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Edited Transcript of PSM.DE earnings conference call or presentation 7-Nov-19 8:30am GMT

Q3 2019 Prosiebensat 1 Media SE Earnings Call

Unterfoehring, Bayern Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Prosiebensat 1 Media SE earnings conference call or presentation Thursday, November 7, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Max Conze

ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO

* Rainer Beaujean

ProSiebenSat.1 Media SE - CFO & Member of Executive Board

* Ralf Peter Gierig

ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board

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Conference Call Participants

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* Annick Tonie Maas

Exane BNP Paribas, Research Division - Analyst

* Catherine T O'Neill

Citigroup Inc, Research Division - Director, VP and Analyst

* Christopher Johnen

HSBC, Research Division - Analyst

* Conor O'Shea

Kepler Cheuvreux, Research Division - Head of Media Sector

* Julien Roch

Barclays Bank PLC, Research Division - MD & European Media Analyst

* Laurence Davison

Deutsche Bank AG, Research Division - Research Analyst

* Lisa Yang

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Omar Farooq Sheikh

Morgan Stanley, Research Division - Equity Analyst

* Patrick Schmidt

Warburg Research GmbH - Analyst

* Richard Eary

UBS Investment Bank, Research Division - Executive Director and Head of European Media Team

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Q3 9 months 2019 results call of ProSiebenSat. 1 Media SE. This conference is being recorded. Today's call is hosted by Mr. Ralf Gierig. Please go ahead, sir.

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [2]

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Good morning, ladies and gentlemen, also from my side. [Good morning] to our Q3 9 months 2019 results call. Today's call is hosted by Max Conze, our CEO; and Rainer Beaujean, our CFO.

Before we start with the presentation, we will have, for those of you who follow our webcast, a short video featuring our current hit format Joko and Klaas versus ProSieben. For those of you who are connected to the telephone line, those will listen to music during the course of the trailer. So please stay tuned. Post the trailer, Max and Rainer will first lead you through our presentation. Web links, dial-ins and presentation materials were made available via our e-mail invitation sent out this morning. The presentation, as always, will be followed by a Q&A session. With this, we start with the trailer.

(presentation)

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [3]

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Good morning, and thank you for joining us. I hope you enjoyed the trailer. Joko and Klaas (foreign language) ProSieben or what we in English call, beat the channel, is a signature show for us, with more than 4 million viewers per episode and 19 million video viewers across the season.

It's also a great example of how Live TV can surprise and make a difference and how we create IP. It's just been rated the #1 show at the European pitch event, and I'm sure will travel globally.

Now if you go to Slide 4. We are making good progress on our transformation agenda, with investments in the future of the group gaining traction, Joyn with about 4 months in is now at 4.9 million app downloads, 5 million monthly active users, d-force our joint venture with RTL is live. And digital and smart advertising grew plus 37% in Q3.

NuCom where we're investing in accelerated growth in Flaconi, and that is working well in showing plus 59% in Q3. On local content, just a few examples. We've just launched, 2 months ago, a digital-first news platform called PULS 24 in Austria, has 500,000 plus app downloads. And if you consider that Germany is 10x the size of Austria, you get an appreciation of how well that's working for us. This week, we've just announced the launch of a local scripted content production company with the faces in front of and behind Jerks our most iconic comedy format.

And as you well know, we're exploring strategic options for our Red Arrow Studio international part. So on the one hand, we are strengthening our local content creation grid and at the same point in time are looking what is the right future for that business, and we're finding very strong interest, and I look forward to lots of exciting new formats still between now and Christmas, amongst those Queen of Drags and others.

And we are doing all of this focused on creating an organization that we can [win within] the future. We have done a lot of work to upgrade and strengthen management positions in NuCom and across the group. We're creating an end-to-end entertainment company and a leaner holding structure. And indeed, we are increasing efficiency on a number of areas, not least by taking out 20% of management layers.

On to Page 5 and numbers. Group revenues for the quarter are up 4%, 3% organic and indeed the same for the first 9 months. On entertainment, we are seeing strong growth on digital and smart advertising that is tempering the impact of a structurally challenged TV advertising business, which leads to entertainment revenues about minus 3% for the quarter. And indeed, minus 2% for year-to-date, both Red Arrow studio and NuCom Group are showing strong growth for the year and for the quarter.

If you look at our mix, 56% of ProSiebenSat. 1 business is now non-TV ads, largely digital, growing plus 13% for the quarter and the year. ProSiebenSat. 1 faced structural headwinds, but 4% revenue growth for the group compares favorably to our European peers, which I think are somewhere around 0%. And as you know, we are accepting earnings declines this year to invest in the future of the group.

And with that, I hand over to Rainer to provide more financial details.

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [4]

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Thank you, Max. Let me now continue with a few more details on the financial performance of the group and our 3 segments in the third quarter as well as the first 9 months. Please turn with me to Page #7. Our Q3 results were about in line with the financial performance of the first half as well as our indications provided in the Q2 results conference call.

Group revenues grew plus 4% on a reported and plus 3% on an organic basis. As expected, adjusted EBITDA for the group declined due to the investments in our entertainment business and the NuCom Group. In addition, the decline in advertising revenues also had an impact on the group's profitability. Both the reported and adjusted net income have mirrored this development accordingly. Please note that the more pronounced decline of the reported net income in Q3 2019 is largely due to a high comparable figure in Q3 2018, resulting from valuation effects.

Please turn with me to Page #8. Revenues of the entertainment segment declined by minus 4% to EUR 525 million on a reported basis, and by minus 3% organically. This decline has primarily been driven by lower TV core advertising revenues, which fell minus 6% in Q3. In addition, the deconsolidation of maxdome and 7NXT affected the revenue development on a reported basis. At the same time, we achieved a very promising development in our digital and smart advertising business, which grew plus 37%, supported by the launch of Joyn as well as the broader commercial launch of the addressable TV spot business.

The distribution business also showed a solid performance with revenue growth of plus 12%, helped by an increase in HD subscribers to 9.9 million. The adjusted EBITDA reduction to EUR 108 million in Q3 mainly reflects the already indicated higher level of investments, especially in local content. Besides that, the decline of advertising revenues by minus EUR 50 million also had a negative impact. As you would expect, the development of the TV advertising business is highly correlated with the macroeconomic environment, which can be seen on Page #9.

