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Edited Transcript of SAA1V.HE earnings conference call or presentation 7-Feb-20 9:00am GMT

Q4 2019 Sanoma Oyj Earnings Call

Helsinki Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Sanoma Oyj earnings conference call or presentation Friday, February 7, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kaisa Uurasmaa

Sanoma Oyj - Head of IR & Corporate Social Responsibility

* Markus Holm

Sanoma Oyj - CFO & COO

* Susan Duinhoven

Sanoma Oyj - President & CEO

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Conference Call Participants

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* Pete-Veikko Kujala

SEB, Research Division - Equity Analyst

* Petri Aho

Inderes Oy - Partner & Analyst

* Sami Sarkamies

Nordea Markets, Research Division - Senior Analyst of TMT

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Presentation

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [1]

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Good morning, ladies and gentlemen. Welcome to Sanoma's Full Year 2019 Results Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations at Sanoma. And today's presenters here with me, the CEO, Susan Duinhoven; and CFO and COO, Markus Holm. After the presentation, we will have a Q&A session, during which we will first take questions from here at Sanomatalo. Please wait for the microphone, and then hand over to the telephone line. This event will be recorded. The recording is available on our website after the event.

Before handing over to Susan, I would like to remind you of the impacts of the divestment of Media Netherlands into our reporting. The divestment was announced in December, and that the business is reported as discontinued operations for 2019. And the continuing operations include the Learning segment and Media Finland segment. And this presentation only focuses on the continuing business.

With this, I would now like to hand over to Susan to start the presentation. Please.

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Susan Duinhoven, Sanoma Oyj - President & CEO [2]

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Thank you, Kaisa. Yes, as Kaisa indicated, 2019 was an important year. A year of transformation. And we grew the Learning business significantly with 4 acquisitions, the main one, of course, being the Iddink business in the Netherlands, Belgium and Spain. And on December 10, we announced the intention to divest Sanoma Media Netherlands, the Dutch media business. And with that, we now have 2 strong businesses: a growing European Learning business; and a strong business in Finland, in media, ready for future growth. And that is then also supported by EUR 400 million headroom for M&A, with a solid pipeline of opportunities for both businesses.

In December, when we were together, we also indicated the targets for the 2 individual businesses, both on the comparable sales level and on the profitability.

But also financially, it was a good year for Sanoma. Net sales grew and profitability further improved. The net sales grew to EUR 913 million, and that was mostly due to the acquisitions that were done. The comparable net sales for the underlying net sales was minus 1%, but still considerably better than the year before. There was also clear profitability improvement of EUR 135 million. And that was also due to acquisitions, but also largely due to the improved profitability of our Learning business due to the High Five business development program. Now that profitability would have normally shown even a little bit higher, but due to the divestment of the Dutch business, we allocated the remaining group cost on the 2 continuing businesses, and that impacted that result with close to EUR 4 million. Of course, the 2018 was then also restated, and that was impacted by EUR 3.5 million.

The free cash flow improved to EUR 131 million. That was largely due to the IFRS 16 implementation. The leverage increased to 2.7, slightly above our long-term target, but that was, of course, because the Iddink acquisition came into the year quite late. Further impact on the leverage was also due to IFRS 16. Now the board will propose to the AGM a dividend of EUR 0.50 to be paid in 2 equal installments.

And with that summary of the year, I would like to go into a bit more detail on the individual businesses. The earnings improved both -- improved in Learning and were stable in Media Finland. Earnings significantly increased with 15% in Learning, partially the Iddink acquisition, which impacted the fourth quarter and the High Five program. In Media Finland, very good year, stable sales, stable earnings, well performance of the team. Other operations was significantly lower than last year, and that is a little bit of an exception due to both the comparable year and cost reductions that have a one-off character in the year. So going forward, we will be looking more towards a level of 2018 than in 2019.

If we look into Learning, net sales grew through acquisitions. Iddink performed well, fully in line with our expectations. It added EUR 22 million to our results in the -- due to the inclusion in the fourth quarter. But overall, for the year, Iddink sales was EUR 157 million compared to EUR 141 million the year before. So good performance. Operational EBIT, EUR 5 million adding to our results due to the fourth quarter; total year, EUR 22 million, also 10% up from the year before. itslearning, the acquisition we did in December, contributed EUR 2 million to the net sales. The smaller acquisitions of Essener and Clickedu that were done -- specifically, Clickedu only halfway through December did not add in a significant way, neither in sales nor in profitability.

