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Edited Transcript of SAX.DE earnings conference call or presentation 8-Aug-19 8:00am GMT

Q2 2019 Stroeer SE & Co KGaA Earnings Call

Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Stroeer SE & Co KGaA earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Schmalzl

Ströer SE & Co. KGaA - Co-CEO & Member of Management Board

* Udo Müller

Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO

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Conference Call Participants

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* Annick Tonie Maas

Exane BNP Paribas, Research Division - Analyst

* Catharina Claes

Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst

* Christoph Bast

Bankhaus Lampe KG, Research Division - Analyst

* Craig Abbott

Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany

* Emily Johnson

Barclays Bank PLC, Research Division - Research Analyst

* Fathima-Nizla Naizer

Deutsche Bank AG, Research Division - Research Analyst

* Julia Matoshchuk

Morgan Stanley, Research Division - Equity Analyst

* Patrick Schmidt

Warburg Research GmbH - Analyst

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Presentation

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Operator [1]

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Good day and welcome to Ströer Publication of Half Yearly Financial Report 2019 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Udo Müller, Founder and Co-CEO of Ströer. Please go ahead, sir.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [2]

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Dear ladies and gentlemen, thank you for joining our Q2 results call today. Together with my Co-CEO Christian Schmalzl, I will present our quarterly results and business update for the second quarter of 2019. But before we start into the presentation, let me welcome Christian Baier, our new CFO. We are very happy to have him on board since last week, and I guess Christian will be in touch with you as soon as he has finished his internal onboarding meetings.

First, I will comment on our main KPIs and what has changed in the past 6 to 9 months and which strategic midterm opportunities we currently see. Christian Schmalzl will then dive deeper and give you a business update and also present the details of our excellent financial performance in the first half of the year and the promising outlook for the second half of 2019.

Let me start with our results of the second quarter, which are reflecting the strength of our core business and are a proof point of the rise of structural shifts in the German media market with out-of-home being the structural winner of this change. Q2 2019 was another strong quarter, also overcompensating several disposals, mainly in the digital out-of-home and content segment, announced with our Q1 release, which had a total effect of around EUR 17 million in Q2 and a total effect of EUR 28 million in revenue and around EUR 3 million adjusted EBITDA for the first half of 2019. That said, our reported revenue grew by 8% from EUR 726 million to EUR 787 million in the first 6 months. This is based on an organic growth of 7.3% ahead of our original mid-single-digit expectations for the first half of 2019. The adjusted EBITDA increased by 8% from EUR 237 million to EUR 256 million despite the already mentioned disposals. Our adjusted EBIT also showed a positive development and increased by approximately 6% from EUR 109 million to EUR 115 million.

Adjusted net income increased by 7% from EUR 79 million to EUR 84 million. Operating cash flow in the first half of the year was up by 14% from EUR 153 million to EUR 174 million. The net investments of around EUR 47 million are fully in line with our CapEx plan, however, EUR 30 million below previous year due to phasing effects. On a full year basis, we expect, as in the past, CapEx of around 6% to 7% of sales. Net debt including lease obligations for the first half of the year is at EUR 1.7 billion, at the same level as 2018.

As already briefly mentioned, the advertising market context has changed over the last 6 to 9 months. After the ongoing decline of print and, for the first time ever, as well free-to-air linear TV, online and especially out-of-home are the clear structural winners of this development. Latest forecast from Nielsen and other market research companies are underlining this pleasant trend. But ads have changed in the last quarters. For the first time ever, we clearly see the various components of what we call digital dividend for out-of-home are coming through. For many years, we worked very hard on the preconditions, and now we can take the credit for our efforts.

The first dimension of the digital dividend is a significant growth of programmatic revenue for digital out-of-home and public video. We were waiting for that for a couple of years but we are now getting for the first time ever revenues from completely new budgets that are allocated in the online segment and fits with DSPs and trading desks like MediaMath, The Trade Desk, Active Agent or Adform. We have connected our digital out-of-home inventory with the online ecosystem, enriched it with data and have seen now in the last 6 to 9 months a constantly increasing cash inflow via programmatic.

The second dimension of the digital dividend for out-of-home are the constantly decreasing prices for digital out-of-home displays, which gives us now the opportunity to start the digitization of our prime roadside inventory on a bigger scale. We saw the huge digitization upside for the out-of-home industry already 20 years ago when we introduced 9 square meter pulsar scrollers to the German out-of-home market, anticipating that the premium pulsar scroller locations would be exactly the ones which also would have the necessary quality for digitization and LED technology on a later stage.

After 10 years of ongoing strong competition for big-format premium locations in Germany in the early '90s, we were very satisfied to secure a market share of more than 90% in premium 9 square meter and bigger size in cities with more than 100,000 inhabitants. The existing scrollers on these locations from today have always been a bridge technology on the pricing for LED screens, reached a tipping point for these sites into digital. It's a bit like a real estate developer who anticipates 20 years in advance that a city is going to build its new airport and secure its relevant plots on time before the prices of the plots are rising. 60% of our CapEx overall goes into the deployment of another 500 premium screens indoor and outdoor in 2019.

The third dimension of the digital dividend is the special payback, which we now get for our huge investment into our strong and nationwide local sales force. When we convert an analog pulsar scroller into a digital screen, we leverage at the same time our local sales force by tackling primarily local and regional clients. They pay higher prices, get a highly individualized package according to their funds, and we can therefore at least triple or quadruple the income per location. The combination of leveraging our huge investment and acquiring approximately 90% of Germany's prime big-format locations 20 years ago and leveraging our huge investment in building up the globally only national sales force for local advertising products at the same time is putting us in a pretty comfortable position for the upcoming years, additionally supported by incremental new programmatic revenue streams from online budgets.

To be at the forefront to capture the opportunities and potentials of these changes, we have changed and sharpened our strategy [and have called it] Out-of-Home+. We clearly concentrate on our core out-of-home business, which, combined with public video or digital out-of-home, represents roughly 2/3 of our group EBITDA.

