Good morning, ladies and gentlemen, and welcome to Sanoma's Q1 2022 results presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. Today we have the management, CEO Susan Duinhoven, and our new CFO, Alex Green, who will present the results. After the presentation, we will have a Q&A session, and we are lucky after the two years period of remote and webcasting only, we also have audience here at Sanoma House today. We will first take questions from here at Sanoma House.
Please wait for the microphone before you ask your question. After that, we will hand over to the telephone line. Thirdly, you can also use the chat function on the webcast. The webcast and the Q&A will be recorded, and the recording will be available on our website soon after the event. With this, I would now like to hand over to Susan to start the presentation. Please.
Thank you very much, Kaisa. A very good morning and a warm welcome also from my end. I'm very happy to see people here at Sanomatalo again after two years. We had a good solid start of the year. All in all, sales being stable at EUR 211 million this quarter. 1% comparable sales growth. Same level in both businesses. Operational EBIT, excluding PPA, at EUR -10 million, and that is the same as last year, and it's typical for our learning business to be loss-making in the Q1 because typically the revenue comes in with the back to school in the Q2 and Q3.
The free cash flow improved versus last year at EUR 39 million, also seasonally negative, and the leverage improved to 2.6, which is well below our long-term target of being below 3. Our outlook for the full year 2022 remains unchanged. Now, if I go into a bit of detail on the learning business. There we see a typical small quarter but a good performance. As net sales EUR 69 million, a little bit up from last year. What we now see in this business is that in the Netherlands and Finland, which are highly digital businesses, we see already some more revenue recognition throughout the year. Because the digital business is then recognized on a month by month and not only at the school start.
The operational EBIT excluding PPA, stable at EUR 20, and there we see two compensating effects that very much resemble what we later in the year will see on the revenues. We see an increase in marketing and sales costs in Spain, and that is ahead of the new curriculum that is launched in September 2022. We see a decrease in marketing and sales costs in Poland, where the last curriculum renewal ended in the autumn of last year. Where the revenues we will see the same in Spain going up this year and in Poland going down, and we see the marketing and sales expenses in line with that. We're now well prepared for the high season, which is Q2 and Q3, and particularly I must say Q3.
Spain is the main new element with the new curriculum starting this autumn. We now expect that 12 out of the 17 regions will implement the new curriculum in 2022, and that means that the remainder will be done in 2023. Those 12 provinces represent about half of the market volume. This is our latest expectation, and still some decisions need to be taken on that regional level. We'll update you when more becomes known. If we then look at Sanoma Media Finland, there are rapid changes in the operating environment, but again, a good solid quarter, good start of the year.
Sales stable at EUR 142 million, where we see the subscription sales declining slightly, and that is due to, you know, the high that we had during the corona that is now coming down to a little bit more normal level. We also saw, particularly with Helsingin Sanomat, some distribution issues. Heavy winter together with the corona pandemic for distributors and their quarantines, regulations, making that there was a shortage of distribution capacity in the start of the year. That has led to some compensations and therefore a slight decline in revenues. Overall, the total number of subscriptions and specifically the digital subscriptions continuing to grow.
Advertising sales for us was stable, and that was a growth in digital and radio as it was in the last couple of years, but TV a bit slower. That is expected. The Olympics and the heavy news intensity drew viewers away from us. That news intensity was, of course, due to the war in Ukraine, and that also had some impact on the advertising demand in March. We see that as a temporary delay. April and May already show that the recovery is quite complete from the delay in March.
Overall for the full year, we expect advertising market to be stable, certainly in the segments in which we are active. Operational EBIT excluding PPA declined slightly to EUR 10 million, and that was due to some inflationary pressure, some higher personnel cost, some higher pension cost, part of which was the delay of the pension that we could postpone during corona and that now kicks in in 2022 and 2023. Also the expected paper cost increases came through in the Q1 . Now we're also looking forward to our high season, let's say on the media side, the high season in events, and I think, with us, the whole of Finland is looking forward to that summer full of events. We're ready for that.
We see ticket sales developing quite nicely, so we're hoping for a nice first post-corona summer. If we then come to the Ukrainian war, of course, the world has changed since February twenty-fourth, and we are shocked with the rest of the world and appalled by the Russian invasion, the atrocities, all that is happening there. We stand with the Ukrainian people. If we look at the business impact of the Ukrainian war, that is very limited for us. We had no business in Russia nor in Ukraine. We had some supplies, for example, paper out of Russia. We immediately discontinued that, and now get that supply out of Central Europe.