But if we then look at the comparable business, so the business that was already there the year before, stable. Net sales in Belgium and Poland continue to grow on the back of the curriculum renewals that were taking place there. The Netherlands, the Dutch publishing business, nicely stable and a slight decline in Finland, which was expected because there, the curriculum reform ended in 2018. So 2019 was a bit of a low year because then typically schools do not need to repurchase the recently-bought materials. But on top of that, we saw quite a positive trend of increasing sales of digital learning materials. But that, of course, has an effect that the recognition of those revenues are flowing into the next year.

For 2020 and 2021, the market will grow in several of our core markets, most pronouncedly, Poland, the Netherlands and Finland. So as we have shown in December, on the back of those market growth, we also expect our Learning business to grow.

If we then look in the picture, there you see, I think, also that within the Learning business, the acquisitions have really created a very nice transformation. Last year, at the end of the year, we had 15 million users on Sanoma's digital learning platforms, coming from 6 million the year before. And that growth is both organic growth through, for example, the Bingel platform in primary education and the recently introduced Kampus platform in secondary, but 8 million of that increase came from acquisitions, most pronounced, of course, the Iddink acquisition, itslearning and also Clickedu. So 15 million students on Sanoma learning platforms.

If we then look at profitability, profitability nicely improved both in the existing business and due to the Iddink acquisition. Total improvement, 15% to EUR 73 million and the split between existing business and Iddink acquisition was roughly 50-50. In the existing business, it was the High Five business development program that created cost savings both on the variable and on fixed cost. And of course, the Iddink acquisition was 1/4 that was added -- that contributed EUR 5 million to this improvement. And in the curve, you see a nice improvement in the EBIT margin over the years.

If we then look at Media Finland, also, again a good year. Continued growth in digital subscriptions. Net sales being stable at EUR 477 million (sic) [EUR 576.8 million]. But specifically, as we also already discussed in December, the total number of HS subscribers, of Helsingin Sanomat, continued now for the third year in a row. And I think also on an international scale, that is quite an achievement. And we even went back into the archive and saw that the subscription sales, so the revenues from subscription for Helsingin Sanomat, it was this year at an all-time high. So Helsingin Sanomat, a good year. But also Ilta-Sanomat, monthly visit in December at an all-time high. And when you look at the graph, you see that the best week of the year, 42 million weekly visits to the site.

News & Feature unit that we started on the 1st of October after preparation, important milestone for the news & feature business. That business unit now combines both Helsingin Sanomat, Ilta-Sanomat, but also 7 magazine brands that have content, that can be shared digitally. And that's also the key objective of forming that unit, that the sharing of that content and technology is made more easily.

Also, the entertainment business saw a good success, increasing digital subscription sales from Ruutu+, where the revenue from that even offset the discontinuation of pay-TV that took place in the second half of 2018. The growing festival and event business performed well also on the profitability level. Of course, part of that supported by the acquisition -- the addition of the Rockfest Festival in 2019.

If we then look at the advertising market, we see that digital advertising for us grew significantly with 6% and grew more than markets -- market -- the domestic digital advertising market grew with 4%. Total advertising sales for us decreased with 1%, in line with market. And that was, of course, due to the print advertising decline that we see on an annual basis.

If we then look at profitability, stable sales, stable profitability at a level of EUR 69 million, excluding PPA, improved profitability of festival and events. This was the second year operating with a large portfolio, clear improvements in the way of operating, also good cost control, lower marketing, paper, distribution costs, across basically all cost lines. We, of course, saw that with the inclusion of the Fox channels, we saw higher sales from TV, but also higher costs due to the payments made to Fox on that. Write-down in the fourth quarter specifically on IT solutions and IT infrastructure that we have replaced over the time, and we took that now in the fourth quarter, and that's where you see that specifically that quarter is a little bit lower than the comparable year.

The board proposes to the AGM in March a dividend of EUR 0.50. That is a nice increase of 11% versus the previous year, and represents around EUR 82 million cash. That represents 58% of the adjusted free cash flow, and it's then adjusted for the settlement of the rent on the office building of the divested Belgium business. It will be paid in 2 parts: half of it in April, on the 3rd of April, with a record date of March 27; and half of it in November. Dividend policy, unchanged. We aim to pay an increasing dividend and it will be in the range of 40% to 60% of the annual free cash flow. But the important part will be the growing dividend.

Then just to remind you, before the Christmas break when we were together, we announced the long-term targets for each of the SBUs. And we now, for the first time, track against that long-term target. If we look at Learning, you see that we target the comparable net sales to grow in the coming years, 2% to 5%. Last year, 2019 was at 0, in line with expectations. Operational EBIT margin, we target to be between 20% and 22%. We're already at 21.7%. So you might ask, is this now a challenging target? But of course, to remind you that adding the Iddink business, which is on average slightly lower margin business, shows that the target for the continuing business is still to continue their profit improvement path of the last year.

