Stroeer SE & Co KgaA

XETRA:SAX

Earnings Call Transcript 2018-Q1

[Operator]

Dear ladies and gentlemen, welcome to the Ströer Quarterly Results Q1 2018. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Udo Müller, Founder and Co-CEO of Ströer SE, who will start the meeting today. Please go ahead, sir.

[Udo Müller]

Thank you. Good morning everyone and thank you very much for joining our call. Together with my Co-CEO Christian; and our CFO Bernd, I will guide you through the development of the first quarter of 2018. Due to the fact that we have just had our Capital Markets Day in London, that's then 3 weeks ago, where we gave you detailed views on our current strategy, operations and innovation initiative, we will concentrate today on the key summary of the first quarter of our financial results and our outlook on the upcoming year. Moreover, we are happy to take your questions up at the end of our presentation.Overall, we increased our reported revenue by approximately 20% in Q1 2018 from EUR 281 million to EUR 337 million. This growth is based on scope effects, but also due to an organic growth of a market with 6.8% in overall rather demanding market context. The operational EBITDA including effects from IFRS 11 and 16 increased by 16% from EUR 95 million to EUR 110 million in the first quarter 2018. The resulting operational EBITDA margin stands at 32.6% or almost at the same level as in previous year period.Our adjusted EBIT including the effect from IFRS 11 and 16 showed an even more positive development and increased by 32% from EUR 33 million to EUR 44 million. In terms of margins, our adjusted EBIT margin increased by impressive 1.2 percentage points from 11.8% to 13%.Adjusted net income increased by 42% from EUR 21 million to EUR 29 million. Operating cash flow in Q1 improved significantly from EUR 59 million to EUR 78 million. The net investments of around EUR 34 million for the first quarter are in line with our plan and reflects our increased consideration scope, as well as our focus on organic growth opportunities in the fastest-growing media segment, Online, Mobile, Out-of-Home and Direct Media.Based on the strong operational performance and our ongoing financial discipline, we could keep our bank leverage ratio at 1.6 which is still way below our target leverage of 2.5. All in all, we see robust and stable developments of our key financial figures in line with our expectations.Given our good results in the first quarter 2018, we can reconfirm our full-year guidance. The target for total revenue of EUR 1.6 billion in 2018, and as in the prior years an organic growth in the mid to high-single-digit percentage range. The expected operational EBITDA of EUR 375 million or EUR 535 million considering the effects from the application of IFRS 16.Free cash flow should be around EUR 175 million pre-IFRS 16, EUR 30 million higher than the previous year's target or EUR 310 million including '16 effects. Net income adjusted will be approximately EUR 215 million pre-IFRS 16 and some EUR 15 million lower due to interest expenses on the IFRS 16-induced higher net debt at around EUR 200 million. We will update our IFRS 16 impact for the full-year 2018 at the time of the release of our Q2 numbers in August and expect a slight beneficial impact on our guidance including IFRS effects.Summarizing also our Capital Markets Day 3 weeks ago, I would like to outline our core strategy which is a foundation of these results. We believe that we offer a significant structured benefit to our advertising clients through our integrated multi-channel model. We can successfully reconnect them to our -- to their source of business, the consumer.The traditional value-chain media business model was linear, a variety of different layers between the advertisers and its targeted consumers. This model evolved for decades, but now becomes largely disrupted. Historic media and advertising processes and structures have been ultimately broken by Google, Amazon, Facebook and Apple. Advertisers have little alternatives than feeding this system that takes away the proprietary control over the media value-chain and strengthens the GAFA's platform.Advertisers Media CRM is now data-driven as a part of ecosystems they cannot control and they're not able to leverage all data and information embedded there. That is a highly unsatisfying situation for advertisers and long-term threat for the businesses.We do see a clear demand for new models. This is exactly the core of Ströer's strategic proposition to our clients, people-driven CRM, combining clients' insights to best-in-class tech solutions beyond platforms or walled gardens and therefore the most efficient management of first and third-party data. Our overall resources, by means of top-qualified human capital, tech, data and analytics based on deep knowledge and understanding of consumers' experiences and operators on the best-in-class direct marketing platform for each of our clients, is a perfect match to our customers' demands in handling their media and marketing operations in the age of digital transformation.In our 141 locations all over Germany and its neighboring countries, we are able to serve our clients either on a regional or local level, and scale our operational capabilities quickly to any needed dimension. Being number 2 already in the German market directly after the start, with a clear focus up on sales, we can quickly and efficiently answer any client's demand.Our Direct Media capabilities complete the integrated funnel from location-based advertising and Out-of-Home media by our content marketing services in our online portfolio. This integrated multi-channel model ultimately connect branding investments to sales conversions.Christian will [indiscernible] our unique strategic position and our activities in each of our core 3 sectors and show you some actual case studies of Q1.

[Christian Schmalzl, Co]

