Viaplay Group AB (publ)

Good morning, everyone, and welcome to today's Q2 2024 results conference call. My name is Matthew Hooper, and I will be your host today. Joining me here on the call is our CEO, Juergen Mats Melindermann. And as usual, our presentation will be followed by a Q&A session. We are adopting a new format for this call this morning with shorter presentations from us in order to provide more time for questions and discussion. You can find our results materials, including a presentation deck on the investor relations section of our website. We will not, however, follow the slides, but they do provide the usual information for you. Please be advised that today's conference call is being recorded. If you want to ask questions and you are following the webcast, please post your messages or questions on the message board at any time, and I will read them out for you. If you prefer to ask your questions directly, you are, of course, welcome to do so by using your phone keypad. But more about that later when we get to the Q&A session. I will now hand the call over to Jürgen to walk you through the Q2 highlights. So over to you, Jürgen.

Yeah, thank you, Matthew. And good morning, everyone. Our results are in line with expectations and our outlook remains the same. So we have made no changes to our forward-looking guidance. We are fully focused on making all of the operational improvements that are necessary to achieve our plans and return to profitable growth and free cash flow generation. We have made progress, but there's still much to do. Our corporations generated 3% organic sales growth in Q2, while the losses for the corporations preliminary reflected higher content costs due to the annual inflation built into our sports rights contract and the weakening of our SEC reporting currency against the currencies in which we buy our content. Turning first to our largest business, Viaplay, which accounts for almost half of the group core revenues, Viaplay's sales were down 1% year-on-year on an organic basis. This reflected the decline in the core subscriber base, which was partly offset by the 11% to 27% price increases that we have introduced across almost all of our markets. These price increases resulted in 1% quarter-on-quarter organic revenue growth for Viaplay, despite the quarter-on-quarter decline in the subscriber base. We continue to discuss with our key B2B distribution partners how we can enhance our commercial relationship so that we can get fairly remunerated for our content. The Q2 subscriber figures also reflect the usual pattern as we enter the summer period and the number of the international sport league seasons come to an end. We are prioritizing value over volume in our wire plate business and the price increases reflect the content investments that we have made and the value for money that our competitive and relevant product offer to our partners and to our consumers. Let's move on to our second biggest business line, the B2B partner, linear channel subscription sales, which accounted for almost 30% of core group revenues. Sales were up 7% on an organic basis after the price increases that we have introduced. There's still much to be done in this area and discussions are ongoing with our partners to ensure that we can together monetize much better on the investments that we have made. The discussions with our partners include what we can jointly do to launch relevant new products in our market. A good example is Viaplay Sport News, our new sport news channel, which includes content from both Sky Sports News and Sky Sports Premier League channels in the UK. It is being rolled out this summer, firstly in Denmark and August, and we are discussing both channel distribution deals and advertising sale deals at the moment. We will also together focus on tackling account sharing, which is a major value leakage issue for the industry and especially for high ARPU products. As I mentioned on the Q1 call, we estimate approximately a third of the Viaplay subscribers, including a third of the Viaplay premium subscribers, have sharing their account details for their subscriptions. We have now started this summer to implement broader initiatives, which are already up and running in the Netherlands and Denmark, with the other countries to follow. Initial signs are good, but it is yet early days. We are also working with our industry peers to combat piracy, but it is very clear that we need much more help from the politicians and regulators to prevent and police all forms of illegal content distribution. Our third largest sales business is advertising, which accounted for just over 20% of the group core revenues in Q2. We said last quarter that we would like to see our total ad sales return to growth, and we managed to achieve that in Q2. The 5% organic growth that we reported was well ahead of the ongoing decline in the linear TV advertising market, and this was driven by a number of factors, including Swedish linear ad sales being up year and year in Q2. Our radio advertising revenues were also up in growing markets in Norway and Sweden, and our digital ad sales are continuing to grow at a rapid double-digit rate with a 31% increase in our overall digital ad inventory. This is an important transformation as we plan to replace all lost linear advertising revenue with digital ad revenue. Two other examples of further innovation of the advertising side are the recent free TV partnership with Telfer Network in the Netherlands where Telfer's widely available SBS9 channel was rebranded as Fireplay TV and includes selection of our vast amount of sport content hours. And they launched this summer of a hybrid video and demand tier for our Viaplay subscribers in the Nordic. The new tier is competitively priced and includes advertising. The first rollout was in Denmark and the other markets will follow. Finally, let's look at our sub-licensing and other sales which account for less than 5% of the group core revenues and compromise the revenues that we get from Viaplay Select as well as the sport and non-sport sub-licensing deal we have done in our core markets as part of our self-help measures to bring down our committed cost base. Per-year number includes our studio operation that we have now closed or sold, and our solar energy sales were up 11% on an organic basis. Moving now to the cost side, I would like to remind you again of the comment I made last quarter that our Nordic content costs have been growing almost twice as fast as our Nordic subscription sales, and that is clearly not sustainable. The primary reason for this is the competitive pressure on sports-wise pricing in the last few years and our over-invested in original programming. We've also had significant currency headwinds. Looking ahead into Q3, we have the Champions League now also again in Sweden for the first time in three years, as well as a new season of the Danish Super League, the Premier League, kicking off. We will be launching our Wireplay Sport News Challenge in Denmark. We have fifth skiing is back. We will have more Formula One races, including World Champion Max Verstappen Home Grand Prix in the Netherlands next month. And we will premiere new seasons of proven local productions like the Paradise Hotel Sweden, Charter Fever Norway, and Expedition Robinson in Denmark. Finally, then, we have continued to streamline the organization by exiting the non-core markets. Poland is the only one left now. And more broadly, we continue to improve the setup and functioning of our team across the core business. and ensure that we locally mandate and accountable teams with strict governance processes, but there still remains more to do in that space as well. All of this is critical to enable us to achieve our goals of low to mid single-digit percentage revenue growth, double-digit operating profit margins in five years, free cash flow generation in 2025 for our corporations, and in 2027 for the group, so that we can build our balance sheet and enable shareholder returns. So that concludes my initial remark. So in the absence of a CFO, Matthew has volunteered to comment on our financial performance and position. So over to you, Matthew.

