Good morning and good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the MTG Third Quarter 2011 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 any difficulties hearing the presentation, please press star followed by zero for operator assistance. May I also remind you that you can find presentation slides on MTG's website at mtg.se. I will now hand the call over to Hans-Holger Albrecht, MTG President and CEO, who is joined on the call today by Group CFO Mathias Hermansson.
Thank you, operator, and good morning and good afternoon, everyone, and welcome to the conference call of MTG. As you have seen probably by now, sales were up 4% year-on-year in the third quarter if you take the constant exchange rate, and we delivered another record quarter for the company. You know that Q3 is the seasonally lowest sales period of the year, but each of our four broadcasting divisions generated sales growth at the constant exchange rate. We have increased our investments in programming, channels, technology, and platforms, but still, despite those investments, we delivered a higher group operating margin of 12% when you exclude associated company income. Before we go into more detail, I would like to emphasize that we have not seen any signs of deterioration in the Scandinavian advertising market so far.
Yes, we know the comps are getting tougher, and we are not immune, obviously, to what is going on elsewhere in Europe and the world. Yes, we know as well things can change very quickly in our industry, but so far, demand levels have remained strong. We will obviously know more when we enter the upfront discussion in the coming months with our advertising clients. The picture remains different in Eastern Europe, where the recovery is lagging and pricing levels remain low, but we have taken audience and advertising market shares in most of those territories. On the pay-TV side, the level of subscriber growth for the major Scandinavian cable, Satellite, and broadband pay-t o-operators is slowing or declining.
We can see that OTT is taking share and that there is an opportunity for our premium service on multiple platforms to take share away from the DTT operators in particular, and we will therefore be investing further in our content and service offerings. When it comes to the emerging markets' pay-TV operations, we are clearly on track with the development of our platform, and we are now increasingly focusing on improving the quality of the mini-pay channel contracts so that we can drive up ARPU levels in the future there as well. As always, there are always areas in the company we can improve or we have to fix, but overall, if we take the helicopter view for a second, obviously, the company is in a good shape overall.
Now, if we then start to look at our four broadcasting divisions in more detail and start, like always, with our free TV Scandinavian business, while there aren't any official numbers out yet, it is estimated that the Swedish TV advertising market was up around 4% year-on-year in Q3, which is in line with the IM's forecast, and that the Danish and Norwegian markets were both up around 12%. Our sales in that period were up 7% year-on-year at constant exchange rates, and we took market share in both Sweden and in Denmark. Prices have continued to rise in each country, and we were close to sold out for most of the quarter in each of the markets.
The Swedish ratings have now recovered to the high level that we saw a year ago, and this reflects the earlier start of the fall season this year and the success of our slate of local production. Our Danish ratings were affected by the underperformance of some local productions, but also by the September general elections, which favored viewing on the incumbent and, obviously, the public service channels. However, this did not stop us taking further advertising market share in the quarter, and we are working to correct the short-term ratings underperformance. Our ratings in Norway continue to be affected by the two new rival channels launched at the end of last year. We have changed now the Program Director and are working to ensure improved programming selection and execution, which will mainly obviously come with the new season next year.
If we look at the OpEx segment, OpEx was up approximately 10% if you take constant exchange rate following the programming investments in all three countries, including the launch of TV10 in Sweden in September last year. Operating profits were therefore slightly down year-on-year, but we still delivered an operating margin of 22%, which is good if you consider it's the third quarter. If we talk about the outlook for Scandinavia, the demand, as I said earlier, continues to outstrip supply. Advertising prices are up, and the ratings in our main markets, Sweden, are back to the high levels. Obviously, and don't forget that the comps are getting tougher in the second half of the year for us.
We have not changed our expectation for the full year if it comes to OpEx, which is to be up in line with the growth we saw last year at constant exchange rates. However, we did invest less than anticipated in the third quarter, and it is therefore possible that we may see a similar trend in the fourth quarter, but it's really too early to say right now, and we have to watch a bit the competitive landscape. If we then move on to our Nordic pay-to-view business, we have seen revenues up 4% year-on-year if you take constant exchange rates, which primarily reflect 8% satellite premium subscriber ARPU growth at constant exchange rates again. ARPU is up due to the previously introduced price increases and the increasing number of subscribers to our HD, PVR, and multi-room services.