Our position in the German Out-of-Home market is strong and unique. We control more than 50% of the market with a portfolio structure that is well-balanced between public and private business partners and based on long-term contracts. The Out-of-Home category is growing structurally due to increasing mobility and urbanization. We started our investment in digital Out-of-Home 8 years ago with our public video channel as the entrepreneur of that kind of media in Europe at such a large scale.We invested significantly to keep that position by extending our public video coverage developing our roadside products in line with our forecast and rounded up our digital signage long-tail product with the acquisition of Neo and United Ambient Media end of last year. That gives us strong performance-oriented, highly flexible and data-driven footprint in Out-of-Home and allows us to provide smart solutions for cities and environments beyond pure advertising.By doing this, we can monetize our advertising rate rights and our Out-of-Home inventory in various ways. ALDI, Germany's number one advertiser for years investing heavily into newspapers. ALDI modified this strategy knowing that digital transformation leads to a growing population with no interest in printed magazines or paper. Out-of-Home reaches everybody anywhere at any time when people are on the move. That's convinced ALDI to invest more and more in Out-of-Homes since 2.5 years now.Jaegermeister used our public video flexibility in Q1, post their best social media feeds in near real-time. They gain huge attention and earn media in high-density locations. Out-of-Home becomes more and more the natural and complementary partner for social and online media. And finally we are very proud that we finally succeeded to bring Haribo back into Out-of-Home in the first months of this year. They ran a campaign to celebrate their iconic gummy bear and wanted to have iconic media, iconic locations and iconic positioning beyond other advertising cluster that we were able to provide in the public space.Besides GAFA-controlled platforms, which in many cases like Google AdWords selects Q-rated content, exclusively markets nearly 1/3 of the German online inventory, well-balanced between owned and third-party inventories and we are perfectly positioned to further fulfill the market consolidation in Germany. Our news, e-mail, tech and entertainment content platforms are strong like the online, the newly launched watson and desired [indiscernible]. Our dedicated central publishing company in Berlin stands for best-in-class digital journalism and maximum synergies across the entire segment, our strong owned inventories backed up by our proprietary tech spec that ensures 100% compliance with upcoming regulations, as well as quality and visibility benchmarks of advertisers.Our share of mobile and programmatic advertising is already well above the German average. That allows us very efficient use of our inventory years and a significant rising share of direct clients because more and more clients connect directly with us without intermediates. In Q1, Subway and About You were excellent cases where our inventory was directly connected to the demands and platforms of customers. Subway used our capabilities to locally drive store traffic, while About You was broadcasting performance-oriented across our complete portfolio of opportunities.For the Audi campaign, we have developed a completely new product. We are using voice interfaces to interact with the ad leveraging a mega trend and creating a smart new way of personalized ad experiences. Udo already pointed out that our direct media capabilities complete our unique strategic proposal.Q1 was the first complete quarter with all hands on deck and we concentrated our efforts in connecting our clients with this new opportunities successfully. We also started leveraging synergies in recruitment, data or IT and are currently rolling out best-in-class tech features that we have identified inside the various companies and units of our direct media segments and we see growing new business success through the customer relationships of Ströer. We acquired a large CRM project for Toom Baumarkt using quickly scalable service and cross-selling capabilities of the Ströer Direct Media group.HRS has historically been a very strong partner from the Ströer group with a footprint in Out-of-Home and also content-based digital advertising. We used this relationship to help our Ströer Direct Media group to win the pitch for HRS for customer care and care to sales services. Finally, we won in and out on contract of Check24, Germany's largest consumer portal, now also stepping into financial services. For that the demand for [ Chinese Wall's ] very well-trained staff with deep knowledge in the sector was key and we won the contract.We strongly believe that our concept of customer-centricity is the right answer to the current [ techtonic ] transformations in the ad industry in Germany and that our concept of do-it-for-you proprietary client-focused solutions is the right answer. All our products and capabilities are managed for our clients by our national, but also by our strong regional and local sales-forces.Let me hand over to Bernd to complete our presentation with more details on the financials of Q1.

[Bernd Metzner, CFO & Member of Management Board]