Thank you, Jürgen, and good morning again, everyone. So I'll keep this short and focus on the key points here. So we'll start as usual with our organic development. Our organic growth was again higher than our reported growth due to the divestment of the remaining studios operations, as well as the continued interplay of our currency mix this quarter. FX had a negative impact of 10 million on sales for our core operations, inflated our core costs by 79 million, and core EBIT was therefore negatively affected by 89 million in the quarter. This means that 60% of the 153 million year-on-year decline in core EBIT was due to FX. The remaining 64 million was a result of 109 million of higher sales, 143 million higher COGS, and 30 million higher STA and A. Based on current rates and our more limited ability to hedge currencies, we expect a negative transactional FX impact on full year EBIT in the range of 300 to 400 million. The H1 impact was 130 million. 80% of our OPEX relates to content costs, which were up 8% in Q2, and reflected the rise in sports content costs due to the annual inflation in those agreements, as well as adverse FX effects, as Juergen mentioned. Sports makes up 80% of our content costs, and our content costs are expected to be broadly flat in the second half of the year. Our core SG&A costs were up 7% in Q2, as we now allocate all central overhead costs to the core segment. This results in a higher SG&A cost for the core segment throughout the year, which is largely offset in H1 by the headcount reductions that were made in Q3 last year. The increase in SG&A will be higher in Q2, as the comps include the majority of the headcount savings from last year. For the non-core markets, we actually made a small profit this quarter due to the reversal of some accrued costs and lower marketing costs. For the rest of the year, the non-core EBIT line is basically the Polish SG&A, and there is no change to our guidance ranges for the non-core operations. We had a 48 million positive IAC this quarter, which comprises 71 million gain on the sale of Viaplay UK, 76 million of costs arising from further redundancies, and 53 million of positive unrealized and non-cash FX translation effects related to the previous content provisions that we have made. Associated company income was in line with expectations, and we continue to expect our share of Alente's full year 2024 earnings to be in the range of 100 to 150 million. As expected, there were no further dividend payments from Alente in Q2. Moving on to our cash flow, our operating cash flow of $614 million comprised the core EBIT losses of $72 million, just under negative $100 million from the combination of CapEx, interest, taxes, and adding back the depreciation and amortization charges. A positive working capital change of $794 million for the core segments and a one million cash flow from the non-core operations. The positive working capital change reflected the usual seasonal patterns when it comes to payments for sports and non-sports content. And we continue to expect a working capital build-up again in Q3, as usual, given the timing of sports rights payments in particular. We drew down 1.5 billion on the 3.4 billion RCF after the end of the quarter to fund the sports rights payments that fall due in July. Our financial net debt, when excluding net lease liabilities, was a net cash position of 372 million at the end of the quarter, with cash and cash equivalents of 2 billion, total borrowings of 1.9 billion, and 250 million of prepaid borrowing expenses. We have a very clear focus on cash flow and cash return on investment, and this is reflected in how we make and follow up on capital allocation decisions. It will take time for the impact of these actions to be seen in our results, and we do still sit with large and long-term content commitments in our core and non-core markets that we are looking to monetize in as many ways as possible. So that's it from me on the financial performance position. We are now ready to take your questions. If you would like to ask a question and you have joined the conference call via the web link, you can post questions on the message board by clicking on the Ask a Question tab at the top right-hand corner of the window. and I will read them out for you. Please don't forget to write your name and your company name. Or if you would rather ask the question yourself, press star one and then one again on your telephone keypad and you will enter the queue. To cancel your question, simply press star one and one again. So we'll now have a look at the questions. So the The first question we have is coming from Tom Singlehurst at Citi. So, Tom, over to you.

