Earnings Call: Q4 2020

Feb 10, 2021

Good morning, ladies and gentlemen, and welcome to Sanoma's Full Year 2020 Results Conference. My name is Kaisa Urosma. I'm a heading Investor Relations at Sanoma. And today here, we have President and CEO, Susan Dunhoven and CFO and COO, Markus Holm, presenting the results. This event will be recorded, and the Recording will be available on our website after the event. After the presentation, we will have a Q and A session. You can use the telephone line to ask questions. And we will use first we will first hand over to the telephone line and take questions from there. And then after the telephone questions, we will take questions from the chat function of this webcast. And with this brief introduction, I would now like to hand over to Susan to start the presentation. Susan, please. Thank you very much, Kaisa, and welcome also from my end To this full year 2020 results presentation. And it was quite an exceptional year and we're very happy That we ended the year with a strong operational EBIT margin and a strongly increased sales. But even more important for us was that this year we also managed to accelerate our transformation into a learning company further. But let me first summarize the financial results. If we look at the net sales, we landed on 1,000,000,062,000,000 compared to €930,000,000 the year before. And that net sales growth came from learning, with close to 50% growth, Most of it due to the result of the Edinc acquisition, but very importantly also with an underlying comparable sales growth of 5%. In Media Finland, of course due to the corona pandemic, the net sales declined. The operational EBIT It came to €157,000,000 compared to €138,000,000 the year before and that improvement was coming from learning But the Media Finland business did very well in keeping its EBIT stable. The operational EBIT margin then came to 14.7 percent which was very close to the 15.1% in 2019. So we're happy with that The free cash flow declined to €95,000,000 and that was due to the divestment of the media business in the Netherlands that we had until April in our results. The leverage was very low during the year and then increased at year end to 2.6 and that was due to the acquisition the closing of the acquisition of Santrellana in Spain. The Board proposes a dividend of 52¢ Expected to be between €1,200,000,000 €1,300,000,000 so a continued increase from the €1,100,000,000 in 2020 And an operational EBIT margin excluding PPA between 14% 16%. And that wider range reflects The uncertainties that the corona pandemic still holds on in our business. But as I said, even more important was The continued transformation that we managed to do during 2020. And if we look at that, We see that in 2019, if you remember, we did 4 acquisitions in learning. Idink by far the largest, but it's learning a digital platform Throughout Europe, click Edu, a digital platform in the Spanish market and SENER, a specialist publisher in the Dutch market. And during 2020, we've spent, of course, considerable time in integrating those businesses into our European Learning business. Then at year end, in October, we announced and by December 31st, we already closed The Santaviana acquisition in Spain and Santaviana being the leading provider of K-twelve learning content in the Spanish market. So very happy that that went even faster than we anticipated when we announced. If we look at the media business, there was significant transformation as well. We divested the media business in the Netherlands, Divested also the classified online business Oikotija in Finland and we acquired in Finland the regional news And we spent during 2020 considerable effort on integrating that business into our subscription, news and feature business. So if you now look at Sanoma, you see 2 focused and leading businesses each in their own field With a very solid profitability and cash flow. And we have 300,000,000 to 400,000,000 headroom that we intend to use to grow our K-twelve learning business even further. So all in all, successful transformation and specifically focused on the learning business. And that Let me go into that into a bit more detail than now. If we look at Learning, you see strong net sales growth From the €336,000,000 last year to €500,000,000 this year. And that was driven by acquisitions And predominantly the largest one, the Idink acquisition that was closed in September of 2019 and was now for the first time Full year into our results. But as important, the underlying comparable sales growth was 5% And that is on the higher end of our long term range. And that was driven by the curriculum renewals both in Poland and in the Netherlands. Now the corona pandemic did have slight impact on the sales in Learning and that was mostly due to The impossibility of doing on-site trainings. That was of course quite logical that we couldn't do that in Q2, but we had during the year the hope That in Q4 we could regain that, but due to the school closures and the large extent of remote teaching that was not And if we then take that net sales growth, you also see that the profitability of course increased Significantly, the full year increased 27 percent to 96,000,000 coming from 76 in the year before. The margin decreased to 19.2% and that was expected Because we added now both IdInc and its learning for the first time for a full year into our results And those businesses are typically lower margin businesses than our publishing learning businesses. So the EBIT improvement followed the sales improvement due to the acquisitions and