The main carrier ship is supported by the 2 accompanying boats, digital content and Direct Media, which help us to get better access to our customers. We increased our share of wallet with national key accounts, become a full service marketing partner for SMEs and get smarter in leveraging tech, data and content for the digitization of out-of-home. We furthermore focus on the German market, which improves our execution excellence, avoids management dilution and therefore gives us higher margins.

The various disposals like out-of-home in Turkey, Conexus, BodyChange, Vitalsana, Foodist, twiago, Ströer Mobile Performance as well as the massively reduced M&A activities give us more headroom to improve the already remarkable growth of dividend yields and ROCE. This clear positioning has made the Ströer speed of total shareholder return and value creation more transparent. And in combination with strong organic growth rates, there's a clear strategic path for the coming years.

Beyond our focused Out-of-Home+ strategy, the tectonic changes within the media landscape and the digital dividend for out-of-home, there's one more aspect which has changed in the last month, Statista. Since the acquisition back in 2015, this premium asset was somehow hidden within our content segment. But the dynamic growth of the #1 global business data platform and the market discussions after our Q1 presentation have made the substance of the company way more visible. The excellent Statista results for the first half of 2019 are in line with our high expectations and a strong proof to achieve Statista's full year targets at the same time.

Statista's revenue grew in the mid-30s to EUR 30 million in the first 6 months. Also, the team was busy with opening up offices in Singapore and Los Angeles. And despite the strong growth, cash flow was positive, and we are fully convinced to achieve our annual revenue target of EUR 60 million to EUR 65 million and our midterm goal of around EUR 200 million by 2023.

The net revenue retention reached, meanwhile, remarkable 100% and in developed markets already above 100%. This is not only fueled by low churns but also price increases of around 13% in the first half of 2019. Cost of sales represent roughly 30% of revenue now and 80% of those costs of sales go into new client acquisition. That gives us strong comfort on the sustainable margin potential of the company on the long run, especially in combination with the outstanding net revenue retention.

Let me hand over to Christian who will explain in more detail where our operational focus is at the moment.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [3]

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Thank you, Udo. Although a couple of strategic parameters have obviously changed, we are quite consistent in our focus on operational excellence, so in that area most of the things have not changed.

For 26 quarters in a row now, we do not only deliver robust organic growth rates but constantly outperform the ad market. As Udo pointed out, print and meanwhile also TV are going backwards. And in the first half of 2019, the total ad market is down by roughly 2.5% in net numbers, and we grow beyond 7% in such a climate and outperformed the market by roughly 10 points. No one can completely decouple from macro environment, but we have enough business drivers in our own hands to continue our growth path even in a more challenging market context.

Within the out-of-home segment, which grew from 3.5% to over 7% share of the total ad market in the last 8 years, we have continuously improved our market share to, meanwhile, 60%. The broad range of over 20,000 long-term portfolio contracts is a strong backbone of our operations. And with our acquisition team, we add another 1,200 to 1,500 top locations on private ground this year. This will give us even more flexibility to digitize the right inventory to deliver top-class advertising solutions for our clients, parallel to profitable allocation of CapEx with reasonable payback times. Our leading position across all digital out-of-home categories, having video on premium sites indoor, roadside screens on highly frequented outdoor areas and city centers as well as digital signage solutions in point of sale or point of interest locations is unchanged.

On the back of our strong portfolio and together with our 2 support businesses, we've continuously improved our marketing and sales positioning over time. The Nielsen numbers across all sales houses in Germany show that we get closer and closer to the 2 large TV groups. Our combination of out-of-home, online, mobile and Direct Media and the fact that all areas are growing gives us confidence for the second half of the year. In addition, there is no other sales organization that is combining a leading national position with a full nationwide local sales infrastructure. We are the only player in the market with full access to every single advertiser from the largest spender, Procter & Gamble, to a small butcher around the corner.

Our consistent organic growth is also fueled by our efforts to constantly improve our integrated key account management, and we have updated the overview on our top 20 customers based on the first half of the year. We are maximizing our share of wallet by investing in the incremental key account structures, which serve as marketing teams almost like agencies, deliver strategic advice and planning as well as creative or production services out of one hand by bundling our offerings commercially and by leveraging existing client contacts and client insights to cross- and upsell within and across our different media categories. It's sometimes difficult to monitor the impact precisely as campaign budgets and marketing goals of clients are volatile, but outperforming the total ad market as well as the peers within our media categories is the ultimate proof for us increasing our share of wallet.

We permanently developed new media concepts, technologies and advertising solutions together with our clients and their agencies. Let me curate a couple of examples. To generate enough touch points within the core online shopper target group, eBay used programmatic public video to extend their campaigns. Focal point of the commercials was the precisely targeted approach with suitable product recommendations that were displayed on digital screens on bus and train stations. Based on geotemporal data from a telco provider, different user classes were identified when approaching a specific touch point. Then, in near real time, the right products in combination with additional content specifically for the target group cluster were broadcasted on the screens.

For more than 40 years, Lidl has been advertising the price performance ratio of its offerings and a large range of owned and external brands. The latter is now the focus of a German-wide out-of-home and social media campaign, which uses clever word creations to mess with the competition. Lidl uses headlines like (foreign Language] a creative solution that needed to build its perception very fast before the competition was able to find a suitable answer. Ströer's mega light networks are the ideal solution for that kind of broad mass audience penetration.

For more than 10 years, Ströer Dialog is delivering direct marketing services for Vattenfall. We provide qualified and experienced project management and highly qualified client advisers with excellent process and system knowledge in the energy sector. It's a transparent and trustful corporation. Our partnership was extended accordingly for another period of 3 years, and it's, meanwhile, an important backbone for our also increasing share of Vattenfall's traditional media spend in the online and out-of-home area.

