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Identifying and managing potential risks is just as important for a company as recognizing and taking opportunities. In order to deal with risks early and consistently, the ProSiebenSat.1 Group uses effective management and control systems. This keeps the overall risk situation at a manageable level. No threat to the Company is currently foreseen.
The global media industry is subject to constant market change and intense competition. We are in a good operational and strategic position to benefit from the market’s dynamism and to use it as an opportunity to grow the TV business. At the same time, our business approach focuses on identifying and actively managing potential risks.
In recent years we have consistently diversified our value chain around the advertising-financed TV business, thus paving the way for future revenue growth outside the TV business. In 2013, we already generated 29.5 % of our revenues outside the traditional TV advertising business. At the same time, we have made the Group even more efficient in recent months and continued to optimize our corporate portfolio. The Group continues to have a solid basis financially and in balance sheet terms. As of the date of preparation of the management report, we consider risks to be limited and the overall risk situation to be manageable. There has been no fundamental change in the overall risk situation compared with December 31, 2012. Currently no risks are evident which, individually or in combination with other risks, could have a material or lasting adverse effect on the ProSiebenSat.1 Group’s earnings, financial position and performance. No such risks present a threat over the twoyear forecast period.
Our business is influenced by a number of external and internal factors, which entail risks as well as abundant opportunities. Risk is defined in this report as a potential future development or event that could result in a negative deviation from targets or forecasts. The risk indicators that we have already taken into account in our financial planning do not therefore come under this definition of risk and are therefore not explained in this Risk Report.
Clear decision-making structures, standardized guidelines, and a methodical approach are a fundamental requirement for secure risk handling across the Group. In view of the momentum of the media sector and the increasing diversity of the ProSiebenSat.1 Group’s business areas, processes and organization must be flexible enough to allow an appropriate response to new situations at all times. The ProSiebenSat.1 Group has therefore established a systematic risk management system, which focuses on the Group’s specific circumstances and involves our subsidiaries in the process. The major steps of the risk management process are described below:
The process begins with the identification of material risks. The “Group Risk and Compliance Officer” reports risks that exceed a specific materiality threshold to the Executive Board and Supervisory Board on an ad hoc basis. Reporting on relevant risks throughout the year is geared towards specific indicators and based on a target/actual comparison. To this end, early warning indicators have been defined for all significant areas of risk. In the risk assessment, all relevant risks are analyzed with regard to the severity of their impact on earnings, financial position and performance and their estimated probability of occurrence. The following table shows the scales used to measure the two assessment criteria (probability of occurrence and severity of impact) and the resulting risk classification matrix.
In accordance with the potential severity of the impact on earnings, financial position and performance and the estimated probability of occurrence, the risk is classified as “low”, “medium” or “high”.
Risk assessment also includes analyzing causes and interactions. Opportunities are not included in the measurement; they are recorded in budget planning. The third and final step involves risk management. As soon as an indicator reaches a certain tolerance limit, countermeasures are developed and implemented. The defined measures and risks are documented and tracked in reports throughout the year.
Decentralized risk managers in the various corporate units are responsible for identification and reporting risks. The managers categorize the risks according to a Group-wide catalog and document their results in a database every quarter. The “Group Risk and Compliance Officer” reports the identified risks to the Executive Board and Supervisory Board regularly. In addition to quarterly reporting, the risks are reported on an ad hoc basis when necessary. In this way, the Executive and Supervisory Boards receive all decisive analyses and data in order to respond proactively to emerging threats. However, the Risk and Compliance Office not only supports the various corporate units in identifying risk at an early stage. It also ensures the efficacy and timeliness of the system by training the decentralized risk managers and continuously monitoring the scope of risk consolidation. Moreover, the Internal Audit unit regularly reviews the quality and compliance of the risk management system. It reports the results directly to the Group CFO.
In 2013, the audit of the risk management system again generated a positive result. The system itself has not changed in the past financial year. The basis for the audit is the Risk Management Manual, which summarizes company-specific principles and is based on the internationally recognized COSO (Committee of Sponsoring Organizations of the Treadway Commission) standard.
The following chart provides an overview of the individual steps involved in the risk management process:
The overall risk situation is determined by assessing the risk clusters across all risk categories in the different business areas and segments (external risks, sales risks, content risks, technological risks, organizational risks, financial risks, compliance risks) and is the result of an aggregate analysis of the Group’s three risk categories: operating risks, financial risks, and compliance risks. Risk clusters that could materially impact our earnings, financial position and performance as from today’s perspective are outlined below. These are not necessarily the only risks that the Group faces. However, we are not currently aware of any additional risks that could impact our business activities, or we consider them as not material. We consider the overall risk situation for the Group and its segments to be manageable.
