Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG's Q1 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 participants have difficulties hearing the presentation, please press star 0 for operator assistance. May I also remind you that you can find the presentation slides for this call at mtg.com. 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 CFO Maria Redin.
Thank you, operator. Good morning, everyone. Q1 was another quarter of record sales driven by continued high subscriber intake for Viaplay, the addition of the new esports and MCN businesses, and a really strong performance by our international entertainment operations. We gained audience shares in six out of eight free-to-view markets. Our group-wide digital revenues were up 45% on an organic basis. Viaplay had a record sales quarter. The Champions League game between Paris Saint-Germain and Chelsea in February set a new record for viewing of a sports event. The Viaplay satellite base was down. ARPU was up, as were third-party operator volumes. The esports and MCN businesses that we have acquired last year continued to perform in line with or above expectations. Sales were up approximately 60% on a pro forma basis.
I had the pleasure of going down to Katowice in Poland in March with 113,000 other people to experience the Intel Extreme Masters, which is the world's largest esports event. The best players in the world came together for a three-day event to play Counter-Strike, League of Legends, Hearthstone, StarCraft, and Rainbow Six. It was watched by more than 34 million unique online viewers, representing an increase of 32% compared to last year. 2015 was a breakthrough year for esports. This is still just the beginning. Not only did we generate record sales this quarter. We also grew our profits. Adverse currency effects, continued investment into MTGx, and a material step-up in sports costs were offset by our cost transformation initiatives and the leverage in the international entertainment operations. Were it not for the currency headwinds in Q1, profits would have been up over 60%.
The portfolio realignment has also continued with the sale of our Ukrainian pay TV business, which is now only awaiting regulatory approval. We also expect to exit CTC Media soon, when they return cash to shareholders during Q2. We have a new financial reporting structure which much better reflects the way in which the group is now organized and managed, as well as the way in which we expect the business to develop moving forward. Our objective here is to provide a simpler and more relevant structure and story for the market. We've also continued to strengthen our content and products by adding a number of key sports rights, including the Spanish League and the Italian League football leagues, the European Handball Championships, and UFC fighting.
Viaplay is now also commissioning a number of exciting new original TV series, often from our own production companies and often with our own channel as partners. These include Swedish Dicks, featuring local legend Peter Stormare and Hollywood superstar Keanu Reeves, Black Widows and S.W.A.T., sharing with our own TV3 as partners, Occupied with TV 2 in Norway, and our historic cooperation with SVT on their biggest-ever drama production, Our Time Is Now. Looking forward, our outlook is unchanged. We aim to accelerate our sales growth and increase our operating profits in 2016, and that despite the additional currency headwinds, the disposals we have made, a significant step-up in our sports investments, and the expansion of MTGx.
This is made possible because our products are stronger and more relevant than ever before, because we are seeing the benefits of the transformation process, and because of the operational gearing in our international entertainment businesses. As usual, I will now briefly review the performance of each of our business areas before we take your questions. Sales for the Nordic entertainment operations were up 3% on an organic basis and driven by our digital businesses, both Viaplay and the advertising video on-demand services. Operating costs were up due to the US dollar currency effect, the addition of the new sports rights, and the ongoing investments in the development of our streaming services. Operating income was therefore down compared to last year, with both this and last year's results including positive one-off effects.
Our Nordic free TV average sales were up at constant exchange rates, with higher sales in Norway and Denmark, but lower sales in Sweden. Our AVOD sales were up 33% and show the strong momentum we have here. The Danish TV advertising market is estimated to have grown in the quarter, the Norwegian market is estimated to have been stable, and the Swedish market is estimated to have declined. We increased our media house audience shares in Sweden and Norway, and I'm pleased with the performance of TV3, which gained shares in all three markets, and I'm also very happy with the performance in Norway, which reported higher sales and audience shares for the sixth consecutive quarter. Our radio businesses in Norway and Sweden also performing well with higher sales and listening shares.