Another example, Ströer realized the mobile commercial campaign for the Zalando outlets, attributed with location-based targeting approaches. Consumers within a range of 50 kilometers around the Zalando outlet stores in Cologne, Berlin and Frankfurt and Leipzig were attracted with mobile solutions in order to increase the visitor number of the shops. Expert campaign data analysis show clearly that consumers with commercial contacts visited the stores almost twice as often as consumers without ad contact.

To further penetrate the local and regional ad market, we continue to increase our overall sales force capacities and are on track. We don't see any need to change organizational structures or recruiting or hiring processes. It's rather an optimization game for us at the moment to constantly improve the effectiveness of our teams while increasing the number of salespeople.

Looking at the first half of the year and considering a strong national sales development, we generate currently around 60% of revenues via regional and local customers. Over 50,000 active clients with an increasing share of multiyear deals make us more and more independent from the short-term volatility of campaign-oriented large customers. As long as we've been focusing mainly on large national accounts, our broad range of products was quite a challenge. Especially niche media like buses, bicycle stands or mast signs were difficult to monetize.

Meanwhile the potential weakness has become a strength. We structured our portfolio clearly for the different customer clusters, their marketing budgets and specific needs, and our roughly 1,000 salespeople have clear sales guidelines to make sure that they find the right product proposal for the right customer. Revenue per salesperson and, more importantly, gross margin are evolving quarter by quarter.

Beyond the growing effectiveness per salesperson, we have used the first half of the year to further improve efficiencies as well. We streamlined internal processes, automated collaboration between outbound sales and sales support and then developed and introduced a new digital front end for our organization. All client information from our CRM system, meeting calendars and KPI dashboards are integrated on the same platform and tablets that our hunters also use for their client meetings and presentations. They have live access to all relevant products and therefore create by far more interactive client sessions and ultimately get a digital signature from the client for the contract, which goes directly into our ad operations and ERP system.

We celebrated our first fully digital and automated order 4 weeks ago and expect significant efficiency gains for the future. We have come to a point where the growing number of people led to more and more challenges in handling the orders and managing our yield. Our new sales front end for local sales, we call it [EZS] , will make our sales force faster and more flexible and will prevent us from hiring too many sales support managers. However, we still believe in do-it-for-you instead of do-it-yourself solutions.

So let me summarize our unchanged operational focus areas and where we are by means of KPIs for this year. First of all, we massively invest and prioritize the digitization of our infrastructure. The first of the -- in the first half of the year, we've installed another 274 premium screens indoor and roadside on top of our existing portfolio, so we are slightly ahead of our plan to get to 500 new premium screens by the end of this year.

Secondly, the further ramp-up of local sales resources was and remains the #1 sales priority. We want to add 175 more people this year and are slightly behind the rollout pace with 81 from January to June. But at the same time, revenues per capita have improved beyond our expectations so that we are overall quite happy with the performance of the team.

Leveraging tech and data in a smart way to increase sales is our third focus area. We've deepened our data partnership with the Auto Group and established a separate joint venture entity for digital data products to underline the long-term ambition together with Auto. More importantly, the further acceleration of tech sales and programmatic revenues for our digital out-of-home products remains key. In the first half of 2019, we've already generated 24% of public video revenues via DSPs and trading desks, one of the key reasons that public video grew beyond 35% and attracted completely new non-cannibalizing budget.

Finally, the combination of out-of-home with online and direct puts us in a quite unique position, and we work hard on increasing our client relevance and maximize our share of wallet, especially amongst our top key accounts. While the ad market is going backwards by 2.5% in terms of net numbers, we are growing more than 7% as a group and outperformed the market by roughly 10 points. We believe that this is the ultimate proof of concept and gives us confidence that we keep our growth pace even if macro environment or ad market get more challenging.

Let's look in more detail at our P&L, cash flow and segment results. Before I will run through our financials of Q2 2019, let me reiterate that this year will be straightforward as we will have only one set of numbers, including IFRS 16 and IFRS 11, and consistently on the basis of continuing operations. Revenues of Q2 grew by 4% or in absolute terms from EUR 397 million to EUR 413 million despite the effects from disposals in digital out-of-home and content and Direct Media of in total EUR 17 million. Organically, we grew by a remarkable 7.3% in a continued demanding, overall stagnating German media market.

Adjusted EBITDA increased by 7% from EUR 129 million to EUR 139 million in line with the strong business development. Exceptional items are on the same low level as in previous year's period. Depreciation and amortization was up by EUR 4 million to EUR 91 million, mainly due to a larger scope in consolidation. Tax expenses increased to EUR 6 million from EUR 4 million in previous year's quarter. This increase is primarily attributable to the sustained improvement in operating activities and as a result of further increase in the tax base.

Adjusted net income was up by 6% from EUR 47 million to EUR 50 million, in line with operational performance. Adjusted free cash flow for the second quarter 2019 is with EUR 19 million, slightly above previous year's quarter. We had various phasing effects especially in working capital compared to the same quarter of the previous year. Tax payments of EUR 12 million are according to plan and below previous year's high onetime tax payment. Unchanged to our Q1 statement, we expect for the full year a normalized cash tax out ratio of 20% to 25%.

The buildup of working capital was EUR 14 million, affected by payment shifts between quarters. For the full year, we expect a positive back-loaded working capital performance as in previous years. Investments of approximately EUR 27 million reflect our commitment into internal growth opportunities and are well in line with Q2 2018.

Our banking leverage ratio remains stable at 1.8, just on the same level as in the second quarter 2018. As described before, in Q2, we delivered again a strong sales and earnings performance. We were able to accelerate organic growth further for both out-of-home media and digital out-of-home and content to 7.5% and 11.3%, respectively, against strong comps from the previous quarter. Our Direct Media organic growth was 7.8%.