Our total premium subscriber base was slightly up year-on-year and slightly down quarter-on-quarter at more than 1 million subscribers. The summer months are a seasonally slower sales period, but we can now see that subscriber growth is slowing across the market and that digital penetration is not pushing ahead as far as anticipated. The one exception is OTT, or the internet-driven business we have, which is obviously taking share from other distribution forms because it is simple to use and simple to access, and it's available on multiple devices in, and even more important, more and more out of the home. That is why we are investing in our Viaplay platform and in enhancing our content offering in terms of available channels, HD, and 3D services in order to take market share away from other platforms.
We are also, going forward, being more selective internally in terms of the type of virtual operator deals we are doing in order to ensure direct and immediate access to the end subscribers. Operating profits were up 17% year-on-year despite all the investments that we have made in Viaplay and the addition of our seven new Viaplay channels since the beginning of last year, and the business therefore reported an increased operating margin of 20% for the quarter. Briefly to the outlook, we expect the growth to be driven by rising satellite premium ARPU and more modest levels if it comes to the virtual operator subscriber growth. If we talk about OpEx, it will continue to increase, obviously, due to the premium content price inflation, and we will also invest further in enhancing and promoting our Viaplay, the DTH, and the virtual operator content and services offering moving forward.
Based on where we are today, I think we now expect our full-year operating margin to be approximately in line with the level for the year to date and therefore higher than last year and previously anticipated. If we then turn to the free TV operations in the emerging markets, the Czech and the Lithuanian advertising markets grew in the quarter, but the recovery in the other markets, unfortunately, is still lagging. We did, however, which is more important for us, take audience share in all but one territory and increased our ad market share in all but two of the markets, and the second sales were up 12% year-on-year if you take constant exchange rates. The combined OpEx was also up year-on-year at constant exchange rates as we selectively invested in programming to boost our ratings and launched our full schedule earlier than usual in those territories as well.
As a result, obviously, we reported an unchanged operating loss in the seasonally lowest sales period of the year. The outlook, again, there are no signs of a trend shift in these emerging advertising markets at this stage, and the prices remain low, so no change to the first quarters we see this year. If we then take in more detail the most important markets, which are together generating 14% of our year-on-year sales growth, let's start with the Baltics. There, as in Scandinavia, we haven't seen any official numbers yet, but the estimates suggest that the Estonian TV advertising market was down approximately 5% in the third quarter, the Latvian market was down a couple of percentage points, and the Lithuanian market was up between 15% and 20%. Our sales were up 19% year-on-year in the third quarter if you take constant exchange rates.
Our target audience shares were up quarter- on- quarter in Estonia and Lithuania, but down in Latvia due to the run-up to the September general elections. Our Lithuanian channel reported the best ever start to the fall season, and we have launched a third channel, TV8, since the end of the quarter to complement our existing TV3 and TV6 formats in that market. If we look for the outlook, briefly, the prices are up and the markets are growing, although obviously from low levels and only gradually. The markets do differ in performance terms, so we continue to only expect for the region a mid-single-digit percentage point market growth for the year. We are investing in programming, but do not expect any major changes in OpEx levels this year for the Baltics.
If we then secondly turn to the Czech Republic, there, the TV advertising market is estimated to have been up approximately 5% in the quarter, which is in line with previous quarters, but obviously, we already see there still is that prices are low. Our sales, however, were up 18% year-on-year if you take constant exchange rates, so it is pretty clear that we have taken further market share if it comes to the Czech Republic. This reflects the increase of our audience shares or the target audience shares, which rose above 28% for the first time ever, and we have seen that all three of our channels increased the target audience viewing shares in the quarter.
Obviously, we are benefiting also from the addition of the new channel, Prima Love, which was launched in March this year. The outlook for the Czech Republic, the low growth environment has continued due to the low pricing levels, and we do not expect any change for the rest of this year. However, we do expect to continue to take market share on the back of higher audience share, and the cost associated with the launch of Prima Love will have an impact, obviously, for the rest of this year as well. Finally, if we move to Bulgaria, the TV advertising market there is estimated to have been down approximately 10% year-on-year in the third quarter, and our sales were down 3% if you take constant exchange rates, so we have regained some of the market share that we lost in prior quarters.
