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Central European Media Enterprises Ltd. (NASDAQ:CETV)

Q4 2008 Earnings Call Transcript

February 25, 2009 10:00 am ET

Executives

Romana Tomasova – VP, Corporate Communications

Adrian Sarbu – President and COO

Wallace Macmillan – CFO

Analysts

Ben Mogil – Thomas Weisel Partners

Laurie Davison – Goldman Sachs

David Kestenbaum – Morgan Joseph

Matthew Walker – Nomura

Lisich Glaskow – KBC Securities

Murray Arenson – Janco Partners

Barry Konig – Cumberland Associates

Andrew Gunwich [ph] – ASB

Andrew Wallach – Cumberland Associates

Grange Johnson – LaGrange

Andrzej Knigawka [ph] – ING

Nancy Utterback – European Credit

Operator

Hello, this is the conference call operator. Welcome to the Central European Media Enterprises fourth quarter earnings conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator instructions) This conference is being recorded. At this time, I would like to turn the conference over to Romana Tomasova of Central European Media. Please go ahead.

Romana Tomasova

Good morning or good afternoon to each of you and welcome to CME's fourth quarter 2008 investor conference call. During this call we will refer to presentation slides, which you can download from our website www.cetv-net.com. You can find them on our homepage at the bottom left corner.

The participants of today's call will be Adrian Sarbu and Wallace Macmillan, who will give you the formal presentation. We are also joined today by our General Counsel, Daniel Penn. Before I turn to Adrian, let me read the usual Safe Harbor statements. Our presentation today will contain forward-looking statements. Through these statements we claim the protection of the Safe Harbor contained in the US Private Securities Litigation Reform Act of 1995 and refer you to the forward-looking statements section in our Form 10-K filed with the Securities and Exchange Commission earlier today for a list of such statements and the factors, which could cause future results to differ from those presented in this call.

During this call, we will refer to our segment financial information. These are non-US GAAP numbers. However, a reconciliation to our US GAAP numbers is provided in note 19 to our accounts on pages 157 of our 10-K. And now, over to Adrian.

Adrian Sarbu

Good afternoon or good morning. I invite you to turn to page four of our presentation. At the end of 2008, the world changed and the economy conditions in our markets worsened dramatically. The capital markets collapsed. The credit market crunch became a credit crisis. And now we have a recession. Despite adverse events in the fourth quarter, we delivered strong growth in our core markets in 2008.

We foresee a two-year crisis in our region with unprecedented challenges that have not been seen in our market since the fall of the Berlin wall. The future has become less and less predictable, and we know that we are operating in a new environment. Over the next two years, we will be surrounded by uncertainty. Only some companies with strong management teams and strong strategies will survive. Our presentation today will show you that we understand the challenges ahead of us and we understand what we need to do.

Let’s move to slide five. CME is strong. Our 2008 results speak for themselves. Despite the currency headwinds at year-end, an economic downturn in the fourth quarter, painful restructuring cost in Ukraine, and losses in Internet, Bulgaria and Croatia, our revenue grew by 22%. Our five core stations increased segment EBITDA by 30% to $391 million with a segment EBITDA margin of almost 43%. Our Internet sites now attract over 1.5 million unique visitors every day and generated revenues of almost $10 million.

We had spectacular results in Czech Republic and Romania. Our Croatian station achieved 47% revenue growth and proved we can deliver on our startup strategy. We took full control of our Ukraine operations and acquired two stations in Bulgaria. And finally, something that I’m personally totally focused on, liquidity. We finished 2008 with $414 million of liquidity. We feel we are strong.

Let’s look at slide six. In the Czech Republic, we had an outstanding audience share performance fuelled by our successful local productions such as Rose Garden Medical, Street, Crime Series, and Comeback. Our revenues were up 35% and segment EBITDA was up 33%, with a 55% segment EBITDA margin. The Internet operations are ranked fourth by unique visitors. We acquired Jyxo and Blog.cz, as well as launching the news portal and the Catch up TV service. We started broadcasting our latest channel Nova Cinema on the digital terrestrial network.

In Romania, an excellent audience share performance was driven by own local fiction and non-fiction productions such as Regina, Dancing for a Dream, and Singing Bee. Revenues increased 27%. The segment EBITDA up 20%. We are very proud that Pro TV was the first channel in Eastern Europe to receive an International News Emmy Award.