| Key management measures |
External risks:
Ongoing analysis of economic and industry trends, strategic
brand positioning
Sales risks: Regular and systematic assessment of adverting revenues and market position, diversified customer base Content risks: Long-term relationships with licensors and close contact with producers, contractually securing exclusive rights, development of an in-house production unit Technological risks: Regular investments in the technological infrastructure, IT updates, back-up systems to minimize risk of possible failure in studio and broadcasting equipment Organizational risks: Monitoring HR figures, strategic human resources recruitment and development programs |
| Effective risk management is very important for the ProSiebenSat.1 Group, not least due to the low visibility of the advertising market typical for the industry and the short-term nature of booking TV advertising. Our experience in the TV advertising market and our expertise in the media sector, together with clear organizational structures and qualified staff, enable us to deal with operating risks appropriately and implement effective measures for risk reduction. We address challenges posed by the economy – the largest potential external risk factor – with systematic cost and efficiency management. In addition, we optimize our risk profile by consistently investing in growth areas to reduce our dependency on individual markets and simultaneously leveraging digitalization as a growth opportunity for our TV and online business. |
Macroeconomic risks. Research institutes currently estimate that the German TV advertising market is likely to grow by around 3 % net in 2014. This growth is attributable firstly to the positive economic outlook and secondly to the structural weakness of print media. High growth rates of close to 10 % are still expected for online advertising. The European Commission’s economic forecasts for Austria and Switzerland are also quite optimistic at 1.6 % and 1.8 % growth in gross domestic product respectively. As a result, the advertising markets are expected to develop positively. The TV advertising markets are characterized by comparatively low market visibility and often react in a procyclical manner to macroeconomic developments, owing to their close link to the economic environment. When the economic outlook is positive, companies are more willing to invest and advertising expenditure increases. Conversely, in a period when the economy slows, companies often react at extremely short notice by reducing their advertising budgets. In addition to the short-term booking patterns, the great importance of the fourth quarter, when the Group realizes the majority of its revenues, also limits visibility. We cannot therefore completely rule out the possibility of a potentially high impact on our revenue and earnings performance if there is a major slowdown in the economy. In view of the positive economic outlook, however, we consider it unlikely that this risk will materialize in 2014. Overall, we classify this risk as a medium risk.
To optimize our risk profile sustainably, the Group invests consistently in new growth markets. In 2013, the Group already generated 29.5 % of its revenues outside the traditional TV advertising business, an increase of 5.2 percentage points year on year.
General industry risks (media usage behavior). Television remains the ProSiebenSat.1 Group’s core business. With the emergence of digital media at the end of the 1990s, the assumption spread that traditional media such as television could experience a significant loss of importance. Due to the diversification of screen-based media, video content can be downloaded on an increasing number of devices, such as laptops, smartphones, and tablet PCs. Migration to mobile devices and a decline in the usage of television therefore constitutes a potential risk for the ProSiebenSat.1 Group. However, while print media are actually at high risk of being substituted as a result of digitalization, television remains the medium that is used most. According to a study by SevenOne Media GmbH, media consumption in 2013 climbed to 594 minutes and reached a new record high at just under 10 hours a day. More than a third of the media budget is spent on TV. Owing to technological innovations such as HD, we anticipate that television will be the main form of screen-based media in future as well. However, the main driver of the increase in total consumption is the internet at 115 minutes. Two trends are emerging in the wake of digitalization: The usage of mobile devices such as tablet PCs and smartphones and the consumption of video content at any time and place are increasing in Germany continuously. At the same time, TV and online are increasingly being used together. Parallel use is particularly widespread among digital natives. Four out of five 14 – 29-year-olds watch TV and use the internet at the same time.
TV also remains the medium with the greatest advertising impact. On many occasions, television provides the initial stimulus to order content online. For example, one in four viewers (24 %) have purchased a product online directly following TV contact. For this reason, advertisers invested the majority of their budgets in TV with a share of 45.0 % in the German gross advertising market again in 2013 (previous year: 43.3 %).
Television is not negatively affected by the range of new media, but instead remains the no. 1 medium in both the audience and advertising markets. At the same time, the internet is firmly integrated into everyday life. 95 % of those surveyed now own one or more second-screen devices. The conditions for integrating TV and internet are therefore present in nearly all German households. In recent years, the ProSiebenSat.1 Group has established Germany’s leading online-video portal, maxdome, built up a broad online network and positioned MyVideo as a web channel. Today, the company has an attractive online portfolio, which acts synergistically with the TV channels and serves the changed requirements of media users. ProSiebenSat.1 is therefore very well positioned to utilize the change in media usage as an opportunity for the traditional TV business and the digital activities. We therefore believe it is unlikely that this risk will occur. However, we cannot completely rule out a potentially very high impact on our revenue and earnings performance. We therefore classify this risk as a medium risk.
To meet competitive challenges in the future, ProSiebenSat.1 maintains ongoing market research and invests in strategic positioning for its brands.