As before, demand levels and pricing remain low, whilst our combined target audience share is broadly stable. The outlook for Bulgaria, there are no signs of growth yet or of the incumbent raising its prices. There is no change, therefore, to the overall view at this stage that the Bulgarian TV ad market will not return to growth this year. We will, however, continue to invest selectively to drive up our viewing and market shares. Now to the pay-TV emerging business, where we have seen sales up 14% year-on-year, again at constant exchange rates following continued strong subscriber intake on our platforms in Ukraine and Russia, and the addition of almost 15 million mini-pay subscriptions over the past year. The Ukrainian and Russian platforms are developing according to plan, and together with the Baltic platform, have added 88,000 subscribers over the last year and 22,000 in the last quarter alone.
We have also added 10 new Viaplay channels to our emerging markets' pay-to-view offering since the beginning of last year, including A channels, and we are rolling out our mini-pay business in Sub-Saharan Africa as planned. Despite all those investments, profit doubled year-on-year and our margin expanded to 6% in the quarter. The outlook for this area, we expect continued satellite subscriber growth to be driven by the expansion of our Ukrainian and Russian businesses, but also expect low or no growth from the mini-pay business, as we now shift our focus to improving the quality of our contracts and ARPU levels. It is no longer purely a volume game, but more about securing long-term revenue growth potential, and we are continuing to invest, so as before, do not therefore expect any significant changes in profitability levels at this stage. That concludes the overview of the operation.
Before I hand the call over to Mathias, our CFO, for his comments on our financial performance and position, I would just like to come back to some of the comments I made last quarter about CTC Media. As we indicated there and can confirm now, we have a strong new partner with whom we recently attended high-level meetings at the Kremlin regarding the future of TV and media in Russia. We can see the partnership is functioning. We can see that CTC is well-positioned and is focused on executing a very similar multi-channel and multi-platform media house strategy to the one we have developed here quite successfully in our markets. That's about CTC, and now over to you, Mathias, for the financial comments.
Thank you. As you all know, Q3 is the seasonally lowest sales quarter of the year, and given a largely fixed cost base, it's also typically the lowest profit quarter. Currency effects that we have been impacted by over the last two years, I think, were less marked this quarter than in recent quarters, but the year-on-year strengthening of the Swedish krona against more or less all our operating currencies reduced our constant exchange rate sales and cost growth by approximately 1% on a group level. These currency effects are expected to continue to gradually diminish moving forward based on the current exchange rate levels. Hopefully, we will have a smaller and smaller impact of this next year.
Our 4% year-on-year sales growth at constant exchange rates was matched by a 4% OpEx growth at constant exchange rates in the quarter, and our profits were up 6% year-on-year in Swedish krona with an increased operating margin of 12%. Total group operating income was up 21% year-on-year following the increased contribution from our associated company, CTC Media. Our net interest costs were down year-on-year in the quarter due to lower borrowing levels. Our other financial items line includes the impact of two non-cash and non-operating items that had a larger than usual combined impact this quarter and accounted for an almost SEK 130 million negative year-on-year impact on pre-tax profit.
To give you some flavor on what these two items were, the first one was a SEK 64 million non-cash financial loss that arose from the decline in the CDON share price and the resulting change in the value of the option for the CDON convertible bond that we subscribed to last year, if you remember. The second item was a non-cash financial gain of SEK 12 million arising from new share issues in CTC Media as part of their incentive plan, which diluted our ownership in CTC Media slightly. If you remember last year, this impact was a positive SEK 71 million gain, so the delta there was lower, obviously.
These factors will continue to impact us, I think, moving forward, so we decided also to publish both these numbers as well as the associated company income from CTC Media on our web page at the end of each quarter and before we publish our results in order to assist all of you to understand these items and know the numbers because they can be very tricky to estimate. The Q3 P&L tax rate of 30% was at the top end of the anticipated full-year range that we said was between 25% and 30%, and this was mainly due to two effects. One is that we had some deferred tax payments from prior periods in the quarter and also a higher tax rate from CTC Media, as most of you already know.
