Good morning, everyone, and warmly welcome to Sanoma's Third Quarter interim report for 2020 presentation. My name is Mira Rinne-Helenius, and I work as an Investor Relations Manager here at Sanoma. I'm joined today by our President and Chief Executive Officer, Susan Duinhoven, and Chief Financial Officer, Alex Green, who will shortly present the third quarter results. After the presentation, we will have a Q&A session, and we will start by taking questions from the audience here at Sanoma House. After that, we will move on to take the questions from the telephone lines. Please note that you can also place your question via the chat function on the webcast platform. This event will be recorded and the webcast, including the Q&A session, will be available on our website shortly after this event. Without further ado, I welcome Susan on stage, please.
Thank you, Mira. Good morning to you all. Warm welcome also from my end to this Q3 results presentation. We saw a quarter with good net sales growth due to the Spanish curriculum change and the recent acquisition in learning. If we look at that EUR 40 million in revenue growth, you could see that being split between the learning business and the Sanoma Media Finland business, both organically growing. Then EUR 20 million of that growth was coming from the Pearson acquisition in Italy and Germany. An organic net sales growth of 2%. But even with that good sales growth, our operational EBITDA declined, and that was due to two reasons. One, a particular reason was the Dutch learning distribution business that had a difficult high season this year.
Throughout the business, we saw higher paper cost impacting both the learning business and the media business. That made the overall operational EBITDA excluding PPA EUR 192 million year to date. Now, with that lower earnings and the higher investments that we had already indicated at the start of the year our free cash flow landed below last year at EUR 48 million. There we also have to realize that where last quarter we were talking a lot about the Spanish curriculum change being late in its decision-taking, and therefore a lot of the revenues moving from Q2 to Q3.
Now, of course, being happy that we see that full revenue into the third quarter, but it does mean that the cash flow is now of course also delayed following that revenue shift and comes in more towards the year end. That is one of the reasons for the lower cash flow now in the year-to-date figures. If we then look at our leverage, our net debt over adjusted EBITDA, that's at 3.3. That is above our long-term target of being below three but that is very logical because the Pearson acquisition of Italy and Germany was only closed on August 31. The loans that we had taken from that are fully in the debt. If we then look at our outlook, that is unchanged.
On August 31st, when we did that acquisition we adjusted the outlook based on the fact that the Pearson businesses are only for four months into our results. In that sense slightly dilutive. Since that moment, the outlook fully stands for 2022. Let me now go into a bit of detail on the learning business. If we look there at the net sales, we see strong organic growth, and that comes from Spain and the Pearson acquisition. The Pearson acquisition itself contributed for more than EUR 20 million to that sales growth. Organic growth was 2%. There you see the two effects that we have talked about before.
Spain, where we are very happy to say as indicated that the delays in the curriculum implementation have now come to full bloom, I would say in the third quarter. We see that the conversions in the schools have gone well so the market share that we were aiming for is fully there. That is something that we will benefit from of course not only this year but also in the coming years. We still see that a big part of that curriculum change will flow into 2023, as we said before. In the places where the curriculum change happened, it was done well. What we also knew in advance is that in Poland, where the last curriculum change was last year that we would have a strong decrease in the market.
You know, strong has different meanings for different people. If I attach a value to that, EUR 18 million lower sales, and that is just totally in line with how the whole of the market in Poland has performed. You see that decline, and then you also understand that all the other content businesses have also grown quite nicely in the Netherlands, in Finland, in Belgium, and with that still resulting in a net organic growth, even with a decline of that size in the well-performing Polish business. Lot of pluses and minuses, but overall, good solid sales growth. If we look at the earnings, there we see some impact, not in the learning content businesses. Those have performed very nicely. Earnings improved across all markets.
Of course, apart from Poland, because in Poland, the EUR 18 million revenue decrease, of course, then also translates as expected in a EUR 10 million lower profitability in that market. That is, I would say all part of the normal curriculum change. All the other learning content businesses doing quite nice despite the very significant impact of higher paper costs. Because we're selling hybrid solutions both digital and paper, so we are impacted by that increase. Where the issue was in this quarter what made overall a net decrease of EUR 4 million EBITDA in the learning business was in the Dutch distribution business. That business declined due to a bit of an exceptional situation and a very strong competitive market that is ongoing there.
Now, it's good to realize if we just deep dive a little bit into that. It's good to realize that a distribution business is by nature a low margin business. Therefore, if costs start going up on a big base with small margin, then you're very quickly entering in the zone of actually losses. The inflationary cost pressures that we see, be it on trucks, on fuel, on all aspects of the operation, already had a significant negative effect. Then it was compounded by an extreme shortage of labor in the Dutch market over the summer. Normally this business, if you realize it is only in four to six weeks that those millions and millions of books and parcels have to be constructed, and that is all manual labor.