Selling advertising time. The ProSiebenSat.1 Group generates the biggest share of its revenues from the sale of advertising space, especially of TV advertising time. The Group holds leading positions in the advertising market in both the TV and the online sectors in Germany. Despite our strong market position, we face a potential risk from declining advertising budgets, the possible loss of major customers and falling prices for the sale of advertising time. However, SevenOne Media, the advertising sales company for ProSiebenSat.1 for the German market, has for years had a stable customer base from a wide range of sectors. The sectors with the highest TV advertising expenditure and thus the greatest relevance to advertising in 2013 included food, personal care, commerce, services and telecommunications. These top 5 sectors account for the majority of the ProSiebenSat.1 Group’s TV advertising revenues. Our diversified customer portfolio enables us to compensate for potential defaults by individual advertising customers. As well as expanding our existing customer relationships, we have in recent years substantially expanded our business with new customers, and in 2013 we likewise generated higher advertising revenues with the largest advertising agencies. In addition to higher income from traditional advertising spots, we also marketed more free TV advertising space according to the model of advertising time in exchange for a revenue or equity share. In this way, the company not only makes efficient use of programming and advertising inventory — we also free up additional advertising budgets. The medium-term objective is to increase the share of TV advertising in the overall advertising market. In order to identify potential sales risks early, advertising revenues and advertising market shares are analyzed regularly. Comparing actual and budgeted figures with the corresponding figures for the previous year allows budget deviations to be recognized and countermeasures to be implemented at short notice. This could include cost adjustments or changes in program planning and price policy.
Despite our leading position on the market, we believe it is possible that this risk can occur. We cannot completely rule out the possibility of a potentially high impact on our revenue and earnings performance in the event of a decline in advertising budgets and falling prices. We therefore classify this risk as a medium risk.
Audience shares. Ratings are another early warning indicator: They reflect how the programming offer meets the taste of the audience – and thus the reach of a show or an advertising spot. Daily audience shares are an important performance indicator for our advertising customers. However, short-term fluctuations of market share ratings do not influence advertising bookings. To monitor risks, audience shares are analyzed daily on the basis of data from the Working Group of Television Research (AGF). In this way, we are able to monitor the success of our formats extremely closely and if necessary to take countermeasures at any time. In addition to quantitative analyses, qualitative studies are also an important control instrument. In 2013, program research at ProSiebenSat.1 again cooperated closely with various institutes on this. ProSiebenSat.1 commissioned them to carry out numerous telephone and online interviews and group discussions with viewers in Germany. In this way, stations obtain direct feedback from their audience and thus can optimize and further develop their programs on an ongoing basis. In 2013, the ProSiebenSat.1 Group continued to expand its share of the audience market. It succeeded in carrying through moderate price increases in all markets. The market share of the German station portfolio increased to 28.1 % in 2013 (previous year: 27.8 %). This means the station family is the market leader ahead of the RTL Group, not only among advertising customers but also among viewers. Our portfolio comprises complementary TV stations that address different core target groups. Possible market share weaknesses or short-term fluctuations at individual TV stations can thus be offset by the others.
In the wake of digitalization, the barriers to market entry for new competitors have lowered considerably due to falling production and transmission costs, which means the number of TV stations is growing continuously. However, it can be assumed that established station brands like ProSieben and SAT.1 will continue to dominate the market thanks to their name recognition. At the same time, we are successively expanding our complementary station family with new stations with their own brand profiles. After the women’s channel sixx, which was launched in 2010, quickly generated audience shares of up to 1.2 % (2013 as a whole, E14–49), two additional stations went on air in 2013. In total, the Group has successfully established six new stations in Germany, Austria, and Switzerland in the last few years. Our young TV stations also have a programming profile and unique selling point specific to their target group. For example, ProSieben MAXX primarily targets men and has closed a gap in the market with the exclusive broadcast of hit English-language series with the original audio and subtitles.
Despite the extensive measures we have taken to identify risks at an early stage and the success we have achieved, we believe it is possible that this risk could occur. We cannot completely rule out a potentially high impact on our revenue and earnings performance if this risk materializes. We therefore classify this risk as a medium risk.
Media convergence. The high market penetration of convergent devices such as tablets and smartphones means that video content can be accessed online without the use of a TV set. This means that television is increasingly competing with new media formats, which involves both opportunities and risks. Consumption of video content could shift increasingly to mobile devices, which could lead to a decline in the use of television. This could have a negative impact on TV bookings by our advertising customers and thus also negatively affect prices for TV advertising time. Although we have a strong market position in both TV and digital business and make consistent use of synergies between the two areas, we believe it is possible that this risk could occur and cannot completely rule out a potentially high impact on our revenue and earnings performance. We therefore classify this risk as a medium risk.
The active control of sales risks is the focus of the management of operating risks. In view of growing market fragmentation, reach and brand awareness will continue to be crucial competitive factors in future.
As well as strong brands, the quality of content is an important unique selling point for the ProSiebenSat.1 Group. The Group has attractive programs, works closely with more than 100 renowned licensors and has established its own production unit, Red Arrow, for the development of attractive programs.
License purchases. The ProSiebenSat.1 Group acquires many of its feature films, TV films, and series as licensed content from third parties, with a strong focus on the major US studios. In addition to currency risks, the Group is therefore also confronted with the risk of potential price increases. This applies primarily to the ProSiebenSat.1 Group’s smaller stations, which are competing with the well-financed digital TV offshoots of the public broadcasters. While individual purchases are becoming a more frequent necessity for the growing number of small free TV stations due to their focused target group profiles, price competition for the large program bundles remains limited. Our close, long-term business relationships with licensors and our high purchasing volume secure our strong negotiating position.
