Group Financial Position and Performance

Borrowings and Financing Structure

ProSiebenSat.1 Group uses various financing instruments and practices active financial management. As of December 31, 2018, debt accounted for 83% of total equity and liabilities (December 31, 2017: 81%). At EUR 3,194 million or 59%, the majority was attributable to the Group’s non-current and current financial debt (December 31, 2017: 60%).

The Group continuously monitors and assesses developments on the money and capital markets. In March 2018, ProSiebenSat.1 Group extended the duration of the syndicated term loan and the syndicated revolving credit facility (RCF) by one year at a time. In addition, ProSiebenSat.1 Group has notes in the amount of EUR 600 million. The notes are listed on the regulated market of the Luxembourg stock exchange (ISIN DE000A11QFA7); the coupon of the notes is 2.625% per annum. Since 2016, the Group’s portfolio has also included three syndicated promissory notes totaling EUR 500 million with maturities of seven years (EUR 225 million at a fixed interest rate and EUR 50 million at a variable interest rate) and ten years (EUR 225 million at a fixed interest rate).

083 / Debt financing instruments and maturities as of December 31, 2018 in EUR m

Rating agencies do not take ProSiebenSat.1 Group’s loan agreement or notes into account in their credit ratings. For this reason, no corresponding statements are made here.

Interest payable on the term loan and the RCF is variable and based on Euribor money market rates plus an additional credit margin. The Group uses derivative financial instruments in the form of interest rate swaps and interest rate options to hedge against interest rate changes caused by the market. As of December 31, 2018, the proportion of fixed interest was approximately 98% of the entire long-term financing portfolio. The average fixed rate of the interest rate swaps was 0.5% per annum; the average interest rate cap was 1%. In 2018, the Group entered into interest hedges in the amount of EUR 1,000 million to hedge against interest rate risks in the period from 2020 to 2023.

Financing Analysis

The leverage ratio is a key indicator for Group-wide financial and investment planning. It reflects the ratio of net financial debt to adjusted EBITDA over the last twelve months (LTM adjusted EBITDA). The target is a ratio between 1.5 and 2.5 at the end of the relevant year. The target range may be exceeded for a short period of time as a result of fluctuations during the year. The leverage ratio was 2.1 as of December 31, 2018 (December 31, 2017: 1.6) with net financial debt of EUR 2,163 million (December 31, 2017: EUR 1,632 million). The higher net financial debt reflects the development of the cash flows, characterized among other things by earnings performance, payments for the repurchase of own shares, the acquisition of eHarmony Group and higher tax payments.

As of December 31, 2018, the definition of ProSiebenSat.1 Group’s net financial debt does not include lease liabilities according to IFRS 16. They amounted to EUR 155 million. Also not included are real estate liabilities of EUR 22 million. In the comparative period, the liabilities for finance leases under IAS 17 of EUR 65 million are likewise not included.

084 / Net financial debt¹ in EUR m

085 / Leverage Ratio¹

Analysis of Liquidity and Capital Expenditure

In the financial year 2018, ProSiebenSat.1 Group generated a cash flow from operating activities of EUR 1,459 million (previous year: EUR 1,621 million). The decline primarily reflects the earnings performance. In addition, higher tax payments had an impact. The development of working capital was in line with the previous year.

087 / Investments by segment¹ in %, 2017 figures in parentheses

Detailed information on off-balance-sheet investment obligations can be found in the Notes, Note 31 “Other financial obligations”, page 205

The cash flows from investing activities resulted in an cash flow from investing activities of minus EUR 1,536 million for the financial year 2018 (EUR –894 million). The increase in cash outflow of 72% or EUR 643 million primarily reflects the Group’s M&A activities:

• Cash outflow from additions to the scope of consolidation amounted to EUR 302 million (previous year: EUR 197 million) in 2018 and mainly reflects purchase price payments for the acquisition of eHarmony Group, Zirkulin, esome, Aboalarm, and Kairion as well as deferred purchase price payments for Verivox Holding, Virtual Minds AG, Freiburg im Breisgau and the US production companies Fabrik Entertainment, LLC and Kinetic Content, LLC. The value for 2017 includes purchase price payments for Jochen Schweizer GmbH, the film distributor Gravitas, and ATV.

