Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good afternoon. It is my pleasure to present to you Sanoma as an investment today. And overall, Sanoma has really transformed over the last 5 to 10 years into an innovative and agile learning and media company. What I would like to do today is bring that to life to you a bit more. Starting with highlighting that we really have 2 distinct parts to our business. And the first part you probably are very familiar with, which is our #1 digital media company in Finland. And we reach 97% of all Finns every week with our newspapers, with our TV, radio, events, entertainment and of course, also increasingly Ruutu+ or video-on-demand. What you might be slightly less familiar with is that we also are a leading European K12 learning company. And that really means that if you step into a classroom in Europe in the foundational years of primary secondary education, the chances are very high, you will come across a teacher and the students who use materials, learning solutions, learning analytics, all the things they need to really learn and develop further. And those are developed by Sanoma. And that's very much the position we have in the European K12 market. Let me show you what that also means the transformation in terms of our financials. And that's what you see here using the 2023 results. Not only have we transformed the business so that now learning is about 57% of our revenues, but on profit, that actually has transformed to about 80%. And that really means that on the learning side itself, we have doubled our business in pretty much every conceivable metric over the last 5 years in particular. And that has been organic growth, but that has also been mergers and acquisitions. And that is really also a doubling of the number of students we then support across the market, which is about EUR 25 million. On the media side, we've seen and are in the middle of the digital transformation. And to give a bit of perspective of the role we play, you see it here that we have about 900,000 subscriptions with a paid for digital component, which is, of course, a very strong position. And that digital transformation also means that something like print advertising is now less than 10% of our net sales. And that whole journey that we're on as an organization, we do that with also clear and strict metrics on the financial side in place. And you see them reflected here with a net debt over adjusted EBITDA at the end of last year of EUR 2.8 million, where our target is below EUR 3 million. And I can mention the other ones as well, but mainly the important one from an investment point of view is our focus on cash flow because cash flow, of course, is a real determining factor for our dividend, which is a really important part of our investment story. And I'll share with you a bit more on that later. Let me now zoom in on both sides of the business, starting with media in Finland. And what you see here is that we have 2 core parts to the media business. There's the News & Feature, which is about 2/3 of our business on the media side, which goes from the ad-funded journalism that you see with Ilta-Sanomat to very much the foundation on our subscriptions, which is Helsingin Sanomat. And there, you see a transformation happening from print subscriptions to digital and what we call hybrid. And you see also the change happening that you probably all are familiar with in increasingly using both print and digital in your news consumption. So that's 2/3 of the business. The other part is around entertainment, which is, of course, TV, radio and increasingly video on-demand, particularly driven in our case with the growth of subscriptions in Ruutu+. And if you look at this picture overall, you see a very strong portfolio of independent complementing brands who also have substantial digital synergies. And that digital transformation is very much what we are focusing on. And we also see going forward, a lot of further potential to combine subscription products across all the offerings you see here. That's on the media side. Let's now zoom in a bit more on K12, the part where we support about 25 million students in those core foundational years. So really roughly from 6- to 18-year-olds. And our core focus is on supporting the teachers, supporting the teachers so that they have as much time as possible to spend with the children so that they can reach their potential. Teachers are also the key decision makers. They decide by and large, what learning content to use. And they don't change very often. It's a really sticky market in that way, which is also logical. They choose a method that we develop for typically 4 to 8 years because it also really goes through the years at school. Once you start it, you will continue to use it for many years. And something else that is interesting to put it in perspective is that our markets, the education markets, they are largely, of course, publicly funded. But the bit that we focus on typically represents only 1% to 3% of public education spend. The other part, mainly, of course, around teachers and infrastructure. And also on learning, we see that our content supports a positive impact on the learning outcomes. It very much is focused on the teachers. Let me also zoom in a bit on what you hear a lot about blended learning. So we really truly believe in trying to find the right combination of print and digital. In all the markets that we are active in, whether that is here in the Nordics or in the Netherlands or in Southern Europe and Spain and Italy, in all cases, you will find the print book with a digital version. You increasingly will find in all those markets also additional online solutions, exercise platforms, additional ways of making sure children can practice what they are learning. And in markets that are more advanced, which, for example, is here in Finland in the upper secondary education. So just before you go to your final exams, but also in markets like the Netherlands, there you see the fully blended approach, which also has a lot of learning analytics and personalized learning elements to it as well. And we also support the teacher with a lot of materials on how to best use all this blended learning materials to get the best outcomes for the students. So that's very much the way we look at it. It is not a race to digital only. It is trying to find the right combination of print and digital. And of course, AI, artificial intelligence offers a lot of opportunities there. And let me zoom in on that a bit for both the media as well as the learning part. So for both part of our businesses, when you think about our editorial processes, AI really helps to become more efficient. That's true if you think about independent journalism and how can you support the journalist in his or her day-to-day work. But it is also very true on learning, if you think about the developing of new methods. Also for both businesses, we do that with clear guidelines in mind for the right, what we call ethical use of AI. And that is, of course, on the media side, again, supporting that independent high-quality journalism. And on the learning side, it's making sure that we use the technology in the right and considered way with, of course, young children and trying to really help their personalized learning experience. And you see here just a few of the examples of what we do. Of course, on the journalistic side, we have new summaries, especially also trying to tailor news to different audiences, younger audiences, trying to increase their spend -- time spent on an article. But it's other things as well, like the predictive headline analytics and those points. On the learning side, a good example is also the immersive reader, trying to support children who learn a language with technology, so that becomes easier, especially if that is, for example, their second language to learn. A lot of opportunities here over time done in the right way to personalize the learning experience as well for every child. Core here, too, is the efficiency for teachers because in most of the markets we are active in, a little bit with the exception of Finland. But in most of our markets, there are not enough teachers. So the teachers that are there, the more we can support them to become more efficient, the more time they have to really invest in the children and work with the children. And lastly, of course, there's a lot on the curriculum and pedagogy as well. This links nicely to our sustainability profile, where we have, as mentioned at the start, that impact in the lives of millions of people really resonates on the sustainability element as well. It's inclusive learning. It's that independent high-quality journalism, but it's also emission reduction targets that you see mentioned here around the science-based targets initiative. And we are increasingly linking it to our financial instruments like the revolving credit facility and the bond as well. That leads to a lot of recognition on the metrics you see here on the right, and it is our constant work to improve on those further in years to come. If I then link it to our financial targets and our investment case, what you see here on the left-hand side are really the core focus points we have, which is around increasing our profitability. And that really means 2 things. That means doing successfully in the Media Finland business that transition, the digital transition. But it also means in learning to really benefit from the scale we have created and continue to create in learning across Europe in K12. And that leads, if you look at the long-term targets on an organic growth on learning of 2% to 5% and an operational EBIT that will improve towards over 23% by 2026. And that increased profitability also leads to improved cash flow generation. And that does 2 things; that on the one hand, links to strengthening the balance sheet because, of course, we continue to want to increase our M&A, but it also supports a strong, consistent dividend policy, which is around 40% to 60% of our annual free cash flow and also the aim to increase that, which, of course, comes on the back of improving the cash flow generation. If you look at Media Finland, the digital transformation that I talked about really leads to a top line that is more or less stable, plus or minus 2%. But with that digital transformation over time comes further improvement on the operational EBIT. Let me now link that to the final part, which is our longer-term growth story. And you've seen all the different components of that. But our ambition is to continue with the M&A to continue with that transformation towards the leading learning company, K12 learning company across all the markets. And that means in the short term, having M&A that really focuses on the markets we're already active in, but in the outer years, also really stepping into new K12 markets, which links to what you see here as a target of the EUR 2 billion in size with 75% coming from learning by 2030. That, together with making the scale work and the improved long-term profitability target of 23% really shows where the benefits of that scale lie as well. And on media, we will continue to focus the digitalization and improving, therefore, also the profitability. And linking it back to what I mentioned earlier around the dividend, this really all supports a very important part of our investment story, which is the dividend. That 40% to 60% of free cash flow with the growing free cash flow, there's, of course, also the opportunity to increase that further. Rounding it off, all these targets are, of course, based on a very strong position we have both in Learning and Media, where we have a positive impact on the lives of millions of people every day. Thank you very much.

