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Good morning, ladies and gentlemen. Welcome to the Q2 and H1 2018 results call of ProSiebenSat.1 Media SE. Today's conference is being recorded.Today's call is hosted by Mr. Ralf Gierig. Please go ahead, sir.
Yes, good morning, ladies and gentlemen. Welcome also from my side and welcome to our Q2 H1 2018 result conference call. Our today's call is hosted by Max Conze, our new CEO, and by Jan Kemper, our CFO. Max and Jan will first brief you through our presentation which is made available on our IR webpage and via the download link provided. The presentation as always will be followed by a Q&A session. Please kindly note that Jan Kemper will answer today's questions regarding Q2 H1 business and operations, related financials and full year business and financial outlook. Max Conze will focus in the Q&A on those topics he has addressed in his part of the presentation.With this, I hand over to Max.
Good morning, everyone. Let me start by saying that I joined ProSiebenSat.1 because I believe in this company, its entertainment to content to e-commerce footprint, and that we can deliver significant value and growth. Clearly, we had a challenging moment with growth, not what we want it to be. Jan will take you in detail through our current business in some minutes, but while our market environment in the entertainment and content production business proves to be challenging, we also see strong organic growth in commerce as well as good progress in realizing our savings potential of over EUR 50 million by 2019 and '20. And very encouragingly, our ratings are showing a positive upward trend especially with more local programming delighting our viewers. For me, all this is a good starting point for change. I had a chance to meet quite a few stakeholders in my first 60 days traveling, listening and learning.So let me start by talking about our viewers and consumers. We have strong entertainment brands that they love. For example, we have up to 20% of German viewers waking up to our breakfast TV format "Frühstücksfernsehen" with an additional 1.4 million video views every single day or take Germany's Next Topmodel where we average nearly 9 million viewers and 4 billion minutes online per episode or take strong and long lasting formats like taff or Galileo.If you look on the e-commerce side, we have equally strong brands, for example, Verivox online price comparison which over the last 20 years have saved 8 million customers EUR 2 billion or take Parship which spawned nearly 150,000 marriages and 100,000 babies and it is the very clear market leader in matchmaking. Flaconi, our platform for perfume and beauty, currently grows with a rate of around 50% year-on-year and we aspire to be the #1 online beauty destination. And indeed if you look at Jochen Schweizer, mydays, which is the experienced [ voucher ] business, we're making over 1 million people experience great events every year. We also have some good digital efforts with Studio71 as the leading multi-channel network in Germany.All in, ProSiebenSat.1 generates 1 billion views online per month, but consumers want to be entertained wherever, whenever and on any device. They want more life, more local and more relevant content. For us, this means we must do more of this, better and faster. No TV walled garden couch to lean back on. I talked with our top advertisers, agencies and industry, they all want and need total and ideally addressable performance-based reach, be it linear or digital: one currency, aka measurement, and one integrated advertising technology solution that delivers it all. I also had many discussions within the investment community. We all want the same, sustainable value creation and growing total shareholder returns, strong growth top to bottom, an entertainment business that is future fit, a clear e-commerce portfolio that delivers high growth, a better balance of organic and M&A growth, a sharper and more focused business with clear guidance and a team that delivers.We have great people that are passionate about what they do, creators who love to build great entertainment and brands. They also want a company which is more open, transparent and without silos and has a clear vision and mission. The team and I are in the midst of a strategy update. Our 3 pillars: entertainment, content, commerce, are good framework for our activities and they prove to be increasingly synergistic as consumers become more digital and therefore expect a seamless cross-device experience.How will we generate growth in the future? Let's start this discussion by framing the markets we operate in. Kind of think of it like the sandbox we play in and if you look at that sandbox, then advertising is a EUR 21 billion market. Entertainment direct to consumer is a EUR 36 billion market and e-commerce is about a EUR 58 billion market. And so really if you look at our footprint, we are only anywhere from 1% to 10% of those markets and so it's a big box within which we can play and there is substantial room for growth if we evolve, go where viewers and consumers are, and deliver products, brands, channels, events, experiences that excites across all age groups.Let me now share a few overarching strategy observations and a few time-critical jobs we're focused on. We will present the complete forward plan, including capital market parameters, shortly after our Q3 results at our Capital Markets Day. I take all responsibility towards our onus very serious. We will look at all parameters including investments required to deliver profitable growth, offsets, the future mix of shareholder returns based on dividends as well as potential share buybacks given the substantial trading discount versus P.S.Now let me introduce a few early beliefs I have when looking at our business. One, the viewer and consumer-centric in all we do. Make people happy and the money will follow. Sounds benign, but is profound. For example, this means we need to offer our content where viewers are and want to watch today. Two, create one entrant entertainment unit that focuses on total reach with one video currency versus to the overnight ratings from the '70s, one advertising technology and one selling marketing engine. We have already defined our teams and interventions to tackle this, but of course, there is much work still to be done. Three, build a stronger position and local German content and owned IP, both owned and commissioned and using the global scale at Red Arrow Studios. Within this, also find the right balance of U.S. content inflow. Four, mount an all-out digital attack so that we build total reach.Our 7TV joint venture, aka creating a German Hulu, is one critical pillar for this and just received approval by the German and Austrian antitrust authorities. As announced, we're actively inviting and working additional media partnerships. These discussions, although still early days, are progressing well. Focus is on scale with a target of 10 million users within the first 2 years and an all channel offering, both advertising supported skinny bundled with no advertising interruption and premium content bundles with maxdome and Eurosport.We will also create digital press formats that go online OTT mobile first and then spread to all other forms and outlets. And we will build seamless teams across the core content brands and exchange intensively with Studio71. We have appointed a single digital leader to push for total reach within entertainment and a clear action plan.Five, build critical capabilities required especially on tech as this plays a decisive role in delivering on our plans. Six, on top of finding the right additions to our portfolio, strengthen organic growth and synergies within our great e-commerce companies.To sum it up, what does all of this mean. An entertainment footprint that is better balanced in digital and TV reach, advertising and subscription revenues. A content footprint that is better aligning in feeding our channels and brands. An e-commerce footprint that delivers rapid growth focused on leading brands in large-scale markets. All more synergistically integrated, focused on German-speaking countries first and aiming to deliver strong top and bottom line growth and total shareholder return.In the recent past, we've disappointed you and the market and so are trading at a 30% give or take discount to P.S. If we can deliver a future fit entertainment business together with a rapidly growing e-commerce business, I'm confident that we can strengthen our European leadership position and indeed are finding more and more opportunities to cooperate throughout Europe.With this, I'd be very disappointed if we would not be able to double shareholder value in the next 3 to 5 years. We're now working to translate all this into a clear game plan and clear KPIs that we will share with you in November. I'll work with all I've got to get us there, so come with me on a journey of growth and transformation. It won't be easy, it won't happen in a day, but I'm very confident that it can and will.And with, that over to Jan.