In Media Finland, we target to have comparable net sales between plus and minus 2%, so stable. Last year was minus 2%, and so that represents a true target. Comparable EBIT -- sorry, operational EBIT margin excluding PPA, we target for Finland to be 12% to 14%. Last year was at 12%, so at the lower end of the range. So also there next steps to be made in that business. And we're comfortable with that.

The outlook for the whole of the group then, for 2020. We expect the comparable net sales to be stable and the operational EBIT margin excluding PPA to be around 15% compared to 2019, this report, 14.8%.

So with that, I'd like to hand over to Markus Holm for more details on the Q4 results.

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Markus Holm, Sanoma Oyj - CFO & COO [3]

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Thank you. The fourth quarter operational earnings developed well in line with our expectations. Operational EBIT improved by EUR 7 million compared to prior year. In Learning, the Iddink acquisition added EUR 5 million and the rest were explained by lower fixed costs across the business. Media Finland saw a slight decline of EUR 2 million explained by a positive effect of lower paper costs and negative onetime write-down related to discontinued IT solutions and TV program costs related to Fox channels.

In the full year 2019, the costs of other operations were exceptionally low across categories. We expect this to normalize closer to 2018 levels, i.e. from this 7% to 10%, I would say we expect it to be closer to 10% than 7%.

Cash flow was solid. We had a free cash flow of EUR 131 million compared to EUR 109 million a year ago. This is explained, to a great extent, by IFRS 16, which added EUR 25 million. We had also lower taxes paid that was positive. And then as earlier mentioned, we had a EUR 10 million settlement of rental contracts related to discontinued operations, Belgium, and also higher IACs related to the several M&A transactions in the year as well as IT infrastructure changes. And also the divestment of the LINDA. Magazine in Netherlands had a negative effect. But overall, well in line with our expectation and on the current cash flow.

Net debt was higher due to the Iddink acquisition and IFRS 16. And the net debt was at EUR 795 million at the end of the year and net debt to adjusted EBITDA at 2.7. The equity ratio declined below our long-term target level due to the EUR 105 million capital loss that we booked related to the divestment of Media Netherlands, the Iddink acquisition and IFRS 16. But both the net debt to EBITDA and the equity ratio are expected to return to the target level once we close the Media Netherlands divestment.

We repaid the EUR 200 million bond in November. This is expected to significantly reduce our financial expenses going forward. You remember that the interest on the bond was 3.5%, while our current run rate on the interest is below 1%. We raised the EUR 250 million, 4-year term loan in September to finance the acquisition of Iddink. And on the net financial items, we were at EUR 22 million last year compared to EUR 12 million the year before, explained by IFRS 16 of EUR 5 million, and then we had an old exchange rate loss related to a liquidated Ukrainian subsidiary of EUR 3 million in that.

And that concludes my part. As a reminder, our annual general meeting will be on the 25th of March.

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [4]

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Thank you, Markus. Thank you, Susan. We will now start the Q&A.

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Questions and Answers

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [1]

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So please wait for the microphone before your question. We have the first question, please.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [2]

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Sami Sarkamies, Nordea Markets. I have a couple of questions starting from Media Finland. You've been quite positive on the unit recently despite sluggish advertising media markets. Did the fourth quarter meet your expectations? And what can you say on the outlook for this year?

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Susan Duinhoven, Sanoma Oyj - President & CEO [3]

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Yes. The fourth quarter definitely met expectations. We knew, of course, that we would revisit the IT and look at potential necessary write-downs given the lots of IT development that we had done in both '18 and in '19. So that was, to that extent, expected. The underlying business performs well and we're very enthusiastic about that increase in digital subscriptions that you see both in Helsingin Sanomat and in Ruutu+. And that, I think, is why you see an underlying enthusiasm from us on this business. That is that the core essentials of it are doing well.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [4]

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And then a follow-up, where do you see the main improvement potential in Media Finland going forward?

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Susan Duinhoven, Sanoma Oyj - President & CEO [5]

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I think that it's doing well. The improvement will be just sort of continuing the good cost control. The TV market is, of course, a market where we see that if you look at, for example, price levels, very much below the European average. So if the TV market turns to a little bit more regular performance, you would say then that could show significant improvement also in our results. So those are things that we do not take into account. We take into account the things that we can influence ourselves. And there, we say, that's the reason why we target for the 12% to 14%. We see good opportunities to step-by-step improve that profitability still while keeping the business stable.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [6]

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Okay. Then moving on to Learning. We are entering a period of faster pace. How do you expect margins to behave over the next few years, when you will be benefiting from this curriculum renewals?

