Good morning and good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the MTG Third Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, participants will have an 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 zero for operator assistance. May I also remind you that you can find the presentation slides on MTG's website at mtg.se. Before we start, may I remind you of the forward-looking information safe harbor statement under the U.S. Private Securities Litigation Reform Act of 1995, that this report contains forward-looking information based on the current expectations of MTG management.
Although management deems that the expectations presented by such forward-looking information are reasonable, such forward-looking information is subject to risks and uncertainties, and no guarantee can be given that these expectations will prove correct. Accordingly, the actual future outcome could vary considerably when compared to what is stated in the forward-looking information due to such factors as the prevailing economic and business environments in certain markets and the impact of the Eurozone crisis, in particular. Commercial risks related to expansion into new territories. Political and legislative risks related to changes in the rules and regulations in the various territories in which the group operates. Exposure to foreign exchange rate movements and the U.S. dollar and euro currencies in particular, and the emergence of new technologies and competitors.
These risks and uncertainties are described in more detail in the 2011 annual report, which is available from the group's website at mtg.se and in the group's registration statement on Form 20-F, which is available from the website of the U.S. Securities and Exchange Commission. I will now hand the call over to Jørgen Madsen Lindemann, MTG President and CEO, who is joined on the call today by Group CFO, Mathias Hermansson.
Thank you, Aurelia, good morning and good afternoon, everyone, to my first conference call as CEO of MTG. Today is more about the future than the past. It's about the investments that we are making in key areas of content, technology, and geographical expansion to drive future growth of MTG. I will start with a short overview before we dive into our performance and plans in each of the operations. Q3 is the smallest sales quarter of the year, but sales were actually up 2% year-on-year at constant exchange rates if you exclude the operations that we discontinued or sold earlier in the year. All of our broadcasting divisions, except Free-TV Scandinavia, reported continued sales growth at a constant exchange rate, while slightly higher costs resulted in lower profit levels in the quarter.
Our ratings have continued to improve in Sweden and stabilized in Norway and are fine in Denmark. We expect continued TV ad market growth in Sweden and Norway in Q4, but at lower levels, and a continued decline in Denmark. We have taken further market shares in Denmark, expect to gradually recover shares in Sweden, while with Norway taking longer. We're also now established as the most watched online commercial media house in Sweden and in Denmark. Almost all of our emerging markets Free-TV operations have taken further viewing and ad market shares and improved their profitability levels, but we have not seen a sustained return to market growth. When it comes to the pay-TV side, competition is continuing to heat up, and that is clear to everyone.
We have invested in premium movies, TV, and sports content to ensure that we have the most attractive multi-platform offerings in the market, and that we are well-placed to take subscriber market shares in the future. Our Nordic efforts are focused on our premium channel offering and our market-leading and fast-growing Viaplay OTT service. In the emerging markets, we have launched HD movie channels in Russia and the CIS and added a prepaid satellite service in Ukraine. Taking all this into account, we currently expect the total Nordic premium pay subscriber base, excluding Viaplay, to continue to decline, with stable total Nordic pay-TV sales in Q4 and 2013.
The combination of this with investments that we are making and therefore also currently expected to result in lower margins for our Nordic pay-TV business in Q4 and 2013, but will position us to grow our subscriber base revenues and profit in the medium and longer term. At the same time, the investments that we are making in the emerging markets pay-TV business are currently expected to boost our revenue growth, but result in operating losses for the segment in Q4 and 2013. Our financial position is now even stronger as our healthy cash flows and the CTC Media dividend stream have enabled us to reduce our borrowings to low levels. We have reduced our net debt by SEK 1.2 billion over the past year, and it now represents less than 30% of trailing 12 months EBITDA.
In addition to the operating investments I have described, we are also looking at a number of organic and M&A-led expansion opportunities. We have already acquired the Swedish communications operator Zitius and signed an agreement to buy out the other half of TV 2 Sport in Denmark. You should expect us to continue to pursue M&A opportunities in our target markets with a focus on content and technology business and broadcasting assets in Central, Eastern Europe, and Africa. Let's go through our core business in more detail. As usual, we'll begin with our Free-TV business in Scandinavia. The official advertising market data for the quarter isn't out yet. IRM reduces its forecast growth for the Swedish and Norwegian markets to 5% and 4% respectively. We suspect that the Swedish market, in particular, may actually have grown less than this in the quarter.
No forecast available from DRRB for the Danish market, but it is clear from the July and August reported figures, which indicated a 17% year-on-year decline, that the market worsened significantly in the quarter, and we estimate that it may have been down as much as 15% year-on-year. Our sales were down 7% at constant exchange rates in the quarter, with lower year-on-year sales in all three countries following high sold-out ratios and the Olympics being shown on state-owned or rival commercial TV channels during the summer. We estimate that we lost TV advertising market share in Sweden and Norway, but increased our share in Denmark. Our Swedish ratings were up significantly quarter-on-quarter as all of our four channels reported increased audience shares.
