Stroeer SE & Co KgaA
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Stroeer SE & Co KgaA
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Dear ladies and gentlemen, welcome to the Q3 2018 quarterly results call of Ströer. 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? Please go ahead, sir.
Dear ladies and gentlemen, thank you for joining our Q3 results call today. Together with my Co-CEO, Christian Schmalzl; and our CFO, Bernd Metzner, we will present the financial results and business highlights of the first 9 months 2018.First, I will guide you through the results and give a short strategic update on the market development for the first 3 quarters. Christian will then dive deeper into our business segments and talk about key initiatives and business highlights. Finally, Bernd will present the details of our financial performance and the outlook for Q4. After the presentation, we are happy to take your questions.Our results of the first 3 quarters demonstrate that we clearly outperformed the German media market. Looking into the details, we were able to successfully accelerate top line growth. Revenue grew by 28% on absolute terms from EUR 870 million to about EUR 1.1 billion. This growth is based on scope effects but also due to an organic growth of remarkable 8.1% and the continued demand in market content. The operational EBITDA, including the effects from IFRS 11 and 16, increased by 15%, from EUR 317 million to EUR 364 million in the first 9 months 2018. Our adjusted EBIT, including the effects from IFRS 11 and 16, continued its positive development and increased even stronger by 18% from EUR 140 million to EUR 164 million. Our adjusted EBIT margin was 15% at the end of the reporting period.Adjusted net income increased by 18% from EUR 101 million to EUR 119 million. Operating cash flow in the first 9 months was up by 6% from EUR 214 million to EUR 226 million. The net investments of around EUR 89 million for the first 3 quarters of the year are in line with our CapEx plan and reflect our increased consolidation scope as that is our focus on organic growth opportunities. Based on the strong operational performance and our ongoing financial discipline, we could keep our bank leverage ratio at 1.8. All in all, we see continued robust and stable developments of our key financial figures, in line with our expectations for the full year. Our numbers prove that we are fully on track with our organic long-term growth strategy. Three points are crucial for us: the focus on Germany and the divestment of noncore businesses to concentrate on sustainable growth and profitability around our core segment, out-of-home. On the CapEx side, a continued investment into our digitalization of our out-of-home inventory like roadside screens and our digital out-of-home portfolio in the Content Media segment.When it comes to OpEx, increasing our footprint and enhance customer intimacy by accelerated investments into both regional and local sales force, in parallel to our customer-centric national sales. In this context, I want to briefly comment on the successful divestment of our Turkish out-of-home business. We started the business at the end of the '90s. Turkey was one of the fastest-growing economies with good prospects going forward, building the bridge between the Orient and Europe. However, since then, the overall economic and political environment changed significantly. An ongoing devaluation of the Turkish lira and increasing inflation rate at the beginning of this month, with 25% on the highest level in past 15 years. Due to this development as well as Turkey not being core and against the backdrop of the strategic realignment focused on our German home market, the management board decided to divest the Turkish business. At the end of the sale, the Turkish business accounted for around 2% of revenue and just under 2% of our EBITDA. Bernd will discuss the details of the financials later.The out-of-home market showed a robust and sustainable growth in the previous years. The forecasts from the media agency Zenith Media are showing continued growth for cities for out-of-home also in the near future.Finally, the main German media census, the Media-Analyse, is also forecasting a growing reach of out-of-home due to the high levels of mobility, with other media channels facing severe declines in reach, especially print, TV and radio. We have always outlined how regional and local business holds high relevance to us. The local business is not just a highly relevant demand platform, with a huge variety of client, but also a very important supply platform for many contracts from our infrastructure partners such as cities, enterprises and private businesses.In order to improve our offering beyond just advertising, we have developed our digital roadside screens in a way that cities and citizens can use them as a public portal for local communication and city management. The way we did it, we won a very recognized European award at one of the year's largest trade shows for smart cities, Nordic Edge, in Stavanger. That motivates us and our partners to improve the installation of our roadside infrastructure program and put us even a bit ahead of schedule. The digitalization of our out-of-home remains a key priority for our organic growth program.We can also report significant progress in the development and deployment of our regional sales force. Our bespoke do-it-for-you software platform that is used by our more than 800 local and regional sales staff to manage our offerings and the client relationships. The development of our office infrastructure, combined with the development of our [ contractors ] and hunters, builds the foundation of our regional sales strategy. We have also invested heavily in our B2B marketing, with presence in major local and national events.Let me get back to our sales channel that you know already from previous presentations. We have some measures that we have already implemented. On the one hand, the further expansion and strengthening of our local and regional sales force, and on the other hand, the optimization and alignment of our portfolio, we are implementing our customer-centricity and value creation strategy along the sales funnel even more consistently.We clearly see the need of our clients for managed service for marketing and sales solutions, which combine both brand advertising with consumer interaction and sales conversion. And therefore, we believe that our integrated approach of Out-of-Home Media, Content Media and Direct Media. All 3 product categories have growing relevance on a stand-alone basis, but we get an even higher share of wallet for all 3 segments than we combine them individualized for our clients. Broadcast means reach. Content Media allows more precise targeting, and Direct Media brings our clients in direct contact with their customers, creating a unique communication experience. But it also works the other way around. Once the direct marketing approach reaches its diminishing returns, it can offer nearly unlimited content and reach to amplify the base for direct marketing success ratios and the only other [indiscernible] product you want to supply for clients, and you have more solutions in your portfolio to become a partner. You can close with the decision makers, you then get better insights on clients' needs and KPIs, and you ultimately get a higher share of wallet. Out-of-home, supported by online and Direct Media, gets more traction in the sales process than out-of-home only.With our focus on our home market Germany, the market we know best and which we have the best customer intimacy and where we have significance of our portfolio, we can further increase our market impact, get into all categories and, with that, deliver value for our clients and for our company.I hand over to Christian now who will dig a bit deeper into our segments regarding financial performance and operational focus areas in the first 9 months 2018.
