Earnings Call: Q2 2021

Jul 28, 2021

Good morning, ladies and gentlemen, and welcome to Sanoma's First Half twenty twenty one Results Presentation. My name is Kaisa Orosmaa. I'm heading Investor Relations and Sustainability at Sanoma. Today, we have President and CEO, Susan Dunhoven and CFO and COO, Markus Holm, presenting the results. After the presentation, we will have a Q and A session. We will first take questions from the telephone line and then from the chat function of the webcast. The webcast will be recorded, and the recording will be available on our website after the event. And the presentation we will have today is also available on the webcast platform and on the website. So once more, welcome. And I will now hand over to Susan to start the presentation, please. Thank you, Kaisa. Good morning to you all, and welcome to our first half year results presentation, and it was a good first half of the year. We've seen strong growth both in net sales and in operational EBIT In both of our businesses. So if we look at the sales growth, you see increased to €530,000,000 from 4.34 last year. And that was a result of both acquisitions and organic growth. And if we look at Learning, we see the Santayama acquisition contributing and an organic growth of 5%. In Media Finland, it was the regional news acquisition. And then from the organic growth perspective, both on the subscription sales, Continued strong growth and a strong recovery of the advertising sales, which, of course, had a Low comparable last year. So overall, for the group, comparable net sales growth of 7%. The operational EBIT, excluding PPA, improved together with the cash flow in line with the net sales growth. And we see the leverage at the end of the second quarter at 3.1%, which is typically our seasonal peak and was slightly above last year due to the acquisition of Santayana. Overall, when we look for the full year Forecast for 2021 outlook is unchanged. If I then go into Learning in a bit more detail, We see that ahead of the high season, which is in Q3, we already saw interesting growth to NOK 270,000,000 Coming from NOK 173,000,000 the year before. And out of that, the net sales of Santiana was NOK 35,000,000, which was roughly comparable to the year before. The comparable growth was 5% in the Learning business, And that was driven partially by pre ordering in the Netherlands and Poland. If we look at the full year for 2021, The comparable growth in our Learning business is expected to be in line with the long term target of 2% to 5%. And if we then look at the profitability of the business, we see that earnings increased. An increase was To €29,000,000 coming from €24,000,000 before. And there was in that already a positive contribution from the Santillana business. The earning improvements from the good organic net sales growth was partially offset by the one off marketing and sales A cost increase. That is it was compared to a one off low cost in last year because if you remember The corona pandemic closed the schools and made it almost impossible for our teams to visit the schools and do the teacher events. And therefore, last year was an exceptionally low marketing and sales cost. And this year is on a much more normal level. If we then go to Media Finland, also very solid quarter. Net sales Growing to €154,000,000 And that was coming specifically from the subscription sales. That was growing both Helsinki Sonamat and Route 2 Plus. And Helsinki Sonamat had again A strong quarter growth of 3% year on year. And that is particularly impressive given the fact that last year With the corona news peak, was actually a very strong quarter already for Helsinki Saldomat. So very well done by the teams in Media Finland again. The comparable Advertising sales grew, of course, significantly. Last year was the lowest point in the second quarter. So the increase is 33% year on year. But maybe more relevant is in comparison to 2019. And there we see that the advertising sales is still 6% below the 2019 level. And that was particularly in the second quarter due to the month of April, which with all the uncertainty about lockdown or not, had quite a low advertising sales still. In the sales, we see the regional news contributing €21,000,000 for the full quarter, Which of course is only €9,000,000 additional when you compare to last year because We acquired the business already end of April. So also last year, May June, we're already in, Offset by the loss of a full quarter of Oikotija, and that was contributing to CHF 5,000,000 loss in sales. So all in all, with acquisitions, strong subscription growth and the recovery of advertising, A very significant growth in sales in Media Finland and followed by a very good profitability. Operational EBIT, excluding PPA, improved to €19,000,000 and that was both the sales growth, But also some of the synergies from the regional news business acquisition coming through. The Events business made this quarter a small loss. And that has compared to a very strong Q2, which sounds counterintuitive. But last year, if you remember, we booked in the 2nd quarter the full Insurance compensation that we got. So relatively speaking, quite a bit of a change between the years with now an Events business making a small loss. Overall in the business, you see that the operational expenses And specifically, the TV content expenses are increasing in line with the recovery of net sales and advertising sales. So all in all, for Media