We expect some impact, but more indirect through the development of the global economy on our operating cost and potentially also on customer demand, but we don't see that yet. We see both customer demand and advertising demand in Finland continuing as usual, and specifically in learning completely unimpacted by this. We of course support both the people in the Ukraine through humanitarian aid through the Red Cross, both Sanoma and our employees, but also through our businesses and specifically our Polish business is very active on this.
They have one day a week, paid leave for volunteer work, both volunteer work at the border, but also, volunteer work in schools and helping 150,000 Ukrainian children that have now entered the Polish education system, helping them settle in and making sure that to the best of the abilities, the children will not miss a year of education. We're there supporting teachers and schools and working very closely with the Polish government to make sure that to a large extent, students that don't yet speak Polish still can get a Ukrainian language education. Itslearning, our digital learning platform has translated itself into Ukrainian and Russian so that it also facilitates remote teaching for refugees.
Also in Media Finland, digital news on the war and the global geopolitical situation has been put before the paywall, so free for all readers. Helsingin Sanomat is one of the three Nordic newspapers that has published now a selective number of articles in Russian in order to provide Russian language independent high-quality news, as long as that is doable for Russians in Russia to access those sites. We're trying to do our best to mitigate this horrendous situation, but on our business, we see limited impact so far. Therefore, our outlook for 2022, where we in February indicated that we expect another good year, with a group's reported net sales between EUR 1.25 billion and EUR 1.3 billion and an operational EBIT margin excluding PPA between 15% and 16%.
We expect that outlook to be unchanged and still dependent on, of course, the operating environment, and we see two elements there. The coronavirus pandemic, we expect it to continue in some form or shape, but not having any impact on our business anymore, and the advertising market in Finland to be stable. Even in a bit more volatile and uncertain environment, an unchanged outlook for the full year. With that, I want to conclude my remarks and hand over to Alex Green for his first more details on the financials. Alex.
Thank you very much, Susan, and it's wonderful to be here for my Q1 end release. As you know, my name is Alex Green, and I joined Sanoma as CFO on the first of March this year, and I came from eBay where I spent 16 years, the last 9 of which as the CFO of eBay's Classifieds Group. I've got 3 slides to take you through the more details of the financials, and so we will start off with operational EBIT excluding PPA. As you saw before, a solid overall profitability performance. You can see on the slide there, so roughly EUR 10 million negative seasonal numbers. We do see some movements between the business units.
You see on the learning side, we're slightly higher EBIT, mainly because the marketing expense we have in Spain is versus the expense we had in Poland last year, the different curriculums nets to a slightly lower level, so a slightly higher EBIT. In Media Finland, you see lower EBIT this year versus last year, mainly due to the printing costs we talked about and somewhat higher personnel inflation and pension issues, costs rather, and some slightly lower TV productions costs due to phasing.
Offsetting that. At the group level, we see a decrease in personnel costs, largely due to LTI provision changes, but the main thing there is lower technology costs phasing. We still expect this line to be roughly the same as last year on a full-year level, but we just have some phasing within the quarters showing here that netting to a roughly similar EBITDA last year. If I move on to free cash flow, you can see on the chart on the right-hand side, a reminder we do have a seasonally negative free cash flow due to the nature of our business, our investments and our revenue orders. It's actually a lot lower negative number than last year, mainly due to working capital and so timing issues.
Lower working capital in Media Finland with some lower payables there. Also some positive income tax movements and are offset a little bit by the higher capital expenditures we are starting. Pretty much timing and phasing issues there. You can see on the line, our line is trending and improving up to EUR 149 million. That's the twelve-month rolling free cash flow number is going in the right direction. As a reminder, we paid our first installment dividend earlier this month, EUR 0.27 per share, and we'll pay the second amount for the 2021 dividend in November. All this adds up to a healthy balance sheet with headroom for M&A, as you see here on the slide, so well within our covenants. Net debt over adjusted EBITDA is 2.6.
Our equity ratio is bang in the middle of the range, so in a good place. To summarize, solid performance Q1, we feel good about where we are, healthy balance sheet and ready for the rest of the year, well-placed. One more item I'd like to talk about is a save-the-date for you. To mention, we are having an event on the ninth of June. This is the first of a short series of deep dives on our learning business. For the first one, we will talk about leveraging our digital learning. I will host this along with Rob Kolkman, the CEO of the Sanoma Learning business. This is a virtual presentation.