Commercial TV PVT on linear viewing in our target group was down again in Q1 in each market. We do expect commercial PVT levels in our target groups to continue to decline in 2016. We have raised prices this year in all three countries, precisely because of the content investments that we have made and the fact that our products are stronger than ever before. We also expect our AVOD sales to continue to grow and represent an even higher proportion of total revenues. Nordic pay-TV sales were up on constant exchange rate as Viafree delivered another quarter of high customer intake and record revenues. Our third-party Viaccess subscriber base has continued to grow, and in IPTV networks in particular.
The number of satellite subscribers was down in the quarter, but satellite ARPU was up again, and we have further improved the product by adding more content and significantly strengthened our TV To Go product. Viafree grew even faster than in Q4. Overall, we have seen a notable improvement in our customer loyalty over the past year, and we have the best programming content lineup than we have ever had. Viafree usage is on all-time high levels. The number of started streams increased by 17% compared to Q4 and was up 58% compared to Q1 last year. The launch of EST, or Electronic Sell Through, a few weeks ago now makes it possible for us to buy or rent movies only months after they come out in the cinema. This was previously an exclusive DVD window.
Viafree is the only service in the Nordics to offer EST, TVOD, SVOD, and sports. The latest addition we have here was the Star Wars coming in on EST here in April. Moving forward, we do expect our Nordic entertainment sales to continue to grow on the back of the investments that we have made in content, technology, and the local customer experience. We do have current headwinds for the rest of this year, which we have quantified, and we do also have higher sports content costs. We have now seen the full quarter effects of adding LaLiga, Serie A, and UFC, and the handball, and there will be further step up in Q3 with the new Premier League contract, the Olympics, and the World Cup in ice hockey coming in.
Our sports content is clearly stronger than ever, and we have added new products like C More Sport HD in Sweden and a new fighting package on Viafree. These investments are impacting the 2016 profitability for the segment, but provide us with a real opportunity to scale our businesses and continue our digital transformation. If we shift the focus from Nordic to the international entertainment business, I am very happy to report that Q1 was the best first quarter in terms of like-to-like sales and profit development for more than five years. Sales were down on a reported basis due to the recent disposals, but up 6% on an organic basis. This reflects very healthy double-digit growth in Bulgaria. This was offset to an extent by the previously announced change in the agency structure in Czech Republic, but underlying Czech sales were also up nicely year-on-year.
Operating costs were broadly stable on an organic basis, we achieved SEK 40 million from a small loss to a 5% margin in what is a seasonally weak advertising sales period. International free TV and radio sales were up on constant exchange rates, with higher sales in almost all countries and digital AVOD sales up 39%. The Bulgarian and Czech TV advertising markets are estimated to have grown, while the Baltic market is estimated to have been stable. The Bulgarian and Czech media house audience shares were both up significantly. Our pan-Baltic share was also up. Our international pay-TV business is now smaller after the recent disposals, but sales were up on an organic basis following continued growth in the Trace business, which is about to launch its own multinational SVOD service.
Moving forward, we do expect continued like-for-like growth for the segment in 2016 and continued year-on-year margin expansion, but probably not at the rate we've seen here in Q1 as we face more challenging comparisons going forward. We move on to MTG Studios, where sales were up 9% on an organic basis, the growth was driven by strong demand for scripted drama production and strong demand for digital productions. Sales were also boosted by a record sales quarter for our content distribution business, DRG. Q1 is a seasonally weak sales quarter, but the operating loss was reduced significantly compared to last year. Moving forward, we do expect continued sales growth and further profit improvement in 2016. Finally, MTGx, where sales were up approximately 60% on a pro forma basis. Turtle continued to perform above our expectations.
Sales were up approximately 75%. March was the second highest sales month in the company's history, as the Intel Extreme Masters event in Poland generated over 24 million hours of viewed coverage. Turtle extended its partnership with Twitch during Q1 and also signed new non-exclusive agreement with YouTube, Subaru, Hitbox, and Microsoft. The total numbers of hours of content watched was almost up 90% during Q1. Zoomin.TV has continued its geographical expansion with an accelerated push into the Asian market, recently opening new offices in China and Japan, as well as focusing on the branded entertainment space. Zoomin.TV generated close to 2.5 billion monthly views during Q1. Splay almost doubled its sales compared to last year. It has also continued to expand both geographically and into new segments.
