Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG Q3 Earnings Call. I will now hand the call over to your host, MTG President and CEO, Mr. Madsen Lindeman, who is joined on today's call by MTG's CFO, Maria Reddin.
Thank you, operator, and good morning, everyone. In order to make this call as helpful as possible for you, then please do follow the presentation slides that we have put on our website at mgg.com, which I will refer to during today's call. So as you can see on Slide 2, our story is simple. We are transforming MGG from a leading traditional TV broadcaster into a leading digital video entertainer while growing sales and profits and returning cash to shareholders at the same time. If I can now turn to Slide number 3, where you can see that we are today reporting the highest Q3 sales in MPG's history.
This record is driven by 7% organic growth, which is the highest for more than 5 years and clearly shows that our products are more relevant, more available, more popular and more valued than ever before. Profit was down as anticipated and as we discussed when we announced our Q2 results, and this is due to the significant investments that we have made in our front end offering, the expansion of NTTX, the ongoing adverse currency effects and the disposal of profitable businesses over the past year. The investments that we have made in sports rights and board original programming are the foundation for our future growth. This is why we are able to retain our full year outlook for accelerated sales growth and higher profits. As we have said before, Q3 was an exceptional quarter in terms of major investments in a seasonally small sales quarter.
Our 2016 outlook implies a strong ending of the year, which is exactly what we expect. Our announcement last week on the acquisition of 35 percent of InnoGames is another important step in our strategic transformation. We now have market leading positions in 3 global online verticals in e sport and multiplatform networks and online gaming, which are all complementary. Furthermore, our presence is now extending up the value chain as we control more and more IP through the content and communities that we are creating. If I can ask you to turn to Slide number 4, then you can see that the key takeaway from this is that we are able to capitalize on the shifting consumer behavior and rising customer demand for more and more video entertainment online, on mobile and on demand.
Yes, we see lower linear gearing levels. And yes, our satellite subscriber base is gradually getting smaller, but OTT gearing and subs are up, retail and wholesale prices for premium content are up, and revenues for our e sport and NPN operations are up. Our digital sales were up 60% on an organic basis in Q3. Our published were down, as I have said, and the major impact were in the Nordic Entertainment and NGGS. This did, of course, include the SEK 50,000,000 of currency headwinds this quarter, most of which impacted our Nordic Entertainment business.
The year on year comparison also includes the impact of the various businesses that we have bought and sold. The Russian and CIS Pay TV operations that we sold in Q4 2015 contributed $46,000,000 in profits alone in Q3 last year. If you turn to Slide 5, you will see that the Nordic Entertainment sales were up 11% on an organic basis, and this is our highest sales growth in the quarter since Q4 2010. Our Nordic free TV and radio sales were up at constant exchange rates. Linear viewing levels declined in all three markets, but at more moderate pace than in the first half of the year and were more than offset by higher prices, healthy AVOD growth and the advertising sales boost from the Olympics.
All of this also contributed to an all time high Q3 revenue quarter for our Swedish free TV operations. Our Nordic Pay TV sales were up at constant exchange rates due to ViaPlay and total ViaSat sub growth and price increases. We reached a broader distribution agreement with Telia in August to cover our new sports channels in Sweden. This adds to the agreement with Telenor and Convent and reflects the demand for our enhanced sports offering following the investments that we have made. Wireplay usage continued to grow, and we again broke the record in the quarter for the number of startup streams for a single day as well as for a month.
Biophage churn levels were stable compared to last year and clearly shows that consumers value the content investments that we have made. Not only do we have a very comprehensive sports offering, but also the start of a steady stream of fire play original drama productions That includes The Swedish Big, The Big Experiment this year and Hacken and Sugar Suite next year. I've talked about the profitability already, and the lower profit in Q3 reflected the investments in the Olympics, the ice hockey World Cup, our overall enhanced sports offering, the new channel that we launched and the ongoing currency headwinds.
If I can ask you
to turn to Slide 6, you can see that the sales for our international entertainment business were up 8% on an organic basis but down on a reported basis due to the divestments that we have made over the past year. Operating profits were at the highest level for our Q3 since 2010, and the underlying performance was even better when adjusting for the businesses that we have sold in the last year. International free TV and radio sales were up at constant exchange rates with double digit sales growth in both Bulgaria and the Czech Republic on the back of continued audience share gains. The sale of our African free TV and production business has yet to close, but we do expect that to happen in Q4, which will result in a capital loss of approximately DKK50 1,000,000. Our international pay TV sales were down at constant exchange rates, which was due to the disposal of the international mini pay businesses.
