Good morning, and welcome everyone to Viaplay Group's Q2 results call. My name is Matthew Hooper, and I will be your host today. With me here on the call are our President and CEO, Jørgen Madsen Lindemann, and our CFO, Enrique Patrickson. A warm welcome to both of you. Today's call is, of course, a very different one, as we're also presenting a new strategy, plan and targets after all of the changes that have been announced in the last six weeks since the beginning of June. You can find the presentation deck for this meeting in the Investor Relations section at viaplaygroup.com. We will take questions after Jørgen and Enrique's presentations, so please post your questions on the message board if you are in the web platform, and I will read them out.
If you prefer to ask your question directly, you are, of course, welcome to do so by using your phone keypad, but more about that shortly. There's plenty to discuss today, we will keep our presentation short and leave as much time as possible to answer your questions. First of all, I will hand over to Jørgen for a summary of our results for the second quarter and to present our new strategy and plan. Over to you, Jørgen.
Thank you, Matthew, good morning, everyone. As Matthew alluded to, we have a lot to get through today, so I will start with a few words about the Q2 results that would normally be the sole focus of today's call. We have reported 16% group organic sales growth and group sales at the top end of our guidance range. The primary growth driver was Viaplay service, which accounted for more than half of our sales and generated 42% organic sales growth. This reflected the 19% year-on-year growth in the base, as well as the fact that we have increased our prices in all markets. The total base was down 13% or 1 million subs compared to the end of Q1. It is quite clear that volume growth has been prioritized over ARPU growth, especially with B2B partners.
That is not good for the product as it creates artificial low prices, close price points for quality content. We have therefore taken the opportunity to not prolong or initiate ARPU diluted temporary subscriber acquisition campaigns with our partners, as these do not drive revenues or profitability. On a like-for-like basis, when excluding the temporary campaign subscribers, the base would have been up 25% year-over-year and 1% quarter-over-quarter. Now that we have cleared the base, we have provided an updated target for the year, end of seven million-7.2 million subscribers. If you were to compare that like for like with the end of 2022, it would amount to 9%-13% growth. We did also experience a degree of higher churning Q2, which is natural given the return to the post-pandemic wars of sports fans, in particular, churning out during the off-season.
Good news is that the new football season kicks off already today, with the beginning of the Women's World Cup. Sweden's first match against Italy is on the 29th of July on Viaplay. The Premier League and other leagues kick off next month. We have plenty of other live sports during the summer months, as well as our movies and series to watch while on holiday. Locally relevant and high-quality storytelling is therefore more important than ever. Breaking down the 8% Nordic organic sales growth, the Viaplay service delivered 26% organic growth and accounted for 43% of our Nordic revenues. The Viaplay Nordic subscriber base was slightly up year-on-year, but decreased by 668,000 subscribers compared to the end of Q1, due to the removal of short-term and ARPU diluted, dilutive B2B campaign, partner campaigns.
On a like-for-like basis, when excluding the temporary campaign subscribers, the base would have been up 2% year-on-year and down 1% quarter-on-quarter. Moving to linear subscription and other sales, these represented approximately 29% of group revenue in Q2 and 34% of Nordic revenues. Organic growth here was 9% and was driven by sub-licensing in particular, which was up 200%. Wholesale channels sales were up 6%, and studio sales to external customers were up 74%. Advertising revenues, which made up approximately 19% of group revenues and 22% of the Nordic revenue in the second quarter, were down 16% on an organic basis.
We had previously indicated that ad revenues in Q2 would be down between 12% and 16%, This is clearly shows the deterioration in the markets. 70% of our ad revenue comes from our TV channels, with 20% from our radio stations and 10% from AVOD or online, of which half is through the com, cooperation with Pluto TV. All of the TV and radio ad markets were down in Q2, with only online growing and even that at low levels. Our results mirrored these trends. For 2023 as a whole, we expect the TV and radio ad market to be down around 10%, with only AVOD showing single-digit percentage growth.
Turning to our international segment, which comprises the Viaplay service in eight markets and Viaplay Select in 21 markets and represent 17% of the group revenue, sales were up 115% on the back of 69% Viaplay subscriber growth and price increases in all markets. Just like in the Nordics, we took the opportunity to do some housekeeping and clean the business to business base, B2B base of short-term or temporary ARPU dilutive campaigns. In terms of subscribers in our international markets, then the subscriber base grew by 69% year-on-year, but was down 344,000 compared to the end of Q1. And on a like-for-like basis, when excluding the temporary campaign subscribers, the base would have been up 95% year-on-year and 4% quarter-on-quarter.
Regarding churn, we did see higher levels in the Netherlands, but that was balanced by D2C growth in Poland. Overall, some important cleaning and rebasing of subscriber numbers, so that you'll be able to clearly track ARPU changes and growth moving forward. We therefore closed the quarter with four million Viaplay subscribers in our five Nordic markets, 2.6 million subscribers in our eight international markets, and 6.6 million subscribers in total, of which more than a 1/3 were D2C and less than 2/3 were B2B.
When it comes to profitability, our Q2 numbers were in the middle of our guided range, with the Nordic coming in with a sequentially improved margin of 5.4%, while the losses for the international operation increased quarter on quarter due to the investment in content, consolidation of the U.K. operation, and launches in North America. We also have a very large set of one-off charges that Enrique will talk about later, and which relate to the various and major changes that we are making.
We are today announcing a new strategy and plan, which includes, but is not limited to, focusing on our core Nordic and Netherlands and Viaplay Select operations, implementing a new operational model, downsizing or partnering or exiting our other international markets, right sizing and pricing our product offerings in the Nordics, and undertaking a major cost reduction program, and conducting an immediate strategic review of the entire business to consider all options, including content subleasing, asset disposals, equity injections, or the sale of the whole group. The content investments that we have made are not all paying off and are committed in the short and medium term. The pursuit of subscriber volume growth has been at the cost of value, especially when it comes to our partner agreements.