The fall schedule, which were launched earlier this year, have performed well to date, but there is, as always, a time lag between recovered audience share and recovered market share. TV3 and Puls both increased their target audience share year-on-year in Q3, but our combined Danish media house audience share was down as main Q TV3+, in particular, was impacted by the broadcasting of the Olympics on state-owned TV channels. The fall schedule were also launched early in Denmark and have shown good momentum to date. Our combined Norwegian media house audience share was up quarter-on-quarter again in Q3 as we continue to take back viewing shares. We are still not back to the level of a year ago in a highly competitive market, which is why our market share was down.
When it comes to the online viewing of catch-up free TV services, the MTG media house has now established itself as a leading commercial player with the most-watched commercial channels online in both Sweden and in Denmark. OpEx was slightly up year-on-year at a constant exchange rate as lower programming costs in Norway were offset by higher programming costs in Denmark and in Sweden. Segment operating income was therefore down year-on-year. In terms of outlook, IRM has reduced its forward forecast for the Swedish and the Norwegian TV ad market growth, while there are no forecasts for Denmark, but it is clear that the market will be down for the rest of the year. We do expect to maintain or increase our Danish ad market share and gradually increase our Swedish ad market share now the ratings are improving.
As before, the Norwegian turnaround will take longer, but comps are getting easier and ratings have established. This is not about investing more, but about improving execution, so we are actually now expecting full-year OpEx to only be up low rather than mid-single-digit percentage points this year, and to return to the usual mid-single-digit percentage point increases next year as we look to build on the positive momentum and benefit from the new studio deals we have signed this year. If we now turn to the Nordic pay TV business, revenues were up 3% at constant exchange rates, and premium satellite subscriber ARPO was also up 3% following the previously introduced price increases and continued growth in the penetration of HD service in particular.
The overall premium subscriber base did not grow in the quarter, mainly due to the continuing decline in the satellite subscriber base, which continued to be affected by a high level of competition in the Danish market in particular, and a shift in the subscriber mix to the basic tier in Norway, but also due to lower growth in third-party network subscriber base. This was due to lower subscriber volumes for third-party cable networks in Sweden and the impact of the price increase that we have put through in the Norwegian IPTV networks. We've continued to focus on the development of our Viaplay online pay TV service and added further key movie, TV, and sport content to the Sport platform, made the service available on Philips Smart TV sets, added a download-to-go feature, and now making the service available on PlayStation 3 games consoles.
The OpEx growth in the quarter reflected the investment that we have made in premium movies and sports content for our platform and channels. The expansion of Viaplay, as well as the Viasat Film rebranding, HD and catch-up channels launched earlier in the year. Segment profits were therefore down, but our operating margin was in line with the full year expectation of approximately 17%. In terms of outlook, the sales development in Q4 and moving forward will be impacted by the increased competition and the fact that our satellite volumes have been falling for the past year. This will be offset to some extent by the positive ARPU impact of ongoing DTH price increases and higher HD penetration. We do expect continued growth in the Viaplay and third-party network subscriber bases.
This is why we have invested to strengthen our overall movie series and sports content offering to ensure that we have the most attractive on and offline content offering in the market, so that we can take subscriber market shares in these increasingly competitive markets. Following the addition of four new HD channels and five catch-up channels early in the year and the Viasat Film rebranding, we are now adding a further 11 Viasat HD channels and four catch-up channels to our offering in Q4. There can be no doubt now about our market-leading position in HD services. Finally, we're increasing our investment in Viaplay to ensure that we consolidate our first-mover advantages and market leadership at a time when a number of rival services are now being launched.
As a result of the above, segment sales are currently expected to be stable quarter-on-quarter in Q4. We still expect to deliver full-year operating margin of approximately 17% and a Q4 margin of approximately 15%. Moving to next year, sales are currently expected to be stable year-on-year due to the continuing fall in premium DTH volumes not being fully offset by rising Viaplay and third-party networks volumes. The investments that I have described are currently expected to result in a full-year 2013 operating margin of between 10% and 12%. Moving on to the Free TV emerging market business. Our sales were up 3% year-on-year at constant exchange rates and reflect the growth in sales, viewing, ad market shares in almost all of our markets, but also the year-on-year impact of the discontinuation of the Slovenian operations.
The largest markets, the Baltics, the Czech and Bulgaria, reported a combined 6% sales growth at constant exchange rates and together represents more than 90% of the segment sales. However, we're still not seeing any significant trend shift in the overall market development at this stage. The Latvian LNT operation contributed their first full quarter of sales and costs, while the year-on-year costs were also impacted by the discontinuation of the loss-making Slovenian operations and of the depreciation of the Czech and Bulgarian broadcasting licenses. The quarter results did include realization costs and losses for the LNT Latvian operations, which amounted to low single-digit millions of EUR. Operating costs for the segment were down year-on-year, but far less at constant exchange rates than the reported numbers would suggest. The reduction also reflected lower programming costs in Bulgaria and Hungary, offset by continued investment in the Czech operation.