Thank you very much. Hopefully you can hear me okay. The apologies if I missed this at the beginning of the call. I didn't quite catch it, but I'm interested, firstly, in the advertising trends, just to see whether there's anything specifically run off in the second quarter. I don't think you had any particular rights that were sort of expected to significantly boost advertising and whether that therefore signals a slightly better outlook for the full year. That is the first question. And then I'm particularly interested in some of the actions you're taking to sort of crack down or address piracy and account sharing and progress you're making there and the scope of that to... drive incremental revenue across the second half, presumably with relatively high jobs. So those are the two questions I had in the short term.

Yeah. So when it comes to the advertising market, as I said, it is a combination of a decline, which we unfortunately still see in Sweden and in Denmark. We could believe that the Norwegian advertising market has been flattish in Q2. But the decline then in the Swedish analog market and then Danish market is then offset by the digital initiatives that we are having, the initiatives that we're having on our general digital advertising, the digital eyeballs that we are generating, which was quite substantial also here in the second quarter. At the same time, we saw very strong radio markets. So we believe that the Swedish radio market would have been up with some 6%. and like the same plus minus the Norwegian market. So it is a combination of decline free TV, strong digital advertisement, which as we said as well, we would like to see replace the losses that we are having in the analog market going forward. So we'll make that transformation. And then last but not least, of course, that the Norwegian or the Swedish radio market was good. When it comes to account sharing, we have rolled account sharing initiatives out in Netherlands and also now in Denmark. And obviously for us, it is important to learn from those two markets we are rolling out now as well in the fall for both Sweden and Norway as well, Finland. And the first learning that we are having is that more than 90% of the people who used to share accounts are still customers with us. That was, of course, a worry that people would get say this is not worth it or whatever. We can't share a conference with all our friends and therefore we don't want to be with you. But I think it is, I think it's very positive and people understand that it doesn't work to watch or to just share content for free. You know, then it is a little bit difficult to run a business. So I think people on fairness appreciate that. That is what we are seeing. Then it was recently launched and we also see positive signs there. And obviously we are following what the peers are doing on this space as well. Netflix has been there for some time now and also as we have seen at least from what they have communicated have seen good results as well from asking people to be fair and to pay for the content they're seeing. We of course will develop over time our offering as well for the ones who want more accounts to your subscription. So that is something which will come over time but first and now it is important for us to end the opportunity for sharing. But there's so much we can do. Then, of course, we have discussions with our B2B partners as well because we are selling our content into their packages that they are selling, linear TV channels or whatever in cable universe or fiber universe and so forth. And obviously, we also see account sharing there. And it is important that our partners take that serious as well for benefit of all, for sure, all to them. that we are preventing people from sharing those accounts as well. We do have seen examples that there has been business practice from some of our B2B partners to have that as a selling point that you can share your account, which of course is something we simply don't accept. And that is something we're doing, we're discussing with them as well, to be fair. And then last but not least, the piracy, which is a big issue obviously as well. So we, yeah, the politicians of course need to step up, you know that can take time in all fairness so we have ourselves initiated a range of things and speaking to peers in the market also our shareholders to understand what they are doing in this space it affects us all we are talking to rights owners they of course are not happy that people are sharing their rights it's difficult to sell rights if they are shared broadly almost for free so it is a united effort to fight para piracy as well but that is something we are actively addressing as well in different shape and form but that requires again the partners as well or others banks or what do I know to play ball as well to make sure that we can either block credit card or we can block the what's it called the URLs and so forth so that is something that we need to do much more about.