The underlying tax rate for us when excluding these effects was 26%, which was similar to last year's levels a full year. As it stands today, given the reported numbers were slightly higher, we expect the full-year tax rate to be in the top of this guidance range of 25%- 30% that we discussed earlier. Our net income and EPFs were down year-on-year, which was mainly due to these non-cash items in the financial net which I recently mentioned. When we move a little bit to the cash flow, we didn't receive a dividend payment from CTC this calendar quarter at the payment date for the third quarter dividend in October. That means that actually in the fourth quarter for MTG, we will receive two dividend payments we expect from CTC.
Our cash flow from operation, the gross cash flow, was therefore down in the quarter, but still up for the year to date, year-on-year. The particularly high negative change in working capital in the quarter, as you all probably have seen, was primarily due to timing of payments for certain key sports rights and also increased programming investments that you've seen in our P&L. As a result of this, we don't expect that this will continue into the fourth quarter, or rather the contrary, that we will see a positive and rather sizable positive change in working capital in the fourth quarter. When we look a little bit further down the road into next year, I think we should all expect that we continue to tie up slightly more money in our working capital, but more in line with this overall growth of the business that we have.
Remember that you will continue to see quite significant swings between the quarters, which can be quite unpredictable as we have seen historically as well. Unlike last year, we have not made any investments in shares, and group CapEx has remained quite low at less than 1% of group sales, so we have been quite conservative with cash, as you've seen. We increased our borrowings by SEK 68 million in the quarter, but we still had only drawn down SEK 2.4 billion of the SEK 6.5 billion revolving credit facility, which compares with the SEK 3.5 billion that we drew down at the end of September last year. Our net debt was therefore substantially lower year-on-year, but slightly higher quarter- on- quarter at SEK 1.9 billion or 0.7 times EBITDA.
Our profitability continues to increase with both return on capital employed and return on equity closing in on the 30% level. Now back to you, Hans-Holger.
Thank you, Mathias. Maybe just to summarize before we then move to the Q&A session, as you have noticed, we have delivered a record short quarter in terms of sales and higher group operating margins, and that is very important for us despite all the investments that we have been making into this product and the operations we have in the company. The Scandinavian advertising market has remained strong, and we have not seen any falloff in demand so far. We have seen as well that our Swedish audience share is back to its high levels, but obviously, we do have issues to fix in Norway. I'm not concerned if it comes to Denmark. The third point to take away is that the recovery in the emerging advertising markets is lagging, but we have increased our audience and market shares, and we are investing to further build our position.
Operationally, I think the Eastern European side is in good shape, and the last takeaway probably is that our Nordic pay-to-view business has amongst the highest margins in Europe now and is leading the way when it comes to the development of on-demand OTT or internet solutions, while our emerging markets' platform and channel business are rapidly establishing themselves as the growth drivers for the future. That's in a nutshell the takeaways from the third quarter, and it concludes our comments on the results, and we will now be happy to answer your questions. Operator, can we have the first question, 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 today comes from Stefan Nelson, SEB in Skellefteå. Please go ahead.
Hi guys, Stefan here, SEB. Could I start just coming back to the cost guidance for the full year? I'm not really getting it completely. Are you still reiterating 10% growth for the full year? That, to me, implies a way higher cost growth in the fourth quarter, but that seems not to be the case. Could you just repeat or kind of explain a bit more on the cost in Q4 specifically?
Hi, it's Mathias. Yeah, the 10% we haven't that we talked about before still remains, but we also tried to explain to you that since Q3 was slightly lower than expected in terms of cost growth, it's likely that it can be the same trend in the fourth quarter. If that happens, obviously, it's slightly lower than 10% for the full year. You should look at 10% as the ceiling.
Right, sure. It's just that the first half of the year was basically 5% in local currency, so it still would imply a big cost increase compared to Q3. Is that still what you're saying? You couldn't be more specific. Just tell us what the cost guidance is for Q4, basically.
At this stage, no, we're not going to be more specific because we have some level of flexibility in the fourth quarter as well. As you see, the Swedish ratings are back on track and it looks very good. Obviously, some of the investments we intended to do may not have to do, but we will monitor that and look into it.
Okay. Should we also take it that you have kind of reached a higher cost base for the free-to-air Scandinavia operations that will roll into next year, or are some of these costs kind of more a boost in the short- term?