On the left-hand side of the slide, we compare the development of the German TV advertising business and a customized German macro indicator comprising business climate, PMI and consumer confidence. As you can see there is a high correlation between the 2 in the past 7 years. From our point of view, the weaker macro environment has been one of the main reasons for the TV advertising revenue decline since 2007.

On the right-hand side of the slide, we looked at the TV advertising spend of our customers, which are listed at the stock exchange and compared this to the analyst consensus expectations in terms of the revenue development in 2019. As can be seen, customers, which are expected to grow this year on average kept their TV advertising spend about stable. On the other hand, customers for whom analysts expect a decline of sales this year have reduced their TV advertising spend by an average minus 10% in the first 9 months. This result is certainly not surprising, but it shows that the recent weakness in our TV advertising business is to a large extent related to a currently weaker business climate in Germany.

Let me continue on Page #10, with the performance of Red Arrow Studios. Red Arrow Studios continued their positive development of the first half and again achieved strong revenue growth of plus 21% in the third quarter 2019. Currency adjusted revenue growth was plus 15%. Revenue growth of the production business was driven by good performance of the U.S. production companies Half Yard, 44 Blue and Left/Right. Studio71 also continued its dynamic growth of plus 41%, based on a good performance in its key territories, U.S., Germany and the U.K.

The number of Studio71's YouTube subscribers globally increased strongly by plus 29% in Q3 from 1.1 billion to 1.4 billion. The good segment revenue performance also resulted in an increase of adjusted EBITDA by plus 46% to EUR 9 million in Q3 2019. As you know, we have started a strategic review of our international content production and global sales business and are evaluating all different kinds of scenarios, including a potential sale of business combination with the partner.

In any case, our German production asset, RedSeven Entertainment as well as the digital studio Studio71 are not part of the discussion. Once we have decided, we will inform the market accordingly.

Please turn with me to Page #11 for a closer look at the performance of NuCom. NuCom's revenues grew by plus 13% on a reported basis and plus 10% organically in Q3 2019. Reported revenues benefited from consolidation effects primarily related to Aroundhome and Consumer Advice and eharmony and matchmaking respectively. Both acquisitions have more than offset deconsolidation effects in the amount of EUR 30 million, resulting from the sale of the online tour operator Tropo in Q3 last year.

On an organic basis, we have seen a strong development of our experience as well as our Beauty and Lifestyle business. Here, especially Flaconi and Amorelie, contributed to the plus 27% revenue growth and more than compensated a revenue decline of Verivox, which was again related to a demanding market environment following the insolvency of a German energy provider.

As already indicated in our Q2 conference call, we have stepped up the investments in Flaconi to stimulate growth in the German-speaking markets. In addition to that, we have launched Flaconi in Poland in Q3. Adjusted EBITDA development reflected these incremental investments, and hence declined by minus EUR 4 million compared to the previous year. Let me now finish my part of the presentation with comments about our financial outlook on Page #12.

We continue to target mid-single-digit percent group revenue growth. And as already mentioned in our Q2 results conference call, an adjusted EBITDA margin at the lower end of the targeted range of 22% to 25%. Although the first 9 months have developed about in line with our targets, the achievement of the 2019 financial outlook meaningfully depends on the economic environment, and in particular the development of TV ad revenues at the end of this year. Since we have seen swings of TV advertising revenues in the fourth quarter from minus EUR 60 million to plus EUR 40 million only in the past 2 years, the range of possible outcomes in terms of group revenues and profits is light. Although easier comparable figures and potential advertising share gains suggest the normal and solid TV advertising business at year-end, the further weakened German macroeconomic environment increases the risk of potential significant budget cuts of our advertising customers.

As a result, we believe it is prudent to highlight the financial impact of a potential negative scenario with a potential high single-digit percent TV advertising revenue decline in Q4.

Also in such a scenario, we would maintain a high level of investments. A potential TV advertising revenue shortfall of up to minus EUR 60 million would in this negative scenario affect adjusted EBITDA by a similar amount. Applying this number to the adjusted EBITDA over the last 12 months of EUR [913] million, would result in a 2019 group adjusted EBITDA of about EUR 850 million.

This figure assumes an about flat adjusted EBITDA contribution of NuCom and Red Arrow combined in Q4 2019 compared to last year.

Having said this, I would like to reassure you that we are working very hard to avoid such a scenario and to achieve a solid result also in Q4.

With this, I hand back to Max.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [5]

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Thank you, Rainer. Before we go to questions, I just wanted to give you a few examples on how we are doing across our strategic priorities to go and grow local, digital, smart and NuCom. If you go to Page 15, I think at the intro, I already talked about our local content push on PULS 24, on Beat the Channel, on the content company that we've just set up with Christian Ulmen and Carsten Kelber. And indeed on a very strong lineup of formats in Q4 that we feel confident will continue our trends in gaining audience share and total video views.

If you go to Slide 16. On Joyn 5 million monthly active users, 4.9 million app downloads 4 months in, is not a bad start. If you recall, we set a target of getting to 10 million monthly active users in the first 2 years. And with the progress we are making, I'm hopeful that we can get there more in 1 than in 2 years. We have a great product, great user feedback. And I think, importantly, we are doing something very unique. One aggregator platform, 55 channels, huge library and originals, and all of that for free, easy to access. And indeed, it's quite encouraging for me when you look at the numbers that 79% are using our apps to consume content.

And also the mix between Live TV and video on demand, I think, is very good and healthy. We are continually working to bring new features and make our platform available across all technology ecosystems. And importantly, we are well advanced on our subscription premium launch before the end of the year. I am not going to give you a lot of detail on this, because we will have a specific announcement and moment for that, but suffice to say that I'm really excited. We'll have 10 originals and just to mention, 1 we'll launch with a political thriller series called Dignity that's built around Colonia Dignidad ex-Nazi cult in the '60s in Chile, and I've had the chance to watch some of the rough cuts and I think is going to be talk of town and hugely exciting.

