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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Welcome to the Q3 9 Months 2018 Results Call of ProSiebenSat.1 Media. This conference is being recorded.Today's call is being hosted by Mr. Ralf Gierig. Please go ahead, sir.
Ladies and gentlemen, welcome also from my side. Welcome to our [indiscernible] in the past couple of months. Today's call is hosted by Max Conze, our CEO; and our CFO, Jan Kemper. 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 will be followed by a Q&A session. With this, I hand over to Max.
Good morning. This will be a busy session as we take you through Q3 outlook for the year, and importantly, our strategic view for the future. We will provide full depth at Capital Markets Day in a week, which I really encourage you to attend so that you can understand our total plan and the team that will deliver it. But I decided for maximum transparency to already give you quite a deep high-level view today. This way, we can also take your questions onboard, and I think provide a better Capital Markets Day.I've now been in the business for 150 days, spend lots of time with our viewers, agencies, advertisers, our teams everywhere, industry peers, investors, journalists and so on. I am very confident that we can create an amazing future for ProSiebenSat.1, and I will show you how. This is a company that has done many great things in the past, but also lost a bit of its focus on the consumer and customer, became too complicated and siloed, and we have to improve our performance and execution culture. So there is a need for change and reset and to get much, much better in executing and delivering on what we promised. Media, and we need to evolve from a B2B to much more of a consumer-focused business with a strong technology engine to lead change and not be dragged. Now my DNA is consumer tech. And if you want transformation growth, and so I was brought in for this. There's some pain we'll have to take, but also encouraging proof points that our reset is taking hold and plenty to come. Entertainment is gaining ratings and competitive position for the first time in many years. NuCom is delivering dynamic organic growth behind a sharper focus. We're making a decisive bet on digital and OTT. We're in midst of reorganizing ProSiebenSat.1 for future success. Clear leadership across all 3 segments with a leaner broad structure all at one table to drive performance, one entertainment setup versus different TV, digital and so-on teams. And we're beginning to simplify how we operate, drive performance culture, take out cost inefficiencies and invest for growth. More to come, but I am encouraged by the deep passion our people have to win.Now on Slide 5 let me cover business ahead. Q3 was marginally better than our expectations with revenues up 1% all in and up 4% organic. Adjusted EBITDA declined minus 13% due to program cost saving. This was as anticipated but and indeed marginally better than in our forecast and the same rationale impacted adjusted net income. Now on to our 3 pillars on Page 6. For Q3 we see encouraging progress on NuCom with 14% organic for the quarter and low double digit growth for year to date. Partnership with General Atlantic is working well and the just dynamic position with eharmony is a good deal with much upside. There is a rich target pipeline and we have a very clear and focused strategy for growth I will discuss later. But our studios performed better with plus 14% organic in Q3 after 2 rather disappointing quarters. There's work to be done to generate reliable top and bottom line growth and clarify our priorities for the future. And again, I will comment on this later. Entertainment, which is the critical core of our business came in at minus 1.5% in Q3 on a like for like base. I'm pleased about better and more local programming with TV rating performance well ahead of last year and competition and indeed augurs the best in 3 years. We have more digital footprint from Celebrity Big Brother to The Voice and a clear programming strategy and one entertainment team put in place so we can drive one agenda from programming to digital to monetization. Clearly we're not yet translating this into the advertising growth we aim for, but we have a game plan for '19 that we'll talk about later on. Higher ratings will help us in '19, but take time to translate through. Our Q3 quarterly ads were flat, market was marginally negative and our critical digital and non-TV revenues are not yet developing in the way we want. Now onto Q4 on Slide 7. As you know, our forecast for the year was at the thin margins of guidance, and I commented on this in Q2. The advertising market provides much less visibility and more swings than in the past, which makes forecasting our business a mighty challenge. We're changing how we operate to reflect this for 2019. October was in line with expectations, but 30% of the year hangs on November, December performance. And while the team will do everything to deliver against the targets with current booking forecast, I need to lower full year revenue guidance for organic a.k.a. like-for-like for mid- to low single digit. This will flow through on reported and slightly negative, and Jan will comment on EBITDA impact and expectations.We expect double-digit organic growth for both NuCom and Red Arrow studios in Q4. On Entertainment, the advertising market in Q4 looks quite soft, and we expect our organic entertainment performance to be low single-digit negative. Clearly, not acceptable as we look to the future, and we'll talk about how we plan to change this. With this, I hand over to Jan, and I'll be back in a bit to talk about our future.
Thank you, Max, and also welcome from my side. Let me start with our group financials at a glance on Page #9. Q3 saw the anticipated swing-back for the group overall. Thanks to a dynamic development of both the content production on global sales and the commerce segment. Portfolio and currency adjusted group revenues increased by 4%. Despite deconsolidation and negative currency effects, reported group revenues still increased by 1%. Revenue growth in the first 9 months declined by 3%, which reflects meaningful deconsolidation effects, adverse FX effects as well as weak content production business in the first 6 months of the year. As already indicated in previous earnings calls, group adjusted EBITDA was affected both in Q3 and the first 9 months of the year by a front-loaded programming cost increase, which also translated into a decline in adjusted net income. Let's get into more details with regards to the segments on the following pages. External entertainment revenues were down by 3% in Q3 and 1.5% on a like-for-like basis. In the first 9 months of the year, revenues declined by 1%, reflecting a challenging advertising environment. TV advertising revenues remained stable for the segment. In Germany and Austria, we were able to increase our TV ad share in the third quarter compared to first half of the year. Our strong ratings performance helped, with August being the best month and Q3 being the best quarter in 3 years despite the World Cup in July. Here, the continued gradual shift to local content had a positive impact on the ratings development. We have a strong format pipeline for the upcoming month, especially with new local formats, which will also lead to the U.S. content rights overhang in the years to come, which Max will elaborate on a bit later. As highlighted in the press release, we are currently in negotiations with the studios to improve conditions for the remaining periods. We were, however, not able to translate the good ratings performance and strong performance grades overall in higher-edged revenues yet. Advertising revenues were down 2% due to lower online advertising in SevenVentures revenues. Although the online advertising business improved in Q3 compared to the first half of the year, the loss of Sport 1 still led to a decline. One remark toward distribution business. While the subscriber base distribution business has again benefited from an increased HD and mobile subscriber development, the seasonality of regular onetime payments just led to a flat development in Q3.Other revenues grew underlying double digits, but were down EUR 7 million in Q3 due to the deconsolidation effect of maxdome and 7NXT in the amount of EUR 60 million. Let me also highlight that we successfully launched our netID, with 60 partners already signed, for example, the auto group, Zalando, [ Blue Glass ] and Spiegel. The integration of netID into TV channels websites and 7Pass is a key element of our entertainment strategy with potentially 35 million users who are ready to register and are locked in on our sites. In terms of profits, our third quarter was as indicated affected by deviating seasonality of programming costs.Let's have a look on our Content Production & Global Sales segment on Page 11. We achieved a strong 14% revenue growth in Q3 on a like-for-like basis with all areas contributing to this development. Studio71 made the largest contribution to the revenue growth, but also the production business with, for example, the fifth season of Harry Bosch contributed to the positive segment development despite an ongoing challenging environment. Our global sales business benefited from the first time consolidation of Gravitas. Adjusted EBITDA declined by EUR 4 million in the third quarter and by EUR 1 million in the first 9 months due to temporarily lower profitability in our global sales business. However, adjusted EBITDA margin in the first 9 months was stable.On Page 12, I would like to run you through the development of our commerce segments. Our NuCom Group achieved a strong 14% growth on a like-for-like basis and even show a further improvement compared to the first half of the year. Almost all assets contributed to the dynamic organic growth, especially Flaconi, Verivox, Windstar and Talenthouse. On a reported basis, Q3 is still affected by deconsolidation effects of Etraveli and [ Commwer], only partly counterbalanced by the consolidation of Jochen Schweizer, all recognized in digital services. Adjusted EBITDA was still affected by the before-mentioned deconsolidation effect, a new media contract as well as certain cost seasonality. Let's have a closer look on the acquisition of eharmony which was announced about a week ago. Please turn to Page 13. We are really glad about that acquisition. We acquired the asset at an enterprise value of USD 85 million, thus, for less than 1x revenue multiple. Overall, cash contribution for ProSieben will be at around EUR 60 million to EUR 65 million, including the cash purchase and restructuring expenses on a pro rata basis. Through this acquisition, PARSHIP ELITE becomes the #2 in online matchmaking globally based on revenues. eharmony is a pioneer and one of the leading matchmaking platforms in the U.S., With the experience of PARSHIP ELITE Group, we will increase the customer lifetime value and will achieve meaningful cost synergies of around EUR 20 million., for example, through the integration of eharmony in the IT system of PARSHIP ELITE Group and through centralizing the online marketing teams. PARSHIP ELITE Group management team already proved their ability to integrate and scale, and we are convinced that they can achieve this again. 