Over 500 people are needed in order, during those couple of weeks, in order to push that business out. If you can't at that moment get the labor, you need to pay almost whatever it takes to get the people in to do the work, because you can't wait because there is the hard stop of the school start. That's the business they are in, and this year, quite exceptional situation where both the increase in labor rate per hour was needed, but also we had to rely on foreign workers to be brought into the country quite quickly, in order to fill those shortages. Then compounded by another unfortunate element that we had not seen before, and that is that publishers were late in delivering their books.
That not only creates the cost of double deliveries, because in the end you need to make sure that the students can at least start with the majority of their books, so you have to do that first delivery, and then you had to do the delayed books in a second delivery. So that extra cost, but also it creates, of course, a massive inefficiency during your whole process. It's quite impressive to see the scale of that operation once you start handling over 5 million books in the period of a couple of weeks. Now, a number of these effects are one-offs, but a number of them we expect, for example, the labor cost and the labor shortage, we expect also to continue into the next year.
We want to pre-warn a bit that this business, even though we see that the pressures in the market have led to also a thinking through on both the publisher and the schools to optimize this chain, and that will give, in the longer run, good results back to this business. For next year, we still expect some of these impacts to continue, and therefore a relatively low performance also next year. Now, whole story on that business, but we don't often talk about it. This is now a moment to understand a little bit the pressures that business is under.
As I said, the acquisition of Italy and Germany performed well, according to the plan, contributed already nicely to both the sales but also to the earnings in the third quarter, in that one month that we owned that business. All in all, earnings strong in the content businesses, issue in the Dutch distribution business that made the EBITDA go down with EUR 4 million year to date. The Pearson acquisition, I already talked a bit about it, and we have, of course presented that before. With this acquisition, we're quite happy to now enter the Italian market, which is one of the largest K-12 market in Europe, and which is at its starting point of its digitalization. It's the third-largest publisher, 15% market share.
The interesting thing for us is it's focused on secondary education, and that gives us more scale in that important part of the publishing portfolio, and that allows us then also to invest further in digital platforms specifically for that part of the K-12 market. The EV of this business, EUR 190 million. As said, we closed it on August 31st. With this acquisition, our share of learning revenues within the total group increases to 55%, and the share of total profit, the total EBITDA excluding PPA, increases to about 70%. As we indicated the sales for these acquired businesses contributed around EUR 20 million in the third quarter. For the full year we expect EUR 4 million-EUR 5 million contribution in operational EBITDA.
If we then turn to Media Finland, there we saw stable net sales and earnings a bit impacted by the higher paper cost. The stable net sales we feel quite comfortable with, and it's quite a compliment to the Media Finland team to have achieved this. Because the advertising market as the B2C market, are declining slightly. If we look at the total advertising, we're in a good position that the digital and the radio advertising is continuing to grow, which are typically quite resilient types of advertising. Of course, compensated unfortunately by a decline in print and TV. That made net a small decline in line with how the market segments operated.
If we look at the subscription sales, that also declined slightly, and it's coming from a high of the Corona-driven period. Because during Corona we had these two balancing factors, lower advertising but higher B2C. Now the subscription sales is coming back to a more normal level. What we do see is that also when consumers are economizing, they exchange print for digital, which is from a top-line perspective, leads to a decline, but is not necessarily a negative for our profitability. In the quarter, the event sales and the external printing services contributed to the net sales and compensated the decline. There, even though the net sales of course stay stable that way, we know that we're exchanging high-margin sales for lower-margin sales. Therefore you see an impact on the operational EBITDA.
That was EUR 21 million compared to EUR 24 million last year, and a large part of that difference is coming from the increased paper cost, that even with economizing on our paper usage, we still see that in our numbers. As indicated, change in sales mix impacting the profitability. Just on the events business, small positive contribution also in the profitability in the third quarter. For the full year, as we have indicated before, it will be around breakeven. Now if we go to the outlook for the full year, that is unchanged, since we last updated it on August 31st, and that was an update only because of the acquisition of the Pearson businesses in Italy and Germany.
We only have those businesses four months in our numbers, so was slightly dilutive on the full year outlook. Unchanged at this moment, meaning in 2022 we expect to be between EUR 1.3 billion and EUR 1.35 billion in sales, and our Group operational EBITDA margin, excluding PPA, to be around 15%. At this point in the year, looking out for the last quarter, we can see that we will be on the lower end, trending towards the lower end of these ranges.
This outlook is as before still contingent on our operating environment staying stable, and that means the continuing coronavirus pandemic not to have an impact on our business, also not in the fourth quarter, and the advertising market in Finland for the whole of the year to be stable. Outlook 2022 unchanged. If we then look forward to 2023, we see an operational environment that will continue to be challenging. We're in a solid position, a strong starting position with a resilient learning business that will be looking out for some growth both in Spain with the second year of the curriculum change, but also in Poland, where we this year had a big step down.