Thank you, Udo. Let us start with our out-of-home segment. After the sale of our Turkish business, the figures shown here for our Out-of-Home Media segment mainly reflect the successful development of our German out-of-home business, which stands now for almost the entire segment. In Q3 2018, we were able to accelerate organic sales growth, as expected, compared to the first 2 quarters of the year, both from established as well as from newly acquired media assets. We delivered an organic revenue growth of 3.7% or 16% on a reported basis from EUR 140 million to EUR 163 million, including the effects from IFRS 11 against the background of a challenging media market. And even more promising, September was the strongest month so far this year and gives us confidence for a good Q4. On the back of this, let me elaborate on the effects that influenced our accelerated sales development in the third quarter. Overall, again, the growth of this segment was driven primarily by our regional and local business in Germany, which grew low-double-digit year-on-year. To see the good performance in Q3 perspective, you should also keep in mind the tough comps with an organic revenue growth of around 8% in the prior year period. And as expected, we've seen a reduced drinking and tobacco spend versus the first 2 quarters of 2018 and expect even a slight increase versus previous year in Q4.Operational EBITDA margin, as well as absolute operational EBITDA development, is displayed with and without IFRS changes. Without IFRS changes, the operational EBITDA margin stands at 23.1%, which relates to an operational EBITDA of EUR 39 million. Including IFRS changes, the operational EBITDA margin was at 45.7% or EUR 75 million compared to 49.8% in the previous year. Besides product mix, the slight decline in margin was due to the consolidation of the UAM Group, which due to its Ambient Media business model, still has a diluting effect on the margin of the entire out-of-home segment, in absolute terms, an effect of around EUR 2 million. As in the prior quarter, accelerated investments in our organic growth and the continued expansion of our local and regional sales force also took its share.Looking at the full year. We continue to expect a mid-single-digit organic revenue growth at the lower end of 3% to 7% for Out-of-Home Media, fueled by an expected increase in advertising spending in various categories that further focus on our local and regional sales initiatives as well as from existing commitments from our national customers.I would also like to show you some examples of our clients' campaigns in Q3 that demonstrate the strategic benefits of our core segment. Oatly is rather well-known abroad but just launched the brand in Germany. To become talk of town in a situation where each city has double the oat milk brands and similar products, Oatly had to really stick out of the box. So Oatly put billboards and super posters in very trendy areas of the city and related the message to the context of that location. Social media channels were used to amplify the effect of the campaign and built earned media by using the out-of-home posters as its main source, a very good way to show what out-of-home can do. McDonald's has always been a strong out-of-home client. In Germany, the new McDelivery service was just launched in Q3, and the client combined out-of-home media with Instagram to create a campaign. Ordering online McDonald's while the existing delivery platforms on the McDelivery Day gave you access to an exclusive fashion collection, with pieces exclusively created by Germany's main social influencers. That shows the combination of broadcast and out-of-home media and social media is a perfect way to quickly launch a new product in a target group that would never be watching a commercial on a classic linear TV channel. The third exemplary case is an event case in the Berlin Station by Nestlé premium animal food brand Purina. The brand cube is a development by Ströer and combined sampling with advertising and presentation of a new product, location-based advertising in a very unique and interactive form.Let me summarize our current key business drivers and focus areas of Out-of-Home Media. We do have a sustainably strong position in a structurally healthy and growing market segment, with our growing regional and local sales forces leveraging this opportunity. We dominate the digital out-of-home market in Germany with our product portfolio of public video, roadside screens, UAM and Neo Advertising in the long-tail segment. We are improving that strength by constantly expanding our screen portfolio. We are accelerating even more the ramp-up of our local and regional sales capacities and system, which will deliver approximately 60% of our out-of-home revenues at the end of this year. This makes us more independent from the more volatile national key accounts.We do have smart and integrated solutions towards all means of Out-of-Home Media and can offer a very broad suite of concepts to our clients, reaching the consumer in many spots of his real-world customer journey, easily integrated with online, mobile and Direct Media, our other segments which help pushing out-of-home. And finally, we are a strong partner for the development of smart cities and environmental solutions in a broader strategic context. The investments of [ CASA ] companies into out-of-home this year show the potential of connecting real-world infrastructure with digital services and touch points, and our solutions are recognized as state-of-the-art.For Content Media, Q3 was another strong and profitable quarter despite tough comps in the prior year period. We managed to increase revenues by 11.3% reported from EUR 118 million to EUR 132 million or organically by a very strong 17.8% across all product groups. All of our products supported this continued growth momentum. One of the highlights was, again, our product group video dominated by digital out-of-home public video with a revenue increase of 18% from EUR 23 million to EUR 28 million. As mentioned already in the last quarterly call, the enforcement of GDPR had no material effect on Content Media and our online advertising business.Operational EBITDA as well as operational EBITDA margin are both well above prior year's level with and without IFRS effects. The strong profitable development, especially of Statista and public video digital out-of-home, overcompensated the effects from investments into growth initiatives of Statista, our local digital services, as well as the ramp-up of our millennial portal watson.de. These measures reflect our ongoing optimization of our portfolio to sharpen the segment and to focus on profitable growth.Let me outline some of our cases of Q3 in the area of Content