the strong comparable sales growth in Poland and the Netherlands. And we saw in our cost base also some impact from the corona pandemic, some Pluses and some minuses. The higher cost was in the warehousing with high complexity of course in that peak summer period, But also higher hosting costs due to the strong increase in usage of our platforms. That was mostly offset By the typical lower cost that we have throughout the business, in lower travel, lower office cost, that compensated these increases. But while we had an increase over the full year, We had a decrease in profitability in Q4. The loss there was 18,000,000 compared to 10,000,000 the year before. This is a logical effect of a growing learning business Because as you know, strong seasonality in learning makes that with the growth of the business, the Q2 and Q3 increase, But of course then the losses in Q1 and Q4 also increase. So that is a logical consequence And that we will also see therefore in 2021 and in the coming years. There was a bit of a one off effect as well in 2020. And that was due to the fact that both the sales and the margin of Idinc Declined in Q4 due to this faster shift from renting books to selling books. And here it is good to remember that when you sell a book, the costs of that book are fully taken into the P and L as cost of goods sold. Where if you rent out a book, typically a more expensive book, but when you rent that out You capitalize it and you write off in depreciation over a number of years. So that's where the margin itself It is directly impacted by this shift and the acceleration of that shift created a margin impact that was now booked in Q4. Going forward, in the coming years, we will make sure that the actual margin is booked throughout the year. And even with the peak in Q3, we will make sure that the true up also happens within the quarters. Overall, that shift from renting to selling is a favorable shift Throughout the whole of the business chain, we see that schools like it because it gives a better learning result for the students. Students like it because they can keep the book at the year end, it is an annual book, they can write in it, it is their property, they can keep it. The publishers like it because combined with the digital license, It forms this interesting subscription based proposition and also the distributor likes it because It takes away the high logistic costs of this expensive and complex return flow of rented books that need to be refurbished and repackaged all during a very high peak season in the summer. So all in all a positive trend impacting Q4 in 2020 a bit more significantly. Q4 was also important for us as a quarter in which we closed the Santillana acquisition. And that closing happened on the 31st December much faster than we had initially anticipated. A very positive speeding up for us and now allowing To already successfully start the integration of that business. Just to remind you, the Santiviana business It's the leading provider of learning materials, primarily primary education and secondary education in Spain. Their sales for 2020 was €106,000,000 with a strong operational EBIT of €29,000,000 representing a 27% margin, so an above average for Sonoma Learning and above average margin. The digitalization in Spain is also increasing and you see that it is now 3% of Santoyana's total But of course it shows that even though it is increasing, it is still at a start in the Spanish market. If you compare the 2020 sales with the 2019 sales, you will see that We are on the downward slope of the curriculum change. That will continue in 2021, so sales expected to be of a similar level As will be the EBIT, and that is because we are preparing now for the introduction of the new law, The curriculum change that will kick in in 20222023. Another reminder is that the seasonality in the Santillana business is even a bit stronger than in our other Learning businesses. You see a very Strong business focus in Q3. And that is logical because in the Spanish market the holiday season is more in August And therefore, the school starts are in September, leading to a late Q3 peak. Therefore, to be expected, adding of Santillana will add to the loss of the learning business in Q1 and Q4 next year. We did see in the Spanish market Some impact of the very severe lockdown measures that had to be taken in that market and the school closures. So The pandemic did have some impact in the Spanish business and if the pandemic continues to be a factor to count with In 2021, we might see a similar effect occurring also during this year. So with that, I will close the summary of the Learning business by saying Strong business, very strong growth both in sales and in margin during 2020. If we then look at MediaFinland, There the net sales was of course impacted by the corona pandemic. The comparable net sales declined with 10%. The regional news business added 54,000,000 But the divestment of the Oikotija business subtracted 11,000,000 from the net sales. So, the overall total net sales was helped by the acquisitions, but the underlying business did decline. And that was of course due to the advertising and the events. But the subscription sales did very well, again I would say this year. Helsinki Sanomat with the digital subscription growth solidly above 400,000 subscribers And now for the 4th year in a row with year on year growth in total subscriber base. Truly an excellent performance by the team. But also the video on demand, the entertainment platform, during this corona year with 27 percent of subscriber increase. So