In Poland next year a small curriculum change will be happening, so that will end that decrease and give a little bit of uplift, but nowhere near back to let's say last year's levels. Still, a bit of an uplift. Then, of course, the addition of the Italian and the German business. In Media Finland we have a good starting position because the digital advertising continues to grow, and it is, by now the largest single advertising part of our business, so the largest single segment. That is typically a segment that is more resilient towards economic worsening situation than for example TV or print.
Part of our good starting position is that we are quite used to thoughtful cost management across our businesses, and we will apply that again in full for the next year. We do think that when we look forward to 2023, there are also elements that will burden our performance. We see, as discussed before, that in learning, our Dutch distribution business will have another year of strong market pressures, but also in Media Finland, declining advertising market is what we think looking ahead. We have been, I think, positively surprised by the resilience of the advertising market so far, but we do not think that will continue going forward.
In addition, we also see a slightly weakening B2C demand, and that impacts not only the news subscriptions, but also, for example, the events and the route to the VOD propositions. That weakening B2C demand is coming just from simple lower consumer confidence. Now, none of us have a crystal ball. If we think back last year this time, we would not have expected 2022 to go this way. You know, if, of course, the market situation changes, maybe for the positive, then this could look differently. If we now look out to 2023, we see top line some pressures as indicated, but also continuing inflationary cost pressures. Paper and distribution, we still see further increase, so we're not at the peak yet.
Particular attention I think we should pay to the rising personnel costs, because personnel costs and salary adjustments are typically done at the start of the year. That means that in 2022, we see personnel costs that are based on the still relatively modest inflation of 2021. In the beginning of 2023, we will see, of course, that the demands for salary increases will be based off inflationary increases in 2022, which in some of our territories are double-digit. The good thing is that more than half of our personnel is based in Finland, where Finland has been relative to Central Europe quite modest in its inflation, but still significantly above what we have seen in the last couple of years.
Now, we just wanted to share that with you at the moment that we see it but at the same time saying our long-term targets we see in place. Solid business, both in Learning and in Media Finland, an important part of our equity story increasing dividend year on year. That also is when we look further out to 2030, where we have stated a strategic growth ambition, and we see that fully in play. Of course, the acquisition now end of August already brought our Learning share of the total business to 55% of sales. What we're aiming for by 2030 is to have a group total net sales of over EUR 2 billion, of which 75% would be coming from the Learning business. That means in the Learning business, significant additional growth.
That growth comes from organic growth in line with the targets that we put on the business of 2%-5% annual growth, but also growth through acquisitions while paying that increasing dividend. That's from the solid cash flow that the businesses generate themselves. Important that we will keep our leverage, certainly in a higher interest environment, keep our leverage below three. In addition, as we have stated before, if it is in the interest of all shareholders, we also see equity as a way of funding further acquisitions in the future. All in all, solid quarter sales. Spain has picked up nicely after the Q2.
Strong content Learning business, some issues on the profitability in the distribution business for Learning in the Netherlands, but that is a contained element. The Media business having done a good quarter, but some impact of the paper cost. With that, I would like to hand over to Alex Green to give you some further details on the financials. Alex?
Thank you, Susan. Thank you Susan , and a warm welcome from me here also to our Q3 results presentation. First of all, looking at the operational EBITDA and focusing on Q3 here, the EBITDA is stable or in fact slightly increasing versus last year. As you can see, it is Learning increasing by EUR 4 million versus last year and Media Finland being EUR 3 million lower. If we look at Learning, we can see that the organic growth in the content businesses in particular in Spain and Netherlands, has helped boost our EBITDA for this quarter. Also there's been a contribution from Pearson, Italy and Germany, where we had for one month in the quarter.
As you've heard, the weakened profitability in the Dutch distribution business brought us down, and also because Poland had their curriculum change last year and not this year that creates quite a change from year-on-year basis, which is you know, to a great extent replaced by Spain, which had a good high season. If you remember, we talked last quarter about the delays to Spain. We were very pleased with how that worked out in Q3. On the Sanoma Media Finland side, we had a small positive contribution for the events business in Q3. Overall for the full season, the full year, it'll be roughly break even, but it added to Q3.
However, this was offset by the quite significant paper cost situation we're seeing and also by the lower advertising and subscription sales. In terms of the other and elimination line, this, as we've said before, will remain stable versus last year. If we look at the free cash flow and talk about Q1 to Q3 free cash flow. First of all, if you look on the right-hand side, you can see clearly that Q3 is our large high season quarter, particularly obviously in the learning side, and that was actually slightly higher than last year. On a year to date basis, we are quite a bit behind last year for a number of reasons.
If you remember, at the beginning of the year, we talked about how we were expecting our cash flow to be down because of the investments we were going to make in the business, particularly in digital development and also adapting our offices to a hybrid working. Despite some small positives coming from the Pearson one-month acquisition, so in one month in our numbers, the lower EBITDA for the period has brought it down together with those investments in development and office adaptation and also the higher taxes paid because 2021 was a more profitable year than 2020. We're also seeing higher net working capital in a number of markets as we see a buildup in inventory, particularly in Spain in the curriculum change years. Also, as we talked about before with.