Thank you, Max, and good morning also from my side. Let me now continue with the operational and financial performance of the group and our 3 segments in Q2 and the first six months of 2018.On Page 8, I would like to summarize the key developments on the revenue and earnings side, as well as in terms of our financial leverage. In the first half of 2018, we have achieved about stable group revenues on a portfolio and currency-adjusted basis. As you know, we have sold a large part of our travel portfolio in 2017, which has led to meaningful deconsolidation effects and an important revenue and earnings decline.In terms of group profitability, we've seen first positive effects from the now agreed upon efficiency program, which led to lower SG&A expenses. External entertainment revenues have been flat in the first 6 months, which includes a stable TV advertising business. As already announced, we signed an agreement with Discovery Communications to build the leading German streaming platform by integrating maxdome and the Eurosport player in the 7TV joint venture.In content production and global sales, we saw a similar development in Q2 as in the first quarter of the year. Revenues declined mainly as a result of a softer U.S. TV production business and a weak U.S. dollar. However, at the same time, our pipeline has improved meaningfully which is leading to new orders such as the fifth season of Bosch by Amazon, the second season of Deep State by Fox and the weekly order by TV networks FX and Hulu.In our commerce segment, organic revenue growth accelerated nicely in Q2, which was primarily driven by Flaconi, Windstar, Verivox and Parship. Financial leverage was at 2.1x after the dividend payment of EUR 442 million in May 2018.Let's have a look on how this translate into numbers on the following pages. On a portfolio and currency adjusted basis, revenues were stable in the first half of the year. Reported group revenues at the same time declined by 4%, mainly as a result of a disposal of Etraveli and adverse currency effects related to the U.S. dollar and the Swiss franc.Adjusted EBITDA and adjusted net income came in almost stable, as before mentioned, deconsolidation effects were compensated by a tight SG&A cost management. Please note that our adjusted EBITDA also partly benefited from the IFRS 16 implementation from the beginning of 2018. In terms of adjusted net income, IFRS 16 does not have a positive impact.Let me continue with a short comment on the progress of our efficiency program on Page 10. In June, we concluded the negotiations with the group's works council and agreed on the implementation of a new organizational structure, as well as reduction of headcount, primarily in the entertainment segment as well as across the holding. At the end of Q2, we have initiated the required measures, which will lead to a headcount reduction on a 3-digit level.As a result of the successful negotiations with the workers council, we can confirm our communicated net savings target of EUR 50 million by 2020. We will see positive effects of about EUR 10 million in 2018 already, plus additional savings of EUR 20 million in both 2019 and 2020.Let me now provide additional comments regarding our segment performance, starting with entertainment on Page 12. External revenues were down by 3% in the second quarter but remained stable in the first half of 2018. Despite higher program costs, adjusted EBITDA developed in line with revenues in Q2 as the increase in program cost was counterbalanced by tight SG&A cost management and the IFRS 16 effect. In the first half of the year, adjusted EBITDA increased by 4%, which also reflects the IFRS 16 benefit.The third segment performance in the first half was a result of slightly declining advertising revenues, which have been offset by the growth of other entertainment activities such as our advertising platform solution business and distribution revenues in particular. As indicated before, TV advertising revenues declined in Q2 due to the timings of Easter and the impact of FIFA World Cup. However, TV advertising revenues were stable in H1 2018.In order to provide you with sufficient disclosure, you'll find in the backup of this presentation a slide with last year's sub-segment financials for Q3 and Q4.Let's now spend some time on the underlying trends in the entertainment section. Page 13 shows the audience shares for each month in the first half of 2018. So while the ratings in the month of February and June were as usual affected by the Winter Olympic Games and the FIFA World Cup, ratings showed a very positive development in all other months with April being the strongest in year-on-year comparison. Please note that both sports events have been aired on the public broadcasting channels. The positive rating developments has actually continued in July where we were able to exceed last year's group audience share in the target group of 14 to 49 despite the remaining matches of the FIFA World Cup. This strong performance resulted in a continued audience share leads overall competitor RTL as shown on the next slides.Even in the second quarter, marked by the FIFA World Cup, we were able to secure our leading position in the German TV audience market. We achieved Q1 -- Q2 audience share of 27.1% in the target group of 14 to 49 compared to 23% for RTL. In particular, our younger stations; sixx, SAT.1 Gold, ProSieben MAXX and kabel eins Doku showed a very positive and sustainable development.Please turn to Page 15. One of our primary goals is to further strengthen our TV ratings. We aim to achieve this with a well-balanced content grid consisting of both U.S. license and commissioned local formats, while gradually shifting the share of local content over time. Slide 15 shows a strong pipeline of commissioned content for the second half of 2018. On the right-hand side, you can see an overview of promising new and returning formats which we air in the second half. New formats include game shows like Alle gegen 1 and magazines like Endlich Feierabend and to be added on Sat.1. Endlich Feierabend is the excess prime time equivalent to our very successful breakfast TV format Frühstücksfernsehen. This primetime will be supported by returning formats like The Voice of Germany and Duell um die Welt. These well-established formats come with a strong track record delivering up to 27% and 16% audience shares in 2017 respectively.Please note that we will see a front-loaded program expense in H2, with a meaningful increase in Q3. This both reflects a deviating seasonality of program costs last year, but also a higher spend in order to kick off