all in all, clear that the subscription sales is Continuing on its growth path. The advertising sales declined And that was of course logical and you see in the graph that in the period, the Q2 and start of Q3 There was in the whole of the market a very strong decline. But I think the team did a very good job in focusing on the customer and therefore outperforming the market both in TV, online and radio advertising. And while the market decreased by 17%, The Sanema Media Finland Business decreased with only 9%. Now as you know, the impact on the Events business was complete. There were no events held during 2020 and we therefore showed a decrease of €35,000,000 in that part of the business. The uncertainty that we had during 2020 is continuing in 2021. The development of the advertising market and the ability to do events is still uncertain. And that is a fact of life that we will live with and you see that also reflected in the wider range of the outlook that I will come to. But I think the strong performance of the Finnish media team is shown specifically also in the fact that they managed to keep The profitability is stable even with decreasing sales. The EBIT, excluding PPA, was 67 a million coming from 69 the year before, with a margin of 11.8%. The active cost mitigations that the team did during the year across all cost categories basically managed to offset The lower advertising sales. These savings are also largely connected to the Change in operating environment due to corona. Therefore, we also need to be careful that when the corona pandemic disappears, these savings, to a large extent will disappear as well. The other positive effect that we had in the business was that even though we had to cancel all the events, We were insured for that and therefore that business, even without sales, still contributed slightly positively to the total results. The change in portfolio during the year in 2020 did not have an impact on the net earnings. So the additional earnings from the regional news media business were taken out by the divestment of the online classified business Oikotija. If we then look at 2021, there we Expect that the structural changes in the business, so the addition of the regional news business and the divestment of the Oikotija business, Deliver net a slight positive result where the increase and the hopeful return Of the advertising sales and the Events business will be taken up mostly by increases in cost, both fixed and cost of sales, in addition to the digital growth initiatives that we have planned for our subscription business. So, all in all, for Media Finland, if you look towards 2021, then you look at, Hopefully, with the disappearing corona impact and increase in sales also due to the structural changes in the business, But the profitability will be slightly up, but relatively flat. If we then turn to dividend. The Board proposes a dividend of 0.52¢ per share. And that is an increasing dividend, coming from 50¢ the year before. And that represents a total cash out of €85,000,000 This will be paid in 2 parts to equal parts 26¢ on April 22nd with a record date of April 15 and the 2nd part, 26¢ in November. The dividend policy is unchanged. Sanema aims to pay an increasing dividend equal to 40% to 60% of the annual free cash flow. And if we then look at Our performance against the long term targets that we have stated before and updated in December. There you see, if I take out a couple of these, that the leverage, the net debt over adjusted EBITDA, And if you look at the 2 business units, you see that in Learning, the comparable net sales development, the long term target is 2% to 5% And this year we were on the higher end of that with 5%. And the operational EBIT margin excluding PPA, We increased that target to quite an ambitious level of above 23% Compared to this year a 19.2 it shows both ambition but of course also the fact That we took in the acquisition of Santeliana, which on average adds 1 percentage If we look at Media Finland, There you see that we our long term target is to have a stable business from a revenue perspective, plus or minus 2%. This year of course with the corona impact that was below that with minus 10%, but an EBIT margin of 12% to 14%, Where this year was 11.8. And there of course it is good to remember that this is also still a long term and ambitious target because the divestment of the Oikotija business typically reduces our profitability. If we then turn to the outlook, in 2021 we expect to have reported net sales Between €1,200,000,000 and €1,300,000,000 compared to 2020 €1,100,000,000 so continued growth for the business And that operational EBIT margin excluding PPA is expected to be between 14% 16%. And this is a slightly wider range that we think will cover the various scenarios on the corona pandemic impact on our business. But to guide a bit further, we indicate that the midpoints of these two ranges are based On the assumption that the advertising market in Finland will be relatively stable compared to 2020 and that there will be no major restrictions to the events business. The learning business is then expected to be not significantly impacted by the prolonged school closures in the main operating So with that, I would like to round off my part of the presentation and hand over to Marcus Holm for more details on the financials. Thank you, Susan. Good morning, everyone. I will start with a summary on the 4th quarter earnings. In Learning, we saw a decline of SEK 8,200,000 in the operational EBIT, excluding PPA. Majority of this was explained