There will be an opportunity to ask questions, so very much looking forward to seeing you there, many of you there online at that event, as I say, on the ninth of June. That concludes what I will say, so I will hand back to Kaisa, who will help facilitate the Q&A session.
Thank you, Alex. Thank you, Susan.
Mm-hmm.
Now we will start the Q&A session. As said, first questions from here at Sanoma House, and please wait for the microphone before you ask the question. We have the first question. Please.
Okay. Hi. Sami Sarkamies, Danske Bank. I have a couple of questions. Firstly, starting from the learning business where you reported high digital sales in Q1. Is this something that is additional sales or is it then away from the typical sort of seasonal high second and third quarter sales?
Yeah. It's taking a little bit away from that, because we are selling, as you know, a package, a hybrid, both print and digital. When it gets more digital, more of the revenue gets recognized throughout the year. The total of the year is still the same, but the spread is a bit different.
Okay. As a general question, can you elaborate on the impact of this digital transformation on your top line and margins at learning? How will this behave going forward when the transformation progresses also in other countries?
I think the progression is a slow progression. As in learning, we have an annual sales cycle. What we have indicated the long-term target, 2%-5% autonomous growth, and that is in the mix, so both digital and print because we're not making that distinction. We're selling it as a hybrid package. We're indicating that the margin will be above 23%, where it's now trending around 21%. We do expect that the combination of digitalization and scale will improve margins. That's the indication that we're giving and that we see sort of year after year playing out.
Okay. Moving on to Media Finland. First question would be on the subscription sales trend that has been pointing downward since third quarter last year. Can you open up trends within sort of printed subscriptions and then digital subscriptions are both experiencing weakness?
Yeah. The digital subscriptions grow and continue to grow. I would say a little bit explosive growth in the corona period and certainly in the start of the corona period, that is no longer there. It's a continuous growth on the digital subscriptions. We're roughly a third, a third, a third. The other third is hybrid, so that is digital plus print, and then a third is print. The print component during corona actually went up a bit because people were working from home, and therefore that's our rationalization of it, why we saw actually an increased attention to print were at home and therefore enjoyed you know reading the paper in the morning again.
That also is normalizing, so we see that the print subscriptions are declining. They have declined throughout the years and have always been compensated and more than compensated by the digital. That trend is continuing, but the print has had, for example, in Helsingin Sanomat, a bit of a.
Contraction now with the long winter and the COVID issues on the distribution. We've had issues in distribution. You don't see it that much in the number of subscribers, but you do see it a bit in the revenue because we then compensate people if they don't get delivered, they get a longer period for free. That is what you see then in the revenues. That's a temporary effect. It's unfortunate, but can't be helped. That's on the Helsingin Sanomat, which is of course a key component. Regional news performing well. Ruutu performing well, and actually there we would have expected quite a bit of shrinkage post-corona, but that continues quite nicely to grow.
Okay, regarding the advertising media market, just wanted to confirm that, was your message that, if we think about, advertising sales in April and May, we're back to sort of, the trend you experienced in, you know, January, February, that, there's basically no sort of, impact from, the situation in Ukraine?
No. That is what we see now. As you know, visibility on advertising sales is always horribly short, so we can't say for all of May, but the first weeks of May look good. April definitely looked good. We see that, as we saw with Corona, that when such an event happens, particularly on TV, people pull back their campaigns because the campaigns themselves from a content perspective are also not appropriate. It's not appropriate to have, you know, big fun and party type of video or content when you have just seen the news. This is where, you know, you typically see then a little bit of holding back, and that has now been released again.
Okay. My final question would be on the TV business. Quite recently, Netflix announced that, they-
Yeah
May introduce sort of partially advertising funded subscription sort of models. Are you concerned that this could sort of eat into sort of the market shares of the local TV providers?
Yeah. It is a bit early days, I'll be honest, because we don't know if that is going to be directed at maybe African or Asian markets or, you know, also in more Western European markets. So we don't know where that's going to be. But we have a pretty solid digital proposition both in our news and in our entertainment. A good data, of course, underneath it. So we would not see ourselves being, you know, heavily disadvantaged. But of course, you know, anyone entering that market, preferably not, but.
Okay. Thanks. I don't have any further questions.
Thank you. The next questions, please, Maria.