As predicted, the year-on-year reduction in cost in the second half of the year is proving to be lower than in the first half. All in all, the segment operating loss in this seasonally smallest sales period of the year was reduced to 48 million SEK, and the loss for our combined large operation was stable year-on-year at 50 million SEK. Looking at the three largest markets in turn, let's start with the Baltics, where our sales were up 10% year-on-year at constant exchange rates and include the newly consolidated LNT operations in Latvia, as well as year-on-year sales growth for the Estonian operations. The Estonian TV ad market is estimated to have grown slightly year-on-year, while the Latvian market is estimated to have been stable and the Lithuanian market to have declined.
On this basis, we estimate that we have taken market shares in Estonia and Latvia, excluding the 2011 election effect, and lost some share in Lithuania, which also reflects our audience share development during the period. Our pan-Baltic target audience or viewing share increased significantly year-on-year to 47% from under 41% due to the LNT impact and higher ratings in Estonia more than offset the decline in Lithuania. Secondly, if you go to Czech Republic, where our sales were up 4% year-on-year at constant exchange rates in a TV advertising market that we estimate to have been stable. We therefore believe that we took further advertising market share in the period. This again reflects the significant increase in our target audience share with the Czech Media House recording its first ever quarterly share of 40% following the addition of further news, sports, and other locally produced programming.
Finally, to Bulgaria, where our sales were up 6% year-on-year in what we estimate to have been a stable market. Again, we believe that we took further advertising market share on higher ratings despite the fact that programming costs were actually down year-on-year. All in all, as before, we're yet to see any trend shift in competitor behavior or return to sustained growth in advertising spending or pricing. However, costs are down, and we do not see the need to increase our level of investment beyond what we've already done ahead of a return to sustained market growth. If we move on to pay TV operations in the emerging markets, where the segment sales were up 13% at constant exchange rates following continued subscriber growth for our satellite platform in the Baltics, in Russia and Ukraine, and mini-pay subscription growth in particular Russia.
Our satellite platform added a net total of 83,000 new subscribers year-on-year and 9,000 subscribers in the quarter. We have also added more than 14 million wholesale mini-pay subscriptions over the past year and more than 2.6 million subscriptions in Q3 alone. We now have reached the milestone of 75 million subscriptions for the first time. Operating costs for the segment were down year-on-year, and segment profit therefore more than tripled year-on-year to just under SEK 15 million. In terms of outlook, we do expect continued subscriber intake on the satellite platform and growth in the number of mini-pay subscriptions.
We have now a big opportunity in Russia and Ukraine, in particular to boost the penetration of our services, which is why we announced in September that we would launch three new premium HD movie channels in Russia this month. We have signed multi-year licensing agreement with four Hollywood studios to provide high-quality content for these channels. It is also why we launched a new pre-pay satellite service in Ukraine at the end of September, which will sit alongside our existing premium satellite service. These investments and our ongoing subscriber acquisition activities are expected to boost sales moving forward, but also to result in Q4 operating losses of less than SEK 20 million and a full year 2013 operating loss of less than SEK 50 million before a return to healthy profitability levels in 2014. Finally, just a quick word on the other business segment.
Firstly, we sold Bet24 operations at the beginning of May, so that reduces sales and costs for the segment when compared to last year. Sales for our combined radio and energy distribution business were down 18% year-on-year at a constant exchange rate, but actually up year-on-year when excluding the Bet24 contribution last year. Higher sales for the Norwegian radio energy distribution operations more than offset the decline in the Swedish radio operations due to the ending of the energy distribution agreement in Sweden. Result for the previously acquired and profitable Paprika Latino content production business will be consolidated from the beginning of this month. Profits for the segment were slightly down year-on-year due to the increased losses for the Swedish radio operations.
In terms of outlook for these other businesses, we expect the sales decline in Q4 to be in line with Q3 and profits to be down in Q4 due to the fact that we cannot adjust the Swedish radio cost base fully until the distribution agreement comes to an end with energy. Now over to you, Mathias.
Thank you, Jørgen. Currency exchange rate movements were a major factor as you've seen in this quarter, with large year-on-year movements in the SEK exchange rate against the DKK and the EUR in particular. Our sales performance was therefore 4.5 percentage points better at constant exchange rates than at reported rates. That included as much as 10 percentage points negative impact in the emerging markets operations itself. Group sales were up 2% year-on-year in the quarter at constant exchange rates when excluding the businesses that we sold and closed down. Those ones were Bet24 and Slovenia primarily. Group operating expenses was up less than 1% year-on-year at constant exchange rates as we balanced our cost savings with investments throughout the quarter.