In order to stay informed about new productions and trends at an early stage, our license purchasing department is in constant dialog with international and national licensors. New programs and exclusivity are an important competitive factor. Exclusive agreements in the form of contractual blocking periods, known as hold-back clauses, protect our rights against other licensees and program licensing forms. Programming contracts are often signed on the basis of a script and thus some time ahead of production and broadcast. Signing programming contracts early of course harbors a certain risk with regard to quality and success. For this reason, the company signs programming contracts exclusively with film studios and production companies that can demonstrate an appropriate reputation and successful track record. In view of this, we classify the probability of occurrence of this risk as very unlikely. However, we cannot completely rule out the possibility of a medium negative impact on our revenue and earnings performance. Overall, we classify this risk as low.
Commissioned and own productions. With its TV stations, the ProSiebenSat.1 Group focuses on an individual and generally balanced mix of licensed programs as well as commissioned and own productions. Productions and formats produced locally are designed especially for individual stations. They strengthen the recognition value of a station and in some cases can even be created more economically. For this reason, it is becoming increasingly important for a media group to produce high-quality programming itself. The Group laid the foundation for this, while simultaneously extending its value chain, by founding its own production arm, the Red Arrow Entertainment Group. Because reference figures such as ratings are sometimes unavailable, the prospects for the success of in-house and commissioned productions tend to be less certain than for purchased format or programming licenses that have already been successful in other countries or in the movie theaters. In order to assess the appeal of its in-house productions as reliably as possible, ProSiebenSat.1 conducts intensive market analysis. Researchers accompany the development of new programs using a wide range of different methods, in many cases as early as the concept or screenplay stage. So-called Real-Time-Response tests (RTR) are a frequently used instrument. They are deployed when initial sequences or a pilot episode are available for new TV programs. When programs are screened, test persons document their response and reactions using a type of remote control, with accuracy down to the second and in real time. Another measure to limit risk is “format management”. This involves an improvement to the program approval process, which has two key aims: Firstly to design customized program ideas for specific slots, and secondly to establish uniform development and production processes, without restricting creative scope. Although we believe it is unlikely that this risk will occur, we cannot completely rule out a medium negative impact on our revenue and earnings performance. Overall, we classify this risk as low.
Competition for attractive content has also increased on the web as a result of growing professionalization. As a TV company, ProSiebenSat.1 is benefiting from this development. Due to our extensive library of rights, we also provide viewers/users with premium video online. This service is mostly free for users and is financed by means of online video advertising. Since 2013, the company has also produced formats especially for the online target group. With measures such as these, the Group is strengthening its leading market position while securing its competitive advantage over purely online suppliers such as Google, which have distribution channels but not their own content.
Ensuring uninterrupted transmission has high priority for the ProSiebenSat.1 Group. This also applies to system failures and data protection. Faulty technological infrastructure can have negative effects on our revenues and costs.
Broadcasting equipment and studio operations. Damage to studio and broadcasting equipment can have financial consequences for the ProSiebenSat.1 Group: In the event of temporary failures or program changes at short notice, advertising customers could make guarantee and goodwill claims. We counter this risk with a comprehensive security plan. Back-up systems guarantee a broadcasting process without interruptions, even in cases of malfunction. The redundancy systems are kept at separate locations. Ongoing maintenance and upgrades when needed keep the systems state-of-the-art.
The ProSiebenSat.1 Group fully digitalized its transmission operations some years ago and transferred the content of the TV stations and online platforms to a shared platform. With this digital pool of materials, the Group has not only set the benchmark in the media industry, but has also leveraged time, quality, and cost advantages. As a second step, the company upgraded the technical studio equipment in 2013. The automation of technical processes reduces dependency on manual procedures and thus contributes to minimizing risk.
In view of our extensive back-up solutions and systematic controls, we believe that this risk is unlikely to occur. However, we cannot completely rule out the possibility of a low negative impact on our revenue and earnings performance. We therefore classify this risk as low.
IT risks. The growing complexity of the system architecture presents the Group with various challenges. Failures of systems, applications, or networks are as much potential risks as violations of data integrity and data confidentiality. The effectiveness of the security standards is examined regularly by the Internal Audit department. Drills of crisis scenarios help to simulate potential weaknesses and further improve the IT system. The ProSiebenSat.1 Group invests on an ongoing basis in hardware and software, in firewall systems and virus scanners, and establishes various access authorizations and controls. In order to prevent losses, the Group also has multiple computer centers at separate locations, which assume each other’s tasks in the event of a system failure. In 2013, the Group subjected all relevant business applications to extensive tests, which confirmed the redundancy of the systems. As well as information technology risks, production processes could also be adversely affected by unforeseeable events such as natural disasters. Clear responsibilities and instructions are crucial, especially in an emergency. For this reason, the ProSiebenSat.1 Group has adopted a comprehensive safety guideline for dealing with emergencies and established a crisis management organization.
Although we believe it is unlikely that this risk will occur, we cannot completely rule out a low negative impact on our revenue and earnings performance. We therefore classify this risk as low.
Personnel risks. It is our employees who are shaping the transformation of the ProSiebenSat.1 Group into a broadcasting, digital entertainment, and commerce powerhouse with their dedication and skill. The loss of specialist and managerial staff in key positions as well as bottlenecks in recruiting staff represent potential risks for ProSiebenSat.1.