the important ad season after the FIFA World Cup. Please keep in mind that we expect the increase in programming costs in Q3 to be offset in the fourth quarter with no negative impact on group profits in the second half.Page 16 shows an advertising share in the German-speaking markets. We maintained our leading position in Germany and extended our advertising market share in Austria as well as Switzerland. In Austria, the acquisition of ATV in 2017 plays out nicely. Integration is well on track and the anticipated synergies materialized.On Page 17, you can see that 9 of 10 biggest industries have increased their TV budgets in the first half of the year, which translated into 3% market growth based on Nielsen's gross advertising revenue data. Based on positive commitments of our TV advertising clients, we remain confident that the TV advertising market will continue to show a solid development in the second half of the year. As always, the full-year outcome will be meaningfully determined by the development of the add-on booking season.Let's now have a look on our distribution business on the next page. The dynamic growth of our distribution business in Q2 was driven by a continued strong uptake in HD subscribers. At the end of June, we reached 9.2 million and thus achieved our 2018 growth target 6 months ahead of time. Although not shown on the slide, we also benefited from steady strong increase in mobile TV and OTT subscribers. Along with a dynamically growing subscriber base, we extended deals with streaming services like waipu.tv, Zattoo and Magine TV enabling us to maximize reach over all platforms.A key project to maximize total reach of our brands and content will be the streaming platform 7TV, but we aim to reach 10 million users in the first 2 years after relaunch. Our vision here is to create the most comprehensive and convenient German streaming platform with a focus on local content, sports and lighthouse U.S. content.As already announced, we will integrate our SVoD service, maxdome, in the new platform and Discovery will commercially add its Eurosport player with exclusive sports rights too. The broader set of this service pulls our overall strategic approach to increasingly capitalize our content investments on the basis of subscription revenues for live streaming and on-demand services on top of advertising revenues.After receiving kabel clearance by the German and Austrian authorities at the end of July, we are fully on track for the market launch of the new integrated platform in H1 2019. Let me emphasize again that we are open for new partners in the broadcasting and content space to make this platform the leading destination in Germany for online content consumption. Please also note that the integration of maxdome and 7TV or in the 7TV joint venture will lead to a deconsolidation of the business going forward.Let's now move to our second segment, content production and global sales. Page 21 indicates that the segment showed a similar development as in the first quarter. The weak U.S. dollar and the still demanding environment in the U.S. production market affected the revenue development of our production business. Our global sales business, however, developed positively, mainly due to the consolidation of Gravitas in November 2017.Our digital studio, Studio71 also posted low double-digit revenue growth on a currency adjusted basis. Adjusted EBITDA rose by EUR 3 million to EUR 9 million due to improved profitability of Studio71, the first-time consolidation of Gravitas and an overall efficient cost management.What makes us confident to return to double-digit growth rates in the second half of the year is our improved line up of attractive formats to be produced. Let me point out our lighthouse formats like the new season of Bosch. The very successful crime series is the longest running 1 hour series ever in the history of Amazon Prime. The production of the fifth season started in July. Furthermore, spin-offs of lighthouse formats like Married At First Sight, A League of Their Own and Say Yes To The Vegas Dress are also supporting our improved content production pipeline in H2.Last but not least, our production company Left/Right produced 30 episodes of The New York Times lighthouse series The Weekly for FX and Hulu. Another good example for our improved pipelined in the content production business that should support revenue and earnings growth in the second half of 2018 and thereafter is the scripted series Deep State, a spy thriller series of our British production firm Endor. Deep State has been ordered by Fox Network Group and the second season was already greenlit ahead of the show's premiere in April 2018.Let me now continue with an update on the performance of the commerce portfolio. Organic revenue growth accelerated to 12% in the second quarter. In the first half, organic revenue growth, therefore, reached a solid level of 10% year-on-year. Having said this, we aim for further improvement in the second half of the year, which should be supported by a positive mix effect, i.e. a higher revenue share of dynamically growing assets. Reported revenues declined by 9% in the second quarter, again due to the deconsolidation of our travel businesses Etraveli and weg.de. Revenues in digital services decreased due to the aforementioned deconsolidations, which were only partly counterbalanced by the acquisition of Jochen Schweizer and aboalarm. Adjusted for portfolio changes, digital services would have grown organically too.Physical products which include Amorelie, Windstar and Flaconi developed dynamically with double-digit growth both in Q1, Q2 and H1 2018. Q2 adjusted EBITDA were still affected by EUR 10 million deconsolidation effect and the new media contract, which was only partly offset by the first time consolidation of Jochen Schweizer.Please turn to Page 26 where I would like to highlight one driver of the commerce segment performance. As promised, we are going to shed additional light on some of our assets in the form of onetime case studies. Today, we would like to start with our online beauty destination, Flaconi. The company has seen impressive growth over the last years, especially TV advertisement proved as highly efficient marketing channel for the company.New monetization initiatives like the market launch of the first private label brand, I expect it to continue to drive sales throughout the year and especially in the upcoming Christmas season. Page 26 also shows on the right-hand side Flaconi's high cohort loyalty, which has been a meaningful revenue growth driver in the past. Looking at cohorts with a 