Group operating income excluding CTC contribution was down year-on-year due to the lower profits from the high operating leverage we have in the free TV Scandinavian business in particular. For those of you who had time to look at the year-on-year comparisons, actually the loss or the reduction of EBIT in free TV Scandinavia is more than 100% than the reduction for the overall group. We continue to have high cash conversion of 74% of EBITDA into operating cash flow when you take out the effect of CTC Media. We reported a positive change in working capital in the quarter compared to rather large negative change last year. This is all mainly driven by timing effects of payments for key content, including sport rights.
This resulted in more than SEK 400 million positive year-on-year swing in the net operating cash flow. Included a SEK 51 million dividend payment from CTC this year. As you remember, no dividend in the third quarter last year as both third quarter and fourth quarter dividends was recorded in the fourth quarter for MTG. As opposed to previous quarters, our pre-tax profit was only marginally impacted by the revaluation of the option element of the CDON Group convertible bond that we hold. However, given the sharp strengthening of the SEK against the EUR, we have also revaluation loss of EUR forward contracts of SEK 24 million in the quarter, recorded in the financial net. Our effective tax rate was lower in the quarter than the expected rate of 25%-30% that we have.
This was mainly due to a one-off adjustment for prior periods before 2012. Which leads us now to expect that the full-year tax rate will be below 25% for the year. When we look into next year, some of you may know that there's a new Swedish tax legislation proposed. We are right now trying to assess the impact for us of that. We currently expect the tax rate overall next year to be in the same range as we had expected for this year. That's the 25%-30%, somewhere in the middle of that range. Moving back to the cash flow. We invested SEK 174 million overall in shares and participations in the quarter, which almost entirely comprised of the acquisition of Paprika Latino and Zitius open access communications operator in Sweden.
The SEK 23 million of other cash flow from investing activities comprised mainly of the end payment from the sale of Bet24 that Jørgen just mentioned. Cash flows used in investing activities therefore totaled SEK 179 million net in the quarter. We reduced our borrowings by SEK 363 million in this seasonally weakest quarter of the year, and we have therefore had lower total borrowings of SEK 1.3 billion at the end of the period. We have now reduced our net debt by 66%, or more than SEK 1.2 billion year-on-year to SEK 630 million in the quarter. This is equivalent to 0.3 times trailing net debt to EBITDA.
We have almost SEK 5.8 billion still of available liquid funds in the end of the period when we include our unutilized credit facilities, and we have a stock market value of our shareholding in CTC that was almost SEK 3.6 billion at the close of trading on the last day of the quarter. All in all, we are therefore now in a much stronger financial position than we've been before, and we'll continue, of course, to invest in the long-term future growth of our businesses, as well as the long-term enhancement of shareholder returns. I'm back to you, Jørgen.
Thank you very much, Mathias. A quick summary before we move to the Q&A. We are making the investments that we are making now in order to drive future growth. The pay TV markets are increasingly competitive, for we have invested to secure the most attractive content for years to come, so that we can take subscriber market shares and consolidate our market leadership. Our Nordic efforts are focused on our premium HD channel offering and Viaplay, while in the emerging markets, we have launched new HD movie channels in Russia and the CIS and added a prepaid satellite service in Ukraine. All in all, this will reduce profitability levels in 2013, but increase our subscriber revenue and profit growth potential in the medium and longer term. Ratings are improving our stable forward Scandinavian free TV operations, and we have reduced our full-year OpEx expectations.
Our focus is now on taking back market shares. We have taken audience and ad market shares in almost all of our emerging free TV territories, while at the same time achieving cost savings and improving overall profitability levels. We are better positioned to benefit from the return to sustained growth when it comes. Financially, we are stronger than ever with low borrowing levels and substantially available liquid funds. We have done some key deals and there are more to come as we continue our organic and M&A investment in content, technology and geographical expansion. That concludes our comments on the results, we will now be happy to answer your questions. We have a lot of people on this call today and want to answer each of your questions. To allow time, please limit yourself to no more than two short questions each.
Operator, can we have the first question, please?
Thank you, sir. Ladies and gentlemen, we are now ready to register questions. If you'd like to ask a question, please press star, followed by the digit one on your telephone keypad, and you will enter the queue. Should you wish to cancel, please press star two. The first question comes from Adrien de Saint Hilaire with Exane. Please go ahead.
Yes. Good afternoon, everyone, and welcome, Jørgen. Good luck in your new position. I'd like to clarify a few things in pay TV. First of all, if you're still guiding for ARPU growth next year, that means that you're expecting, I think, a significant decline in premium subscribers. Can you sort of guide us on what kind of premium subscribers you expect for next year? That's the first question. The second question is about Viaplay. Can you tell us if the trend in subscriber growth, well, the latest trend in subscriber growth over the last couple of days and weeks, especially in the wake of the arrival of Netflix and HBO. Have you seen a significant slowdown or a significant increase, or if you can quantify this, please? Thank you.