Assets resulting from initial consolidations are not reported as segment-specific investments. Cash and cash equivalents used for the acquisition of the initially consolidated entities are shown as “cash outflow from additions to the scope of consolidation.”

• Cash inflow from the sale of consolidated subsidiaries fell by EUR 467 million year-on-year and amounted to EUR 6 million (previous year: EUR 473 million). In 2018, maxdome, 7NXT and Tropo were deconsolidated, and purchase price payments were received for disposals made in previous years. In 2017, the Group conducted an extensive review process of its travel portfolio and realized the sale of Etraveli, among other things.
• The cash outflow for the acquisition of programming rights amounted to EUR 1,070 million. This is an increase of 2% or EUR 23 million compared to 2017. 100% of the programming investments were made in the Entertainment segment (previous year: 100%). 56% went on licensed programs (previous year: 62%) and 42% on commissioned productions (previous year: 38%).
  Group Earnings

Programming investments are a focal point in investing activities. In addition to the purchasing of licensed formats and commissioned productions, in-house formats secure the Group’s programming supply. They are based on the development and implementation of own ideas and, unlike commissioned productions, are produced primarily for broadcasting in the near future. For this reason, they are recognized immediately as an expense in cost of sales and are not considered as an investment.

• Investments in property, plant and equipment increased to EUR 55 million (+26% or EUR –12 million year-on-year). Most of this was also attributable to the Entertainment segment at 81% (previous year: 75%) and was related to technical facilities and leasehold improvements at the Unterföhring site. EUR 106 million also went on other intangible assets (–5% or EUR +6 million year-on-year). At 68%, the Group invested in other intangible assets primarily in the Entertainment segment (previous year: 82%).

The developments described resulted in a free cash flow of minus EUR 78 million for 2018 (previous year: EUR 728 million).

M&A cash flow amounted to minus EUR 321 million, after EUR 260 million in 2017. The previous year’s figure is shaped by the net cash inflow from the sale of Etraveli; the cash outflows for additions to the scope of consolidation had an opposite effect.

The free cash flow before M&A amounted to EUR 244 million (previous year: EUR 468 million) and was therefore also down on the previous year. This equates to a decrease of 48%, which is primarily based on the earnings performance and higher cash outflow for the acquisition of programming rights.

Free cash flow: Total cash and cash equivalents generated in operating business less the balance of cash used and generated in the context of investing activities. Free cash flow before M&A: 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.

Cash flow from financing activities amounted to minus EUR 468 million (previous year: EUR –426 million). This figure is characterized by various contrary developments: The sale of shares in the NuCom Group to General Atlantic resulted in an inflow of EUR 286 million in the reporting period. In contrast, cash outflow of EUR 221 million resulted from purchase price payments for additional shares in Parship Elite Group and the acquisition of additional shares in SilverTours and Sonoma Internet GmbH, Berlin operator of the platform Amorelie. There was also a cash outflow due to the dividend payment in May 2018 in the amount of EUR 442 million (previous year: EUR 435 million). The repurchase of treasury shares resulted in a cash outflow of EUR 50 million. At the same time, payments for lease liabilities increased by EUR 24 million to EUR 40 million as a result of the initial application of IFRS 16. Under IAS 17, payments for “leases classified as operating leases” were reported under cash flow from operating activities in previous years.

The cash flows described resulted in a decrease in cash and cash equivalents of 34% or EUR 521 million year-on-year to EUR 1,031 million. The Group thus has a comfortable level of liquidity despite this decline.

