Conference Title: Sanoma Full-Year Result 2017 Moderator: Kaisa Uurasmaa Date: Thursday, 8 th February 2018 Kaisa Uurasmaa: Hello and welcome to Sanoma s 2017 full-year results presentation. My name is Kaisa Uurasmaa, I m from Sanoma Investor Relations. It is my pleasure to start this presentation and bring you to the same line with what we talk about. During last year, we have made some major changes in our business and in January this year, we announced our intensions to divest the Belgian Women s Magazine portfolio. Those operations were, consequently, classified as discontinued operations in our 2017 results and in this presentation, we only speak about continuing operations. So we exclude the Belgian Women s Magazine portfolio, unless otherwise stated. So in most parts, you can be sure that we talk about continuing operations. In July last year, we divested the Dutch patriot TV operations, SBS. That has also been adjusted from our 2017 figures to make comparisons for this year easier. Regarding the SBS divestment, we received a cash consideration of 237 million, but that s naturally not included in the cash flow figures we will talk about later. With this, I would like to hand over to Susan to start the presentation, please. Susan Duinhoven: I will talk mostly on the full-year results and will leave some comments on the fourth quarter to Markus, but 2017 was a good year for Sanoma. We had good profitability improvement, 21%. If we look at the continuing business, the total operational EBIT 181 million, coming up from 150 million in 2016 and if we then include SBS, there was 178 million and the EBIT margin, as we report, is 12.4%. So well within the guidance of above 12% margin that we indicated lastly. The increase in profitability is driven by Media Finland and other costs. Page 1 Ref 8984878 08.02,2018
The net sales were stable at 1.3 billion and with 2017, with the changes in our portfolio we have now rounded off this restructuring of our business. The operational EPS improved by 56% to 72 cents per share and the net debt has now gone below to 400 million and its bringing the leverage down to 1.7, compared to 2016 s 3.2. And with this important KPI now well below our long-term target we have also, from that aspect, sort of, finalized our transformation in the business. The board will propose a dividend to the ATN of 35 cents per share, paid in two installments, 20 cents on 4 th April and 50 cents on 1 st November. The outlook for the full-year 2018 - the net sales adjusted for the structural changes in 2017 will be slightly below 2017 sales levels and the operational EBIT margin is expected to be around 14%. And I ll go into each of these points in a little more detail. First looking at the operational EBIT improvement. We improved to 180 million operational EBIT replanting a margin of 13.6% on the continuing business. That earning - as you see in this slide - that earnings growth is strongly driven by Sanoma Media Finland. And both the BeNe business and the Learning business have been quite stable in their performance and the other costs have decreased significantly. If we then look at Learning, for example, Learning we started out the year with the expectation that the profitability would be a little bit lower than last year due to the normal cycle. But given the success of the share gain in the Polish market, we actually managed to keep the Learning profitability stable versus last year. And in Media Finland, you see the strong uplift from 50-66 million, which represents an uplift in margin from 8.5% to 11.5%. The three SBU s absorbed quite a bit of the cost that you see here as a cost improvement in the other category. So the real cost reduction in other is about 4 million and 10 million of that reduced cost is actually an allocation difference, spreading the cost more into the SBU s where the costs are maintained and services are used. Page 2 Ref 8984878 08.02,2018
We then look at Sanoma Media in Holland and Belgium, there we saw the biggest changes in the portfolio last year. The sales were slightly lower than the year before and that was mainly due to the divestment of Kieskeurig.nl, while the subscription sales actually performed quite strongly and grew. The operational EBIT margin is now 15.6% from 14.7% the year before and the major changes have now finalized in that market. Free to air TV business SBS sold as we indicated the intention to divest the Belgian Women s Magazines, which will be effectuated halfway through this year, but we already now classify it as a discontinued business in our 2017 accounts, as Kasia indicated. At the same time we have also restructured and streamlined our BeNe business and reduced - in a sense - the leadership and the back office support organization in order to reflect the lower complexity of the business of not having to manage both SBS and our online and print business simultaneously. We have now a new CEO, I m happy to welcome Marc Duijndam to the group. He started on the first of January of this year and has a strong digital background. If you can look at BeNe business and the composition of the sales, you see that our exposure to the advertising market has reduced very significantly and is now 19% of our total revenue. And out of that, two-thirds is digital sales. And talking about digital, Nu.nl. Channel had really a - sort of, an all time high last year. Now last year, of course, was quite a news year so you will see that in all our news assets - but unique visitors, above seven million and about half of the Dutch population being reached on a weekly basis. And a very strong increase in our total number of video views, which is from an advertising model and a very interesting KPI. We then turn to the Finnish market and first look at the media market as a whole. There you will see that through the quarter the media market has improved slightly, but the whole year was actually a bit of a disappointment that is didn t continue the positive trend out of 2016. So, overall, the advertising market declined slightly with 3% as you see almost across all categories with the exception of radio and online. But overall, the Finnish business managed to keep its net sales stable and that amounted to 571 million. Share of non-print sales grew 44% from 42% the Page 3 Ref 8984878 08.02,2018