2018 pro forma revenues of PARSHIP ELITE and eharmony combined will be above EUR 200 million in revenues and EUR 30 million in adjusted EBITDA.Page 14 will give you an idea of the track record of PARSHIP ELITE Group. Since the merger of PARSHIP and ELITE in 2015, the EBITDA CAGR was 42% over the last 3 years by improving the customer lifetime value and by reducing SG&A cost of above 10%. We were able to increase profitability significantly. The acquisition of PARSHIP ELITE Group by ProSieben in 2016 even fostered this development.On Page 15, I would like to comment on our net debt and financial leverage development as of September 30. Compared to the end of Q2, our net debt remained almost stable at the level of EUR 2.2 billion. The increase of around EUR 300 million compared to the end of Q3 2017 is especially based on the dividend payment and M&A CapEx, which couldn't be fully offset by the free cash flow before M&A. And sequentially, our financial leverage, thus the net financial debt to adjusted EBITDA ratio is at the level of 2.1x versus the 1.8x at the end of the third quarter last year and is well within our leverage target range of 1.5 to 2.5x. As I already mentioned, our free cash flow in the second half of 2018 has impacted by a meaningful amount of payments related to the efficiency measures and potential cash costs related to the ongoing studio negotiations.Moving to Page 16, let's have a look towards the year-end. Despite the nice win back in revenue growth in the third quarter of the year, we updated our financial outlook for financial year 2018. This has 2 reasons: First, a softer organic revenue development anticipated for Q4; and second reason, deconsolidation effects. Meaning maxdome, 7NXT and tropo has already communicated at our Q2 earnings call. In Q4, those deconsolidation effects will be around EUR 50 million net. As a result, we expect group revenues in the amount of approximately EUR 4 billion. And adjusted for portfolio changes and currency effects, group revenues are expected to increase low single-digits percent. As in every year, the advertising business remains the big swing factor at the end for both revenues and profits. For both the Content Production & Global Sales and Commerce segments, we expect the continuing dynamic revenue growth of above 10%. In terms of Q4 profitability, we expect an adjusted EBITDA margin in the range of 28% to 32%. This rather wide range reflects a still quite low visibility in terms of the development of the advertising business, both in November and December. We maintain the profitability of our group and can confirm an unchanged adjusted EBITDA margin guidance in the mid-20s as well as an unchanged adjusted EBITDA to adjusted net income conversion of about 50% though at the lower absolute basis. With this, I will hand over to Max who will give you a sneak preview of our new strategy to be presented at our Capital Markets Day on November 14.
Thanks, Jan. So despite an encouraging Q3, clearly 2018 will not be the year to write home about. We need to make the reset now to deliver what you and all of us want: growth, reliable performance with a 10% to 15% total shareholder return on an annual basis. This will require careful investment, better balancing how we use cash for growth and dealing with U.S. content legacy issues, then providing you with a clear path to growth, building blocks, and most importantly, getting us fit to deliver what we promised consistently.Now on Slide 18, let me start with what you have taught me or asked me. How will we create a future-fit entertainment set-up? Will you reduce U.S. content dependency and generate growth as TV reach is challenged? How do we own more IP and production going forward? What is the forward path for NuCom? And how do we provide more clarity and execute better?On to Slide 19. Now I commented on this in the beginning. 150 days in, I find ProSiebenSat.1 very much a glass half-full. Yes, we're not going as we want. Yes, we have the U.S. content overhang. Yes, we do not execute well enough. But also, yes, we have much more strength to build future growth on, powerful and beloved entertainment brands with fan communities of 10 million and more and strong digital assets. E-commerce and platform brands, 35 million consumers love and use an exciting content production and digital champions. We're trading at around 20% discount to European peers, a 30% discount to U.S. peers, yet I'm convinced are better placed if we use our strength decisively to create the future.Now this strategy renewal has no white rabbits or hats. Indeed, many concepts are obvious, but if we execute on them, we will win.On to Slide 20, just 3 data slides to set the scene. Now on 20, a statement of the obvious. How people consume entertainment is changing, more digital, more subscription services, more on all devices. Now for all of us, actually, are rather golden age to enjoy. On Slide 21. While online video and video on demand is going fast, TV still has strong resilience. And given Germany is largely a free-to-air market, I would expect better resilience as U.K. or U.S. We'll talk about our growth model later, but I'm fundamentally assuming a negative to flat underlying market where we deliver growth by a more local programming, more digital reach and smarter advertising products.Slide 22 is important. What I'm showing you are the 3 markets we compete in, all Germany only for simplicity. Advertising is a EUR 21 billion market, of which we have about a 10% share, and that's not counting all the promotion budgets out there, which I'm guessing would double that number. Entertainment. So everything we consume from rock concerts to Spotify is a EUR 36 billion market, of which we have very little indeed. And e-commerce platforms are EUR 60 billion market, of which again our market share is small. So all in, close to EUR 120 billion. And at EUR 4 billion revenue, we have about a 3% share of the space we competed. Now why does this matter? Well, if there's one thing I've learned in 25 years in business is that if you want to grow, you pick the biggest available space making you the smallest because turning, say, our 3% market share into 4% or 5% or 6% does not sound crazy. But of course, if you do, in reality, EUR 4 billion becomes EUR 5 billion or EUR 6 billion or EUR 7 billion fast. If we want to grow, then we must access more of that market, capture more advertising via digital reach and smarter product, build more meaningful subscription and direct-to-consumer entertainment products, more e-commerce. Not easy, but all doable.On Slide 24, let me turn you to our vision for the future. We see the consumer and viewer in the middle with entertainment and content consumers love and commerce platform brands consumers need, synergistic and brought to life across all channels for more reach and absolute and better monetization. We've got our 6 principles as lightning rods for our teams: consumer-led and obsessed, contend-led, digital first, total reach, growth-driven, and passionate creators.On slide 25, what does all this mean in numbers? Well, our ambition is to accelerate growth. And over 5 years or so, turn EUR 4 billion of revenue into EUR 6 billion, EUR 1 billion of adjusted into EBITDA into EUR 1.5 billion, and then it's really up to you and the markets to determine the equity value of this. We will do this by diversifying our business base so that half of our business is in advertising and half of our business in non-advertising revenue, half of or more in digital and 25% in smart advertising products. By smart advertising products, I mean making linear in digital inventory targeted based on data insights, thereby creating more value for advertisers and a strong value uplift of up to 50% to 150% for us. All in, we aim to deliver a 10% to 15% total shareholder return on an annual base.If you turn to Slide 26 the strategic priorities across our 3 pillars are clear. Red Arrow Studios will become a bigger feeder of total entertainment and we will scale our digital footprint. Entertainment will be more live, more local, with a massive expansion of digital reach all turned into smart reach advertising products that capture more of that EUR 21 billion advertising market.NuCom will focus on vertical sets of large and fundamental consumer needs with #1 or #2 brands proving unassailable market leaders and thoughtfully expanding globally where we have proven models. NuCom and Entertainment are synergistic, or rather symbiotic, as media flows one way and data the other and both learn from each other focused on serving one consumer. An ecosystem, so more a bit like Amazon or Alibaba or Tencent over time.On Slide 28 clearly how we tackle Entertainment is the core challenge and we'll spend most of our time on this. And before I do this I deliberately wanted to spend 5 minutes on NuCom.While always an exciting plan and story and with Entertainment and NuCom coming closer together this is and will be even more so an integral part of the total groups future. Today NuCom is a EUR 0.8 billion revenue, EUR 110 million adjusted EBITDA business with about 35 million monthly visitors. We're focusing on 4 big consumer needs and verticals. Consumer advice and saving money with Verivox. Verivox over 20 years has saved EUR 2 billion towards 10 million. A strong #2 in a vast market that has almost limitless growth potential. PARSHIP ELITE is by far the #1 in Germany with a correct team and business model and don't we all want to fall in love. Jochen Schweizer mydays Group creates experiences that last and is also the end market leader. And Flaconi serves consumers' beauty needs, growing 40% just this year. And indeed if you look in the beauty market, e-commerce as percent of total beauty is only 5% in Germany, whereas it is 10%-plus in the U.K., 25%-plus in China. Now these business account for 75% of NuCom's revenues and can become unicorns in their own right. And of course, we have more businesses in the portfolio and over time see one or two other breakout opportunities.So on Slide 29, our game plan is to turn this into a EUR 2 billion revenue, EUR 400 million adjusted EBITDA business over 5 years or so. And we think we can largely do this organically, but also have a rich disciplined M&A pipeline, Jan commented earlier on eharmony, which I think is a great deal at great value for the future. Our organic growth for NuCom will be around 10% to 15%, possibly slightly better and with M&A closer to 20%. The business is fully operational. We have strong leaders, great partnership with General Atlantic. And if NuCom delivers on the plan, clearly, a major value creator for