Media, again, illustrating also the benefits we actually deliver to our customers. For the dating service, Tinder, we have created an integrated solution based on our female website and platform, desired. desired is focusing on young women, and the campaign, Tinder Diaries, was a native content format, with several Tinder stories creating trust and also curiosity on the variety of [ presets ] the platform can provide. The Croatia tourism board was using T-Online, Germany's #1 consumer portal, to tell stories about Croatia and create consideration. The campaign was very much content related and had things to tell and was combined with video galleries online and in our public video channel. A good example how content media also push digital out-of-home. The third case is a really remarkable one. MediaMarktSaturn, Germany's major retailer for consumer electronics, decided to use the targeting data of MIA, the joint venture product of Auto Group and Ströer, to improve the targeting of all of their campaigns within Q3.Additionally, I'm happy to follow up on our last presentation's announcement that we would be able to offer new Content Media mandates in Q3. We won golem.de, Computec Media as well as Gamesworld to strengthen our market position in the tech and entertainment space.Let me summarize our current key business drivers and focus areas of Content Media. A strong backbone on our highly profitable owned assets, including public video digital out-of-home, which is constantly driving revenue growth in the video subsegment. Secondly, the ongoing and increasing pressure from Google, Facebook and also Amazon is helping us currently to further consolidate the market. We have clearly outperformed the German online market, which was slightly negative in the first 3 quarters of the year and also has a slightly negative forecast into Q4 according to Nielsen numbers. We are growing double digit. The broad range of third-party inventory was stable in the first 9 months of the year, and we were able to renew mandates, as mentioned, which will open up further growth and consolidation potential. Furthermore, our content portals, watson and T-Online, are doing really well, and our consistent work shows a steady growth in reach and relevance of our platforms. We are also working hard on the relaunch of desired.de to improve traffic for female target groups. Finally, so far, we have not seen any negative impacts of GDPR on our sales momentum but rather deepened relationships with third-party publishers due to our supporting tech services.As in the prior quarter, we saw a boost in revenues versus prior year figures in our Direct Media segment due to the expansion of our dialog marketing activities, i.e., DV-COM and D+S 360. Total segment revenues nearly doubled from EUR 51 million to EUR 97 million in the third quarter 2018, driven by the acquired businesses as well as by strong performance in our door-to-door business. Organic growth stands at 5% for Q3 2018.Taking the IFRS effects into account. Operational EBITDA increased from EUR 5 million to more than EUR 30 million, delivering an operational EBITDA margin of 13.8%. In the pre-IFRS world, margin is also double digit with 10.9%. With this, our margin was in line with our previous quarter. This is remarkable given that our performance in this segment was negatively affected in the amount of roughly EUR 2 million as customers favored inbound services instead of outbound-oriented activities on the back of GDPR. We see this more as a onetime phenomenon as outbound volumes already recovering in Q4 so far.As explained in the past, with the various assets of dialog marketing, we will build one consolidated platform to drive market share and leverage structural synergies on the way to achieving this goal. We are in line with expectations and continue to strengthen our business with investments in tech innovations like optimise-it and versatile and technically flexible solutions for chat, including chat bots and multichannel solutions.Let me show you some client cases and product innovations in the Direct Media segment from Q3. Our acquisition optimise-it specialize in real-person chat but also strong in AI-based chat by bots. The most efficient product is the ideal combination of the human intelligence and AI's capabilities with smart handovers between those 2 layers. That is the clue of Realperson Chat Suite of optimise-it, which is currently used to improve chat experiences but also to create new means of advertising, for instance, interactive banners that we use in our online sales department.Second case. DeutschlandCard operates one of the biggest customer loyalty programs, which has more than 20 million subscribers. The company separates from its in-house partner, Arvato, and transferred all contact center services to Avedo, a part of the Stroer Dialog Group. The change will be completed in the beginning of 2019 and then turns into a long-term partnership.Besides our out-of-home and online partnership, we also won more direct business with MediaMarktSaturn. The integration of their online and off-line offers reaches millions of customers every day. Their multisite project covers the first-level support, which is characterized by highly flexible -- by high flexibility and service-level requirements. Therefore, Ströer Dialog Group provides an exclusive team in 2 cities to improve customer service and cross-selling opportunities for MediaMarktSaturn.Let me summarize our current key business drivers and focus area of Direct Media. Direct Media gives us better access to our clients and strengthens our out-of-home product sale and increases the share of wallet with customers. We see a growing demand of Direct Media and benefit overproportionately from the higher expectations of clients towards integration of tech and data in order to create smart service experiences. After 1 year into the business, we are almost -- we are amongst the top 3 suppliers and in an excellent position for further market consolidation in Germany but with a clear focus on sustainable and profitable growth. Quicker than expected, we are also able to integrate Direct Media into our sales processes and gain a higher share of clients' wallets with integrated group solutions. At the moment, 2 out of 3 new business wins are ultimately influenced and driven by Ströer Group capabilities.Consolidation of all segments, all agents and direct channels on one tech and campaign management platform is well underway, and it's already helping us to grow existing client revenues through higher flexibility of resources. Mid and long term, this is also one key to drive our targeted margin improvement.Let me now hand over to Bernd who will dive deeper into our financial figures and what we expect for the remainder of the year.