Thank you Christian. Before I will run you through the numbers, I would like to take the opportunity to make some general comments on the changes in our financial reporting for 2018. As elaborated already at the Q3 and Q4 presentation as well as our Capital Markets Day 3 weeks ago, we have significant reporting changes in 2018.Today, we will release for the first time our actual numbers in the new segmentation format and considering the IFRS effect of IFRS 16 and the elimination of the IFRS 11 adjustment. To make sure that we all can focus on our business performance, several measures were transparently taken. First, for the new segmentation impact, the previous year figures were adjusted retrospectively.Second, for the IFRS impact of IFRS 16 and the elimination of IFRS 11 adjustment, we will display 2 datasets; a), one dataset including the IFRS effect; and b), one dataset results the IFRS effect as you know it from the previous years. IFRS 16 will significantly change our financials. You see this clearly in our Q1 numbers.The basic idea of IFRS 16 is to eliminate nearly all off balance sheet accounting policies. On the one hand this is our required to initially recognize as this liability for the obligation to make lease payments and on the other hand write off used assets for the rights to use the underlying asset for this term. On the back of this, Ströer's balance sheet increases for accounting purposes by approximately EUR 1.1 billion.As you know, IFRS 16 has no impact on total revenues. In contrast to this, we are faced with the significant increase of our operational EBITDA of EUR 46 million due to the elimination of operating lease expenses from P&L lines above EBITDA for Q1 2018. Instead, operating lease expenses are [ conceptionally ] replaced by depreciation and interest. The major chunk of these operational EBITDA effect is reversed in D&A which increases by EUR 43 million as this reflects the write-down of the capitalized right of used assets.Consequently the EBIT adjustment increases by some EUR 3 million as the increase of depreciation does not cover the full effect of the reversal of the operating lease expenses in the EBITDA line. Technically, the rent payment is split into an interest component and the repayment component. So the financial result increases by EUR 7 million due to this calculated interest component.Due to higher interest during the first years, net income will be negatively affected by EUR 3 million which will be compensated over time. Free cash flow before amount A will increase by EUR 59 million as the repayment component of the rents reclassified in the financing cash flow. For this reason, this free cash flow figure might not sufficiently reflect the true free cash flow generation. Therefore, we will also report an IFRS-adjusted free cash flow.We will update our IFRS impact for the full-year 2018 at the time of the release of our Q2 numbers in August and expect a slight beneficial impact on our guidance including IFRS effect. As I have just explained, the impact of the application of IFRS 16 on the P&L as well as on the free cash flow is significant. It is our main priority to deliver you a good insight of the underlying development of the businesses and our company.Therefore, we prepared for 2017 and 2018, both, a set of figures including the IFRS effect as well as a set of figures without adopting IFRS 11 and 16, the old world. In our quarterly report published today, we make use of the so-called modified retrospective approach for simplification reasons. That means that we will -- that we only present our figures, mainly P&L and cash flow statement, in this report including all IFRS effects for Q1 2018.Q1 2017 figures, however, are presented only without the adoption of IFRS 16 in line with the modified retrospective approach except for some KPIs in the report. Therefore, we refer for full set of figures to this presentation including both accounting regimes, with and without the adoption of IFRS 16 and which uses pro forma figures if necessary.The profit and loss statement represents reported figures for Q1 2018 and figures for Q1 2017 based on the new accounting rules of IFRS 16. We got off to a good start to the year 2018, steadily continuing on our profitable growth course of the last years. The Ströer group's revenue increased by 20% from EUR 281 million to EUR 337 million.This increase is triggered by an organic growth of 6.8%. The contribution in Q1 of newly acquired companies mainly United Ambient Media group; Avedo; Ranger; and to a smaller extent [indiscernible] and [ TNS Unit 60 ] amounts to approximately EUR 70 million. Our operational EBITDA increased by 16% from EUR 95 million to EUR 110 million. Exceptional items were somewhat higher with EUR 8 million compared to EUR 4 million in the prior year, mainly due to integration costs and the treatment of Bodychange as discontinuing operations.The depreciation and amortization expenses increased by around 5% from EUR 78 million to EUR 81 million in the first quarter 2018. You have to cluster our D&A in 3 main markets. First, underlying D&A of EUR 24 million; second, IFRS in used D&A of EUR 43 million; and third D&A on revalued assets for -- of acquired companies as directed by the so-called IFRS purchase price accounting and impairments in the amount of EUR 15 million in total. This bucket is not part of our adjusted net income.Our key performance, our EBITDA adjusted net income has grown by 42% from EUR 21 million to EUR 29 million in the first quarter. Reported net income grew by a factor of almost 3x from EUR 3.5 million to EUR 9.7 million. As you can imagine we are really pleased by this achievement.The depicted cash flow statement represents reported figures for Q1 2018 and pro forma figures for Q1 2017, based on the new accounting rules of IFRS 16. I would simply leave the reported numbers with a short recap about the impact of IFRS 16 in the depicted cash flow statement and assess our cash flow performance of Q1 later in the pro forma dataset of our old accounting world for Q1 2018.Recap; the leasing expenses in scope of IFRS 16 are no longer operational cash out in full, but the individual leasing installments are divided into an interest in the repayment portion. The repayment portion is no longer included in the cash flow statement from operating activities. Instead the repayment portion is now reported under cash flow from financing activities. This changed allocation of a partial amount of the leasing installments so leads to a corresponding improvement in the cash flow from operating activities and to significantly higher payments in the cash flow from financing activities.By contrast, cash flow from investing activities remains unaffected by IFRS 16. As you're all aware, IFRS 16 has a major impact on our net debt with an increase of EUR 1.1 billion on first side, which increases the plain vanilla balance sheet leverage to a balance sheet leverage of 3.2. However, banking reality is materially different. Main reason for the difference is that our banks do not consider the IFRS 16 effect. This results in a leverage ratio of 1.6. This leverage ratio of 1.6 is relevant for our banks and at the end of the day determines our real firepower with 1.6 far below our financial leverage target of 2.5. As this is the KPI that affects our financial status best, we will use and publish the banking leverage ratio going forward.Let us now have a short look on the set of numbers prior to the application of IFRS 11 and 16. Revenue reported as unchanged to what we have already discussed. Operational EBITDA is up by 17% from EUR 56 million to EUR 65 million. The main difference between this and the [indiscernible] IFRS effect is EUR 46 million, due to the effects already discussed. EBIT is up by 88% from EUR 9 to EUR 18 million, pretty much of the same level as the figures including the IFRS effect.The main difference between this and the [indiscernible] IFRS effect is only approximately EUR 3 million. And income adjusted was up by 32% from EUR 25 million to EUR 33 million. The main difference between this and the [indiscernible] IFRS effect is expected slightly negative with minus EUR 3 million due to the interest effect. The depicted pro forma cash flow statement is the one you know from previous times and they are familiar with. Our guidance of the free cash flow before M&A of around EUR 175 million relates to this dataset.Some remarks of performance in Q1; our cash flow performance was by EUR 8 million better than in the prior year period and according to plan. Please keep in mind that our Q1 of the year is basically always negative due to seasonality reasons. Cash out remains stable at a level of EUR 3 million. However, it's worth mentioning that in the next quarters we expect significant and higher tax cash outs, expect the cash tax out ratio of 20% to 25% for normal year, plus/minus exceptional tax items. The build-up of our working capital was the EUR 30 million in line with the previous year, and will come down over the next quarters.The key reason for the negative working capital effect in Q1 is the true-up for rent payments for successful previous year. The investments before amortization is in the amount of EUR 34 million, reflected the bigger scope and needed investments for further growth. This is the amount we are in plan, that means we still expect a CapEx cash out of up to EUR 110 million for the full-year 2018. Remaining EUR 70 million to EUR 75 million CapEx budget should be evenly split over the next 3 quarters.Finally, I can confirm that we are on track to deliver the free cash flow we guided for in the amount of EUR 175 million for the full-year 2018. There are changed perspectives and let me explain the developments in our segments. The newly compiled Out-of-Home media segment is dominated by the German business development and Out-of-Home Germany overall stands as a proxy for the Out-of-Home media business in total. This proves as well the shrinking importance of our international operations. 85% to 90% of the business of this segment is constituted by Out-of-Home Germany.In Q1 2018 we saw a profitable organic growth of 2.4%, basically on par with reported growth and a stable margin development. The margin respectively absolute EBITDA development is this trade with and without the IFRS changes. Without IFRS changes, the EBITDA margin stands at 18.5% and is almost like in the previous year. Including the IFRS changes, EBITDA margin stand at 46.1% and is even slightly higher than the 44.6% in the previous year.In absolute terms, revenue increased from EUR 137 million to EUR 141 million including the effects from IFRS 11. Various effects influenced the sales development. Q1 is traditionally the weakest quarter due to seasonality reasons. We faced a negative onetime effect with respect to the advertising spend from the tobacco industry by switching from traditional to electronic products with a lower budget attached.We had a positive effect on reported revenues due to smaller bolt-on acquisitions like United Ambient Media. However, this positive scoping effect was counterbalanced by the sale of the Istanbul contract in 2017 and the decline in the Turkish lira. Organically, we were in the end able to grow our business by the expansion of our digital product portfolio and our local sales initiatives. Looking at the full year, we expect a mid-single-digit organic growth for Out-of-Home media.Coming to Content Media, here we are able to increase revenues by more than 6% from EUR 116 million to EUR 123 million or 9.1% organically in both newly acquired and established Content Media assets. Operational EBITDA remains with or without the IFRS effects almost on the same level as prior year. Besides product mix related effects, we had to consider ramp-up costs for our new online portal watson.de in Q1 2018.watson is a portal that is dedicated to millennials, people grown up without newspapers, but with mobiles and social media. We had a great start with 8 million visits just in the first 4 weeks. There is -- we are already number two behind [ venture.de ]. Given the size and relevance of our Content Media segment, I want to zoom into the segment and its product groups. First, display; second video; third, digital marketing services.First, display; as one of our core product groups in this segment with a revenue split of 70% Desktop and 30% Mobile ad revenues. All in all revenues increased by 2.1% from EUR 63 million to EUR 64 million. Second, the product group video grew by around 15% to 70% of the revenues [indiscernible] from public video and the remaining part coming from online video at. Revenues increased here from EUR 22 million to EUR 25 million. Third, the product group digital marketing services grew by 9% from EUR 31 million to EUR 34 million. Major contributor to this growth was Statista.In our Direct Media segment, we saw a boost in revenues to that of the prior year figures due to the expansion of our direct marketing activities. In total, segment revenues more than doubled from EUR 33 million to EUR 77 million in the first quarter 2018. Organically excluding the amount in FX, we were able to grow by 12.4%. This growth was profitable and slightly better than expected.Taking the IFRS effects into account, operational EBITDA increased from EUR 3 million to more than EUR 14 million delivering a operational EBITDA margin of close to 19%. In the pre-IFRS world, margin would have been still very pleasing with 17%. The disposals, prospectively closures of some transactional businesses Vitalsana, Stylefruits, MCG online shop could be clearly overcompensated and together with the new dialogue marketing activities resulted in a margin improvement, very relevant in the assessment of this segment.Due to the CapEx slide dialogue business model, the adjusted EBIT margin was 16%, even 3 percentage points higher than the adjusted EBIT margin on the group level, the 13%. From the very beginning of the project, we knew that the acquisition of the dialogue business will be EPS-accretive in the magnitude of 5% to 10%. Looking at Q1 however, this segment is not only EPS-accretive, but also margin-accretive for our group.With that let me hand over to Christian.