the group.Now on Slide 30, this value creation also rest on leveraging and further developing the synergies between NuCom and our Entertainment business. Think of it as we serve large consumer needs through both businesses, learn more about our consumers, leverage data and can jointly fuel new business models. NuCom is our biggest advertising client, strongly benefiting from our media power while Entertainment learns our consumer data-centric approach from NuCom to pick just one example. So now with Slide 32, let me move on the critical core of ProSiebenSat.1. Our Entertainment business has much strength to build on, even if we don't put all the pieces together today quite the way we want and quite for the growth we want. But we have entertainment brands consumers love with large fan audiences, a great distribution portfolio and very strong ad sales capabilities. Today, entertainment is a EUR 2.7 billion business that is flattish to slightly negative, and we want to accelerate and deliver solid growth, at least in line with and rather ahead of the past. And we'll get there by doing 4 things: One, create more relevant content; two, make this available on a much broader footprint; three, create better balance of advertising with distribution and subscription models; and four, possibly most importantly, create smart reach and advertising products at scale.Slide 33 is our guide track. Consumers to content to reach to making money. Only in that order. Now let me move to content. We're expanding in attractive life and local genre for more factual to shows, to comedy, to fiction and transports. We have more unique programming coming online this fall and into 2019 than in many years and are seeing meaningful ratings growth. We've under invested in local content in past, so we'll commit an incremental EUR 80 million from 2019 onwards.On to Slide 35. Now we'll continue to rely on a mix of relevant U.S. content and local creation, and we think this balance is important for the future. Great U.S. films and series work well and are wanted by our viewers. But we need better balance. We have too much inflow from these past, and at the same time, lower airing success rate on some of the content without the digital rights scope needed. Yet, we also need to secure content access at the right cost for the future. This has been under intense scrutiny with a dedicated team. We just closed negotiations with Warner, our most important and trusted partner that adjusts inflows starting already for 2019, provides better qualifiers and rights at stable pricing. This is a good success. Nevertheless, we have overhangs from the years past that need adjusting once. We're talking about up to EUR 400 million of overhang, and we'll deal with it until the end of the year when all negotiations are done. We're working through the most effective treatment of this from simple write-down to other options. The cash impact of this is a maximum of EUR 110 million. And importantly, this will remove any content overhang liability as we go forward and takes risk and uncertainty off the table.Let's move from content to reach on Slide 36. I have a simple premise, to move the business from being largely focused on TV reach to being focused on total reach, a.k.a. linear and digital with aggressive reach expansion digitally that we turn over time into smart reach and product with much better advertiser benefits and yields for us. If we can do this, we will have a future-fit entertainment footprint that benefits from the changes in viewing behavior versus the terminal value model some analysts apply. Now let me just give you one example. Germany's Next Topmodel, one of our lighthouse franchises, has a fan base of, give or take, 10 million passionate fans. Already, 25% of total viewing is digital and more than 10% of the net unduplicated reach is digital. The #1 entertainment brand on Instagram. Clearly, not all our programs are that sticky. Otherwise, we grow leaps and bounds. But as we invest more in local contents and increase our investments in digital platforms, more of our business will behave this way.Slide 37. So we're really mounting in all our digital attacks from building and boosting fan communities to 7TV as our German Hulu aggregator platform to expanding Studio71, which is already one of the leading digital channels and video providers, both in Germany and the world with 10 billion monthly video views.On Slide 38, let me spend a moment on 7TV as you and others are asking many good questions. This is our streaming play to capture 10 million or more unique users and offer one German entertainment hub that has all the channels and content brands you love in one place. Today, we have around 2.5 million users and subscribers, and that's really with current product versus the one we're building for the future and virtually no marketing. As you know, there's a 50-50 joint venture with Discovery, and we have an open invitation for everyone to join. Discussions are ongoing. And clearly, it makes no sense, for example, for AirTel and us to spend competitively when we could join forces. Discovery and we will invest in 2019 to create the leading German entertainment hub. We have a team of 200 plus working hard on the product and expect to launch for mid-next year. Now let me talk about how we make money and generate growth with all of this. There's a lot of work going on to better serve agencies and clients, optimize yields and contract flows, and Sabine will cover this in the Capital Markets Day. I wanted to focus on 3 examples.Slide 39. One, we're building an advertising portfolio that can serve advertising needs, both across the advertising to engagement to conversion funnel and across all media needs from TV to digital to out-of-home and performance. Two, on the next slide, we're monetizing both via advertising and a much broader value chain that ranges from licensing to sponsoring to events. And if you look at the Germany's Next Topmodel example I referenced earlier, close to half the revenue already comes from nonclassical and more differentiated products.Slide 41. Three, by going all in on smart reach. Now smart reach, or addressable, as many of you refer to it, describes reach that can target based on data insights, thus, geolocate and/or individualize consumers we address. So advertisers can serve more relevant information to the right people. 20% of our TV inventory can be smart today, that's 12 million TVs on 39 million households, all digital reach of smart by definition. Imagine your car company launching a new car, we can mount you a national campaign, but also provide a banner window that links to every local car dealer across this reach, creating uplifts of 50% to 150% in reach monetization. Remember the EUR 21 billion advertising market I referred to, well, if we commercialize smart reach at scale, we can shift more of existing and new budgets into video-moving pictures, which is by far, a more effective mode of advertising than print or digital banners or really anything else. Now are we doing this at scale today? No. But the technology is there, the advertiser need is there, and we're now very focused on building the products, teams and client pictures to scale this fast. And if we can do that, we can reach 75% of all the EUR 21 billion in advertising money out there. Slide 42. All right, if we then take all this and have a look at the entertainment building blocks, we have an ambition to develop our current EUR 2.7 billion revenue, EUR 0.9 billion EBITDA business to EUR 3.2 billion at about EUR 1 billion adjusted EBITDA. We've taken very conservative underlying assumptions on the core TV advertising market. So we take into account that it may well decline by 1% or 2% a year. Hopefully, a little better. But then growth comes from better managing, advertising use in products, digital reach, smart reach a.k.a. addressable and products, distribution and advertising technology levels, some small M&A, altogether growing at least at the 2% to 3% rate, and hopefully, at the upper end, all-in once the building blocks grip at scale.44. Let me briefly cover Red Arrow Studios before I bring it all together for you. Red Arrow Studios today is a EUR 600 million business, EUR 500 million with external customers with really 3 activities; German content creation, international studios and distribution and Studio71. On Slide 45, we have a clear and focused plan forward for Red Arrow Studios. One, to develop a bigger German footprint by partnering with the best creative minds and thus, increase the share of local commissioned content from about 13% to 30% or more in the future. This, by the way, is a real opportunity for the whole German creative scene. On our core international business, we have a better slate of tied-off productions coming into 2019 from Bosch Season 5 for Amazon, The New York Times, The Weekly for FX and Hulu, Deep State for Fox, Vienna Blood for ZDF and ORF, to mention just a few examples. And we'll work hard to make the business sharper in delivering growth at an adjusted EBITDA level. And by the way, we continue to be open to explore strategic partnerships.Now on Studio71, we'll actively look to expand. It's the TV of the future, and we have a front seat. So if you then look at Slide 46, if we do this, we'll develop from a EUR 0.5 billion to a EUR 0.8 billion external revenue, EUR 1 billion if you include internal. We'll work on our profitability by driving core production assets, anticipating Studio71 to be positive and leveraging cost efficiencies at scale. We aim to deliver organic revenue CAGRs of 5% to 10% and around 10%, including M&A.48. Let me wrap this all up with a few slides on how it comes together and how we'll operate. I wanted to start by reminding you what the goal is, EUR 4 billion to EUR 6 billion, EUR 1 billion to EUR 1.5 billion, 50% on advertising, 50% digital, 25% smart product, 10% to 15% total annual shareholder return.49. Now what does this mean in terms of guidance? Well, I looked at this closely, and frankly, we've not delivered on guidance. So instead of playing around with this, we'll hold guidance targets and focus on executing and delivery. My ambition is certainly to deliver at the upper end of these numbers, and I'm confident the strategies and plans we laid put can do this. It will take a bit of time.On 50, if you look at the building blocks, you can see what we laid out coming together. We've modeled this with a variety of conservative to more aggressive assumptions, and I'm confident this can be done. All 3 segments contribute meaningfully.51. Now 2019 will be a year of sort as we absorb the investments critically needed for our future. All in, I'm confident we can return Entertainment to growth in 2019 and accelerate thereafter. But we need to make EUR 120 million of investments in the business from local content to digital and tech. Against this, I'm committing another EUR 50 million of run rate cost savings by reducing, for example, the number of legal