In absolute terms, out-of-home media revenue grew by 10% from EUR 164 million to EUR 181 million, supported by local and regional sales initiatives and by our ambient media activities. Adjusted EBITDA of out-of-home media increased by 9% from EUR 77 million to EUR 84 million. The EBITDA margin stands at 46.4%. Favorable product mix in our core business was able to overcompensate the dilution effect of ambient media as well as the more cost-intense expansion of local and regional sales forces.

Revenue growth of digital out-of-home and content was mainly triggered by a strong performance of our public video business as well as Statista, which slightly overcompensated divestment effects such as twiago or Ströer Mobile Performance in the segment. All in all, reported revenues grew to EUR 141 million from EUR 140 million in the previous year's quarter. On a like-for-like basis, as said, revenue growth was 11.3%. Adjusted EBITDA of digital out-of-home and content increased by 15% from EUR 42 million to EUR 48 million with an outstanding margin improvement of around 4 percentage points to 34.3%. This reflects our focus on profitable growth and business opportunities.

Reported revenue in the Direct Media segment was up from EUR 97 million to EUR 102 million. This is against tough comps in the previous year's quarter and portfolio changes from the divestments of Conexus and Foodist. Underlying sales development was strong with an organic revenue growth of 7.8%. Adjusted EBITDA of the quarter was EUR 11 million and EBITDA margin was with 11%, below Q2 2018. This was due to integration projects to optimize and integrate business processes and projects by Direct Media to initiate and deepen business relationships with new and existing clients as a temporary part of our Out-of-Home+ strategy.

Let us now get to our guidance for 2019. There is not much more to say other than we confirm our guidance of mid-single-digit growth for the second half of the year. With that, let me close our presentation with a reference to the publication of our Q3 figures on November 13, 2019. Thank you, everyone.

And we are now happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Patrick Smitten (sic) [Patrick Schmidt] from Warburg Research.

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Patrick Schmidt, Warburg Research GmbH - Analyst [2]

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The first one is referring to your digital out-of-home market share of 90%, which is obviously quite strong. How do you see competition going forward? So how do others behave, like JCDecaux behave, for example? We are based in Hamburg, for example. So when I'm walking around the streets, I see more JCDecaux public screens, but that might be the location based in Hamburg.

A second question would be whether you could explain a bit more about the metrics about -- because you said you were connected to the online budgets with your public video screens. Is that sustainable? Or is that maybe kind of a test phase? Because, obviously, you can't monitor or report click rates, view-ability, and how does that impact the pricing, for example? How's your feedback from customers, for example? Could you maybe comment on that a little bit?

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [3]

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Okay.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [4]

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Let me take the first question, Christian. The market share of 90%, I think, will be sustainable in the midterm because, I mean, if you live in Hamburg, you'll see some pictures (inaudible), which is posted on [CFP] format mainly. Don't forget that we are actually in 3 different segments. Roadside screen, it's a big segment which we very well deploy now on a bigger scale. In the upcoming years, we're going to convert more and more locations. And as I said already before, this, for us is a very, very satisfying situation now because, 20 years ago, when I was personally driving through the city searching locations for pulsar scrollers, the idea was always these locations will be the entry points for digital in the big-format markets. And our market share there is around 85% today from scrollers, pulsar scrollers -- 9 square meter pulsar scrollers. And that gives you a good hint where our market share for big-sized digital LED screens will also be in the future.

So second, everything what we do at the point of sale, then we talk about this huge number of smaller digital signs. So we are the only one from the 2 big companies today in Germany who are really focused on point-of-sale digital locations. So we are talking about 50,000, 60,000, 70,000 digital screens in the future.

And the third one is clearly that everything what we do in public video, what we do in the railway stations, in tube stations, et cetera, there's no competition because we have the relevant contracts for that and as well as in shopping centers. So that's why if you would only look on street locations, especially on CFP format, market share of Decaux will be ahead of ours in this subsegment, but this is only a very small part of the market. So if you look at the whole market, roadside screens, big format, point of sale and classic public video, et cetera, then the picture will be more or less the same. We cannot say today it is 80%, 85% or 90% or 95%, but we expect it's around 90%. Let's leave it at that.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [5]

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And your second question, Patrick, is on programmatic public video. Well we see the development over the last, I would say, 4 or 5 quarters, it's constantly growing. We see that clients or agencies behind the trading desk that wants to integrate public video inventory into their digital online plans, they continue to book and rather increase the budgets. So we feel that the whole development is quite sustainable, and I think it just follows the logic that both clients and agencies try to invest more and more into automated inventory bookings. That's why you naturally get more money out of those streams.

And you're right, we only sell on CPM basis and have no click-through rates or anything like that because it's a physical medium that is not directly connected to a website. But customers have normally, anyway, more sophisticated marketing attribution models where they also see the impact of television and print. And the key point for us is that we get access to digital branding budgets that historically sits with, in part, television but more with online video, YouTube and so on. And I think on a CPM basis, our products are very competitive already.

We see that programmatic revenues in part have even better CPMs than traditional bookings that come up the out-of-home world. So it's difficult to predict what the ultimate share of programmatic is for that product. But with the currently 25% and the growth on both sides, so traditional bookings via out-of-home agencies and programmatic revenue streams from trading desks, at least for the moment, we don't see any signals that there are any changes. It's rather growing faster than slowing down at the moment.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [6]

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And by the way, I mean, there, we've been waiting for the biggest upside. We already discussed it, I think, last year. Because, today, we're only connected to, let's say, 35% of the market on the DSP side because Google globally didn't connect any digital out-of-home up to now because, for them, the market volume was not relevant. So at the moment, this is going to change. We're going to see clearly a substantial inflow from money into the system because they control around 65%, 70% of the online business on this side. So we are constantly discussing with them.

And -- but nobody can say when it's going to happen because, clearly, in Germany, I think, we are far ahead globally at this point. So maybe globally, you see the same amount of programmatic income for out-of-home companies what we are going to achieve this year only in Germany. So there's a big upside because our infrastructure, since you already have this, would suggest easily minimum EUR 250 million net income without any additional investment. So this is clearly a substantial upside. But it's unfortunately, today, impossible to say if it's going to happen this year, next year, in 3 years, but it's going to come.

