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Edited Transcript of SPR.DE earnings conference call or presentation 14-Aug-19 9:30am GMT

Q2 2019 Axel Springer SE Earnings Call

Berlin Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Axel Springer SE earnings conference call or presentation Wednesday, August 14, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Fard-Yazdani

Axel Springer SE - Head of IR & Head of Sustainability

* Julian Deutz

Axel Springer SE - CFO & Member of the Executive Board

* Mathias Döpfner

Axel Springer SE - CEO & Chairman of the Executive Board

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Conference Call Participants

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* Christopher Johnen

HSBC, Research Division - Analyst

* Craig Abbott

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

* Fathima-Nizla Naizer

Deutsche Bank AG, Research Division - Research Analyst

* Patricia Pare

UBS Investment Bank, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome and thank you for joining the Axel Springer conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Fard-Yazdani. Please go ahead.

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Daniel Fard-Yazdani, Axel Springer SE - Head of IR & Head of Sustainability [2]

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Yes. A very good late morning here from Berlin. Welcome to our call on the first half results figures that we published this morning. You know the procedure here. So we will start, as always, with remarks from Mathias Döpfner, our CEO; followed by Julian Deutz, our CFO. And after that, we are looking forward to taking your questions.

And with that, I'd like to hand over to Mathias.

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Mathias Döpfner, Axel Springer SE - CEO & Chairman of the Executive Board [3]

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Yes. Hello. Good morning, and welcome to our call today. This call has been scheduled to discuss our H1 numbers, and we will do this in a moment.

Before that, let me start just by briefly commenting on the important developments over the last weeks. My board colleagues and I are very happy that the attractive tender offer by KKR has already been accepted by 27.8% of our shareholders, and you know that the additional offer period of 2 weeks is still ongoing. Significantly passing the 20% minimum acceptance threshold was an important step towards the strategic partnership with KKR. And we want to support our strategy of growth and investments into growth assets.

You know that Friede Springer and I will be part of the consortium and that we will keep our shares, thereby ensuring continuity for Axel Springer regarding its share listed footprint and its classified business. The latter means that we will invest in further growth but also continue to have a strict focus on cost discipline as we have shown it in the past.

Having said all this, I need to mention that while we don't expect major obstacles, we are, of course, still waiting for the various regulatory approvals that we expect in Q4 this year or maybe even in Q1 2020. And having said that, you all know that this is a very formal process. We have disclosed all details and plans in the offer document. And we want to dedicate this call entirely to our H1 figures and hope that you understand that we would not like to discuss the KKR project during this call.

Let's now turn to the operated business on Chart 4. Looking back on the first 6 months of the year, we can say that our business kept up reasonably well but at the same time, felt the challenging macro environment in some respects. We, again, had several consolidation effects that led to a significant difference between our reported and our organic numbers.

Reported revenues decreased by 1.9% while they grew slightly by 1% organically. Due to the consolidation effects, our adjusted EBITDA was down 2.7% on a reported basis but up 1.7% on an organic basis. Finally, the adjusted EPS declined by 11.9% on a reported basis and was down 4.6% if you adjust for consolidation and currency effects.

Axel Springer is a digital company for many years by now. Chart 5 shows where we stand in that respect. And in that respect, after the first 6 months of 2019, 74% of revenues and 87% of adjusted EBITDA come from digital activities. Digital revenues have grown by 7.7% on an organic basis.

Before Julian will give you more details on the financials, let us take a look at the recent developments in our 2 core pillars, which are classifieds and content. Firstly, for classifieds on Chart 6, we have done further add-on acquisitions both in the jobs but also in the real estate business. On the jobs side, we have already discussed the acquisitions of Studydrive and PersonalMarkt earlier this year. At the end of June, StepStone acquired Appcast, a leading provider of programmatic job ads in the U.S. That type of business is much more relevant in the U.S. than it is in Europe. With the acquisition, we further executed on our growth strategy and expanded StepStone's portfolio of intelligent recruiting and matching tools.

And at the beginning of August, we did another very interesting step on the real estate side, where we have also enlarged our portfolio and expanded the value chain fronts through entering into a put option agreement with the aim of acquiring MeilleursAgents. They are the go-to destination for homeowners in France who want to get a quick but very accurate estimate for the value of the property. MeilleursAgents has established itself as the clear market leader in this business and is, therefore, a very attractive partner for thousands of real estate agents as MeilleursAgents is providing very interesting leads to them. Not only the brand but also the technology is very attractive for us, and we see great further potential for the whole group.

