 8 million booked in Q2, EUR 2 million of which come from program Solar and then the others coming towards the end of the Pearson integration costs and also other strategic development costs throughout the business. You'll notice, and as a reminder, in Q2 2023, there's a large amount there, which is the VAT claim booked at Media Finland for which we have an appeal out still. So that's not yet concluded, but booked in 2023. In terms of net financial items, that did grow from EUR 8 million to EUR 10.7 million in Q2. This is mainly due to the repayment of the low coupon rate EUR 200 million bond at the beginning of this year. That was obviously done 3 years ago at a very low interest rate. And so refinancing that with our term loan and with other funding sources is at a more contemporary interest rate, so higher. So the average interest rates they go up from 4% to 5.3% in Q2 and then similarly for H1, it goes up in the same way. If we look at free cash flow, so free cash flow is always negative in the first half of the year because of the Learning business cycle. We did improve it from the minus EUR 84 million last year to minus EUR 54 million with the higher operating results and also lower investments at this part of the year and also some acting working capital management, which included significantly lowering our inventory levels due to the higher cost of capital. We are reducing those to be more exactly what's needed in the following months, therefore, improving the working capital. That was offset a little by the higher interest paid, but also the lower prepayments in the Dutch distribution business, which is one of the changes from last year. So obviously, as we talked about, when we discontinue low-value contracts, last year, there would have been a prepayment associated given we don't have the contract, therefore, a less prepayment, so that does impact the number here as well. With regards to those timing impacts and all that, so overall, net-net, as we look at the full year, we still expect the free cash flow to be relatively similar to 2023. And here we state also the installments of the dividend. So the second half installments, there will be -- the second one will be in September and the third one will be in November. As you remember, we do it in 3 installments. So the free cash flow has contributed to improving our leverage position and bringing us to 2.9% below our long-term target of 3%, and we expect that to -- given the nature of the flow of cash in the second half of the year, that will come down towards the year-end. So net debt reduced by EUR 62 million year-on-year, obviously, slightly up from March due to the seasonal patterns of our spending. And the equity ratio at 37.4% is inside the long-term target range that we have of 35% to 45%. That concludes the finance section. So I'll invite my colleagues back on stage for the Q&A session.

Thank you, Alex. Thank you, Rob. And we are happy to start the Q&A session from here at Sanoma House and the microphone is on its way. Nikko, please.

Yes. Nikko Ruokangas from SEB. I have a couple of questions. So first of all, starting with the guidance and maybe, how did the quarter go compared to your estimates before the quarter? So, given that you have now improved your profitability in H1, so, what should happen that you should [ launch ] at the upper end of the guidance? And what is something you are still cautious about, given that you're keeping the guidance?

Yes. So maybe a couple of points indeed on that. First of all, we are pleased with the results, very pleased with the results in the first half of the year. We also try to be quite specific on how we see it for both businesses. And if you look at the media side, that's where we are saying that the improvement in profitability that we saw in the first half of the year is there to stick, right? Is there to stay. For the second half of the year, the key uncertainty, of course, remains, as always, around the advertising market. And that's why we are saying we expect more similar result there. On Learning, we are very pleased with the results we've seen so far. There, I think the main caveat is simply that it is still a relatively small part of the full year, right? So, that's why we are saying for quarter 3, which is such an important one, that's where so much needs to come in that, that is not enough reason to change our forecasting there. And there is always a bit of phasing between the quarters as well.

Then on free cash flow, it's also improved in H1. So what is your expectation for the full year? Has that changed since the year start?

So a lot of the impacts we see are timing related and specifically looking to improve the free cash flow, working capital in the middle part of the year. When I take a step back and look at the longer term, and we talked about it before in terms of '25 and '26, we do see improvement -- strong improvement in free cash flow coming with the absence of the IAC's related to Solar and also as the margin improves. So relative to that, 2024, we still see it as being relatively similar to last year. And yes, very pleased with the good performance in the first half, but however, the timing impacts still keep us to that conclusion.

All right. So that you expect a more negative or weaker free cash flow in H2 compared to last year then?

Well, we see there's still a lot of cash to come in and come out. We did improve a lot of our collections in the first half of the year, which obviously just impacts the other side of the quarter. But yes, indeed, we see the full year to be relatively similar to 2023.

What was the year-on-year impact of order phasing in Learning in Q2?