Thank you, Christian. With the positive developments in Q3, we are on track for our full year guidance. As in the past quarter, we managed to achieve a pleasing organic revenue growth of 8%. With that, we are able to outperform the development in the German media market significantly, driven by positive developments in all our segments.Let me now run you through the numbers of the third quarter and remind you on the changes in our financial reporting for 2018, what you already know. As presented already in the past quarterly calls and in our several individual teaching sessions, we had significantly -- significant reporting changes in 2018. Today's release will be the third time presenting our actual numbers in the new segmentation format and considering the IFRS effects of IFRS 16 and the elimination of the prior IFRS 11 adjustment.As a short recap. For the new segmentation impact, the previous year's quarterly figures were adjusted retrospectively. For the IFRS impact of IFRS 16 and the elimination of the IFRS 11 adjustment, we will, as in prior quarters, display 2 data sets: first, one data set including the IFRS effects; and second, one data set without the IFRS effects as you know it from the previous years. Different to the prior quarters, we have to reflect the effect from the sale of our Turkish out-of-home business in the presentation for -- of our numbers. As mentioned already by Udo, we will focus on continued business. In our slide deck, it's not otherwise indicated. All accounting effects referring to our Turkish operations will be, as commanded by IFRS 5, booked in just one discontinued operation line in the P&L right before net profit.As you all know, IFRS 16 has a significant impact on our financials. As explained before, the basic idea of IFRS 16 is to eliminate nearly all of balance sheet accounting for leases. On the one hand, leases are required to initially recognize a lease liability for the obligation to make lease payments and, on the other hand, a right-of-use asset for the rights to use the underlying asset for the lease term. And on the back of this, our balance sheet increases for accounting purposes by approximately EUR 1.1 billion.Let me walk you through the main accounting lines for Q3 2018. On total revenues, IFRS 16 has no impact. In contrast to this, we see a 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 Q3 2018. Instead, operating lease expenses are conceptually replaced by depreciation and interest. The major chunk of the operational EBITDA effect is reversed in D&A, which increases by EUR 44 million as this reflects the write-down of the capitalized right-of-use assets. Consequently, the EBIT adjusted increases by EUR 2 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 a repayment component. So the financial result increases by EUR 5 million due to this calculated interest component.Due to a 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 M&A will increase by EUR 25 million as the repayment component of the rent reclassified in the financing cash flow. As discussed, this free cash flow figure might not sufficiently reflect the true free cash flow generation. Therefore, we will also report on IFRS 16 adjusted free cash flow before M&A going forward.As I have just explained, the impact of the application of IFRS 16 on the P&L as well as on the cash flow is significant. It is our main priority to deliver you a good insight of the underlying developments of the businesses and our company. Therefore, we prepared for Q3 2017 and Q3 2018 both a set of figures including the IFRS effects as well as a set of figures without adopting IFRS 11 and 16, the old world. Both sets leave out our discontinued Turkish operations. In our third quarter financial report published today, we made use of the so-called modified retrospective approach for simplification reasons. That means that we only present our figures, mainly P&L and cash flow statement, in this report, including all IFRS effects for Q3 2018. Q3 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 a 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.As published on October 9, we successfully sold our Turkish out-of-home business for a transaction value of EUR 15 million. This business has not been part of Ströer's core business anymore. By focusing on the German core business and future growth fields, the significance of the Turkish out-of-home business faded into the background for quite some time. At the time of the sale, the Turkish business accounted for only around 2% of revenues and just under 2% of our group's EBITDA for the cumulative first 9 months in fiscal year 2018.Let us now have a look on the P&L effects of the disposal of our Turkish business in detail. We show pro forma the effects of considering our Turkish business as discontinued operation on the individual income statement line. In accordance with IFRS 5, the effects of the sold business has to be eliminated in each P&L line and has to be summarized in just one line, results from discontinued operation. In the first column of these pro forma figures, you can see the income statement that would have been shown, including the financials of our Turkish business. The middle column represents the individual income statement of our Turkish business, practically as a stand-alone. In the right column, you see the consolidated income statement of our continuing business, which we will also discuss in the following page in depth.By reporting the Turkish business as discontinued operations, group revenues for Q3 2018 fell by EUR 5 million or 1.3% from EUR 392 million to EUR 387 million, as already described, continued EBIT increased slightly by EUR 0.5 million to EUR 33 million, net income and net income adjusted increased by 2 respectively, EUR 1 million. As you can clearly see, the disposal is accretive to earnings and will improve our financial profile.Let me now come to the already mentioned profit and loss statement, representing our reported figures for Q3 2018 and pro forma figures for Q3 2017 based on the new accounting rules of IFRS 16 for our continued operations. As said in my opening remarks, Q3 2018 performed in line with our expectations and plays into our full year targets in all respects. The Ströer Group recorded an increase in revenues from 27% and 8.1% organic growth, respectively, from EUR 304 million to EUR 387 million, fueled by a strong development in all our segments.With EUR 127 million, our Q3 2018 operational EBITDA is well above prior year's operational EBITDA of EUR 109 million. Exceptional items of EUR 8 million were in line with prior year and are mainly due to restructuring portfolio decisions to sell minor operations as well as integration efforts. The depreciation and amortization expenses increased by around 13% from EUR 76 million to EUR 86 million in the third quarter 2018. This is mainly due to increased IFRS items. D&A can be clustered in 3 main buckets: first, underlying D&A of EUR 27 million; second, IFRS 16-induced D&A of EUR 44 million; and third, D&A on revalued assets of acquired companies as directed by the so-called IFRS purchase price accounting in the amount of EUR 14 million. This last bucket is not part of our adjusted net income.Our key parameter, adjusted net income, was up by 20% from EUR 34 million to EUR 41 million in the third quarter, ahead of operational performance.As described before, IFRS 16 has