Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG Q3 earnings call. At this time, all participants are in a listen-only mode. After the presentation, participants will have the opportunity to ask questions, at which time instructions for the question and answer session will be given. If any participant has difficulties hearing the presentation, please press star followed by the digit zero for operator assistance. I will now hand the call over to your host, MTG President and CEO, Mr. Jørgen Madsen Lindemann, who is joined on today's call by MTG CFO, Maria Redin.
Thank you, operator, and good morning, everyone. In order to make this call as helpful as possible for you, please do follow the presentation slides that we have put on our website at mtg.com, which I will refer to during today's call. As you can see on slide two, our story is simple. We are transforming MTG 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 ask you to turn to slide number three, where you can see that we are today reporting the highest Q3 sales in MTG's history. This record is driven by 7% organic growth, which is the highest for more than five years and clearly shows that our products are more relevant, more available, more popular, and more valued than ever before.
Profits were down as anticipated, and as we discussed when we announced our Q2 results, this is due to the significant investment that we have made in our content offering, the expansion of MTGx, 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 broader 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 investment 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% of InnoGames is another important step in our strategic transformation.
We now have market-leading positions in three global online verticals, in esports, in multi-platform 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 four, 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 viewing levels, and yes, our satellite subscriber base is gradually getting smaller, but OTT viewing and subs are up, retail and wholesale prices for premium content are up, and revenues for our esports and MPN operations are up.
Our digital sales were up 60% on an organic basis in Q3. Our profits were down, as I've said. The major impact were in the Nordic entertainment and MTGx. This did, of course, include the SEK 50 million 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 SEK 46 million in profits alone in Q3 last year. If you turn to slide number five, you will see that the Nordic entertainment sales were up 11% on an organic basis. This is our highest sales growth in a 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 a 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 and [Com Hem] to cover our new sports channels in Sweden. This adds to the agreement with Telenor and Com Hem and reflects the demand for our enhanced sports offering following the investments that we have made.
Viaplay usage continued to grow. We again broke the record in the quarter for the number of started streams for a single day as well as for a month. Viaplay 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 Viaplay original drama productions. That includes Swedish Dicks, The Big Experiment this year, and Hassel and Super Sweet next year. I've talked about profitability already. The lower profit in Q3 reflected the investment in the Olympics, the World Cup of Hockey, our overall enhanced sports offering, the new channels that we launched, and the ongoing currency headwinds.
If I can ask you to turn to slide number six, 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 their highest level for a third quarter since 2010. 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 company 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 SEK 50 million.
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. We have also now launched Viaplay across the Baltic region. If you turn to slide number seven, you can see that MTG Studios sales were down at constant exchange rates. The underlying demand for scripted drama productions and brand entertainment continues, but the production schedule is skewed to Q4 this year. We did experience a slowdown in the Norwegian event market.
However, our studio business delivered significantly improved profitability levels with an 8% margin. We are now looking forward to our best-ever drama lineup, including "Nobel," "Midnight Sun," and a second season of "Thicker Than Water." If you turn to slide number eight, MTG sales were up approximately 35% on a pro forma basis, with our esports business generating over 40% revenue growth. Turtle held a number of successful events during the quarter, including ESL One in Cologne, which had over 22 million unique viewers consuming over 30 million hours of content. We further extended the distribution of our esports channel in Europe and Africa. DreamHack continued its expansion with three new cities in Europe and its first-ever Canadian event. Also concluded three new venues for its North American expansion in 2017.
Splay and Zoomin continued to see good demand for brand entertainment and influencer campaigns. Also benefiting from the new distribution partners seeking broader multi-platform presence. The operating loss of SEK 69 million was higher than we initially expected, but it did include M&A costs in relation to the InnoGames acquisition. We will have additional SEK 20 million of M&A costs 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 MTGx 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 least because we are now launching more and more large-scale events, introducing new national leagues, and building 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. I will now hand the call over to you, Maria, for your comments.
Thank you, Jørgen, good morning, everyone. If I can please ask you to turn to slide nine. 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, a minor FX translation impact as the depreciation of the GBP was offset by the appreciation of the EUR. Operating income was down compared to last year, as anticipated. This was a function of our investment in content and MTGx, as well as the SEK 50 million negative FX impact. Please also remember that the year-on-year impact of the disposals that we made, these contributed to SEK 46 million of profits in Q3 last year. Excluding these factors, you can see that we have a healthy underlying profit development.