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Patrick Schmidt, Warburg Research GmbH - Analyst [7]

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Okay. Maybe one follow-up question. But you don't see any pricing trends out of this? So how does the CPM compare to the online world, for example, as customers have -- they do not have the visibility of click through rates, viewability, et cetera?

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [8]

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The basic pricing of the product is video CPMs compared versus online CPMs and TV CPMs as there is no sound. And as you say as there is no reporting beyond the context there we already work with lower CPMs. And I think that price level and the price distance versus, for instance, online video has rather improved over time. So we see that online pricing is under pressure, but we rather see that we improve our pricing the more targeted contact packages we sell, because historically, most of the bookings were really, well, loop-based to adults 14 plus. And what we now do more and more via programmatic advertising, we combine it with -- the inventory with data, integrate, as an example, for eBay, integrate telco, mass mobility data to target specific target group segments more precisely where we are able to take a higher CPM and optimize the yield. So I think overall, the price level versus our video peers is quite attractive already. And I think the growing targeting opportunities through more data in combination with the inventory will rather help us improving prices.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [9]

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By the way, I mean, this is one of the key reasons why we said we don't expect, let's say, 5% growth in average for the next 10 years. It could be also 0% 1 year or it could be 10% or more percent, it's difficult to forecast now because we're in the very, very early beginning of that. One thing is for sure, a substantial part of our inventory is going to be digital and it's also for sure that we actually were preparing ourselves for 20 years now. The rollout mainly of our poster product, and now it's all about execution. And to do it in the right space, to do it in the right pace, and to see that increase the billing ratio part and parcel. So that's actually very difficult at this stage to forecast on 1, 2 percentage points is because the market is in its very first beginning, but we see that the demand is very strong, and we have no doubt that this is actually exactly at the point which will push the stock and our company ahead for the next 10 years because this is minimum the time, that you would see -- that you needed to transform the auto market in Germany from analog to a fully digital business.

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Operator [10]

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We will now take our next question from Nizla Naizer from Deutsche Bank.

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Fathima-Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [11]

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I had a couple of questions from my end. The first is on the traditional Out-of-Home media segment, 7% organic growth in Q2, very strong. Where is that growth coming from? In the sense how much of this is national base kinds and how fast are they growing? Or have they been flat, similar to what we've seen in this last quarter or so? And how fast is the local and regional sort of sales exposure growing for you? And is that really what's driving that strong organic growth?

Linked to that is when you look into the rest of the year, do you think you can sustain the sort of high levels of growth when it comes to the traditional out-of-home media segment? Or given the strong comp from second half of last year, do you expect it to moderate a bit? So just some color there would be great.

My second question is on the digital Out-of-Home and Content Media segment. You had a strong organic growth number from Q2 last year, as much as 17% if I remember correctly. Growth this year has been 11%. And you mentioned that Digital Out-of-Home is growing really fast within this. What is not growing? Or what has sort of decelerated in terms of expansion within that segment which has affected organic growth? Some color there potentially on T-Online and the display advertising side of the business would be great.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [12]

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Okay. Thanks, Nizla. Actually, when I look at the second quarter in isolation, I think the regional and the local business was growing around 8.5%, maybe a little bit more. And the local one was like 14%, 15%. And the regional one was, I think, rather around 5% to 6%. And the national business was growing 5.5 percentage points. So if you look at the total growth, yes, that was 7%. I would say 2/3 came from regional and local customers and 1/3 from national ones. But I think it's also quite a strong and interesting number if you compare with national growth versus the rest of the ad market, especially the large clients that are normally investing in television. I think for the rest of the year, I think, first half of the year gives good indication. I think we've been a little bit better than what we normally say that we think we can grow around 5%. So I think the rest of the year is -- should be pretty much what we said originally for the full year. We don't see any acceleration. We also don't see that there are any bigger problems. But as Udo said before, you never know exactly what the last 3 or 4 million might bring because it depends on the individual short-term decision of the customer. Yes, but we see further growth for the rest of the year.

And on your Digital Out-of-Home and Content question, you're right. We had extremely tough comps from last year and still are very strong this year. And indeed, if you look at the segments, there is on the one hand public video, which is growing massively. There is on the other hand Statista, which is growing. But both of them in combination are probably only 1/3 of the total segment. And the rest of the business is our publishing business, as you said, like the online and third-party advertising sales.

And I think there, on average, we were -- we had a growth rate of around 3.5%, maybe 4%, which I think is again against a German local internet market which was flattish, quite a robust number, especially if you take into account that we have quite mature asset like T-Online, which is operating on a margin beyond 50%, and which is still growing against all predictions of anyone else. So that is probably the less dynamic part, but it's still growing. It's still outperforming the ad market. And we are operating here on a really outstanding margin. So I think the combination of those fast growth assets like Statista and public video, in combination with a really mature and very profitable business around our traditional online publishing and ad sales is, I think, quite a strong combination.

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Fathima-Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [13]

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Great. If I can just have a follow-up on that segment. The margin expansion that you reported of 4 percentage points, what was that driven by? Was it the fast growing assets in particular which come at higher margins? Or was there something else within the display advertising that also helped the margin side?

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [14]

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I think the -- on the one hand, a little bit of the margin improvement came through our online business. But the biggest part of it clearly came through the public video growth. As Udo has already explained before, there's a lot of programmatic demand coming in that requires less sales efforts. It's pretty much driven by being smart enough to connect technically with the demand side. And we've invested here historically in our own systems. And that's why I think that is currently the big margin driver in that segment and also overall important for the company.

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Operator [15]

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We will now take our next question from Julia Matoshchuk from Morgan Stanley.