On 17, how are we turning all this into money. I just wanted to give you a little bit more progress update on what we're doing on addressable and targetable. You heard earlier, d-force with RTL is live, ING Bank was the first campaign, and we're seeing big advertiser interest, and think we will have tradable inventory in 2020, somewhere around 2.5 billion ad impressions or EUR 200 million-plus gross advertising revenues. On addressable TV, we've now won 60 campaigns. We've had about 3x the inventory available in the third quarter versus the first quarter. This is no doubt still small, but we are putting all the technology and data systems in place that make me confident that in 2020 this will be a significant growth driver in transforming our advertising and monetization engine.

On to NuCom, look, I am very confident that we're creating huge value with NuCom. And I just wanted to spend a moment and focus on our 4 signature companies, where we are either market leaders or very strong #2, where we are addressing very big and fundamental consumer needs and huge addressable markets, where we have very clear growth vectors. And indeed, this week, we've just done the cutover on eharmony in the U.S. after 1 year of incredible work to our technology and marketing platform, and we have very high expectations for growth resulting from this as we go into next year.

On Slide 19, because in Q2, we talked about Flaconi as an investment case, I just wanted to give you a glimpse of what that means. We've been growing Flaconi about 34% for the first half. And as we are investing in accelerated growth that has boosted to 59%, we are now for many of the premier beauty companies in Germany their #1 growth driver. And indeed, we have also expanded Flaconi into Poland with very good initial success and revenues.

To close, 2 points. One, we are making good progress on our strategic priorities. Digital platforms, smart reach and NuCom and this despite increasing macroeconomic headwinds; 2, we are confident that we have the right strategy and will continue to invest into the future of our business.

Remember, already more than 50% of revenues are non-TV ads, mostly digital, growing 13%. And indeed, as I think you get from the presentation that Rainer and I did, we wanted to both give you a sense of the confidence we have in our strategy, but also be clear and transparent about some of the risks and challenges we face.

And maybe as a closing remark, both Rainer and I have put in somewhere around EUR 6 million of our personal money. So please take this as an assurance that we are nothing, if not, all in and committed and convinced in delivering our strategy and the future for the group.

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Questions and Answers

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Operator [1]

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[Operators Instructions) We'll now take our first question from Omar Sheikh from Morgan Stanley.

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Omar Farooq Sheikh, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got 3 questions, if I could. First of all, Max, on the guidance. Obviously, it's -- you've highlighted a scenario, downsized scenario where TV ad revenues declined high single digits in Q4. I just wonder whether you might be able to give us a sense of how likely you think that is? And when it is you think you might know for certain what the outturn will be? Secondly, I just want to -- if you could just dig into Joyn, obviously, very encouraging app downloads so far. Could you talk a little bit about the investment that you plan for next year, given perhaps you have a bit more visibility and some early signs of success? And then finally, could you give us an update on the U.S. output deals. I think you have 3 or 4 still outstanding. Just wondering if you can say where we are.

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [3]

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Thanks, Omar, for your question. I'll take the first one. First of all, we have already said in our presentation that we continue to target a mid-single-digit group revenue growth and an adjusted EBITDA margin at the lower end of our -- before target range of 22% to 25%. The same guidance which we have given also in our Q2 call. For sure, that takes into account the dynamic revenue growth of Red Arrow's duty as NuCom Group and also our digital and smart advertising business. So the scenario -- negative scenario, you can also say worst-case scenario of EUR 850 million takes into account that we -- that the visibility for the last 2 months of the year is pretty unclear.

And please have in mind that approximately 40% of our annual adjusted EBITDA is done in the fourth quarter. So -- and to go up to a high single-digit decline in the last quarter perhaps sounds based on that what we've reached, especially up to -- in the first 9 months, sounds not very realistic. But we have to flag it somewhere somehow because we have seen fluctuations in our last quarter between -- in the EBITDA between -- on the sales and EBITDA of approximately plus EUR 40 million to minus EUR 60 million that hopefully takes it into the right picture, it gives you the right picture what we believe the EUR 850 million looks like. [Joyn?]

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [4]

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Yes. I'll take that. Maybe just to add one comment on guidance, Omar. Really, I think what Rainer and I looked at is we wanted to make sure that we are prudent and transparent in what is the likely range of outcomes. And we just can't call it, and we went back, I think, as Rainer said and looked at the past 2 years. And not that I like it, but I think the reality of the advertising and business and booking patterns is that we have been significantly wrong 2 years in a row. We've been wrong positive one time. We've been wrong negative the other time.

I think we are looking at a range of outcomes for this Q4 that still has a lot of bandwidth. And there are reasons to feel good. One could argue, last year was very weak. So we should have a stronger flow on that. We are seeing some pretty decent booking patterns. There are also reasons to be cautious because there's a lot of uncertainty out there. I think we have a history when there is a lot of uncertainty, I think, as we showed in -- Rainer showed in one of the charts that companies react to that, I think, wrongly by curtailing their advertising and marketing spend. And so I wish we could give you a more precise answer, but I think we're doing what is right and prudent, which is providing a range of outcomes and rest assured that the team with Rainer's and my guidance will do everything to maximize performance and growth for the group.

Now on Joyn, one, I think we're quite pleased, I think, with the progress that we've been making on Joyn. Sometimes I wish -- I don't know how many of you on the call because most of you are not Germany based have ever had a chance to use Joyn. And maybe actually in follow-up we can -- for those that haven't with the team, we can try to find a way that you can use it. Because sometimes it's actually difficult, I think, to realize or understand what we're doing that in an environment we are still being able to access entertainment, information, TV and all these things frictionless in an app that really works is unusual. And I think we have an offering here that is exciting a lot of people, and we're seeing pretty good growth behind that.

In terms of investments, look, what we said before and I know nothing different to that is that we would anticipate investments for 2020 to be in the same range of the investments that we're making. This year, it might be marginally more. But let's say, somewhere in the EUR 100 million, EUR 120 million range of which then, of course because it's a 50-50 joint venture with Discovery, each partner carries 50%. Third question, update on U.S. output deals.

I think we are quite comfortable where we are. It was very important for us last year to look in Warner because that's a bedrock and kind of gives us the inflow that we want, number one. Number 2, we're accelerating both production and inflow of local content. And you have seen our announcements on more local production firms. And number 3, I think on the balance, we're moving from big multiyear output deals to smarter packaging and picking. And when I talk with the content team, we're quite confident that we have the right agreements in place to secure the inflow that we require at cost we can handle.