This includes the launch of the new platform unicorn.me, which supports online influencers to create and launch their own apps for iOS and Android. Splay also produced Guldtuben again this year, which is the largest YouTube award show in the Nordic. The live streams on YouTube had 671,000 views. 1.4 million votes came in. Splay generated over 200 million monthly views in Q1. The operating loss of SEK 50 million reflected the continued geographic expansion of all the businesses, as well as the strategic investments in new studio facilities and new platforms. Q1 profitability is impacted by the seasonality of advertising revenues and the timing of our esport event. Moving forward, we do expect continued high revenue growth. Our content is available on almost all the global streaming platforms, which helps us to maximize reach and effectively grow the global viewership.
The opportunities are very significant. We will therefore continue to invest into these businesses. We do expect continued losses, but at a more moderate level than in Q1. In summary for the group, we have again grown our sales to record levels. Profit were up despite currency headwind, increased content cost investments, the expansion of MTGx. The portfolio realignment has continued. The transformation savings are on track. Our aim for 2016 remains to accelerate our sales growth and grow our full-year profits. A higher annual cash dividend is proposed to our AGM. We expect to receive the cash returns from CTC Media in the coming weeks. That concludes my comments on the results. I will now hand the call over to you, Maria, for your comments.
Thank you, Jørgen, and good morning, everyone. Q1 sales at a record high for the first quarter. Sales were up 5.1% at constant FX, corresponding to 3.3% organic growth and a net positive 1.8% impact from M&A. Sales were, however, negatively impacted by 1.7% due to foreign exchange, primarily following the depreciation of the Norwegian krone. Operating income before items affecting comparability was up compared to last year, despite SEK 70 million of negative foreign exchange rates. This includes both the anticipated transactional effects but also the translational effects of the weakening Norwegian krone. The majority of this negative SEK 70 million impacted the Nordic entertainment segment. Looking at 2016 and based on current spot rates and net of forward currency hedges, we currently expect a negative transactional impact from currency of approximately SEK 250 million, which is in line with what we have previously been communicated.
Our cost transformation is developing according to plan, we generated savings of approximately SEK 100 million in Q1. We expect savings of approximately SEK 450 million for the full year. The cost of the program is estimated at approximately SEK 700 million, of which SEK 550 million will impact our cash flow. Of the SEK 550 million cash impact, approximately SEK 270 million of payments have been made so far. This includes SEK 110 million in Q1, the majority of the rest of the payments will come further in 2016. As before, please keep in mind that we will reinvest the majority of these savings into the ongoing transformation of our company. Cash flow from operations were lower than last year's due to the restructuring payments of approximately SEK 110 million, which means the underlying cash flow was actually up year-on-year.
Changes in working capital were negative due to upfront payments for newly acquired and extended rights, along with other content investments. Moving forward, we expect the cash flow in 2016 to continue to be negative, impacted by these two factors, and return to a more normalized level in 2017. We increased our borrowing to finance the Q1 outflows, the net debt increased from SEK 2.1 billion at the end of the year to SEK 3.7 billion at the end of the quarter. Our holding in CTC Media, which is reported as a discontinued operation, is revalued at the end of the quarter. This generated a loss of SEK 70 million due to the depreciation of the US dollar since the beginning of the year, as well as the lower expected proceeds from CTC Media sales of its Russian business, UTH Russia, as announced in February by CTC Media.
CTC Media has now also received approval from the OFAC to proceed with the previously announced transaction. We expect to receive our share of the cash returns to shareholders now in Q2. The final amount is still subject to a number of factors, we currently estimate that the net proceeds to us will be approximately SEK 1 billion. CTC will be fully deconsolidated once we receive the proceeds. I would like to remind you also that this will give rise to a non-cash charge of approximately SEK 1 billion, which will be reported in the discontinued operations line. This charge relates to all historical translational effects that need to be reclassified from equity to net income.