First of all, with the Spanish delays in ordering within this year, we saw basically the business operate later than it otherwise would have done, which means that more sales were coming in in Q3, and then a lot of the cash will come actually later in Q4. Versus previous years, we see that shift in cadence back towards the back end of the year. This will be increased going forward as we have Italy. As we've brought in markets from Southern Europe where the school start date is later, and also you sometimes see longer payment terms, we will see that sort of cadence of cash coming in later in the year or sort of stretching out more than it has been in the past.
Here, we also confirm our second installment of the dividend, which will be paid on the fourth of November at EUR 0.27 per share. If we look at the net debt and leverage, a number of impacts from our acquisition can be seen here. You see our net debt over-adjusted EBITDA ratio is up at 3.3, which is understandable given the debt levels. We do expect that to come down towards our long-term 3 target. At the end of the year, it might still be slightly above, but it will go back to our long-term target. Our interest-bearing net debt at EUR 838 million, which includes the EUR 250 million four-years long-term loan drawn down for the acquisition of Pearson Italy and Germany.
In terms of our net financial items, it's slightly higher than last year, and this is again impacted by the acquisition, so the last quarter. It's only a slight increase, higher debt, but also with the rising interest rates. On the year to date basis, we've done, I think we're very pleased with the job we've done using commercial papers to optimize, to ensure that our interest rate levels stayed relatively low through the year. It's starting to impact us in Q3. Obviously, interest rates rising, and as we go into next year, that will have an impact, you know, as we have, as we bring down that debt, optimize with commercial paper, but with the higher interest rates, it will clearly have a significant impact.
Finally, on the bottom of the slide, to our PPA for the Pearson acquisition. This will be approximately EUR 4 million amortized each year, but we do also have, like we did with Santillana, an extra EUR 10 million amount for the first 12 months, which relates to how we value the purchased inventory as part of the PPA. We value it as a sales value rather than than a sort of cost value, and that gets amortized as that inventory gets sold, which will be approximately 12 months from the date of acquisition. Post that, it will be the four million every year.
That concludes my three finance slide, but I do have one date for your diaries, as we will have another deep dive into the learning business, in this case, talking about the learning content businesses that we have in Europe at the moment. Rob Kolkman, the Chief Executive Officer of the learning business, and I will host a virtual presentation and roundtable, similar format to we did before. As I say, first of December. Save the date for that. Here, I give you the financial reporting dates for 2023, including the AGM on the nineteenth of April, for your information. With that, I will hand back over to Mira Rinne-Helenius, and welcome Susan Duinhoven back so we can go into the Q&A session.
Thank you, Alex, and thank you, Susan and Alex, for the presentations. Let's move on to the Q&A session. As I said, we will first take the questions from this here, from the audience at the Sanoma House, and then move on to the telephone lines, and then also to the webcast chat, where we have questions pending. Yes, wait for the microphone. We will start with Maria from SEB.
Thank you. My first question is coming on the Sanoma Media Finland, the subscription sales. Do you think, I mean, in the current environment, you could compensate these declines? Perhaps, I mean, now it was declining in Q3, but the declines in subscription revenue by or subscriptions, number of subscriptions.
Yeah.
By price increases going forward. Yeah.
Yeah. I think the price increases are a very normal part of, let's say, how to build the product packages. The combination between hybrid, digital print, seven days print.
Three days print, weekend subscriptions. All those packages get priced and we there is quite a bit of science, let's say, from a whole team that is working on how to then also help consumers that might not want to go through an increased price on one set into another product that is for them doing the same job, let's say, but in a different mix between print and digital. The price increases are part of the normal procedure. Of course, with increasing cost base, there is more pressure and bigger steps in those price increases. Will we be able to do all? That is, of course, that's a constant measuring in the market.
What we do know is that every time when we increase the prices, we know that it might impact a number of subscriptions a bit on the negative end, but in the total profitability on the positive.
Maybe on a follow-up there, what happened to your subscriptions, the number of subscriptions, I mean, during the financial crisis, for example, or the-
Yeah.
I guess you weren't part at that time in the nineties in the Finnish crisis.
Yeah.
Economic crisis.
Yeah. We would need to look them up. The general trend is that in a strong consumer-oriented economic crisis, so take, for example, the financial crisis in 2008, didn't impact that much because it didn't hit the full consumer market to the same extent. If it is a consumer-oriented recession, so where everyone feels it in their wallets, we typically see subscriptions coming down. What we, of course, at that time did not have was this, I would say, way out through digital, which is considerably lower priced.
That is a new dynamic that we hope will help sort of keeping everyone well-informed through the news, through quality curated news, and then you know being able to adapt, let's say, the package that they choose to their economic circumstances.