In the course of digitalization, the need for qualified specialists and managers is rising, particularly in our growth areas. Proactive recruitment, targeted appeals for applicants and close relationships with universities are therefore crucial in the competition for talented employees. Other components in our personnel management include skills development in accordance with requirements and a long-term performance and talent management system that, among other points, begins succession planning for key positions at an early stage. In recent years, the Group has expanded the in-house ProSiebenSat.1 Academy’s offerings and developed special support programs such as the learning expeditions. A variety of opportunities for specialist training and development as well as attractive remuneration generate long-term loyalty on our employees’ part and make us a preferred employer. This is reflected by the average turnover rate, which fell by another 0.8 percentage points to 10.6 % in 2013. The average period of employment remained stable at 7.3 years. In addition to the relevant HR figures, various external studies document ProSiebenSat.1’s attractiveness as an employer.
In view of our extensive personnel measures, we believe it is unlikely that personnel risks will occur, but cannot completely rule out a medium negative impact on our revenue and earnings performance. We therefore classify these risks as low.
Risks associated with the outsourcing of business processes. The Group has outsourced selected IT divisions and other business processes to external service providers in order to improve costs and efficiency. At the same time, this outsourcing involves potential risks, including the possibility of dependence on our strategic partner or the loss of expertise. To minimize risks, ProSiebenSat.1 cooperates exclusively with selected service providers of good standing. As well as close and continuous coordination, the agreed services are monitored on the basis of a monthly reporting system that covers all key criteria relating to operational reliability. This allows us to identify critical business processes at an early stage and implement countermeasures if necessary. Strict compliance with the international standard for IT security ISO 27001 further minimizes IT security risks. Although we believe it is unlikely that this risk will occur, we cannot completely rule out a medium negative impact on our revenue and earnings performance. Overall, we classify this risk as low.
In its operating business and due to its borrowings, the ProSiebenSat.1 Group is exposed to various financial risks. Changes in exchange rates and liquidity shortages can also have a negative impact on earnings, financial position and performance. Overall, however, we still regard the probability of occurrence of financial risks as very unlikely. In December 2012, the ProSiebenSat.1 Group sold its TV and radio activities in Northern Europe. The transaction was completed in April 2013. The Group used EUR 500.0 million of the proceeds to prepay term loans. The Group thus further reduced its financing risk, which is its potentially highest financial risk. In 2011, the Group had already prepaid a significant part of its term loans. In the course of reducing the loans, the Group extended the maturities of all remaining term loans of EUR 1.860 billion and the revolving credit facility to July 2018. This further improved the Group’s capital structure on a sustained basis.
The ProSiebenSat.1 Group has a solid financial and operating basis, but nevertheless monitors its financial risk positions intensively. The Group Finance & Treasury unit is responsible for managing financial risks on a central basis. The management measures are defined in close cooperation with the Executive Board. Guidelines that apply across the Group regulate principles, tasks and responsibilities of financial risk management on a uniform basis for all subsidiaries of ProSiebenSat.1 Media AG. As part of risk management, the Finance and Treasury units are systematically audited by Internal Audit once a year. The last audit again generated a positive result. For more information on the hedging instruments, measurements and sensitivity analyses together with a detailed description of the risk management system in reference to financial instruments, refer to the Notes to the consolidated financial statements.
Financing risk. The availability of existing borrowing depends in particular on compliance with specific contractual conditions, which are subject to regular assessment. The financial covenants of the facilities agreements were complied with once again in 2013; on the basis of our current corporate planning, a violation in the future is not foreseen. The Group monitors changes on the money and capital markets on an ongoing basis in order to ensure availability of and access to sufficient funds and the cost efficiency of the financial instruments used at all times. We believe it is very unlikely that this risk will occur, but cannot completely rule out a potentially very high impact on our earnings performance and financial position. Overall, we classify the financing risk as low.
Counterparty risks. The Group concludes finance and treasury transactions exclusively with business partners which meet high credit rating requirements. The conclusion of finance and treasury transactions is regulated in internal counterparty guidelines. As well as carrying out an assessment of the credit standing, ProSiebenSat.1 limits the probability of occurrence of counterparty risks through a broad diversification of its counterparties. Although we believe it is very unlikely that this risk will occur, we cannot completely rule out a potentially high impact on our earnings performance and financial position. Overall, we classify counterparty risks as low.
Interest rate risks. The ProSiebenSat.1 Group uses interest rate swaps and interest rate options to hedge its variable-interest loans against interest rate risks. To a minor degree, interest rate risks can arise in connection with cash drawings on the revolving credit facility. As of December 31, 2013, there were no cash drawings on the RCF. 86 % of the term loans was hedged by interest rate derivatives. In the wake of the extension to July 2018 of the maturities of the financing loans amounting to EUR 1.860 billion, derivative interest rate hedging transactions were concluded with a volume of EUR 1.350 billion in the period from 2016 to 2018. We believe it is unlikely that this risk will occur. However, we cannot completely rule out a low negative impact on our earnings performance and financial position if this risk nevertheless materializes. We therefore classify the interest rate risks as low.