The weakness in the advertising market and currency exchange rates are additional factors that we must live with. The international expansion assumptions, including the timelines to profitability, have also been pushed materially into the future since the expansion started. We have a number of challenges to face, which together have created something of a perfect storm. These factors are listed on slide 12, and you can see that some are external and others are our own making. The cost of living crisis, of course, impacted the ad markets, especially TV and radio, and subscriber bases, especially streaming services that are easy to churn in and out of. That is not a, no big secret, and you will have heard the same thing from many other companies.
What is a little more unusual is the level of currency headwind that we have right now. We expect approximately SEK 460 million of headwind this year due to the weakness of the Swedish krona against the dollar, the euro, and the Norwegian krona in particular. We expect at least another SEK 300 million next year. In terms of what we can control going forward, we will focus on Viaplay value growth. We'll focus on addressing ARPU dilutive deals with B2B partners and create an artificial that create an artificial low price for what is a premium product. We will focus on local, relevant storytelling that you would expect a commercial media company to produce.
We will focus on building inventory and audiences in the part of the advertising market that is growing and will continue to grow online and in AVOD. We have a range of very costly but important sports rights, and they are locked in now, in some cases for many years to come, with some significant inflation built in. Our Nordic operation have, for a number of reasons, been negatively affected, and our international operations are not moving quickly enough towards profitability. That is why our revised guidance for 23 is where it is, because our costs are growing faster than our revenue, and we cannot change quickly enough this year.
We now have a plan to meet each of these challenges head on, but we cannot solve everything in the short or medium term, and some of the macro elements are, of course, largely out of our control and something we need to deal with. First and foremost, we want to be in markets, with products where we can compete and build long-term and sustainable business with premium products that people love to come back to time and again. We will focus on the Nordics, the Netherlands, and Viaplay Select. All of our other international business will be sold or partnered or the content sublicensed. That process has started, and we are already in discussion with various parties.
This is part of a broader strategic review of the whole business that is necessary because of the negative cash flows over the next couple of years, in particular, require that we consider all options. We have ongoing discussions with our lending banks in order to navigate the period until we can return to healthy, profitable, profitability levels. As a result of our revised geographical focus, we have provided 2024 guidance on the basis of the new setup. This new setup will deal with the sports rights cost, the FX, the currency headwinds, and the negative SG&A synergies of spreading ourselves over fewer markets. We have a number of levers available to us, and we have slides on each of them in the presentation. We have already set a new operating model that is country-based and a lot slimmer centrally.
This will mean more than 25% of our people leaving, which of course is a horrible situation, but unfortunately, very necessary for the future of the company. Editorial, sales, and marketing decisions making will now sit locally where they belong, while we continue to benefit from our common tech and delivery platforms. On the content side, it is all about return on investment, and that means securing scale audiences and customer bases with broadly popular content that works with the core demographics that we are targeting. As you can see from the slides, this will mean that we will focus more on acquired content and unscripted content. We have scripted shows that have worked well, especially in the dramedy genre, but we have too much.
We will use what we have already produced wisely and focus our forward investment on a better mix, not least given that some of the Hollywood studios are open for business again. Internationally, we will continue to sell our content through Viaplay Select, but now also close down our TVOD offerings in the international markets and focus on premium sports. When it comes to the sports content, we have an extremely attractive portfolio of content. There are many opportunities to partner up or sublicense content. We are already working on deals in this area, both in terms of international market solution and improving Nordic profitability levels. The reality is, though, that we have some longer term right with fixed embedded inflation.
We cannot adjust those until we establish new economic, new economics through renewing on different terms, walking away, or charging customers significantly more. This will enable us to unlock our higher margin ambition that we have. In terms of the top line refocus, we'll continue to raise our prices, especially in the premium sports tier, and especially in the B2B partner deals that we do. We will also look to increase our digital ad inventory over time, both with our sports and non-sports content, as that is where the market growth will continue to come from, and we simply need to be better positioned for that. Finally, portfolio optimization. I've talked about the strategic review, about exiting most of our international markets, about already discounting, discontinuing our TVOD offerings internationally.
In addition to this, our holding in Lende is non-core, but does pay us annual dividends, so we'll continue to review options to monetize the asset for the right price and at the right time. All in, it is very clear that to bring about better outcomes, we must do things differently. That is what we are 100% focused on doing, as I hope you can see and feel. That is for my initial comments. Over to you, Enrique, for your comments on our financial performance, decisions, and plans.
Thank you, Jørgen, good morning, everyone. I will start with some comments on the second quarter numbers and move on to the new strategy and that plan. To begin, let me give you the general point on currencies. We once again experienced a favorable translation effect on sales during the quarter. Currencies inflated our sales by about SEK 170 million, but also the currencies inflated our cost base. The total net effect of that was an EBIT, negative EBIT impact of about SEK 150 million in the quarter. As Jørgen mentioned, we now expect the total transactional headwind to be about SEK 460 million for the full year, and we do continue hedging our US dollar contracts. We're about a 14-month horizon on that, it gives us some time to plan.
We expect that as well 2024 to have a SEK 300 million negative impact on the EBIT line, and that's already reflected in our guidance. Our operating expenses were up by about 35% in the quarter, which reflected the investments in live sports and original content. The international expansion accounted for approximately 60% of that increase. Content accounts for approximately 75% of our total costs, with live sports being the largest category. Our total content spend was up by about 50% in the second quarter, that should be compared with our organic growth of 16%. The main impact is visible on the cost of sales line and the impact it has on our gross profit. The vast majority of the cost of sales increase of SEK 1.4 billion comes from the sports cost increases.