That's very clear and one maybe follow-on question I suppose if I'm look at our numbers and maybe they're not that representative but I think there was just expectation that sort of profitability would improve through the year I know seasonally obviously the four quarters would be bigger more profit probably a bit of perspective anyway but given there's a slightly better two key trajectory you know is there I mean should we think about the full year perhaps being the sort of upper end of your sort of guidance range i.e. towards break even or even flat profit rather than towards the lower end or are there any other moving parts that are missing on the possibility?

Yeah, Thomas, Matthew, we haven't changed the guidance range here so we've stuck with that and you have that for the full year both on the free cash flow and the EBIT which therefore implicitly gives you a sort of working capital understanding as well. When you look at what's happened in Q2, I was at pains to point out that more than half of that year-on-year delta is due to currency. So we still have that volatility sitting in there, as you know. It's also worth noting that if you take the total operating income and you exclude IAC and ACI, we actually have a 75% reduction in the operating loss. So there is quite some traction there from the actions that we've taken over the past year. So no, long and short, no change to guidance range at the moment, but I'll leave you to draw your own conclusions.

Okay, thank you very much.

Okay, thank you. Just a couple of things on the message board. There was a question regarding no visual presentation today. I think if the question relates to the actual presentation document, it's on the website and available to you. We just wanted to kind of try and keep this a bit short today. We're conscious there's another 60 companies reporting their results today. We know your time is precious. If it's to do with whether we're actually going to be on video presenting to you, we've adopted this audio format for several courses now, which seems to work well, but we welcome any feedback, of course. Juergen, a question from the message board for you, which is just to give a little bit more information around the Talbot joint venture in the Netherlands. There's a question from a private investor around that.

Yeah, no, we are, of course, very excited to have teamed up with Talbot, which is a very relevant player in the Netherlands, and Obviously, we saw an opportunity given the vast amount of content we are having to utilize that much better to get that out broader and still keep the Viaplay product as a premium product and intact as a very special, unique offering. At the same time, there are events and other products that we are having which actually features very well on an advertising-based channel, which is the case with... via play tv now together with with talpa so it is um it is actually a win-win for us so we capitalize even further on our content that we have invested in and we have now a fairly strong presence as well when it comes to the the offering we are having and enhancing the partnership with talpa so um so we're happy about that

Okay, great. Then I think we'll go to our next caller on the telephone line, and that is Mikael Assen from Carnegie. So, Mikael, over to you. Yes, good morning. Can you hear me? Yes, we can.

Great. I have a few questions. First of all, when it comes to digital ad inventory increase of 31%, just wondering what does this mean and how has the inventory increased?

Yeah, but that is increasing because we have had more people engaging with our products where we have digital opportunities or advertising opportunities. Now, the trick is, of course, to capitalize fully. And unfortunately, as it is, we're not 100% sold out. So there is actually opportunities there as well where we are fairly sold out when it comes to our free TV channels. We managed to sell all inventory we're having. There are still even further opportunities in the digital world. So that is where you are putting or you are launching in interesting content and then you have a lot of viewing on the content. That of course helps then the whale or the minutes that you can the eyeballs you can sell and that is we have been extremely good at in all fairness the last quarter. So it is a strategic important part for us to make that transformation from analog terminal you can argue decline TV as it looks right now at least at the same time though In Europe, you see analog TV starts to increase, both in Germany and UK now, but we think that it looks a little bit tough in all fairness going forward, and that's why we have initiated the digital initiatives as well. So if the analog would not be as terminal as we believe, or as we forecast it, or I am forecasting, of course, that is another good positive upside for us in the future. But let's see.

