Strategy and Management System

ProSiebenSat.1’s most important goal is to grow sustainably and profitably in a dynamic competitive environment. With this, we are pushing ahead with the digital transformation. Since January 2018, the Group has bundled its portfolio in the pillars of Entertainment, Content Production & Global Sales and Commerce. Thereby, we have a holistic management system that reflects the financial growth targets and the interests of investors.

Strategy and Objectives

ProSiebenSat.1 Group’s most important goal is to seize opportunities in a changing market environment and to continue its profitable growth in the long term. For this purpose, the Group consequently continues to push ahead with its transformation from a traditional TV company into an integrated entertainment and commerce corporation. In order to accelerate this process, the Group rearranged itself into the three pillars of Entertainment, Content Production & Global Sales and Commerce since January 2018. Company Outlook, Opportunity Report

With everything we do, we want to delight, inspire and support those who use our offerings — and offer our advertising customers unique added value. Therefore, we are successively extending our value chain based on the high reach of TV. Thanks to our digital entertainment offerings, we deliver viewers and users attractive entertainment at any time or place. Our production businesses operates worldwide, which gives us crucial access to program content. In addition, we are using our wide TV reach to expand our dynamically growing commerce business and to increase and reinforce brand awareness via advertising.

At the same time, ProSiebenSat.1 is extending the value chain with the aim of increasingly offering its own products and mapping the entire retail chain, both digitally and offline. There is significant potential here as consumers and especially young customers, known as “digital natives,” now determine themselves when and where they want to see offers or products. ProSiebenSat.1 is therefore reacting to changes in consumer behavior. Commerce and entertainment are merging like never before as various media and channels are being used simultaneously. Furthermore, we are stimulating new advertising segments with our own products, e.g. in the health sector. The next step is to invest more in the growing fields of addressable TV, AdTech and data in order to generate additional revenues with data-driven offerings and to customize advertising.

ProSiebenSat.1 is already one of the world’s most diversified TV companies. We established thriving initiatives in every business field. By successfully diversifying our business, we do not only strengthen the TV business, but can also generate additional revenues and grow more independent from the TV advertising market. Acquisitions are part of our strategy to push ahead with the transformation from a traditional TV company into a digital corporation as well as to open up new growth markets.

In 2017, the Group already generated half of its revenues outside the traditional TV advertising business. With this, we have achieved an important target of our growth strategy. With cross-linking, we are marketing our offerings on different media and can make optimum usage of the synergy potential between our business areas. This is the basis for our continuous growth: Consolidated revenues have grown by 11% every year since 2011, while adjusted EBITDA has increased by an average of 6% at the same time. Acquisitions have accelerated growth. (Fig. 039) (Fig. 040)

039 / Multi-year Comparison of Revenues in EUR m

040 / Multi-year Ccomparison of Adjusted EBITDA performance¹ in EUR m

ProSiebenSat.1 expects to continue growing profitably. ProSiebenSat.1 has also set clear targets for its M&A measures. The corresponding financial targets result from the target range for the leverage ratio, while the Group pursues an earnings-oriented dividend policy. The distribution ratio is based on adjusted net income and has been between 80% and 90% over the last five years. Due to the significant growth in earnings, ProSiebenSat.1 has stated an annual average increase in its dividend payments over the last five years of 12% (CAGR). The Group has also intensified its M&A activities at the same time. The leverage ratio has constantly been within the defined benchmark range of 1.5 to 2.5 at the end of the year. Opportunity Report

Our financial strategy includes ongoing assessments of the capital structure. In this context, the Group increased its share capital by around 6.5% in November 2016. This capital increase has given the Group additional financial headroom for acquisitions. Funding needs for acquisitions made in the past financial year were covered with cash and cash equivalents. In addition, the media volume on digital platforms and on TV stations in particular represents a second investment currency for ProSiebenSat.1. By using media, the Group is able to establish new brands without high cash investments while accelerating companies’ growth at the same time. As a result, ProSiebenSat.1 is not only growing profitably; the Group is also earning high interest on the purchase price of its investments.

In the interest of reporting efficiency, ProSiebenSat.1 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 medium and long term and on changes in the objectives and strategies since the previous year can be found in the Annual Report.

Planning and Management

ProSiebenSat.1 has a management system based on key figures. This forms the basis for all 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 (Fig. 041). 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. Risk and Opportunity Report

Intragroup Management System

The performance indicators specific to ProSiebenSat.1 are aligned to the interests of the capital providers and cover financial planning as well as aspects of comprehensive revenue and earnings management. The Group has defined specific performance indicators for each segment and will update its management system accordingly as part of the switch to a three-pillar structure.

• Non-financial performance indicators: The development of audience shares is a key criterion in programming and media planning in the core business of advertising-financed television. At the same time, the Group is using its advertising reach to establish new brands and expand its portfolio with digital business sectors. In Germany, TV usage data is collected by GfK Fernsehforschung on behalf of Arbeitsgemeinschaft Fernsehforschung (AGF). ProSiebenSat.1 analyzes viewer ratings that have been empirically collected by the institutions on a daily basis; these form the basis for program planning. 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.
• Financial performance indicators: External 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. Internally, EBITDA serves as a performance indicator both at Group level and for the Digital Entertainment and Digital Ventures & Commerce segments.
  
  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. EBITDA adjusted for reconciling items 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.

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’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’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 in financial year 2017 also served 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. Net financial debt and EBITDA of the Group and external revenues and EBITDA in the Digital Entertainment and Digital Ventures & Commerce segments serve as a variable basis for determining the Executive Board’s compensation.

By harmonizing the Executive Board’s compensation with our KPI for corporate management, we implemented a holistic and effective management system, which reflects the company-specific characteristics. Further information about the individual compensation of Executive Board members can be found in the Compensation Report. Compensation Report

Operational and Strategic Planning

Management and planning are closely intertwined at ProSiebenSat.1. 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 2017 (Fig. 044). The different levels in the planning process build on each other and are closely linked to our risk management:

044 / Planning Calendar 2017

• 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. Report of the Supervisory Board
  
  The Group pursues a consistent growth and diversification strategy aimed at strengthening the core business of television and leveraging synergies by linking the advertising business to the digital business. Nothing changed here in 2017; however, individual requirements were prioritized and redefined at the strategy meeting. The strategy meeting was held in June 2017.
• 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 statement of cash flows of individual subsidiaries are analyzed and aggregated at segment and Group level.
• 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 2017, 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 and Compliance 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. (Fig. 045)

045 / Budget Planning and Risk management at ProSiebenSat.1