Strategy and Objectives
Our industry is characterized by constant change: The digital development and the growing significance of the Internet have changed consumer behavior. This is also true with regard to media usage. Entire business models are being tested and new opportunities for addressing target groups are always emerging. We updated our Group strategy in 2018 in order to benefit from these opportunities and actively promote the change. In addition, we have defined clear priorities and will make our businesses even marge interconnected. We presented the update of the Group strategy and our mid-term growth targets at the Capital Markets Day on November 14, 2018.
Our activities center on the best entertainment that people love and commerce offerings that people need. In everything we do, we want to be as close to the consumers as possible and to delight people — with the right offers at the right time, no matter where. The Group is already one of the world’s most diversified media companies. In order to make our organization even more agile and to sharpen the focus on customers, the Group implemented a three-pillar structure at the start of the year. An important step was to anchor TV and digital entertainment activities in one segment. Only by bundling our market expertise we can offer our viewers or users fascinating content that they can consume on their choice of platform. The same goes for advertising clients, who benefit from our marketing innovations across all channels and from better addressed advertising thanks to data-based offerings. For this reason, the Group will invest additionally in local content, the expansion of digital platforms and an improved monetization of reach in 2019. The objective is to further improve the Company’s competitiveness through these investments and to accelerate revenues and earnings growth in the mid-term.
Around the next five years, ProSiebenSat.1 Group intends to increase revenues to EUR 6 billion (2018: EUR 4,009 million) and adjusted EBITDA to EUR 1.5 billion (2018: EUR 1,013 million). Therefore the revenue shares of non-advertising business (2018: 44%, target 2023+: 50%), of digital business (2018: 29%, target 2023+: 50%) as well as of addressable advertising (2018: 6%, target 2023+: 25%) should be significantly increased.
036 / Strategic priorities Across our Three Pillars
The financial targets reflect our strategy of expanding the entire Group into a diversified and fast-growing digital company. At the same time, the Group aims to generate an average annual total shareholder return of between 10% and 15%. The Group is thus underscoring its future focus on total shareholder return along various components, which particularly include an increase in earnings per share growth as well as an attractive dividend yield. The Group intends to pay out 50% of adjusted net income as a dividend (previously 80% to 90%) for the first time in the financial year 2018 (to be paid in 2019). ProSiebenSat.1 Group will use the funds thus released primarily for earnings-increasing investments in organic and inorganic growth.
In the interest of reporting efficiency, ProSiebenSat.1 Group does not make further statements on the Group’s objectives and strategies in this Combined Management Report. Information on how the Group intends to manage and develop its business in the mid and long term and on changes in the objectives and strategies since the previous year can be found in the Annual Report Our Strategy.
Planning and Management
ProSiebenSat.1 Group’s management system based on key figures forms the basis for all of the Company’s economic and strategic decisions. Company-specific key performance indicators (KPI) are derived from the Group’s strategy and cover both financial and non-financial aspects. They are planned and managed centrally by the Executive Board of ProSiebenSat.1 Media SE. The planning and management process is complemented by the monitoring of key figures on the basis of regularly updated data. This also includes the assessment of developments as part of opportunity and risk management.
Intragroup Management System
The performance indicators specific to ProSiebenSat.1 Group are aligned to the interests of the capital providers and cover financial planning as well as aspects of comprehensive revenue and earnings management.
037 / Overview of relevant key performance indicators as of December 31, 2018
NON-FINANCIAL PERFORMANCE INDICATORS
Entertainment segment
- Audience shares
FINANCIAL PERFORMANCE INDICATORS
Group
- Revenues
- Adjusted EBITDA
- Adjusted net income
- Leverage ratio
- Free cash flow before M&A
Segments
- External revenues
- Adjusted EBITDA
- Non-financial performance indicators: The development of audience shares is a key criterion in programming and media planning in the advertising-financed TV business. In addition, this data is used as a benchmark for the calculation of advertising time prices since this indicates the number of potential customers a broadcast is able to reach. In Germany, TV usage data is collected by GfK Fernsehforschung on behalf of Arbeitsgemeinschaft Fernsehforschung (AGF). ProSiebenSat.1 Group analyses viewer ratings that have been empirically collected by the institutions on a daily basis. In addition to this data on linear TV consumption, we also analyse digital reach figures and KPIs relating to our data-based business models.
Development of ProSiebenSat.1 Group’s Relevant Business and Market Environments
- Financial performance indicators: Revenues, adjusted EBITDA and adjusted net income are the central key figures used to manage profitability. The earnings figure adjusted EBITDA stands for adjusted earnings before interest, taxes, depreciation and amortization. Significant reconciling items, such as costs related to M&A transactions, reorganizations and legal claims, are not taken into account so that this figure provides the Executive Board as the chief operating decision maker with the appropriate performance measure to assess the operating profitability of the Group and the segments respectively. Adjusted net income represents the adjusted consolidated net profit after non-controlling interests and provides a suitable indicator for calculating the dividend. In addition to the adjustments from adjusted EBITDA, effects of purchase price allocations and other reconciling items in particular are adjusted in the calculation.