Okay. Any formats that are successful and that can continue to support the inventory there?

Yeah, you keep on innovating, actually. And also the partnership we have with Pluto is also helping out, you know, which is a successful product as well. So there is new clips opportunities. There is different ways of utilizing our content, the formats that we are having, which are not one-off formats like you have Paradise Hotel coming. 36 weeks, of course, there is a lot of content in between the weeks where you can utilize that much more. A lot of footage we are not showing today, which we can put online. So there is honestly quite a lot of opportunities, to be fair, which we want to utilize and capitalize on since the content we're having has traction. So it generates eyeballs and therefore the opportunity to grow.

Okay, got it. I'm just curious how much of the advertising revenue line is coming from digital ads?

Yeah, it's still sitting at a relatively low level. Yes, a relatively lower level, Michael, so sitting below in the 10% to 20% range, but it is growing at double-digit rates, and you've probably seen the markets growing 15% to 20% as well, so we've got good growth there. Radio is also strong, just to be clear here, so both the Swedish and Norwegian radio app markets are growing, and we've been developing nicely there. So you still have this sort of broad split of around sort of 70% or so linear, you have around 20% or so radio, and then you have 10 to 20% in the digital space.

Okay. Moving on then to the streaming side, just wondering here about the ARPU increase of 3% quarter-and-quarter. How much of the officially disclosed prices have so far materialized? in the contract and in your Q2 revenue?

Yeah, that's a good question. So first of all, on the D2C part, of course, the ones who are not in binding, they are, you know, if we have 12 months contract or six months contract in some areas, the ones that were out of binding, they got the increase and that we have managed to increase on our own side. And we have seen, as you can see from Q1, due to, you know, quite good offer increases, despite the fact that we have a decline in the subscriber base, we're still growing 1% quarter on quarter. So that also shows the quality of the content that people are ready to pay for it. So that's good news. And then, of course, when it comes to the B2B world or the partnership, it's a little bit different because then exactly some people will be in a binding period. And when they get out of it, of course, there will be, you know, also be part of the price increases. So it is a mix we are having. So right now we are realizing the biggest ARPU increase with ourselves in the D2C part. And then over time, of course, you will see that our partners will follow when it comes to the price increases. And then, of course, there's a whole other discussion we are having with our partners as well around the ARPU or how we have historically sold the content to them. And there we have talked about as well that our revenue has increased some 40%, but the cost 80, you know, so obviously that we need to enhance our output in order to make up for the difference of our costs and what we are charging the partners. So they just multifaceted. But good news is that the price increase has come through and people, you know, see the value for our product.

And I think the other thing, Michael, is that in Q2, obviously, that was when we implemented the price increase in the Netherlands. So that happened in May. So the other ones had come in progressively, as you know, but it was May when the Netherlands impacted and that was a two euro increase there.

Okay. Yeah. Thanks. Follow up here. How much is the mixed effect? I mean, if you have churn in the TV movie side and more stability in the sports side, that is of course improving the ARPU. Do you have any such effects in Q2?

I think there should be fair assumption to be fair that we see the sports size being the relative stable as it does. Of course, the seasonal turn you will see. But but of course, it is a bit more stable.

And just bear in mind that different markets have different price points. So, as you know, for the Netherlands, it's a prevailing lower price point. So therefore, when you compare that with the Nordics, it obviously, you know, that has an adverse effect there. But yeah, so overall, the mix is changing and you're right to point that out.

Okay. And when you mention it, just also curious about the trend in your different countries in terms of those number of subscribers. How did the Dutch market perform in the quarter?

Yeah, I think we haven't split out any specific markets. I think there were, like always, when there's so many products, so many packages, there's ups and downs. There was you know some areas where b2b partner was going and some other areas where we saw interesting trend in the dgc so we haven't split that out as such but but aggregated the revenue increased q1 to q2 on on a on a lower base and as you pointed out the sports subscribers are for good reasons the most resilient one probably Okay.

Fair enough. All right. A couple of more questions, if I may. First, on the cash flow situation, it improved a lot in Q2, but the guidance is unchanged. Can you help us out a bit on how we should think about the second half? And maybe also repeat what you said about the revolver here that you utilized a bit.