Thank you. Please join us here for the interview.

Thank you.

So Sanoma CEO, Rob Kolkman, you started as the CEO in the beginning of this year. Before that, you led Learning division. Is your focus still mostly on the Learning division? And what's the role of Finnish media businesses in Sanoma as a whole?

So there's 2 different elements to that. As you saw in the presentation, learning is about 80% of the profit. That means by and large, my time and attention also goes for around that percentage to learning, which is also possible because we have a very strong dedicated management team led by Pia Kalsta on the media side. But of course, there's a lot going on in media and that digital transformation. So that's, of course, where I also follow that and lead that very closely.

Yes. So we actually have quite a few questions already from the audience. So I'll just go ahead and start with the first one. This is a tricky one. So in 3 years, Sanoma's share has fallen from EUR 15 to the current price of less than EUR 7. How will the company create shareholder value in the future?

Yes. I think we're very focused on making sure that we have even more so than we had in the past, very clear strategies for the 2 parts of the business that we now have, that media side and the learning side and really executing on that. And then as I mentioned in the presentation, leading to that improved profitability, but also improved cash flow, which leads to also the dividend that I mentioned. So that's very much our focus. That's what we can influence, and that's what the team does on a day-to-day basis.

Okay. And then the price hopefully will go up?

[ Just that ] control the market. But of course, that's -- we're doing the right things there. That's very much what we can focus on and what we can influence.