Interesting. One question on basically the wage inflation in the Netherlands and Belgium, and what is to my understanding that we are seeing much higher wage inflation already now in these countries. That I mean, how do you see the pricing that will I mean, when can you raise your own prices in the.
Yeah.
I mean, the content as well as in the distribution business.
Yeah.
How long we are going to be behind?
Yeah. Take, for example, the Belgian market a little bit as an extreme, because in the Belgian market, there is an index that is written in all the contracts and all the union agreements, and that index just does a multiplication, and that multiplication lands on double-digit salary increases. Now, that is across the whole of Belgium in every sector, civil servants, business. I mean, this is a societal phenomena, of course, with its consequences. That means also that the price increases in Belgium can be higher because everyone is in the same situation that they need to translate that into the price.
That's where it is easier to communicate in Belgium than, for example, in the Dutch market, where typically the salary increases are more a result of sector by sector negotiations, where also the profitability and the circumstances of a sector are taken into account into that negotiation. That's where the differences between sectors can be high, that leads to more moderation. At the same time, it makes it a little bit more difficult to communicate because it is not the same for everyone.
If we now look, because this is the moment where we also in our learning business are thinking through and communicating and testing the price increases we do see that in some of our markets, the cost increases have now gone so fast so high that we will not be able to translate it all in year one price increases. We will need multiple years for what we're now seeing. In other markets we do see more modest inflation, and therefore the price increase being able to cover those cost increases quite well. We are happy with, let's say the fact that we have a broad portfolio so that you have more variation, let's say, between the markets.
The other thing is that, as I said in the presentation, the positive thing is that a big part of our employee base is in Finland, where at this moment, Finland is less inflationary hit let's say than take the Polish market or the Belgian or the Dutch market.
My final question that, I mean paper prices are still going up, but let's play with the thought that they would be coming down. When we would see this inflection point how long does it take that we can see it in your cost base?
Yeah. Let's say everyone is, of course, trying to estimate where that is, and at that moment you will try to decrease your inventories well enough in advance. It is that game that we need to play. At the moment, we're quite careful and building up quite a bit of stock because of the situation that it's not only a paper price. But it can also turn into a paper availability if for example, in Central Europe, the energy crisis would lead to restrictions on production in certain sectors. As the German government is preparing restrictions on production in certain sectors. They will make an order, let's say, in which industries are allowed to produce emergency industries first, and then graphical paper is not coming in that very first highest category.
That could impact availability across Europe, and that's why at the moment we're having well stocked inventories. As soon as we, of course see the winter how the winter is going we will be quite clever, and we have a very good team on this that also managed us through the strike, that built down that inventory. The long answer to say, it's not exactly to say, but it is a matter of months before we see it in our results.
It's fair to assume that usually you say that it's three to six months you have inventory. Are you now more.
No. Normally, it's quite a bit less. Normally, inventory are less. Now we're in the two to three months because you know we're talking big bulk. If you think what is running off the printing plant for us in a night, that is quite a bit of volume.
Thank you very much.
Let's move on to Sanna from Nordea.
Hi. Thank you. You touched a bit on this, but regarding the higher costs in learning, what kind of margin development will we see going to 2023? Do you believe you will be able to make price increases to offset the increasing costs, or should we expect margin pressure in learning?
Yeah. Some margin pressure might be happening. As I said, it might be different between the territories. In several of the markets, price increases will be able to match the increase. Also remember the funny thing about margin, that even if you in absolute terms are able to translate it fully into your price, it still means that your margin comes down. Your absolute profitability might be the same, but your margin is then decreasing because your top line goes up. You know that is a balance. In February, we will of course guide in more detail for 2023, and then we will also indicate what that absolute profitability will be.
Thank you. Maybe a little bit detailed on that what kind of profitability should we expect from the Netherlands and from Spain? Or, I mean should we think them as offsetting each other in profitability terms or?
Yeah. We typically don't guide on the profitability by territory, so I will not deviate from that. We are happy with the fact that we have that portfolio where we can sort of have the pluses and the minuses balance with each other. But at the same time, it's also for the reason that we have, of course central costs that we allocate, where we typically don't put you know, enormous extensive allocation mechanisms behind it and do that quite bluntly, in order not to create unnecessary work. That's where these profitabilities, if you go country by country then you're getting a bit lost in also in the allocations.
Okay. Well, maybe one more question regarding the Netherlands and the increasing costs and difficulties in that country.
Mm-hmm.
Can you just a little bit clarify what kind of an impact will they have next year and maybe this year, have you seen these difficulties already in H1 or?
Yeah, no, that's a very good question. The unfortunate thing, and this is specific to the distribution business, because the content business, as I said you know performed also in the Netherlands very well. The transformation, you remember from earlier stories that the transformation from this rental model to the sold model in the Dutch market has actually a quite nice impact on specifically also the sales at Malmberg, our content business. It is not as much the Dutch market as the distribution in the Dutch market that is a bit under pressure. I would say you know there will be a continuing effect from that.