entities, making our holding structures leaner, both on segment as well as on group level, reducing external costs and adjusting spans of controls, management layers and so forth. So that the earnings impact in the Entertainment business will be around EUR 70 million only. And then on group level, our adjusted EBITDA should be impacted less as NuCom and Red Arrow Studios will deliver earnings growth. Of course, we'll be very diligent on how spend investors' money and we'll work hard to do above or better.53. To support this growth trend, delivering 10% to 15% TSR per annum, we also relooked at cash capital allocation. Going forward, we will fix dividend at 50% of adjusted net income so that we return half earned straightaway to investors while investing the other half for future growth. This balance is still very attractive yield of around 5%, with accelerated EPS growth behind organic, smart M&A and share buybacks. We confirm our leverage target range of 1.5x to 2.5x and would only consider going above this for large deals with a strong strategic fit and rationale. Now on our current share price levels, the board and I believe the company is meaningfully undervalued. So we're announcing up to EUR 250 million share buyback plan over the next 12 to 24 months. We have strong conviction in our strategy and plans. And given the valuation, opportunistically deploying capital on this is the smart thing to do. We'll commit EUR 50 million until year-end, and we'll periodically relook at this depending on whether organic and M&A opportunities materialize as planned. I will put more of my money into ProSiebenSat.1 immediately post the blackout. All in, as they say.54. So how will we actually get all this done? One, we have a clear game plan and are focusing all we do on execution; two, we have a sharp capability leaders in all 3 pillars accountable to me; three, we're simplifying how we operate, much progress already and much to come; four, we'll be disciplined in how we use cash, it's the investors' money, and I take this stewardship very serious; five, we're partnering for more scale from General Atlantic and NuCom to netID to European Broadcaster Alliance. I've built personal relationships across the industry, and we're looking where we can synergistically pool efforts and resources; and six, we're reviewing and building our tech capabilities.On 55, to sum it all up. No white rabbits, but a clear growth plan, building blocks and commitments. Future-fit entertainment, more local, digital and smart reach. Rapidly scale NuCom and Red Arrow Studios. All synergistic, all serving our consumers and viewers with great content brands and services.Now let me close on a personal note. I took on this role because it's a great challenge, and what I found confirmed my personal investor thesis: a business with great bones, people and strength, that needs more focus, execution and pivoting into the future fearlessly. You'll get every ounce of the team's and my energy and intellect. It will be hard work, but it will be done. Now I will personally engage with investors to explain what we're doing and how we'll win. So please don't miss next week's Capital Markets Day because I think it's really important you hear the team and you see the detailed plans which are very sharp, and we spend very hard work in getting ready over the last few months, and you can ask all the questions you have. Then I'll be in Barcelona with many investors and on the road, thereafter, to engage in even more depth. Thank you.
[Operator Instructions] We will now take our first question from Julien Roch from Barclays Capital.
My first question is what is the basis for your EUR 50 million decline in EBITDA for 2019. So you're guiding to EUR 1 billion to EUR 1.05 billion in 2018, so that puts us on EUR 950 million to EUR 1 billion in 2019, but surely EBITDA also depends on advertising. So what is the range of total advertising or TV advertising you have for your 2019 EBITDA guidance? That's my first question. The second question is why is online advertising declining at ProSieben? I mean, Mediaset España reported 20% growth last night. ITV is talking about 35%, so you've the only growth gap there in Europe versus something that is supposed to be growing fast is declining which is very puzzling. So if we could get more information on that, that will be great after that, actually.
Sure. It's Jan Kemper. First of all, with regards to the decline in 2019. So we have the 3 investment buckets of EUR 80 million in content, EUR 20 million in reach, and also an additional EUR 20 million here, and we have counterbalancing effects of roughly EUR 50 million of additional cost measures we anticipate for 2019. So an overall -- so a net impact of EUR 70 million in the Entertainment piece and as we anticipate in the other segments, so in Content Production & Global Sales, but also in the commerce segment, profitable growth that would lead to an overall impact on group level of roughly EUR 50 million, just to the bridge. And when now it comes to total advertisement or like the advertisement -- the TV advertisement that is baked into our assumptions somewhat for next year, as also Max elaborated on in his presentation, we are cautious when it comes to the TV advertisement, so it might well be that there is a slight decline. We hope for more, but let's see. I mean, visibility is low, but we are confident that with additional measures when it comes to 360° monetization, so digital, the respective uplift could stabilize, even let that business somewhat increase in the future. When it comes to online advertisement, yes, I think overall assessment is disappointing on that side, and we can only restate the comments we did in the first quarter and the second quarter, that we lost 2 or 3 important clients on that end. And still, we're not able to bring our new targeting product on the ground, still hoping to finalize that over the next couple of weeks in order to swing back beginning of next year.
So just a follow-up on your answer. So you're saying that could you -- you're giving a guidance of an absolute level of EBITDA. So you're giving us a guidance for 2018, and you're saying 2019 is that guidance is less EUR 50 million. But obviously, the top line will impact the EBITDA. If advertising is up of 5, or down 5, EBITDA is very different. So you're telling us that EUR 50 million decline next year is based on the slight decline in TV advertising. If TV advertising is actually slightly improving, so there is a 2%, 3% swing on TV, will EBITDA be better or will you reinvest some more?
Well, somewhat depend, we'll look on it on a quarter-to-quarter basis. But as you correctly pointed out, there might be some upside. But I think overall, we'll cautiously look on, A, the investment on a quarter-to-quarter basis because we simply has to look like how those projects pickup and then invest along the way and the same holds true with regards to revenue pickups because I think Max elaborated on the developments in 2017 and 2018, where we have certain business models that were not at the level we anticipated, but we still have some homework to do until the end of the year, coming out strong out of the gate somewhat beginning of next year. And so to sum it up, yes, there is some upside, but with regards to reinvest, we'll see along the way.
Our next question comes from Laurie Davison from Deutsche Bank.
The first question is just on the Warner deal you mentioned. So you said you already started to see renegotiations. What does the Warner deal implied for most slightly scale of the cash impact? But you said that could be up to EUR 110 million, and the negative earnings impact could be up to EUR 400 million. I'm just wondering you've clearly had some implications on the Warner deal of how those withdrawals have gone. Can you give us a feeling for what end of the range is most likely? Second question is just what portion of your U.S. contracts are output deals rather than volume supply deals which is what a lot of the other broadcasters have moved to? I'll leave you there -- those right now, and I'll come back with the third if that's okay.
Okay. So to start with the second one, looking at the 5 output deals we still have and obviously to say that they are all running out in 2019 and 2 of them at latest in 2020. They are -- 2 of them are actually output deals, the other somewhat volume related or volume supply. When we look at the EUR 400 million and also the Warner deal, to put that into perspective, so with Warner, we negotiated literally the centerpiece of our U.S. content strategy going forward. And that implies especially the years after all the U.S. output deals, current U.S. output deals run out, so 2019, but especially '20, '21, '22 and the likes. And what we did with them is like literally going, going deep and saying, okay, based on the experience we have especially over the last 2 years, what are the respective outputs we need, what is the quality, what are the qualifiers we actually need in order to also plan ahead in an industry that is changing in order to make sure we have the necessary flexibility, but also at the same time, access to the great content that, that the partner provides. So that is the centerpiece going forward. And I think we're also very cautiously looking on any additional output or volume deals along the way. And as you correctly pointed out, rather at looking at cherry-picking as other broadcasters did in other countries beforehand. When I look at the EUR 400 million overhang, which is somewhat vaguely baked into the presentation, it is, we want to flag that there is a potential overhang based on the strategy reach -- or like the shift in strategy where we say when we invest now in platforms that can transport great formats from the TV, from the linear side to the digital side. And then also make it smart, so addressable, in order to monetize that. That is only possible with owned content where we have all the rights to play that content in a linear signal but also in the digital space and all platforms, potentially also platforms of third parties out there, and then literally, monetizing that. So it is a shift more towards local but even more importantly to owned content. And with that, there is a certain overhang of like old U.S. content we have to take care of. Certain portion, roughly the half, that is already on the balance sheet towards the end of the year, and around half of it, like EUR 200 million future commitments that are still coming from those old output deals over the next couple of years. While we cannot give you an explicit number -- or like an implicit number at the moment is because we are still in negotiations with the studios at the moment to finalize the number and then we can also give you a specific treatment with it how to deal with things on the balance sheet and future commitments to come. And we hope to all finalize it in the fourth quarter and then give you a decent update with all the relevant information.