The SEK 6.3 billion of items affecting comparability that you see in the P&L relate to write-downs and provisions for both sports and non-sports content of about SEK 5.2 billion, a goodwill impairment related to Premier Sports of close to SEK 500 million, cost for exiting the Baltics, it's likely about SEK 500 million, SEK 45 million for the initial costs related to the restructuring of the group's operations and the redundancy program. Most of the redundancy cost will be taken as an IAC in the third quarter. The IFC is obviously a big number, but reflects the strategic changes we're making on the content side in particular, and it's made up of both sports and non-sports content adjustments.
Let me highlight that about 40% of that amount is cash of the total SEK 6.3 billion number. We're also changing our original content expensing schedule as of July 1st, so that we now recognize 60% of the cost in year one, and the remaining 40% in the subsequent five years. This, I mean, more accurately matches the viewing patterns around the content that we have. On Allente, it is performing below expectations at this time, and that's due to slower subscriber growth and negative currency effects. Allente reduced the size of its organization in May, this resulted in a restructuring charge in the second quarter. The changes will result in lower running costs moving forward, Allente contributed with associated company income of SEK 5 million in the second quarter.
We still expect the full year share of Allente's net income to be in the range of SEK 150 million-SEK 200 million. More importantly, we did receive a SEK 100 million cash dividend in Q2, and we continue to expect cash dividend payments totaling SEK 200 million in the second half of the year. Cash flow from operations, excluding the changes in working capital, total and negative, -SEK 198 million, and included the receipt of the Allente dividend. The positive change in working capital of about SEK 500 million was in line with our guidance for the full year, but below last year, mainly driven by seasonality of sports rights payments. We have a more favorable view now on working capital build-up for this year, and we're looking at it to be about SEK 1 billion.
On the other hand, the cash impacts from the IACs have an adverse cash flow impact of about SEK 900 million. This effectively means that we will have a negative free cash flow of about SEK 2 billion in the second half of this year. Regarding our financial position, we ended the quarter with SEK 2.2 billion on net debt, or SEK 1 point billion, if we exclude the leases. We had SEK 1.6 billion of cash and cash equivalents and SEK 3.5 billion of total borrowings. We drew SEK 500 million on the SEK 4 billion RCF facility at the beginning of the third quarter. Moving on to the strategy plan.
You will see on page 20 on the report or on the slide pack that we laid out that 2022-2023 bridge that shows how we get from the SEK 372 million loss in last year to the EBIT for guidance that we have SEK 850 million to SEK 850 million loss to SEK 1.05 billion loss. That includes the savings as well, that we have made and will make across many areas of the business, as well as the approximately SEK 600 million of lower cost of goods sold, following the provisions and write-downs that we have made. The SEK 450 million-SEK 600 million profit for the Nordics for this year reflects the lower COGS as well, and from the write-downs and provisions.
The majority of the redundancy costs, that we have announced will come in the third quarter, as those happen in July. On the international side, we're guiding for the full-year losses of SEK 1.4 billion-SEK 1.5 billion, in line with previous guidance, in fact. That as well reflects the lower cost of goods sold, from coming from the write-downs and provisions. The large bar that you see in the middle of that chart is a, I would say, key headache that we carry inflating sports costs that Jørgen referred to. Before I move on to 2024, let me just mention a bit about the trajectory now for the second half. Q3 is a tough quarter with lots of sports prepayments, meaning a high working capital outflow, many football leagues haven't really actually started throughout the quarter.
We don't get the full benefit of the revenues for premier sports. In addition, as we have new football season starting, we as well have a new high cost level for that. As a result, we expect the Q3 to be loss-making, both for international as well as for Nordics. From a cash flow standpoint, Q3 will take the vast majority of that negative hit of SEK 2 billion cash outflow I mentioned earlier. As Jørgen explained, our 2024 guidance is based on having sold or exited all our international operations, except for Netherlands and Select. Of course, if this does not happen, it will create a further earnings and cash drag on Group, but we already have good discussions ongoing.
The working assumption is that we will have an EBIT result of -SEK 150 to +SEK 150 in 2024, which includes about SEK 700 million of lower COGS after the write-downs and provisions. The profitable Dutch and Select operations will compensate for a slight loss in the Nordic operations in 2024. From there, we expect the group's profit and margins to steadily increase with a long-term plan to reach double-digit margins. We have included free cash flow assumptions for both years, 2023 and 2024. As you can see, this is we have approximately SEK 4 billion-SEK 5 billion of negative free cash flow over these two years. With a low profitability, this puts us in a very challenging position.
We will fund this gap through our cash balances, available facilities, asset disposals, further sub-licensing, as well as funds that we're looking to from lenders and equity injections. We're also in the discussions with all stakeholders regarding these options. In addition, we have as well announced a full strategic review that is ongoing. We have, at this time, three independent banks advising us on continuous basis on all of these options. We will proceed to have meetings with our largest shareholders and lenders over the next few weeks about how to best address this.
It would not be prudent to provide guidance or speak on their behalf at this time, I will leave it at that. On this slide deck, you will find on page 24 an update in terms of our available facilities and maturities, and so on. With that concludes my comments. Over to you, Matthew.
Thank you, Enrique, and thank you, Jørgen, too. We're now ready to take your questions. If you would like to ask a question and you have joined the conference call via web link, you can post questions on the message board by clicking on the Ask a Question tab at the top right-hand corner of the window, and I'll read them out for you. Please don't forget to write your name and your organization name, or if you would rather ask the question yourself, please press star one and then one again on your telephone keypad, and you will enter the queue. To cancel your question, do the same, press star one and one again. Okay, we're gonna take the first question from the telephone line. First up on the telephone line will be Derek Laliberté from ABG. Derek?