a major impact on our net debt with an increase of approximately EUR 1.1 billion. However, as already explained in the past, this IFRS-triggered impact has no effect on our financial leverage for our lender banks. Simply, reason for this is that our banks do not consider the IFRS effect. This results in a leverage ratio for our continuing operations of 1.8 after 9 months, just the same level as 1 year ago.Let us now have a look on the set of numbers prior to the application of IFRS 11 and 16 for continued operations. Reported revenue is unchanged to what we have already discussed. Operational EBITDA is up from EUR 72 million to EUR 83 million. The main difference between with and without IFRS changes is EUR 46 million due to the IFRS effect.EBIT increased by 35% from EUR 23 million to EUR 31 million. The main difference between with and without IFRS changes is only approximately EUR 2 million, as discussed before. Net income adjusted increased from EUR 37 million to EUR 44 million, up by 20% and 5 percentage points ahead of operational performance. The difference between net income adjusted with and without IFRS changes is, as expected, slightly negative with EUR 4 million due to the described interest effect.The depicted pro forma free cash flow statement is the one you know from previous quarters prior to the application of IFRS 16, however, only for our continuing business without our Turkish operation. Our free cash flow in Q3 2018 developed nicely versus prior year quarter and increased by almost 50% from EUR 15 million to EUR 21 million. Analogous to Q2 and commented in the last call, the fiscal tax authorities enacted procedural changes which lead to this anticipation of prepayments for Q3 as well. In light of this, a significant chunk of the EUR 12 million has to be seen as a onetime tax cash-out and will relieve our tax burden 2019, 2020. For Q4 2018, we expect no meaningful tax cash-out anymore to fiscal tax authorities.With EUR 13 million, the working capital increase is on the same level as in the prior year period. As it is known, our working capital follows a certain seasonality pattern. In line with this, like in previous years, our working capital will significantly contribute to our free cash flow in Q4. Investments before M&A were EUR 27 million for the quarter, which is slightly lower than in the previous quarter but guarantees sustainable high investments in out-of-home infrastructure, digitalization, software and other intangibles.As you know already from our Q2 2018 call 3 months ago, as cash target, we strive for EUR 175 million adjusted for a onetime tax cash-out of around EUR 25 million. Given the free cash flow of EUR 21 million in the third quarter, we are on track to deliver this target. Remember, we need to deliver EUR 120 million to EUR 125 million free cash flow in Q4 2018, which is actually the performance of Q4 2017 plus around EUR 15 million to EUR 20 million, absolutely doable. This growth will come from additional EBITDA and working capital contributions.Please remember, 2015, 2016 and 2017, more than 2/3 of the free cash flow of a year was generated in Q4. This will be repeated also in 2018.As elaborated, the developments and results of the third quarter 2018 are in line with our expectations for the full year 2018. With that, we can reconfirm our guidance of total revenues of around EUR 1.6 billion and an operational EBITDA before IFRS changes of around EUR 375 million, not considering the sale of Turkey.Based on the feedback from our clients and our order book, we expect the following developments for our Q4 2018. Similar to the development of the meanwhile last 23 quarters, we see a solid business development across the entire group in line with the annual guidance. Second, an overall challenging Out-of-Home Media business despite robust regional and local sales development and an accelerating momentum in national out-of-home. Third, our Content Media segment will be consistently on track with low double-digit top line growth, market share development as well as consolidation and integration processes. Fourth, Direct Media to continue in line with our expectations. Going forward, we expect to see additional synergies and cost-cutting opportunities post-merger, which will get us closer to best-in-class performance.Let me now close our presentation with a reference to our next catalyst on February 26, 2019, on our preliminary figures 2018 and the guidance for 2019.
Thank you, everyone. We are happy to take your questions now.
[Operator Instructions] The first question is from Marcus Diebel.
Two questions from my side. The first question is on advertising trends. I mean, clearly, a strong rebound in the out-of-home business, very different, too, to other players in German media in this space. Could you maybe elaborate a little bit more why that is, how you see current market shares in the media mix moving a bit more? If you could give us a bit more about the latest developments in this regard. And the second question is straightforward. Could you give us the growth rate for T-Online in Q3, if possible, ideally, organic growth and the margin if it's possible?
Okay. I'm just coming back to your first question on advertising trends in general. I mean, I would say you see an ongoing pressure in the ad market in total, driven by Google, Facebook, Amazon taking a bigger share. But -- and I think that's important to notice, I think we are a bit different to many other player in the German media landscape. I think, first of all, we see that, especially content media, television or print are under pressure. Clients look for alternatives, and out-of-home offers rather growing reach and, through digitization, more flexible opportunities. And I think that's a long-term trend that we see for the category in general, and that's where we benefit from. I think in combination, it's the huge share of regional and local business that we can influence directly through our sales force, which was historically pretty much a print market only. And I think that consolation (sic) [ consolidation ], especially in out-of-home, makes us very different from other players. But in general, you're right, there is more pressure in the national ad market probably than in the last couple of years in 2018. I think in the content media part, we are benefiting from the consolidation tendencies. I think it's getting tougher the smaller you are, and clients focus their investments more and more outside of Google and Facebook with 1 or 2 bigger players. And we are clearly amongst the big ones now and probably the first choice if the clients spend money outside the global platforms. And I think the direct business is almost separate from traditional advertising. And if clients shift money away from traditional broadcasting or brand advertising, they rather shift it to performance or direct media activities. And I think that's where we benefit as well. That's why we feel all the 3 categories and -- but also especially out-of-home, which is probably very close to the normal traditional ad market, is not comparable with television or print or even radio. I think the underlying structural benefits that we offer create a completely different momentum. No doubt that the first 2 quarters have been suffering a little bit from tobacco, but that was neither structural nor cyclical. It was just tactical by a handful of customers.