No, I think you're right there. I think we lifted the cost base slightly here in the second half of this year, and obviously, you will see a similar year-on-year impact in the first half of next year. Moving one year down the road, the fall next year shouldn't be any major cost increases, we think.
Okay, thank you. My other question relates to the pay-TV business. The sequential growth is quite weak despite the continued ARPU trend. Is this kind of a negative mix in the subscriber base? Is it just the churn, or can you kind of talk a bit more on that and how we should see it going forward?
Yeah, I think it's a combination of three factors. The first one, of course, is that the third quarter is a low sales season normally, so you're a bit more affected, obviously, by what's going to happen on the churn side where Denmark still remains to be an issue to a certain extent. The second point is, as we see industry-wide in Scandinavia, we can see that new sales are slowing down, so it's more becoming an ARPU game or taking market share game than a growth factor on other distribution platforms. The third point, which is starting maybe to become an impact as well, and we have to monitor what can be positive for us, obviously, as well, is that the OTT starts to take some shares. The internet distribution becomes more important.
Okay. Since you seem to be kind of not taking market shares anymore the past few quarters, who is taking them right now, and are you willing to invest to take them back? You obviously have quite healthy margins in the pay-TV business.
If you go into detail, like for example, what kind of Digital has done in terms of subscriber performance scale, we have taken a lot of market shares in the last 12 months. When you look at the growth rates, for example, which came out from Telia, you can see the same trend that it's slowing down slightly. I don't think it's that we are not taking market share; we're losing market share. Where we are normally, we are taking market share towards the competition. What we obviously will do, of course, we will continue coming to the second part of the question. We will continue to invest in the OTT strategy, obviously, and we will continue to invest maybe in technology and content in order to take market shares, particularly from DTT, which we think is a good target for satellite customers, for example. We will continue to do this, but keep the balance, like we always said, I think, between optimizing the growth and subscriber intake and affordability.
Okay. It is still the same, as you said before, that DTH should be a slight decline, and you still expect growth even in the other traditional operator businesses, IPTV and third- party, or have you revised that downward on the third- party?
No, in general terms, exactly, it's the same story.
Okay, great. Thanks.
Our next question comes from [Zegniš Paradishi]. Please go ahead and answer in your company name.
Thanks. Just a couple of questions, really. Firstly, coming back to that free-to-air Scandy cost number, I mean, on our numbers, it implies that almost a 20% increase in Q4. Is that about right? The second question I had was really on the balance sheet. You know, what are your thoughts on that? Are you keeping flexible, or are you looking at shareholder returns or anything in the near term?
If I may make another goal on the cost on the free TV side for the fourth quarter, the 10% we mentioned was the absolute ceiling we were talking about. That's the kind of maximum we would anticipate. We want to keep a certain flexibility at this stage because we have to see how the rating performance is doing, and we want to see a bit of the kind of competitive landscape during the fourth quarter as well. Therefore, we can't give a kind of exact figure and wouldn't give an exact figure at this stage. What Mathias indicated, however, as well, if you look at the Swedish situation, for example, things are getting better in terms of ratings. Therefore, maybe the pressure to put in more money may ease. We can only keep it at this stage because, as I said, we want to keep the kind of competitive flexibility to respond to market conditions.
Okay.
On the second question, I can pick that one up, of course. We have a relatively strong balance sheet that you see, and there is an ongoing review on what to do with the balance sheet. Obviously, there may be other investment opportunities. There may be, as well, shareholder return we can have as well. At this stage, we haven't made any decision on how to move forward, but I'm sure you will find out very shortly when we decide.
Great. Thank you very much.
Thank you.
Our next question comes from [Stefan Leich]. Please go ahead and answer in your company name.
Hi guys, [Stefa] at Deutsche. A couple of questions on the pay-to-view side, if I may. Firstly, if you can care to give me a rough split of the ARPU growth, how much is coming from the previous price increases and how much is coming from the additional services? That's a rough split.
The majority, obviously, is still driven by the ARPU growth. It's driven by the price increases we do. We can see, as I said, a very healthy impact of the added service we are selling as well. If you just ask for the third quarter, the majority is the price increase.