Thank you very much. If you look at the ARPU growth, of course, what we are saying right now is that we see fights when it comes to our DTH platform, particularly in Denmark. We see also that the revenue mix that we have right now due to the fight in DTH in Denmark and due to other third-party networks not performing as we anticipated, we of course see a revenue mix shift. When it comes to Viaplay, we have seen over the period a clear increase in terms of subscribers, we are the content leader when it comes to these services and therefore, of course, we expect our increase to continue.
Okay. For example, in terms of the number of subscribers you expect at the end of next year, can you have some sort of number here?
No. Far what we are not doing is that we aren't giving out the subscriber numbers. It may come at a later stage, but right now what we can say is that the subscribers are increasing and that is of course on the back of all the content that we have, which is quite a superior offer in the market.
Sure. I was actually referring to the premium subscribers, so DTH and third-party network. What do you expect for 31st of December 2013?
Yeah, we expect it, as it is right now, again, we expect them to be lower, but we of course expect that the combined DTH, IPTV, and Viaplay subscriber base to grow.
Okay. If I can ask just one follow-up about margins in Free-TV Scandinavia. From what you can see in terms of current ad trends and investments needed, will you expect margins to grow in 2013 in Free-TV Scandinavia?
What we're looking at is that, of course, it will depend on the market and how the market will evolve. We have the market forecast for IRM. We're forecasted for Norway a growth of 5% next year, and in Sweden, a growth of 3%. Unfortunately, we don't have the DR figures yet, but if the market should grow accordingly to the forecast and the market in Denmark should come into better shape, we see around a 20% margin for the Free-TV in 2013.
Okay. Thank you very much.
We will now move to our next question from Stefan Nilsson with SEB Enskilda. Please go ahead.
Thank you. Hi, Jørgen and Mathias. I'd like to kind of understand a bit more about your pay-TV guidance. Obviously, it's a huge difference in margins, which implies that costs will be up more than they've been in the past years. Could you kind of explain a bit more where the cost increases come from? Because if I understand it right, a lot of your pay-TV costs are after all variable and depending on the subs you add. So maybe you could split it up a bit more.
Yeah. If you look at the investment that we are making right now, it is of course in content, as you say. It is in sports content. That is fixed content. It is in the movie content that we're investing in. It is in Viaplay as well. It is in marketing. Then, of course, if you take the last thing in that mix, when you look at the margin guidance for 2013, is of course that it is increased competition, and we see in the DTH market for sure, we have a tough fight there. It mainly consists of increase in content and simply a better offering to our consumers going forward. Because now what we have been doing with the movie acquisition is that we have signed them off until 2016 and 2017. The sports is signed up, Danish Superliga 2015, Champions League 2015, Premier League 2016.
We even managed to get the Premier League for Denmark as well for our DTH platform. It is long-term now that we have managed to secure very good content for our platform, which means that our products should be very strong in the market.
Sure. What I don't understand is that a lot of these deals are already taken in the cost base this year, and you're launching new channels. There's a marketing war going on in Stockholm as we speak. Still, you're guiding for 15% margins in Q4, but then they should collapse in the next year. Just kind of what's the new cost drivers in terms of content that aren't already in the numbers?
Stefan, Mathias, the way we should look at it is, as Jørgen said, it's a couple of different things. One, the content cost increase is the content investments we're doing in HD, in the Olympic Games. We're going to start taking cost from next year, for example, and the sports costs. In the sports costs, you both have new content, but you also have a lot of inflation in existing content as well. A lot of that starts kicking in from the beginning of next year. Even if some of it has been announced, that we renewed, for example, the Champions League, et cetera, we're going to have an increased cost for next year for that price. That's one thing that we are doing.
The HD push, a lot of it's going to be launched toward the end of this year, that's going to see an impact from the beginning of next year. That combined with the fact that over the course of the last quarter now, we've seen that, as Jørgen said, that the acceleration of the decline of the DTH bases has been a little bit faster than we've anticipated before. The earnings potential from the DTH business has been slower or slightly lower, which means that the payoff for these investments, which is fixed cost investments, they're not so variable as we discussed, are not as high as we anticipated before.
At the same time, of course, we're pushing more into these content areas and strengthening the products in order to make sure we win this in the long term, because it is long-term For the Nordic area, of course, longer term, we believe that Viaplay is a very strong product for other markets as well. We're taking additional investment in Viaplay at the same time. If you factor them in, if you try to simplify the delta between the profits from this area next year and compared to this year, if you want to simplify it very much, it's one third from lower earnings from the old pay business, one third from the strengthening of the content and building a much stronger product, and around one third from the investments we do in Viaplay.