[Christian Schmalzl, Co]

Thanks Bernd. Based on our order-book and intense contact with our clients and partners, we see the following indications for our Q2 2018. First all, similar to the development of the meanwhile last 21 quarters, we see a very solid business across the entire group with an expected growth for 2018 in line with the annual guidance.Secondly, robust development of our Out-of-Home media business fueled by both regional sales and our extended local sales-force activities. Third, our Content Media segment is consistently on track regarding top line growth, market share development, as well as consolidation and integration processes including GDPR developments in Q2 and both Direct Media will continue to be in line with our expectations going forward with the additional synergy potentials, cost-cutting opportunities post-merger which will get us closer to best-in-class performance. Our next catalyst will be our AGM on May 30 in Cologne and our half-year numbers will be published on August 9th.Thank you everyone and we are now happy to take your questions.

[Operator]

[Operator Instructions] The first question is from Asen Kostadinov of Barclays.

[Asen Kostadinov, Research Analyst]

I have 3 of them. The first one is on the development in Germany Out-of-Home business. You had a rather slow start to 2018, partly driven to weakness in the overall German outdoor advertising environment. However, you maintain your guidance for the full year for meeting the digital organic growth. What gives you confidence that things will improve for the rest of the year, bearing in mind that your comparison base gets tougher through the year? And do you expect margins to be flat year-on-year as in Q1 or do you expect a similar improvement? That's the first question. Secondly in the operational EBITDA margin in Direct Media excluding IFRS 16 impact was 17.3% in Q1 which is at the very top end of your guidance range for 12% to 17% for the full-year. Do you feel you can sustain that or should we expect that the duration over the rest of the year? And finally the third question is with regards to some of your smaller transactional businesses. So you have now closed Stylefruits, the online shop, and we just heard that Bodychange has been moved to discontinued operations. Are there any other businesses you are looking to close or dispose off in full-year 2018, and what is going to be the impact of those on your full-year financials?

[Christian Schmalzl, Co]

Let me start with your first question on our Out-Of-Home business. Yes, as you said correctly, we maintain our guidance and I think Bernd has mentioned it in his part on the segment performance that we saw what we see at the moment as a onetime impact, some reduced budget from the tobacco industry at the beginning of the year because of the switch from traditional cigarettes to e-cigarettes and sometimes that takes time until they have their international campaigns up and running, and are 100% sure what kind of statements they can make on the ads about the products. I think there have been some [indiscernible] and that's why probably spendings have been postponed or reduced versus previous year. And I think apart from that what makes us confident I think where we are constantly in touch with our clients, we have both national, regional and local sales-forces just to get our fill-rate up and a lot of those strings are in our hands and do not only depend on a handful of large budgets like in the -- like in TV for instance. And I think we've also shown that at the Capital Markets Day we see that overall there are less budgets coming through agencies and meanwhile more than half of our revenues come from regional and local businesses which are direct client relationships and about 1/3 of the national business is also coming from direct clients, so I think we are right here by far closer to the revenues than only via agencies, and I think all of that gives us confidence between the sides affected, I think Out-of-Home and especially our portfolio is overall very robust by means of audience numbers versus traditional contact media.And then I would take your second question regarding Direct Media, and the target range because as you mentioned and observed already, they're a little bit beyond even the 17.3%, with all the IFRS changes in our margins already beyond our band with -- between 12% and 17%. It will be -- for the full year our expectation is that it will be around 15%-16%, let's say 16% because it's the first time a consolidation of [ DNS ] and [indiscernible] which have a slightly lower margin than the others, and they started to see consolidation in March, what we see in this segment, and we not yet exploited all the synergies, so there's even a room for improvement here.