Yeah, so if I take your second question first, then we drew down 1.5 on the 3.4 just after the end of the quarter, which is natural given the seasonality in these sports rights payments where you know July is a heavy month for us. So that's natural and that is a facility which we will use from time to time in order to facilitate these flows. I think when it comes to the broader outlook for the second half of the year, nothing's really changed. I mean, Q3 is the build-up quarter. So because of those payments we make, you would expect to see those negative changes in working capital coming in Q3. and then a more benign or positive, but more muted development in Q4. So that lends itself to the full year outlook on group free cash flow. So nothing's really changed there. I mean, yes, it was positive in Q2, but that is typically more of a release quarter anyway. So it's the natural rhythm. So yeah, but do expect a significant buildup in Q3.

Okay, and the final one, sub-licensing. How should we think about this? for the second half. It's relatively lumpy, as I mentioned before, and should increase substantially now in Q3, right?

Yeah, I mean, obviously, you know that we have the Amazon deal, which then kicks in with the beginning of the new Premier League season. So therefore, yes, there should be a significant increase into Q3 and Q4. Q2 is at a lower level. If you remember, Q1 was quite high because we had particularly the non-sports content sub-licensing, which was strong with the Netflix and Amazon deals coming off the back of Sky Showtime in the fourth quarter of last year. So I think, yeah, Q1 was high. Q2 has come down quite a bit. Q3 and Q4 should be stronger again because we have Amazon. And then that deal perpetuates, as you know, during the coming Premier League seasons. All right. Thank you. Thanks, Michael. Yeah, we've got a few things on the message board now. So some questions from even the Campania in Norway. Two questions really. And the second one first, which is when it comes to the new sports news channel, when will that be launched and what plans do we have around that? Then I'll come back to his other question.

Yeah, we are launching the channel first now in Denmark, and hopefully we'll take some learnings from that launch. The idea is, of course, to launch it broader in the Nordic region, but the learnings is now coming from Denmark, where we also have a fairly big sports hub. So that is coming out now, in all fairness, which we are very excited about, and all will still be launching.

Good, okay. And then the second question, which is a series of questions, and I think we've touched on some of this, but I'll raise it anyway. How is Viaply working towards content sharing? In the press release, there are some words about limiting the number of current streams possible, but are there also actions in play regarding this problem? There was also an anti-piracy campaign launched in Sweden. Will this campaign be launched also in other markets? Is piracy a big problem in all of the Nordics, or are there countries where this is more frequent? What do you think the politicians should do with this issue? This is a lot of different questions.

I think we touched on it, to be fair. So again, on the account sharing part, that is ongoing. That is what we are working on ourselves. As I said earlier, things we can do. And then obviously we do also have the partners which need to take their responsibility as well and make sure that... that we don't have people sharing their accounts, but they're actually paying for the content that they are watching. So this is a work in progress and we are learning from other peers around the world what they are doing and take best practice there. When it comes to the piracy, this is not a new phenomenon. Unfortunately, that has been the case And obviously for years and obviously what we want to do now is of course more forceful because we do not see the politicians acting as they should and the way they can act is of course about prioritizing this and also when it comes to legislation to make sure that it is seen as a serious crime and therefore that you will get seriously fined as well if you are stealing content, which it is, in all fairness, and redistributing it. So that is, but it is a long shot with the politicians, fortunately. So we are speaking to peers in Europe. Also, our shareholders are very active in that space, obviously. So we are, again, they're sharing best practice, what can be done. The rights owners as well, of course, the Premier Leagues of the world are very focused on that. There is anti-piracy community as well in the Nordics, where they are sitting in the board as well of that of that community. So it is on everybody's agenda that it is difficult to run a business if people keep on stealing from you. So of course it is serious for us and that is why we are not waiting for the politicians that they have to act, but it might take too long time and therefore we need to do something ourselves together with our partners.

Good. Well, I think we know you've all got a very busy day. I think that concludes the questions on both the message board and the telephone line. So I'd just like to say thank you for your time and your questions today. We do really appreciate your interest and always welcome your feedback on the format and content of this session. We are available for follow-up meetings, of course, so please don't hesitate to reach out to my colleague Anna or me if you would like to schedule a meeting or have any further questions. So that's it for today. Thank you again. Goodbye for now. Wish you a happy summer and see you soon. Thank you.