by the accelerated shift from renting to selling books in EIDINC as explained by Susan. I want to also highlight here that both in the Q4 and in the coming Q1, we will see, of course, An increasing impact of the Learning business that is negative in the 1st Q4 of the year. Also in 2020, we saw an impact of the lower margin businesses. It's Learning and Iding on the overall margin on the Learning business. Then to Media Finland, we saw positive SEK 2,600,000 operational EBIT, excluding PPA improvement. And this is mainly explained by the higher net sales and also continued cost mitigation actions across cost categories. Then in our other items, we saw a reversal of accruals related to the divestment of Media Netherlands. Looking at cash flow, we had a fairly good development in the cash flow. Cash flow continuing operations grew by 16% in 2020. The reported cash flow, however, declined to NOK 95,000,000. Majority of this is explained by the free cash flow impact of Media Netherlands that was SEK 22,000,000 in 2020 As we only had negative 1st 4 months in our results. Also, there Just explaining the cash flow, we saw, of course, a positive effect of the acquisitions and comparable net sales growth in Learning. In Media Finland, a negative effect of lower profitability due to the corona and in learning higher investments in digital Form Development. Also significant transaction and integration costs, for instance, related to the Oikotear divestment media Netherlands divestment as well as the integration costs related to regional media in Finland. For our dividend calculation purposes, we'll eliminate that EUR 22,000,000 negative of the Media Netherlands divestment. Our net debt increased at the end of the year due to the earlier than expected closing of Santiana's Spain acquisition that happened on the 31st December. Our net debt then was SEK661 1,000,000 compared to SEK7 €5,000,000 a year ago. Our net debt to adjusted EBITDA, however, was relatively stable at 2.6 And the equity ratio improved to 37.4 percent having been 30.5 percent a year ago, and that is due to the capital gain that we booked related to the Oikotija divestment. Our net financial expenses decreased to NOK 9,000,000 Having been SEK 22,000,000 a year ago. And this significant reduction is due to lower interest bearing debt and also the repayment of the of the SEK 200,000,000 bond that had a relatively high interest rate. Here's picture of our debt structure. Currently, we have external interest bearing debt of SEK 583,000,000. The acquisition of Santiana Spain was financed by a bridge loan. And then in December, we signed a SEK 200,000,000 term loan. The remaining part of the bridge, we will convert into long term financing and we currently foresee this to happen now in winter springtime. The average interest rate of the external loans was on a good level of 0.8%, down from 2.3% a year earlier. Then as a short reminder of So reporting in 2021 week 10, we will publish our annual report. And on the 30th April, we published the Q1 interim report. That concludes my part. Thank you. Thank you, Markus. Thank you, Susan. I would now like to ask Susan back to the stage for the Q and A. So As a reminder, we will take questions from the telephone line as well as through the chat function in the webcast. And now first, I would like to hand over to the operator for questions over the telephone line, please. And our first question comes from Sami Salopis from Nordea Markets. Please go ahead. Your line is now open. Hi. I have a couple of questions. Let's start from learning. I think you were opening up this adjustment that was made in Q4. First question would be that, is there risk that continued migration from renting to purchase of books We'll further erode the results indeed, I think, in the coming years. And if that's the case, how much downside From this, could we be looking at in total? Yes, let me start with answering that question. This conversion from renting books to selling books is a trend that We foresee to continue in the coming years. And as we as you know, with the publishing part of our business, We are also very much counting on that increase in subscription sales. So, this is a trend that continues And it is important to realize that, of course, though the margin is impacted, the cash flow is much less impacted and specifically once We can start reducing the fixed infrastructure on the logistics, which is in the Hybrid period, of course, you need both systems, but longer term, you will scale down on the logistics and therefore reduce those logistics costs. So, we see this long term as a positive trend That we are actively working towards and that we also see for the whole of the business and the business chain in the market As a positive trend, so yes, this impact on the margin It's something that continues and was also taken into account when we did the acquisition. I mean that it was already going on last year as well. Okay. So no regrets in hindsight After having completed the acquisition. The only thing you see now is an acceleration. And the exact Speed of the market uptake of this sort of transformation, that's always a bit hard to forecast. So, there we see that it went faster, Specifically also during a corona year when the closeness to the market is a little bit less, so the foresight on it It was a little bit less than we would otherwise have had, but the intrinsic trend is both desired and speeding it up Helps in the overall transformation. Okay. Then my second question would be on targets for learning that were raised In early December at