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Operator [5]

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And we'll now take our next question from Laurie Davison from Deutsche Bank.

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Laurence Davison, Deutsche Bank AG, Research Division - Research Analyst [6]

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It's Laurie here from Deutsche. First question is on advertising share. In terms of TV advertising share, you've lost share in third quarter, somewhere around 2 percentage points based on the RTL results yesterday, yet you're saying your audience share is good. So why are you losing share? And should we expect that to continue in the fourth quarter? Second question is just on the Red Arrow international sale? Can you just update us on what level of interest you've seen for that? And what your current thoughts are about whether you might dispose or merge with another entity? And then third question is just over the cash flow over third quarter. It looks significantly worse cash flow conversion than last year. Can you just highlight whether there's anything one-off going on in the cash flow.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [7]

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Laurie, so I'll take the first 2, and I'll let Rainer talk about cash flow. So on audience share, look, if you take a look at the first 9 months in, that we are gaining something like 0.8 audience share, which is, by the way smack identical, I think, to the kind of gains that RTL has. So if I take a look over the year, then I think the performance is very analogous. If you look at the third quarter that was strong in shares. If I look at the flow throughout the year it was marginally below last year. And I think RTL gained a little bit, but we see those moves depending on programming, sequencing of what we have on here all the time. And as I look across the year, I think I'm confident in our outlook on audience shares. And you know that overall we're building and gaining.

And by the way, maybe in some ways more important, if you look at 9 months and you look at total video view time, then we are losing something like 3% in total minutes. So that's the linear reach decline, of which we are compensating 2 of those 3 points with digital growth. Again, it's slightly different in Q3 because of some of the year ago comparators. But I think the 9-month picture is indicative of what we expect for the year. And so is what we're doing digitally already completely compensating the structural linear decline, the answer is no. And of course, you guys understand that you have to compensate for that in audience and minutes viewing, number 1, you have to compensate for that in revenue number 2, and then profit 3.

And 1, 2 and 3 are successively more difficult, but I think we're in a very good way. And because you were comparing to RTL, if you look at our 37% digital growth, I'm very pleased with that. And rather bare bones set of numbers that RTL provided yesterday, I think, indicated they are at, I don't know, 14% or something like that. But our studios, very healthy process, very strong interest. And that's really as much as I think we want to say at this moment. And I'm reasonably confident that we'll be able to talk about what the outcome of this process is in some way shape or form before Christmas. And I'll let Rainer take cash.

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [8]

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Yes. Let me add to the process. Overall, we are evaluating all different kinds of scenarios, including a potential sale or business combination with the partner. And as Max already said, we are very happy with that. And cash flow is mostly phasing because a lot of this change compared to last year is program payments and also a little bit of CapEx.

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Laurence Davison, Deutsche Bank AG, Research Division - Research Analyst [9]

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Okay. If I could just come back on the first question. It was actually about the advertising share, your TV ad share. Your audience share, I agree with you actually has been reasonably good. But why are you losing TV ad share despite the audience share being relatively strong?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [10]

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Laurie, one [,] audience -- audience share, and if you want TV advertising share, correlate in the long run, but don't necessarily correlate mathematically in the short run because of the way TV advertising is being booked with agencies. And so we've seen in past years that we sometimes have overperformance in the quarter. We have underperformance in the certain quarter. We have a lot of volume-driven deals in place with agencies where they have very strong incentives to honor those deals because otherwise they have a major profitability issue on their P&L.

And so we've learned to kind of count our chickens after the 31st of December. Do I -- I don't have -- I don't quite know what is RTL's concept of an advertising share and what is counted in this or not. Do we think that they will have done marginally better in, let's say, TV advertising decline in Q3, then we have, yes, in the same vein that we did marginally better than they did in the first 6 months? If one takes a longer-range view, we tend to -- in a market that really has 3 participants move reasonably in tandem.

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Laurence Davison, Deutsche Bank AG, Research Division - Research Analyst [11]

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Okay. So we should expect though that ad share loss to recover over the fourth quarter?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [12]

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One would hope to see some recovery, but I'm going to couch that into Rainer's uncertainty statement that we have a lot of moving parts here between macro, between advertising booking patterns. And so as frustrating as that may be, the best I can say is that we, I think, have a very capable team that is doing everything it can to maximize performance and outcome for ProSieben.

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Operator [13]

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And we'll now take our next question from Chris Johnen from HSBC.

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Christopher Johnen, HSBC, Research Division - Analyst [14]

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I'd like to take them one by one, if that's okay with you. First, coming back to Laurie's last question on the share. I actually think you guys may have underperformed in the first 10 months of the year versus RTL. And then kind of raise the question why these share agreements are not being met. I mean [you reflect the] important also to the agency's P&L, but why do you think the flow this year has been lower towards you guys.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [15]

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I don't know the answer, Chris, because I can see our books can't see RTLs books. But if I look organically, the easy -- the best way I can compare is if I look organically, 9 months in entertainment revenues were about minus 2%. And if I read RTL's numbers correctly yesterday, they are about minus 2%. Then underneath, there may be some mix and contribution differences. I'm not entirely sure we are all counting apples to apples and how we're treating certain portfolios of advertising. So for example, we count addressable in digital and smart reach because we think that's a better metric to insulate core TV performance relative to the things that we're investing in.

I think, for example, RTL is counting addressable into their TV performance and because that's growing that will kind of temper maybe the view on TV ad losses. So I -- based on what I can see, I just don't see a big difference. But I'm very happy to look at where we come out by the end of the year. And then I think all of us will have transparency both on our performance and RTL's performance to be able to compare the 2. By the way, the other comment that I should make because we -- I find in our conversations, this is not a point about you Chris, but all of us are very, very focused on the advertising market and TV performance, which understandably is critical.

But if you look at the diversification we have, particularly with NuCom, I think that is helping us to outperform many of our peers in terms of revenue performance. And I think importantly, we are building a better and more diversified portfolio for the future, much as the earnings that we're investing this year may be painful to all of us.

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Christopher Johnen, HSBC, Research Division - Analyst [16]

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Right. If I may still follow up on that. So as a general comment about share deals, you don't think that they're necessarily [dead]. So even if going into negotiations for 2020, you don't expect any significant difference in your discussion on just overall share versus, let's say, last year. Or am I overinterpreting that?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [17]

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Yes. I want to be careful to get into too much detail on what advertising details [on] how, but I think what we've seen historically, and we would expect to see that in the future, is quite an equalized market and positions.

