Stroeer SE & Co KgaA

XETRA:SAX

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Ströer Q3 Figures 2022 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Christian Schmalzl, Co-CEO. Please go ahead.

[Christian Schmalzl, executive]

Dear ladies and gentlemen, dear analysts, thank you for joining our Q3 results call today. As usual, I would like to share with you the latest developments and give you a strategic update. Henning will then take over and present the financials for the third quarter 2022. Before, I'll give you a short outlook of what we expect for the remainder of the year and for 2022 as a whole. After our presentation, we will be available for Q&A.

Despite the continuing tense economic situation due to the war in the Ukraine, the high level of inflation and rising energy and consumer prices, we were able to deliver a comparatively robust earnings performance in the first 9 months of the fiscal year. In addition to our strong position in the German advertising market, our well-differentiated customer portfolio, but also our efficient cost management were decisive factors in this. Reported group revenues for the first 9 months in total were up by 13% from EUR 1.1 billion to EUR 1.25 billion. Organic revenue growth accelerated from 11.7% to 13.5% versus the prior year period. The successful sale of our online performance marketing specialist [ SEM ] for roughly EUR 14 million in Q2 has no major impact on growth development.

The adjusted EBITDA increased by 11% from EUR 319 million to EUR 354 million, driven by the robust performance of out-of-home, especially digital out-of-home, but [dent] by a slowdown in digital business over the course of the quarter. Adjustments remained low and came in at EUR 5.4 million positive in the first 9 months, including the positive exceptionals of the same sale discussed in our Q2 call.

Our adjusted EBIT reflects the solid performance of the quarter by rising by 23% to EUR 155 million. Same applies for adjusted net income, which increased by a comparable pace from EUR 83 million to EUR 104 million in the first 9 months. Operating cash flow for the 3 quarters 2022 increased disproportionately low compared to the sales performance by 5% to EUR 234 million; however, taking an additional payment of around EUR 11 million for corporate taxes and EUR 14 million for municipal taxes -- trade taxes in the quarter into account, operating cash flow developed in line with sales.

Also in the third quarter, we continued to invest into profitable growth and with that into the rollout and accelerated expansion of our digital out-of-home portfolio. Consequently, CapEx spend of the 9 months increased from EUR 62 million to EUR 118 million when compared with prior year CapEx spend.

There's still academic discussions if and when Germany might face an advertising recession. I think the answer is it's already there when you look at the publicly available data in the last couple of weeks. Even global products and companies like YouTube and Facebook or Instagram has been going backwards in Q3. The Nielsen numbers in Germany only show gross numbers, but they should be a very reliable indicator about the net development.

The total ad market has been down by 9% in Q3. More or less all media, TV, print, online radio are suffering on a comparable level. The out-of-home segment in total is slightly better with minus 8%. But that's including us and our performance clearly shows another direction. Digital out-of-home was growing against the market trends by remarkable 23% in Q3. About 5 to 6 points came from incremental inventory, i.e., converting analog top roadside locations into digital display but still 17% to 18% is organic growth in demand.

Driven by digital out-of-home, our out-of-home segment in total is growing 4% in the last 3 months. And it's worthwhile mentioning that we have the ban for tobacco advertising since this year. That's equivalent to EUR 20 million on a full year basis for us or 2.5 percentage points of out-of-home revenue quarter-by-quarter. And the total group is with 5%, also exactly on the mid-single-digit growth we've been guiding for Q3.

What are the key drivers for the resilient performance of our core out-of-home business? On the one hand, it's clearly the digitization of inventory and the client demand for more targeted flexible solutions, also via programmatic advertising. The programmatic share of national advertisers was slightly above 50% in Q3, and the share of data products has gone up by over 40%. End of Q3, our total public video product, including the new roadside screens, has a net reach of 68% in the top 10 cities. And by the end of the year, we should be able to get to 70% based on our rollout plan.

So we've crossed the critical mark where our product, excluding any other digital out-of-home offerings in the market, can work as a stand-alone campaign or support other channels is available on all relevant DSPs and trading desks in the market, including Google DV360 since a couple of weeks, and it's offering constantly more audience data and targeting features and increases based on our rollout plan and the general growth of audience reach and coverage across all target groups.