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Julia Matoshchuk, Morgan Stanley, Research Division - Equity Analyst [16]

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I have actually 3. So the first one, could you please give us a little bit of an overview of economics in Digital Out-of-Home? So for example, when you're installing on payment screen, right, how much is the Op and CapEx? And what is your payback period in this new world and how it was historically? So this will be very helpful.

The second related question will be what do you consider a proper margin in public video segment? And the third is actually -- so you keep investing in local sales force, and obviously it's paced out. But I'm just wondering why it would be such a strong growth in programmatic advertising, for how long do you actually have to invest in local sales force? Because at the end of the day, they're going to be obsolete.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [17]

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Yes. Let me take the last question first. Programmatic is national advertising from national clients, but even if there's a lot of small ticket, but local clients will take a long time until we see local money inflow flowing through programmatic. That's why the investment in the sales force is really focused on local clients. And if you take into consideration that they still spent EUR 3 billion, EUR 4 billion in print, then that's clearly the budget they're targeting here. So in earlier days, the sales guys from the newspapers had something like local agency or replacing an agency function for local clients. So they actually were selling radio, newspaper and similar local advertising products taken from the cities, [10x plus] from local budget. And that's exactly our target here. So we are investing mainly in our local sales force. And today, we have the -- we are globally the only company that's a national tech organization for local end product. So this is -- it's also growth, which we believe is very important for us in the future. This is more or less parallel to the programmatic side.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [18]

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On your second question about the proper margin for Digital Out-of-Home and if it's sustainable, well, everything we do is sustainable. So of course, I think we have long-term contracts and concessions. I mean it's a business that was, I think, started already before the IPO back in 2009, 2010. When we built the inventory, we constantly grow it, we constantly grow the revenues so that margin level in general is very sustainable, yes, because it's based on long-term investments, long-term contracts and constantly growing business that hasn't seen any decline or dip over the last 10 years. It was constantly going north.

And on the economics of Digital Out-of-Home, for us to be honest, it's a bit tricky because a lot of that information has also an impact on competition, not only larger but sometimes also smaller local competitors. But just to give you a couple of parameters, if we digitize 4 square meter screen, so a public video screen or a digital City-Light-Poster outdoor, you talk about at the moment, around EUR 20,000 CapEx. If you digitize a screen, which is roadside, it depends on the size. It's between EUR 60,000 and EUR 120,000. As Udo said, I think, in his presentation, when we are good, and normally we are very careful and thoughtful which locations we digitize, we are able to triple or quadruple the annual revenues once sales for the digitized board are fully up and running. And then the payback time can be 3 to 5, 5.5 years if everything is working. So that's the current parameters.

I think the interesting additional information is that the pure panel price of the digital display, which is not the cassette or the chassis or the box and the fundament, just the panel, the screen, there, the prices have gone down by roughly 30%, 35% in the last 18 months. So the cost for the screen are going south, which means we have the opportunity to digitize more and more locations on the basis of the KPIs we are currently working against. But (inaudible). It's a mid-to long-term project, and it's also driven by the approvals from municipalities, by resources of operational teams and in parallel, how quickly you roll out additional local salespeople when you switch from national to local advertisers.

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Fathima-Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [19]

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I have a quick follow up, if I may. Could you just give me, again, if you think about all your outdoor advertising slots, what is the share of digital? And what do you think is an achievable target on a 3, 5 year view?

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [20]

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I mean, the nice thing is you haven't given me a time frame. So at the moment, I think in Germany we have like 230,000 advertising sites and we've digitized at the moment or by the end of this year we probably digitized 5,500. And I'm just leaving that point of sale digital signage products away for a moment because it's a, I guess, a special niche product and not the traditional Out-of-Home business. So 5,500 out of 230,000 is like a little bit more than 2%, 2.5% by means of numbers. But if I throw all the revenues in one pot, they probably represent 15% to 18% of our Out-of-Home revenues. At the moment, I think, when I look at the next 5 years, I think I see a maximum potential of maybe 5,000 incremental screens. That's the max potential for the moment, I would see. But it's difficult to predict exactly if it's plus 5 or plus 3,500 or 4,000 or it's maybe more because it's driven by 2 facts, and that is not completely in our hands. First of all, it's the cost per panel, which is constantly changing. And no one knows if maybe new technologies like passive displays comes suddenly in at reasonable prices. And it's driven by incremental demand. We are pushing that especially locally to, again, local advertisers to shift their spends from traditional print media to especially Digital Out-of-Home. But that's also a process which we can try to accelerate, but it's not fully in our hands. It also depends on the decisions of advertisers. But in general, it's like an open and long-term project which might be a little bit faster or slower in a specific year. But in theory, the potential is endless. In practice, I will think -- I would say we will never come to a point that all of our sites will be digitized.

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Operator [21]

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We will now take our next question from Emily Johnson from Barclays.

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Emily Johnson, Barclays Bank PLC, Research Division - Research Analyst [22]

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I have 2 questions this morning. First one is I know you mentioned that Statista is growing very well. I was wondering if you can quantify that. How much did it grow in the first half? And how much growth do you expect in the full year? Are you still targeting EUR 90 million of revenues in full year '19? And can you talk a bit about what investments you're making into the business?

And then secondly, we've seen German industrial output falling sharply. You're exposed to German macro trends that you seem very confident about your progress in the second half. Could you talk a bit about the visibility that you have on German advertising and how you think about the risks of being hit by a weaker German economy in the second half?

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [23]

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Yes. Let me take the first one. So Statista is growing in the mid-30s. And the targeted, like we expect it to grow also in upcoming years. So we always said mid-30s revenue growth and also -- EBITDA margin in mid-30s on the long run in the developed market. And the target revenue for this year -- there may be a misunderstanding was EUR 60 million to EUR 65 million, and this is exactly in line. So we are completely satisfied with the development, and we are fully on track with the projected EUR 200 million for 2023. This is actually the next key mid-term target. But it's also very positive in the first 6 months that net revenue retention is around 100%. So that's impacting no churn, 0 churn, because we were losing a few customers but -- and our customers we could increase the prices.