Okay. But just to understand, I mean, you've given up to EUR 400 million and up to EUR 110 million in free cash flow impact. What has Warner told you about whatever we should be thinking of the most likely end of that is?
Well, the 400 -- up to EUR 400 million and EUR 110 million, I'm not only dependent on that Warner deal, but on the other discussions we have at the moment with other studios out there. But looking at the number, obviously, we gave you the up to number because we anticipate also a number coming close to that. We're still having to think about the treatment thereafter.
Okay. And then just a third question. What's the organic growth assumed in NuCom reflected in the guidance for 2019?
Somewhat in that range. As we also guided for this year in the range of 10% to 15%, given the dynamics, we see at the moment especially in the third quarter and running into the fourth quarter, our ambition is somewhat even go to the higher end of that range next year.
Our next question is from Charles Bedouelle from Exane.
I actually have a couple of follow-up on the various questions. So the first one, I would like to actually, the EUR 50 million cost saving, is that incremental to the EUR 50 million that you are already anticipating when you had the consolidation of maxdome and the realignment last year? So it was like EUR 100 million in total or is the EUR 50 million somewhat overlapping? First question. The second question is you talked about advertising potentially slightly declining next year. Now it's a EUR 2 billion business, so let's say, it declines by 2%, that's probably a EUR 30 million to EUR 35 million headwind on the EBITDA. So I'm not quite sure I've seen it in your bridge, so can you describe around that? And then the last question, I suppose is on the programming write-off, and I'm not quite sure I understand exactly what you're doing because you're writing off EUR 400 million, you wrote off EUR 200 million in last year, so like EUR 600 million which is obviously a very significant number. And also in the write-offs, you've just said that around EUR 200 million of the EUR 400 million is actually not being paid for or otherwise, all your output deals are going to be negotiated basically in the next 12 to 18 months. So are you basically charging ahead program that you will show? Or are you charging ahead program that you never use? I mean, just explain us a little bit more what's going on and how come the number is so big this year after already having a significant write-off last year?
Sure. On the first question with regards to the EUR 50 million cost savings, yes, that is on top on a run-rate basis. So the EUR 50 million we have in our bridge is a combination of revenue increase that flow through to EBITDA, but also we are aiming for an additional EUR 50 million of cost savings on a run-rate basis that will somewhat materialize over the next 1 or 3 years coming in. With regards to the second question on advertisement, and I was talking about a potentially flat or slightly negative TV advertising market overall. With regards to advertisement and then entertainment overall, we somewhat, for sure, aim for bringing that segment back to growth in 2019, so overall, with all the different levers that Max was talking about. And when it comes to the write-off, yes, I mean, it's a big number, EUR 200 million last year, and now we're talking about up to EUR 400 million to come. I mean, last year -- so 12 months back, we looked at the balance sheet and considered what are -- what is the write-off for the linear signal, yes, and literally looking on formats that are not used on our channels any longer because it's -- they are simply not suitable with regards to quality and volume. Now it's kind of a different ballgame because we took a similar decision to say for our strategy going forward in order to bring Entertainment back to growth, we need the combination of linear, digital with old own platforms and potentially, also third-party platforms, and for that, we need content that travels. And that is why we need to invest in more owned content to start with more local content that we can use in the linear signal, but then also on our digital platforms in order to make that bigger. That same is -- and, obviously, some of those slots that were originally planned for U.S. content, some of them blocked, and so we're talking about an additional overhang we have to address here. And to the last question when it comes to cash flow profiles, obviously, it's highly dependent on the respective contracts, but they are different cash flow profiles, some are bound to the respective contracts where some of the tranches are sooner or later. The only thing we wanted to flag here is, yes, there is an overhang, but half of that overhang is already until the end of the year on the balance sheet and paid for. The other one, like a EUR 200 million are still to come and to be paid for. But given the potential tax shield on the overall bucket, the net cash impact is at max EUR 110 million.
And we'll take our next question from Chris Johnen from HSBC.
I'd like to take them one by one, if that's okay. First on your mid-term guidance. I mean, how much of an economic backdrop do you have in your assumptions for the next 10 years? Maybe some general color on that.
Chris, this is Max. Well, look, we can't forecast the world. We build strategic plans for us and look to execute them. So clearly, we've modeled our plans under different conservative to more aggressive assumptions. We're confident we can deliver that. But of course, if the world hits another crisis point, then things may be different. But failing that, I think we're pretty confident that we can deliver the growth that we put into the presentation.
Yes. And then coming to that, I mean, also in terms of the gearing, I mean, I guess, most people would agree that the gearing is fine when EBITDA is growing, but we're now 10 years into the, let's call it, macro recovery. And there's -- well, as with it most things, the certainty we had on performance, I guess, can you run us through how you thought about the gearing with respect to the new sort of buyback strategy and whether the idea of maybe delevering how that has come into play, if at all?
Sure. Well, let me maybe start with 1 or 2 comments on the share buyback program, yes, because it's something we want to especially combine also with the growth strategy laid out because what we are asking for is simply another 12 to 18 months of patience also from our shareholder base, yes. Because we simply say we went through that strategy refresh process any way, came out and say, we have a clear plan on how to bring Entertainment back to growth, but -- and also use the nice dynamics in commerce in order scale that business and the diversification play going forward and also use Content Production & Global Sales as a more integral part of the entertainment piece, so in order to scale that going forward. So we're asking for another 12 to 18 months. And therefore, I also consider it feasible to announce that share buyback program with a EUR 15 million somewhat to be executed towards the end of the year. And then also to make that clear, only thinking about additional tranches, only if our investments, our organic investments and the potential accretive M&A transactions do not materialize to the extent possible, yes, but simply also signaling that we're willing to execute on that lever, that was part of our investor presentations also in the past. Now when we are looking at that, also when it comes to gearing, we think, yes, there will be a kind of a transition year in 2019, where we see the investments kicking in and then somewhat towards -- rather towards the third and fourth quarter, and then coming in to 2020, all the seeds we plant will somewhat materialize, and we see a pickup on those respective initiatives. And so there is some -- also some pressure on the gearing in 2019 coming from 2x, roughly 2x now, but potentially going up a bit. But then thereafter, once -- so in 2020, '21 and the likes, we are very confident on the respective cash flow profile and then also potential delevering when it comes to the group.
Okay, that's clear. And then coming to the whole execution thing. I mean, I don't want to sound disrespectful, it kind of sounds a little bit like you were running around like a headless chicken before. And now all of the sudden, you have a plan and you will just simply execute on it. I'm just wondering, how much out of the -- I mean, maybe there is an example you can give where you think that you can actually quite easily improve things because it seems hard from the outside to get a good grasp of how much of it is due to execution or simply due to things that are simply not within your control?
Yes. Sure, Chris. Well, look, I think, one, execution is a statement of the obvious because clearly on -- in '18, we're not delivering at the level that would satisfy us or you on the target and the changes that we had set. And I'd provide you with 2 examples. So I think, one if you look at NuCom Group, the focus on 4 big verticals and being very, very clear and very focused with that organization of how we want to achieve growth plans via our M&A strategies, focus and all those kind of things, I think we're already seeing is giving us more flow. And I think as Jan commented earlier, we have quite an optimistic outlook as we roll into 2019. I think the second example is if you look in our entertainment mix, we're -- clearly, the big opportunity is to build digital and smarter products that can overcompensate for what, in all likelihood, is a flattish to marginally negative core TV advertising environment. And that has been a bit hit and miss. In fact, if you go back in history, there's been great years where I think ProSieben has been leading the charge. More recently, I think the team and I are not as satisfied as we want to be, that we're doing that. Somebody commented earlier on the fact that we're lagging behind peers. And we have a very clearly defined plan broken down into specific building blocks with very clear teams and ownership dedicated against that, that make us confident that 2019 will look quite different.