And Marcus, I'm going to take your second question regarding the growth of T-Online. Just let me add one topic overall in the Content Media organic growth. I mean, we were above 15%, and the key driver for this organic growth is basically digital out-of-home, Statista and mobile. Having that said, as you know, we don't disclose so much our very specific assets. Having that said, however, for the organic growth of T-Online or growth of T-Online, we would always say flattish to low single-digit growth, and it's what we see for T-Online. And regarding the margin, it's clear, the drop-through rate, each additional euro which we do there with T-Online gives us more than EUR 0.50 profit. So therefore, we feel that this is a very profitable business, what we have there, which is also flattish to low single-digit growth.
The next question is from Craig Abbott of Kepler Cheuvreux.
Yes. I just wanted to understand a little bit better the margin decline in out-of-home. You mentioned in the call that a part of that is scope effects in UAM, which are around EUR 2 million, you said. But still, if we strip that out, there's still about 3 percentage point year-on-year drop, I think, if I did my math right, in that quarter. And clearly, we can also see that the growth in the top line has been overproportional in the other category, then you did mention there was a mix effect there. So I'm just trying to understand a little bit, to what extent was this margin decline due to that mix effect? Or was it maybe other factors like the digital out-of-home rollout where obviously, it takes some time before you can pull up the sell-through rates? Or is it a pricing issue? And how do you see that progressing roughly, roughly over the next couple of quarters? And my second question, please, is just if you could just give us a brief update again this quarter on where you stand with the digital out-of-home rollout and how you're seeing those capacity utilization rates developing.
Craig, just to take your first question regarding the margin in out-of-home. Just to put it in perspective, previous year's quarters or in Q3 2017, there is an EBIT margin of 25.7%, and this quarter, we make around EUR 166 million revenues. So if you would apply this 25.7% margin, we should have generated EUR 42 million EBITDA. However, we only contributed EUR 38.5 million EBITDA. So basically, if you have to explain for the dilution effect, you mentioned EUR 3 million to EUR 4 million EBITDA, which is, from this perspective, missing. If you really go through, basically, there's a product mix effect of United Media mainly because instead of generating a 26% margin in the basic UAM, it's just having an EBITDA margin of 10%. Therefore, they are contributing EUR 2 million to this missing EUR 3 million to EUR 4 million EBITDA, and the rest is basically investments into OpEx. The -- previously, there -- so where also our growth is coming from, you see this on a local and regional level, we invest in our sales force, IT and then this kind of infrastructure. We don't have these as exceptional items, and therefore, have these kind of launch costs, let's say, but we have these now on normal operational expenses included, and that's basically the reason. Looking in the next couple of quarters, I think this kind of tendency should be the same also in Q4. But then in the next year, you should have the same level of margin like in the year before because United Ambient Media was included in our numbers starting from 1st January 2018.
All right. So next year, more and more flattish year-on-year comparison on the margin? Okay.
Exactly.
Just on the digital rollout, I think we are -- I mean, it's an ongoing midterm project where we constantly make sure that we get -- have enough approvals from municipalities and the landlords in our pipeline and then execute it step by step on the basis of well, CapEx management in parallel with ramping up the local sales forces so that we make sure that we do not just build inventory for the sake of building digital screens. We make sure that we monetize them immediately. So current -- I think this year again, we've improved our public video portfolio across station, mall and transport and now also integrated, for instance, the Dusseldorf Airport into the network. And I think currently, we spend around 4,729 screens there, that's the latest status, and we get beyond 5,000 next year. That's, well, still the backbone of that. I think roadside screen is currently going beyond 367. I think that's the latest number that we have started for our sales team. We've in parallel started now also what we call, well, Super Motions or Mega Visions. It's large-format screens where we meanwhile have 10 up and running. The latest one last week at the Cologne main station, so that we also have large-format besides roadside and public video in our portfolio. And I think on the mid and long tail with UAM and Neo, we have currently 1,960 screens roughly, where -- which we own and operate, and roundabout 72,000 where we are the service provider for content, for the technological or the tech system and the ad sales. And in those 4 pillars, so public video, network extension, roadside screen buildup, adding large-format Super Motions on top of it and constantly improving our penetration in the mid- and long-tail area, I think we are well on track. And it's probably, besides local and regional sales, the top priority for our out-of-home team.
The next question is from Julien Roch of Barclays.
My first question is on German outdoor. You said September was the best growth for a while. Can you give us an idea of how much that was? And can we get October and November trends? That's my first question. The second is, staying on German outdoor, you say the weakness in the first half was mostly linked to tobacco. How much was tobacco as a percentage of revenue and how much did you decline? That's my second question. And then my third question is on Direct Media. Is there a differential in margin between inbound and outbound call? And if yes, could you give us some indication?