Thank you very much, and good morning. Apologies if you mentioned this somewhere in the presentation or report, but I was wondering if you could elaborate a bit more on Poland and the U.K. Why they're sort of excluded from the markets that you're intending to focus on going forward?
Yeah. I think we had, you know, made an overall due diligence on where we believe that we, for the foreseeable future at least, can be a, you know, a long-term or a relevant player, and where we can be competitive with our content, and also the horizon to profitability as well. In all fairness, when looking at the Polish business and the way that has developed for us in some areas, you know, then we would see that a little bit difficult to do that alone. That is the idea, is to team up with some strategic players.
The idea could be to sell off content or exit. The same goes for the U.K. market. The whole exercise is, of course, to make sure that we spend the money in areas or in countries where we know that we can be competitive, and we are a relevant long-term storyteller. That is why we focused in on the Nordic part and have very good traction on our Dutch business as well, and then obviously with MyPlace eShop.
Okay, that's very clear. Thanks. Focusing on the lower D2C sales here of late, can this sort of lower-than-expected subscriber additions be related more or less to the specific sports rights? Like, could you give some flavor on whether, you know, you invested too heavily in F1 and the hype has come down, or whether it's more related to Premier League? I understand it's kind of broad-based, but could you give some flavor on the different sports rights there and how you invested in them?
I think, Derek, just to be very clear on this, the fall in the subscriber numbers quarter on quarter is a function of cleaning the house, cleaning the base. It's not a function of the underlying situation. As we said, that is growing still, like for like. This is to do with a specific cleaning the house on short-term campaign subs through the B2B partners.
All right. All right, that's, yeah, I got that. I think it's still, yeah, if there is something to say, because, obviously there's been some disappointment, we think, in the subscriber additions as well, but that's.
Well, I think.
That's fair, yeah.
We have said that there is some higher churn here during the summer months. We're seeing that there's a return to more like the kind of pre-COVID realities, where you do have this churn coming in the sports off seasons. That is a reality, and yes, we have seen that. Fundamentally, the big quarter-on-quarter sequential adjustment is to do with the cleaning of the house. That's what that is.
Okay. And finally, on Allente, I think you mentioned it's been up for sale before. What could accelerate this at this point? Are you willing to go a lot lower on price now compared to before, or what could happen there? Thank you.
Yeah, I think yes. I mean, we have commented on it before that, I mean, it's not a strategic asset that we're necessarily holding on to for the long term. I think it's part of the mix of what we're looking at when it comes to our funding. I think it's too early to comment on it this time.
Understand. Okay, thanks. That's all from me.
Okay, thanks very much, Derek. We have a question on the message board here from Martin Arnell at DNB. Question is: How much more cleaning up of the subscriber base should we expect going forward, or is that it?
I think, I think we should assume that that would be it, in all fairness. We have, again, with the only caveat that I've been here six weeks, but that has been done together with the different executives in the different markets. I think we should be there to be done.
Okay, we have another question from the message board from François Godard. You seem more positive about the Netherlands than the other international markets. Can we get some color as to why that's the case?
Yeah, that is obviously because of the development, the financial development of the Netherlands, which has turned out better, in all fairness, than the other international markets, and that is why we are more positive there. The ambition is, of course, to stay in markets where we can play and where we are profitable, and the Netherlands definitely will look like being profitable. That is why Netherlands is a focus for us.
Okay, and now we'll go back to the telephone line again. Next person up on the telephone line is Claus Almer, Claus from Nordea. Claus, please go ahead.
Yes, can you hear me?
We can.
Yeah. Fantastic, fantastic. Yeah, good morning. Thanks for taking my questions. I have a couple. First off, I mean, in the procedures of exiting these markets, I was just wondering if you could maybe help us understand that side a bit more, and what sort of the associated costs in each scenario is, whether that is in shutting down the operations, selling this, or partnering. Also if you have any possibility in really recuperating this, these port rights? I mean, clearly, it's difficult to reach profitability with the total prices you have now. Just some color on that side would be great to start with.
Yeah, I think I can take the first part, where, as I said, we are in discussion. We'll talk to different strategic partners. Could be local partners, it can be newcomers, whatever, to see if we can do something together, and if 1 + 1 = 3 in some of the instances. That is not the case, obviously it is, in all fairness, attractive, right? We will try to sublicense as many of them, and then eventually in the end, exit the market if we don't see a long-term viable solution for us.
Then, of course, the financial outcome of that depends on what solution we will need. It's a little bit premature, to be fair, to discuss about any impact. Of course, if we don't find any solution with anybody, of course, we then are liable for the commitments that we have in the market, of course. The ambition is, of course, to make sure that we find partners. We'll try to do that who can help or partners who will be interested in buying the content forms with a minimal loss for us.
Yeah, I think it's worth to point out, I mean, in the provisions that we have taken as well, I think it's a balanced approach in terms of that we do have. I mean, we're taking a one-off charge, especially for TV movies and series content for those international markets. For the Baltics, we have as well taken an impairment for, I mean, including sports. Essentially the same thing goes for the U.K. market.
Yeah, fantastic. Just following up on that, in the case where you are to sublicense, sort of, let's say, Polish sports, right, in that case, what would the economic, sort of impact be? Do you expect to get basically back, to get on neutral cost, or would that still imply sort of a cost drag until I mean, you have Premier League until 2028 or 2029, I think. Would you still have that cost drag until then? What are you sort of imagining here, at least, for the entertainment with the added?
Yeah, I think it's, I think it's honestly too early to comment, because obviously these are as well related to ongoing discussions. I mean, our working assumption is that from first of January 2024, we are not carrying those costs in our P&L. That would be the, you know, what I can tell you at this time.
