CEO's review

President and CEO Susan Duinhoven:

6 February 2019

”2018 was another good year for Sanoma. We improved our profitability in all three SBUs despite the challenging business environment in media. During the year, we also took pre-emptive actions to ensure we remain competitive in the months and years to come. Thanks to our solid financial position, growth returned to our agenda and we announced several acquisitions during the year. I am proud and grateful of the hard work and commitment that our teams have again shown.

In Learning, our teams have been particularly successful with the curriculum renewals in Poland and in Finland in recent years. In 2018, we also launched a business development programme, “High Five”, which focuses on creating lean, harmonised and efficient operations and processes for our five operating countries. The positive effects of the programme were already visible in our 2018 profitability. The “High Five” will continue in the years to come and we expect further cost benefits with modest additional investments in 2019.

In December 2018, we took a significant step on our growth path from a predominantly media company into a learning and media company. We announced our intention to acquire Iddink, a leading Dutch educational platform and service provider. The transaction enables the development of seamless digital learning solutions, improving our products and services for the pupils, parents, teachers and schools. Iddink provides Sanoma Learning a platform for future growth not only in the Netherlands, but also in Belgium and Spain, and significantly increases Learning’s share of Sanoma’s operational EBIT excl. PPA.

In Media Finland, our success in transformation was visible in the growing number of digital subscriptions for Helsingin Sanomat and Ruutu. In HS, the total number of subscriptions increased for the second year in a row. Growth in digital subscriptions compensated the decline in print, and we experienced new, younger audiences being attracted with new product combinations, such as a digital subscription complemented with printed HS Viikko. Unfortunately the continued decline in print advertising volumes was not fully compensated by the increase in digital advertising. With this trend expected to continue, we conducted targeted co-operative negotiations in certain parts of B2B sales, printing operations and media units in the fourth quarter to prepare for the coming years. We are actively seeking growth and completed several smaller synergetic bolt-on acquisitions during the year. Most prominently, the expansion into the growing markets of live festivals and events by the acquisition of N.C.D. Production strengthens our cross-media proposition in entertainment and creates advantages for advertisers, consumers as well as the creative talents.

In Media Netherlands, we had a particularly strong year both in the magazine subscription sales as well as in the news business, where both the usage and revenues grew. We continued to focus our business portfolio even further and divested both the women’s magazines and the content marketing operations in Belgium. To align with the simplified business portfolio, we continued to streamline our organisation during the year and our profitability improved significantly. At the end of the year, we took some one-off costs (booked as IACs) in order to prepare for the discontinuation of the Home Deco e-commerce operations, which have been licensed to a third party. Growth in digital advertising was partially supported by the data-driven marketing and cashback service Scoupy, of which we own 95% since June and have now integrated it into our organisation.

In addition to improved profitability in all SBUs, our balance sheet strengthened further during the year, and our leverage was 1.4 at year-end. In 2019, the main impacts on our leverage will come from the new IFRS 16 standard, effective as of 1 January, and the closing of acquisition of Iddink, expected in Q2-Q3 2019. We have decided to prudently maintain our long-term leverage target unchanged at “below 2.5” although the new IFRS 16 by itself is expected to increase our leverage roughly by 0.6. The impact of the Iddink acquisition is partially dependent on the timing of the closing, but it is expected to temporarily take our leverage above the long-term target level.

The Board proposes a dividend of EUR 0.45 to be paid for 2018 (2017: 0.35). Our 2018 free cash flow improved slightly from the previous year, and for dividend calculation purposes we have added back EUR 17 million of one-off costs related to the divestment of the Belgian women’s magazine portfolio. The dividend represents a pay-out ratio of 58% (2017: 55%) of this way adjusted free cash flow. We remain strongly committed to our policy of paying an increasing dividend equal to 40-60% of annual free cash flow.

With the attractive bolt-on acquisitions done in 2018 and our organisations well prepared for the coming year, we look forward to integrate these acquisitions successfully in 2019 and grow our business further.”