Julien, I will take your first -- the first 2 questions. First of all, the German out-of-home. Basically, if you really look only on out-of-home result, excluding for a while out-of-home Turkey actually as a result of discontinuing operations, you see a really nicely trend. So we had -- in the first quarter, we had between 1.5% to 2% organic growth in Germany; in the second quarter as well, 1.5% to 2%. Now we are close to 4%. And we think that we should be even in the fourth quarter to come to around 5%. So in the end, for the full year, we expect that we have -- that we will have mid-single-digit growth for the full year for Out-of-Home Media. This is as we see it. And this kind of trend is also supported by the advertisement spending of tobacco in the end of the day because if you look at, say, Q1 and Q2, basically, we lost around -- yes, in each quarter, around EUR 4 million in the first 2 quarters. And then actually, in Q3, we lost less than this amount. And we expect even that in Q4, we should be slightly positive in comparison and contrast to Q4 of the previous year. And this also describes in the end by there is now an improvement in trends of organic growth for out-of-home Germany. But don't make a mistake, the real substantial growth which -- is really coming from local and regional sales initiatives in out-of-home media and also the digitalization there, as has been mentioned by Christian. I hope I could answer now your first 2 questions.
And back on your question on outbound versus inbound services, I mean, it's a bit difficult because individual contracts with clients, of course, differ. But if you take rough average, you see that outbound, in combination with care-to-sale services or cross- and upselling mandates from clients, yes, where you have an active sales element or do outgoing calls, then the average margin is between about 12%, 15% to 20%, sometimes even beyond in peak quarters. If you look at pure customer care inbound services, the range is broader. It goes from 4%, 5% up to 15%. So still a broad range, but clearly, the more you're able to work sales oriented for customers, the higher the margin is when you have a sales-oriented, well, infrastructure with agents as we do.
Okay. So you said -- for customer care, you said 4%, 5% to 15%, right?
Exactly, yes. And again, if you talk about very -- I mean, very advanced and tough categories like telco, you're probably at the low end of the corridor. If you look at more complex areas, like tourism or also financial services, even in the automotive industry, where, well, the average check behind the customer is also higher and clients tend to invest also more just to be on the safe side in customer care businesses, and then you can also get up to 15%, but it's pretty much driven by the industry you're operating in.
The next question is from Nizla Naizer of Deutsche Bank.
I guess my first is on the outlook for 2018 on a post-IFRS world. Bernd, maybe you can run us through what we should expect in terms of the EBITDA post-IFRS 16 and excluding Turkey. Secondly, my questions on the ad market that you referred to in Germany in Q4. Bringing to 2019, do you get a sense that it will stay tough on a national level? And would you continue to be compensated by that shift from the local and regional advertisings coming your way? And lastly, on the digital screens that you referred to, Christian. If you can take us through, is it still the strategy where you'd like to target the local and regional clients with these screens? Or with the large formats, are you going after the national clients as well? How has their response been to these type of formats? And are you able to push ASP increases as a result of the different formats that you're offering?
Nizla, just I take your first question regarding the guidance of EUR 375 million and what is the implications of IFRS effects. Just formally, we confirm our guidance of EUR 375 million, including the discontinuing operations of Turkey. If you would exclude this for a second, then technically, we should come to EUR 370 million, if you do this math without Turkey. But really, it's a rounding difference. In the end of the day, we are talking about 1% deviation. So therefore, EUR 375 million including our Turkish operation. If you then look at IFRS effects, they should be for the full year around EUR 180 million. So actually, if you really calculate what should be the -- what should 2019 bring, if you want, so as a jumpoff point, 2018, I would calculate the EUR 370 million without Turkey plus EUR 180 million, then you have basically EUR 550 million in -- as a jumpoff point for 2018 looking into 2019.
And when we look at the ad market in 2019, I think, once again, I think the context won't change. I think regional and local markets are pretty much in our hands. So when we execute our sales initiatives, the ramp-up of more salespeople, and do our homework properly, then I think all of that is in our hands. I think when we look at the national ad market, I guess pressure won't change, but there is, from what we see currently, one big difference. Last year, we were a bit surprised by the changes coming from the tobacco industry, there without almost no prewarning. We are meanwhile through the first round of annual commitments with Philip Morris, Smart JTI, British American Tobacco. And what we see that -- so far is that we are at least on -- for next year, on the spending levels of this year. Yes, I mean, it's probably too early to define exactly what potential growth rates are, but we are -- we won't lose any revenues here versus 2018. And I think besides tobacco, we had a very robust and strong year also in the national ad market no matter what the pressure is. That's why I would also say, out-of-home is, with our key benefits, strong enough to also, well, run overproportionately good next year in the ad market. I don't see any changes, but I'd see some relief on the tobacco side. And regarding digital out-of-home, indeed, the roadside rollout is primarily fueled then by local and regional revenues and also signage offerings to local clients. The large-format screens that we start integrating into our portfolio, of course, have some kind of anchoring effect for national advertisers because they are always a little bit more interested in same locations. And that's just -- it's more like a marketing instrument to push more national advertisers on our public video infrastructure and adding some highlights with larger formats to the existing infrastructure in stations, shopping malls and public transportation systems. Yes, but I still think it -- when you look at the total revenue growth, it will come both from the national part, where we just get a bigger share of the video pot, in combination with large-format and the roadside screens, clearly fueled by local revenues and local customers.
The next question is from Patrick Schmidt of Warburg Research.