Let's turn to the News Media segment on Chart 7. We see continued growth in digital subscription of our German offerings BILD and WELT. Digital subs were up 11.5% in H1 compared to the first 6 months last year. While the sentiment of digital subscription is positive, we have to acknowledge that, overall, so far this year, the environment on the advertising side was rather challenging. Not surprisingly, here we are especially talking about the print side. Julian will further comment on this.

Our digital activities continue to perform well. UPDAY had an especially strong growth and promising development and is on track to reach their goal of being profitable this year. We also announced that Insider and eMarketer are to be combined from 2020 onwards, which should further help their developments in the B2B business. I won't comment in detail on the acquisition of CeleraOne, which we already did earlier this year and discussed in previous calls.

And with that, let me hand over to Julian for the financials.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [4]

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Yes, good morning also from my side. Mathias had already commented on the very important news regarding the successful tender offer by KKR. While many of you might also have questions on this topic, the purpose, as we said, is predominantly really to give you an update on the operational development of the first 6 months.

For that, let's start as usual with a look at the group financials on Chart 9. Obviously, the development of both revenues and EBITDA in the first 6 months has been impacted by consolidation effects, mostly the sale of aufeminin in 2018 and the sale of @Leisure as of beginning of June 2019 and in addition, the sale of the print business in Slovakia last summer. Reported revenues decreased by 1.9% but were up 1% organically in the first 6 months. Adjusted EBITDA is down 2.7% on a reported basis but up 1.7% organically. Overall, we have continued with selected growth investments as we announced at both on the Capital Markets Day in December last year and in March.

Following the sale of @Leisure and the operational setup within AVIV Group, we are introducing reporting changes within the classified segment that we explain on Chart 10. As of this quarter and with the first half results, we will now have 2 main subsegments in the classifieds segment: StepStone and AVIV. StepStone, obviously being the former Jobs Classifieds subsegment, which now also contains the new additions to the portfolio and to the StepStone Group, namely Appcast, PersonalMarkt or GEHALT.de and Studydrive but otherwise unchanged.

The AVIV Group contains, on the one hand side, the former real estate classifieds assets as well as the French CarBoat Media, La Centrale and Yadstein or yad2 in Israel both from the former General/Other segment. And thirdly, there's a subsegment Other only with @Leisure business, which we will report as long as the prior year comparison still plays a role.

On Chart 11, you see the overview for our classifieds segment. Revenues were up by 4.8% on a reported basis and up by 5.6% organically. Adjusted EBITDA grew by 4.5%. Organically, the increase was stronger with 8%, driven mostly by StepStone and by Immowelt.

Let's move on to StepStone on Slide 12. Revenues have grown by 10% on a reported basis. Organic revenue growth stood at 7.5% after the first 6 months and at 5.8% in Q2, where we continued to see a sluggish hiring tendency among StepStone's customer base. For the first 6-month period, Continental Europe, again, contributed most to the growth with an organic increase of 10.9%. This was, again, driven by the German business, which was up 12% year-on-year at 12.4%.

In the U.K., Brexit uncertainties led to a more or less stable organic development. Overall at the moment, StepStone continues to see customers going more for short-term rather than long-term contracts. So this trend that we already mentioned in March is continuing in visibility, has therefore been further reduced during the second quarter. And if you obviously look what happens with our large clients, and you see it from all the listed ones, I think this is no surprise.

Adjusted EBITDA of StepStone was up 9% on a reported basis due to a strong Q2, following higher branding investments in Q1. Organically, it was up 12.3%. The margin was roughly on prior year level but with 35% in the first half. Margin increase in Q2 this year was simply the result of phasing of branding investments. We are not anticipating similar improvements in the second half but rather margins below the prior year.

Slide 13, you find the financials of AVIV. As discussed before, this contains all real estate assets as well as CarBoat Media and yad2. Revenues in the subsegment grew by 5.7% on a reported basis. Organic growth was at 2.7%. The difference between the 2 is mainly the consolidation of Logic-Immo. As expected, the adjusted EBITDA on a reported basis was burdened by the negative consolidation effects from our investments in the hybrid agents, Purplebricks and Homeday and was slightly above the prior year with plus 1.4% in the first 6 months. Organically, it was up 3.5% due to a strong development at Immowelt, where the margin has increased 46% now.

Let's turn to the News Media business on Chart 14, where advertising revenues have been impacted by weaker macro trends in the first half. In addition, we had tough prior year comps, especially in the second quarter. Revenue development shows reported figures down by 6% and organically down by 5%. In national, we've seen continuing declines in circulation revenues due to the declining trends in print, again, no big surprise.