Finland, strong quarter And great thanks to the team for accomplishing that under not easy conditions. If we then look at the outlook for 2021, that is unchanged. We expect the group's net sales to be between €1,200,000,000 and €1,300,000,000 and the operational EBIT margin, excluding PPA, between 14% 16%. And when we specifically look at the corona impacted businesses, we see that the net sales of the event business will be approximately half what it was in 2019, where it was €35,000,000 And the profitability of that business will be around breakeven. The advertising demand, We expect to be weighted slightly towards the second half of the year. And the Learning business overall will not be impacted by corona or school closures like It was last year. So with that, I would like to round off my part of the presentation and hand over to Markus Holm for more of the financial details. Thank you, Susan, and good morning, everyone. Let's start by looking at the 2nd quarter results. Earnings in the quarter grew nicely in line with net sales. In Learning, we saw an improvement of NOK 9,700,000 in the quarter, and that is mainly explained by the acquisition of Santiana. We also saw organic net sales growth contributing positively. And then as a negative in the quarter, the fact that higher marketing and sales costs were We had higher marketing sales cost compared to the corona savings in the Q2 2020. In Media Finland, we saw 3,200,000 improvement. That's due to the organic net sales growth and synergies also of the regional News Media acquisition. Then as a negative overall operational expenses, including TV programming costs that are growing, in line with the recovering net sales as we've indicated earlier. We saw a small loss in the events business compared then to Q2 2020. We had a positive from the insurance compensation that we received. In other, it was a negative €1,900,000 They're mainly explained by a positive provision incentive provision reversal that we had in the Q2 2020. Also some timing of cost between the quarters explaining this. Then looking at free cash flow that improved to negative €51,000,000 The negative free cash flow of the divested Media Netherlands in the comparison period is, of course, the main Change, positive change now, but also improved EBITDA and working capital in Media Finland. We then have to remember also we have the seasonally negative cash flow in Learning, including now also then the impact of Santillana. As a separate note, I want to highlight here that we paid taxes, penalties and interest of €25,000,000 related to the VAT claim In the magazines distribution, for the years 2015 and 2018, that was paid on the 1st July. And we paid it to avoid further penalties and interest on this amount. We still consider the claims completely unjustified, and we have Build the decisions, so no provisions have been made on this. The amount paid will be reported as a receivable in the 3rd quarter, Financial reporting. And for the group's free cash flow, for dividend purposes, we are eliminating this impact. Looking at the balance sheet and leverage. Net debt to adjusted EBITDA increased to 3.1%, having been 2.6% a year ago. Equity ratio, 32.9 compared to 34.4 a year ago. And net financial expenses, they decreased to minus 3,000,000 compared to minus €4,000,000 a year ago. The improvement was due to foreign currency translation loss in the comparison period And also then lower financial expenses of external loans during the quarter. The average interest rate of external loans increased to 1.1% From 0.7% in the previous year. That's at the end of June as a result of the 3 year, NOK 200,000,000 bond issued in March. Then just finally, as a reminder, Our financial reporting for the Q3, we will publish the Q3 interim report on the 27 October. Thank you. Thank you, Markus. Thank you, Susan. And This was our presentation about the first half results, and we will now start the Q and A session. I would like to hand over to the operator at the telephone line, please. Thank Our first question is from Sami Sykamias from Nordea Markets. Please go ahead. Hi. I have two questions. Firstly, on the Learning business, we did see quite Soft operating leverage in Q2, and you're explaining that TESAR marketing costs were at abnormally low level in Q2 Last year due to coronavirus. How will that be the case in the second half of the year? Did you have, let's say, a more normalized cost base during 3rd or 4th quarter? Or will it be same thing going in the second half of the year. Yes. Maybe I start answering from an operational perspective. It's, of course, good To remind that, in Learning, you have an annual cycle. So the most of the marketing and sales It's actually done at the end of the Q1 and the start of the second quarter. So that was exactly when we were, I would say hit by the corona pandemic. So that was one of the areas where we saw some savings last year. But I remind you that we also had some losses of revenue, for example, last year In that same period, when you think about trainings that are paid for by teachers, so it is a mixed bag. So I would not put too much of attention to that. In the second half of the year, typically marketing and sales cost are less significant. Our Polish business does still do some sales effort just before the high season. But this is an annual cycle. And the comparability, of course, with corona pandemic is a bit complex. Okay. I think that opens up the situation quite well. And then I