Currency risks. Currency fluctuations can influence the ProSiebenSat.1 Group’s operating business. Currency risks occur primarily if revenues are generated in a different currency from the related costs (transaction risk). This is particularly relevant for license purchasing, as the ProSiebenSat.1 Group concludes a substantial number of its license agreements with production studios in the United States and generally fulfills the financial obligations resulting from these in US dollars. The Group manages this risk by using derivative financial instruments, primarily currency forwards. Due to the high hedging rate, the impact of currency fluctuations is assessed as manageable. We believe it is unlikely that these risks will occur, but cannot completely rule out a low negative impact on our earnings performance and financial position. All in all, we therefore classify currency risks as low.
Liquidity risks. Liquidity risk is managed centrally through a cash management system. The most important early warning indicator is expected liquidity headroom. This is calculated and assessed regularly by comparing currently available funds and budgeted figures, taking into account seasonal influences. We assess Group liquidity as good, and assume that the liquidity headroom will remain sufficient in the coming years. No larger cash investments are planned. With media-for-equity and media-for-revenue-share, the Group has developed an attractive model to tap into new markets — without making major cash investments. Although we believe it is very unlikely that this risk will occur, we cannot completely rule out a potentially very high impact on our financial and earnings performance. Overall, we classify liquidity risks as low.
| Key management measures |
Financing risks:
Ongoing monitoring of financial covenants
Interest and currency risks: Targeted use of derivative financial instruments Liquidity risks: Securing solvency with a central cash management system and ongoing monitoring of liquidity headroom Counterparty risks: Broad basis of capital providers and strict credit rating checks |
| Interest and foreign exchange volatility or the default of lenders could considerably impair the financing situation and liquidity of the Group. We counter these risks with extensive measures, so we consider the overall probability of occurrence to be very unlikely. |
| The internal controlling and risk management system in relation to the (consolidated) reporting process is intended to ensure that transactions are appropriately reflected in the consolidated financial statements of ProSiebenSat.1 Media AG (prepared in line with the International Financial Reporting Standards, IFRS) and that assets and liabilities are recognized, measured and presented appropriately. This presupposes Group compliance with legal and company regulations. The scope and focus of the implemented systems were defined by the Executive Board to meet the specific | needs of the ProSiebenSat.1 Group. They are regularly reviewed and updated as necessary. Nevertheless, even appropriate and properly functioning systems cannot offer any absolute assurance that all risks will be identified and controlled. The company-specific principles and procedures to ensure that the Group’s single-entity and consolidated reporting is effective and correct are described below. | |
| Goals of the risk management system in regard to financial reporting processes | The Executive Board of ProSiebenSat.1 Media AG views the internal controlling
system with regard to the financial reporting process as an important component
of the Group-wide risk management system. Controls are implemented in order
to provide an adequate assurance that in spite of the identified risks inherent in
recognition, measurement and presentation, the single-entity and consolidated
financial statements will be in full compliance with regulations. The principal
goals of a risk management system in regard to single-entity and consolidated
reporting processes are: > To identify risks that might jeopardize the goal of providing single-entity and consolidated financial statements that comply with regulations. > To limit risks that are already known by identifying and implementing appropriate countermeasures. > To analyze known risks as to their potential influence on the single-entity and consolidated financial statements, and to take these risks duly into account. | |
| In addition, in the reporting year we updated our process descriptions and our risk control matrices. The focus here was on standardizing the descriptions and establishing effective control mechanisms. These updates combined with regular tests on the basis of samples were part of the PRIME project. Since then they have been an integrated part of the internal controlling and | risk management system in relation to the (consolidated) reporting process. On the basis of the test results there is an assessment of whether the controls are appropriate and effective. Any deficiencies in the controls are eliminated, taking into account their potential impact. | |
| Structural organization | > The material single-entity financial statements that are incorporated into the consolidated financial statements are prepared using standardized software. > The single-entity financial statements are then consolidated to form the consolidated financial statements using modern, highly-efficient standardized software. > The financial statements of the main individual entities are prepared in compliance with both local financial reporting standards and the Group‘s accounting and reporting manual based on IFRS, which is available via the Group intranet to all employees involved in the reporting process. The individual companies included in the consolidated financial statements provide their financial statements to Group Accounting in a defined format. > The financial systems employed are protected with appropriate access authorizations and controls (authorization concepts). > The entire Group has a standardized plan of accounting items, which must be followed in recording the various classes of transactions. > Certain matters relevant to reporting (e.g. expert opinions with regard to pension provision, measurement of the stock option plan, impairment testing of intangible assets) are determined with the assistance of external experts. > The principal functions of the reporting process — accounting and taxes, controlling, and finance and treasury — are clearly separated. Areas of responsibility are assigned without ambiguity. > The departments and other units involved in the reporting process are provided with adequate resources in terms of both quantity and quality. Regular professional training sessions are held to ensure that financial statements are prepared at a consistent and reliable level of quality. > An appropriate system of guidelines (e.g. accounting and reporting manual, intercompany transfer pricing guideline, purchasing guideline, travel expense guideline, etc.) has been set up and is updated as necessary. > The efficiency of the internal controlling system in regard to processes relevant to financial reporting is reviewed on a sample basis by the Internal Audit unit, which is independent of the process. | |
| Process organization | > For the planning, monitoring, and optimization of the process of compiling
the consolidated financial statements, there is a user-friendly web-based tool
that includes a detailed calendar and all important activities, milestones, and
responsibilities. All activities and milestones are assigned specific deadlines.