Our Slovak business delivered strong audience share based on well performing local fictions such as Rose Garden Medical, Neighbours, and City of Shadows. We grew revenues by 20% and segment EBITDA by 21%. Our Internet news site was re-launched and we saw a dramatic increase in unique visitors. The Slovak Parliament finally passed new legislation reducing TV advertising on safe channels from 3% to 0.5% by 2012.

Let’s look now at slide seven. Our Slovenia operations had an outstanding audience share performance fuelled by successful non-fiction productions such as The Farm 2, which delivered the highest share for any reality show in Slovenia. We grew revenues by 16% and segment EBITDA by 12%. The Internet site 24ur.com became the number one most visited site in Slovenia by unique visitors. And our Internet business delivered positive EBITDA.

We are very pleased with our development in Croatia. Our strong local content is the foundation of our success. We are the only major channel in Croatia showing audience share growth in 2008 driven by successful own non-fiction productions such as The Farm, Don’t Forget the Lyrics, and Moment of Truth. Our revenues were up 47% and we delivered positive segment EBITDA in the second and fourth quarter. Our Internet traffic increased to over 200,000 daily unique visitors, supported by the launch of a Croatian video sharing service.

In Ukraine, we took full control of our operations. We established our own fiction and non-fiction production units and re-launched news. We acquired two channels in Bulgaria. And within six weeks, we launched news. We have secured major football rights and concluded volume deals with key distributors.

And now, over to Wallace.

Wallace Macmillan

Thank you, Adrian. I want to draw your attention to some items of key interests in our financial statement and these are set out on slide eight. Looking first to our P&L, our operating income would have been flat year-on-year had we not incurred an impairment charge of $337 million in respect to goodwill and intangible assets in Ukraine and Bulgaria. This created an operating income loss of $128 million compared to income of $211 million last year.

In both cases, the impairment charge as a result of changed economic conditions giving rise to meet [ph] our projected performance as well as a sharp increase in the pricing of risk [ph] and consequently the weighted average cost of capital used in the asset valuations. This impairment charge has no cash effect and is not relevant to covenant ratio calculations in respect of our debt. It is possible that a further deterioration in projected performance or in the pricing of risk could lead to additional impairment charges in this or in other markets.

And now I want to talk about cash flow, net debt and liquidity. In 2008, our cash flow from operations grew 27% to $136 million. And our free cash flow, which I show here as operating cash flow less CapEx, more than doubled to $57 million. The $79 million that we spent on CapEx was $31 million lower than the figure we had guided to that we started cutting back those in the year.

Our net debt grew from $476 million to just over $1 billion, principally due to our taking full ownership of Studio 1+1 and entering into Bulgaria, as well as smaller investments in Media Pro in Romania, Jyxo and Blog in the Czech Republic, and CapEx. And on Studio 1+1 investment, this is the first year when CME – first year-end when CME exercises full effective control over all of its operations. And finally, as Adrian mentioned, we ended the year with $414 million of cash and undrawn facilities and overdrafts, a solid liquidity there [ph].

Now, back to Adrian.

Adrian Sarbu

Thank you, Wallace. You have joined this conference call not to hear about the past, but to hear about the future. We delivered some results in 2008 and we are proud of that. As all of us know that 2009 and 2010 would be dramatically different than 2008. We started to understand this in October and we learned more every day.

The rules of our market in the last five years were continued growth, emerging market premiums, easy access to funds. And all we had to do was to grow EBITDA. Today, forecast for GDP and advertising spending will decline, and the cloud of uncertainty and skepticism covers our region. Availability of financial resources is close to zero today. Liquidity has become the only benchmark. We learn in this month that we have to adapt our management tools with the new conditions if we run to continue to be successful.

Let’s turn to slide 10. There is only one thing to understand in this start. Macroeconomic forecast for 2009 declined dramatically in January and February. Recession will be the reality of our market, and we will have to leave in this reality show. As a result of change in the economic environment, we decided we had to go beyond our contingency plan and to develop a new strategy for our operations.

Let’s move to slide 11. Our strategy capitalizes on our strength in the three pillars of our business; broadcasting, local content, and new media. The main goal is to emerge from the current economic crisis with our leadership position intact and to return to our past growth.