Okay. Thanks. Looking at the pay-to-view environment, I mean, it looks to me, when I look at IPTV subscriber players, etc., that they and you as well, it's becoming much more promotional. Is that sort of something you would do you agree on that or not, really?
Yeah, you have, of course, you have a higher pressure. I hope you caught the question. You have higher pressure that comes through marketing because, obviously, you not only have the competitive landscape, but you have all the kind of new services and new functions and new technologies we have to promote. You see a lot of marketing activities, I think, from all pay-TV operators like we do. The benefit for us, obviously, is, of course, that we still have the integrated model and the cross-promotion opportunities within our environment. Marketing-wise, in general, if you compare this time to what was three years ago or five years ago, clearly, you have to do much more marketing than it was previously.
Yeah. Do you believe that there is a risk for price pressure? I mean, given the fact that if you look at Telia or what have you, they are offering loads of services at a lower cost than you are?
It depends what kind of customer you're talking about. If you go to the premium segment again, it's not so much about price. It's more about the value for money. Since we control and own a lot of the most attractive premium sports rights and movie rights and so forth, I think we don't feel that really the kind of pressure. If you go to the kind of very low ARPU basic tier customers where they bundle it together with other services, yes, of course, there may be more pressure. This has never been our bread and butter business. We have been always focusing really on the premium end.
True. I mean, I'm getting your channels as well on these IPTV offerings at a substantially lower price, and I'm wondering if there is a risk that customers like me will start churning given that I'm basically getting the same kind of channels for a lower price.
If you mean we lose a customer from DTH towards virtual operator networks or IPTV networks, obviously, for us, it's different than ARPU, but it's not a big difference in profitability. That wouldn't bother us too much.
All right, thanks.
Thank you.
Our next question comes from Paul Gooden. Please go ahead and answer in your company name.
Hi there. Yeah, Paul Gooden from RBS Search. Just a couple of questions. The first one is on emerging market advertising. It looks like growth picked up from 8% in Q2 to 12% in Q3, so a reasonable improvement, but you don't sound particularly upbeat about this region. I just wondered if you could add some color there, please.
Yeah, you have a bit of a mixed picture. If you go and look at the Baltic markets, they have been picking up. They have been becoming better, but it's a mixed picture, to be fair as well, where Lithuania was much stronger, for example, than the other two markets. In terms of growth and return to growth, if you take the third quarter, the Baltics have been positive. We haven't seen any change there yet in terms of performance. Whereas the Czech market is small growth, it's pretty stable. There, we don't see any changes either in terms of demand, a bit as well, maybe because prices are not going up that strong in that market. That's maybe one of the reasons as well. Bulgaria continues to be a kind of low-moving market as well.
There, clearly, we can see that the price discipline from the incumbents is not as strong as it should be normally for incumbents, which can have a negative impact as well. It is very hard to take a kind of general view or a general trend line at this stage. I think the best summary is what we did earlier to say it is stable. You see slight growth in some of the regions, but it's not the kind of clear picture you would have wished for probably at the beginning of the year.
Just to push on, I mean, the Baltics, 19% growth in Q3. I mean, that's a pretty strong growth number. Is there something in there that we're missing, or is that a real underlying organic growth number?
I think one of the things that you should remember is that there was the Euro basketball quarter in Lithuania, and that's why the Lithuanian market was outperforming the other ones so much.
Of course. Yes, I forgot about that. The second question is on the recent European court ruling. Are you concerned that could lead to increased competition in pay-TV or make it harder for you to monetize the sports and movie deals that you spend money on, or do you think you can kind of manage your way through this?
I think in the first court, it's an issue for the rights holders. As you know, the ruling was a bit, how to phrase it, unclear. If you ask the lawyers, they can't give you a clear answer either. If the rights holders are very protective with their brands and trademarks, for example, it's pretty much status quo. Fundamentally, I don't think it's a big issue for us, it will not change the industry, and we're not open for new competitors to come in, I guess. We take it at this stage relaxed.
Okay, thank you.
Our next question comes from Mikael Holm. Please go ahead and answer in your company name.
Hello, Mikael Holm, Erik Spencer. First of all, coming back to the OpEx in free TV Scandinavia, what was the reason for you having lower investments in the third quarter than you earlier guided for? You talked about the earlier fall schedule this year. Could you give some indication how much that added to cost inflation in this quarter?