Advertising revenues have been weaker due to macro trends. In addition, we had very tough prior year comps due to the BILD special edition in Q2 '18, which was missing this quarter. As a result, advertising revenues in national have declined by 16%. Adjusting for the effect of the BILD special edition, the decline would have been approximately 11%. So BILD special edition accounts for roughly 1/3 of the decline. In international, revenues were slightly down by 1.3% on a reported basis and up by 3% following the sale, as I mentioned before, of the print business in Slovakia last summer. The organic increase was driven by the growing digital assets in the subsegment.

Looking at the year-over-year development. Adjusted EBITDA was down by 12%. Organically, it was down by 9%. Again, the development in international was much better with an organic increase of 26%. And that was due mainly to improvements at UPDAY and at eMarketer.

Let's turn to Marketing Media on Chart 15. Due to the sale of aufeminin in April 2018, revenues were down by 4% on a reported basis. Including these consolidation effects and excluding FX effects, revenues were up 13%, double-digit organic growth in both subsegments. Reach Based Marketing growth was driven mainly by the excellent development at idealo. Adjusted EBITDA was up 9.8% on a reported basis and 21.5% organically, again, mostly driven by idealo and Reach Based Marketing but also by group performance of Bonial.

On Chart 16, looking at the bottom line. Adjusted EPS was down 11.9% and stood at EUR 1.19. On an organic basis, the adjusted EPS decreased 4.6%. As expected, depreciation and amortization increased from EUR 101 million in the first 6 months in '18 to EUR 106 million now. Adjusted EBIT was down 5.8% from EUR 253 million in the prior year to EUR 238 million. Also, the financial result was in line with our expectations and on the prior year level at EUR 10 million. The tax rate on the adjusted results stood at 32.6% and was up by 2 percentage points in comparison to the prior year figure. For the full year 2019, we expect to have a tax rate that should be slightly better than last year.

Let's take a look at the net financial debt and free cash flow on Chart 17. Our net debt at the end of June stood at EUR 1.5 billion, which corresponded to a leverage of 2.1x. Looking at the free cash flow, we continue to show the development, including and excluding headquarter real estate transactions. Just by the way, the development here of the new building in Berlin is both in time and in budget so also there, no surprises to be expected. The difference between both, obviously, mainly is the CapEx for the new building that I just mentioned that we are going to sell at the beginning of next year. And as the ones of you who follow us for some time, this contract has already been signed 1.5 or 2 years ago.

Free cash flow excluding effects from this real estate transaction is down compared to the prior year, especially due to the reversal of prior year positive phasing and one-off effects. And if you remember the March call, we clearly said that the cash flow in '18 was significantly above our expectations, and we would see exactly the reverse effect at the beginning of '19. And that's what you see here. And then we have, in addition, the effect of the deconsolidation of @Leisure. Continue to expect a significant decline, therefore, in free cash flow in 2019 compared to the prior year, so also, that is not new.

On Chart 19, you find our outlook for the group as published on June 12. We expect a lower single-digit percentage decline in terms of reported revenues and a lower single-digit percentage organic growth. On the adjusted EBITDA, we are forecasting a mid-single-digit percentage decline for the reported numbers and an organic development on the prior year level. In terms of adjusted EPS, our expectation is a high single-digit to low double-digit percentage decline on a reported basis and a low to mid-single-digit percentage decline from an organic perspective. Just as our outlook for the group, the segment outlook shown on Chart 20 hasn't changed compared to the adjusted outlook from June 12. So the guidance is the same that we gave you on June 12.

Before taking your questions now, I would like to inform you that as many of you already know, Claudia Thomé, after 16 years working for Axel Springer, has decided to go on with her career and decided for a new job adventure and leave Axel Springer. Mathias and I would like to thank Claudia for 16 years of really great Investor Relations work but even more for being a wonderful colleague for everybody on the Management Board and for the whole finance team. Thank you very much.

So -- and now -- thank you for your attention, and we are now looking forward to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Chris Johnen with HSBC.

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Christopher Johnen, HSBC, Research Division - Analyst [2]

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Maybe more generally, the performance within the AVIV Group, I mean looking at the H1 organic figures, up 3.5% for Immowelt, 0.2% for Immoweb, La Centrale at 1.2%. I mean can you talk a bit about how you've seen over the first half the competitive development in this market? Or what do you think has driven the relatively small organic growth in the first half?