Yeah. Yeah, okay. Just lastly on, from my side, the distribution deals and restructuring that side of the business, I guess most of the deals you've signed, and then most of the deals you had, I guess those have been signed over the last kind of one to two years. Basically, what changes are actually in scope on that side? How much can you control on those agreements?
Obviously you can have good dialogues with the partners on how to position these products in a much more favorable way. That is important. Of course, when also, as you point out, when we negotiate it is to understand how we package these products the best way, also for the partners, to make sure that all can get even more out of it. I just want to make sure we have that due diligence properly made, to make sure that we are maximizing the opportunity that is, you know, extremely strong products that we have. It's very relevant products in the NHL or Premier League or skiing or also today we have, as I mentioned, the World Cup women coming up, so forth. Those are discussions we're going to have ongoing basis with our partner.
Okay. Okay, fantastic. Thank you very much for taking my questions.
Okay, Claus, thank you very much. I think next we're going to take some questions from the message board. First of all, from Morton: What is your view on the revenue-generating, non-scripted part of the business? Will that be a bigger part of the content offering going forward? Just to take his other question at the same time, which types of scripted content will be commissioned going forward? It's basically about the content mix.
Yeah. No, the content mix will be skewed towards towards being a commercial media company. What we want to do is, of course, to produce content which, first of all, has very local, relevant presence. That is quite important that we have strong local storytelling as well. That would have, of course, a broad commercial angle as well, to make sure that we reach as many as possible. That is good discipline for a media company, because the big audience is hopefully the more money that you can make. That is the focus, and we have been historically very good at non-scripted.
Obviously the ambition is that all these genres that we enter into, we wanna respect the genre, we wanna do it properly. If you do reality, you do proper reality, and if you do documentary, do that properly as well. When it comes to the, to the scripted, we have produced a lot of scripted products, and some of it has worked very well for us, and we have, you know, quite a lot. That is not the focus that we're having right now to produce more, that is correct.
Another question we have on the message board: The Formula 1 broadcasting rights from 2025 for the Netherlands will be sold soon. Will Viaplay in the Netherlands continue if F1 rights are lost after 2025?
I think what, again, we'll look at the business case as such, how they can develop. The assumption is, of course, that we have a very strong offering also next to Formula 1 in the Netherlands. Again, as I said, the business case, it needs to be profitable in order to continue to be in those markets.
Thank you. We have a question from Stefan Victor: Could you please elaborate on your comment that there are significant inflation built in some of your sports rights? Are we talking about Premier League in particular? Should we expect a material step up after the first year, first three-year period, or is the inflation more linear?
Good question, Stefan. I mean, it's more on the linear side of it. That's what's happening, what you see coming through in our P&L.
Okay. I think we're gonna go back to the telephone lines again. Next on the telephone line, we have Giles Thorne from Jefferies. Giles, please go ahead.
Thank you. My first question is on sub-licensing. Can you confirm whether that will or won't potentially include sport in the Nordics? If it does include sport in the Nordics, some color on how you'll protect your consumer value proposition would be useful. Second question is on the covenant waiver. Under your current plan, the plan announced today, do you actually breach your private bond covenant? Forgive the direct question, but we're all wondering it. Do you absolutely rely on a covenant waiver or a refinancing under the current plan? The third question is: What elements of your Nordic business couldn't ultimately be replicated by a competitor over, let's say, a five-year period? Thank you.
Yeah. When it comes to the sub-license of sport in Nordics, I think, that is definitely something we will be looking into. You can argue some of the rights eventually fits better in a free TV environment and than in a premium pay or a OTT product. That, of course, means that if advertising markets are difficult, as we see right now, there's little reason or no reason to have those rights, in all fairness. That is, of course, a new situation when it comes to the advertising market. Therefore, stuff like that will be looked at and will be sub-licensed to companies who can use that better or partner with media companies who can use those better.
When it comes to the USP, well, we have been here many years in the Nordics because we have been very, very strong, relevant storytellers, and that is the USP for a media company. We have very strong footprint, and we have very strong presence in the market in our different products. We have OTT products, we have radio products, we have free TV products, and we have productions and so forth. Of course, we will continue to develop, like we have done the last many years, the Nordic business. We do feel that with the more focused approach that we have right now, that we will definitely continue to be a very relevant and competitive player in the Nordics also for the foreseeable future.
Maybe I comment on the covenant question. I mean, at this time, we are not in a breach of covenants situation. As you see from the guidance section, where we guide for negative cash free cash flow for this year and next year, there is, I mean, clearly an elevated risk that that is the case. At the same time, I think that we have laid out a number of proactive steps that we are taking to mitigate such, you know, covenant breach, and that, of course, includes as well, discussions with lenders and bank group.
Thank you.
Okay. Thanks very much, Giles. We had another question from François Enders. François, you asked about what the sports costs were in 2022 for the Nordics. The answer to your question is SEK 5.8 billion. Otherwise, we have a question regarding the redundancy program, in terms of when that will be effective and whether that is that, or whether there'll be any further redundancies.
Yeah. The, the redundancy program obviously varies from the different countries, so there's no general comment to that. We are, of course, following the local rules and regulations around these redundancies. That is, that is what we are, you know, working on right now, as we speak. Going forward, of course, we will understand how we're set up, and we'll refine the way that we'll be set up going forward as well. That is, of course, ambition to make sure that we are continuously fit for purpose. There's no steady, what's it called, steady state here. It is something which we'll continue to look at to make sure that we are set up the right way and we are fit for purpose.
Okay, we have the same question from a couple of people. One for you, Enrique, I think. Please elaborate why you expect such large negative free cash flow next year, 2024, if you have an ambition of break even EBIT.