Okay, great. My second and final question is a bit shorter, when you say you're going to grow earnings from here, this is a new normal. It's from the 10%-12% margins that we should look forward to 2014, 2015. There's nothing non-recurring. This is basically the new normal in pay TV.
Of course, we expect all these investments that we are doing to have an impact and to push further future growth and future margin expansion.
Revenues for that DTH will continue to fall in for 10 years or so. It will be the same kind of flat revenue growth probably for a few years in that perspective.
Our expectation is that with the investment we're doing, that we will return to healthy growth in the business. Exactly when and how, it of course depends on the competitive situation and other things, we believe it will return to growth.
The whole idea is, of course, when we invest in this content and looking at our content offering going forward, it is quite strong. Of course, it is something that we will market heavily in order to make sure that people understand that going forward, if you want best movies, if you want the sport and so forth, best TV series, own produced content, we have a very strong offering. Compared also to some of the competition, which we have not lost any content, which some of our competitors have done. We have actually a very strong and enhanced content offering going forward.
Okay, thanks so much.
Thank you.
Our next question comes from Rasmus Engberg with Handelsbanken. Please go ahead.
Yes. Hi. Can you hear me?
Yes.
Yeah. Hi. I had a question on your comments regarding your Free-TV business. As I see it, you lost ratings share in all Scandinavian markets, yet you say you are growing. Surely we are not looking at ratings sequentially or am I missing something?
If we're looking at the share viewing for the third quarter,
Yeah
we have grown the Swedish Free-TV operation in terms of TV3, TV8, and TV10. Of course, what is positive for us is when you look at TV3, that the programming department at TV3 actually has managed to find good shows which have had the appeal to the consumer and which then means that we are doing a bit better than we did last year. TV6 went down in the quarter. That, of course, is due to the Olympics, that we have a lot of male audience, people going to SVT and to watch the Olympics. Looking at TV3 in Denmark, in Q3, TV3 managed to grow from last year, to be precise, 10.49 to 10.70. The same did Puls from 2.93 to 3.44. They actually managed to grow these two stations.
Again, the same thing happened with the Olympics for TV3+, where we lost the shares versus same quarter last year.
The Olympics in Sweden was on public TV.
Still what you are doing is, of course, is that you take, unfortunately, a lot of the male viewing away, which of course is something which is healthy for helping our TV6, our main stew TV6. TV3+ in Denmark was affected the fact that TV 2 also as a commercial broadcaster had the Olympics.
Okay. In Norway, we lost shares on TV3, but we managed to gain shares on Viasat 4.
Yeah.
Of course, if you see Norway, if you take the markets, we will say, I think that we have done a good job and the program people have done a good job on TV3 in Sweden, and we also see for the house, the first two weeks in Q4, that we actually gaining, as it looks right now, as entity as such. In Norway, it is tough now that we are number 3. We have some good shows, which of course we can take with us to next season. That is also why we are saying for us, it is not so much about the money. It's more about the execution because we do have money in almost all of the slots.
It is simply up to our programming people, our editors, and our scouters, and our content people to go out and get the best stories and produce the best content for our viewers. Just because that you double the investment in the slot does not necessarily give you double ratings, as you of course know.
This is the way we look at it. We are stabilizing. We are improving when it comes to our commercial viewing. Of course, we are glad that we produce content that more viewers would like to watch now. This is, of course, where everything begins for us.
My question then is, given that over these three markets and the three quarters, you have lost ratings in all markets, in all quarters, except in Q1 in Sweden.
Just wondering, what's your pricing power going into negotiations about price next year? Don't you think you need to promise for next year to increase spending in free TV significantly?
There are many reasons for price increases. With improved rating performance in Sweden, of course we believe that we have a more attractive product going forward next year as well for the advertisers. As you know, you are being rewarded on your historical merits when it comes to rating. We are stabilizing, and we are increasing a bit. The programs we have are also, in terms of demographic, very interesting. We see that also when we look at the online viewing that we're having, where we are by far the largest in Sweden. We saw since week 33, according to MMS, we have 51% share of the online viewing in Sweden amongst the TV channels. That, of course, implies that we have young target groups. We have very good target groups.
I even read somewhere that Anna Digges, as you see she was English, is our fantastic female audience share. This is one component. Of course, there's still a demand for TV ratings in Sweden, and that, of course, is another thing which could drive prices next year.
Just finally on this subject. Last year it was basically seen as a disaster in Sweden in Q4, where you had 34% rating share. Presumably you would not be happy with 34% in this Q4. Is that correct?
It's a tough thing. You can never be satisfied, to be honest. We want all the shares in the world. That is what we are trying to get. Most important for us is that we produce content that our viewers they like. That, of course, is reflected in that we should grow our shares, and that is always the aim. Of course, we grow the shares in the right target groups. That is the aim for us in the program department. We would like to gain shares also in Q4. Yes.