At the end of last year, sales were up on an organic basis, and we have also now launched bioplay across the Baltic region. If you turn to Slide 7, you can see that in the June, FTD Studios sales were down at constant exchange rates. This underlying demand for scripted drama productions and brand entertainment continues, but the production schedule is due to Q4 this year, and we did experience a slowdown in the Norwegian event market. However, our studio business delivered significantly improved profitability levels with an 8% margin, and we are now looking forward to our best ever drama lineup, including Lobel, Midnight Sun and a second season of Bigger Than Lovesa. If you turn to Slide 8.
FTG sales were up approximately 35% on a pro form a basis, with our e sports business generating over 40% revenue growth. Turtle held a number of successful events during the quarter, inclusive ESL 1 in Kolonial, which had over 22,000,000 unique viewers consuming over 30,000,000 hours of content. We further extended the distribution of our e sports channel in Europe and Africa, and Dream has continued its Dream has continued its expansion with 3 new cities in Europe and its first ever Canadian event and also concluded 3 new venues for its North American expansion in 2017. Sprague and Zummin continue to see good demand for brand entertainment and influencer campaign and also benefiting from the new distribution partners, Seijing Board of Multiplatform presence. The operating loss of DKK69 1,000,000 was higher than we initially expected, but it did include M and A cost in relation to the InnoGames acquisition, and we will have additional DKK 20,000,000 of M and A cost in Q4 relating to the InnoGames investment.
Once the InnoGames transaction is closed, we will report our share of the company's net income as associated company income, which will be included in MGGX operating profit.
It is fair to say that
we are investing at an accelerated rate during the second half of this year because we see such an opportunity right now. These investments and the resulting sales output do not exactly match, of course, not just because we are now launching more and more large scale events, introducing new national leagues and bidding the support infrastructure, including new studios. We have produced almost double the amount of hours of content. We have doubled the number of national championships and doubled the number of studios that we have since Q3 last year. That concludes my comments.
So I will now hand the call over to Eunha Maria for your comments.
Thank you, Jorgen, and good morning, everyone. If I can please ask you to turn to Slide 9. Reported sales were up 8% in the quarter. This included 7.4% organic growth, a 6.2% contribution from acquisitions, a negative 5.7% from divestments and a minor FX translation impact as the depreciation of the sterling was offset by the appreciation of the euro. Operating income was down compared to last year as anticipated and this was a function of our investments in content and FTGX as well as the $50,000,000 negative FX impact.
Please also remember that the year on year impacts of the disposals that we made, these contributed to $46,000,000 of profit in Q3 last year. Excluding these factors, you can see that we have a healthy underlying profit development. If you can turn to then Slide 10, our cost transformation is on track and we generated savings over $107,000,000 in Q3. We continue to expect savings of approximately $450,000,000 for the full year, so an additional $140,000,000 to come through in Q4. The cash flow impact on restructuring was approximately $60,000,000 in the quarter, taking the total third party to $390,000,000 dollars Looking forward, there is around $130,000,000 of cash still to be paid out, of which we expect around $60,000,000 in Q4.
This would then take the total cash cost to approximately $520,000,000 which is slightly lower than our previous expectations of $556,000,000 dollars If you then can turn to slide 11, cash flow from operations was down due to restructuring costs, which I just referred to and due to the payment of content price. We will have a higher level of content investment this year, but our business continues to be very capital light. CapEx amounted to $75,000,000 in the quarter and we expect around $300,000,000 for the full year, which will be equivalent to less than 2% of sales. We ended the quarter with a net debt of $2,100,000,000 which is equivalent to 1.4 times trailing 12 month EBITDA before items affecting comparability. If you then turn to Slide 12.
Our outlook for the full year for 2016 is, as Jurgen just mentioned, unchanged. We continue to expect accelerated sales growth and higher profits. We do expect a negative FX transaction impact of approximately $240,000,000 for the full year, which is slightly lower than previously expected and would imply $40,000,000 isolated in Q4. The average U. S.
Dollar rate that we expect to pass through the P and L in 2016 is approximately SEK 8. Based on current spot rates and net of hedges, we do expect a transactional headwind of approximately NOK 75,000,000 in 2017. So that is it for my comments. And back to you, Jorgen.