year before, but the most prominent improvement was in the profitability, 33% up, as I indicated to a margin now of 11.5%. And that was done through continuous cost and process improvement. Part of those improvements having been put into motion already in 2016, part of them new concepts and projects started in 2017. And I think one of the most prominent features of last year, I would say, is a quite unique turn of events on the Helsingin Sanomat subscriptions, where you see that - now for months on end since May, there is an increase in total subscriber base, month after month. And that, I think, is both relatively unique in Finland, but also in the world around us. So, a very strong subscription performance and not only on Helsingin Sanomat but also in the entertainment space where the [inaudible] C.O.D service also gained quite significant subscriber base. The new Media commercial viewing share stayed, also, very strong this year. So overall, Media Finland a good year, strong improvement this year. So overall, Media Finland a good year, strong improvements and profitability. If we then look at learning, there the sales growth was prominent, 13% up from the year before and growth - as we have discussed in previous sessions, the growth was strongest in Poland, where the market, of course, grew exceptionally in 2017 due to the curriculum reform. But we also gained shares in that market with our one-stop-shop concept. But net sales not only grew in Poland, it also grew in Finland and Belgium so overall, sales growth, 13%. Operational EBITA also improved by 13% and that was done - benefiting of course - from that sales uplift combined with well-managed boss[?] innovations. Operation EBIT was stable and that is due to the higher development cost that we have also in the past year that are creating slightly higher depreciation and amortization and also the depreciation of the acquired asset book that are now in our accounts. So overall you see that Poland is - for one year - the largest market in our learning portfolio and we do not expect that to continue for 2018 because - as we discussed before - this is a one-time growth in that whole of the market. Because the Polish market grew that strongly, you also see a slight increase in the percentage of print sale within Learning, because the Polish market is still dominantly a print market. Page 4 Ref 8984878 08.02,2018
The report proposes a dividend of 35 cents that represents 55% of our operational cash flow minus capex. So this is well within the range indicated in the dividend policy. We want to see that and the board will propose that we pay in two installments, 20 cents on 4 th April, 15 cents on 1 st November and the reason for that is our abnormal seasonality in our cash flow in the business, which is typically at a low point in Q2. The dividend policy remains the same, we aim to pay the increase in dividends 40%-60%, the annual cash flow from operations, less capital expenditure. So if we can have a good moment to look a bit - so further than just 2018. If we look where we stand now, 2017 was really for us an important year of closing off the portfolio restructuring. We will continue to do smaller adjustments in the portfolio, we have a large set of title and assets. So there is always some acquisitions and divestments within that, but the major changes have now been completed. And with that we now have a solid base with improved profitability, a good balance sheet, a leverage that is well within the long-term target range. So that chapter if you want to say - we can, sort of, close. What we will continue to focus on is just like we have done the last years. We have continued to focus on our customers, on our profitability and our cash flow generation. So that will not change now that we have rounded of this first phase. We will follow our customers, go through continuous cost innovations, but our restructuring costs, for example, that have taken quite a bit of our cash in the last years, that will decrease because the major restructuring we had done. Of course, with the exception of the already indicated restructuring associated with the intended Belgian portfolio restructuring. Cash conversion, will increase therefore and that is, sort of, a continued focus. But we re now in the good position that we can also increase our focus on growth. And growth we see in Learning, for example, both within our markets and through geographical expansion, but also through all our businesses we will be keen to take opportunities for highly synergetic bolton acquisitions. So acquisitions that we can connect to our business and can get synergies out of. All this will then result in proof of stability, stronger cash generation, therefore, increasing dividends and an equity ratio, and a leverage that will stay within our long-term target. Page 5 Ref 8984878 08.02,2018