Yes. So, I would like to make 2 comments on that specifically. If you purely look at it from a customer-by-customer basis, the impact was very limited. So yes, some customers, be it schools or bookshops ordered earlier, some later. That's only a very minor impact on the quarter. I think the key thing to highlight is if you look at the growth in the first half of the year, Spain is still growing in that one. And that's to do with the point I tried to highlight around, we have more books already available to sell because there is no change in curriculum. Of course, for the full year, we are expecting Spain to go down quite significantly because of the long way. So call it phasing, call it slightly different way [indiscernible] so not so much on a customer-by-customer level, but on the Spanish point, you will see that flip the other way in quarter 3.

Okay, Sami Sarkamies, Danske Bank. I have 3 questions. Starting from Learning, it seems that the year may pave out somewhat stronger than anticipated with top-line headwind coming to [indiscernible] discontinued distribution deals with low margin. Why are you not seeing margin improvement on full-year level as you will benefit from mix improvement and the Solar program?

I think from my perspective, the key point there to keep in mind is that the decline in quarter 3 for Spain is in a part of the market that is also from a profitability point of view, one of the more profitable parts, which is the primary education in Spain. So that is, I think, where we see the headwinds also in the profitability side.

And then regarding Media Finland, you achieved a EUR 7 million profit improvement during the first half. I think previously, you have expected also improvements during the second half as you will still benefit from cost tailwinds. Why are you now so cautious regarding second half? You did well on the advertising front in the second quarter.

I think the key thing for me there is around -- if you look at the Finnish advertising market itself and also the Finnish economy, there are no signs for us there at the moment that, that is actually improving. So for example, a quarter 4 to be better, you would also expect that to become slightly better than currently the forecasts are. So that's why we are saying we now -- the way we currently see it, see more of a similar performance in the second half of the year.

And finally, can you maybe elaborate a bit on the advertising success you had in the second quarter that what were some of the reasons for that? I mean you're still heavy on print media, but you were able to grow faster than the market.

Yes, there's a few things to mention here. One is, it is driven by our focus on the digital, in particular, of course, TV as well. We also see with some of our customers that we are leading the way towards digital, which means, yes, they are going faster down on print, but we're actually working with those customers very well to have their overall spend even move more to us. And that is also good to keep in mind, there was a small acquisition as well in the comparable numbers, which I think had roughly EUR 0.5 million or so impact on the numbers.

And maybe a final one for Alex. You were a bit downplaying the free cash flow improvement during the first half. How much of that EUR 26 million improvement is driven by pure timing?

Look, always very hard to get exactly that. I'd say a large part of it is to do with the reduction in inventory levels, which kind of doesn't -- is a timing impact. And also the very strong cash collections we got at the back of end of June. And so we were -- as by last year, we targeted H1 point to try and do as well as we can to reduce interest payments and to get our debt down. And we got the -- I'd say we got the whole team mobilized last year and again this year to try and optimize our working capital, and we're very pleased with the results we did. It's almost a slightly separate exercise to think about full year cash flow, where we're at a different cycle at that point but we're pleased with where we are at the moment and still focused on having similar levels of cash at the end of this year and then improving it in 2025 and '26.

It's Pia Rosqvist from Carnegie. I'm interested in understanding, do you see any evidence of you taking market share? I'm now interested in both segments. In Learning, I think you explained that on a customer-by-customer basis, it's too early to draw that conclusion. But how about in Media Finland, are you taking market shares?

Yes. So we saw in quarter 1, a bit of regaining of market share that we had lost in the previous year. And I think I highlighted that in the quarter 1 results, that is there to stay. So, we saw that being still the case also for the half year, but that was more stable in the market share perspective, looking through all the kind of changes.

And just to clarify, so in Learning, you're not seeing or it's too early to draw the conclusion that you would take market shares?

In Learning, the cycle is as such that we have no indications on indeed, ordering. And then of course, the Nordics is a good example where most of the orders are actually in, right? But we do not know how our competitors perform. We only see that when we see the full year numbers, which normally is even not until January, February. And only then you can really draw more firm conclusions on market shares.

And then a question regarding the in-market acquisitions you mentioned. We haven't seen much of those yet but what is your ambition level? Do we see -- should we expect to see them towards the end of the year?

We never comment specifically on that, of course, but it's very firmly in our focus, right? Because we strongly believe in some of our markets, there is a real benefit from in-market consolidation, making the scale work even more. So we're very focused on that, but that's, of course, happening all behind the scenes until we can say anything about it.

Thank you, Pia and Sanna, please go ahead.

Hi, Sanna Perl from Nordea. I have a couple of questions first. Regarding the personnel costs, which were down year-on-year, could you elaborate more on the -- what's the mix between still personnel cost inflation, salary inflation versus lower headcount you had?