[Udo Müller]

And regarding your last question, I mean we are constantly reviewing our portfolio of activities and clearly the move to Direct Media was also a move to focus on -- be focused on products through the entire marketing and sales channel, so based on this strategic implications, we decided to de-consolidate, close or sell these 4 assets which we're talking about here, Online Shop, Vitalsana, Stylefruits and Bodychange, so this was already a significant move for this year. I think that we are done now with our review of our portfolio of activities, yes.

[Asen Kostadinov, Research Analyst]

And just, Bernd, lastly on the margin for the German -- for the Out-of-Home media for 2018?

[Bernd Metzner, CFO & Member of Management Board]

Sorry, I missed that one. Basically, it still be the same level as previous year with or without the FX, this would be the logic, so we keep it stable and we try as you know always to balance profitability and organic growth and then investing in our operational sales-force and so on and therefore we keep it balanced and we do have the same margin as previous year, that's the idea.

[Operator]

The following question is from Marcus Diebel of JP Morgan.

[Marcus Diebel, Research Analyst]

Just two questions for Bernd. Could you give us the organic growth rate just for Germany? Is it possible so we get an idea what the impact actually of this typical issue actually was, that would be quite helpful? And secondly on the free cash flow generation, I know and then you highlighted this, that the Q1 is always seeing special impacts, but is there a chance to see much higher cash conversion going into the remainder of the year. What needs to happen to improve that further, if you can maybe give a general statement on this? These are the two questions.

[Bernd Metzner, CFO & Member of Management Board]

Just the -- regarding the first question regarding organic growth, basically the segment is representing Out-of-Home Germany, so what you see is -- but is Out-of-Home -- with Out-of-Home media as -- if you see a growth of 2%, basically it's the German Out-of-Home media growth. So the non-German operations are growing there also with 2% and so this is as far as the organic any growth is concerned, but going forward because 90% of the business is Out-of-Home Germany, we also for our internal reporting, we are focused only on the product groups now, so street furniture and large format transport and others, so that will be our reporting structure going forward because the other part is not any more so significant. Regarding the free cash flow -- regarding the free cash flow, the key reason why Q1 -- and this is important to note, is always let's say relatively weak for first quarter is the fact that you have -- in Q1 you have basically to pay, you have a true up for the rents which you should -- which you have already provisioned in, in the previous year, but which you have to pay now. Actually if you have a very strong year and you are paying less rents, but you have to pay them in the first quarter, if you are quite successful because as you know a lot of our rents are actually revenue-based, so as more revenues you have, it's more you have to pay rents and this moment of truth is coming in Q1 and therefore you have exceptionally high hits here. Looking now in the next 9 months what you will see is actually that our cash conversion which will be much better I expect that we will have as in the previous year as well and we have the same [ conceptionally ] the same logic as the previous year. So you will see a CapEx cash out of around let's say EUR 105 million, you will see a very nice cash conversion and probably you should have a working capital, it'll be a slightly positive impact overall for the full-year 2018. So I just want to -- as you know our company very well, you cannot look at cash flow on a quarterly basis, but only on a basis of the last 12 months. And this would be also the concept for the next -- for the next upcoming quarters.

[Marcus Diebel, Research Analyst]

So Turkey and Poland both are also growing 2% more or less?

[Bernd Metzner, CFO & Member of Management Board]

Yes. Basically indeed -- on a reported basis indeed was growing in this magnitude.

[Operator]

The next question is from Craig Abbott of Kepler Cheuvreux.

[Craig Abbott, Head of Mid and Small Cap Research, Germany]

First of all, maybe just 2 follow-ups on the earlier discussion on Out-of-Home, just wondering if you could confirm already that you're seeing in Q2 your organic growth rate pick up already. And I wondered if you could maybe give us some indication of how much the tobacco share of Out-of-Home sales still is? Then secondly on Content Media, if you could maybe give us an indication on how much the drag effect on the margin was from the watson.de startup investments and are these now concluded? And what kind of returns are you targeting on this watson.de investment program?

[Bernd Metzner, CFO & Member of Management Board]

Just coming back to your first question on Out-of-Home, in tobacco represents meanwhile less than 5% of the revenues in the Out-of-Home segment, so giving you a rough indication on what it means is -- I mean it's still -- it's still the important client-range, but not that massive as probably 10 years ago. And on the basis of what we see now in the order-book, I think -- see robust development, so that's probably no indication that we are concerned about our full-year guidance and Q2 so far especially may -- looks quite okay. We will see what our June is doing, but it's probably a little bit too early to know exactly to the last 2 or 3 percentage points where the growth rate in the segment will look like and overall I think we are confident with what we've put on the table for the full year. Regarding your watson question and overall we expect respectively to have additional revenues with watson of around EUR 15 million to EUR 20 million. And as far the -- as far as the startup investment on watson, I think we have low mid-single digit euro which we have to spend to really to bring it to this level where we need to be and this is basically spread throughout the year evenly. That's a little bit of logic for watson conception.

[Udo Müller]

Just giving you maybe -- or adding some audience numbers, I think the most successful millennial portal in Germany so far is Bento from Spiegel and they exist since a couple of years now and have monthly average business of roughly 12 million per month. And after the first full 4 weeks having our portal in place we got to 8 million visits. I think in the second, but the latest in the third month of the portal we should get very close to Bento and the 12 million. And long term, we see probably perspective of 15 million to 20 million visits per month and as stands that -- on that level, you probably get to double-digit revenues and maybe also to beyond 50 million. But that's 3 year to 4 year midterm plan behind that, but there's an interesting niche here for millennials and it makes sense for us to leverage both the sales power that we have in combination with the publishing resources and the tech know-how in Berlin and our content up to ramp up that portal.

[Operator]

The next question is from Sascha Berresch of Hauck & Aufhäuser.