Analysis of Assets and Capital Structure

Total assets amounted to EUR 6,468 million as of December 31, 2018 (–2% or EUR –101 million). The decline in cash and cash equivalents was mainly offset by higher intangible assets and property, plant and equipment, so total assets changed only marginally overall year-on-year. With an equity ratio of 17% (December 31, 2017: 19%), ProSiebenSat.1 Group has a solid asset and capital structure. The key items in the statement of financial position are described in more detail below:

090 / Change in Cash and Cash Equivalents in EUR m

• Current and non-current assets: As of December 31, 2018, goodwill increased by 7% to EUR 1,962 million (December 31, 2017: EUR 1,831 million); its share in total assets was 30% (December 31, 2017: 28%). Other intangible assets increased by 11% to EUR 824 million (December 31, 2017: EUR 745 million). This development was driven by the initial consolidations in 2018, primarily of esome and eHarmony Group. Property, plant and equipment rose by 60% or EUR 122 million to EUR 327 million. This was due to the capitalization of leased property, plant and equipment as a result of applying the new reporting standard IFRS 16 for the first time as of January 2018.
  Notes, Note 16 “Goodwill”, page 180
  
  Other non-current financial and non-financial assets grew by 39% amounting to EUR 249 million (December 31, 2017: EUR 179 million). This increase was primarily due to new media-for-equity and fund investments and positive valuation effects on these investments. Other current financial and non-financial assets increased to EUR 122 million (December 31, 2017: EUR 105 million). This was partly attributable to the positive development of currency hedging instruments. In addition, current trade receivables increased by EUR 27 million or 5% to EUR 529 million (December 31, 2017: EUR 501 million).
  
  Programming assets decreased by 7% year-on-year and amounted to EUR 1,113 million (December 31, 2017: EUR 1,198 million). This decline compared to December 31, 2017, primarily results from the realignment of the programming strategy described under “Group Earnings.” Program acquisitions of EUR 1,070 million had an opposite effect. Programming assets made up 17% of total assets (December 31, 2017: 18%) and comprise non-current and current programming assets.
  Notes, Note 21 “Programming assets”, page 190
  
  Cash and cash equivalents amounted to EUR 1,031 million. This equates to a decline of 34% or EUR 521 million compared to December 31, 2017, which was primarily due to earnings performance, the acquisition of eHarmony Group, the repurchase of own shares, and higher tax payments.

Employee potential, organizational advantages, own brands or long-term customer relationships are important success factors, which are largely non-financial. On the other hand, we capitalize certain internally generated intangible assets to a limited extent. Further information can be found in the Notes in the “Summary of Key Accounting Principles”, page 230

• Equity: Despite the positive net result, equity declined by 15% or EUR 182 million to EUR 1,070 million. The development of equity firstly reflects the dividend pay-out of EUR 442 million in May 2018 (previous year: EUR 435 million). Secondly, the share buyback had an effect amounting to EUR 50 million in the fourth quarter of 2018. The corresponding equity ratio was 17% (December 31, 2017: 19%).

As part of the share buyback program, a first tranche totaling 2,906,226 of the Company’s own shares was acquired via the stock exchange in the period from November 9, 2018, to December 11, 2018, inclusively, at an average price of EUR 17.2044 (total amount: EUR 49,999,999.46), without restriction on the use of the treasury shares acquired; they can therefore be used by the Company for all legally permissible purposes or retired. The treasury shares thus acquired comprise EUR 2,906,226.00 or around 1.25% of the share capital.

• Current and non-current liabilities: Debt increased slightly compared to the closing date in 2017. Overall, liabilities and provisions went up by 2% to EUR 5,398 million compared to December 31, 2017 (EUR 5,317 million). This is due primarily to the increase in provisions for onerous contracts as a result of the refocusing of the programming strategy and to higher lease liabilities as a result of the first-time application of IFRS 16. Payments and positive valuation effects from put option liabilities had an opposite effect. Non-current and current financial debt reported in debt totaled nearly unchanged EUR 3,194 million (December 31, 2017: EUR 3,185 million).

091 / Structure of the Statement of Financial Position in %