Yes, thank you. Maria Wikström from SEB. I mean, first of all, it's quite clear quarter, so thanks for that. Just a few questions, which one is for the paper cost and you announced in Q4, you said the inflation, you are looking at this EUR 5-10 million. Now, of course, you needed to reroute, I mean, some of your sourcing outside Russia, which I would think, I mean, increases the cost somewhat. Is this still the guidance, the 5-10 you are looking for? How should we think about that?
Yeah. What we indicated was around EUR 10 million, and then EUR 5 million in Learning and EUR 5 million in Media Finland. You're absolutely correct in your analysis that that will be exceeded slightly, you know, because at the end of the year, we did not foresee, of course, February twenty-fourth. But we also see that we are economizing in clever ways, that the business is finding cost innovations in other areas, but also in efficiency and paper use. We have indicated, and that is still very much our view on it, that these inflationary cost effects they will have a temporary effect on the margin in 2022 because the price increases that normally coincide with these cost increases, they take a bit of time to kick in.
We're active in consumer markets, so you can't make these steps in big steps. In smaller steps, we will of course adapt pricing, both in Learning and in Media Finland to the new cost levels.
a very detailed question, but I would like to learn more about the, like the printing of the in Learning, so in the-
Yeah
... the school books. I mean, where is that currently done, and is there any, like, any issues that now we have some problems of like in mainly in China with this?
Yeah
COVID virus and all the transportation
Yeah
logistics. Maybe if you can a little bit
Yeah
Educate me on that subject, please.
We're printing most of our usage of the books is in Europe, so we're always taking logistics cost and printing cost as one element. We're printing some further away when it concerns, for example, large runs of very special products that can only be produced in certain printing plants. We have a widespread sourcing across Europe and even you could say a bit across the world. The procurement team is constantly tuning in on these changes. China has of course been on and off and with very high logistics cost already last year. We have pulled back from that area already quite significantly. This is a dynamic sourcing.
The interesting thing of course with Learning is that you have quite a peak. That's a peak that is not identical to, for example, peaks in publishing, in reading books, in normal books. We're using also a little bit of the free capacity here and there, that is. This is an active field where you're constantly optimizing. The books, only a very limited set of books have very specific specifications. You know, you can imagine in primary education, the first classes, there it needs, you know, things need to pop out of the paper and it needs to be exciting, so there you have very specific printing plans, but the rest is quite common.
Okay. Maybe a bit of a update on the M&A. I mean, that was clearly stated that, I mean, still in the agenda and EUR 300 million-EUR 400 million. Maybe that, I mean, now when you meet with the potential targets and talk with the owners that has there been any kind of change, I mean, since the negotiations that they were before the February 24th?
Now, we have, of course, a full pipeline in different stages of discussions. You know, of course, the war is a key phenomenon in the whole of the world. I would not say that has changed our M&A outlook or the ongoing discussions or our pipeline in a material way, no.
What about the pricing? Is there any feeling that if, because, stock market has of course, sold down, that if there is any change in the pricing that you are looking at?
Yeah. Not yet visible, but we're always looking, of course, for decreasing pricing. This is not a market, let's say, with hundreds of targets. That's where, you know, we also, in all honesty, don't have the statistics to say, you know, if there are up or down, downward trends. These are very individual discussions that we're having.
My final question relates to, I mean, you set up a new local editorial team in Turku. I think this is kind of a alternative of making an acquisition in the area that, I mean, you kind of like strengthen your position with adding the local content to Helsingin Sanomat. Is this kind of a pilot you are testing, and if it's successful, you take it further out to the other cities as well or how would you think about this?
Yeah. I mean, I think that when we acquired the regional news business from Alma, that of course was an acquisition in itself, but also getting to know how the regional journalism works and how that interaction works with Helsingin Sanomat, and we're very happy with how that works. We see that there are very interesting articles coming out of the Satakunta area, out of the Pirkanmaa area, out of Tampere, coming into also Helsingin Sanomat. That's where there is a clear and digital we can, of course, exactly follow what is read, how much it's read, so how interesting that is. We see very good readership from that.
Once you see that, you also see that it therefore makes sense in, you know, an important city and an important area like the Turku area, to have local journalists on the ground there as well. That's more the consequence of it. When there are other areas, you know, with good economic activity, then we might consider to do the same thing. We'll now experience this, let's say, you know, in Turku, and then we'll take it from there. We're very clear that this is coming out of the good experiences from the regional news reporting and that integration into Helsingin Sanomat.