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [3]

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Yes, Chris. Thanks for that question. So we obviously see these numbers and the relatively low growth rates compared to the last years. And one probably needs to go in a way to analyze that asset-by-asset. The very core of our -- of AVIV and of the former real estate subsegment, which is obviously SeLoger in France has with their core business developed really, we believe, very well and has in the first 6 months, without Logic-Immo, an organic growth rate of around 8%. So that is definitely something where we see the competitive situation there was Leboncoin has not really changed, and we are happy with that performance. But we also have to see that there are for some reason that are different from asset-to-asset. Obviously, slower growth currently or quite low growth at assets like Immowelt, CarBoat Media and yad2.

At Immowelt, we see a slight acceleration of revenues. We are now, as you see in Q2, at around 4%. We've had a change in the management team. We have a big increase in EBITDA margin, as I mentioned, with 46%. And overall, what we see here is we believe a confirmation of what we already mentioned on the Capital Markets Day, that these assets need some investments to push for the new growth drivers. And we continue to believe there that activities like especially working on the seller lead side is strategically, absolutely the right direction. This is also the context in which you should look at the potential. It's not a real transaction yet, as you know, [of] MeilleursAgents announcement.

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Christopher Johnen, HSBC, Research Division - Analyst [4]

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Okay. That's clear. Yes because this feels very much like a goodbye. I just wanted to say it's been a pleasure working with you guys over the last 8 years. And yes, I kind of look forward to still seeing you guys and speaking to you guys in the future. All the best.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [5]

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Thank you very much.

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Operator [6]

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Next question comes from the line of Craig Abbott with Kepler Cheuvreux.

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Craig Abbott, Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany [7]

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Yes, okay. My question on AVIV was just answered. But just trying to understand a little bit of yad2. I realize, obviously, not the most important -- the biggest asset but still pretty poor KPIs. And I just wondered, is that still because of last year's regulatory change? Or is there a general shift of traffic away from the general horizontal model there? Or if you can maybe just give us some insight there, [that'd] be helpful.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [8]

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Yes, Craig. That's pretty much the same reason that we've mentioned last year. So that's still the effect of regulation. And obviously last year, we thought this will not go on until the middle of '19. But it has been going on. And so we are, I think it's fair to say, not super optimistic that we get back to whatever mid- or high single-digit organic growth rates within the next quarters. So we are not optimistic to reach that.

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Craig Abbott, Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany [9]

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Okay. Also from my side, it's been a pleasure working with all of you guys. And wish you, of course, a very successful future.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [10]

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Thanks, Craig.

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Operator [11]

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The next question comes from the line of Patricia Pare with UBS.

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Patricia Pare, UBS Investment Bank, Research Division - Associate Analyst [12]

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I have a few questions, please. The first one is on the AVIV Group. When you introduced it last year, you talked about some of the benefits such as having like a joint strategy or sharing some of the product initiatives in IT. So I was wondering whether you can share your views on how is that tracking, or what level of efficiencies or synergies are you seeing so far. My second question is on Google for Jobs, whether you can provide an update on what are you seeing from them in Germany. And my last question is on the media concentration loss, whether you can give some details on what are the rules and regulation in Germany in terms of owning different mediums in the media sector.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [13]

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So thanks for your questions. So with Google for Jobs, I mean, what we see there is that, on the one hand side, if you look at our core market Germany, that only around 10% of applications are coming from SEOs so from free Google Search traffic. This traffic has been going down by roughly around 10%, leading to ease in applications that one could say corresponds to the Google for Jobs introduction by, we estimate, between 1% and 1.5% so not yet material. And as you know, overall, we stick to the policy that in geographies where we have a leading market position, like in Germany or in South Africa, we don't participate in Google for Jobs. And in markets where there's obviously a higher degree of competition, like in the oligopolistic structure like in U.K., we do participate if also the competition is participating. That has served us well. And we see, for example, that in South Africa, our business is quite robust or has developed very well after the introduction of Google for Jobs.

Coming back to your first question, if I got it right, regarding the -- you mean the synergies, not only between SeLoger and Logic-Immo but more, overall, the synergies within the AVIV Group. The idea is to have the same benefits that we have at the StepStone Group, where we see that we hugely benefit from particular cooperation on the IT and development and product side, where you develop a common road map of development and then basically one country or a shared development center is in the lead and then one country is testing that and so on. In the past, we have -- before establishing the AVIV Group, we had cooperations sometimes between France and Belgium, to a lesser extent with the German business of Immowelt. And we believe it now needs this kind of structure, foster this cooperation as we want to free investment [need] for initiatives like the seller leads and in some areas, for stronger investments in the brand to get to these efficiencies on the development side and to reduce time to market is definitely the right thing to do. And there, we are on a good way to reach that, we believe.

The -- we don't really feel comfortable to comment on the media concentration question, how they will check the KKR deal because it's really a question how the regulator wants to go at that. And they don't need recommendations from our side. However, we are very optimistic that we get a clearance here within the time frame foreseen and don't expect this to a material threat or risk to the deal.