If we then specifically look at the outlook for 2018, there you will see consolidated net sales when adjusted for the structural in 2017. We ll be slightly below 2017, and that is a actually quite logical because of the Learning market in Poland, but also that fact that the leeguard we will not have that revenue coming in in the second half of the year. The operational EBIT margin will then be around 14%. And this outlook is, of course, based on the assumption that both consumer confidence in the advertising markets, in Netherlands and Finland, stay within the range of, let s say, 2017 levels. So with that, I would like to hand over to Markus to give a bit more detail on the financials. Thank you, Susan. I will start by analyzing the profit and loss statement and this, as a reminder, is adjusted for both SBS and Belgian Women s Portfolio. If we look on the fourth quarter, net sales at 301 million was stable compared to last year. The operational EBITDA adjusted for items affecting comparability at roughly 46 million. The items affecting comparability here were positive, 17 million thanks to a real-estate sale in Finland and then, somewhat, offset by other one-off s in the quarter. Operational EBIT, 1.6 million, an improvement versus the negative 4.3 million a year ago and it s good to remember that this is a small quarter in the year, the fourth quarter. It was, pretty much, as we expected. In the Finnish business we had slightly higher development costs. This is digital development costs in business infrastructure that we spent in the Media, Finland. Then, on the full year, also stable, offline and the operational EBITDA adjusted for items affecting comparability, 330 million, that s a 31 million improvement versus last year and 24.9% of net sales up from 22.6% in 2016. An operational EBIT improved by the same amount 31 million from 150 million, to 181 million and that is a 13.6% operating margin compared to 11.3% in 2016. Operational EPS improved by improved by 56% from 46 cents to 72 cents and this, of course, is very much helped by the strong improvement in our financial items. Page 6 Ref 8984878 08.02,2018
Then, if we analyze the operational EBIT by businesses, first Media BeNe, the full-year improvement was 1 million cost in innovations across the board. Including streamlining of the back-office post the SBS transaction. It s a positive offset then by lower sales especially in B2B due to the divestment of the Kieskeurig.nl business. Media Finland, 16 million improvement year-on-year thank to a growth in Helsingin Sanomat and Ruutu subscription sales, also cost innovations, especially distribution costs, lower fixed costs overall. And then it s good to remember also that we had the one-off positive correction in the first quarter, last year, of 4 million. Learning, in line with 2016, positively affected by strong sales growth and a good overall cost management in the business, and then offset by higher development costs, especially in the Polish business due to the new curriculum change and increased depreciation, amortization following higher investments and acquisitions in the Learning business. In other changes, as Susan said, in internal allocation brought a higher share of the overall costs to the business units. The impact was 10 million in cost reductions, so we had roughly 4 million. Then to the cash flow - and it s good to remember here on the cash flow as reported it is including SBS and discontinued operations. If we analyze the positives and negatives in 2017, positive side, higher EBITDA and then significantly lower financial costs somewhat offset by restructuring costs, higher taxes due to the higher result and a negative working capital change. Also, it s good to remember - comparing to 2016 - that we had a one-time working capital positive, working capital change of up to 20 million in 2016. So, overall, a fairly good free cash flow for the year. Looking on the leverage we are now well below long-term target level, which is at maximum twoand-a-half. The net debt to adjusted EBITDA was at 1.7 at the end of the year compared to 3.2 the year before, very much affected by the positive operational cash flow and the divestment of SBS, which contributed by 237 million. The net debt was now 392 million, so nearly 400 Page 7 Ref 8984878 08.02,2018
million down versus 2016. And the equity ratio recovered to 38.5%. The equity ratio was negatively affected by the SBS transaction in the second half of the year already, then recovered to this 38.5%, which is already in our long-term target range of 35.5. Then to the financing costs, significant improvement in net financial items as well. They decreased to 23 million compared to 37 million the year before. Our average interest rate came as expected, down to 2.1%, compared to 2.8% in 2016. And it s good to note that we repaid a bond 200 million in March 2017 using commercial papers and bank financing. And here you can also see the debt structure now at the end of the year. Then I just want to highlight a change in IFRS 15, which is a revenue from contracts with customers. This will be effective 1 January 2018. It impacts the group s net sales, net results and balance sheet, but it s considered insignificant as a total. Although the phasing of the individual quarters will be affected and mainly in learning. We will disclose the reinstated financial figures for 2017 and a separate release in quarter one, 2018. And with this, I hand back to Kasia for some closing remarks. Kaisa Uurasmaa: Yes, thank you Markus. To wrap up, I would like to draw your attention to a few investor events that we are planning for the coming months. First, end of this month we will publish the full financial statements of 2017 and followed by the Annual General Meeting, on 22 nd March. And the end of April first quarter results, as usual, and on 7 th June we will be hosting a capital market day in Helsinki. And with this, I would like to open the floor for questions and we will first take questions from the participants here at Sanomatalo and only after then, hand over to the phone line. To ask questions here, please wait for the microphone, thank you. Page 8 Ref 8984878 08.02,2018