Our transformation from a traditional broadcaster to digital entertainment has continued at pace in Q1. The fact that we're able to increase both sales and profits despite the FX headwinds and the investment that we're making provides me with a lot of comfort that we are on track to accelerate our sales growth and increase our operating profits in 2016. That is it for my comments, back to you now, Jørgen.
Thank you, Maria. That concludes our commentary on the results. Over to you now, the 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. The first question comes from Maria Bullock from Goldman Sachs. Please go ahead.
Good morning, everybody. A couple of questions from my side. On the pay TV Nordic part, could you please give us more color on the impact that you've seen from the recent price increases you've put recently? Second, on the free TV part in the Nordics, what is the put level that you see in your key markets? Third, we've seen great performance in the international entertainment part. Could you give us more color about your operational leverage going into the next couple of quarters? Third, we've seen in terms of your KPIs that you've restated some of your numbers, and if you can give us more color, like how we should think about these numbers going forward. Thank you.
I will try to answer the 3 first, Maria. You will take the last one on KPIs. You can do that. When we look at the pay TV, I start pay TV Nordic, I think there is different things to note. First of all, if you look at the combined premium base that we have in both IPTV and also on DTH, we have actually more customers now in Q1 than we had in Q1 2015. That shows, of course, that the content that we have acquired has good traction, and of course, that help selling our also selling together with our partners like Com Hem and so forth. We have more sales in that segment. The same goes for Viaplay, where we have more sales as well. Actually it was the best sales quarter ever for Viaplay.
Also we had a very strong lead intake in terms of customers, as you can see. Today we have more customers on Viaplay than we have ever had before. I think it is quite important to note around the price adjustments that we made, that that was done on the back of increased content. It is not that we just raised the prices. We had a lot of investment in order to become even more relevant in content. We have, as you know, we acquired LaLiga, Serie A, we acquired now UFC, we have the Olympics coming up. We have the World Cup ice hockey coming up and so forth. The product has become more relevant and therefore we do see continued strong customer intake for Viaplay as well. Also, again, for our third-party network partners.
If you look at the PVT level, yes, we do see a decline in PVT levels. That varies, of course, from the different markets. You will say that the commercial PVT in Sweden was down some 2% in the quarter. We will see that the Danish PVT was down some 7% in the quarter, but actually in Norway, the PVT was up. It is also somewhat seasonal as well. Still, it is fair to say that the overall PVT, the trend is that we do see a decline in PVT levels around the Nordic markets. The international business is performing very well. They do that on the back of very high ratings and very attractive target groups, which of course then gives higher sales. As you can see as well, the sales were up.
That is basically what is happening is that the return we have on the money we invest in the programs is coming out much better because we are increasing our relevance and ratings. That explains the very strong performance in this area. Also we have invested a lot in the digital businesses in that area as well. There you can argue we are ahead of the curve. You don't see the PVT level declines to the magnitude you have seen in the Nordics. There we are already investing in digital businesses. Countries like Bulgaria are growing +20%, which is of course much more than the advertising market. There is a lot of leverage in the products in these markets, and we have invested over time now and are a big and relevant player in these areas.
I hope that answers your question. Maria, the last one.
Yes. On the KPIs, we changed the revised disclosure structure to better reflect on how we actually run and operate the company following the transformation and also how we expect the company to growth going forward. I believe on the website you will find all the performance numbers for the last two years broken down by quarter. If you should just bear in mind when you look at these and in the new segments, the MTGx, the different items that were previous in this bucket, we have reallocated AVOD fully into the Nordics. The sort of the close initiatives we have charged into parent and others and central operations in the historic numbers and MTGx currently now only reflects the pure venture costs and the operating companies from within the segment.
Thank you. We will now take our next question from Adrien de Saint Hilaire from Morgan Stanley. Please go ahead.
Good morning, everyone. Thanks for taking those questions. First of all, Maria, can you just repeat the benefits of the restructuring that you've indicated for Q1? Secondly, Jørgen, when you mentioned the growth in MTGx Ventures at 60%, that seems to be tracking quite ahead of your 40% target for the full year, and you said it would slow down, but can we get an idea? Also can we have an indication on the size of the losses that you expect for the full year? Are they front-end loaded to the year, or should we expect the full year losses to be bigger than what you had in 2015? Thank you.