have also one question on the Media business. You were quite positive on the second half outlook after the Q1. No, I think you were saying that you expect second half Advertising Media sales to be Somewhat stronger than for the first half of the year. But I mean, if you think about the outlook for 3rd quarter, you will probably show sales growth. But do you think that will also be the case in the 4th quarter, Thinking of the comparables from last year. Yes, you're absolutely right. The second half of the year, of course, last year was already quite good. And that's where we are comparing ourselves much more towards 2019, which was more of a normal year. So the comparables towards 2020, let's be careful with those because there were Some peaks and valleys there. We're comparing towards 2019. We do see that the first half of the year still had some Corona impact. So it will now again be quite dependent on how does this go forward. We still expect also in the second half of the year Some impact from corona, but let's see how we all come back from the holiday season. The visibility on our advertising revenues is still extremely short. Yes. But I guess the outlook is quite strong still for the Q3, but then maybe So some caution needs to be applied when thinking of Q4? Your estimates. Okay. Thanks. I don't have any further questions. And our next Question is from Panu Latimaki from Danske Bank. Please go ahead. Thank you. I have several questions, Maybe starting from advertising and continuing on Sami's question. I assume you won't give any kind of Forecast on 2022. But if I ask it this way, can you remind us what is the split in your advertising revenue in terms of print, online And so on after all this M and A. I'm just thinking that what's your longer term view on the advertising revenue outlook After we are kind of done with the recovery post the pandemic, do you think this is a growing business? Or is it something that's Less growing than the other areas. Yes. I will come back to you on the exact split Because that, of course, depends on what year you look at last year, very hard to give that split when you look further forward. Typically, we're not giving that far out. I mean, if the next quarter is already difficult, let alone 2022. But overall, I think you can see that in the advertising market, if you look at the different segments, you see that typically print advertising is declining. Digital advertising for us very strongly increasing, also above market growth there, What we're very happy with. And you see, of course, that the digital advertising is already becoming a larger and larger part Of that total mix. And therefore, that growth is already compensating the print decline to a large extent. Then we have TV and radio, and those are markets that are very dependent on the viewing trends And viewing market shares. So there, we really need to look year by year and follow that. So that gives maybe a little bit of flavor. And I would otherwise say that when we look back at the full year, That is typically a good moment to then also look at the next year and look at the details of this mix. Because during The year, you also see some fluctuations in that mix. All right. Thank you. And secondly, continuing on Media Finland, can you comment on the trends that you see in single copy sales and Subscript sales, I mean single copy sales was up 2% and subs by 11% in Q2, but that included probably some impact from the M and A. So how do you see this kind of continuing? Do you think that Helsinki Sanomat can continue At the good levels that they have seen. And what about the single copy sales? Yes. We definitely are very positive on the prospect You see that digital product creating a lot of growth. Of course, also the opportunity to go outside the Usima area, outside the Southern Finland area With the digital product much more easily than with the printed product. So we definitely see good prospects For Helsinki Sonamat overall, it's of course good to remind that in the subscription business in Media Finland, It's not only Helsinki Sanomat, it's also RUTU plus And RUTU plus shows also a very strong development In the last years already. So that contributes to that subscription business. If you look at single copy, Has been impacted last year by the low traffic in the retail with the lockdowns And the tail of working. So that makes that also the comparable year might be impacting A bit of that growth. But we overall see that specifically, Ildesanumab and the magazines have had good performance Also in single copy. Okay. Thank you. I would also have a couple of questions on learning, if that's okay. Maybe starting with organic growth, Which was good in Q2, and you said it will be in the range of 2% to 5% this year. How does this split to the To kind of materials and then to the systems and the digital products that you are providing? Yes. We don't give that split midyear. We can come back to that also when we look at the full year Because then we see a more balanced mix. Because, of course, now you see some products already being sold and others Not digital, of course, being recognized through the year and the Q3 being particularly strong, of course, for printed products. So I would say let's come back to that maybe after Q3, but probably best after Q4. All right. And then on Santillan, is it performing better than you were expecting if it was flat year on year, While I understood it was expected to be lower this year? We're