Second key driver is the structure of revenue sources, more than 60%. And in Q3, 63% of our segment revenues come from almost 60,000 local customers. They book for longer periods. Advertising is by far a smaller part of their P&L and therefore, more resilient, and we constantly increase our sales force and sales activities to penetrate the large segment. Similar to the digital out-of-home development, the local ad market development for us is still in an early stage, and there is so much incremental potential that we can also grow in a more recession-like scenario.

And finally, we have more than 60% market share and -- in a fully consolidated market where advertisers can do out-of-home only with us but not without Ströer. So as soon as advertisers accumulate less spend on fewer players, we have a good chance to increase our relative position.

Of course, we are not immune against the current headwinds. And as we have businesses that even benefit from the current situation like dialog marketing, we have to work hard in the online business to defend our position when already global platforms start to struggle, but the mix of businesses and the resilience of our core business bring a lot of stability.

We have also seen the guidance from TV broadcasters expecting beyond minus 15% in Q4. Our out-of-home order book for Q4 is on prior year and thus above pre-COVID level, and we are already halfway through Q4. Again, we cannot influence the overall ad spend level in the market, but we see that we outperformed the market significantly.

We see similar development for Statista besides the core out-of-home business and its underlying long-term digitization potential, probably the second key value driver for our group. Statista has grown both sales and revenues beyond 38% in the first 3 quarters. We are fully on track with our globalization road map, and in Q3, more than 35% of revenue came from the U.S., which is by far our biggest market now. And especially in more challenging times, we see an even growing stickiness of the product. The most recent Net Promoter Score is at 57, and our net revenue retention is above 100%, while we constantly increase new customers and markets. So another quarter to get EUR 250 million top line in 2025, while we broaden and strengthen the content on the platform.

Henning will take you through the detailed financials year-to-date in Q3 and also share transparently where we see like others, more challenges. But even if the environment is getting really challenging now, we think we come to a phase that we have seen already a couple of times in the last 15 years, economic crisis, financial crisis, pandemic, new global competition. On the long run, we've been significantly improving both top and bottom line relative to the overall market and all crisis and the rebound phases have been a catalyst for that momentum.

When you look at the development during the pandemic and in the recovery phase afterwards and compare our out-of-home segment with our global out-of-home peers, you see that only one other player apart from us is in Q3 this year, back above pre-COVID levels from 2019. More importantly, there is almost a linear correlation between the share of local sales and the revenue low point during the lockdowns when you look at the respective quarter in 2020. Local business is the best downside protection. That's what you see on the left side of the chart, comparing pure out-of-home players with our out-of-home segment.

When we integrate our PLUS businesses and the analysis to fully reflect our different strategic approaches, you see an even more robust downside case and a clearly stronger performance in the rebound phase. So customer and business diversification helped in all stages of the advertising cycle.

With that, over to Henning.

[Henning Gieseke, executive]

Thank you, Christian, and hello to everyone. Let us now walk through the key financials of the third quarter. With organic growth of more than 5% for the third quarter, we are on spot with our guidance as communicated 3 months ago. And this against the backdrop of a strong prior year base and the current macro framework that Christian just described.

Adjusted EBITDA, however, came in EUR 5 million below the prior year's level at EUR 134 million. This decline is mainly related to the sales development in the Digital & Dialog Media segment, which could only partly be compensated for by an earnings increase in out-of-home media.

Exceptional items stood at minus EUR 2.7 million on prior year level and related to the subsequent effects from the sale of our Turkish online performance marketing specialist [ SEM ]. Reported EBITDA came in at EUR 131 million. As in previous quarters, depreciation and amortization continued to decline and were down to EUR 73 million in the quarter, mainly due to declining D&A from capitalized purchase price allocations.