[Sascha Berresch, Head of Institutional Research]

Can you please provide us an update how much is direct business within the group and how much you still generate with agencies? And the follow-up would be obviously given that your group is now developing in a much broader -- has developed a much broader footprint which enables the customer to sell across different channel, if this trend to more direct business will continue? And generally in my -- I feel this should also have a beneficial effect on the margins because obviously there is an intermediary being cut out and I think traditionally it's something like 20% to 30% what is left with the agency, so that should be a benefit for the group in the long term, that's the first question? And the second question, it's regarding your cash generation capabilities and what you do with the money. So I think that your cash, free cash flow to equity is trending toward the number of EUR 200 million in the next 1 or 2 years and that despite significant investment within the infrastructure for EUR 300 million, so you could easily significantly increase the dividend, but still have probably just from the cash flow something like EUR 100 million then for M&A plus your balance sheet capability. So I wonder what else is there for you to buy to further progress buy and build strategy, in which areas are you looking?

[Christian Schmalzl, Co]

On your first question about more direct client relationships, indeed that's the kind of trend that we also see for 2 or 3 reasons in our case. I think first of all clients shift more and more budget from branding to performance solutions, and performance often deals with proprietary lending pages of client propriety data and they handle it rather directly than giving it to intermediates like agencies. Secondly, we see also in the traditional media phase here and there in-sourcing tendencies. I think that's been a large feature of Deutsche Telecom, last year who have in-sourced most of their media business meanwhile. And thirdly I think in our case we focus very much also on regional and local clients who work without agencies. And I think in all areas, the key benefit for us first of all is to have more direct and imminent impact on the decision-making process of the marketing decision-makers within the client because if you just leave it up to intermediates to discuss the media mix and there is too much of the money going to Google, Facebook and before you have a chance to interfere, the money is already gone. So I think the key reason for us is being more in touch with clients to convince them that our products make sense as well, but indeed mid or long-term, it also makes the business easier if you have no one in between who probably takes a margin. And looking at our 3 segments, the Direct Media business is by nature pure direct business. There are no intermediates. Again because it's very performance-oriented and it deals with direct customer data, that's why the client handles that directly, I think the online business is still 50%-55% agency business, but a lot of e-commerce clients and all the programmatic demands is coming in and that represents maybe by the end of this year also half of the revenues and only half is going through agencies, so we also see the trend that clients handle more DSPs directly. And you need to be prepared to handle the more complex demands of clients because there's no doubt that agency simplifies sometimes processes for media owners. But when you're able to manage the needs of clients, you can of course do it directly and I think in Out-of-Home as we mentioned, half of -- more than half of the revenues come from regional and local clients already, that's direct business and I would say in the national ad market it's still 70%-75% coming from agencies, but also there we see that especially e-commerce companies like Lieferando or other clients who are used to work in the online space directly with media owners that they simply copy their approach, also do traditional media and try to manage it directly with the larger media vendors. And that's at least one aspect of our strategy being able also strategically to be a proper counterpart if the client wants to discuss this marketing budget directly with us. And it's important aspect of our sales strategy going forward.

[Sascha Berresch, Head of Institutional Research]

And that's probably completely different than 5, 10 years ago, right? So it's very beneficial trend for your group.

[Christian Schmalzl, Co]

Absolutely. And I think again it only works when you have strong market share in your category and you're un-substitutable. And I think you can do an out-of-home campaign with only Ströer almost, but it's almost impossible to do an out-of-home campaign without Ströer. Of course you can spend all of your money with Google and Facebook, but if you go for local content, it's very difficult to not working with us. And I think meanwhile also in the Direct Media space we have a very -- we're very strong in sales win back the areas or care to sale a campaign, so I think also given the size that we have here in Direct Media, it makes sense to connect with us and clients at the end of the day look at performance and I think the relative strength in all 3 categories just helps us to become overall a more relevant partner in the direct discussions with advertisers.

[Bernd Metzner, CFO & Member of Management Board]

Sascha, taking your second question regarding what we do with all the money, if I look at it empirically in the last couple of -- in the last couple of years -- first of all, to start with, indeed our business is quite cash-generative and indeed we think that we should be also at a number of EUR 200 million in the upcoming years -- in the upcoming years. So what to do with the money; if you're looking back, it depends finally very much on that we find opportunities on the M&A level. And regarding M&A, in the last 2 years for example, after M&A investments, we had a negative free cash flow, so it always depends on this element. Considering however if you would not find any M&A, it's obvious that we would give the money back to the investors because for example for CapEx if we thinks that this EUR 100 million-EUR 110 million here the appropriate level to invest into organically in our growth on the one hand, on the other hand we have a little bit room to improve the dividend payout ratio, but really mid, long term, only if we don't have any concrete M&A activities to pursue further M&A activities. As you know we have today a dividend payout ratio between 25% and 50%, in this range. We are distributing actually 40% of our earning per share to our shareholder, looking at other companies in the media universe, there's some room for increasing this dividend payout ratios, but only if we don't find any concrete M&A activities to invest in.

[Sascha Berresch, Head of Institutional Research]

Talking about M&A, are there specific areas you're looking? So are you looking to further consolidate the Direct Media segments?

[Udo Müller]

Definitely, definitely. So there are -- I mean there are broad range of options out there. So we are convinced and what we already said during the Capital Markets Day, the direct communication will become more important in the next level of digitalization because our customers are collecting more and more data about their consumers and this also gives us the possibility for better targeting and direct communication. So we believe that there's a -- we're going to see a strong shift also from budgets from more general let's say media investments in analogue times to more targeted direct investment in digital days because if you don't -- if you're are not able to keep an open line to your own customer, then you have to pay all your margins to Google, Facebook and Amazon and obviously that's what every business need to avoid somehow. And that's why we believe, especially in direct communication, we're going to see a couple of interesting consolidation opportunities. By the way, probably one more good news; we are actually -- we're expecting that you would put the next more detailed question on the table regarding the dividend, so we are going to increase the dividend from EUR 1.10 to EUR 1.3, that's what we're going to suggest the shareholders' assembly, so I think that's a quite good news for our shareholders, significant increase of the dividend.

[Operator]

The next question is from Lucas Boventer of Warburg Research.