Reconciling items can influence or even overshadow operating performance and can make a multi-year comparison difficult. Therefore, adjusted earnings figures constitute suitable measures of performance with regard to sustainable profitability. However, the analysis of unadjusted key earnings’ figures provides a holistic view of the expense and income structure. For this reason, ProSiebenSat.1 Group also uses EBITDA as a financial performance indicator. In addition, EBITDA facilitates international comparison, as it does not take into account the effects of taxes and depreciation and amortization or the financing structure.
ProSiebenSat.1 Group is investing in markets with long-term growth opportunities and examining options to expand its portfolio. Part of the investment strategy is the acquisition of companies that complement our value chain synergistically. A capital-efficient leverage ratio is a key performance indicator for the Group’s financial planning. The leverage ratio indicates the level of net financial debt in relation to LTM adjusted EBITDA — i.e. the adjusted EBITDA that ProSiebenSat.1 Group has generated in the last twelve months (LTM = last twelve months). The target value is a ratio between 1.5 and 2.5. In addition, free cash flow before M&A was added to the list of most important financial performance indicators for 2018 because of changes in the Executive Board compensation system and management system. This key figure is defined as free cash flow adjusted for cash used and generated by M&A transactions (excl. transaction costs) related to majority acquisitions that are carried out and planned, the purchase and sale of investments accounted for using the equity method and other investments with the exception of media-for-equity investments.
Compensation Report, Analysis of Liquidity and Capital Expenditure
Our Group strategy is designed for sustainable and profitable growth. A primary objective is therefore to increase the above earnings figures through continuous revenue growth in all segments. The business units operate mainly as profit centers, which means that they act with full responsibility for revenues and earnings. At the same time, this results in flexibility, which is an important element for ProSiebenSat.1 Group’s success, as the Company operates in a dynamic industry environment and is consistently diversifying its value chain. The organizational entities reach operating decisions independently within a centrally adopted framework based on the competitive environment. This performance-based approach supports entrepreneurial activities among our employees on all levels.
With their knowledge and ideas, every employee of our Company is contributing towards the development of ProSiebenSat.1 Group’s strengths while driving innovation. We are therefore systematically investing in human resources’ development and targetedly promoting young staff while giving all employees an appropriate share in the Company’s success. Adjusted EBITDA is the key indicator for the Group and its segments. In addition to adjusted EBITDA, EBITDA also serves as a performance indicator and as a basis for measuring performance-based employee compensation thanks to the holistic view of the Company’s expense and income structure. Adjusted net income, EBITDA (where necessary, adjusted for effects arising from significant changes in IFRS accounting standards, from unplanned effects from M&A transactions conducted within the reporting period, and from measurements of Group-wide, multi-year variable compensation plans), free cash flow before M&A and for the first time relative total shareholder return (TSR) served as a variable basis for determining the Executive Board’s compensation in the financial year 2018.
038 / Definition of selected non-IFRS figures
ADJUSTED EBITDA
Adjusted EBITDA stands for adjusted earnings before interest, taxes, depreciation and amortization. It describes earnings before interest, taxes, depreciation and amortization, adjusted for certain influencing factors (reconciling items). These reconciling items include:
- M&A-related expenses include consulting expenses and other expenses for ongoing, closed or cancelled M&A transactions.
- Reorganization expenses include functional and personnel expenses for significant reorganizations and restructurings. They comprise expenses such as severance payments, leave compensation, consulting costs and impairments on non-current assets.
- Expenses for legal claims include fines, penalties, repayment claims and consulting costs in connection with significant ongoing or expected legal claims.
- Fair value adjustments of share based payments include the portion of the changes in the fair value of cash-settled share-based payment plans that affects profit or loss, which results from the difference between the share price on the issue date and the current price on the reporting date.
- Results from changes in scope of consolidation include income and expenses in the context of mergers, demergers, acquisitions or disposals of Group entities.
- Results from other material one-time items include transactions approved by the Group Chief Financial Officer but not connected to current operating performance. In this context, ProSiebenSat.1 Grop considers transactions of at least EUR 0.5 million to be significant.
- Valuation effects relating to strategic realignments of business units primarily comprise largely expenses incurred in the context of changes in the underlying business objective or strategy of the unit in question.
ADJUSTED NET INCOME
Adjusted net income is the net result attributable to shareholders of ProSiebenSat.1 Media SE before the amortization and impairments from purchase price allocations, adjusted for the reconciling items as outlined above as well as additional reconciling items. These include valuation effects recognized in other financial result, valuation effects of put-options and earn-out liabilities, as well as valuation effects from interest rate hedging transactions. Moreover, the tax effects resulting from such adjustments are also adjusted.
039 / Information on reporting and accounting policies
REPORTING AND USE OF NON-IFRS FIGURES
In addition to the financial information determined in accordance with IFRS, this Annual Report also includes non-IFRS figures. The reconciliation of these non-IFRS figures with the corresponding IFRS figures is shown in the Group’s earnings.