Okay, that's clear. And then the last one. In terms of the local contents that you've done more recently, how has that done in terms of rating overall? Because -- I mean, you see the usual outliers, things that are working, things that are not working. But from your internal data on a sort of, yes, level basis, how has that performed?
Well, I think if you look at the -- well, first of all, if you look at our total rating performance, as I mentioned in my comments, I think it's quite pleasing. We've -- in the last few months, I think, we recorded the best ratings in a very long time. August was the best in 3 years. And indeed, September and October ratings were also very strong. The obvious question is, well, then, Max, why are you not translating this into more money? And the answer to that is, it takes a little bit of time. But I think it is an underlying confidence marker as we go into 2019. And those ratings, I think to a very good extent, are driven by some of the changes in our programming strategy, both from magazine formats where we have morning and Breakfast TV. But we have -- you come home from work TV, we have late-night TV through expansion of our entertainment formats and so forth. So all in, we're very pleased with that. Does that mean that everything we're programming is working perfectly? No, it doesn't and will never be that case. But all in, I think we're actually quite pleased with that. And the slate that's coming online as we go through fall and then as we go into next year is the strongest we've had in a very long time with some great German fiction that I think people will love to watch.
Our next question comes from Omar Sheikh from Morgan Stanley.
So I've got a couple of questions here. First of all, on the investment, maybe one for Jan, you highlighted EUR 70 million of net investment in 2019. I wondered whether you could just confirm does that includes investment in 7TV because I'm not sure I saw that called out in the presentation? And also, within that EUR 70 million, EUR 120 million is gross. I'm wondering whether you could just say how much of the EUR 120 million of investment is ongoing rather than just for 2019? That's the first couple of questions. And then just on the U.S. studio renegotiation. Could you just say how much of the output that you currently buy from U.S studios is represented by Warner? And how much is left to negotiate? And then maybe, if you don't get what you're looking for, whether it's in terms of digital rights or lower volume, but the same money, for example, would you be willing to maybe cut one of that -- one or more of those output deals and have just relationships with U.S. studios?
Sure. So when it comes to the investments, overall, we have the -- as I said, like the 3 buckets. So EUR 120 million overall, EUR 80 million in content and then the additional 2x EUR 20 million. And on the content side, I would consider, it recurring going forward. With regards to the other EUR 40 million, somewhat depending a bit on the respective scaling of those platforms. But when those materialize and also the respective projects picking up, I think it's also fair to assume that, that is a recurring investment going forward. Same holds true for the counterbalancing effect of about EUR 50 million. But especially in 2020 and thereafter, that is when the respective revenue uplift should materialize for the entertainment piece, which should also mean that from 2020 onwards, and obviously, we also expect growing Entertainment -- so absolute Entertainment margin going forward, yes, from counterbalancing that going forward. So we see a 2019 dip based on those investments, but then revenues and following profits will kick in. And when it comes to 7TV, correct, those are not somewhat included in the EBITDA because of joint ventures, so it's below EBITDA. Until now no specific number to be communicated because we're still somewhat working on the product. As Max pointed out, which will come into play, come live somewhat in the end of H1 2019, and still discussing also with our joint venture partner, but we at least from our side are willing to invest low to mid-double-digit million amount also in that joint venture. But again, let us first do our homework when it comes to structure and product and then give you a more clear execution plan thereafter, also allocating the respective investments on the time line.
Then, Omar, let me just comment on Warner and U.S. studio and in flow environment in total. So Warner is about 50% of the U.S. content that we're playing for the grid and thus they're a really critical partner. And we need to do 2 things here. Because on the one hand, it's very important that we secure a future in flow in a world whereas you know, many, many players are starting to constrain what they make available in content because they're building direct-to-consumer offerings of their own and all of those kind of things. And there's many great films and series that our viewers love and that are being made by the team at Warner. So one was create and underpin certainty into the future. You know do that in pricing that is stable in an environment where you know there is more competition for content, and overall, it's a price inflationary environment. And number three, make sure that we have qualifiers and a rights package that reflects the shifts and changes in our business and the landscape. And so that's why -- and at the same point in time, if you want right sized deal flow so that we get everything that we need but we don't get the things that we don't need. And that the team has worked on very intensively. I was in LA and met personally with the Warner team earlier this fall, and I'm really pleased that what is our biggest and most long-standing partner, I think has really reached out and tried to help us to shape our joint business in a way that is fit for use and right sized for the future. If you go beyond Warner, all our output deals are running out within the next year or so. And we don't necessarily have a need to extend any of those output deals, and we'll have a very careful look whether we do output deals or indeed, as many of our European peers have done have more limited kind of picking approaches. Thank you.
Our next question comes from Adrien de Saint Hilaire from Bank of America.
So first of all, Max, if you assume that core TV advertising declines by about 1% or 2%, but your entertainment business grows 0 to 5%, you need to deliver double-digit growth in the other areas of entertainment. I think distribution was declining in Q3. So you can you explain to us which areas have the strongest growth in the entertainment going forward? Second question is around NuCom. So in your new guidance, you expect NuCom to deliver an additional EUR 300 million of EBITDA on EUR 1.2 billion of revenues, which is a pretty high drop through, 25% drop through for an activity which normally has a relatively low margin. So can you explain to us how you're going to deliver this? And the last question is how much headroom do you have to finance M&A without raising further equity given that you are going to spend more money towards the buyback and you're probably going to be at the upper end of your targeted range by the end of this year or early next year?
Adrien, thank you. On the first, well, the simple answer is you're absolutely correct. We need to and we have plans to be able to, within our total entertainment portfolio, grow what is outside of TV core advertising double-digit or better. And that is mostly structured at around digital reach in video and performance products, where we are building both the product suite, and you let me talk about smart reach, but also underlying the tech capabilities and advertising technology companies that can deliver that, where we are seeing both encouraging growth but importantly big plans for the future. Two, on NuCom, I think it's actually important maybe to make the point that when you look at NuCom, some of these businesses are e-commerce. But some of these businesses are characterized much more as platform businesses. And if you look at PARSHIP ELITE partners, so I think that's more of a platform business with a good underlying profitability model. And indeed, if you look at Verivox, that's similar. And so when we looked at it, we felt confident that as we scaled the business to EUR 2 billion that then generating a 20% margin on EUR 2 billion is achievable. That's a margin that we know we can deliver today on some of these assets. And as we're running at scale, we're pretty confident we're delivering that. We will be judgmental through the curve, and that's a great advantage of having a portfolio, on where at different points in times in some assets, we optimize profit delivery. But also where different point of times because it's a race for scale, we use some of the investment firepower we have to get to scale first and then turn that scale into profitability. And then I'll pass to Jan on the M&A question.
Yes, I think when it comes to free cash flow, well, obviously, I mean, given the news we put out today when it comes to what is still ahead in the financial year 2018 and also the investment we plan for 2019, yes, I mean, there is some pressure when it comes to the leverage ratio, not saying that we max it out. But as said before, somewhat, I mean, from the 2x, somewhat a bit ahead, especially as free cash flow is impacted by some of the cost from the restructuring program, some potential cash-out now from the studio negotiations and the investment somewhat next year. But we feel comfortable that especially thereafter soon in 2020, in 2021 and the like, we generate the respective cash flow and in combination with a lower dividend payout, also give us the required headroom in order to acquire all those assets not baked in, in our 5-year financial plan. And we'll elaborate a little bit more on that also at the Capital Markets Day. So I think overall, we should generate a free cash flow from our businesses in order to do the required M&A without raising additional capital.
Okay. And if I could just squeeze in one more, Max, how much of your ad revenues are generated from U.S. content? And on that, would it be reasonable to expect that you're going to lose that, some ad market share, in the first years as you transition away from U.S. content to local content?
I'm not sure I actually have the precise numbers to answer that. But maybe just to put it in perspective, if you look within our total grid, there or thereabout 55% of our total grid is U.S. content, about 45% is German. But what's important to understand is, of course, the total, it looks at 24 hours. If you look then underneath, for example, you look at SAT.1, which is one of our 2 core channels, actually already today 80% of everything that we play on SAT.1 is local and largely generated by us. And if you look at pre-prime and prime time, which is very, very overproportional part of the total advertising that we generate, that is where the majority of our local investments will be focused and also that we have the content that people love to watch when they come home and want to be informed and entertained and all of that. That's the best answer I can give you.