The financial result improved from EUR 7 million to EUR 5 million due to an unexpected interest income from an already fully written down loan. So the improvement of the financial results should not be seen as an indication going forward. Let me stress at this point that, of course, we have to anticipate higher interest expenses going forward. But please bear in mind that large parts of our gross financial debt are subject to fixed interest rates, namely the around EUR 900 million from the recognition of IFRS 16 leases plus some EUR 180 million or 50% of our outstanding promissory note loans by the end of October, leaving us with some EUR 600 million floating debt.

Looking at current rates that would lead to everything else being equal, some EUR 10 million to EUR 15 million higher expenses coming back to this year's Q3. With this development, pretax earnings were broadly stable compared to the previous year. With EUR 39 million, reported net income was just EUR 1 million below the prior year's level. With lower adjustments, the adjusted net income declined to EUR 46 million.

Moving on to cash flow. On the one hand, altogether we again saw a very solid underlying cash flow generation despite more challenging times. On the other hand, we had 2 nonrecurring items affecting cash conversion and investments in this third quarter.

[Technical Difficulty]

[Operator]

Ladies and gentlemen, due to technical issue, the speaker line dropped. You will hear the speaker line back in a second. Please hold the line.

[Henning Gieseke, executive]

Hello, everybody, again. I have to apologize for the technical hiccup, and now I'll continue with my comments. So I was talking about tax payments, which added up in total to EUR 38 million compared to EUR 13 million in the third quarter of '21. And excluding the 2 mentioned effects, cash out for taxes was virtually flat.

In total, operating cash flow stood at EUR 84 million compared to EUR 101 million in Q3 '21. Cash out from non-M&A investments increased from EUR 25 million to EUR 51 million reflecting the continued expansion of our digital roadside and public video portfolio as well as the purchase of our headquarters building here in Cologne for roughly EUR 11 million.

All in all, free cash flow before M&A declined from EUR 77 million to EUR 32 million in Q3 '22. 80% of this decline related to the described nonrecurring cash outs for the '21 taxes and the CapEx for the HQs. The free cash flow adjusted, so after deducting leasing payments came in at minus EUR 4 million, representing a decline of EUR 41 million, again, including the mentioned one-offs of around EUR 36 million and higher underlying CapEx. These developments also led to a slightly higher financial net debt amounting to EUR 740 million at the end of Q3 '22. At the same time, the bank leverage ratio improved to 2.2x versus 2.5x in Q3 '21 due to better earnings quality in the last 12-month period.

Let me now talk you through the performance of the individual segments, starting with out-of-home media. In total, out-of-home delivered a strong performance in absolute terms and achieved an index of more than 100 compared to the recovered Q3 of '19. Also in relative terms, against the declining broader advertising market, out-of-home delivered remarkable resilience with good translation of the order book into sales, in particular, for the month of July and August and some softer trading in September, revenue increased by 4% and amounted to EUR 202 million in total for the segment.

Adjusted for the ban on tobacco, advertising growth was almost 7%. The overall uncertainty as a large part of the first 6 months already implied softer demand from national accounts, in particular, for our classical products. In contrast, the local business trajectory was still completely unimpressed by the cycle.

Looking into the different sales categories. Classical out-of-home sales were slightly lower when compared with Q3 '21 and came in at EUR 129 million. This was outpaced by the developments of digital out-of-home, which rose by 23% to EUR 58 million. Our home services increased by 3% from EUR 14 million to EUR 15 million. Taking all these developments into account, EBITDA adjusted increased in line with revenue by 4% from EUR 95 million to EUR 99 million in Q3 '22, and accordingly, the margin remained on prior year level.

Our Digital & Dialog Media segment continued to show growth and revenue increases by around 4% from EUR 170 million in Q3 '21 to EUR 176 million in the third quarter of the reporting period. However, the business dynamics within this segment have been more diverse than in the past. Q3 revenues in digital, online advertising and content publishing decreased within an increasingly challenging market environment and due to continued lower traffic on T-Online, mainly triggered by bad news fatigue and changes in the publisher portfolio.

Special interest sports like [indiscernible], however, performed solidly. The businesses grouped under Dialog Media continued to develop well. Sales were up by 26% and increased from EUR 69 million in Q3 '21 to EUR 87 million in Q3 '22. This was mainly driven by highly suspectable direct sales activities for telco products that offset demand and conditions for sales in the French energy sector.