Compliance with reporting duties and deadlines is monitored centrally by Group
Accounting. > In all accounting-related processes, controls are implemented such as the separation of functions, the dual-control principle, approval and release procedures, and plausibility testing. > Tasks for the preparation of the consolidated financial statements are clearly assigned (e.g. reconciliation of intragroup balances, capital consolidation, monitoring of reporting deadlines and reporting quality with regard to the data of consolidated companies, etc.). Group Accounting is the central point of contact for specific technical questions and complex accounting issues. > All material information included in the consolidated financial statements is subjected to extensive systematic validation to ensure the data is complete and reliable. > Risks that relate to the (consolidated) accounting process are recorded and monitored continuously as part of the risk management process described in the Risk Report. | |
Our business operations result not only in operating and financial risks, but also a wide range of legal risks. Results of legal disputes and cases can considerably damage our business, our reputation, and our brands as well as cause considerable costs. Ways we limit legal risks include cooperation with highly qualified legal experts and targeted staff training. The Group also establishes provisions for legal disputes if there is a present obligation arising from past events, it is probable that settlement will require an outflow of resources embodying economic benefits and the obligation can be measured reliably.
We classify the risks of individual legal and media policy changes or legal offenses differently, with regard to both their probability of occurrence and their potential financial consequences.
The objective of compliance is to ensure seamless management at all times and in all respects. Possible violations of legal statutory regulations and reporting obligations, infringements against the German Corporate Governance Code or insufficient transparency in corporate management can jeopardize conformity to the rules. It is for this reason that the ProSiebenSat.1 Group has established a Code of Compliance which applies across the whole group, which provides employees with specific rules of conduct for various professional situations. Another effective measure to prevent possible compliance infringement is staff training on specific topics such as antitrust issues or the correct way to deal with insider information.
In order to prevent possible infringements, the ProSiebenSat.1 Group also implemented a Compliance Board constituted of legal experts, Internal Audit staff and employees of operating units. The task of the Compliance Board is to identify possible illegal actions at an early stage and initiate appropriate countermeasures. Another function of the Compliance Board is to introduce safeguards against possible external threats such as acts of sabotage. For a television group with a high level of public awareness, the issue of company protection is extremely important. For this reason, the ProSiebenSat.1 Group has taken various measures in order to realize comprehensive security of operating equipment. This includes state-of-the-art access control technology and qualified security staff.
The work of the Compliance Board is coordinated centrally by the Group Risk and Compliance Officer. His task is to keep abreast of legal developments and any changes in international legislation so as to be able to initiate suitable measures in due time. To bolster the Compliance organization, additional decentralized structures have been implemented. Regular exchange of experience and information about current trends in different corporate areas have reduced the level of risk. The processes were analyzed by an independent consultant. The result of this risk assessment demonstrated that the Compliance processes in place are effective. In respect to implementing current antitrust law, ProSiebenSat.1 has been assessed as “best in class.”
In view of our effective compliance structures, we believe it is unlikely that this risk will occur, but cannot completely rule out a medium negative impact on the Group’s earnings performance. Overall, we classify the risk associated with general compliance as low.
Windows for regional programs. To ensure plurality of opinion, companies such as SAT.1 Satelliten Fernsehen GmbH are legally required, in accordance with the Interstate Broadcasting Treaty (RStV), to finance regional programs for a total of five broadcast areas and to broadcast these simultaneously during prime time. The federal states have also each adopted their own media laws, which can stipulate the obligation to provide such a window. For example, the media law of the Saarland stipulates that at least the two nationwide private television stations with the largest technical reach must broadcast regional programs state-wide, which must be financed by the operator of the nationwide stations. ProSiebenSat.1 Media AG and SAT.1 Satelliten Fernsehen GmbH respectively have taken legal action against the obligation to offer a regional program for the Saarland and have won the case for formal reasons. A decision has not yet been reached on the content of the case. It may therefore be the case that the Saarland maintains its demands and institutes further legal proceedings. Media policy discussions with federal states may also give rise to requests from states in which there have not been any regional program obligations to date. It is estimated that it would cost around EUR 5 million per year to finance a new window for regional programs. To help prevent the extension of regional TV obligations, ProSiebenSat.1 Media AG actively participates in dialog relating to society, media policy and the law.
Regulatory risks. The ProSiebenSat.1 Group is exposed in particular to risks in connection with tightened regulations, for example with regard to advertising, forms of advertising, broadcasting licenses and competitions. Any unforeseen changes to the legal and regulatory environment could have a significant impact on individual business activities. The ProSiebenSat.1 Group actively monitors all relevant developments and is in constant contact with the regulators concerned, to ensure that its interests are taken into account as far as possible.
We believe it is unlikely that these risks will occur. However, we cannot completely rule out a medium negative impact on our earnings performance if this risk nevertheless materializes. Overall, we classify these risks as low.