These are things that to a certain extent you see it upfront, but given the fact that the whole of the high season is done in six weeks time, it then really comes down to can your temp agencies recruit the right staff at the right price? When they two weeks in advance come to you and say, "We can get the people, but the price is 20% up," then you can say, "No, I disagree with that." You know, then you negotiate for a week, and then you have one week left, and then they need to come because then all those books need to be made into parcels, otherwise you never make it. That's a little bit the pressure that that business is under.
Normal circumstances, let's say the last 20 years have not seen such a shortage in labor market as we have now seen, which is, I think, surprising us all in general. Specifically, if you then in six weeks time need 500 people in the center of the country, you're quite exposed to these fluctuations. Did we see this, for example, not even in July, did we see this coming? Because it was mid-July that we only got the inkling. Like, we will need to get migrant workers into the country in high speed in order to have enough. It's quite short-term. For next year, we're of course now taking the careful approach and saying we start from the assumption that it will be as difficult, and then we have of course also learnings from this year.
Thank you. That's very clear. I don't have any further questions.
Okay. Let's hand over at this time to the telephone lines.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. First question comes from the line of Sami Sarkamies from Danske Bank. Your line is open. Please go ahead.
Okay. Hi. I would actually like to continue on the Dutch distribution business. You haven't really spoken about this in the past, at least I don't recall. Can you please still open up the problem a bit, and kind of quantify the impact on results this year? I mean, also talk about, you know, your expectations regarding next year. You're now a bit cautious that this might be an issue still next year.
Yeah, I think, Sami, thanks for that question. I think not going into further operational detail on it, even though it's tempting, of course, to explain, because it's such an operational business. If I give you a feel for the financial impact that we see year to date, that is about an EUR 8 million negative impact in contribution, meaning a loss-making business to that effect. Typically, these businesses do 4%-5%+ , and this is, you know, we're talking of course only on a smaller part of the Iddink business. This is only the learning material part of that, but that is an EUR 80 million-EUR 90 million business. So that gives you a little bit of a feel for the deviation and the size of the deviation. Of course, it is not just one element.
It is a compounding of inflationary cost pressures in, let's say, all aspects of the chain. The inefficiencies coming from publishers, which is quite unique, that publishers have difficulty with their supply chain. Not our publisher, Malmberg. Our books were there, but other publishers had difficulties in their specifically Far East supply chain, with printing and bringing that over to Europe. Being delayed there made inefficiencies in our process that you don't normally see. This is a logistics business in essence. The part that happens during the summer, of course in the springtime, you go to schools you do the sales process you help them forming the book lists and all that. In the summertime, this is a pretty straightforward parcel-forming business.
It needs to be shipped out with trucks to the schools and with the post to the individual students. Of course all of those contracts have inflation correction measures. By summertime, inflation in the Netherlands was double digit. Those contracts really also exploded in their cost. You know, that's the situation. Given the fact that we are projecting for 2023 a continuing difficult economic climate, we're therefore also predicting that this cost base will stay high. The contracts that you go into in this business are longer term. Governmental contracts, some of them with an inflation correction, but typically with a cap, and then others even without a possibility to correct for inflation.
Now of course that is what I indicated, that within the chain and with our customers, we are of course now in discussions. That's not only us, but our largest competitor, who has the majority of the market, went this summer through a full financial restructuring change of ownership during the high season with the support of their banks because they couldn't continue operating. That, of course would have had a disastrous impact on the start of the school year. I'm saying this is now a well-known market phenomenon where it also gives us the opportunity with the whole of the supply chain to solve this. That solving, and that's what I'm signaling, will take more than, let's say, April next year, because by April next year, what isn't solved isn't solved for the high season.
It will take us some time before we're back to the more normal ranges of margin on this business. In the meantime, business did contribute to the top line growth. Customers are enthusiastic about it because we were performing from an operational perspective quite well. People are grateful, let's say for the fact that the schools that buy their books through Iddink, they had their school books, the majority of them on time, but of course not too much pleasure on our end, at least not financially. Sami, does that answer your question?
Just wanted to verify, there's been no impact on your sales, so it's just about sort of incurring additional EUR 8 million in costs relative to, kinda like, the previous year cost base.
The only thing is that I do indicate that for next year, if contracts really would go, you know, to a large extent in the losses, then at some point it will have also top line impact. Because then we will not be able to bid for example for those tenders that do not allow the right price level. So for next year there might be a bit of top line impact, but that is then only to mitigate further bottom line impact. Competitively speaking, we have improved this year and gotten market share. Unfortunately, at the moment it was a loss-making market. That is, of course, not winning any prizes.
Just curious on timing. This kind of EUR 8 million delta you highlighted, did bulk of that take place in the third quarter or has it been kind of like more evenly spread throughout the quarters of this year?