Let’s move to slide 12. The key action of ours is to maximize liquidity and reduce gearing. Let me repeat. The key action of ours is to maximize liquidity and reduce gearing. Costs – operation costs and cash costs are a continuous target for reduction. We are the lowest cost operator in the region. Since October we reduced our headcount by 20%. CapEx would be further reduced in 2009. We are thinking to reduce the cost of acquired programming.

Today we are already operating our business under 2008 cost levels despite having more channels and we are costing further. We are investing our sales tactics to the specifics of each advertising market. In 2009 we will maximize our revenues in an environment where advertising spending is slower than last year and the budgets of our clients are still unclear.

During 2009 and 2010 we plan to diversify our sources of revenues from TV advertising to Internet, content distribution, subscription and management services. But the main contributor to our revenues would still be TV advertising. We have set ourselves strictly limits for our developing businesses. We will manage Ukraine, Bulgaria, and Croatia so that cash funding does not exceed $100 million in 2009.

Let’s look at slide 13. Over the last month I talked to many of you, investors and analysts. I now understand much better what your key concerns are. Wallace and I are now going to address them straight in this presentation.

Wallace Macmillan

Adrian, starting the Q&A, investors often worry about how GDP movements impact on advertising. Can you talk about how much advertising could fall in the event of GDP decline?

Adrian Sarbu

We now foresee advertising in our markets flat or in single-digit decline. If the current economic conditions worsen, the decline will be greater. I want to point out that in Ukraine we expect advertising spend to fall by over 50%.

Wallace Macmillan

And how do you foresee our audience share changing in this new environment?

Adrian Sarbu

We will maintain leadership in audience and increase our share in markets where we do not have leadership. This is the core of our strategy.

Wallace Macmillan

Looking to slide 14, can you talk about how we are adjusting our sales approach?

Adrian Sarbu

We will incentivize our clients to spend more by targeted stimulus packages. As clients see the benefits of more intense advertising in their own sales, we expect they will spend more.

Wallace Macmillan

And what is the insight of all of this in our revenues? Do you still anticipate double-digit price increases in 2009?

Adrian Sarbu

As I said a few weeks ago, first quarter sales are slow. We cannot quantify 2009 revenues now, but expect that in some or all of our markets we will see a decline in revenue. Our prices would be optimized to increase our share of advertising budgets and revenues.

Wallace Macmillan

If you look at slide 15, many investors worry about our ability to cut costs. How much and in what areas can we cut costs without damaging our audience share and leadership position?

Adrian Sarbu

We are implementing cost cuts of up to 20% compared to 2008 across all areas, including people, overheads, marketing, production, and programming.

Wallace Macmillan

Another concern is currency movements. How will they affect our EBITDA?

Adrian Sarbu

Fortunately, 70% of our costs are in local currency. The currencies of all of our markets have weakened against US dollar in 2009. But we can’t predict future foreign exchange movements.

Wallace Macmillan

So taking together, how will all of these factors play out on our EBITDA?

Adrian Sarbu

We foresee EBITDA decline in some or all of our markets. Now is my turn, Wallace. Let’s look at slide 16. The most frequent questions I have had this year have been about our liquidity. Can you please explain why we are in a secure liquidity position and why investors don’t have to worry about default on our debt?

Wallace Macmillan

Well, the key points, Adrian, is that we do not have traditional maintenance covenants. We have incurrence covenants. If our gross debt-to-EBITDA exceeds 4.5 times, it does not trigger a default. Our core stations will continue to generate significant cash. The earliest maturity of our senior notes is 2012. And under our senior notes we have flexibility to secure additional debt at local level if needed independently of corporate EBITDA. And also of course, we have $414 million of liquidity at the end of the year.

Adrian Sarbu

So, will you be cash positive in 2009?

Wallace Macmillan

We have limited visibility at present. Due to the worsening of economic conditions, we have taken actions to conserve cash and to protect profits and make sure we have sufficient liquidity. In connection with liquidity, I should mention something else, which is that we intend to file a short registration statement. This protects our position as a well known seasoned issuer for another year, which we may otherwise lose due to the movements of our share price. This simplifies the process of any US registered financing. We don’t currently have any plan to issue equity or debt under the shelf, but it does give us flexibility should we wish to do so.

Adrian Sarbu

Thank you, Wallace. If we generate additional liquidity, we will do it. My top three priorities this year are simple. Liquidity, liquidity, and liquidity.

Romana Tomasova

Thank you, Adrian and Wallace. And now, operator, let’s open the call to investor questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from Ben Mogil from Thomas Weisel Partners. Please go ahead, sir.