Claims for disclosure and actions for damages by RTL 2 Fernsehen GmbH & Co. KG and El Cartel Media GmbH & Co. KG. Claims for disclosure and action for damages by RTL 2 Fernsehen GmbH & Co. KG and El Cartel Media GmbH & Co. KG against SevenOne Media GmbH and the stations SAT.1 Satelliten Fernsehen GmbH, ProSieben Television GmbH, kabel eins Fernsehen GmbH and N24 Gesellschaft für Nachrichten und Zeitgeschehen mbH (no longer part of the Group) are pending at the Düsseldorf Regional Court since November 10, 2008. The plaintiff is asserting disclosure and damages claims in connection with the marketing of advertising time by SevenOne Media GmbH. On April 13, 2012, the Regional Court resolved to obtain an expert appraisal on the probability of loss. An expert has since been appointed. It is not yet known when the expert’s report will be submitted. The outcome of the case cannot currently be predicted. As a consequence, no provision was recognized as of the reporting date. We believe that this risk may possibly occur and cannot completely rule out a medium negative impact on our earnings performance. We therefore classify this risk as medium.
Conclusion of the suit by TM-TV GmbH and MTV/VIMN against SevenOne Media GmbH and the ProSiebenSat.1 station companies. From November 10, 2008, various legal actions for disclosure and damages against SevenOne Media GmbH and the ProSiebenSat.1 station companies were pending in relation to previous marketing of TV advertising time by SevenOne Media GmbH. However, the actions by TM-TV and MTV/VIMN have since been dismissed by the Munich Regional Court with final and binding effect. The Munich Higher Regional Court dismissed TM-TV’s appeal. MTV/VIMN withdrew its appeal after the Higher Regional Court announced its intention to dismiss this appeal also. At the same time, MTV/VIMN withdrew a legal action brought against IP Deutschland. SevenOne Media GmbH and the ProSiebenSat.1 station companies were involved in these proceedings as interveners for IP.
Section 32a German Copyright Act (“bestseller”). Authors of TV programs have made claims on the basis of Section 32a of the Copyright Act against companies of the ProSiebenSat.1 Group, in and out of court. ProSiebenSat.1 has since developed a model for additional compensation to copyright owners and other beneficiaries under Section 32a and agreed “Common Compensation Rules” with two organizations (directors and actors) under Section 36 of the Copyright Act. For this issue, a provision of EUR 13.8 million was recognized as of December 31, 2013 (December 31, 2012: EUR 6.1 million). This is based on best estimates considering the current state of negotiations. We believe it is very unlikely that this risk will occur. However, we cannot completely rule out a high one-off impact on our earnings performance if this risk nevertheless materializes, i.e. if payments are required that exceed the provisions that have been established. We therefore classify this risk as low.
Tax risks in connection with the disposal of subsidiaries in Sweden. The Swedish tax authorities completed the tax audit of a former Swedish branch of the ProSiebenSat.1 Group in December 2013. In the judgment of the tax authorities, interest payments connected to the financing of shares in the former TV and radio companies of the SBS Group are not tax deductible in Sweden. The concluding report of the tax audit therefore earmarks additional payments totaling approximately EUR 31 million for the assessment periods from 2008 to 2011. According to the same judgment, additional payments of approximately EUR 11 million would be added to this for the 2012 assessment period, which has not yet been audited. The ProSiebenSat.1 Group appealed against the tax assessments within the deadline. In accordance with the request, a suspension of the enforcement of the assessments was granted at the end of January 2014. As things stand, a judicial dispute before the Swedish Administrative Court is likely. The ProSiebenSat.1 Group continues to consider an actual claim unlikely and is supported in this opinion by corresponding assessments of renowned Swedish tax and legal consultants. As a consequence, no provision was recognized as of the reporting date. We believe it is possible that this risk will occur. If this is the case, we cannot completely rule out a very high, one-off impact on our earnings performance up to the maximum amount stated above. Overall, we classify this risk as high.
Warranties from the disposal of the Belgian TV activities. By sale and purchase agreement of April 20, 2011, the ProSiebenSat.1 Group sold its Belgian TV operations to De Vijver NV (“DV”). ProSiebenSat.1 Media AG acted to guarantee the disposal. On the basis of alleged infringements of the accounting and rental contract guarantee included in the purchase agreement, DV has asserted claims for damages against the company. The contractually agreed maximum liability from all guarantees totals EUR 19.8 million. On the basis of the current status, the company does not anticipate being obligated to make the relevant payments to DV. As a consequence, no provisions were recognized as of the reporting date of December 31, 2013. We believe it is very unlikely that this risk will occur. If the risk were nevertheless to materialize, it would have a one-off negative impact on our results up to the maximum amount of liability stated above. Overall, we classify this risk as low.
Claims relating to patent law. The Kudelski Group claims that business activities of maxdome GmbH and SevenOne Media GmbH in particular infringe patent rights to which it is entitled. Based on current circumstances and the information currently available, it is not possible to conduct a reliable assessment of the likelihood that any claims would be enforced. In view of this, we consider the relevant provisions established as sufficient. We believe it is likely that this risk will occur. In this case we cannot completely rule out a low negative impact on our earnings performance. We therefore classify this risk as a medium risk.
| Key management measures | General compliance risks: Group compliance structures and targeted
training of employees Other legal risks: Close cooperation with legal experts |
| We see different levels of impact for the potential financial consequences of individual legal and media policy changes as well as legal offenses, as the differences between compliance risks are in some cases considerable. |