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Christopher Johnen, HSBC, Research Division - Analyst [18]

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Right. Okay. And then another one on studios and the potential disposal. I have to say, I was a bit surprised to see the kind of multiple to put in the press. Now we know that not everything that's being put out in the press [and] such a process is necessarily to be taken for at face value, but still, I mean is there sort of a comment on -- I mean you flagged, there's great interest in the -- during the process? I mean what kind of -- maybe I'm pushing it a bit, what kind of range are we looking at? I mean are multiples like 8x, 9x EBITDA are realistic? Or how -- and what sort of shape do you think the U.S. business being sold is today?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [19]

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[I] might strike but I can't. I mean there's an active process. I can't call it. I will tell you that I've read a lot of things in the press that made me laugh and smile because there's speculation around buyers that are interested, which are different to the ones that we're really discussing with. There is discussions on multiples range that are different to what we're looking at. Look, we're confident that we're in a good process. And I think it's a great business. Maybe that's the most important point to make. If I look at studio performance, if you look at it over year-to-date, and you have seen our numbers earlier, this is a business that in 9 months is up 22% organic, 28% reported. We have just renewed a number of major output deals and also a number of major talent plays. There's a lot of interest in the world for very, very strong content production assets. And so we'll see where we come out.

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Christopher Johnen, HSBC, Research Division - Analyst [20]

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That's very helpful. And then the final comment on -- I know it's early for 2020, but when you look back over the last year, the EUR 70 million you wanted to invest in entertainment in 2019. I mean where we stand currently? Do you think we have -- at least when it comes to those kind of investments, we have sort of reached the trough? Or should we brace for maybe a little bit more to come next year? How do you see the sort of big one-off investment in 2019 as we enter 2020?

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [21]

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Yes. As we have said, our situation that we want to finish the year first, and then thereafter, we'll discuss next year because we have this fluctuation in front of us how the advertising market will develop. And also next year is -- especially the development of the advertising market, one of the key factors how we will perform. On the other side, we have clearly committed ourselves to make all the investments which are necessary to make this shift happen between regional and U.S. content as soon as possible, and that's clearly what we wanted to attack further on and that's what we will do. And therefore, please let us finish the year, and then we will comment what we will do next year.

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Operator [22]

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We will now take our next question from Julien Roch from Barclays.

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [23]

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I'll ask my questions one by one. If I start with Red Arrow, that was one of your best-performing division, with 15% organic in Q3. It's going to increase back the percentage of revenue coming from TV, despite you highlighting the decrease of its percentage as a good thing. And you just told us, it was an amazing business. So can you explain the strategic rationale of selling Red Arrow? Or is it just because you have too much debt, in which case, would it not be better to cut the dividend?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [24]

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I can drill in. The -- I think what we're looking at is to really make sure that the businesses and the wheels we have are very synergistic to each other. And so we're very confident fundamentally that we have a strategy where we have an entertainment wheel. And we have a NuCom commerce and digital wheel and those 2 are feeding each other. And I say it every time, but I will say it again, I think that is a unique business model relative to media competitors in Europe, and I think it is meaningfully superior. And when I look around the world, I think there's a lot of evidence that, that is the case.

When one looks at content, what we're really focused on is having a strong ecosystem that can feed content into our German entertainment network, which are both TV channels, but also digital outlets. And so for that RedSeven, for that Pyjama Pictures, which is the company that we've just set up are important, and I would expect more of those kind of activities in the future. And similarly, Studio71 because it's a major [feature] of digital content for us in Germany and beyond that in the U.S. and other places is critically important.

So when you take a lens that way then the international part of our studio is a very good business, but it's not as synergistic as we would possibly wish. And thus, I think, is prudent for us to look at a moment where these assets, I think, are valuable in the world, whether there's a partnership or sale or other things, and we could then use that cash to reinforce more of the strategy I just talked about.

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [25]

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On your net debt question, which is related to that. We are -- when we reach our guidance, the lower end of the pro forma range on adjusted EBITDA, we -- and that's what we already flagged in Q2, we should end up at a net debt-to-EBITDA ratio of 2.5%. So -- and that's the situation. So we are not in a situation that we have to sell something to get to our leverage targets in that case.

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [26]

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Okay. The second question is coming back on advertising. I mean you've been very clear on trying to go for your target, but highlighting a worst-case scenario, which is 14% below consensus. And it's all based on November, December and you have no visibility. But surely, you must start to have some visibility on November, you at least have the first week and with booking, you probably have the first 2 weeks. So can you tell us what happened in the first week -- or the first 2 weeks of November?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [27]

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Yes. We have some visibility, Julien, but that's a dangerous game because then we get into beginning to comment on our business on a weekly basis and we are commenting on a daily base, I can only reiterate what I said early. I think there are a number of reasons to feel good about the fourth quarter, the things that we like. And there's a number of reasons to be concerned about. And indeed, our forecasts are changing on a daily basis. And so we will do everything to deliver the business with our targets and ambition. But at the same point in time, I think there's significant risk. And that is why we have provided you a range of possible outcomes. That's really as much as I think we're going to comment on that.

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [28]

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Okay. And then the last question is on addressable TV. You said it was small, but you were very confident it was starting well. So can you give us an estimate of how much revenue roughly you are going to generate this year and maybe a range for next year.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [29]

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Yes. I can. I think it's somewhere around EUR 25 million or so this year. I think a more important view would be if you look at d-force, which is the vehicle to give the market more access to addressable inventories. We think we'll be able to fit somewhere in the range of EUR 200 million, EUR 200 million plus gross advertising revenues between RTL and us through that vehicle. And so gross doesn't equal net, obviously. But I think you can see that as we move into next year, I think, addressable can meaningfully add revenue and profit, and we're still in the early days of scaling this.

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [30]

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Okay. So just -- so EUR 200 million is on a gross basis, d-force, RTL, and you. And EUR 25 million is just you on a net basis.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [31]

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Yes.

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Operator [32]

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And we'll now take our next question from Lisa Yang from Goldman Sachs.