Yeah, it's a good question, a good point, a good, you know, moment just want to clarify a few things. What we're looking for next year to be, let's call it break even EBIT, to make, keep it simple. At the same time, when we highlight the, or when we announce the restructuring provision of SEK 6.3 billion, a large part of that is cash. That has a negative cash impact for next year, as well as that we have as well, a working capital build-up in 2024. For 2025, we're looking for working capital to kind of more normalize and be more break-even, could even potentially be a slight positive. Those two factors, working capital and restructuring, that comes on top of that. SEK -150 million to SEK +150 million EBIT, guidance that we have.
Okay, another one. Please, could you remind us what proportion of your debt is subject to covenant, and what the covenants are on that proportion of the debt? Just so it's 100% clear.
It is on the bonds predominantly. I mean, it's measured on the EBITDA for the Nordics at this time. And obviously, that is subject to renewals, and that is a conversation that we have ongoing with the core bank group that we are working with. That would be kind of the short answer on that.
Just to be clear, which bonds, what proportion of bonds?
It's the MTN bonds and the SEK, bonds as well.
Okay. Does that profitability include Allente as well?
Yes. I mean, there's a lot of adjustment items to that. Obviously, it, you know, it will. I mean, it excludes a number of items. It includes the Allente with an adjustment for how we treat the goodwill depreciation, and of course, the Nordic EBITDA.
Okay, thank you. Next up on the telephone line, we're going to have Martin Arnell from DNB. Martin, I have asked some of your questions directly from the message board, but I know you've got a number of others. If we could hand over to you, Martin.
Good morning, guys.
Morning.
My first question is to you, . You, I mean, you've just made a comeback here in this company in a very turbulent time. My question is, firstly, you know, what were you most surprised with when coming back here, if you look at the decisions taking last few years?
I think I would, I would, you know, I would think I would answer a little bit different, to be fair. I think, obviously, what we are looking at is to understand or to make a review of the assumption as well, which were in these different plans, you know. Some of them has, is just, you know, turned out different from what they originally were meant to be. In all fairness, that happens. The focus for me has been, what can we learn from the past, and how do we wanna set it up then going forward? That is the approach that I have had, and therefore, also the conclusion that we would like to make sure that we safeguard our home turf.
We cannot lose our strong position in the Nordics on the expense of eventually further out profit in some markets, which has turned out to be more difficult than we expected. You can argue it is it's just general where you are looking at all, you know, the different drivers in the business, and then you conclude on where we think that we should play going forward. I don't think they're surprised of specific things, to be fair, as such. It is just that range of the things were not adding up and that's why we have changed.
Okay. Then one of the questions I have is, you know, this mix between D2C and the B2B in the subscriber base, you're still not disclosing the breakdown. If you would have done that earlier, it would have been much easier to see, you know, clearly how or diluted the B2B partnerships have been. Have you ever considered now in these first weeks to actually give that breakdown?
I think we actually did. I think we mentioned that it was 1/3 D2C and around 2/3 is B2B.
Could you give, like, specific numbers going forward in the quarterly reporting so that we can follow?
Yeah, I think we are considering a lot right now as well. Also, we discussed ARPU, and so that is something which we could, we could consider going forward, yeah.
Mm. Then just a final question. You mentioned that you have a number of proactive steps, you know, taking to try to mitigate the covenant breach. What would you consider being the three most important steps that you could succeed with in the next coming 6 months?
Martin, maybe I just correct that. I mean, we are not in covenant breach. And I also want to just clarify, because I mentioned MTN, I meant to say RCF. The covenant is on the RCF and the private placement bonds, as well as on the guarantee facility that we have. I mean, you know, we're evaluating all options really, when it comes to our funding then, going forward, and that negative free cash flow that we have ahead of us. I think we've already kind of laid out a number of those options. I don't know if that answers your question, Martin.
Yeah. No, it was just I'm thinking that you given your guidance, it looks like you will approach covenant breach. If you would not succeed divesting Allente, do you expect not to be in covenant breach at the end of the year?
I mean, we so I mean, Allente is one of the options. There are other things as well that could be sold or sub-licensed. It's this asset disposals that Jørgen referred to in the beginning around our international markets. Then as well, it's the discussion we have on the debt side as well as with on the equity side.
Mm. Okay. I'm just trying to understand, you know, the steps that you have in order to avoid equity raise. Okay. Thank you.
You're welcome.
Okay. Thank you very much, Martin. There are a couple of questions here which are covered in the statement we should be clear on again, which is one of the options here that the whole company be sold?
Yeah, that is, as you point out correctly, that is part, of course, of the option. Everything is in play, basically.
Okay. I think we're gonna go back to the telephone lines again. Next up, we have Jamie Bass from Redburn in London. Jamie, over to you.
Yeah. Morning, everyone. Three questions from me, please. Firstly, going back to the Netherlands, you know, you said you are working on the assumption that you will renew the Formula 1 rights. Could you touch on whether you consider yourself still in a strong negotiating position, considering what's happening here? You know, before all of this, part of the conversation was that you'd be in a strong position to renew in the Netherlands, considering how many markets you have the Formula 1 in. That's no longer going to be the case, you know, from a financial point of view, it's not working out as well as it was, say, a year ago. You know, how do you convince the Formula 1 that you are still the best partner?
Second question is quite an easy one. You know, you mentioned that you are in active conversations. Is that purely at this point on partnerships and exits and international, or are you in conversations for the sale of, to put it bluntly, are you in conversations to sell the entire business? Final question goes back to Charles's comment on the Nordic USP, and you said that, you know, part of the USP is that you have this free TV and linear TV business. Does that comment mean that you are not, at this point, looking for the sale of the advertising business or the linear business as a potential option? Thank you.