All right. I'll just take one very quick question, I'm not going to take all of this conference call. These two acquisitions, Zitius and TV 2 Sport, are those in Pay TV Nordic? Is that where they will be reported? Are they included in the sales and EBIT guidance, if so?
Zitius will be reported under broadcasting services, not under Pay TV.
Okay.
It's not included.
All right.
TV 2 Sport, Denmark will be included in Pay TV Nordic, but it is not included in the guidance right now.
All right, thanks.
Ladies and gentlemen, if you would like to ask a question, please press star followed by the digit 1 on your telephone keypad. Our next question comes from Lisa Yang with Goldman Sachs. Please go ahead.
Hi, good afternoon. My first question would be on Pay TV Nordic again. I just want to clarify, you are expecting flat sales next year. Given your market leading content, why top line will not be growing? Are you basically assuming you will be losing share to other players and to other platforms? Is there any particular reason why satellite customers have declined more than you expected? Is that an overall decline in the market, or again, is that basically MTG losing more share? The second question on Pay TV emerging markets. Can you also explain the SEK 50 million loss you expect next year? Just give us a sense of the breakdown of where you are going to invest. You also expect stronger revenue growth. Why is not the cost offset by stronger revenue growth as well? Where do you see the long-term margins in this business? Thank you.
If we start with the sales forecast, of course, what we are seeing right now is this revenue mix where we see that we're losing somewhat on DTH in the Danish market, particularly because of the increased competition. We are losing a bit as well when it comes to the IPTV, which is higher ARPU customers, of course, than the Viaplay customers as is right now. So the revenue mix is different in 2013. What we expect going forward is that we will start to increase again in IPTV sales, because our content offering is superior. And also as we just said, we are launching new HD channels, which of course will help ARPU increase as well on DTH going forward, when we have high uptake on HD subscribers on our DTH platform. When it comes to Russia and to Pay TV emerging markets, we're investing in content.
We're investing in new movie channels. And of course, we foresee that over the coming year, we expect that we will get much more customers. The thing is that again, with the movie deals, it's something that you are paying now per month going forward. And of course, the customers come over the period. So we do believe long-term that we will increase among sales, and also that we will go back to profitability time as well in due time.
Just to go back, you mentioned several times you're seeing increased competition. Can you give us a couple of names? And what are your competitors doing?
We see, for instance, in Denmark, you have seen on the DTH market that you have seen that TV 2 became suddenly a pay TV channel, which gave a big boost to a competing platform, Boxer, a DTT platform, selling a big content package very cheap right now. So there we are in a tricky situation. That's why, of course, we're happy that we managed to secure the Premier League, because always that, of course, will make sure that over time we'll have a more stable DTH base in Denmark. In Sweden, we are simply seeing, for instance, in cable this quarter that the IPTV network, some of our customers are simply not growing. But of course, going forward, the competition will continue, and that's why that in the end, it will, of course, be the company having the best content who's going to win this.
Of course, we are saying that the consumer will go there. It takes time. They have to find the whole point. They have to change probably as well, platform. Over time, of course, we will hopefully expect it, of course, to be very strong. We have good offering, we have good content, we have security long term. I think that is quite evident going forward, that we are superior in the content offering and therefore should grow as well going forward.
Soren, can you also repeat again what are your expectations of longer term margins in both Nordic and emerging markets?
I listened to this here. I think if you look at the Nordics first, I think what we're trying to say right now is that next year we know largely where the levels will end up. After that, I think we have expectations that it will grow. If they grow to the same level as historically, that's still to be seen, I think. That they will come up, of course, is one of the reasons why we're doing what we're doing, that we expect them to come back. In terms of emerging markets, of course, as Jørgen said, I think the push on the premium side in Russia is a fantastic opportunity if we get it right, of course. That could be a very, very substantial business for us moving forward if things play out in the right way and we do it well.
If that's the case, margins will definitely come back very strongly. How fast it's going to take, that's still to be seen, I think. We expect the following year to be in a break-even situation, at least.
Great. Thank you very much.
We will now take our next question from Niklas Djuberg with JP Morgan.
Hello. Just to confirm on the recent acquisitions that LNT and TV 2 Sport are included, if so, could you please break out the impact? Thank you.
Sorry, can you repeat that? I didn't really hear what you said.
Hello. Just to confirm that the recent acquisitions, including LNT and TV 2 Sport, are included in the guidance, and if so, could you please break them out? Thank you.
They are included in Q3, LNT. I'm not really sure I understand. It's an emerging markets Free-TV. We haven't really broken out the financial impact yet. It's not very material.
TV 2 Sport is not included in the guidance currently.
Thank you.
Our next question comes from Baldar with MTG. Please go ahead.
Hi. I'm calling from Danske. Could you give us some sort of a breakdown on the DTH subscriber base? How large is it in Denmark? Just to get a sense for how long this churn might continue.