Turning to slide 10, our cost transformation is on track. We generated savings over SEK 107 million in Q3. We continue to expect savings of approximately SEK 450 million for the full year, an additional SEK 140 million to come through in Q4. The cash flow impact from restructuring was approximately SEK 60 million in the quarter, taking the total so far to SEK 390 million. Looking forward, there is around SEK 130 million of cash still to be paid out, of which we expect around SEK 60 million in Q4. This would take the total cash cost to approximately SEK 520 million, which is slightly lower than our previous expectations of SEK 556 million. Turning to slide 11, cash flow from operations was down due to restructuring costs, which I just referred to, due to the payments of content rights.
We will have a higher level of content investment this year. Our business continues to be very capital light. CapEx amounted to SEK 75 million in the quarter. We expect around SEK 300 million for the full year, which will be equivalent to less than 2% of sales. We ended the quarter with a net debt position of SEK 2.1 billion, which is equivalent to 1.4 times trailing 12-month EBITDA, before items affecting comparability. Turning to slide 12, our outlook for the full year for 2016 is, as Jørgen just mentioned, unchanged. We continue to expect accelerated sales growth and higher profits. We do expect a negative FX transaction impact of approximately SEK 240 million for the full year, which is slightly lower than previously expected, would imply SEK 40 million isolated in Q4.
The average USD rate that we expect through the P&L in 2016 is approximately eight kroner. Based on current spot rates and net of hedges, we do expect a transactional headwind of approximately SEK 75 million in 2017. That is it from my comments, back to you, Jørgen.
Thank you, Maria. If I can ask you to turn to slide number 14, everyone. 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, 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 the accelerated sales growth and higher profits.
The recent acquisition of InnoGames completes the circle when it comes to our investments into the gaming space, and we now have leading positions in three 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&A session, please.
Thank you, sir. Ladies and gentlemen, we are now ready to register questions. If you would like to ask a question, please press star one on your telephone keypad and you will enter a queue. Should you wish to cancel, please press star two. Our first question comes from Stefan Gauffin from Nordea Bank. Please go ahead.
Yes, good morning. 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? Thirdly, MTG Studios has, for the second quarter, reported really solid margins. This business usually fluctuates quite substantially between the quarters. Can you give some indication of where you see the medium-term margins for this business? Thank you.
Yeah. When it comes to the Summer Olympics, you are right that it had a very positive impact, of course, on the revenue for our free TV business. 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 of Hockey as well, which was a very important driver as well. If you look at the overall growth for the Nordics, it was also Norway actually contributing, as we said. We had strong growth in Norway and we had strong growth in Sweden. The Summer Olympics then, just to give you the hard numbers, of course, helped our pay TV business as well.
We have now more customers in Q3 2016, premium customers, than we had in Q3 2015. We, of course, have a very strong Viaplay quarter as well, which was the second-best net intake of customers in the history of Viaplay. I hope that gives you some granularity on the impact of the Olympics. Then on the studios, they are performing very well, and we have a 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 Dicks," the series which we have made together with Viaplay. That was a positive impact there as well. 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. I think, Maria, you can
If I can comment on the OpEx in international entertainment, which was on organic level down year-on-year. I would say that is a combination of the effect of the cost transformation, which we also executed, but on a much smaller scale in the international segment, and the timing on both programming and marketing investments.
Can I just follow up on the Lionsgate deal? Can you quantify the impact of that in the quarter?
No, we have not released that, it was a fine deal. As I said as well, that it is a mid-single digit margin you should look at. 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. That, of course, is good news for the future.
Okay. Thank you.
As a reminder, ladies and gentlemen, it is star one if you would like to ask a question. We will now take our next question. It comes from Victor Höglund from SEB. Please go ahead. The line is open.
Yes, good morning, and thank you for taking my question. Just first a quick question here. You said that you expect extra savings of SEK 140 million in Q4 this year. I was just wondering, last year, if I don't recall wrong, you had some savings in Q4 that affected faster than you thought. I was just wondering is this extra SEK 140 million or including those from last year? If you can say, do we see the full effect now from renegotiated operator deals with Telia, Com Hem, and so on in Q3, or is it more effect from that to come? 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? Is there other important countries here you think?