It's a mix. We changed a bit the kind of programming mix in terms of in the last weeks before we launched a quarter in terms of what we do with local production and what we do with acquired production, which has a kind of positive impact. We got some more, and this is always a kind of moving part you have, obviously. We got some more intelligence when the other ones are launching their shows, and then you normally try to counter-schedule it right away. It was a bit driven as well by the competitive environment. Some of the shows we had over the summer had performed better than we anticipated as well, and therefore, there was less pressure probably to go too early. The lead-in to the full season was stronger than anticipated. This is sometimes what makes it hard to be spot on exactly on the figure.
You have to live with the reality, and you have to see the markets and the competitive landscape, and then sometimes do decisions very short-term instead of long-term. That's the reason you had this kind of difference in the third quarter.
Could you give some rough estimate what this effect with the earlier fall schedule, what that added to inflation?
No, we can't. Sorry.
Okay. Also, considering the very strong ad market in the Nordics this year, is it the case that advertisers have used the larger share of their annual volumes so far so that you in Q4 will be more dependent on the spot market?
No. So far, it is really a kind of normal mix. If you take the kind of usage between annual agreements and ad hoc, remember that at the beginning of the year, there was a very high demand. Advertisers were trying, of course, to secure the annual agreement to be sure that they get access to advertisers. I would anticipate in the fourth quarter you have exactly the same mix like in previous quarters between ad hoc and annual agreements.
Okay. My last question then is, could you give your take on the BSKB case with the regional exclusivity for sports rights in Europe? Do you believe that will have an effect on your business?
As I said a few minutes ago, I think for the industry at this stage, it has a very low commercial impact. It's nothing which will rock the board, at least in the next couple of years.
Okay, thank you.
Thank you.
We will take our next question from Rasmus Enberg. Please go ahead and announce your company name.
Yes. Hi. Handelsbanken. I understand that your cost guidance is reflecting how you rate. With that in mind, there seems to be clearly an issue in Norway. Can you describe more in detail whether this is your pretty significant rating losses? Does that reflect only new channels, or has your own programming not worked well at all?
No, I agree. Norway is a concern, and Norway has been an operational problem for us, which we have to fix. It has been, of course, the competitive pressure from the launch of the other two channels. To be fair as well to ourselves and in general, if you look at the kind of execution of the programming, we have not done the optimum. We picked the wrong shows, and the right shows we picked, we probably don't always execute correctly 100%. It's a combination of the competitive landscape, as well as operational issues. Therefore, we changed Program Director now, and we have to restart the kind of process when it comes to spring next year and do it better. It's painful, but it's something which we are used to. An operational issue, at least, you can fix normally if you get the right focus and the right people on it.
I've been sort of waiting for years now for you to launch a third channel in Norway. What are you waiting for?
Yeah, but it's always a question, of course, whether you put your money first into the existing channels with the existing penetration and the existing brands you have, or do you go over to a third channel, for example, with lower penetration, and you have to build everything from scratch? It's a trade-off. We're not excluding anything at this stage. So far, we have been relying on that strategy. We have seen now in the fall, so far, it doesn't work. Now we have to revisit it.
Okay. Did you have the experience of declining sales in Norway in this quarter?
No, I mean nothing extraordinary. No.
Okay. Can I just ask a completely different question then? With regards to your OTT venture, are you at some point willing to share with us your subscriber figures for OTT as well?
Yeah, at one point of time, for sure. I mean.
It's completely insignificant at this point. I seem to recall that they were something like 30,000 at the capital markets there, if I'm not mistaken.
No, no. I mean, it's up from that, obviously. That's the obvious. We don't share yet. We will do it when we think competitive makes sense and the environment is right for that.
All right. Thank you.
Thank you, Rasmus.
Our next question comes from Adrien de Saint-Hilaire Please go ahead and answer in your company name.
Good afternoon, everyone. This is Adrien from Exane BNP Paribas. I would like to come back on free TV in Scandinavia if you could give us a sense of the carriage fees growth versus advertising growth. First question. Secondly, can you tell us how you anticipate pricing to evolve given the sold-out ratios in Q4 and going into 2012? Are you, I would say, basing yourself on mid-single-digit price increases? If you could give us some color on those two points, that would be helpful. Thank you.