I would like to come back to your full year guidance once more. Isn't that implicitly actually your guidance increased? Because we already set like an EBITDA level you would have -- expect more without -- with Turkey, but isn't that the same on -- at the top line? That's my first question. And my second is on Content Media. Could you give us an indication of your, let's say, pricing and volume behavior and how we should think about the shift from display to video and how that affects the growth and the margin as well?
Patrick, just to be precise, what do you mean by, you think that we increased our -- or logic, just to understand your reasoning behind this better.
Because you're missing now revenues from Turkey for Q4, right? So what will your reportings will look like in Q4 compared to your reiterated guidance.
Basically, for the whole year, basically, regarding Turkey, actually, for the whole year, you would basically lose around EUR 35 million revenues, more or less, and we will lose actually around -- this we had in our original plan, around EUR 6 million -- about EUR 5 million, what we say, EUR 5 million EBITDA. So -- but all in all, we will end up close to EUR 1.6 billion as we will have maybe technically now EUR 1.590 million revenues in Q4, so very close to EUR 1.6 billion even without Turkey. And regarding EBITDA, it's a little bit like a rounding thing because you're talking about 1% actually. Whether you have it in or not, you never know finally where it comes out. So therefore, we adjusted EUR 375 million, including Turkey, and we included Turkey with EUR 6 million. And therefore, we -- technically, you could say, without Turkey, we would end with EUR 370 million. What is important regarding the guidance is that, definitely, the question of the IFRS effects. It's in the end very technically now in 2018 because it's the first time that we apply to this. And definitely, we have to see finally what are really the IFRS implications for the full year 2018. In the past, we were quite, let's say, consolidative on this number, we think, and we started maybe lower than EUR 180 million. But based on the latest estimates we have, we think that the IFRS effects for 2018 are EUR 180 million, and this, you need to add on the then EUR 375 million or EUR 370 million, and you end up then on at least EUR 550 million EBITDA, including the IFRS effects in 2018. I hope that clarifies, Patrick.
Yes.
And on that -- on your question regarding Content Media and pricing, well, I think, first of all, it's fair to say that part of Content Media is also public video or digital out-of-home. And if I look at the development here, I think this year, we've been working with a price increase of around 5% to around 6%. Q3 revenues have been organic growth whilst at 18. So 1/3 is driven by pricing, 2/3 are driven by demand if you look at the increase. When I look at the online part and the advertising revenues there, yes, display traffic is showing upward slightly, but we are operating on 100% fill rate. And especially since we've integrated the header bidding solutions from Yieldlove, the company that we acquired end of 2017, I mean, we are really optimizing our yields price oriented. So this year's eCPM year-to-date, including October, so a little bit more than the first 3 quarters, eCPM is up by 18% in display. In combination with the inventory going backwards, we are still growing here because I think that's the interesting aspect that suddenly, if you have less supply, then prices can be increased and can easily overcome the shortage of inventory. And I think when we look at the mobile business, still, traffic is increasing and fill rates are slowly getting better, so revenues are growing in line with the inventory growth here. And I think that's what actually is driving mobile growth here. But I would say we still have some potential in improving the prices. But it's still too early because clients are still very focused on display advertising. And as long as I think clients do not consequently think in multiscreen offerings and do not differentiate between mobile and display and focus on the customer and actually the content that they are interested in, I think we will have some work to do to get mobile prices closer to display prices. But I think at the moment -- and that's also a bit surprising, display prices are not going backwards. They are increasing massively because there is less inventory out there on premium websites than in the past.
The next question is from Annick Maas of Exane BNP Paribas.
I have 2 question. The first one is, on Slide 6, you gave a forecast for the outdoor advertising market in 2020 of 3.3%. Now considering that there's still quite a lot of inventory that can be digitized, and this would imply price premium and much more volume, I find that 3.3% is quite low. So how do you view that? And then my second one would be on rents. How do the rents that you pay to the landlords change as you convert an analog board to a digital board as I assume that the municipalities or the other landlords also want a share of the upside basically?
I mean, on your first question, yes, I agree with you, Annick. I think we used the data from Zenith Media to forecast a CAGR of 3.5% roughly. And I think that number is also in line with what WPP/GroupM forecast. But when I look at the last 5 years and their estimates, what was their midterm projection and what were the real results, then I think the actuals were always minimum 2 points header than network agency expectations. So I would also say the 3.5%, we took it from third party, but if you would ask me today for my personal opinion, then I think including digital out-of-home, the real number will be higher than that. That's what we aim for and target.
Yes. Regarding rent, actually, there's no major impact, yes. So it's -- most of the time actually, we've been able to lower the rent because the investment is higher. But there's no rent increase through digitalization.
The next question is from Pierre Gröning of Hauck & Aufhäuser.
Maybe to add just a more strategic one. Given that you increasingly focus on organic growth and the sharp portfolio rather than aiming for more bolt-on acquisitions, I just wondered whether you could imagine to adapt your dividend policy actually and let investors more and more participate in the strong cash generation, or would you rather stick to your payout ratio for the time being and for the future?
That one finally not decided yet. As you saw in the past, we have increased our dividend year-over-year, so it's very likely that we are also going to see increase of the dividend, but there is not a final decision taken up to now.
[Operator Instructions] There are no further questions. I hand back to the speakers.
Yes. Thank you very much for your time. Looking forward to see you in 3 months' time again to look at the full year results. Thank you very much. Have a good day. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.