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Lisa Yang, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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My question again is on the advertising trends. I don't -- I know you don't really want to comment, November, December given the limited visibility. But could you give us a trend for October because surely you have a better visibility on that month. That was the first question. Secondly, I have a question on your programming reinvestment. I think you already mentioned you wanted to invest about EUR 110 million, I think, this year. But when I look at your primary amortization, it's only up EUR 20 million in the first 9 months.

I just wanted to check how much of that EUR 110 million has been reinvested in the first 9 months, and why the gap versus the primary amortization? And how much more we should expect in Q4? And last question is on NuCom. Could you quantify the level of investments in Flaconi for this year, potentially next year? And going forward, how should we think about the margin for this business given the change in mix, and you're investing in probably lower-margin businesses. So should we see further margin dilution going forward.

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [34]

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So let me start with your first question and also give you a general statement again. At the beginning, what we currently see. There is no strong indication that our TV advertising business will decline high single digits percent in Q4 as described in our [BK] scenario. And please have in mind that we -- and that's what lots of you think and know that we have easier comparable figures in Q4 2018. And for sure, and that's what Max already mentioned before that there is a certain potential for our advertising share gains [either] via RTL, means that the full year targets can still be reached. However -- and that's the reason why we have explained it.

However, given the decline of TV core advertising revenues in the first 9 months and the overall weak German business climate, that's the reason why we have highlighted the risk for pronounced adjusted EBITDA decline of up to EUR 60 million. That's the only reason for that. So the trend for October, we had -- [and I look to arrive to.] We had a very strong October last year. So therefore, we had a decline, which is perhaps high single digits somewhere in October.

But it doesn't mean -- and that's the reason why we are optimistic also to be on that level, which we originally outlined that November and December will be on the same path. Second question, reinvest of EUR 100 million. For sure you don't see all the numbers because we also have them in working capital and somewhere else. And so at the end, the numbers which we have announced at the beginning of the year, will more or less be the number which we will do in our investments on that in the year 2019.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [35]

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Okay. And then on NuCom, so our investments in Flaconi this year are somewhere around EUR 10 million to EUR 20 million. I think for next year, look, we are managing a portfolio. So we will have a careful look at the right balance in that portfolio of continuing to drive growth acceleration in a number of companies. And at the same point in time, begin to build out a better balanced portfolio of top line and bottom line growth. And so I would expect to see very meaningful both top and bottom line growth in the NuCom portfolio.

And also if I take a slightly longer range view, we are expecting to build margin in those businesses, but we're just choosing and Flaconi is a great example in businesses where we have good structural profitability. And we think there are unique opportunities to build market-leading positions to take cash to do that now and translate that into bottom line earnings and growth down the road.

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Lisa Yang, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Can I just follow up on the second question around programming. How much has been done in the first 9 months. So I just will have a view of how much needs to be done in Q4 in terms of reinvestments?

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [37]

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This is Ralf speaking. I mean you can assume that we have done around about 3/4 of the invest, yes. Because this is our phasing. There will still be additional invest in Q4, yes. And just to remind you, when you look at scheduled consumption, this is only one part of our program costs. We also have directly expensed program cost, and this is more relevant when we look at local content, yes? So the share of directly expensed content cost is growing, which you don't see in the cash flow statement.

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Operator [38]

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And we'll now take our next question from Richard Eary from UBS.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [39]

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I've got a number of questions, if I can just take them one by one as well. The first one, just following on from Lisa's question on programming costs. Within the statement, the consumption programming assets in the P&L was actually down 1% for the first 9 months. And so are we expecting a significant increase as we go into the fourth quarter? And if the advertising market does drop out in a worst-case scenario, as we've seen with other cases, let's say, TV businesses as they manage their programming expenses. Is there a lever to manage that in a worst-case scenario? So that would be -- that's the first question, please.

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [40]

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Richard, Ralf speaking. Obviously, as you know, Q4 is our biggest quarter in all aspects, also [meaning for] content cost. And there is obviously leeway to steer the cost. Our planning for fees that we will do more in local content? Yes. But we also have a little bit flexibility on U.S. content, obviously. And how this turns out, will also be a function obviously of the overall environment.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [41]

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Ralf, just a follow-up. I mean the original guidance for program expenditures this year was about EUR 1.1 billion. I think that was the cash number. So obviously, there's a timing difference between cash and accounting numbers. But last year, you did EUR 965 million of programming costs, of which EUR 300 million were done in the fourth quarter. If you're doing the EUR 1.1 billion or even take into account some adjustments that you've got a substantial change in programming budgets in the fourth quarter. I mean is that correct? And if you [view] that the market is negative, why you're not warehousing content [for] when the market is better?

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [42]

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Yes. Are you asking a cash investment in the cash flow statement or cost?

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [43]

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Well, I'm asking for both.

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [44]

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Yes. Well, look, in terms of cash flow, this number also contains payments for content we have written off last year. And there's no change to our overall guidance we have provided earlier in the year. And as I said, in the P&L, we do foresee continued investments in line with what we have said. And the -- as I said, the outcome will be a function of the overall environment as we have some flexibility to steer our content cost. This as much as I can say right now.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [45]

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The second question just comes from the other costs within the entertainment business, which are actually up year-on-year. Despite, obviously the, let's say, deconsolidation effects of maxdome, 7NXT and also supposedly basically cost savings that were coming out as you're going to simplify the business. And also I would imagine there are some cost programs about the corporate level. So how do we think about that other cost line item, which seems to be increasing, whereas previously, you talked about taking out costs within that line item.

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [46]

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Well, Richard, I think we have also guided for additional invest into our digital platform business and monetization, i.e., AdTech. So the overall program was round about EUR 120 million, including the content cost. And we have guided earlier in the year for cost offsets within the entertainment segment of round about EUR 50 million. I would say, we still stick to what we have guided. And -- but we can debate this once we have the full year results release.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [47]

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Okay. So just on sort of third question, with regard to Studio71, obviously we've seen a continuation of growth coming through in the third quarter and third quarter was particularly strong. We are now at a stage where this business is now starting to turn profitable? Or are we still in a negative EBITDA scenario within Studio71.