Thank you, Maria. And if I can ask you to turn to Slide 14, everyone. So in summary, we have again grown our sales to record levels, and we have reported our highest organic sales growth in more than 20 quarters. We have never had a more relevant, more available, more popular and more valued product offering than we have today. Profits were down and anticipated, but this is a function of investment, currency and disposals.
We do expect very healthy top and bottom line growth in Q4, which is why we retain our full year outlook for accelerated sales growth and higher profits. The recent acquisition of InnoGames complete the circle when it comes to our into the gaming space, and we now have leading positions in 3 key global digital verticals as well as an increasing inventory of high value IP in our digital content creation capabilities and communities. That concludes our commentary on the results. Over to you now then, operator, to start the Q and A session, please.
Thank you, sir.
I have a couple of questions, please. First of all, if you could somehow give some more information on how the Summer Olympics impacted the top line, especially for the free TV business in the Nordics in Q3? Secondly, the operating cost was down in international entertainment. Was this at all sales and marketing related? Or is this more of a structural change?
And then thirdly, MTG Studios has, for the Q2 reported really solid margins. This business usually the medium term margins for this business?
Yes. When it comes to the Swamor Olympics, you are right that it had a very positive impact, of course, on the revenue for our free TV business. And but we have not quantified that how much specific it was, which was related to the Olympics. But obviously, sponsorship and so forth were higher than normal because that is, of course, very attractive to be around the Olympics and, of course, the World Cup in Aisla as well, which was a very important driver as well. But if you look at the overall growth for the Nordics, then it was also Norway actually contributing, as we said.
So we had strong growth in Norway, and we had strong growth in Sweden. And the Summer Olympics then, just to give you the harsh flavor, of course, helped our Pay TV business as well. So we have now more customers in Q3 2016 payment customers than we have in Q3 2015. And we, of course, have a very strong Viaplay quarter as well, which was the 2nd best net intake of customers in the history of Viaplay. So I hope that gives you some granularity on the impact of the Olympics.
And then on the studios, yes, they are performing very well, and we have very strong pipeline of very interesting drama and a strong lineup of customers as well. This quarter, we were impacted as well positively by the deal that we have made with Lionsgate when it comes to Swedish DICK'S, the series which we have made together with BioPlay. So there was a positive impact there as well. So going forward, I think what one should look at is around mid single digit margins for the content business. That is what we have been looking at so far.
On Czech, I think, Malheer, you can Yes.
If I can then comment on the OpEx in international entertainment, which was on organic level down year on year. And I would say that is a combination of the effect of the cost transformation, which we also executed on a much smaller scale in and the timing on both the programming and marketing investments.
Can I just follow-up on the Lions Gate deal? Can you quantify the impact of that in the quarter?
No. We have not released that, but it was a fine deal. But as I said as well that we it is a mid single digit margin you should look at. And the most important thing, as you can see as well, is that the businesses that we have or the dramas that we're having is doing very well. So that, of course, is good news for the future.
We will now take our next question. It comes from Victor Oblund from SEB. Please go ahead. The line is open.
Yes. Good morning and thank you for taking my question. So just first a quick question here. You said that you expect extra savings of €140,000,000 in Q4 this year. And I was just wondering, last year, if I don't recall wrong, you some savings in Q4 that affected faster than you thought.
So I was just wondering if this extra SEK140 1,000,000 or including those from last year? And then if you can say, do we see the full effect now from renegotiated operated deals with Telia, Com Hem and so on in Q3? Or is it like more effect from that to come? And then on international, which is doing really good, is it Bulgaria and Czech, which is the main bulk of EBIT here and the countries we should look at to think around how this will develop? Or is there other important countries here you think?
Yes, I have a few more questions. But maybe just one then on do you still expect M2GX you spoke about this, but I didn't hear. My phone cracked up a bit. M2GX outlook for next year, do you still expect declining losses towards well, further towards 0 than 100 to give a wide range? Or how do you look on that?
And then lastly, any content renegotiations that we could see talks around in 2017? Or is that further out?
Thank you. Yes. I will take most of them. I think when you look about the operator deals, that is, of course, something which is ongoing. So meaning that you are discussing opportunities and you can see that our content is, for instance, the new sports channel is now available in some of the packages in Sweden.