Yes. To start on the savings from the transformation, we saw roughly SEK 100 million in this quarter, and it is primarily relating to the Nordic Entertainment segment and a small part in the central operations. We also paid out roughly SEK 110 million in restructuring payments relating to these charges.
Okay.
On the businesses, I don't think, Adrien, if we have given out, I don't think we have guided or set out a target for the business, how fast they will go. Yes, they should grow fast, and as you see as well, Turtle alone had a growth of around 75% in the quarter, which of course illustrates the relevance of the product. That is, of course, the opportunity we have is to continue to invest, which we have done also in Q1 now, where we have invested more in studios, facilities in order to create more content, more League and so forth, into new countries. That is, of course, something which we will continue to do. We do not expect that the losses that you have seen in Q1 will have the same magnitude in the quarters going forward.
Of course, it is fair to say that we do want to capture these opportunities which we see, in the plans, as it is right now, we do not have the losses to the magnitude you have seen in Q1 going forward.
Okay, thanks very much. If I could just ask a follow-up to Maria. In the prepared remarks, you said you were very comfortable with your guidance on EBIT growth. Can you refine a bit? Can you clarify a bit what you mean here and what we should expect in terms of profit growth?
No, the only thing we said is that we will have growth top line, we will grow profit. That is the guidance we have given. Of course, it is great to see that transformation is going according to plan.
Okay, thanks.
We will take our next question from Viktor Haglund from ABG. Please go ahead.
Yes. Thank you. Some questions here around the different areas. To start off in international, apart from Bulgaria, which countries are doing good? Do you have more potential than Bulgaria? What countries do you have more potentially in? I am just trying to figure out here if this unit can reach SEK 350 or SEK 400 EBIT, if that is even possible, or more than that is possible, just to understand the potential you see here. On the CTC funds, if you can maybe go back to them a little bit here. You mentioned the net debt ratio being as it is. Do you see a scenario where you can distribute those funds to shareholders, or do you need this cash to invest more in esport-related things or maybe do a bolt-on acquisition or something like that in there? Could you also say something on the Viaplay churn here?
You mentioned that the net debt has been good, just explain a bit on the movements throughout the quarter. Has gross profit improved a lot throughout the quarter from the price hikes, or has it been rather stable? You said something around M&A costs before. Could you just repeat that? The last, very sorry for these many questions. On the free TV side, can you say something on how much of the ads you sell this year have been locked in versus not locked in and sold on spot rates? I'm just trying to figure out the prices and how much is locked in and not locked in. Thank you.
On the international segment, we do see a lot of opportunities actually in each of the different businesses, for different reasons. If you look at Bulgaria, already now Bulgaria, they have a very strong digital performance. As you know, we acquired a fairly big digital company some years ago, that is tracking very strong and has been very well integrated into the other parts of the business. We have great opportunities in digital Bulgaria. We already have very strong pay TV business as well there with strong sports pay TV channels, we have now the number one free TV operator as well. That combined, of course, create a very strong media house, we do, and have seen for some quarters now that we have been able to grow at a pace much faster than the advertising market has been growing.
That is, of course, due to investments we have made there. In Czech, we have launched new channels. We either launched new channels with Viacom and launched our own new factual channels as well. There we also see a great opportunity going forward when it comes to the mini pay businesses. You are going to enter into agreement like we have in other markets where you get subscriber fees for your channels in the cable networks. That is something we're seeing right now due to the fact that we have very strong relevance in the content and in the channels that we have produced in Czech. That is the same situation actually right now in the Baltics as well, where we also have a strong subscription business being built now.
Our free TV, our channels there is also getting carriage fees now from the different cable operators, there we are also ahead of the curve when it comes to digital investments and also digital performance. Again, we are moving around the 40% or 50% share in commercial viewing in most of these markets. We are fairly big therefore should also be able to grow the digital at a decent pace. I think what you have seen now is that all the investments that we have done into digital, into new channels, also into content is actually paying off. That is, of course, something we are very happy about, that we have more and more relevant content, which of course, gives us higher ratings and therefore more sales in the business.