We have the first question here with Amit[?]. Okay, thank you. [inaudible] Markets. Congratulations on a good year, I have three questions. Firstly, on the book line guidance, you are anticipating a negative organic growth this year. You already mentioned that you will be faced with two headwinds, one in Poland and another one related to [inaudible] rights. Can you be a bit more specific on, sort of, the magnitude of these headwinds? That would be very helpful. Yes, on the hockey[?] rights we are roughly 10 million. The Polish figure, I don t have exactly on top of mind, but they also had a component in this, but these are the main two. 10 million for this year? Yes. Also a bit more next year. Then the second question is a more, let s say, overall question. I mean. What are you planning to do next? So, you have restored profitability, you have restored the divestments, financial sheet is in order. So what should we expect from the company in the, sort of, next few years? You already touched, you know, some things, but it would be nice to hear a bit more on this. Yes, I ll give - How much potential is left? I will reiterate, of course, a little bit the slides that I have just presented. I think there is still some potential left, you know, and the guidance already indicates that. So on the margin side, there are good projects still going on, they will have full-year affect into 2018, but we will Page 9 Ref 8984878 08.02,2018
also continue to do these types of innovations in our business. So it is - and that s part of the media business. It s constantly changing with the markets and possibly looking for improvements. So that s one adamant. I think the other part is looking at these bolt-on acquisitions and those are harder to pinpoint. You cannot put a project in place and say this is the timing of that, but we do see that the markets that we re in are also consolidating, we are in strong positions and our portfolio at this moment really contains strongholds. So there is a good opportunity to connect smaller acquisitions to that and that will create a point growth, but will also create synergy. And therefore continue to improve margin and you take also new skill sets and new thought, let s say, into the company. That can improve the core of the business as well. So that s what we re in for. So you do not need to expect big things, but there s constant improvement and that s also how we have approached the translation of last years and not by intentionally, sort of, making big steps, but constantly improving. And that then resulting, in the end, in big steps. So that s the - we very much want to continue on the path that we have chosen. And then, finally, a question regarding the advertising media market. The [inaudible] in Finland and the Netherlands. What are your expectations regarding this year on that front? Yes, I think it will stay this, sort of, a little ambivalent type of development in all honesty. Last year we had the idea that the economic uplift in Finland would have pulled a little bit more and - but I think we do think that with growth of businesses, advertising is an essential part. So we do see good opportunities there, but at the same time we also see that our customers markets are consolidating and, therefore, also the number of advertisers. Let s say as a whole, I these markets, it s slightly going down. So you re seeing those two prints combined, so we are expecting similar performance of the advertising market. Both in Holland and in Finland. And them bear in mind that the exposure to the Dutch market has, of course, significantly gone down. And that is now below 20% of our total revenues. Where in Finland, it is, of course, with our Media and with our TV and our radio business, still very considerable. Page 10 Ref 8984878 08.02,2018
So despite the strong moment made Finland related to overall economy, January this year is not looking better than January last year? Yes, I m not making specific comments on January yet. Those numbers are not yet available, but, you know, in general for 2018 we re expecting similar market development and that s what the outlook is based on. Okay, thanks. Kaisa Uurasmaa: Okay, next question. Hi [inaudible]. Maybe a follow-up to the margin improvement question that was already discussed. Now that there has been quite a tremendous improvement in margin, particularly in Finland, of course, the learning business also, went extremely well in 2017. Is there any particular were we re going to see that there s margin improvements? Or is it just the, kind of, general belief that al area s, all divisions can have a, kind of, similar improvement potential for this year? I think it is spread, within the businesses also quite spread. As you indicated, it s not as dramatic as the last couple of years and improvement in Finland we know, of course, of projects that have started in 2017 that will now have a full year effect. But in general speaking you should say, you know, it is across all the businesses, just everywhere a little bit of tweaking and cost innovation. Right, so basically there is still - in-spite of the fairly good margins already from the beginning of last year, year-one, you expect catch-up to basically see if things would be better in the first half compared to second half. So Finland, as one example, would have an - Page 11 Ref 8984878 08.02,2018
I won t make a specific estimation of the quarters to be honest, because that really depends on, also, when you do your investments in marketing and such. So I think a quarter by quarter and I m not in, but if I look at 2018 to your question of, In which of the divisions is it centralized somewhere? Then I would say, no it is quite spread across the teams. Okay, thank you. Kaisa Uurasmaa: Okay, any further questions from Sanomatalo? If not, then I will hand over to the phone line. Can we have the first question please? Operator: Thank you Madam. Ladies and gentlemen on the telephone, if you wish to ask a question, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, it s star one if you wish to ask a question. We ll pause for just a moment to allow everyone an opportunity to signal for questions. There are no questions on the telephone at this time Madam. Kaisa Uurasmaa: Thank you, I would like to thank all participants for joining this news conference and please be in contact with investor relations afterward if you have any further questions. Thank you and have a nice day. Page 12 Ref 8984878 08.02,2018