3-year history, in this example, it is the cohort of Q2 2015, they reached cumulative revenues at 1.6x of its original level after 1 year, 2.2x after 2 years and even 2.8x after 3 years. It is also worth noting that new customers of Flaconi breakeven on a customer lifetime logic after roughly 12 months, which we view as a very good indicator for future profitability of the business.On Page 27, let me give you a quick update on our partnership with General Atlantic, which we signed five months ago. Since then, we have been busy doing our homework thoroughly. Apart from acquiring outstanding minorities, we are implementing standard procedures, establishing a setup to leverage data, tech and marketing synergies and are jointly working on the execution of our deal pipeline. We will continuously update you on the process at the forthcoming company events.Coming back to the group, Page 29 illustrates our financial leverage as of June 30. Our net debt position improved by more than EUR 200 million year-on-year to EUR 2.2 billion compared to EUR 2.4 billion at the end of June 2017. Our strong free cash flow before M&A of about EUR 480 million combined with the disposal gain of Etraveli did more than offset the dividend payment and M&A CapEx.Consequentially, our financial leverage, so net financial debt to adjusted EBITDA, improved to a level of 2.1x versus 2.3x at the end of the second quarter last year and is well within our leverage target range of 1.5x to 2.5x. As in previous years, a large part of our free cash flow will be generated in the second half of the year. At the same time, it will be impacted by a meaningful amount of severance payments and other cash expenses related to the efficiency program. Overall, we still expect our financial headroom to again increase by year end 2018.Moving to Page 30, let's have a look at the program cost and seasonality in 2018. Although I have shown this slide already in our Q1 call, I find it worth spending another minute on the seasonality of the programming cost throughout the year. As expected, our programming costs increased in Q2 compared to the previous year and negatively affected our group adjusted EBITDA. In Q3, we expect a similar development due to the front-loaded program spend, which will lead to a decline in group adjusted EBITDA year-on-year. However, as mentioned earlier, this effect will be fully normalized in the fourth quarter with no visible impact on our full year program cost development.On Page 31, I would like to reconfirm our financial outlook for the year. We continue to target group revenue growth in the low- to mid-single digit percentage range. Given the meaningful deconsolidation effects year-on-year, this should yield mid-single digit portfolio and currency adjusted revenue growth. In addition, we expect our adjusted EBITDA margin to stay in the mid-20s and target an adjusted EBITDA to adjusted net income conversion of about 50%. Our financial leverage target remains 1.5x to 2.5x while sticking to our dividend payout ratio of 80% to 90% of adjusted net income.Please note that our target still includes maxdome, 7NXT and tropo. We'll provide more details about the impact on revenues and EBITDA once all closings of those transactions are done.Let me finalize my part of the presentation by highlighting upcoming events on Page 32. Until the reporting of our Q3 results in November, we will continue to engage in dialogues with our investors at road shows in Europe and the U.S. as well as presenting at investor conferences. Shortly following our Q3 results on November 8, we will host our Capital Markets Day in November in Unterföhring. We shortly will provide a save-the-date. During the event, Max will present the results of his strategy update and will outline the strategic positioning of the group going forward.And with this, I'd like to open the Q&A session.
[Operator Instructions] We can now take our first question from Julien Roch from Barclays.
My first question is previous management had 2022 financial targets of 3% to 8% revenue growths with the midpoint at EUR 5.3 billion, EBITDA margin of 23% to 27% with midpoint at EUR 1.3 billion. Are these targets still relevant or will we get new one at the Capital Market Day in November? That's my first question. The second question is, looking at your press release and the presentation, you say we need to initiate important changes, build a stronger German content footprint, build critical capability required on tech. All of that sounds expensive. Shall we expect in November some kind of reinvestment plan where year 1 earnings are lower, you breakeven 1 year or 2 or 3 and have higher earnings in year 4? That's my second question. And then my third question is why is online advertising down for 2 quarters in a row? It's supposed to be a growth engine. You're the only broadcasters in Europe with negative online advertising, which is very surprising. So if we could get more color on that, that will be great.
So first of all, with regards to midterm targets and also the respective targets you mentioned out of Max's presentation, I think it's fair to say, I mean, first of all, we're running through the 100 day, so his first 100 days, he is now at day 60. So first of all, we have to bring the entire strategy together to bring the pieces of the puzzle together and then also see what that means with regards to financial policies and the likes as we stand and that is why we reconfirmed our financial policy and that also includes midterm targets today. We stick to them and reconfirm them today. With regards to online advertisement, it's correct. The developments here in the first 2 quarters were disappointing. So when you look at the delta of EUR 24 million in the first half of the year with 3 bigger effects. The first one was the currency effect on TV advertisement which was somewhat mid to high single-digit million amount, whereas second which is the current weakness of the SevenVentures business, but from our perspective not really concerning because it's a deal-driven business and we've seen also in the past some weaker quarters, but are still confident somewhat to rebalance that towards the end of the year. And the third bucket is the AdSense business with third parties and that we also commented in Q1 that we lost 1 bigger client Sport 1. We had also a loss of 1 or 2 additional ones. So it's roughly fair to assume that the delta was roughly 1/3, 1/3, 1/3 and we are somewhat confident to rebound in the second half of the year also on that side because it's fair as you said, I mean, it's normally a growing business and we'll also be part of that.