Exactly. So -- and there is another -- or several others, but I'll take the next one. What does the educational material market look like at the moment? You already mentioned something, but tell us more.

Yes. Well, it's a very broad question, right? But if you look at the educational material market, why we are so excited about it is because we genuinely believe we can support the teachers across Europe in the markets we're active in that sort of transition towards the blended solutions. And if you have children or grandchildren and you were to listen to what they do also here in Finland, you really see that happening, right? They have print, but they also have increasingly access to all kind of online materials to support their own personalized learning journey. And that's also the link with AI that I mentioned. So there's a lot going on there. But fundamentally, we are there to make the life of the teacher as efficient as possible so that they can spend the time with the children.

Foreign investors are probably mainly interested in Sanoma as a learning company. Have they questioned that why do you still have media businesses in Finland as part of your organization?

I mean the question does come up. I mean if you were to look at some of the recordings, you will see it also in the AGM. So yes, that question does come up. And our answer is very much we are focused on trying to do the right thing there for both businesses, executing on that strategy.

Yes. Do you see any synergies in general? Or why do you have to be in those 2 businesses?

I think there are some synergies. I mean they are relatively minor. I think we've mentioned that it's around the EUR 5 million, EUR 6 million mark. So there are synergies not to be sniffed at, but it's relatively limited. But the 2 businesses are very focused on executing their strategy.

Yes. Let's talk about your Solar program then. It's a program that aims to improve efficiency in Learning segment. Could you tell us some concrete steps that you have done in the program and what are the results?

Yes. So Solar, just for everybody's benefit is our way of encapsulating all the kind of activities we do around making the scale work, which I mentioned earlier in the presentation. And that goes from tech hubs that we've set up, where in Poland and Spain, we have really concentrated our IT development around the learning analytics and the learning solutions from all kind of other markets where we did it, really fundamentally going from developing these kind of solutions several times to only developing it once, which is, of course, possible because of all the acquisitions and integrations we have done. So that's one area there. It's also around a lot of the supporting functions, really making sure that in HR, in finance, in operations, also in your paper and printing that you really benefit from the scale. Just to mention a couple. And there's, of course, yes, many more to go into also on the method creation side as well.

Yes. And how far is still to go? And also, can you speak a little bit about the results?

Yes. So by the end of this year, we will have taken the way we measure it, 80% of all decisions needed to get to that 23%. Then of course, the way our business works, that takes a little bit of time to filter through to our P&L because initially, it is in less investments, which is less on the balance sheet and then the depreciation will go down. So you will see it first in cash. That's already quite significantly visible next year. And then in the P&L 2026. That's why we mentioned that 23% from '26 onwards.

Yes. And that quite significantly, can you put a little more color on that?

Yes, I think -- I mean, the key point is it's 80% of all decisions taken by the end of this year, which will flow through.

I have some questions from the audience again. So [ Accor ] wants to know which countries could be interesting new markets for Sanoma Learning and why?

Yes, we never comment too specifically on the M&A. But the core point is, it's a focus on K12. So it really has to be focused on the primary secondary education. If you see where we have acquired over the last few years is, for example, in Italy and Spain, those are still very fragmented markets. We have been public about the fact that we would love to do further consolidation acquisitions there. And then within Europe, but also outside of Europe, it's really about that focus on K12. But we know these things don't come along very often. So when they do come, we will look at it in all the markets as long as there's a key focus on K12.

And one related question. Do you plan to expand beyond Europe in the learning business?

There's 2 parts to this. Our focus is on K12, so we don't rule it out. At the same time, we think there's still a lot to be done in Europe. So certainly also in the shorter time frame when you think about those highly synergetic end-market consolidations, they are most likely going to be in Europe.

Yes. You mentioned in your presentation that you have a leading position in key markets in Learning. Can you put a little more light on that? Like what's your market share in general in some of the biggest countries?

Yes, we don't comment on market shares as such. But our position in the market in the primary sector education is either the #1 or #2 position in the markets like Spain, Netherlands, but also here in Finland and in Sweden. And I think Italy is the only exception where we have the #3 position. Otherwise, it's always #1 or #2.

Yes. And as you mentioned in the presentation also, teachers are key decision-makers when it comes to learning materials. How do you get teachers to choose your content instead of competitors when it's time to review their materials?

Well, that's, of course, where we really spend a lot of time really trying to understand the local market needs, the curriculum requirements that are there as well. So this is where I mentioned it on the slides, the high barriers of entry really come in. You really need to know your market, you need to know what is required to be successful. Obviously, we're not the only ones in that. There is competition there, but that what makes ultimately the difference. And then over time, we strongly believe, as I mentioned, it will get more and more towards blended learning. For that, you need scale to properly do those investments around learning analytics, around personalized learning, for example.