Thank you, Maria. We have Petri here for next questions, please.
Thank you. I think we're looking at a pretty good season for the festival business.
Yes.
Can you just remind us of what should we expect in terms of profitability? It's been two tough years.
Yes. We have, we've indicated that this is a business that pre-corona did EUR 30-35 million in sales with about average profitability that you also see in Media Finland. That is still what we expect. Of course, we are hoping for exuberant audience and weather because the weather is a not to be mistaken element still in a festival season. That is a bit what you can expect.
Thank you. Just to clarify on the higher personnel cost, is this just wage inflation and no growth in headcount?
Yeah. It is, it's mostly wage inflation. The headcount changes are just normal headcount changes and even a little bit of what we're all experiencing, a little bit of shortage of personnel, so temporary vacancies.
That's all from me. Thank you.
Thank you. If we don't have further questions from the audience, I would like to hand over to the operator for the telephone line, please.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Currently, we have one question lined up so far. That's from Pia Rosqvist-Heinsalmi of Carnegie. Please go ahead. Your line is open.
Yes. Hello. Can you hear me?
Yes.
Yeah. Good. All right. Thanks. A few questions. One with regards to the group costs. You say low level in Q1 was partly explained by a phasing between quarters. I'm just trying to understand the changes during the year. Should we now expect Q2 and maybe particularly Q3 to see higher costs as revenues also are higher?
Yes. Thank you for the question. As I said, full year we expect that the group costs you see there to be in line with last year. We start off a little bit behind, as I say, due to the phasing of the tech costs. Yes, we will see an acceleration in that line as we go into Q2 and Q3. Yes.
Okay, thanks. A detailed question on the income taxes. They were positive. Can you please just open up what's behind this deferred tax asset in learning?
Yes.
Could you look?
That deferred tax asset relates to Santillana in Spain. It was not booked at this time last year in Q1 2021. It was booked slightly after and so is therefore showing in the comparison and is you know giving us a benefit in that comparison for this quarter.
Yeah, I think you quite clearly signaled that you're ready to move on with acquisitions. Is there anything specific you can share in terms of the M&A market in learning currently? Do you feel it has become harder to close deals compared to, say, two years ago? Are there any, you know, news on your focus areas? Are you still tilted towards content or are you also looking for, you know, for acquisitions in, say, EdTech?
Yeah. Let me start with the last one. Our focus is very clear, K-12, and within K-12 we feel well-equipped from a platform perspective, so the focus will be on content. No changes there. Also I must say that in the environment, not anything recent in changes, we do see a quite active market and quite a good pipeline with good opportunities of different magnitude. You know, we're continuing on this path. You know, M&A, it's like a good wine. You know, it takes a bit of time to ripen to the right level. It's always a pity if you try to open the bottle too quickly.
Yeah. Thanks. That's very clear. Thank you. That's all for me.
Thank you, Pia.
Thank you. There are currently no further questions from the phones at this time.
Okay. Thank you, operator. We have two questions on the chat, and the first one is about free cash flow. For the quarter, it was slightly better than last year, although negative. How do you see now the full-year cash flow?
Yes. A good question. Full year we expect the cash flow to be a little bit lower than we saw last year because we are investing quite a significant amount into our digital platforms this year connected with our strategy and what Susan's been talking about. Lower full year free cash flow despite being in a better position in Q1.
Thank you. I think the final question also to you, Alex. You have now been here two months. Kind of what are the first thoughts and expressions you would like to share?
Thank you. That's a great question. No, it feels fantastic to be here. I've had a very intense, but in a positive way, two months. I've learned a hell of a lot. I've met a lot of people, and they've been incredibly friendly and helpful to me. Also call out my predecessor, Markus Holm, who's given me. He's been very generous with his time. I feel pretty good about where we are. Then as a CFO, coming into a situation where we have a healthy balance sheet, we have headroom for M&A, a strong team, and a great opportunity and outlook and really excited to be here and to be on this journey with Susan and the team.
Thank you. Thank you to the audience also for listening and for active questions. We of course continue to be, you know, available for further discussions and questions. As a final reminder, I would like to remind of the ninth of June when we host the virtual learning deep dive. The invitations will be sent out shortly. Stay tuned with that. Have a nice weekend. Thank you.
Thank you.
Thank you.