Taking the different business dynamics into account, all in adjusted EBITDA of the segment in Q3 '22 was EUR 37 million, EUR 7 million lower with -- compared with the same period in '21. This earnings decline was mainly due to the sales development in our content business and some margin pressure in our call center activities in Germany, which had to digest rising minimum wage levels. The EBITDA margin for the entire segment declined, though was still above the level of 2019.

Our Data as a Service and e-commerce segment, comprising Statista and Asam was up in total by more than 17% in Q3 '22 to EUR 74 million. With a sales increase of 32% in the third quarter, Statista continued to perform on a 30-plus level and achieved sales of EUR 33 million or EUR 8 million up compared with the same period of '21. With more than EUR 100 million in sales after 9 months, Statista already nearly achieved last year's total sales level.

Asam revenue went up by around 8% in the quarter, reflecting some sequential softening in a now more demand and consumer environment, but still showing a solid print in the context of the entire discretionary online retail sector in Europe. Including continued growth initiatives, the adjusted EBITDA of the segment was slightly down compared to the prior year quarter.

Before I hand you over back to Christian, let me summarize the developments of the third quarter from a financial perspective. We've seen a very sound operational performance in out-of-home, in particular compared to other media types and driven by sustainable digital growth. We have seen some burden in the Digital & Dialog segment from slowing demand for programmatic online ad spend. At the same time, the dialogue activities did not show any signs of demand slowdown. Our high-growth assets, Statista and Asam developed expectedly at a slightly lower pace than the very strong first half.

So all in all, our operations across all different sectors show relative strength at a time of high macro uncertainty. Our leverage looks better than in the prior year despite digesting the mentioned one-off effects on cash flow. Our net debt is under control and should see an improvement in the fourth quarter despite the effects of our share buyback kicking in.

At the same time, and with regards to '23, we are intensively working on a further flexibilization of our cost base and CapEx plan, also to mitigate some inflationary headwinds to come. Just to remind us, electricity costs in percentage of sales were accounting for below 1% of sales, which is quite low compared to other industries, and we are currently anticipating a price effect of around EUR 10 million for '23 based on around 25% of billboard contract volume expiring.

So I think, all in all, we are well prepared not only to gain share based on our strong market position, but also to maneuver and more demanding economic cycle.

And with that, back to Christian for some closing remarks and our outlook for the year.

[Christian Schmalzl, executive]

Yes. For the fourth quarter and year-end trading, the group continues to expect a robust business development as Henning said, and thus anticipate for the full fiscal year 2022 sales and earnings development in line with capital markets expectations, which is equivalent to the low-end of our guidance corridor or slightly below EUR 1.8 billion revenue and adjusted EBITDA development broadly in line with revenue.

Let me now close the presentation with looking at our financial calendar for 2023. The start into the new year will be the release of our prelims at beginning on March 3, 2023, followed by the publication of our annual report 2022 on the 30th of March. On May 11, we will publish our Q1 figures, followed by the presentation of our H1 figures in August. And in November on the 9th, we will update you on Q3 performance. As always, further dates can be found on our financial calendar on our IR website.

Thank you, everyone, and we are now happy to take your questions.

[Operator]

[Operator Instructions] The first question is coming from Chris Johnen from HSBC.

[Christopher Johnen, analyst]

Two, if I may. So first, looking at the guidance. I mean, your comment says in line with capital market expectations, and the figures expecting 10%. That's the lower end of your previous top line guidance, but as far as EBITDA is concerned, I see a commentary that you expect that to be broadly -- the EBITDA growth that is to be broadly in line with the top line development, but the figures assuming a little bit less. So we are hovering around, I think, EUR 550 million of EBITDA. Is there a bit more granularity that you can give with respect to particularly EBITDA on the full year.

And related to that, talking about Q4, if I get your comment correctly, you said the books here are roughly on prior year level. You expect to outperform. But is there any sort of guidance you can give us or at least a range of expectations in the current quarter where you see out-of-home in particular with respect to top line growth?