[Lucas Boventer, Analyst]

I actually have just 2 follow-ups, and the first one is on the direct media segment. You mentioned 12.4% organic growth for the segment in Q1. Maybe you could give us a rough idea how organic growth was just the dialogue media activities? And then the second question is on the Out-of-Home segment. You mentioned the tobacco one-off effect. Just a curious question whether there are any other industries where you experienced a slowdown in spending that were also resulting in the rather poor performance in the first quarter?

[Bernd Metzner, CFO & Member of Management Board]

Just to take up -- thank you for the questions, just to take up your question regarding organic growth, we had a double-digit organic growth for Direct Media. In the end of the day dialogue marketing was growing between 5% and 10% and transactions for this part was growing above 10%. This was a little bit the dynamics in this business segment. And Out-of-Home besides tobacco, we don't see any specific trends in -- across any industries or product categories. I think there was only one other remarking aspect that was [ Gaberline ]. They've been very strong advertiser in Q1 last year. I think it was when the company was already under pressure and they spent a lot in marketing just on the last couple of meters of their existence and obviously the company is now bankrupt and gone, so their spend went to 0. So that's the only other aspect. I think their spend last year in Q1 was around about EUR 1 million or EUR 1.2 million. That was the only other aspect that was outstanding apart from tobacco I think the rest was little bit growth here, little bit less there, so it was mixed picture without any clear or visible trend into any direction, rather confirming what we've seen over the last years.

[Operator]

The next question is from Catherine O'Neill of Citigroup Global Markets Limited.

[Catherine T O'Neill, Director, Vice President and Analyst]

I've got 3 questions. First one is Google have announced changes in terms of how publishers can use DoubleClick with GDPR. I just wondered if you've seen any signs of an increase in interest from publishers working with Ströer or an increase in combinations there? Secondly I just wondered if you could remind us of what the main contract tenders are this year and Out-of-Home? And finally could you perhaps provide some guidance on exceptionals and tax this year based on a P&L and cash perspective?

[Christian Schmalzl, Co]

Yes, regarding your question on Google, I mean indeed we've been in intense contact I think over the last 6 months with the existing publisher partners that we have, but also with potentially new ones because of GDPR and now also because of I think the way that Google wants to handle it I think it just makes more obvious both our -- what our USP is actually helping publishers to represent their interests and -- but we haven't seen any physical moves from publishers to us, we haven't seen anything like that yet. I think most of them wait and see and try to find out how to handle the situation, but I think it has helped the relationship with the existing ones because I think they understand what size market relevance and competence can mean to them in -- especially in challenging times and I would say throughout the year we see more opportunities to grow mandates there as well. Regarding your -- [indiscernible] question, Catherine, exceptionals on the level of EBIT, I would assume that we have around EUR 25 million exceptionals net for the full-year 2018.

[Udo Müller]

Regarding the contract which is unchanged because contracts are very long term, more than 10 years remaining lifetime and if you look back from the tenders in the last let's say 24 months, actually it was relatively low activity, but today actually one everything what was out for tender and -- but there's nothing to expect in the -- I mean, you probably remember the famous Frankfurt contracts which was discussed since we were in public. This was re-tendered and we won it, so on this side everything is very, very stable and our biggest contract Deutsche Bank is running far beyond 2030, so that's a very, very solid fundamental for the group.

[Catherine T O'Neill, Director, Vice President and Analyst]

Just wanted to come back on the point on tax, if you just...

[Bernd Metzner, CFO & Member of Management Board]

Sorry Catherine, regarding the point on tax, we expect that we have a tax cash [ out-write ] on our earning before tax of around normally between EUR 20 million and EUR 25 million. This is what you could expect for a normal year. Maybe it might be exceptionally a little bit higher in 2018 and because the thing to pre-payment what we have to do for 2018, but it's not yet final, but this would be a little bit of logic, so in the normal year 20% to 25 % fixed cash out-write, what you could expect in our company.

[Operator]

The following question is from Fathima-Nizla Naizer of Deutsche Bank.

[Fathima-Nizla Naizer]

I guess I just have 2 very quick final questions. If you could just remind us what is the growth rate of your regional and local businesses between the Out-of-Home segment? And how did it perform in Q1? And my last question is on Content Media, so display advertising grew by 2%. Do you think that's a run-rate for the year? And within that how fast is mobile growing over desktop?

[Christian Schmalzl, Co]

Coming to your first question, region and local combined, I think a rough 53% or something like that in Q1, I think 52% or 53%. I think the regional business was growing around 5% to 6% and I think the pure local one was growing beyond 25% -- between 25% and 30% bearing in mind that a lot of -- that we have lot of signage contracts here who are more years, so clients subscribe for 2 or 3 years, so we only signed part of the revenues that we already have in the order-book and then in that quarter just to give you roughly the structure or the relative size and the importance of the regional and local business. Regarding your question, display growth, display I think we should expect overall always a range between 0% and 5%, so the 2% is in this kind of range, so mid -- lower single-digit is here, or a growth concept of between 0% and 5%. If you look -- your second question was regarding mobile growth. We should be always stronger at growing than 10% and for the first quarter for example we grew around 15%, so it's definitely more than 10%, that's the logic in this, our mobile growth.

[Operator]

The next question is from Christoph Bast of Bankhaus Lampe.

[Christoph Bast, Analyst]

Yes, just to follow up on the Content Media please, so I think even if I strip out the launch cost for watson, EBITDA would have been let's say only flat. So given that your high margins, your business was up 15%, why did we not see a stronger EBITDA pick-up here?

[Christian Schmalzl, Co]

I think, Christoph, your question regarding the profitably on Content Media -- you would -- we would have the same margin if you would have EUR 2 million-EUR 3 million more profit in Q1 and looking at it and for us it was not unexpected and basically as planned because as mentioned that because the start of investment cases what we have here is exemplary, this watson definitely it was also a question about product mix, so maybe EUR 1 million in this investment cases, EUR 1 million is linked to the product mix, we saw margin business of Statista and RegioHelden and another element what you need to consider is that we had tougher comps with less minimum fee mandate in the first quarter and 2017. Having so said, we expected for the second quarter '18 it will be in line more or less regarding the margin more less in line with the second quarter 2017, so from this perspective, all good from our -- vis-à-vis our thinking.