That should, of course, hopefully help us going forward, in order to capture even bigger market shares. You talked about the free TV advertising market in the Nordics, I think you related to, and that was around the yearly contract. As I said to you, we have invested in content. We have stronger products coming up. We have the Olympics coming up. We have the handball in January and so forth. The campaign delivery from us is very strong, and the target groups that we can deliver are strong. Therefore, we have increased prices on our products, because we are gaining relevance. Also the advertisers see that. We also had a fairly good yearly negotiation as well, where we have, I think, the normal region around some two-thirds, 70%, something like that, is locked up in yearly contract so far.
You talked about acquiring new companies. I think you asked about the CTC fund proceeds, how they're going to be used. Yes, we are looking at different opportunities, of course, and that is particularly in the digital areas, in the video digital media areas, which we have invested in already, to do more with esports, to do more with Zoomin.TV, or to do more with Splay. To continue to invest in our actual core business as well is also, of course, very important for us. If you look at acquisition, it is directed towards new digital video-centric digital businesses. I think that was the questions from me. There was related to M&A cost and so forth. I don't know if there was more. Did you have more questions? Sorry.
No, that was a good answer. Just on the M&A cost, you mentioned something before.
I don't remember us having any
Okay, I heard wrong.
Yeah, sorry. We didn't say it clear enough. Sorry for that.
Thank you very much.
Once again, if you would like to ask a question, please press the star followed by the one on your telephone. To cancel this request, please press the star followed by the two. We will now take our next question from Rasmus Engberg from Handelsbanken. Please go ahead.
Yes, hi, good morning. I think in the report you talk about, I think a positive one-off in the Nordics. Could you explain roughly what that was and what the size was?
It was a positive revaluation of payables in the Nordic Entertainment, we haven't set the value to it that you can expect. It was lower than last year, we still felt that we should disclose it in the report.
Okay. Lower than last year. Yeah. The second question. How large price increases have you implemented? How is the timing of that given the contract length of your clients and that they were announced sort of in February? How should we face that, how large is it?
Yeah. It depends on the markets that we have. I think on the OTT product, the Viaplay, particularly around the sport, it came in in February, where we had the biggest increase there. When it comes to the movie service, it has come throughout, I think, the first quarter here. That should be implemented now. When it comes to the IPT businesses and for the DTH businesses, that is something, of course, which comes gradually when we are along in the customer's contract. That is something you will see coming in gradually.
If I look at the DTH and the cable business, MIP, broadly, how large price increases are we talking about as an average or something? Is it 10% or 5% or what is it?
Yeah. It is on these business areas, again, depending on the country, you should see around 10%. Price increase is 10%-15%. Viaplay, as you know, was around 50% on the sports side-
Yep
in Sweden. Around 10%-15%, again, depending on the country. In Sweden, it was around 50% on Viaplay, that's all.
Right. Then I missed Maria's comment on how much of restructuring payments you expect to have for the remainder of the year.
We haven't specified exactly how much will come in the remainder. What we said in total is SEK 550 million, we have so far paid out SEK 270, you should expect the majority of the rest to come this year. There will be some payments that will overlap to 2017 and 2018 as well.
Okay. Finally, of course, it was very good growth in the ventures business and especially in Turtle. We are sort of in the dark about the figures for last year. I was wondering if you could help us along the way and give us an indication of roughly what pro forma was for Q2 for MTGx ventures.
We haven't given out anything on those numbers, to be honest. What we said now is that this year, Q1, we grew 60% year-over-year pro forma.
Yeah. Q1, I would assume, is the smallest quarter. Is that correct?
Yes, that is correct. You both have the advertising funded business and you also have a lower events calendar for the esports business.
If you were to guess between Q2 and Q3, then which one would be, or are they roughly the same?
I would say it's largely the same.
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 have our AGM on May the 24th and hope to see as many as possible of you there. After that, we will announce our Q2 results on July the 19th. Please do call with any questions, and we look up to date with our further progress, of course. Thank you, and goodbye for now.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.