And then, of course, over time, hopefully, will generate more customers and therefore, more revenue. So of course, that is something where we have made deals, which hopefully, going forward, the next years to come, will help the underlying development when it comes to customer intake and revenue. So it is not a one off in a quarter. When you look at the CE, yes, it is so a fact that particularly in Czech, it's a big EBIT contributor in that region. When you look at Bulgaria as well, sorry.
And when you look at MGGX revenue for 2017, yes, we do expect it to continue to grow, and we do expect losses to be lower than in 2016. And then when you look at the content renegotiation, yes, it is ongoing. There's nothing immediate coming up, which but it is every quarter. You can just see we just prolonged the NFL. So there are constant negotiations.
Luckily, as you can see, we get more and more customers in. So I think we have made good decisions when it comes to what content that we have acquired.
And then to comment on your questions on the savings for Q4, I would say that they are not incremental to the savings that we had last year. What we're saying this year, we will in total then realize SEK 450,000,000 of the SEK 600,000,000 savings that will have a full run rate next year.
Okay. So we should check what you said around Q4 last year and then compare that to the $140,000,000 more or less?
Sorry, could you repeat that?
No, it's just it's no worries. But just for me, one last question on the PayFaculty uptick. And you said you had more customers now than you had Q3 last year. Is that more customers in total in the base overall on in or is it more on premium packages, let's say, sports related packages? Yes.
It is more customers when it comes to ViaPlay, of course, and it is more customers as well when it comes to the premium base combined. So I think that is, of course, very good news for us.
Yes. Okay. Thank you very much for answering many questions.
We will now take our next question. It comes from Rasmus Engeb from SEB. Please go ahead, sir. Your line is open.
Hello. Can you hear me?
Yes, we can hear you.
Excellent. SHB that is actually. Anyways, I was wondering, firstly, could you give some sort of indication on what the Olympics meant for sales costs or EBIT? Was it a how did that really corrupt the numbers in this quarter? That was the first question, if you have something to say on that.
Yes. Of course, the Olympics had when it comes to cost, had an impact on particularly free TV because the whole cost is taken in that quarter when it comes to the free TV business. And it positively then corrupted the numbers, Hasmooze, when it comes to the increase, of course, in revenue because of the sales advertising sales and sponsorship and bioplay customer intake and so forth and the online business as well, bioplay. And so it has a very positive impact all over the Olympics. And of course, as we have said as well, we do look for a strong Q4.
And of course, there are some of the customers that we get there as we help making sure that Q4 also is a strong one.
Yes. I was just wondering, if I look at free TV, if I take out the Olympics, I assume that it was more flat or slightly down. Is that sort of that a fair assumption?
In terms of revenue or in terms of Yes, yes, revenues. Yes, yes. No, that is not a fair assumption, honestly. So it's quite a good quarter for us, and we are delivering good targets actually. So that actually Sweden's seen 3 to be Sweden's best quarter ever in the history was quite good as well.
Okay. And then my second question is, you now give a very sort of firm outlook for the Q4. As far as looking into 2017, what are the stumbling blocks that we could see there in terms of either revenues or costs that you are aware of today?
Yes. That was a very broad question. I think when we look at the different product segments, I think it is we have very good pace it comes to the Nordic business. Also, you can see with the 11% growth that we have in the quarter as well, and we are forecasting a strong 4th quarter as well. So good content and good distribution deals in place and good products.
So I think that is, of course, something we are looking forward to continue that development in 'seventeen. The same goes for the content business, also looks strong and the CE business, there's no reason why we should believe that it's not strong either. Just so recently some update on the foreign economy as well, which also look promising for 'seventeen. So I don't know. It's difficult to say the something, Brooks.
I think it I think the businesses and the products that we're having, I think they look very promising for 2017. That would be my take on it.
But you are carrying some negative FX with you into 2017, I assume. Is that fair to say at least in the Nordic business?
Yes. It's too correct to say that. I mean what we now see is the 75,000,000 hit on the FX side, but that doesn't take aside what you're already saying that there's a lot of positive momentum in the business. And we're going to have a strong Q4 now that we look forward to.
Okay. Thank you.
That concludes the question and answer session. I will now hand the call back to Madsen Lindemann for his concluding remarks.
Thank you all for your time today. We will announce our Q4 result on February 2, and I would like to take this opportunity to invite you all to our Investor and Analyst Focus Day on November 10 in Stockholm, which will also be webcasted live. We will be focusing on our Nordic business and digital businesses. So thank you for your continued interest in MGG, and we look forward talking to you and meeting with you soon. Have a great day.
That concludes today's conference call.