[Operator]

There are currently no further questions. [Operator Instructions]

[Udo Müller]

Okay. So...

[Operator]

We've received one further question of Sonia Rabussier of Commerzbank.

[Sonia Rabussier, Analyst]

Actually, Christian, to back to your trends on the original advertising, you said the general plus 5% to 6%, local plus 25%. Should we understand that national outdoor advertising was negative in Q1? And what do you expect actually for the national trend for the full year? Second question regarding public video, plus 15% growth. Actually what are the trio's more price, what is the part of volume and what is the part of price? Actually I would like to understand is there still volume outside potential for the volume side in public videos because you are very -- you have many, many screens now in the station and shopping malls, is there still outside potential from the advantages -- from the volume side there? Last but not least regarding dialogue marketing, you mentioned at the beginning that when you made the first acquisitions that you would like to reach cross-selling synergies between dialogue, the legacy business. I understand that the utilization rates are very high now and indeed are you able to reach cross-selling synergies with the rest of the group?

[Bernd Metzner, CFO & Member of Management Board]

Maybe just to -- Sonia, just to take up your first question regarding public video and then I will hand over to Christian, regarding public video, we have some capacities left and as you know we have utilization possibilities here. And having just said basically the growth is 50% -- more or less 50% volume and 50% prices; formerly 40% prices and 60% volume. This will be a little bit the concept here for public video and I think this is also conceptually what we're expecting for the upcoming quarters. Yes.

[Christian Schmalzl, Co]

And on your first one on national sales, I think it was probably flattish in Q1, the pure national part of the Out-of-Home business. To be honest I haven't seen the breakdown per sales channel yet for Q2, but again I think it's just 1 out of 3 opportunities and general long-term I think we always see that regional and local are the faster-growing sales channels for us. On the national level we are always interested in winning market share or acquiring new customers, but the more sustainable part and where the stronger focus is the key is the regional and local business with more direct client relationships. And on cross-selling opportunities, yes, you're right, utilization has always an impact on what's possible, but I think you can also grow your capacities and I think part of the synergies that all the direct media companies for instance inside the Ströer Group as improved hiring processes and funnels, it's easier to get people. We have good recruitment system, training modules, also from our local sales-forces that we adopt and vice versa and all other media we see either -- we see enough capacities. We use Out-of-Home for the recruitment, our unused Out-of-Home inventory for the recruitment of direct media personnel and on the basis of the next 2 years or 3 years we're not really concerned that utilization rates could set a limit to the cross-selling opportunities that we see in the market.

[Sonia Rabussier, Analyst]

Just a follow-up regarding public videos, could you maybe mention utilization rates now from public video and how much it was in the past, or last year actually?

[Christian Schmalzl, Co]

I would assume that it should be around -- it's really a rough estimate, it should be around 40% utilization probably.

[Sonia Rabussier, Analyst]

And I think it's an improvement versus last year or not?

[Christian Schmalzl, Co]

Definitely. Definitely, it's a slight improvement. I think on the last year when we really make a deep dive and assessment we had around 35% utilization rate and now we have 40%, so it's pretty much better than previous year.

[Sonia Rabussier, Analyst]

And where do you think you could reach actually in the midterm for public video for utilization rates?

[Udo Müller]

Something below 100%, I think. But that's -- and not above 100%. So it's difficult to say because on the one hand we also leverage it for our content portals and then bundle advertising opportunities. If you say we -- yes, not 100% sold out, but we extend the portfolio because of regional and local clients who are interested in specific locations. So it's difficult to say because sometimes you build more inventory to reach new customers as well, but I think Out-of-Home overall is somewhere around 65%-70% and I think at least the midterm goal of public video should be to get to the level where the traditional business is.

[Operator]

And the next question is from Patrick Wellington of Morgan Stanley.

[Patrick Thomas Wellington]

Just quick one really on Q2. Can you tell US something about the Q2 outlook? We're on May the 15th, so we're well into it. Can you remind us what the World Cup effect is in Q2, either on you or if there's any effect on pricing because some of the commercial broadcasters don't have the World Cup, so I don't know what their pricing is looking like in Q2, but maybe some comments around that. And finally, can you come in quickly on whether you're seeing your digital formats cannibalize your more traditional formats in outdoor? Are you seeing much to that effect?

[Udo Müller]

No, maybe starting with the last question, we don't see any cannibalization effect for 2 reasons. First one is that we digitize roadside inventory. We also switch the customer group and approach local clients so that we do not actually switch the display and have the same customer on there who has problems to spend a higher price for the same format. I think that is one of the key reason why there is no cannibalization with the roadside products. And public video I think for meanwhile 5 or 6 years is established like an own category, content-fueled and video advertising complementary to TV or online spend and will position it so far away from traditional Out-of-Home that we also see it either additional or also attracting other clients like TV customers. On the Q2 development and the World Cup, I think that people have made their doctor's degree on if or if not the World Cup has an impact on the advertising market, but in our case I think over the years we haven't seen any massive impact, neither positive nor negative in Out-of-Home. I think in the online piece it has an impact on the sports websites like the online sports or KICCA which of course has more traffic and therefore automatically revenues are going up and also traditional sports advertisers or sponsors of the World Cup then advertise on those platform, but I think overall impact both on pricing and demand on our media is not really substantial, it's neither positive or negative for Q2. I think TV is something different because also media consumption is going from private to public stations and therefore also media spend then is moving a little bit and as well our media I would say is overall rather neutral to that kind of content.

[Operator]

As there are no further questions, I hand back to the speakers.

[Udo Müller]

Good. Many thanks for your time and your questions. I hope we were able to answer most of them and hope to see you soon maybe at our AGM or at the Q2 presentation. Take care and bye-bye.

[Christian Schmalzl, Co]

Bye-bye.

[Operator]

Ladies and Gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.