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [48]

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Well, Studio71 is your question, I believe. It's round about breakeven.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [49]

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Okay. And then just a last question in terms of just on the plus 37% increase in obviously the digital and smart revenues, which was an acceleration from the first and the second quarters. Can you just outline within those numbers, what's actually driving that so we can quantify the changes?

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [50]

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So Richard, we have not provided a specific breakdown historically. So -- but obviously, our platform businesses are contributing to the growth as Max already highlighted. We also have our addressable TV within digital and smart. And whilst we have only done switching so far with the d-force joint venture now in full force we will also introduce the spot overlay product. So it's good contribution from all relevant, let's say, businesses within digital and smart.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [51]

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So just on the back of that, as we look at -- as those businesses ramp up into the fourth quarter, which is obviously the biggest quarter, should we see a continued acceleration of the growth that we are seeing in the first quarter, second quarter, third quarter this year?

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [52]

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Richard, I think we will continue to see dynamic growth. The specific percentage growth rate, I think it's [too] premature to tell, but it should grow dynamically, also in the fourth quarter.

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Operator [53]

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We will now take our next question from Conor O'Shea from Kepler Cheuvreux.

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Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [54]

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I have a couple of questions from my side as well. Just firstly, just to be clear, on the programming cost phasing. And I had the impression previously that in terms of the phasing of the extra investment that, that would start to cycle out in the fourth quarter, and it was concentrated in more in the second and third quarter. Has that changed? That's the first question. Second question, just in terms of the -- because I think you brought it up in one of your estimations for October, that October last year was particularly strong.

Can you give us a sense of roughly what the breakdown for October, November, December was last year for core TV advertising as the overall quarter was particularly weak down 8%. So if we could [have] what the mix was between October and, say, November, December? Just a clarification on the international part of Red Arrow being sold, could you isolate what the specific revenues for just the international [part of it] was being sold were in 2018 and also the EBITDA, if possible?

And then very last question, just in terms of the cost savings. I think earlier in the year, you said that if TV advertising were weaker than expected, you could make up some of the difference with additional cost savings. Just wondering, is that the case? And are these -- should we consider these cost savings permanent or temporary? And to the extent that they are temporary, and they will cycle in back in next year, could you maybe quantify them?

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [55]

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Okay. I try to answer some of the questions. But obviously, I can't be too precise. [When] we start with the second one, October 2018, was strong, was your question and you wanted to have a breakdown for November and December. For sure, we're not doing it currently. I think we have given out everything which we want to say to it. We also given you the idea of that. For sure, these are the 2 months where we rely most on to finish the year. And that's everything we can say to that. TV ads. Your fourth question was are the cost saving permanent or temporary? If you can quantify them? And where does it come from?

For me, more or less, the situation which we have is that we have this -- we have 2 effects for the current market development. And we really rely on the last quarter as we already said several times. So for us, how much is temporary, how much is the trend. That's something which we have to figure out when we finish the year on one side. On the other side, we have a high correlation, we already mentioned that during the speech to the overall economic environment. So it's very difficult for us to quantify where it comes from, and therefore, we won't comment on that too.

And the programming cost phasing, how does it cycling. At the end of the year, we have said several times that we would like to spend some EUR 80 million incremental content costs, which are primarily related to local content investments. So we do not expect total U.S. content spend to increase. And that's also -- so we have to see how this will develop also going on further. But our expectation is, as Ralf already said, that we will continue in our TV grids and especially in local content, irrelevant currently what the overall market is doing because we have to do it.

Because on our path to change the shift, we have to invest further and to integrate our formats in the market in our program. And that's -- we can't react to changes in the overall market currently because we have to fulfill a long-term strategy. And we also for Red Arrow, it's too early to isolate the international business because, first of all, we haven't decided what we want to do. Second, when we have finished, for sure, we have to do it, and that's also a discussion, which we then will have in March, because then we should normally know what we are doing and how it will look like.

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Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [56]

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Okay. But can you say whether it's profitable at the moment or not, just the international part?

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [57]

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Yes, sure.

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Operator [58]

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We will now take our next question from Patrick Schmidt from Warburg Research.

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Patrick Schmidt, Warburg Research GmbH - Analyst [59]

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More general ones. Looking at Flaconi, you're highlighting, what are your thoughts about Douglas, the German retailer wants to establish there, let's say, digital marketplace for online beauty products? That will be the first question. And second, could I have your thoughts about the profitability of your smart and digital revenues? I know you're obviously in the ramp-up phase, but in assume steady state scenario, what do you think about the quality of your contact. Obviously, addressable TV is similar to the current ones, but the digital one so -- yet to contact on your platform Joyn. How does that convert into price and ultimately into money?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [60]

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Yes. So on Flaconi, I mean Douglas is obviously our biggest competitor. I don't have the specific Douglas numbers, but I do know that we are growing meaningfully faster than [this] . And it's been very interesting for us to have conversations with the big beauty companies where that sentiment is really changing. We suddenly are a very big driver of their businesses. They are realizing this is a quality place where we can create theater for their brands. And we are having a lot of strategic discussions on how we build the business going forward.

Just like Douglas we are expanding internationally, but we are doing this very thoughtfully and carefully market to market, and where we have strengthened and the reason to believe that we can build a competitive advantage. Our profitability on digital and smart advertising in steady state should be comparable to the profitability of TV advertising. In fact, one could argue it should be marginally better, but it's very, very early days. But certainly, I think, at a steady state, reach is reach.

And as our reach gets more intelligent, the intelligence or addressability of that reach should yield some incremental pricing. One has to offset that probably to the fact that running digital reach businesses in cost terms is probably slightly more expensive. So all in all, I think the best answer I can give you is I would expect that steady state, not in buildup phase, but at steady state to mirror the historic profitability in TV.

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [61]

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Yes. And so that's a classical contribution business because your fixed costs, you put more in that directly takes it on to the profitability.