In Germany, net revenue retention is about 100%, and this actually shows the strength of -- the enormous strength of the business model. And so Statista is fully on track, delivering a growth in the mid-30s.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [24]

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And on your first question, Emily, well, I -- you're right. Macro environment seems to get a little bit weaker, especially in Germany when you look at the last weeks. But about 60% of our business is coming from regional and local customers, especially the local ones normally have long-term concessions -- sorry, long-term contracts with us over 1 to 3 years. Also, the regional have normally, at least contracts that go beyond 1 year. And all of that business is ultimately standing on around 50,000 active clients, and it's driven a lot by that huge sales force who is constantly bringing in new customers. That's why I think that part of the business is completely independent from the macro environment, at least at the moment, because we are still -- the growth is very much driven by more salespeople and more year contracts. And we talk about 50,000 SMEs out of a total potential of 600,000. So there are so many customers that we haven't visited yet that there is enough potential to keep that growth even if maybe a couple of them spend a little bit less.

The other 40% are coming from national advertisers. And there is no doubt that huge advertisers, especially in the FMCG area now tend to spend a little bit lower when the macro environment turns down. But here, I think we have 2 big advantages. The eyeballs and the performance that our media deliver is constantly growing through urbanization and through mass mobility of people, and we digitize more and more inventory. So we have more interesting assets, reaching more people versus the rest of the market that is going structurally backwards because TV is losing to on-demand, print is losing to online. That's why I think even in a stagnating market or if the market, the national market is going backwards, we can grow against that trend because the customers are shifting their budgets.

The first half of the year, I think, is a good example for that. I think even if the ad market on a national level would go backwards by 5%, 6%, 7%, I think we should be able to keep our revenues on a national level stable and combining that than with the growing regional and local business. It still takes us to a growth rate in the mid-single-digit range. But I mean, as I said, I think in one of the slides, no one can completely decouple from macro. But the growth of eyeballs, the digitization that gives more flexible inventory, the weakness of our competition and the constantly growing share of small and midsized enterprise with those customers, driven by more and more salespeople, just gives us a lot of levers to fight against a more challenging environment.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [25]

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And don't forget is -- and investor indices are very much impacted by export driven companies. So this is not 1 to 1 an impact on consumer confidence. And so that's -- especially in Germany. This is always something that you have to differentiate because investors indices are very much impacted from export-driven companies.

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Operator [26]

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We will now take our next question from Christoph Bast from Bankhaus Lampe.

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Christoph Bast, Bankhaus Lampe KG, Research Division - Analyst [27]

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Three questions from my side. Firstly, coming back to display and mobile, please. Can you dig a bit deeper into the decline in this business? Because you said that your online is growing, which means third-party or owned content has declined. A couple of words here would be fantastic.

Secondly, on Slide 12 on your presentation, you showed us a number of 340 roadside screens. So is that the number of screens you have already installed or you plan until the end of the year? And what would be the comparable number of the end of 2018?

And thirdly, a more theoretical question on value crystallization. So during the last call, Udo has talked about a potential IPO of Statista. But when I look through your portfolio, I'm wondering whether health and beauty could also become a candidate for a divestment. I mean [ProZyme] yesterday said they plan to make additional investments in [Flaconi] and in their private label business. But I thought health and beauty here might be a perfect fit and could easily be worth EUR 200 million or EUR 300 million or more. So some remarks here from your side would be fantastic.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [28]

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Yes. Thank you. And I'll take the last question. That's absolutely true. We didn't talk about it. Because it's -- for us, it's not yet the time. Health and beauty is a little bit the last man standing from our old strategy. So we kept it up to now because it's developing very, very successful. And internally, we have -- we have already said that -- we have a similar time frame like for Statista, yes, because that's the time we believe it's going to reach EUR 200 million turnover in 2023. And you know we bought it for 10x turnover multiple. So I don't want to predict what is the multiple in 2023, but we're obviously looking for a substantial turnover base marketable for the very strong and profitable business. It's actually similar with health and beauty. This is growing double digits. It's very profitable. And we are actually targeting a valuation which is clearly above EUR 200 million, $250 million in 2023. It could be also a possible moment where we think about a trade fair, IPO or whatever.

So health and beauty is currently undergoing a very successful transformation from originally large TV sales base trend. I think health and beauty is, if you look for German -- similar German companies, the more successful one in the last 2 or 3 years developing a very successful multibrand platform. And this is definitely a value that are inside the group, but clearly, our focus is Out-of-Home plus. So that's why, actually, we are not talking about health and beauty. But you can definitely compare it with Statista.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [29]

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On your display and mobile question, I think an important point is that in that segment, we had disposals of around EUR 17 million with twiago and Stroer Mobile performance. So if you take public video growth and Statista growth aside, then the remaining business like-for-like was growing around 4%. So our own assets were growing a little bit faster, I think, 4.5%. And third party which is 2/3 of that, was slightly below 4%. And if I then look in -- if I structure it the other way around and look at those 4% from a display and video perspective, then the display part, which is still, by far, the biggest part of our revenues not that they are eyeballs there, I think, it's meanwhile 60/40. But revenue-wise, the display part was something between minus 1% or minus 2%. And I think mobile was growing by 35% to 40%.

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Christoph Bast, Bankhaus Lampe KG, Research Division - Analyst [30]

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And if you put this together, then you arrive at this 3% to 5% organic and display. Is that correct? Organic and display and mobile.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [31]

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Exactly.