And last question for me, please, on the online. It's a little bit difficult from the outside to really always judge the base effect. So if you have a bit of a new fatigue in the third quarter, is it fair to assume that we'll have something similar on a tough comp again in the fourth quarter? Any color you can you can give on to online would be helpful for us to also assess the margin impact on the segment.

[Christian Schmalzl, executive]

Okay. Christopher, yes, I think all your questions makes sense. Maybe first on the guidance. I think you've summarized it pretty much correct. I think the key point at the moment for us is that we see when we look at the order book for Q4, everything, I think October, November in combination, November is not completely done, but almost, I think, looks slightly positive versus previous year. December, the starting point right now before the last 4 or 5 crucial weeks of the month, look pretty much where we've been last year or slightly above the level where we've been in 2019.

So yes, we see more headwinds, but we don't see it in the digital out-of-home area. We don't see it in the local business. And there is still a couple of offers out there also around the World Cup. What we've seen in the last 2 quarters that a lot of advertisers decide very last minute, what they do and that last minute effect have been rather positive.

But I think it's fair to say that the theoretical swing in both directions, I think if you would have asked me the same question 3 or 4 years ago, I would have said, based on where we are, we talk about plus/minus 1 percentage points given the historic numbers that we have in such a situation. At the moment, I think the swing is rather plus/minus 3 percentage points. Nevertheless, I think that's, from our point of view, important to highlight that given the kind of swing that other media companies have been communicating for the rest of the year.

And I think that said, that reflects then a little bit the EBITDA development. I think our original guidance was made number-wise before the Russian invasion in the Ukraine. We set and added to the guidance, that's the numbers without any further turmoil around that invasion. So I think we've seen what happened since then. And on that basis, I think we tried to guide you quarter-by-quarter through the development and what that means. So I think that's a little bit the corridor we are operating in.

As I said, out-of-home media, really robust. I would say that just to add that, the Dialog business also, I would say, slightly better than what we would see and expect in normal times. The challenging part at the moment is clearly the online business.

I think we had probably 2 or 3 special effects in Q3. And that get a little bit easier going forward. The first one is we had end of Q2, a complete relaunch of the T-Online website. We've implemented a completely new tech infrastructure, new content management after, I don't know, 25 years. So that is, in general, midterm, very positive. But as always, if you change an operating system, it takes a while to adopt everything. So I think that was a special situation. Just as the fact that we also had a Google update, quite a huge one in the market that had quite some impact, especially over the following 2 or 3 months on traffic, in general, in Germany on German websites. We've seen that also in our portfolio around third-party inventory.

And I think those 2 aspects are something where I would say that has leveled out through Q3 or towards the end of Q3. There are 2 other things, I would say that won't go away, and there are also the challenge for Q4. One is clearly the relatively high comps of last year. We had a very special situation with COVID again and lockdowns. And I think that just raised the bar from last year's numbers for this year, and that's true for Q3, just as for Q4. And clearly, we see that it's more challenging when you look at the demand of advertisers. That's something that we've seen in Q3, and we expect that also for Q4.

I think when companies or products like YouTube or Meta that historically have been always growing beyond 20%, very often far beyond 20%, if they are suddenly going backwards, I think it just shows where the advertiser demand in the market is. But I would say the demand part is something that develops up and down in line with advertising market signals -- cyclical developments, I think the comp situation is special for Q3 and Q4, the kind of Google update and traffic and the tech change on the online is something that was a one-off in Q3.

[Christopher Johnen, analyst]

That is very clear. Just one follow-up. Did I understand you correctly or I'm referring that the EUR 550 million EBITDA is what you wanted to guide for?

[Christian Schmalzl, executive]

What we can say, I think this is that overall looking at consensus, we see that actually in the forecast, actually, the percent of sales growth is slightly outpacing EBITDA growth. And at this point in time, we would not feel uncomfortable with this current view.

[Operator]

The next question is from Julien Roch from Barclays.

[Julien Roch, analyst]

First question is on the 4.1% growth in outdoor in Q3, could you give us a breakdown of the growth between national and local, regional? I believe the split is 60-40, but you said several times in the call that national was weakening, while local was fine. So it would be good to put a number on that. My first question.