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Patrick Schmidt, Warburg Research GmbH - Analyst [62]

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Okay. But you said reach is reach. I wouldn't confirm, but if you -- I don't know, look digital on the platform, you might not be -- in terms of your traditional laid back audience share might be getting smaller. So [distraction] might be higher and when you look online clips and also Studio71 also showing that profitability is more difficult to reach.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [63]

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Yes. Those are 2 separate things, I think, maybe the best way I can answer it is that we have very exciting conversations with big advertising clients when we discuss total reach. So it's important to understand, by the way it's true globally that still TV advertising and digital advertising markets are segregated in ways that sometimes is very surprising. And we are working very hard on is to provide total reach to our advertising clients, where we can package together the audience that is watching an entertainment show at 8 in the evening or 8:15 in the evening on TV, but also is watching that same show either live in streaming or the day after or 3 days after. And that's a high-quality audience that we can package together. And I think the yield that can be generated on that reach is at least parity across different platforms, if not better at digital. That is very different from yields on, what I'd call, scatter inventories. And particularly, if you look at the big social media platforms, a lot of the views are being measured for people to have spent 3 seconds [also in] content. And so that's a different quality level and there's different pricing for that.

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Operator [64]

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We will now take our next question from Annick Maas from Exane BNP Paribas.

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Annick Tonie Maas, Exane BNP Paribas, Research Division - Analyst [65]

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So just looking at the TV ad market for next year, I'm looking at consensus. They have entertainment still growing at 1%. I suspect you've started your first conversation with advertisers for next year. Can you please tell us how they are progressing?

My second one is for Max. Just can you typically tell us how much you spend typically in a week, focusing on Joyn as opposed to the other businesses that you're running? And my third one is just on digital and smart advertising. Looking into next year, what are you currently modeling in your own forecast? Do you expect this line to grow 10%, 40%? What are the ranges.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [66]

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Okay. I'll happily take those questions, Annick. I'm smiling into your second one. There's people who are frantically going through my calendar to answer that with mathematical precision. But I'll give you the answer in a second. Look, TV ad market, I just don't know. I really don't know. I will certainly say that I think the quality of available macro forecast, whether that's Nielsen or all of these is very weak. And in fact, we have pretty much largely stopped looking at them because all they do is extrapolate the path forward. And so they're always lagging, if 3, 6, if not more months in their understanding of where the advertising market is going.

I think our job, as we do in Q4 is to build a robust business that is future-proof. That has a better mix and better balance between TV advertising, digital and other assets that we're building and to have an approach to forecasting where we can handle a weak market. And if the market ends up being stronger, we can use that strength to drive and reinvest in the businesses. Second question, I think your question was again, how much time I personally spend on Joyn? And the answer is a lot because it's a very important part of our future. And I will certainly see and talk with the team in various interactions on a weekly base. Digital and smart growth rate for 2020, look we'll set our budgets when we sit together in March. But certainly -- and I think that's obvious from our strategy statements, we would continue to expect strong growth on digital and smart. And certainly, our ambitions will be to accelerate that growth.

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Operator [67]

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We will now take our last question from Catherine O'Neill from Citi.

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Catherine T O'Neill, Citigroup Inc, Research Division - Director, VP and Analyst [68]

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I just wanted to go back to the leverage, and you talked about being around 2.5x by the end of the year. So at the very top of your target range. Could you maybe talk about how you plan to get sort of into a more comfortable area of that target range, if you're not planning to cut or adjust down the dividend? Secondly, in terms of strategic reviews and where the share price is, et cetera. Are there any other assets that you would consider looking at as part of a strategic review where you think you could realize value? And then finally, on Joyn or your OTT ambitions. I think in the past, you've talked about looking to expand into other markets. I wondered if that's still part of the plan and how you think you'll go about that?

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Rainer Beaujean, ProSiebenSat.1 Media SE - CFO & Member of Executive Board [69]

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So let me start with your first question. I've said before that we target 2.5x net debt-to-EBITDA based on the low end of our EBITDA range. For sure, this number will increase when we will have a different EBITDA because that's the most relevant number to increase or decrease our leverage figure currently and especially after year-end. Dividend policy, we confirm our dividend policy with a payout ratio of 50% of the adjusted net income because it's in place. And also to make be clear on that, in 2019, our dividend will reflect the adjusted net income decline, which we have guided at the beginning of the year. It's also based, on what we have to pay out on that, what we will reach up at the year-end. So nothing else to say about that, and we feel comfortable with the 2.5x year-end because that's the high end of our range.

We have to invest further so we have to see what we can do. Our strategy is currently not to sell assets, what we always do and what we always have to do, and that's what we did in our portfolio, and that's the reason why we are looking on the international Red Arrow part is that we challenge our businesses and then we see what we can do. But it doesn't mean on the other side that we're also not ready to move in the other direction. So at the end, we have to make our decisions based on the business and what is right and what is wrong for our strategy, and we have a clear strategy in front of us, and if they need some investments also in the next years and yes, we are ready to do that.

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [70]

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And Catherine, on your third question on Joyn. Yes. So as I commented previously, we have a pretty wide and very solid interest across a range of markets to look at expanding Joyn. It's a game of one step after the other. Right now the team is very, very focused on getting a premium subscription version into the market before Christmas. That is absorbing all energy that we have. As soon as we've done that, we are going to go back and look at with what pace we can expand in more countries. I would certainly expect for something meaningful to happen in that space next year. And that's, I think, as much as I'm going to comment on that for now. Thank you.

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Catherine T O'Neill, Citigroup Inc, Research Division - Director, VP and Analyst [71]

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Sorry, could I just come back quickly on that. You talked about the investment for Joyn next year being maybe a net investment of EUR 100 million, EUR 120 million. Does that incorporate some kind of plan for expansion into other markets? Or would that be on top of the sort of existing EUR 100 million to EUR 120 million you referred to?

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Max Conze, ProSiebenSat.1 Media SE - Chairman of Executive Board & CEO [72]

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The answer is it does not. But expanding in other markets, depending on how we structurally do this may or may not be a cost because those may very well be structured in a way that we can take advantage of some of the value that we have already created. So I wouldn't, if you want, pluck a big number into a model. But again, that is all part of what we're working within our 2020 budget, and we'll surely have quite a bit of specifics on our Joyn ambition and expansion plans when we all sit down in March.

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Ralf Peter Gierig, ProSiebenSat.1 Media SE - Deputy CFO, Executive VP of Group Finance & IR and Member of Executive Board [73]

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Okay. Ladies and gentlemen, as our operator already said, this was the last question for the call. And as always, our Investor Relations team will be available shortly thereafter for any follow ups. Thank you, and goodbye. Have a nice day.

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Operator [74]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.