Yeah. I think the EUR 8 million is a year-to-date figure. I'm just looking at Alex if the EUR 8 million split between the quarters. I would think that.
It's predominantly Q3.
It's predominantly Q3.
It is predominantly a Q3 impact. It connects exactly with what Susan talks about in terms of the very tight and short period of the key part of the high season for distribution.
Yeah. Okay. I would have a second question regarding advertising media market. I think, you know, the monthly figures have still been, you know quite decent during the third quarter. Are you seeing softening trends when you look ahead at the year highlighting advertising media market as kind of like a negative factor going into next year?
Yeah. We do see some softening trends, but I think it is also a little bit that we are, I'll be honest, a bit surprised by the resilience of the advertising market so far. Where economically speaking, you would start expecting, already in all honesty in the Q3, we were already expecting some more softening of the market. So of course the digitalization also in the advertising market in general, the digitalization helps with the resilience. Digital advertising is more part of the sales mix than it is part of the marketing mix, so that helps. But still we do expect a softening going forward.
Okay, thank you. I don't have any further questions.
Okay. Thank you.
Our next line comes from Pia Rosqvist-Heinsalmi from Carnegie. Your line is open. Please go ahead.
Thank you. Hi it's Pia from Carnegie. Still with regards to the distribution business, do I recall correctly that when you acquired Iddink, there was also a small distribution business in Spain? Has this been affected in any way in the same way as you're now describing in the Netherlands?
Yeah. Not to the same extent. Yes it has been impacted as well because that is also a low margin business as any distribution business is. The Spanish model is still a bit more towards rental, so that mitigates the impact. For example trucking and you know all the inflationary cost elements were prominent in Spain as well. As it also was in our Polish business, where we also have a distribution part. There we don't make that distinction that clearly because it's more part of the overall Nowa Era business. Also there we saw that the distribution part of the business was more under pressure than the content part of the business.
Okay, thanks. You discussed the publishers or other publishers in the Dutch market being late. Do you have any typical clause, compensations, agreed upon in these situations?
This is such a unique situation because as I say, learning materials are quite predictable, and specifically in the Dutch market where not a big curriculum change is ongoing. You have very much sort of regularly that, unfortunately that is still a hot topic of debate with our publishers. As this webcast will of course also be viewed by our commercial partners in the Dutch market. I will not go into more detail. You can understand that is a heavy point of debate and learning for the coming years.
Thank you. Then, regarding the items affecting comparability. There was, I think, around EUR 11 million impairment relating to the harmonization of digital learning platforms and rental book inventory. Can you give some kind of split between this and E? I mean, do we see a risk for continued impairments relating to either of these items?
In terms of the platform harmonization, the way as we move forward and look to use the right technology across all our products, we do have areas where we have more than one platform or technology that does roughly the same thing. We will look for the right one and use that for the new products going forward and to launch into other countries. Which leaves, you know, the ones that we don't need anymore, which have some balance sheet value that we then do a write-off. It's a fairly standard thing that we are doing going forward. That is a large part of that EUR 11 million.
The rental books, there was an impairment in the stock there, mainly due to the fact that, with some curriculum changes, some of the books that we were renting out no longer are no longer really valid or useful for students. It's a sort of accelerated depreciation, if you like, as we you know we buy different books in order to satisfy the students. That is a smallish or small to medium part of that number. I mean, going forward, we will continue to harmonize the platforms. You know, a lot of these you know where we brought in acquisitions of the past, and we had these different technologies you know, it'll happen more closer to that period.
You know, it wouldn't necessarily continue at the same levels.
Okay, thanks. Coming back to your announcement of the divestment of Eduarte. I mean, should I read this as a signal that you are exiting the vocational business? Or is this just, you know, another platform that you don't need for now?
Yeah it is Don't read more into it than just, you know a good opportunity to divest a platform with quite a bit of overlapping capabilities with Magister the main platform for secondary education. Historically, these had been in the past, Iddink had bought both and not yet integrated those two. We will see now the Eduarte going to someone who had a platform in there and can do some harmonization. We will then take the decision if we want to go and build out Magister more into the vocational or not. The overlapping capabilities, and that's where we do a bit of cleanup in our portfolio in order not to have to maintain all these platforms, you know, even in smaller segments, in smaller markets.
This is more also of a focus and putting our efforts specifically on Magister, which has a very strong position in the Dutch market. Vocational content.
Thank you.
Yeah Sorry. Vocational content is of course an important part of the Malmberg business, and that is fully in play. Nice and profitable business with very good methods. We would not want to exit that in any way.
Okay very clear Thank you. Still coming back to Media Finland. How much of the non-print advertising sales relates to TV?
Yeah. I think we typically publish that. I am just looking around here. We're typically publishing how we do by segment. The TV business is this is where you see me a bit grasping for the numbers, because we're of course reporting Q3, and I'm having more full year numbers in mind. We're typically around EUR 100 million, you know, and that can be some years a bit more on a full year basis in TV.