Yes, that high barrier to entry, I understand, but it concerns like if there are a couple of your competitors that are also big, what makes the teacher choose your materials instead of competitors?

Ultimately, it's the quality of the materials. The real -- does it help them supporting the children and therefore, for the children to meet their required next phase in education. That's ultimately what the teacher makes a decision on.

The audience seems to be very interested in the media business. There are many questions around that. [ Esa ] wants to know if the culture of so-called fake news also be a positive driver for already well-known trusted content providers?

I think it is, is the short answer to that. It makes it also even more important that the high-quality independent journalism is well protected. And I think that's something that at Sanoma and also if you look at our broader shareholder base, find very important here in the Finnish context, especially if you look at the current geopolitical climate. So we do everything we can to protect that in the best possible way.

Okay. And what about some TV, like let's concentrate on the TV side. We have [ Rimer ] asking and telling that MTV's difficulties have been in the news and there has been discussions. How are Nelonen and, for example, Ruutu doing?

Yes. We are very happy with how particularly the video-on-demand is developing, and we have been also giving some examples of that, particularly around Ruutu+. So we do see that transformation happening in the Finnish market. And I think with our Ruutu/Ruutu+ offering, we are in a really good position to do it. I think it also touches on the point of investment in content in the TV business more broadly in Finland. And there, we do take our own decisions, and we do not overinvest or try not to overinvest in the content because we don't think that's in anybody's interest in the longer term.

A few years ago, you bought regional media such as Aamulehti from Alma Media. But your market share in Finland in media is already really big, I think 40% on some case. And some people worry that it's too concentrated. How do you see that? Do you still have possible acquisitions here? Or is it getting too concentrated already?

I think we're very aware of the important position we play in the Finnish market. So if we were to be able to play a role in further consolidation, that will be with very specific kind of, let's say, opportunities. Clearly, that is also limited from the perspective of what would be possible and allowed.

Yes. And media in general is not a big growth market. But inside your media businesses, are there any possible growth drivers other than Ruutu+?

Yes. What you see is, of course, the trends very much still being there, right? So there is the trend of paid online subscriptions, hybrid subscriptions increasing, pure print subscriptions going down. If you look at the advertising side, the digital advertising is growing, but obviously, the print advertising, which, as I highlighted, is now less than 10% of our revenue there is, of course, declining. So those trends increasingly will work in our favor. But overall, that is still a transformation that is still happening also in years to come.

We have a related question to this from [ Katri ] actually. So she's writing, the decrease in the reach of printed media, the recantation of media consumption and the competitive pressure brought mainly by Google and Facebook have weakened the advertising of local media houses pricing power. So how can Sanoma tackle this challenge?

Yes. Our focus is very much on making relevant local content that is as engaging for our Finnish audience as we possibly can do. We are, of course, working in a very competitive environment, as is highlighted here rightly. So it's all about making choices where we can make a difference, whether that is around the entertainment side or also on the news side.

Yes. Sanoma only has 13% foreign ownership. So it's quite low for a Finnish company. It's also less than it was in the beginning of this decade. Do you expect foreign investors interest increase in the coming years when the Learning dominates more and more the overall portfolio?

Well, we work very hard to make that happen, right? So that is where it does really link to our focus is very, very clear. Overall, it is growing further on the learning side. That's where we are really ambitious. It's, of course, then ultimately up to the investors to say whether they find that attractive enough to invest in. And that also accounts for the foreign investors.

Yes. And they -- when they hope for the divestment of Finnish media business, what's your answer to them?

Then we are very focused on both strategies execution, both in media and also in learning. That's the bit we can influence. That's the bit we are focused on.

So here is a short question. When you will be -- when will you start publishing print newspapers, for example, print version of Helsingin Sanomat, what is your best estimate?

I can't see it stopping in the horizon that we look at, at the moment. Clearly, it will change, and that's also what we are working towards. But there is still, I think, a role for print in years to come as well. But that will very much depend on what happens to our readership, what they like to see, that combination of print and digital. The digital transformation is there, but that's not the same as that print would disappear fully.

So as long as they want to subscribe, you will be printing?

Yes. And it might change over time, like you already see, of course, like from some customers prefer maybe only print over the weekend and more the digital access over the week. These things will change, and that's what you see happening internationally, but we are there to support the readership in all those different ways.

Yes. Since you have a lot of different newspapers in Sanoma, there's also like some publishing of the same stories in different newspapers that's synergies. But what's the readers' position on this? Are they frustrated that it's getting less and less independent and different if the same content is in different newspapers?

I think our focus is on making sure that there is real independence for the editorial teams to make sure that on Helsingin Sanoma, Aamulehti Sanomat, on the regional ones that they can put their own mark on it. Obviously, it's up to the editorial teams to decide what that then means for either content sharing or not. But the focus is on their own identity as well.

Thank you, Rob.

Thank you.