very happy with the overall with the integration And with the performance of the business. So overall, we're very happy with the Santoyana business. I wouldn't put too much on the exact numbers at this moment because we never know It can be one order that is a little bit earlier or later. So the split between the quarters always make that difficult. So again, sorry for that. But again, the this is better looked at after the high season. The line with the expectation. The final question about Open Learning. You comment on a political risk gain in Poland. It's mentioned in the annual report as well. Can you remind us what's it all about? Yes. The in all the Learning businesses, We always have a dependency, of course, on the curriculum. And the curriculum is set by the governments. And therefore, requirements that are put on the materials by the respective governments is A risk that we always have as a business. And with governments in more or less flux, You see therefore more or less risks. So that is part of the Learning business. We're not particularly worried by that. We have strong teams in each of the countries locally embedded. So but it is and it is good to keep that always in the back of the mind that local governments set the educational environment, and that is the environment that we have to operate in. Okay. That's all for me. Thanks a lot. Our next question is from Peter Vecchio from SEB. Please go ahead. Peter Vergruillen calling from SEB. A couple of questions, if we start with Learning. In Q1, you mentioned or highlighted already that there might be some shifting of sales from Q2 to Q3. But Now it seems that, that didn't take place at least to the degree that you were expecting. So Is it so that there was actually some kind of like pulling demand forward from the Q3 into Q2? Or is there some kind of shifting that we should now Take into consideration when we're looking at the next quarter? Correct. We saw somewhat higher Pre ordering in learning, especially in Netherlands in the second quarter than we had expected. So that shift is smaller than we anticipated. It's roughly now than half what we had indicated earlier, so that we see going to the Q3. Yes. All right. But still if we look at Q3, we are still looking at basically a net positive FX For that quarter? Yes, yes. Yes. All right. Then on MediaFinland, If we talk a little bit about festival business, you mentioned a small loss in Q2, but was it so that you held 1 festival in Q2, and that was at 50% capacity. Was this correct? Yes, correct. Yes. And now that you mentioned with your guidance or the kind of the commentary with the guidance that Sales is expected to be half of the twenty nineteen and roughly breakeven. So is that Performance for the full year, is that now going to come fully from basically the Q3 quarter? Almost fully, You could say, the sales the 1 festival, it's a sizable festival, but it's 1 festival and 10 in the Q3. But we sort of could foresee that there would otherwise be a lot of questions around the Events business. So that's where we've chosen now to be quite specific on this guidance, let's say, as part of the outlook to help steer this. Yes. All right. Thanks. And Lastly, on the Alba Media acquisition, the synergies, could you give some kind of comment? Where do you see yourself currently or, Let's say, at the end of the year, given what kind of run rate on synergies are you expecting? Yes. We have indicated at The acquisition that we are expecting €13,000,000 of total synergies from the Alma acquisition. And that is throughout the whole of the business. And we're well on track. Most of those synergies are already in. But of course, some of the longer impact hits then only the P and L For the full effect next year, because anything that is happening now during the year, you will only see the benefits for a part of the year. On track and very good progress there. Yes, very clear. Thanks a lot. That's all from me. Thank you. Our next question is from Pia Voskris from Carnegie. Please go ahead. Yes. Hello. It's Pia Faustqvist from Carnegie here. Two smaller questions and one with regards Media Finland and the nonrecurring items you booked in Q2, you referred to some strategic business development In that unit, what kind of business development are we talking about here? Yeah. As you know, we are doing quite also a number of new products ranging from the kids news in Helsinki Cellarmat VCO, the Suppla Plus, so quite some new product developments. And those have, of course, also some associated cost. They're doing well. They're going very well according to our expectations. But that's what we're referring to when we see, say, strategic developments. Okay. I'm just trying To draw the line here, I mean, to me, it sounds more like very normal business as usual. So that's why they Priya. I kind of raised my eyebrow. Priya, sorry, I think your answer was on our question was on the items affecting comparability. And there, of We still have some tails related to the Alma Regions acquisition as well this year. Okay. Okay. That makes sense. Thank you. Then another question with regards to learning. Again, it seems like the second quarter, you've been successful with With in its learning in Germany. Can you shed some light on what's going on Overall, is it just success following success? Or I saw that Schleswig Holstein was At least the last one of the last announcements you made where It's Learning again has conquered some new areas. So