Okay thank you All right that's all for me. Thank you.
Okay, thank you.
It appears that there are no further questions from the phone lines, so I'll hand it back to the studio.
Thank you. We have a few questions here in the chat. I think that we have touched quite a few about the Dutch distribution business, but here is still one about it. As was said it is low-margin business and given the issues and risks, meaning it being very time-boxed and labor intensive, making it sensitive to labor costs and access to labor. Is it financially sensible to stay in that business?
Yeah. At this moment we're happy to have it in the portfolio from an overall market, portfolio perspective. Of course depending on the situation and depending on how we can now longer term see, the changes in the market, returning this to a more profitable business, we will take those decisions along the way. In itself, distribution businesses are part in various markets are more or less part of the learning businesses. Are part of the cost that you typically have to distribute. Dutch market has always been a little bit exceptional in that the distribution business was, you know, due to the rental model, quite sizable.
We'll take that decision while going, but it's good to remember that we see this year impact, next year certainly impact, but we also see very positive trends on awareness both within the publisher community and within the schools and governmental community, where they are very keen to keep the distributors alive and well in order to fulfill their essential part within the supply chain.
Okay, thank you. Can you give any comments on the profitability level of the divested Eduarte?
Yeah. We don't disclose that.
Can we get some more insights into the development in Spain? Has it developed according to plan? What level of additional costs are you taking in this year which shouldn't recur next year?
Yeah. Yeah. I think on the Spanish market, I'm very positive. We have seen the delays in the decision-making, but now that the decisions are there, we see that the schools are picking up the new curriculum in a good way. The editorial team has done an excellent job and clearly produced very attractive methods that have now been picked up. So that, you know, according to plans and maybe a little bit beyond, for the provinces and the methods that have gone into the curriculum change now. That is where next year the second half will happen. As we discussed, the last quarter, that second half is a bit bigger than we had anticipated, last year. A little bit more is still to come.
That also means that a little bit more of the production and the preparation cost, the marketing and sales cost will still need to be done next year. You need to see there that this curriculum change has now been split across two years. This year of course we had to take upfront cost on some of it. Certainly on the late decisions, we have already prepared. Next year, we will do the second round. We do not have an exact number let's say on how much is now non-recurring and will recur next year. I think that will become a very complex math to lead you through. I think this is where I would say if you look at the total business, outlook 2022 stands as is.
Outlook 2023, we will be coming back to you in February.
Good. Thank you. We'll take two more questions. The first about the paper costs. What can we say about the paper cost impact next year?
Next
Next year.
Yeah.
Next year, first of all. If we go back at the beginning of this year before the war situation, we talked about how the paper costs would be roughly EUR 10 million higher this year than last year, split 50/50 between Media Finland and Learning. As we've gone forward and we've seen more inflation and supply challenges that number we believe will be for the full year around about EUR 15 million, with slightly more coming from Media Finland. So that is a fairly decent rise that we've sort of managed through. You know as we've talked about we're still on our guidance.
We believe that will continue into next year, and that is a big part of our equation in terms of as we talked about, how we phase that into our pricing on a market-by-market basis depending on competition and depending on various limitations. That may end up being done in more than one phase. You will have a bit of a gap, like we talked about before. Yes, but we do see it remaining high next year.
Thank you. The last question. With increased personnel costs being a challenge what are you doing outside of costs to retain develop, and hire talent?
Yeah. Now that I think is the interesting challenge that I think the whole of the business community sees this these days, is that on the one hand an extreme shortage of labor in general and talent in particular, and at the same time recession or threats and increasing cost levels. We're very much focused. Our people are our asset. We are in principle not a logistics business. We're in principle a creative business. We are be it news be it entertainment be it learning materials all that hinges on people and creativity and talent. Let alone the digital talent which is about 25% of our educational team is working on the digital platforms and digitalization of content. Talent management is critical for us.
We're having of course traditionally and constantly revisiting the programs to put in place be it on training be it on engagement be it on informing. Big part of our investments of this year are on office renovation, not only in Sanomatalo, but also in all our learning offices, in order to facilitate flexible hybrid working, where teamwork is possible for more focused in the office while working from home is allowed and possible for let's say the other half of the week that people work more individually. Doing a lot in order to attract and retain. A big part of our attraction and retention is of course also our sustainability and our promise let's say that we impact the life of millions in a positive way every day.
That we see certainly in these days being a very important element to be strong in sustainability and to have that positive impact, strong element for talent to attract and retain.
Thank you. That was all the questions from the chat. If we don't have any more questions from the audience, I would like to thank you for your good questions and active participation today. If you have any further questions, please don't hesitate to contact us at Sanoma IR. Wishing you a good day in this result busy day for many many of you. Thank you.
Yeah. Thank you.