And on the second question, so you said you're maintaining the financial -- the 2022 financial targets for now, but in terms of reinvestment, any comments from Max there?
Again, let me rephrase that. I think it would be -- would not be legitimate somewhat to talk about one piece of the puzzle now before Max went through the first 100 days and wrap his head around strategy and all that. So give him the chance somewhat to discuss and formulate the strategy for the next years to come and then we're more than happy at the Capital Markets Day somewhat to break out the different pieces and give you more insight of what that means for the different pieces money wise and also with regards to financial policy.
We can now take our next question from Chris Johnen from HSBC.
I'd like to take them one by one if that's okay with you, first starting with the online advertising. I mean, on the pure online side of things, I mean, are there any tech problems or something that we need to be aware of? I mean, when I'm checking out your 7TV, I barely get any advertising. If I try it on my smart TV, I had one instance where I hit the same spot 5 times in a row. So I'm kind of wondering with all the money you spent on ad tech, is there something that needs to be fixed? That's my first question.
With regards to online ads, it were -- there were 2 parts. And so recalling -- so we had that delta of EUR 24 million in the first half, roughly 1/3 was related to digital ad-led sales. And you could say there were 2 pieces, first the loss of 2 or 3 clients as mentioned before and there was 1 delayed implementation of the targeting product, but literally in the bigger picture that was not, yes, like changing needle, let's put it that way. I mean, yes, it was our ad sales for a certain period of time, but it should be reversed quickly.
Okay, but that [ should be ] for 2 quarters, right. So do you expect it to be resolved in the current quarter or in Q4 or what do we expect?
No, we expect a rebound in the second half of the year, yes.
Can I just make strategic on -- particularly on 7TV because I think you're right to say that is a decent product but is not yet the great product we want and that is very much what we're staffing up the team and we're working on so that we can have great UI, great UX, the right advertising loads, not annoy people and do all of those things, and that's the pathway we're on. It won't happen in a day, but I think by the time we segue into next year, it will be a very, very different looking product.
Thanks for the follow-up. Yes, to be honest, I was curious because I don't think you had had that problems last year. So I don't recall having had those issues with advertising in my own sort of consumer experience before. So I was just curious whether you'd agree that something has worsened or whether there was any sort of problem that needed taking care of, but I guess you answered that. And second question from me on the maxdome deal, could you talk a bit -- in a bit more detail about that? I mean, there's no comment on sort of the EV of the transaction. You say Eurosport is commercially contributing there, the Eurosport player. I mean, what does that mean? Can you talk about the implied valuation for maxdome? I mean, giving up half is quite a big step. And then second related that it seems that before your focus was always on sort of niche sports, things like, I don't know, boxing or eSports or drone racing. Now all of a sudden there's a premium sports product that's part of 7TV. How should we think about that sort of strange -- well, I call it strange, change in strategy? Maybe you have a different view.
Yes, I mean, we will provide a bit more details on the overall, somewhat also maxdome option action somewhat towards Q3 with all the different sensations out there to be closed. But overall to say, I mean, next time you can assume -- I mean, it has been a business just shy of EUR 100 million in revenues above breakeven as we commented over the last quarters. And we shifted entirely into the joint venture because we think it's the right strategic move to do. With regards to Discovery, it's a commercial agreement where we have the right literally to use the content and also take care of the sales distribution part and that comes to your second part with regards to the combination of niche sport and actually premium sport given the fact that we had the joint venture with Discovery already and now beefing it up and, as Max commented on, trying to build an excellent product out there. There was simply an opportunity also to bring in premium sports rights, which give us the opportunity or which were to a certain degree also not accessible for us beforehand in the free-to-air space due to the digital prices that were on them.
Okay. And then 1 more question on the MCN business. I think that has not developed as planned either. So on financial result, the production liability has had a bit of an impact. I mean, how are you looking at that business going forward? Has anything changed materially how you view that business? I mean, are you not -- the growth is not coming in as expected, planning to accelerate the probability or what should we know about Studio71?
Well, I'll put it that way. I mean, the growth is still very good, going into the right direction and as we commented on somewhat end of -- beginning of this year that we've seen profitability somewhat in the fourth quarter of the year. So it's also somewhat trending in that area. But we also have always very, very ambitious business plans for our teams out there and yes, I mean, this quarter there was some kind of reevaluation to the downsides, but overall that doesn't change the view, like our view on the MCA network out there. It's still an important piece of the puzzle especially when you think entertainment end to end. And so when I look at growth rates overall in the context of the group and also profitability level, it's where your company is trending at the moment. It is still very reassuring for me.
Okay, that's clear. One very final and quick one. You say you're confident on the TV advertising market in the second half. So would that bringing the year slightly up and the weaknesses we've had in H1, would you agree that this suggest that for a total advertising for the year, we're sort of looking at something around 0?
Well, yes, I mean, when we look at TV advertisement, we don't give them explicit guidance anymore for that specific line item, but yes, when I look at the market at the moment, when I look at the commitment levels, the close one that are higher than somewhat at the same point in time last year. When I look at the fact that Q4 last year was strong, but still, I mean, we're yet on booking season which was materially weaker than in previous years. So when I take all those pieces somewhat together, I think there is opportunity also for the second half. And when I look at still dynamically growing distribution business in that piece plus rebound of the digital sales, then yes, it's fair to assume that there's positive to come also from -- for the entertainment segment as a whole.