Second question is on the Q4 outlook and the visibility. I mean, you should have several weeks on analog, i.e., more or less know what the quarter is on analog, but how long is your visibility on digital, which is now 30% of your business? And that's the second question.

And then the second -- the third question is still on Q4. You said the order book was flat in October, November, but I'm not sure whether that's flat versus '21 or '19? And also, what does flat order book means for revenue? Because if your revenue is flat in October, November, you don't get to 16% for full year for outdoor, right? You need 6% in Q4 to get to 16%. And then if I could add a cheeky fourth question? The net debt is up by EUR 14 million in Q3. The cash flow, the free cash is negative EUR 4 million, so there's a EUR 10 million difference. I know it's a small number, but can you explain the EUR 10 million difference in net debt between net debt and cash flow?

[Christian Schmalzl, executive]

Thanks, Julien. I think also reasonable points in the local business in Q3 was up around 9%. That said, total national business was down by 2.5% roughly, 3%. That's the mix by revenue streams. That said, we have an underlying product mixture where you could see that the digital business was up by, I think, 23% or 24%. I think we've given the number, 23%, which means looking at 4.1%, I think the classic part was down by roughly 3% or so. That said, 3% are probably driven -- the minus 3% are probably driven 60% of that through the switch that locations move from the analog segment to the digital ones because we digitize it. So it's a kind of cannibalization that is not really a cannibalization. It means upgrading the portfolio while the location moves from the analog to the classic part.

I think that reflects a little bit the dynamic large national advertisers versus small local ones just as analog out-of-home with longer lead times versus the short-term flexible digital out-of-home inventory. And I think we expect that in general, also as a relative development going forward in the next couple of weeks, that's what we see, and that's fueled by the general macro environment.

On the out-of-home segment, yes, you're right. I think to get to 16% growth, we would need extraordinary last 4 or 6 weeks. I don't think that this is realistic. And I think what we said in Q2 -- in the Q1 call, in the Q2 call, what roughly the Ukraine invasion or the Russian invasion in the Ukraine has cost us revenue-wise in the out-of-home segment. I think we always said the range was about EUR 10 million, EUR 12 million, up to EUR 15 million per quarter. That's a little bit what we see as the to-date effect.

I think -- I'm sorry, you started with our French-German partnership and friendship. So I would like to refer back to that at the end, there is a fair chance that we win the quarter final against France in the World Cup, and I think that should have message [indiscernible] business that shows what the football results look like in a couple of weeks' time.

And I think the net debt and cash flow, I think, Henning has the answer.

[Henning Gieseke, executive]

Well, I tried to explain it on the last call, but I haven't done a very good job. But now I'll try again. So the observation is right that the free cash flow development, as we show cannot entirely be reconciled with net debt development. And the main reason is that cash inflows from overpayments from customers must be treated as financial debt and not as a noninterest-bearing liability, if it gives rise to the repayment obligation.

The reason is that in these cases, an overpayment cannot be seen in connection with the provision of a specific service that would allow later clearing against receivables. In other words, the corresponding account is part of the working capital and thus, the operating cash flow and not the financing cash flow. So from a cash flow perspective, the overpayments are recognized in the operating cash flow, but do not translate into a change of net financial debt. This is the reason -- and so this inconsistency will remain whenever there is a citation in overpayments. And that happens sometimes in the constant clearing business with larger accounts like agencies.

[Julien Roch, analyst]

Okay. All right. And Christian, I'm not sure about Germany, France because that would assume that French finish first of their group. And I think we're more likely to finish second or not qualify at all, but we shall see.

[Christian Schmalzl, executive]

You want to talk our Q4 down. What's the underlying message?

[Operator]

There are no further questions at this time. I hand back to Christian Schmalzl for closing comments.

[Christian Schmalzl, executive]

Yes. Thank you very much for your time this morning. Hope to see you soon and hope to see you also in a slightly better environment than at the moment. Have a nice rest of the year. Take care. Bye-bye.

[Henning Gieseke, executive]

Thanks, everyone.