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Patricia Pare, UBS Investment Bank, Research Division - Associate Analyst [14]

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Okay, perfect. And also wishing you the best from my side.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [15]

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Thank you.

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Operator [16]

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Next question comes from the line of Nizla Naizer with Deutsche Bank.

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Fathima-Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [17]

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I have a couple of questions. The first is on StepStone. Could you tell us how fast is Germany growing between the continental segment in terms of revenue growth? Is it still -- I know it's always been growing at a 20%-plus range. I just wanted to understand if there's been a material deceleration there. Secondly, the investments or the acquisitions that you've done in StepStone, how much of incremental revenue would that contribute to in 2019?

Related to that, I guess, on the real estate classifieds side of the business, the acquisition of MeilleursAgents. How much of incremental revenue would that bring to the SeLoger group? And I remember you telling us, Julian, that you were also building a seller lead sort of tool within SeLoger. So what was the reason behind acquiring a marketplace like this over building it out yourself? Just some color there would be great.

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Julian Deutz, Axel Springer SE - CFO & Member of the Executive Board [18]

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Yes. First of all, the organic growth in Germany at StepStone in the first half is around 12%, so still despite all the macro effects and despite from all -- we can all read from the big German corporates in the current macro environment, we continue to grow with low double-digit figures. Second question, the impact from the different StepStone acquisitions in 2019 on the revenue side should be around EUR 30 million.

And thirdly, your question on the revenues of MeilleursAgents. So annual revenues had been EUR 26 million. And therefore, obviously, the business will only be consolidated during the year. So the EUR 26 million is the expectation for '19. But we will obviously only have, depending on when we can close the deal, a small fraction of the year. So it will not be a meaningful impact.

Then your fourth question, on the question if we build up a seller leads feature for SeLoger, do we still -- or why do we need still MeilleursAgents? We simply believe MeilleursAgents would definitely accelerate and strongly support, with all the data, with all the know-how, our position and the -- our seller leads initiative. And we have carefully discussed and examined what it would take to try to build that up organically. And despite the purchase price, which is, obviously, relatively high if you compare it to revenues, we've decided that to create really mid- to long-term value here, this is the faster and better way.

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

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Great. And just on that, I have one follow-up question, if I may, on the M&A activity that you are doing. What sort of sectors would still be interesting to the Springer group going forward when it comes to future digital M&A? And that's my last question. And on top of that, good luck to everyone on whatever comes next.

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Mathias Döpfner, Axel Springer SE - CEO & Chairman of the Executive Board [20]

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Okay. I'll answer that with pleasure. And the answer is, in a way, a bit boring because we will entirely focus on the 2 priorities that we have defined over the last years. And that is digital content, where we still see tremendous opportunities and of course, are encouraged by developments like Business Insider or particularly also UPDAY in the very recent past. And that's one of the reasons why we did, for example, this investment in Pioneer here in Germany in this digital media asset. So this remains a focus. And we may see opportunities here if certain assets are not developing so well, and we may be able to do also some contrarian bets here. But most importantly in that field is, of course, organic investment listing assets.

And then on the classified side, same applies. Despite the very positive developments of that sector, there are still opportunities, opportunities in new markets of existing models or opportunities of slightly more disruptive approaches. And we want to strengthen our foothold here because our goal is and remains to become, after we are in that position of European market leader for digital content and digital classifieds, we want to become a global market leader. And that's why we have to do organic investments and inorganic investments on both fields in democratic markets. And that means also going beyond Europe. So no material change here. And together with a financial partner like KKR, we may be able to also think in slightly broader terms here. That is perhaps the only thing that may change.

But having said that, let me take the opportunity, since this was the last question in the call, just very briefly also to thank Claudia Thomé for 16 years of incredible, good collaboration. You were a reliable source of great competence, of comfort on sometimes uncomfortable trips and most importantly, of positive energy. Thank you very much for that, and good luck for your very exciting new job.

And secondly, since you, Chris, Craig, Patricia and Nizla, have said some nice things, we don't know how things are developing with Axel Springer. But let me reply simply to you, thank you. It was and is and maybe will be in the future very inspiring and a lot of fun working with you. So thank you very much.

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Daniel Fard-Yazdani, Axel Springer SE - Head of IR & Head of Sustainability [21]

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That leaves me simply to say thank you for dialing in, and that concludes today's call. Have, everyone, a good day. Thank you. Bye-bye.

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Operator [22]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thanks for joining, and have a pleasant day. Goodbye.