Next question comes from Laurie Davison from Deutsche Bank.
My first question is just on the cost phasing. You said the EBITDA would be down in third quarter. You're reiterating that on the programming costs. Should we expect then the third quarter EBITDA to be declining by similar value to second quarter, so about a minus 4% year-on-year? Second question is just on the comment from Max about buybacks. Is there a willingness here to reconsider the 80% to 90% payout ratio in order to capitalize on what you clearly regard as a depressed stock price at the moment? And then the third question, could we just get the deconsolidation impacts for tropo, 7MAXX which we're going to have to put through if and when those deals are closed?
Sure. Let me start with the last one, yes, so once all the deals are closed and done, then there will be an update with regards to deconsolidation effects on top and bottom line. That's for sure. We only thought about actually putting them together in order to bring out -- not to bring out piecemeals here. With regards to the cost phasing, yes, that was one of the reasons why I brought the slide deck into the presentation and said the phasing of the program cost assets. We have Q2 and Q3 with a materially higher program costs compared to last year, but then a fully rebalancing effect in the fourth quarter of the year. As I cannot really give guidance on EBITDA level for Q3, I think it's fair to assume that the program costs swing in Q3 is somewhat higher than in Q2 and will therefore also somewhat show in the bottom line of that respective quarter. And when it comes to buybacks or the dividend policy as such, again I mean first of all we have to align on the strategy, which is clear, because our goal, in the end, is to offer very attractive level of total shareholder return as you have also seen in the past. And the first thing we have to do is somewhat stimulating our EPS growth and there are 3 levers. So it's improved organic earnings growth and that has to be like the first main goal we have to answer on. The second is accretive M&A and yes, to phrase that, there's also the potential for a share buyback. But again, first, we have to align on strategy and then bring the pieces of the financial policy together in order to answer that question thoroughly.
Okay. I mean, could we see a buyback in the fourth quarter for instance?
Well, I couldn't either say yes or no. It's just -- let us come with the strategy and then we'll give you the details on the financial policy.
Now take our next question from Richard Eary from UBS.
Few questions from my side. Just coming back to Laurie's question on capital management. So just to be clear that you're not saying that you're sticking to the 80% to 90% payout ratio in terms of dividends and that may change subject to the strategy reset? That's the first question. The second question is about German content investment, which I think Max you talked about briefly at the start there. Can you outline your thoughts in terms of how aggressively you want to transition the business to do that and how possible that is? The third question comes back to this OTT business with Discovery. You've talked about 10 million subs. Are these paying, are there users, how do we think of the investment into that business, how do we think about the profitability or cash flows? And then just lastly going back to obviously Julien's questions at the start about cost increase, can you outline in terms of what are the one-off cost impacts for the strategy reset and investments in '18? Obviously, you talked about there would be some one-off costs coming through this year.
Sure. So first question on capital management, no, what I'm saying is we're sticking to the dividend policy of 80% to 90% and reconfirming our financial policy here in this presentation because literally at the moment I do not have any information that would somewhat justify a different statement on that side. And that also comes back to somewhat the last question when it comes to investments, costs and the like, so it's hard for me somewhat to comment on costs when the different strategic pieces of the puzzle are not discussed and formulated to the final extend. And so I again have to postpone that question to the Capital Markets Day in November where we are more than happy to give a full download on all the different pieces and the respective investments, but also somewhat counteracting effect on that side. When it comes to content investments, I mean, to remind, at the moment we're roughly at somewhat 55% U.S. content, 45% local content. We intend somewhat to change that grid, like this ratio somewhat over the next couple of years. As we -- and that is potentially also very important data point, already did over the last 3, 4, 5 years where since 2013 we increased our program spend by EUR 30 million -- no, by EUR 40 million to EUR 50 million actually each and every year. And now the key question for us is rather coming to November and thinking of the entire strategy. It's like where to invest and especially somewhat where to monetize on those investments because in the past it was rather investments in TV. Now you can think about additional content that might sit somewhat in between, so content you can use on TV, but also digital only as somewhat we want to think more entertainment like end-to-end and that is definitely also something we have to answer then in November.
Yes, maybe just to add 2 comments from on my side. So I think on German content, it's about getting the mix right because there still is great U.S. content and great Hollywood movies and all of that that work really well for us. But we're clearly seeing a need to have a more local mix. And so I think as Jan has commented, we've already started adjusting that. We will continue I think to adjust that and will continue to look at what is the right mix level and then tailor the various contractual obligations and contracts we have to enable all of that. On 7TV, look, 10 million, really we put out as a 10 million user target as a statement of intend and I think it's very deliberately a statements of intend to signal that we're going to go all out for scale. And in many ways I'm somewhat agnostic as we get going, how much of that are [indiscernible] users, how much of that are skinny bundle subscribers and how much of that are top bundle subscribers because I think the whole game here is of building out scale rapidly so that we can have more reach and can have a more digital footprint and then over time I think what you will see as you've seen with Spotify and a lot of other subscription businesses that we can travel people from free-end to subscription-end and start having a better mix of the business. But I think our starting focus is scale, scale, scale and that those are also clearly the learning from all the U.S. guys that built Hulu and that I've talked with.
Max, can I just follow up on that? Does that mean that we're going to have investment, investment, investment to scale that business and therefore we are not going to see a positive cash flow or a positive sort of contribution from that business for at least 3 or 4 years? And are we seeing that with maxdome with fillers and breaking even after basically being around for a long period of time?