the CMD. Were you aware of this adjustment at the time? Or Does it in a way add to the challenge of these new targets? Now what you see is it's a long term target. And in the long term, as we have discussed in the CMD extensively, in the long term we see this subscription model in the learning market. So, long term, we have always assumed that this transformation continues. So, as I said in December, the target is a challenging and ambitious target, but we see that both in our Publishing businesses, the adding of the Santillana business, that these are major steps, But I do want to stress again, as the statements in the charts say, it's a long term target And there is a certain amount of ambition and challenge in there. But this is where we think the business can go to, to above 23% margin. Okay. And then finally, on this matter, I mean, you already emphasized that you've been Improving process and so on, not to see this happening in the future. But I mean, did someone benefit from the fact that you showed Unwarranted results after Q3? No, not at all. I think absolutely not. And we need to stress also that There is an enormous peak in sales that you have in the Q3 and it is quite normal in the business to do the true ups. When you count the inventory, when you have for example also with publishers, You look at the full year results, you do a true up on there, the discounts. So that is in A distribution business is a very normal mechanism and specifically in a distribution business with such a peak, very normal to do these true ups. It has always been part of the business. It's always been part of the practices. But now with this accelerated shift, You of course now see it more clearly and that's the reason why we say we will go forward and install now the practices To basically measure the inventory on a monthly basis, which is no one's pleasure to do, but Yes, that's the only way to get around this. As I say, a normal practice in the distribution business is to measure inventory at year end. Yes. Okay. Thanks. And then I would have one more question regarding guidance for this year. The 15% midpoint looks maybe a bit cautious given that you were at 14.7% last year And you will benefit from EDIC acquisition. You did already discuss assumptions For the midpoint, but maybe you could help us understand the assumptions for you to arrive at lower and upper end of the guidance range, please. Yes, but I think the range is, I think, quite clear. If you take, for example, the sales range, If you take the midpoint as €1,250,000,000 plus or minus, The events business in itself is around 30, 35,000,000 business. So, if the events happen or not, Makes quite a bit of a difference. So, the €20,000,000 decrease in advertising, if we I are wildly optimistic and say the advertising market comes fully back to 2019 level, you have All at once a major uplift. So that's where we say there are pluses and minuses possible. At the midpoint we indicate: we honestly Don't think that we are overly prudent. We think this is a realistic guidance and the best possible that we can give at this moment in time. You know us, we're not going wild, But at the same time, I think in the past year, you have also seen that during a corona pandemic forecasting is hard, But we have been quite realistic in those estimates as well as we think at this moment as We should, of course, also say. And we typically do a few scenarios. And this range, we believe, covers those scenarios fairly well. Yes, thanks. That's very helpful. I don't have any further questions. Thank you. Our next Question comes from Peter Kujala from SEB. Please go ahead. Your line is now open. Hi, it's Peder Vecchio Cuellar calling from SEB. Can you hear me okay? Yes. All right. Let's start with Learning. You mentioned that you have some discontinued operations in Learning that you have placed under strategic Can you give any comments on what these assets are? Strategic review of Yes, the discontinued business. Yes, we have a number of smaller businesses within Learning. Within its learning, we had the discontinued business, for example, that was sold to the U. S. We had some changes there. We have a small business in Agilent Education and Safety, that is a discontinued business. So there are a number of these much smaller entities that are discontinued. But no major review of any kind, just part of a normal portfolio reviews. All right, understood. Thanks. And then continuing on Yiding, can you give any kind of light that what's the typical subscription period that you are driving in Yiding? Do your customers typically Right, for 1 year or multi year period? No, this is definitely a multi year contract that are entered into A school then typically chooses its logistics provider and the company that helps them I think broader than logistics maybe is a bit of an understatement on what EDIG does, but specifically that gathering of all the needs From all the different departments in a school, from all the different subjects for the learning materials, that's a crucial role And that is a role that typically requires quite some intimate knowledge about how the school operates, how the preferences are, Who the key people are in the organization. So therefore, the school chooses a provider For typically a 4 to 6 year contract period and these contracts are highly sticky. So at the end of the contract, Yes, there is a review done but in a high degree, 80% -eighty five percent of the cases, It is then continued with the same party. So, these are longer term, High retention contract. All right. Thanks. And