I have a few more questions, maybe just one then. Do you still expect MTGx. You spoke about this, but I didn't hear. My phone cracked up a bit. MTGx outlook for next year, do you still expect declining losses further towards zero than SEK 100, to give a wide range, or how do you look on that? Lastly, any content renegotiations then that we could see talks around in 2017, or is that further out? Thank you.
I will take most of them. I think when you look about the operator deals, that is of course something which is ongoing, meaning that you are discussing opportunities, you can see that our content, for instance, a new sports channel, is now available in some of the packages in Sweden. That, of course, over time, hopefully will generate more customers and therefore more revenue. 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. It is not a one-off in a quarter. When you look at the CEE, yes, it is so, a fact that particularly Czech is a big EBIT contributor in that region. Bulgaria as well, sorry.
When you look at MTGx revenue for 2017, yes, we do expect it to continue to grow, and we do expect losses to be lower than in 2016. When you look at the content renegotiation, it is ongoing. There's nothing immediate coming up, but it is every quarter. You can just see we just prolonged the NFL. There are constant negotiations. Luckily, as you can see, we get more customers in. I think we have made good decisions when it comes to what content that we have acquired.
Not 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 million of the SEK 600 million savings that we will have as full run rate next year.
Okay. We should check what you said around Q4 last year and then compare that to the SEK 140, more or less.
Sorry, could you repeat that?
No, it's no worries. Just from me, one last question on the pay TV uptake. You said you had more customers now than you had Q3 last year. Is that more customers in total in the base overall, or is it more on premium packages, so say, sports related packages?
Yeah. 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. I think that is, of course, very good news for us.
Yeah. Okay. Thank you very much for answering many questions.
Again, ladies and gentlemen, as a reminder, it is star one if you would like to ask a question on today's conference. We will now take our next question. It comes from Rasmus Engberg from SHB. 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? How did that really corrupt the numbers in this quarter? That was the first question, if you have something to say on that.
Yeah. Of course, the Olympics, 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-to-TV business. It positively then corrupted the numbers, Rasmus, when it comes to the increase, of course, in revenue because of the advertising sales and sponsorship and Viaplay customer intake and so forth, and the online business as well, Viafree. So it has a very positive impact all over the Olympics. Of course, as we have said as well, we do look for a strong fourth quarter, and of course, some of the customers that we get there should help making sure that fourth quarter also is a strong one.
Yeah. 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 a fair assumption?
In terms of revenue or in terms of
Yeah. Revenue. Yes.
No. That is not a fair assumption, honestly. It
It was up anyway.
Yeah. It was quite a good quarter for us, and we are delivering good target groups, actually. It was actually seen free-to-TV Sweden's best quarter ever in the history. It was quite good as well.
Okay. My second question is, you now give a very sort of firm outlook for the fourth quarter. 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?
Yeah, that was a very broad question. I think when we look at the different product segments, I think we have very good pace when 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 fourth quarter as well. Good content and good distribution deals in place and good products. I think that is, of course, something we are looking forward to continue that development in 2017. The same goes for the content business, also looks strong, and the CEE business, there's no reason why we should believe that it's not strong either. I just saw recently some update on the Bulgarian economy as well, which also looked promising for 2017. I don't know. It's difficult to say the something, [about].
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.
You are carrying some negative FX with you into 2017, I assume. Is that fair to say, at least in the Nordic business?
Yeah, too correct to say that. What we now see is a SEK 75 million hits on the FX side, but that doesn't take aside what Jørgen is saying, that there's a lot of positive momentum in the business.
Yeah.
We're going to have a strong Q4 that we look forward to.
All right. Thank you.
That concludes the question and answer session. I will now hand the call back to Jørgen Madsen Lindemann for his concluding remarks.
Thank you all for your time today. We will announce our Q4 results on February the 2nd, and I would like to take this opportunity to invite you all to our investor and analyst focus day on November the 10th in Stockholm, which will also be webcasted live. We will be focusing on our Nordic business and digital businesses. Thank you for your continued interest in MTG, and we look forward to talking to you and meeting with you soon. Have a great day.
That concludes today's conference call.