It's difficult. What I can say is that we are seeing decline in Denmark, and we are seeing increased competition. What we are doing and what we are trying to do right now, for instance, with the HD channels, with the Premier League and so forth, is to make sure that the DTH base in Denmark somewhat will stabilize. Of course, also depending on the competition, how long time that we will see this aggressive competition from the competitors in Denmark. I think it's difficult to split them up.
Okay. Do you anticipate the subscriber loss while maintaining your prices unchanged? Or is it a mix that you're lowering your prices and still expect subscribers to churn?
I think it's a little bit difficult for us to talk about our pricing strategy moving forward, but I think the volume impact is the biggest one.
Okay, thanks.
Our next question comes from Laurent Saglio with Oddo. Please go ahead.
Thank you to take my question. I have two questions. The first is I'm still a little bit confused about this pay TV resetting of the investment you need to do. Ultimately, your share price is losing 10 times what you're going to invest next year, roughly, which seems to indicate to me that it's structural, not just to answer to a competitive or competitor offensive. I just want to understand. You mentioned Denmark, you mentioned the fact that ultimately you need to get some good content. The new competitors, i.e. the new platform which have come through with internet or other sort of platform, in your mind they are existing? Or it's really the traditional pay TV operators which are bothering you and you want to make sure you invest in order to get to leapfrog against them? That's my first question.
If we look at the DTH situation we have described in the biggest market, Czech, if you look at Sweden, it is not looking the same as it does in Denmark where we have fierce competition. It is not that people will go away from DTH. On the contrary, what we have done is, of course, that we have strengthened the offering. Combined DTH and IPTV and Viaplay, we will grow going forward. Again, the offerings as well on Viaplay as it looks right now and the DTH is also different offerings. We are capturing new markets with Viaplay. In the old days, as you know, we had only DTH, then we went to virtual operators, now we have taken the next step and we go online with Viaplay and OTT and can reach basically all population more or less in the Nordic markets.
Combined going forward, whenever the customer they want to find us, we have an offer. We have our product they can find, and if they can't get it with a distributor, they can find it online. Of course, we do believe going forward that we will take market share and we will increase our combined subscriber base.
Okay. That's what I wanted to know. It's not structural. You're investing in getting somewhere or another more clients. I understood.
Yeah.
Okay.
Sorry, can I just add one just so we maybe forgot a little bit in this whole thing. If you, as Jørgen said, in the Swedish market, as an illustration is we have the cable operators only digitized probably almost a third of their subscriber base.
for us that's why our expectation of growth for us on the virtual operator side has slowed down is because they have started to actually decline as the digital base. It's more than 1 million households that are still analog.
means that, of course, these people want to watch Premier League, they want to watch Champions League, et cetera. Now all of a sudden we have an opportunity to get them in other ways. That's one of the things. The other one, I don't know how familiar some of you are with the Swedish market, there is a big trend now that networks are going from being close networks, like in the case of Telia networks and Com Hem networks.
now go more for open networks. That's what part of the strategically why we acquired Zitius, who is an operator who actually sits on top of these open networks and can actually distribute our content together with other people's content as well. I think that gives me a long-term, very positive view of the Swedish market, for example. Whereas the Danish market is a little bit more complicated in a way, the Swedish market is obviously being the biggest one.
Okay. Obviously it come as a surprise, I understand why strategically you're doing it. On the second question I have, I'm surprised nobody mentioned so far a possible disposal of a free TV operation in Scandinavia and what MTG could or could not do, and if obviously you have been invited to the data room. Is it possible you expand on this subject? Thank you.
What we have decided on this, sorry, is to say that we have no comment. That we have said all along, I see speculations all over newspapers, and I think we have been used in issues or whatever. Therefore, I think that the most safe and secure thing to say is to say no comment. We cannot comment on that one.
Okay. If I am not specific on price or blah, blah. I saw somewhere on, I don't know your countries as well as you obviously, that there were probably regulatory hurdle if that was going to happen, and you may have to cover some of the channel on SBS. Is that correct? In your assumption, you think there will be indeed some regulatory, you will have to do it as a team or not?
I think what we are saying is that we do have no comment to this topic. As a general comment, I can say that to predict the competition authorities, what they would like and would not like to see and so forth, I think that is very hard. I think if you want to make the assumptions that we're discussing right now, you need to talk to each of the competition authorities and have a process or whatever. I think what we are saying right now is that we have no comment on the SBS back.
Okay. Thanks.
Sorry for that.
That concludes the question and answer session. I will now hand the call back to Jørgen Madsen for his concluding remarks.
Thank you, operator, and thank you all for your time today and for your continued interest in Modern Times Group. Of course, we look forward to talking with you over the coming weeks and months to keep you updated on our progress. Thank you and goodbye for now.