continuing on this Transformation in Eiding. The shift from rental to subscription or selling books, Is this driven by you or is this coming from the client side? Yes. Always hard to say when you are customer oriented. But we can see that as the whole of the market both and this is of course a working together of publishers and distributors We are really catering for this transformation towards digital. And you see that with increasing digital subscriptions, It becomes more and more normal that when the digital content, for example, changes on a quarterly basis, that it feels quite Out of date, if you have a book that is published 4 or 5 years ago, because these You would like them then to also go into the book. And this is where it comes to more annualized books. Then you have the benefit and the proven scientific evidence that when students can write and They learn better. So that is scientifically proven evidence The teachers also recognize. So, this is the trend where it initiates from. And then of course publishers And distributors try to accommodate this in order to create that increased learning impact. So that's the You know, that's how this has developed. Then always hard to say where does it start. I think success has many fathers typically. So I'll leave that to the market to decide. All right. Thanks. And a couple more from MediaFinland. First of all, I'm certain for this year, but can you give any kind of Insight into the fixed costs that you expect to materialize still if festivals are canceled, what the costs do you still expect to come through? There are a few some fixed costs related to the festivals business, of course, a few 1,000,000. Of course, majority of the costs are variable related to the production of those festivals as such. All right. Thanks. And last one from me. You started Cooperation negotiations in the acquired regional newspapers. Can you discuss this a little bit? And How should this affect content sharing between, for example, housing in Sanomat and regional papers? Thanks. Yes, these negotiations are in a broader field, so also in the operations of the journalistic functions. And the teams are looking and that is the subject of the negotiation are looking of course Into an optimized workflow between all the different subscription titles. It is very clear that there is a total editorial independence of the regional titles 1 by 1. So every title has their own editor in chief who determines the content. So it is the editor in chief who decides Which content to use and which adaptations to content to make. So that's, I think, pretty important To keep that in the back of your mind, but the operational flow, if there are efficiencies that are possible. That is what we're looking at and what the negotiation is about. Okay. That's all for me. Thanks a lot. Thank you. Our next question comes from Ira Roskrucht from Carnegie. Please go ahead. Your line is now open. Hello, it's Pia Roskris from Carnegie. I've got a question regarding your MSA strategy. Given that the education sector gains a lot of interest at the moment, What can you tell us about the valuation levels in the market at the moment? Yes, it is always hard to make a grand average there because there are of course not That many deals and it very much depends on what sector within the education market you are looking at. If you are looking at technology platforms typically with a much higher multiple than for example content businesses, So it is a variety there. I think in the area that we are interested in, the K-twelve education market. In that market and then specifically if you then look at publishing businesses, We think we have a good position because of the synergies that we can accomplish with reusing our digital platforms And integrating businesses from a back office perspective. So we think we have a good position there Given some synergies, but undoubtedly if the interest increases in the market, the price level would go up. And we will be very clear on this that we need to see not on a multiple basis, but on a DCF basis, We need to see a good investment case before we go there. So, that is for us the basis of doing business. But of course, we think we are well positioned due to the synergies and the established digital position that we have. Okay. Thank you. And if I can continue on your capital allocation policy, you Are very clear and committed to your dividend. But can you somehow open up the reasoning Behind this dividend, from the board perspective, I mean, euros 80,000,000 is a lot which you could used for acquisitions as well. It is very clear and we have stated that time and time That we have a strong interest in M and A. We have an acquisition pipeline, But at the same time, we are committed to an increasing dividend for our shareholders. So it is that combination That I think makes also Sonoma interesting as an investment. And that is behind the reasoning of the Board that the investment story in Sanoma is also underpinned by an increasing dividend. And it must of course be supported by the increase in cash flow of the business. Yes, very clear. Thank you. Thank you. Okay. There appears to be no further audio questions. I return the conference to the speakers. Yes. Thank you, operator. We have not received any from the chat line. So I would like to thank Susan and Markus for answering their questions. And let's to wrap up the event. Thank you for participating. And in case you have any questions To this conference call or webcast, please be in touch with us at Investor Relations. So thank you and have a good day.