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Susan Duinhoven, Sanoma Oyj - President & CEO [7]

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Yes. Yes. As we said, we think that the underlying business margins will still improve, adding, of course, EUR 150 million business with a slightly lower margin profile. That impact -- the fact that we already in December indicated that we think that we can stay within that target range already in 2020, I think indicates that the core of that business is doing well, both on sales level and on profitability.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [8]

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And then anything you can share on the M&A pipeline at this point?

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Susan Duinhoven, Sanoma Oyj - President & CEO [9]

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As you expect, I cannot.

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [10]

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Questions from Sanomatalo? Yes, please.

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Pete-Veikko Kujala, SEB, Research Division - Equity Analyst [11]

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Yes, Pete-Veikko Kujala from SEB. A follow-up on Media Finland. You mentioned the IT write-down. Any indication on what kind of size we're talking about?

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Markus Holm, Sanoma Oyj - CFO & COO [12]

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It's EUR 1.5 million impact from that.

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Pete-Veikko Kujala, SEB, Research Division - Equity Analyst [13]

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All right. And then about Iddink. It seems that profitability was indeed higher than, for example, I expected in Q4 for the business. And also, it seems in 2018 Q4. So how should we think about the seasonality in terms of EBIT for that business? Is it a lot more stable than the kind of normal Learning business?

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Susan Duinhoven, Sanoma Oyj - President & CEO [14]

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Yes. I think we have disclosed at the moment of the -- we have disclosed the seasonality of that business. We don't see major changes versus that historic trend.

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [15]

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Any questions from Sanomatalo? Please?

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Petri Aho, Inderes Oy - Partner & Analyst [16]

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Petri Aho, Inderes. About variable costs. You said the last year, the paper cost, for example, were decreasing, and you have the IT infrastructure changes. Should we expect that this year, this will benefit you again? Last year, obviously, the IT wasn't beneficial to you, including the write-downs, but how do you see those costs developing? And are you expecting the paper costs, for example, to come down? And does it have big impact to you at this moment anymore?

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Markus Holm, Sanoma Oyj - CFO & COO [17]

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Yes. We saw an improvement from paper costs already last year, and we expect at least that level to be sustained going forward. And on the IT cost, of course, those were one-offs. So will not impact this year.

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Petri Aho, Inderes Oy - Partner & Analyst [18]

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And then on the M&A, you obviously will have some costs now that you are looking for the targets all the time. Will those costs then be added to your books when something materializes? Or will you have some kind of extraordinary cost from those in first quarters, for example?

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Markus Holm, Sanoma Oyj - CFO & COO [19]

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Sorry, that I didn't quite...

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Petri Aho, Inderes Oy - Partner & Analyst [20]

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Yes, the M&A. Now that you are actively seeking for targets, those will probably make some cost to you. So will those be extraordinary costs booked already in first quarter or so? Or would anything materialize?

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Markus Holm, Sanoma Oyj - CFO & COO [21]

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Yes. Typically, you have a great part of them up on the transaction itself for the closing of the transaction. But there are, of course, things that we are studying during the year as well. So you have something also during the year.

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Petri Aho, Inderes Oy - Partner & Analyst [22]

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And then on extraordinaries, in general, you have had those a lot in recent years. How do you expect them to develop going forward?

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Markus Holm, Sanoma Oyj - CFO & COO [23]

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Yes. Of course, if you take the absolute amount, now we have 1 business less. So to that extent, should be smaller. Last year, we had also this so-called journey to cloud project, which was quite big in IT, and that is now over. So those will not be repeated. So I would say the IACs, as we call them, going forward are mainly related then to the M&A and so forth, if such.

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [24]

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Okay. Thank you. Anything further from Sanomatalo? If not, I would like to hand over to the telephone line for questions.

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Operator [25]

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(Operator Instructions) And there seems to be no questions on the phone. So I'm handing back to the speakers.

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Kaisa Uurasmaa, Sanoma Oyj - Head of IR & Corporate Social Responsibility [26]

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Okay. Thank you. I would like to now conclude the event. Thank you all for participating. Thank you for the questions. And have a good Friday, and please come back with further questions to us at IR. Thank you.

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Susan Duinhoven, Sanoma Oyj - President & CEO [27]

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Thank you.