Again, it's Jan here. No, that means that -- it does not mean that we leave one of the guiding principles from our side which is to come up with a prudence view also on the balance sheet, cash flow generation and in the end profitability of the business overall. And I said in my statement, in the beginning, the different pieces have to come together in order to ensure a very attractive total shareholder return also in the future.
We now take our next question from Lisa Yang from Goldman Sachs.
I was just wondering if you can maybe give us an update on the current trends for TV advertising so far in Q3? And you mentioned you still expect the level commitments to be up year-on-year. I mean, how has that changed at all, has that improved at all in the recent months? Secondly is regarding your revenue growth guidance, which is still low- to mid-single digit, obviously prior to the deconsolidation of some assets. I mean, that would imply obviously a significant improvement to kind of 5% to 14% growth in the second half from minus 4% in the first half. So can you maybe talk through what are the major contributors to the improvement and what would make your growth tilt towards top of the low point or the high point of that guidance range? And thirdly is regarding your Promi budget. Given this recent improvement in the ratings, I was just wondering if you feel the need to -- that you need to invest as much especially in Q3 or you just don't have any flexibility at all on your Promi cost this year?
Yes, so with regards to the first question, I mean, development in -- or like let's put it that way as I'm normally not so prone to discuss different months, but I think it's fair somewhat this quarter as July --I mean, as plans. I mean, they were -- still, half of the months was somewhat affected by the FIFA World Cup. So that month was obviously down. But with weaker comps in August and September, I think there's fair opportunity somewhat also for this quarter and especially going into the second half overall, I'll come to that in a second. So with regards to the second half, I mean, 2 or 3 comments on that. First of all, please bear in mind that our second year is always stronger when it comes to overall -- to absolute numbers in general. So the growth on that piece does not have to be as high as the second one in order -- as in the first one in order to yield bigger impact. But coming to the different measures, as also stated before, let's go through. I mean, the commerce segment, we have a seasonal business there with businesses really skewed towards Q4 and that even increased as we acquired businesses like Jochen Schweitzer somewhat last year. We see a very nice pickup in Q1 after -- in Q2 after somewhat weaker Q1 and are very confident that especially Q3 -- end of Q3 and then the Christmas season will pay on particularly higher growth. With regards to content production, I mean, we've seen a very somewhat weak Q3, Q4 last year. So the comps are week. We've a good pipeline that finally seems to materialize. So we anticipate a swing back on that side. And with regards to entertainment, we have the 2 somewhat -- we have the dynamic growing distribution business, first. And we anticipate the beforehand discussed rebound of digital sales and combined with a rather somewhat confident view on TV ad sales that somewhat gives us the confidence to reconfirm our guidance today and say that H2 will come in stronger than H1 for sure. And last one, sorry, with regards to ratings. Yes, especially after talking to you guys over the last 4 quarters and we're always questioned on ratings and our somewhat subpar performance especially towards RTL, this year is really nice, really pleasing, more than happy to comment on that one, I mean, especially in a year with the Olympics and the FIFA World Cup, which normally implies somewhat decrease in ratings of 1% in the first half and 0.5% for the full year coming out somewhat flat year-over-year and especially when you look on July, even increasing that with an increase over RTL is simply a nice state to be in. When it comes to Q3 and Q4, I mean, yes, as usual, we have some flexibility when it comes to program costs and we look at that closely. But at the moment, it's rather as we want to push further also towards local proprietary content. And we're more than happy with the grid, we actually plan there. Our goal as for now is simply to execute on that grid and actually use that good momentum on the rating side also to push into Q3 and Q4.
Next question comes from Omar Sheikh from Morgan Stanley.
So I have 3 questions if I can. So if maybe I could start with going back to the capital allocation issue again because I'd say I'm a little bit confused from the message that we're getting out in the call so far. Because it sounds like you're saying that you're committing to an 80% to 90% of adjusted net income payout ratio and that you would also like to buy back shares and you want to invest in the business. So, I guess, if you could just clarify if that's what you mean and perhaps if you clarify whether you think you'll be able to do all 3 going forward? And maybe to square the circle, you can maybe say something about your leverage target because it sounds like maybe that's the way that you can square the circle by maybe taking leverage up. So that's the first question. Secondly, maybe for Max, you mentioned on the content shift away from U.S. programming. Could you clarify whether you think that will have a negative or a positive impact on costs? And perhaps you could just highlight when the next opportunity might be to renegotiate or readdress your output deals that you have with U.S. content studios? And then finally maybe for Jan, you mentioned a couple of times that there was an IFRS 16 effect on adjusted EBITDA in Q2. I wonder whether you could quantify that, please.
Yes. So with regards to capital allocation, to be crystal clear, we stick to our financial policy in that [ call ]. So when Max talks about investments in the future, that is his full rights. And yes for sure, I mean, there is a new CEO coming in and he also wants to invest in the business. And that is something we historically have done over the last couple of years in different pieces. Now take your example of content, for example, we deliberately invested EUR 40 million to EUR 50 million on top each and every year in content. And we were able to do so, for example, in the entertainment piece because we have that dynamically growing distribution business and also more and more somewhat internal media customers that actually cross-finance those investments. So when Max talk about the specific pieces, he sees already, not after the 100 days, but in the 60 days, that at specific points he potentially wants to focus. But it's for sure that those have to be somewhat refinanced. As we in the past, we did it somewhat out of the business and again I stick to the financial policy as it stands today and if we change anything along the way, it definitely has to be a round package and not simply investing somewhat on top without any other counteracting measures. When it comes to the IFRS 16 effect, yes, it was EUR 8 million on adjusted EBITDA, on adjusted net income that's leveled out. And what was the third question again?