Yeah, I think if you start me with the second question, I might just think a bit to the first question. If you look at the kind of development in terms of pricing, obviously, it all depends on the demand curve. If you take a status quo situation we have currently, you can see that all channels or most channels are more or less close to a sold-out situation. If the situation stays stable as it is right now, obviously, you're going to see still the kind of demand curve probably overserving the supply curve. Therefore, there should be a good condition if it comes to pricing. That's the kind of general point. Obviously, if the markets change fundamentally, maybe those things are changing as well.
What we're saying, however, is if the advertising market starts to slow down or even becomes fetish or whatever, TV will be less affected than other media because what we have seen now clearly in the last 12 to 18 months is the kind of strong move from other media into television. What we have seen as well more and more is when people start to optimize marketing spend and marketing budget, they rather allocate more to TV than they do to other media. Whatever the impact will be as well, it may be not as massive and as drastic as we have seen in other crises. Overall, as I said, at this stage, as I said, the situation is not completely bleak for us. If the market stays stable as it is right now, then it should be good for pricing. On the first question in terms of the split, Mathias, would you want to take it?
If you look at the first quarter and also the year to date, you have carriage fees are growing quite a lot lower than advertising revenues this year. Normally, you can have like a benchmark saying that carriage fees grow always a couple of percentage points up to mid-single digits unless there is a fundamentally new carriage agreement that's put in place. Obviously, this year, ad market has been quite strong, so advertising sales have grown faster than that.
Okay. If I can ask two follow-up questions. Going into 2012, would you expect again carriage fees to follow the same trend, i.e., a couple of percentage points? First question. Second question, given the figures you have quoted in terms of ad growth in Sweden, Denmark, and Norway, is it fair to assume that you have, let's say, outperformed the market in Sweden, you've been in line in Denmark, and you have somewhat significantly underperformed in Norway?
If I take the first one on carriage fees, I think you don't expect any major difference in 2012 compared to this year, at least what we know right now.
I don't take the market share. We have been taking market share in Sweden, we have been taking market share in Denmark, and we lost in Norway.
Okay, thank you very much.
Thank you.
Our next question comes from Martin Arnell. Please go ahead and answer in your company name.
Hi. This is Martin at ABG. First question on free TV Scandinavia. Do you think that you could be back at viewing share gains in Norway already in Q1 next year, given the changes you're doing there?
Wow. It's a tough question. Obviously, you hope for it. You probably should see better performance in general. That should be the aim, of course. What you're lacking a bit right now is the kind of anchor programs in the schedule, which means you have at least some things which stick out, and you're guaranteed to get the customer or the viewers in there. Around that, you rebuild schedule or replace shows. The situation is a bit more delicate. Looking at the kind of lineup we are working on right now and the things we're doing, the hope is, of course, that the rating situation will improve. I think towards the second half of the year, we should be then better off again as well.
Are you missing these kind of anchor programs right now, or when are these coming in?
Those ones we thought would be the kind of strong points have not performed as strong as we anticipated. That is the problem. It is something which you have then to, as I said, you have to replace. If you have to replace, normally, you have to replace it every season, two or three shows which didn't perform. Now you have to replace more than that. Of course, the risk is potentially always higher because there is a guaranteed failure rate with certain old productions.
Thank you. The second question is on program budgets for next year. Are you hearing anything about what competitors will do with program budgets going into next year?
At this stage, we anticipate that the kind of competitive landscape stays more or less the same like it was this year, i.e., that means seasons are starting earlier again, and people are going off with their programming longer probably as well. Therefore, the kind of situation competitive-wise will be exactly the same in the first half year next year like it was in the second half this year, which means, again, if you take the comps this year to next year, you see an increase, obviously, in the first half year. For the second half, we are more back to normal term.
Okay. Thanks.
Thank you. That concludes today's question- and- answer session. I will now hand the call back to Hans-Holger Albrecht for his concluding remarks.
Thank you, operator, and thank you all for participating today and for your continued interest in MTG. We look forward to meet or speak with you over the coming weeks and months, and we'll try to keep you updated on all our progress. Until then, thank you and goodbye for now.
That concludes today's conference call. Thank you for your participation.