We take the Dutch the question around Formula 1 in Holland first. As I said, in each of the markets, there are a range of opportunities. There's also partnering opportunities. There's also opportunities to team up with local players, make strategic deals, and so forth. There is different ways to capitalize on the position that we have built up in Holland. That is, of course, what we're looking at to make sure that we are in strong position and relevant position also going forward. When it comes to the conversations on the international on sale. Sorry, you talked about general sale conversations, yeah?
M&A conversations, and that is, that is mainly on the international part, of course, where we are talking about different partnerships, as I said, people taking over the assets that we have, and we are selling content. That is the discussions that we're having, and it's mainly international. When it comes to the advertising channels that we have in the Nordics, as we also said, in all fairness, everything is in, is in play here. That is a general comment, not that we are actually looking to sell specific, the advertising products. We have a range of assets, and as Enrique alluded to as well, we want to make sure that we come out strong as well, also financially. There's things we can do ourselves, among others, asset sale.
Okay. Got it. Thank you.
Thanks, Jamie. next up, we have on the telephone line again, Rasmus Engberg from Handelsbanken.
Hi. Hi, guys. Just to be absolutely clear, we're talking about this reporting as discontinued Poland, the three Baltic states, and the U.K.. Am I missing something there? I think I'm missing one, or-
There you are.
I think.
One is North America as well, that's the last one as well.
Okay. Right. Cool. How many people are you actually gonna lay off so we can get to an estimate for further IAC in the coming quarter?
I mean, we, as Jørgen mentioned, he referred to, 25%, or slightly above 25%. We were close to 1,700 employees at the end of 2022, so call it slightly north of 400.
Okay.
Yeah.
Cool. Good. Just a clarification from you, Enrique. You said when you talked about, Allente, that you talked about SEK 200 million in further dividends in H2, or was it SEK 200 million in total dividends?
Yeah.
For us.
Yeah, sorry. Yeah, SEK 200 million in H2.
Okay, further SEK 200 million?
Yes, correct.
In addition to the 100 you. Okay. very good. That was basically it for me. Thanks.
Okay, thanks so much, Rasmus. next up, we'll stick with the telephone lines. We're gonna go to Eric from, SCB. Please go ahead, Eric.
Yes. Hi, good morning, guys. A couple of questions from me. You a lot of talk about, you know, exiting a couple of international markets, such as Poland, the Baltics, and the U.K.. How advanced would you say discussions are here with the potential buyer? Do you think you will need to sort of pay to sell these operations, given the big losses they are producing, or do you think a buyer would be willing to pay to acquire them? Thank you.
Yeah, I think we have touched upon it sometimes, and I, you know, it depends on the deal that we can, that we manage, that we can strike in the market, of course. The content that we have in these markets is, of course, content which has belonged to somebody before, who then have lost that content, obviously, to us when we acquired it. Hopefully there will be interest for that content again. It is too premature in all times to give you any idea on how advanced those things they are.
What we are talking about here is our focus, is the focus area that we are having, and that is, that's gonna be the Nordics and the, and the Dutch business and also Viaplay Select. We have guided in 2024, we have guided for, based on the Nordic business and based on Holland and Viaplay Select. Obviously there is an ambition to make sure that we do this in a swift way, if possible, but also, of course, with a good outcome for us. We have explored all opportunities.
Okay. Thank you. Just to follow up there. I mean, if you can't sell these markets, and if you were to simply sort of wind down the international business, apart from the Netherlands, I mean, how would this look? Could you sort of give an estimate of what sort of cash outflows this would mean in this scenario?
I mean, we're, I think it's too early to say, because, I mean, it depends in terms of how we, what type of deals we manage to strike. We think it's absolutely manageable, considering the type of, I mean, it's within the provisions that we have taken. You can put it in that way. We may not land exactly, you know, on a country by country in terms of how we have laid it out, but overall, we think that it is covered within what we have taken as a provision here.
Just a final quick one, if I may. Just sort of walking through the guided free cash flow outflow next year of SEK 1.5 billions-SEK 2 billions. Can you sort of talk about what this would have been if you were to exclude restructuring charges in this? Thank you.
It would have been, it's about SEK 900 million, so call it SEK 1 billion in of that SEK 2.6 billion- SEK 2.7 billion of. The cash portion of the restructuring charge is about SEK 2.6 billion- SEK 2.7 billion, and would be about SEK 1 billion next year in cash impact.
All right, the remainder is working capital build up, basically?
Yes.
All right.
I mean, I mean, we have Allente, I mean, you have a few other items that are small.
Yeah.
Those are relatively small.
Perfect. Thank you.
Welcome.
Okay. Thank you very much, Eric . The question from the message board again, it's a follow-up: Are you stepping down from any previously announced price increases? Are those being reversed?
No, that is not gonna be the case, and that is not the case, no.
No. I suppose the other side of the question is, will there be further price increases moving forward, which would be fair, we have said as well?
Yeah.
Okay. Then I think what we'll do next is go back to the conference call line again. The next question we have is from Mikael Laséen at Carnegie. Mikael, please go ahead.
Yes. Hi, hope you can hear me?
Yeah.
I have a couple of questions. It's about restructuring costs. I don't know if I missed that. Can you give a breakdown of the massive charges that you're taking now in Q2? Do you have that maybe in the presentation?
Yeah, it's actually in the, in the quarter report. There, there are a few, a few breakdowns in there. I can take you through those. Let me.
It's on page three. Page three.
It's about the actual, the actual tables. We have that further in the back of the report. Are you page 22? There you have a few different, couple of different breakdowns in terms of what PNL lines, as well as the different items. I mean, if I just take them, you know, from the top, it's exiting Baltics, we indicate SEK 540 million. That's the essentially the sports side. Of course, we do have an implied kind of what we think, you know, this is kind of the negative value in terms of what we think is the net of doing a deal in Baltics.