Yes, I think on content shift. Well, look, there is ongoing discussions to make sure that we get the mix right and indeed already this year the mix between U.S. inflow and what we produced locally has shifted and changed. And I think it will continue to do so. And of course, we're working very hard to do this in a way that is fiscally and cost responsible. That's as much I think as I can say at this moment. And, again, we'll have a very clear forward for you on all the strategic parameters when we're together in November.
Next question comes from Conor O'Shea from Kepler.
A few questions from my side as well. Just the first question, just on the IFRS EBITDA impact of EUR 8 million, just to clarify, was that Q2 or the first half? That's the first question. Second question on advertising -- TV advertising in the third quarter, you mentioned, Jan, a soft start to July, but easy comps in August and September. Would you expect a positive growth in Q3 overall given the weights of those particular months? Third question on severance costs in the second half, you took a big exceptional I think in the second quarter already, EUR 28 million. Just wondering to what extent you've provisioned for those severance costs already in the second quarter? And then final question just on the SG&A savings that compensated for slightly higher programming costs and lower advertising revenues to leave margins unchanged in the first half, definitely outside the official cost savings plan, to what extend are they tactical savings, are they permanent savings? Could you just give a little bit more information?
Sure. So with regards to IFRS 16, so with EUR 8 million in Q2 and EUR 15 million in the first half of the year overall. When it comes to TV advertising, please bear with me that I do not really want to be more specific on the quarter, the TV advertising quarter and the guidance specific for Q3 as such, but again that dynamic with July down due to the FIFA World Cup and weaker comps in August and September gives us some confidence with regards to that quarter. When it comes to severance payments, the provision we built were actually in the first quarter. That were the EUR 60 million plus you saw in the Q1 results. When it comes to the EUR 28 million here, they're mainly related to M&A. So the transaction with GA, the ongoing revision of the content production and global sales segment and 1 or 2 smaller ongoing M&A transactions with regard to commerce and some HR changes which went through the press. And when it comes to the SG&A savings, I mentioned, I mean, that were permanent savings especially as you can imagine, I mean, when you run through an efficiency program and also some parts of it are related to open vacancies that are simply then not filled anymore and also part of the overall efficiency programs that are actually cost savings, we were able to lock in already and should somewhat stay longer term.
Next question comes from Pierre Gröning from Hauck & Aufhäuser.
Just one additional question for the commerce segment. You outlined the impressive growth track especially of Flaconi in your case study and then now I see, yes, Zalando basically strongly pushing ahead in that segment. They just recently opened their first physical beauty store in Germany while planning to open at least 3 to 4 additional ones while at the same time ramping up their beauty offering online basically. So what's your view on competition there? I mean, are you already feeling some increasing competition? Are you confident to continue growing double-digit organically in the coming years? Or should we expect some more conservative organic growth rates going forward in case of competition?
Sure, more than happy to comment on Flaconi. Yes, actually it's a very attractive market and that is why you have so many players in there. Yes, when you look at some of the U.S. players trying to get into the market, you've seen Douglas also with the recent acquisition they did. You've seen Zalando going into the market and we're more than happy to have that speed boat of Flaconi which is simply pushing ahead, which is developing very nicely when it comes to cohorts, great paybacks around 12 months after acquisition. So on a customer lifetime logic, so we're more than happy to, I mean, aid with that asset and more than happy to push ahead. And also very, very confident that we can keep up that growth and become like stay and even become a more important player in that field.
Okay. So you basically don't see Zalando in the short to midterm as a meaningful competitor maybe grabbing some market share because there's still a lot of room to grow basically?
Well, again never underestimate my old colleagues and I would never underestimate also some of the U.S. players for sure. But we know how long it takes to actually build up that business when it comes to brands, when it comes to product offerings when it comes to the UX. So overall I think it's work to be done and we have that product, we can push ahead. We have a nicely growing business, it's more than EUR 100 million in sales, the right team in place and so simply going to execute and then let's see where we stand in 12 to 18 months.
Okay. Ladies and gentlemen, this was the last question for today. I now hand over to Max for closing remarks.
Thanks, Ralf. I just want to make 1 or 2 comments in closing. One, I really look forward to meeting, if not all, certainly most of you both through the various investor conference engagement that we have planned and then hopefully many who can join us in November. As a statement of the obvious, I'm a bull on ProSiebenSat.1 because when you take on a CEO role, you run your own investment thesis, don't you? Because otherwise you'd never do this and I'm really a very, very strong believer in that a combination of entertainment and e-commerce is strategically very sensible, that our entertainment business both has resilience today, but importantly can have signals of growth in the future as we drive it more digitally and as we diversify out and that our content and commerce business can continue to deliver very, very strong growth. And then all of you are much better mathematicians than me to know that the moment one stops seeing entertainment as a terminal value business and the moment one accepts the kind of growth rates that I think we can sustainably develop and deliver on top class e-commerce assets, we are very significantly undervalued today and we're certainly significantly undervalued relative to our growth potential. It'll take a day or 2 to put it all together. I realize that all of you tried about 6 different ways to get answers on capital market parameters, which is very understandable, but I think you also have to respect that I've just been in for 60 days and that I think as Jan put it, what we're really trying to do is put together one sensible and also responsible plan vis-à-vis our shareholders and of course we will need to square investments with cost offsets and all the various parameters that Jan commented about and that's a job to be done. And we didn't want to do that piecemeal, we'll do that in one go and then review with that -- review that with you in November. So with that, thank you very much for joining us and look forward to talking soon.
Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.