are you I assume that you are happy with how each learning is advancing. And is it even advancing better than you forecasted? Yes. I think success succeeds. So that is a very good saying. But it would be Unfair to the team who has accomplished this to just say that this is an automatic thing. This is their very hard work. And I think specifically the German team has done an excellent job in accomplishing this growth. And then it is, of course, one of the areas where the corona pandemic in the German market, which was low digitalized, has created that realization that these platforms are super helpful in teaching at a distance And also actually teaching in the classroom. So the It's Learning has fully benefited from that, but I think it is the sales skills Of that team that has really brought that about. Now there is one aspect of it that also in other territories, there are good Progress on its learning. But the German market has this phenomena that they by the contract, by state Or by city. And therefore, these contracts get a certain size that make them, I would say, publishable. And that is maybe less so in Norway or in Finland or in France, So where it goes school by school. So that's maybe a little bit an element why you see so much about Germany. But we're very happy With the development of its learning. Yes. All right. Thank you very much. And our next question is from Panu Latamaki from Danske Bank. Please go ahead. Yes. Thanks for taking my question. I still have 2 on learning if we have time. Firstly, again asking about 2022, but Do you see anything that would prevent you from growing in the 2% to 5% range next year? I mean, In terms of negative curriculum changes or something like that? We are giving a guidance, let's say, on our long term growth targets. And there we say it is 2% to 5%. So long term growth means that it might not be every year. But if we look Specifically forward, the next year is, of course, the year with the curriculum change in Spain. So that is a large market for us. So a good growth opportunity from there. Counter to that is that in Poland, where we have had years of curriculum change, Next year will be a year without any impact from any positive head backwind, let's say, from curriculum change. So you see these fluctuations. So therefore, it is good to have in the back of your mind, we see autonomous growth in learning. And that is with these fluctuations that can but that is not reflecting the strength of the business. Strength of the business is reflected in the 2% to 5% long term comparable growth. All right. And the second question is on the learning margin target of more than 23. I think you will land around 20% this year. What are the main drivers for getting to 2023? And what do you think is the time line For getting it there? Yes. For the profitability target, we have clearly indicated That this is a long term target. And this is we're really talking then a 4, 5, 6 year Long term target to hit the 23. If you look last year, we were around 19. We then indicated that with the Santiana acquisition, That would lift us up typically a percentage point by itself. And then the next steps come from That's benefiting from the increasing scale, but also increasing digitalization, which has a positive profit impact. And those will go stepwise. It will go with the growth in the market and the developments. So that is where we see us growing towards the 23%. Okay. That's clear. Thanks a lot. And we currently have no further audio questions. So I will hand the word back to the speakers. Thank you for all the questions from the telephone line. And we have one more from the chat. And that comes from Petri Gostovsky from Inderes. And so about Learning. Has the pandemic impacted on digital sales in Learning going into a new school year in an environment that is impacted by corona? Yes. Let me take that question. What is good to remind yourself is that the sales we typically do is a hybrid package. So what we offer a teacher and what we offer a school is a full package consisting of a printed book, Typically, teachers materials, whiteboard materials, digital Text application, digital exercise platforms, so it is a full package. So even if the usage might twist slightly more towards digital, it does not directly impact our sales Because we're selling an overall package. Then of course, you have the digital platforms like we already just discussed, the It's Learning, Where they're only selling digital. And there you see a slight positive impact. But we need to remind But that is a smaller part of the business. The larger part of the business is actually our content business where these hybrid methods are sold And therefore, not directly impacted by higher usage of digital. It does, of course, play into our strength Coming out of highly digitalized countries with a long digital experience, we, of course, see that we have the benefit In the market of a strong established digital position. But that is not something in a learning market that you see immediately back into the numbers, for example, for this year's sales. Thank you, Susan. And we don't have any further questions. So I would like to thank everyone participating. And thanks for asking questions very actively. And of course, we continue to be available at Investor Relations and happy to continue the discussions after this event. And thank you again on behalf of the whole team, And have a nice day. Thank you. Bye bye. Thank you. Thank you.