We, we as well take then provision for for content, meaning non-sports content, both international as well as for the Nordics. That reflects for the Nordics, reflects the change strategy that Jørgen referred to in terms of going for much more acquired and non-scripted content, as well as then for international, it's more related to the exits. Then we have a goodwill impairment for the U.K. operation. I would say it's not that the U.K. operation has this deficit value, it's more that how the impairment rules work, is you do that at your cash generating units, as it's referred to in the accounting world.
That's. We do it at the Nordic level and international level. There is an impairment need for international. You effectively start from goodwill effectively when you impair. That's and it's in the U.K. where we do have goodwill. Those would be the main items. There's a small redundancy cost here. I mean, I know it's SEK 45 million we refer to as being small, but in the grand scheme of SEK 6.3 billion. As we indicated before, there is more coming in the third quarter as we announced the first week of July, this 25% headcount reduction program.
Okay. Then what-
Yeah.
How much are you taking for originals on the inventory you have for that spot?
So-
SEK 2 billion or-
Yeah
SEK 1.6 billion?
No, I mean, for the Nordics, which is kind of, because that's mainly the change of strategy, we're looking at about the 2 billion SEK number.
That's basically the originals charge, SEK 2.1 billion?
Yes. I mean, that's down to net realizable value, right? Obviously we do compare versus what is the ROI that this title is bringing. And as well for, I mean, I missed to mention that as well, in the 6.3 total restructuring provision, there is SEK 1.5 billion related to sports content as well.
Okay. This is, of course, then baked into your EBIT accounting and EBIT guidance for the rest of the year and 2024?
That's correct, and that's SEK 600 million for the second half of this year and SEK 700 million for next year. Essentially, we are disclosing it to, you know, to say, you know, to be forthcoming with that information, that of course, if you have a lower inventory, your cost of goods sold will be lower in the subsequent periods.
Okay. Can you say something about the cash cost for originals, how that is accounted for in the P&L? How much of your engagement or sales that's stemming from originals, and how this change of the direction impacts the revenue and the subscriber base? Do you have any thoughts there?
I can take about the commercial part of it. I think a lot of the originals, as also we mentioned in the report or some of the content aside, that we have acquired or have produced, is not paying off. That is probably not because the content is, you know, bad content. It is just that the type of content for a commercial media company is probably not the right one, you know? That is quite important to state that. It's not that we will not have any scripted material going forward. We have produced a lot. What I said is, going forward, we want to make sure that whatever we have and we offer to our customers is strong commercial products. That is the focus that we will have.
I think, Michael, if you have a look at slide 25 in the presentation pack, you have a very clear definition on money spent versus viewing achieved. It shows you very clearly what the scripted, non-scripted, and acquired content has been achieving, and therefore, how we're adjusting our expenditure moving forward. That should help with that.
Okay, good. I'm just curious here, if you can elaborate a bit more on actually this cleaning out of subscriber. What's going on, really? What have you done there with the B2B partners, and what has changed?
Yeah, I mean, I think as I tried to answer before, where we have short-term campaigns that bring in subscribers, where we don't think that is sustainable over a period of time, we've effectively cleaned those balances out. Therefore, what we're looking is removing ARPU dilative short-term acquisition campaigns with partners, and replacing those with long-term, more sustainable situations. If you look on an underlying basis, as Jørgen mentioned in his script, there is growth there on an underlying basis.
It's just we've taken this opportunity to really step back, look at the base, clean it, for want of a better description, in order that we can move forward with a like-for-like comparison. I think to Martin's point earlier, we will try and give you that like-for-like comparison in a more structured way, moving quarter-over-quarter. You did at least anecdotally hear it, and if you need it, if you've got any questions around that, happy to take those offline, of course.
Okay, yeah. All right. That's it. Thanks.
Thanks very much, Michael. A couple of other questions that have come through, one regarding the amortization schedule for originals, which, as we understand it, has changed. Could you just clarify on that, and whether there have been any other changes, or whether it's just related to scripted?
No, we are, I mean, this is the key accounting change that we are making, and that's really to match the expensing much more to the viewing that we see for originals. The previous method of doing six-year straight line expensing, we are moving now as of the third quarter to go for 60% in the first four quarters, and then the remaining 40% of expensing in the coming five years. And that gives us a much— I mean, P&L matches much closer to how the actual revenues are for scripted originals.
Okay. Then the other question, I think it's the final one today, actually, related to the Baltics, and it was just whether the fact that the writedown has been made on the Baltics specifically, means that that is in an accelerated state of sale, and therefore, that whether that's likely to be imminent and the first of the international operations to be sold.
Yeah, no, it doesn't say anything about that. That is not in any accelerated space.
Good. then I think, we have, I think, Martin Arnell back in the queue again from DNB. Martin, did you have some follow-up questions?
If you could, try and elaborate where you think the Nordic margin would be after 2024, like in a more normalized period, if you could give some more color on 2025 outlook? Thanks.
Martin, as I referred to, I mean, we indicated a slight loss in 2024, but then we're looking to get into, I mean, losing in digits and then slightly growing from there. When we look long term, really circa five years, then we're looking to get into double digits, margins for the Nordic operation, as well as for the group.
Yep. Okay, thanks, guys.
Okay, I think that is now it on the questions. Thank you all very much, tried to get through all the ones on the message board. I appreciate for some of you, there were similar questions. I've tried to capture all of those. Thank you again. We really appreciate your time. It's slightly longer than usual, that reflects all the questions and all of the presentation we've made. We really appreciate your interest and always welcome your feedback on the format and content of this session. Slightly different this time, I hope even more focused for you.
We're roadshowing today in Stockholm and tomorrow in London, please don't hesitate to reach out to my colleague, Anna or me, if you would like to schedule a meeting or have any other follow-up questions at all. That's it for today. Thank you for your time. Goodbye for now, and see you soon.