Our next question comes from Conor O'Shea from Kepler Cheuvreux.
A few questions, if I may. Just a follow-up, firstly, on the local versus U.S. content, understand that you're in negotiations with many of your studios, so it's difficult to say. But if we look at the EUR 80 million additional local content investments, which are recurring, can you say directionally with the U.S. output renegotiations and so on, what do you expect to spend more in absolute terms with -- on U.S. content going forward or not obviously you have to broaden the array of rights but by less proportion at least? Could you give us a sense of whether maybe 2020, some of the extra spend on local content will be compensated for that decrease in absolute terms on the U.S. content? Second question, just in terms of your Slide 25, the building and the building blocks of -- summary of the building blocks to grow to EUR 6 billion revenues and your share of non-advertising revenues has gone from sort of 40% to 50% over 5 years. That doesn't sound like a lot. And I think it implies that your advertising revenues grow cumulatively by about 25%. Now you said you expect maybe the TV ad market to go down, there will be addressable advertising and so on offsetting that. But we have a sense that maybe that's with the objective to be stable in terms of overall ad revenues or your online ad revenues are not growing and so on. Is the increase of 25% over 5-plus years not too optimistic and unrealistic at this stage? And then the last question, just very quickly on the German TV advertising market, seems to be beyond the end of World Cup effect on public stations a serious slowdown in the market in September, October, November. RTL's numbers in Germany were also weak this morning. Can you give us a little bit more detail on just the extent of that slowdown?
Yes. So maybe jump -- let me quickly jump on question number one first, the local versus U.S. or, let's say, owned versus additional revenue investments. So the EUR 80 million recurring, which somewhat roughly brings us in 2019 to some program spend of EUR 1.1 billion of program costs. And then especially with the new Warner deal and the price structures included, we do not anticipate inflation from the U.S. content then going forward, at least from the Warner piece, which roughly accounts to 40% to 50% at the moment. And then as we have the angle with Red Arrow Studios, where we also plan to increase our own grid share and thus cut out at least 1 middleman, we also have some flexibility when it comes to program costs. So I think we see the shift in '18 and '19 up to a level which should then be rather in a stable range going forward. That's the first one. When it comes to advertisement, and Max may jump on in a second, you correctly mentioned that we're driving up on Page 25, thinking about driving up the share from 40% to 50%, which it simply means that with a stable of slightly declining TV advertising markets, the others should increase. And that is especially bound to some other thoughts we have on here, the smart advertising share, which we anticipate to drive from 5% up to ambition level 25%, which could give you up to 20% uplift on that business going forward, which somewhat translates into a CAGR of, depends on how bullish you are, 3% to 5% over the time, depending on a stable reach. Yes, so if you would think about a declining reach on TV and then if you are successful when it comes to the digital platforms and the like, stabilizing the reach or even increasing that, that is roughly the triangulation. But please also keep in mind that we have additional very like highly -- like high-growth businesses in the entertainment piece overall. Think about the AdTech business, where we did the recent transactions. And they are developing really nicely at the moment. And also distribution piece, which, yes, was stable in the fourth quarter. But that was only an anomaly, let's put it that way, because we saw some higher churn when it comes to freenet, which is also somewhat normal after 12 months of implementation because the first vouchers are simply running out, something we've also seen in 2015. So we're also very bullish on the distribution piece going forward and that are obviously 2 elements that will also fuel that growth going forward, even if you're not as bullish as we are on the smart reach piece.
Let me just comment on advertising for a moment. Because if you look at -- if you want to know how we're looking to diversifying the portfolio, it's quite deliberate. So actually if I do it in a slightly different order, we're very seriously pivoting over -- or pivoting to digital. And I think that's the 30% to 50%. And if we do it well, by the way, I wouldn't be surprised if 50% ends up being a bigger number than that. On advertising, non-advertising, I think it's about right balance. And if we can have a business that is half in advertising and half in non-advertising, I quite like that diversification. And we are "overall bulls and not bears" on advertising. And that goes to back to my market argument that in Germany alone, there's EUR 21 billion in advertising being spent. And that number is not going down. If anything, that number is going up. And there is a very difficult to get number of further promotion and other budgets being spent that I would estimate probably will double that. And we're capturing quite a small share of that today. And that's because of the constraints in how we can bring reach to life. As our business gets more digital, as TV gets smarter, those constraints go away. And if we can deliver and develop the right smart products, I think we have very meaningful opportunities to capture a higher share of total advertising because we know the products we have are meaningfully better than the alternatives that money is being spent on today. Last comment on the ad market, well, we run a business vis-à-vis trying to forecast the market. And I think yes, the market has been flattish and also our look-forward is flattish to marginally negative but also not much worse than that. But what we are doing is very importantly building -- putting our building blocks and business model together in a way that we can cope with some underlying softness in the core TV advertising market by having a broader digital portfolio, smarter products and all of that. Thank you.
Our next question comes from Giasone Salati from Macquarie.
I think it's a bold step absolutely in the right direction. I only have one question, please. You speak about Hulu of Germany and you also speak about your contacts with the other broadcasters in Europe. Can you tell us about your long-term plans in terms of trying to bring that to a Hulu of Europe? And what are the frictions? What are the potential openings you already have?
Yes, thank you. Well, I always use Hulu as an analogy because I think it's the best analogy I've seen around the world. Where in a way that I think is meaningful and successful, what one in the past would have called "old broadcast companies" has come together to create a very meaningful digital streaming and platform product that consumers use, that consumers love and that I think has a sustainable place in their universe irregardless of what the Amazons or Netflixes of that world do. And so I think that's a good analogy. We're very focused on building the "German Hulu" first because that is German-speaking, maybe the better way to put it, because that's our core center of activity today. And that's what we're doing, together with Discovery, we have a team of 200 people. And I think Jan commented about our willingness to invest in it. And yes, we have very active discussions in the background in getting everyone to join, which is as one might imagine not straightforward as it never is. But I think the strategic rationale is very clear. To your question then on Europe, do I think there is meaningful logic somewhere down the road, but I think it's in step 2 and not in step 1, to look at what everybody in Europe needs to do? And you will have seen Carolyn's comment on ITV. You will have seen comments in France. And so everybody is trying to create, if you want, a national champion streaming platform. And of course, the underlying tech stack investments, technology and so forth will not be all that different. And so one reasonably, I think, can surmise that there are opportunities to synchronize and drive that. Do I think that will happen tomorrow morning? No, it will not happen tomorrow morning. But again, does it make strategic sense? Yes. And we have active conversations that took at how we do that in the future.
Our next question comes from Catherine O'Neill from Citi.
I just wanted to come back on NuCom, where you talked about aiming some of those to be unicorns and comparing to sort of Tencent and Alibaba. I just wondered why there's no organic and incremental organic investment in NuCom. I know you talked about M&A. But unicorns tend to typically be loss-making. If you really want to drive growth there, I would have thought there might be some additional organic investments. And additionally, in terms of M&A and expansion in NuCom, obviously the eharmony acquisition is taking you beyond Germany within the dating area. And are you looking at expansion beyond Germany for some of the other assets at all?
Yes. And then I'll let Jan comment more. It's a very good question. And the answer is yes, we absolutely are planning and have built in organic investment and growth initiatives within NuCom. I think the advantage of having a portfolio is that we can balance those investments in some of the assets with overperformance and others. And thus we're confident that in totality, we can drive very good top line growth, invest for future growth organically and at the same point in time, be accretive at the bottom line. In terms of our view beyond Germany, again the answer is absolutely yes but thoughtful and where the rationale is clear. And so I think what we've done with the eharmony is a good example, right? Because the rationale here is we have a business model and a team that is world-class, already has proven once that they're able to integrate an asset, create synergies and build a better business model. There's a unique opportunity to acquire what is quite an iconic brand with future awareness in the biggest market in the world and do that at what I call a reasonably good value and put all of that together for future growth. I think where opportunities like that present themselves and we're confident that we know how to win beyond the borders of Germany, I think we'll absolutely look at that. Jan?