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Udo Müller, Ströer SE & Co. KGaA - Founder, Chairman of Management Board & Co-CEO [32]

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And by the way, to make it a bit precise, if I just take the Asam mid-term plans of 2023, 2024, we're targeting around EUR 200 million turnover there, and EBITDA around EUR 30 million, EUR 35 million, and EUR 40 million. So between, let's say, EUR 35 million and EUR 40 million. That is the target for 2023, 2024. And so that's why I said valuation today would be realistic on what you said for this year but it can improve over the next 3, 4 years. So that's why we -- for us, it's not the right time to sell it because from our point of view, it's a very secure value creator over the next 3 to 4 years, it's very likely that we are looking for an event in 2023 and 2024.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [33]

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Your last question, Christoph, was on the number of roadside screens. You're right. The 340 roadside or the year-to-date is the year-to-date number. And the comparable number, end of 2018, would be around 270. Let it be 268 or 272, but something in that range.

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Operator [34]

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We will now take our next question from Catharina Claes from Hauck & Aufhäuser.

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Catharina Claes, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [35]

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Yes. Thank you. Actually, my question was mostly answered already.

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Operator [36]

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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 [37]

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I have 2 questions, and they're all related to the Q2 public video growth. Firstly, can you please break down the contribution of price and volume in that growth? And secondly, you mentioned these were totally new ad budgets. So can you tell us from which advertising category they are coming? Are these e-commerce businesses, FMCGs, autos or whatever?

And thirdly, can you just explain to us really how this programmatic public video works in terms of volume insertion? Do you take your time loops and you just suddenly put in an automated advertisement? Or you don't have any time loops any more when you have the digital Out-of-Home? How does it work in theory? Just -- I mean I guess my aim is to work out the volume upside that you have here.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [38]

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Okay. So when I think our overall price increase for that medium was around -- the rate cost increase for this year was around 6%, 6.5%. And I guess it's always you negotiate a little bit with clients back and forth about inflation. So I would say the net price impact was 5%. And on the basis of a growth of around 35% or slightly more, it means that let me take the math that 85% of the growth is demand and 15% of the growth is price driven. When I look at the growth drivers, I think for the revenue growth that it's coming from Out-of-Home specialist agencies, so that booked in the context of Out-of-Home, it goes through the board. I think it's just higher share for digital products that also allow moving pictures. And it's difficult to find any specific -- specifically over penetrated categories suddenly. I think it's different for the business that comes from the trading desks. There, I would say, it's 2 key drivers of incremental revenues. One category is clearly FMCG. It's very focused on video advertising, and they have, over the last years, added online video, including YouTube, to their TV spendings just to get to the same net reach numbers as historically. And I think they've now, via the trading desks, added another layer with digital Out-of-Home or public video. That's one category which we've identified.

The second one is, you've mentioned that, is e-commerce because they -- especially those clients tend to spend, meanwhile, I'd say at least 80%, sometimes up to 100% of their spend programmatically. So as soon as you get on the radar of their booking systems or trading desks, you're automatically part of the potential where they allocate money. And I think that's the biggest second source. And I would say FMCG plus e-commerce represents probably, at the moment, almost 70% of the business in that programmatic area. Just volume-wise, I mean, still, we -- technically we operate on 100% fill rate because whenever there is no advertising booked, we show content. But we are only obliged in very few cases to really show specific amounts of content. So in theory, we have still more than 2/3 unfilled inventory that we could switch from content to advertising.

I think the last one, technically, how does it work, with loops. So we've -- about 2, 2.5 years ago, we've changed our ad serving system and went from an internal system that was only loop based and didn't allow us really fully automated programmatic advertising. We've changed that with a -- together with a Canadian tech company into rule-based -- into a rule-based play out system similar to what you have in the online world. And the base that's off the system is that we still, well, block specific parts of the inventory for loop based advertising. Also, it's then technically played out rule-based like an ad server. And the rest of the inventory is open for pure ad serving. So that's currently the logic. So in the online world, you also sometimes block specific ad formats to create a homepage event or something like that so that you have access at the same time to all relevant ad forms. And that's what we do to somehow get that old traditional loop logics into the playout system. But the real underlying technical process is operating like an online ad server.

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Operator [39]

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(Operator Instructions) We will now take our last question from Craig Abbott from Kepler Cheuvreux.

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Craig Abbott, Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany [40]

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Just one final remaining question from my side, please. On direct marketing, the margin was down quite substantially in the second quarter. You mentioned and called this is largely due to some optimization measures which sounds as if this will be more temporary in nature. I just wondered if you can maybe give us a little bit of an outlook there for the next couple of quarters.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [41]

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Indeed, yes. I think it's probably 3 aspects. The minor one is very strong comps from last year where it was a Q2 especially -- I think 2/3 of the second quarter were pre-GDPR where a lot of outbound -- profitable outbound volume was out there in the market. But other than that, there is 2 aspects. The first one is we still see that the integration of the 3 acquired companies take a little bit more time, not necessarily by executing the campaigns but harmonizing IT, optimizing the hourly income per agent and so on. So that just takes a little bit more time. I would say we are probably 6 months behind our original plan, which might have cost us maybe EUR 1 million or EUR 2 million in that quarter.

The other aspect is clearly that at the moment, we look at the total group and prioritize campaign and demand from key accounts for the group. But sometimes, we take more Direct Media volume that it may be a little bit less profitable in this segment but helps us in the relationship with the customer to push maybe Out-of-Home by another million or so with a far better margin. So I think it's fair to say that we try to optimize that business, also standalone as much as possible, but it has a clear supporting function for the group where we are always happy to make a little compromise on the margin there when it helps our core business. That's on your question about the next quarters. We will constantly work on improving the margins. Yes, and we will see effects over time. But it might always be that we prioritize a big account that helps us overall for the group and delivers group results but maybe not equally balanced across all 3 segments that we report in.

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Operator [42]

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That concludes the question-and-answer session. At this time, I'd like to turn the conference back to the host for any additional or closing remarks.

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Christian Schmalzl, Ströer SE & Co. KGaA - Co-CEO & Member of Management Board [43]

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Okay. Thank you very much for your time, the questions, much appreciated. Have a great rest of the summer and hope to speak to you soon.

Take care. Bye-bye.

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Operator [44]

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