For its financial, strategic and operating decisions, ProSiebenSat.1 Media SE uses primarily non-IFRS figures as the basis of making decisions. These also provide investors with additional information which also allow a multi-year performance comparison, as they are adjusted for specific factors. These figures are not determined on the basis of IFRS and may therefore differ from other entities’ non-IFRS figures. Therefore, they do not replace the IFRS figures and are not more important than the IFRS figures, but they do provide supplementary information. We are convinced that the non-IFRS figures are of particular interest to our investors for the following reasons:
- Reconciling items can influence or even overshadow operating performance; figures adjusted for such items therefore offer supplementary information for the assessment of the Company’s operating performance. Adjusted figures thus are more relevant for managing the Company.
- Moreover, adjusted net income is an important factor at ProSiebenSat.1 Media SE for the calculation of the dividend payment, as we want to give the shareholders a share in the Company’s operating profitability.
- The Group has implemented a holistic management system. Non-IFRS figures are calculated consistently for the past and the future; they form an important foundation for internal controlling and the management’s decision-making processes.
ACCOUNTING OF SHARE-BASED PAYMENTS FROM THE PERFORMANCE / GROUP SHARE PLANS
ProSiebenSat.1 Group involves its employees in the Company’s success with performance-based compensation. This also includes share-based payment plans (Performance- and Group Share Plans) in which selected executives and the Executive Board participate. In this context, participants receive so called Performance Share Units that entitle them to subscribe for shares. Due to the decision of the Executive Board and Supervisory Board of March 11, 2016, to settle the claims of the beneficiaries of the Group Share Plans in cash in the future and the associated conversion of the accounting for these share-based payments from equity-settled to cash-settled, cash-settled share-based payments in accordance with IFRS 2 are recognized in this Annual Report. In contrast to previous accounting (equity settlement), the ongoing recognition in profit or loss of changes in the fair value of the obligation with cash settlement planned in accordance with IFRS 2 results in significantly higher earnings volatility, which is attributable to the fluctuations in the price of the ProSiebenSat.1 Media SE share. ProSiebenSat.1 Group is therefore adjusting adjusted EBITDA and adjusted net income for the portion of the changes in the fair value of the share-based payment plans that affects profit or loss, which results from the difference between the share price on the issue date and the current price on the closing date.
VALUATION OF PUT OPTIONS AND EARN-OUT-OBLIGATIONS
Due to the Company’s continuous M&A activities and the current investment strategy, the obligations from put options and earn-outs have steadily increased as ProSiebenSat.1 Group acquires further shares in connection with the acquisition of the ability to control these entities. ProSiebenSat.1 Media SE therefore adjusts the changes in the fair value of these liabilities in the calculation of adjusted net income. This adjustment results in greater transparency by revealing these effects and enables better comparison with operating performance.
Operational and Strategic Planning
Management and planning are closely intertwined at ProSiebenSat.1. Group Target figures are defined and determined for various periods within the context of planning, with a focus on the management indicators outlined above.
The diagram below shows the individual planning levels for the financial year 2018. The different levels in the planning process build on each other and are closely linked to our risk management.
- Strategy meeting: Analyses of strengths and weaknesses are an important strategic planning instrument. Market conditions and current key figures for relevant competitors are compared, the Company works out its own strengths, opportunities and risks are assessed and growth strategies are developed. Once a year, the Executive Board and the Supervisory Board discuss the results at a strategy meeting. This took place in June 2018 and involved discussion of the Group’s planned strategic development. In addition, an update on the three-pillar strategy was carried out in September.
Report of the Supervisory Board - Multi-year planning (long-term corporate planning on an annual basis): Multi-year planning constitutes a detailed quantitative depiction of strategic planning. This is done on an annual basis and contains targets for a five-year period. The relevant key financial figures from the income statement, statement of financial position and cash flow statement of individual subsidiaries are analyzed and aggregated at segment and Group level.
040 / Planning Calendar 2018
- Budget (operating plan for the year on a monthly basis): For the budget, the targets based on the multi-year planning for the individual financial and non-financial performance indicators are specified on a monthly basis in a top-down/bottom-up process.
- Monthly reporting and trend projections: Trend projections are an important tool in planning during the year. They allow the Company’s expected performance for the year to be calculated on the basis of the targets achieved to date and to be compared with the target figures that were originally budgeted. The aim is to identify potential discrepancies between the target and actual figures immediately and to implement the necessary countermeasures promptly.
In 2018, the Executive Board and the Supervisory Board also discussed short-term and long-term targets. In addition to monthly reporting, potential risks are reported to the Group Risk Officer on a quarterly basis. In particular, any changes to the early warning risk indicators during the year and over time are analyzed here. For example, the development of audience shares is an important early warning indicator. Additional growth opportunities and therefore potential positive deviations from projected targets are analyzed in parallel with risk management; they are taken into account in budget planning.
041 / Budget Planning and Risk Management at ProSiebenSat.1 Group
1 Also refer to the Risk Report in the Annual Report 2018.
It describes earnings before interest, taxes, depreciation and amortization, adjusted for certain influencing factors (reconciling items).
These include valuation effects recognized in other financial result, valuation effects of put-options and earn-out liabilities, as well as valuation effects from interest rate hedging transactions. Moreover, the tax effects resulting from such adjustments are also adjusted.