Yes. Only one additional comment, combining actually the 2 questions, right? I mean, our ambition for each and every vertical, and especially the leading efforts, is to say, first, we have to strive for operational excellence which then transforms into organic growth, which then qualifies you for M&A money to be allocated on those respective efforts. But -- and when it comes to the regional scope, it's clear. I mean, first of all, those verticals should conquer the DACH market, the Germany, Austria and Switzerland. And we have that clear advantage that we can use our TV synergies on that one in order to fuel the verticals. And when we reach that point, where we say, okay, we have like leaders in the respective markets, then we're looking at, okay, is it possible to go unicorn, as you quoted. And then we think, okay, let's look at it, what are the best options? Is it like an organic internationalization? Is it an opportunity, for example, like an eharmony, where we could say, okay, bring 2 efforts together where we can use the playbook we learned on our existing assets and simply put it on the other one and can create additional synergies on a global scale quickly? And then we do not take any options off the table before hand, basically must make sense for the respective verticals in order to reach that final goal to create unicorns for each and every vertical.
Our final question comes from Richard Eary from UBS.
I've got a few questions actually, apologies for the croaky voice. If I can just ask you one-by-one, if you look at the local programming investment that you said you're going add EUR 80 million, when we get to 2023, what has the local versus U.S. mix become? That's the first question.
Yes. Look, our long-term target is 50-50. And it may well at some point in time swing more towards 60-40. But in a funny way, that's actually not the most meaningful measure, right? Because if you look at the total grid, that's 24 hours. The value of different time slots in this grid is dramatically different than -- so we're -- and they're very different on different channels because they serve different viewer audiences. So what we're really focused on is making sure we have the right program that our viewers want at the time they want it. And most of our local investments are going in pre-prime and prime, where that really makes a difference. And by the way, at the same point of time, yes, the flow-through of more local investment is stickier formats. And as we go more digital, that really matters because that pre-prime soap that you love and that you follow, then also has huge digital following. That wonderful German entertainment program that you become a fan of has big following. And that's what we're seeing today with formats like Germany's Next Topmodel or formats like The Voice. And we'd like a few more of those.
Just reading into that, does that mean that the average cost per production hour for your local investments could be more than what you're getting at the output deals today?
No, not necessarily. Because we also try to leverage Red Arrow Studios a bit more in the future. As we say, we want to increase our own grid share from 13% up to above 30% going forward. And maybe linking that to the comment Max just made, in the future, especially by 2023, I mean, they're talking potentially about highly different entertainment piece, right? I mean, so at the moment, it's mainly linear TV with some additions in the digital space. Going forward, and that is the ecosystem we're trying to build, we're talking about a system where you have a seamless integration of linear, digital platforms, owned digital platforms and also third-party platforms where content travels and might also originate, at least for certain part, in the digital space and travel back. And when you look at that, it's not really, at least from my perspective, in 2022 and 2023, we're not talking about a split of U.S. versus local any longer, but it's rather the question of, okay, what is the split of owned content versus bought content in order to monetize better and actually getting more of the overall value chain? And that is what we are striving for. So potentially, split U.S. and local might be 50-50. But our own grid share and the overall share of content we produce and can also use and travels, that should go up.
Just on that, is there any way that you can give us a flavor in terms of over next few years in terms of what type of content you want to produce? Is it scripted? Or is it non-scripted? So we get a sense in terms of what that means. But also how do we think about the cash flow conversion from that? Because historically, there's obviously been a lag in the P&L versus the cash flow. How does that change with more investments into local?
Well, I would put it that way. I mean, from a cost perspective, we anticipate to see that ramp up somewhat in '18 but rather '19 with a step-up. And then with the new Warner deal we negotiated and also the respective pricings in there plus an increasing share of owned productions, which will then mean that we're rather talking about somewhat stable program cost then going forward. When it comes to the respective formats to be produced, I mean, obviously as long as the platforms we are aiming for are still not somewhat light and ramped-up, then for sure those investments will first go more into linear formats that can become bigger and then also move into the digital space like the big brands that Max was commenting on taff, Galileo and the likes. So I think that will also gradually shift going forward. And so when we're talking a couple of years out to 22, '23, I mean, obviously there will be also somewhat purely digital formats to be produced and then, obviously, you also circle back into linear space.
And maybe, Richard, just to add one comment because I think we're all aware how much people's viewing behaviors are changing. I think one of the great opportunities, if we can build a big, successful streaming hub, both if you want TV content flows down or into that, and I as a viewer that can access that content whichever way I want and how I want it. And I think we can do this in a way that is very markedly different to what others are doing. But at the same point of time, a lot of digital content can flow up. If you look at Studio71, which we don't talk that much about, but it's actually terribly exciting because we are producing both in Germany and internationally about 1,700 channels with digital-only format. And some of those formats have as many followers in the digital-only world as the TV things that maybe all of us know. Now a lot of that business does not monetize terribly well because all of it is viewed on YouTube. But of course, as we're building more scale in platforms and we have an opportunity, if you feed that digital-only, which by the way is also younger, think of it as TV of the future business, into it and combine that with the things that we're really good at, by the way, underpin all of that with something that, I think, we have an advantage on the Netflixes of this world, which is we have 25 years of experience, what new people are in, at what point in time through the day, the week or the year, what they want to see and when they want to watch. And I think we can bring some of that to the digital world.
Can I ask you a question about the Warner deal? I'm not sure if I've heard this correctly that you said that obviously once we get into 2019, up to about $1.1 billion of content, can you expect that obviously to be less inflationary pressures? Are you saying that there's no price inflation in the Warner deal? And additionally, within the Warner deal, how much of that deal is related to new content versus catalog?
Well, I mean, especially because -- I mean, obviously at the moment, we're still in the discussions with the other studios and some additional partners out there. So I think we can give you a better quote overall on an aggregated number for the years thereafter somewhat with the next call, when we also give you more clarity on what is the actual number. We are quoting now up to EUR 400 million, the actual number coming out and what is the treatment then on the balance sheet and their respective P&Ls. But then we can also give you an aggregated number when it comes to price inflation. The only comment that I wanted to make is with the new Warner deal, which is somewhat equivalent to 40% to 50% of the U.S. commitments we have at the moment, that is -- it gives us a rather stable development going forward.
Okay. Just one last question in terms of just on the guidance, so I'm clear. The EUR 20 million of EBITDA growth for NuCom and the content business in '19 or the implied number, i.e., that's decline of EUR 50 million EBITDA and entertainment being minus EUR 70 million, does that include any synergies from the eharmony deal? So that -- and additionally, how do you then take EUR 20 million of the increase within those 2 divisions, the EUR 350 million increase over the next 4 years, so it's quite a big delta?
Well, I mean, yes, in 2019, we obviously have counterbalancing effects on NuCom. We're integrating a still somewhat loss-making or plus/minus business and then have some restructuring to do over the year. And the cost will flow through. And there should be some synergies coming in. But I think the EUR 20 million I was talking about, only on the eharmony deal, is something that you would see over time spent of, let's say, 2 to 3 years. As we also saw with -- when we integrated PARSHIP ELITE Group, so when it comes to that, to answer your question, not so much synergies on top baked into the 2019 numbers because those ultimately are somewhat counterbalanced by additional costs we see in that year.
Okay. And sorry, lastly, how did you get EUR 20 million in '19 as an incremental, so essentially EUR 350 million over the 5 years? Is there a massive delta between 1 year's growth to the growth for the next 4 years?
Well, it's a combination, right? We see especially then, when we take the vertical of PARSHIP ELITE Group and eharmony, so the dating piece effect, we see significant organic leaders in order to drive up the respective margin. Where with other businesses we focused somewhat a bit more on the growth side, where we still see things circling back to the operational excellent piece, we mentioned it could be somewhat leaner, more efficient along the way and obviously some of the investments we did in the past to materialize going forward on a stronger bottom line. So I think overall, we are confident that the right combination of: a, organic improvement; but also additional M&A in the respective fields to actually reach the number you see on the slides. But we'll obviously give you more details also with the respective NuCom team on the ground next week at the Capital Markets Day.
As there are no further questions...
Ladies and gentlemen, as this was the last question for the day, we'd like to thank you for your participation. Before we close, I my hand over to Max for some concluding remarks.
Thank you, Ralf. Well, look, thanks, everybody, for joining in. I hope we see many of you at Capital Markets Day, and indeed the subsequent tours that we're doing. And thank you for all of your interest. What are we doing here, right? What are we doing is I think we are facing up to and embracing reality and are really focused on what consumers and customers want and how we can serve them better and are making the investments so that we can deliver sustainable growth and a really exciting future. And I just wanted to close and reiterate that I have, as indeed does the team and the board, a very deep conviction that we can lead that future, that we can deliver exciting growth. And that's what we'll get on to do right at the conclusion of this call. Thank you very much.
That will conclude today's call. Thank you for the participation, ladies and gentlemen. You may now disconnect.