Ben Mogil – Thomas Weisel Partners

Hi, guys, good morning. So, on the – one of the slides you spoke about the funding for the Ukraine, Bulgaria and Croatia being limited to $100 million. Is that to say sort of those are the cash losses, the maximum cash losses, which you would be willing to accept?

Wallace Macmillan

Yes, we had to look at the cost structures and what we expect the impact could be at the current market conditions. And we believe that that is the floor to which our funding could reach in 2009.

Ben Mogil – Thomas Weisel Partners

Okay. I mean, how flexible – or let me ask a different question. You’ve talked about a lot of your programming is local and obviously a lot of your operational costs were obviously local as well. How quickly can you gear them down for a revenue environment, which used to be double digits, which is no longer?

Wallace Macmillan

Is this a question about the developing markets or about the business generally?

Ben Mogil – Thomas Weisel Partners

Both actually.

Wallace Macmillan

With regard to developing markets, looking specifically at Ukraine and Bulgaria, and because of the markets conditions there and because Bulgaria is a very early stage developing market, our potential revenues are going to be quite small. So the potential losses are all about the degree of investment that we put into overheads. And as Adrian has explained, we are taking in those markets significant steps to constrain overhead growth if necessary. In our wider markets, in our established markets, which are cash flow generative, our intention is to cut cost as much as we can without damaging the brand power and the audience share power of those markets. Adrian has spoken to an intent across the business to try and cut up to 20% of our base costs using 2008 as a margin. When we go to that level, we will start carefully in our developed markets to see what additional savings could be incurred without damaging the key elements of the business, which gives us our leadership strength in those markets.

Ben Mogil – Thomas Weisel Partners

What’s your take on – I mean, obviously the balancing out between one of your cut costs, I want to make sure that your ratings in your market share maintain with the way that they are. What’s your take – it may just be from public documents of where some of your competitors like Modern Times and RTL are. Are they sort of still going in head force? Are they sort of adopting a similar cautious approach as you guys are?

Wallace Macmillan

Well, it’s still very early to say. I think that the lack of visibility, which affect advertisers in our region naturally pull back on to all of the broadcasters in the region as well. Certainly I believe everybody has taken steps to cut costs. The extent of cutting costs at this stage among our competitors is impossible to comment on.

Ben Mogil – Thomas Weisel Partners

Okay. Can you provide us with local currency and local currency revenue and EBITDA growth for the quarter? I know that you did it market-by-market, but can you just give us sort of a sum line? Is that possible?

Wallace Macmillan

Yes, it is. Bear with me one moment.

Ben Mogil – Thomas Weisel Partners

Yes, of course.

Wallace Macmillan

If we look at the fourth quarter in isolation, local currency revenue growth in Romania against the guidance that we gave was 3.6%.

Ben Mogil – Thomas Weisel Partners

No, no. I’m sorry, I see all that. I mean, you got it in the slides. I meant more for company-wide. Are you able to give us a company-wide same currency revenue and EBITDA growth?

Wallace Macmillan

That’s always a slightly more complex calculation because there are different types [ph] involved. If I was looking at an overall indicator in local currency in the quarter, I think that our revenues grew by about 4% there about directionally.

Ben Mogil – Thomas Weisel Partners

And EBITDA would be about the same?

Wallace Macmillan

And EBITDA would have been in local currency in the quarter, I believe, down, but I don’t have the exact percentage. I think it’s got to be somewhere around 10%.

Ben Mogil – Thomas Weisel Partners

Okay. Maybe this is sort of a – I'm not sure this is sort of probably for public forum, but are there any markets where you would be willing to exit? I mean, are there any markets that you absolutely think are not marginal markets, but sort of not key to the story as we stand right now?

Wallace Macmillan

Let me just – I'd look [ph] into my previous answer, then pass you on to Adrian for your main question.

Ben Mogil – Thomas Weisel Partners

Sure.

Wallace Macmillan

The reason for that EBITDA impact in the fourth quarter, of course, looking at our total markets together, is because of Ukraine where we had $20 million of one-time cost in the quarter to do with restructuring and programming write-downs and exit from our external sales force situation. So that is an impact which is unique to Ukraine. And of course, we had this year quarter-on-quarter Bulgaria, which we didn’t have last year, which incurred some losses as a startup. And so that is not reflective of the rest of the business. But let me pass you to Adrian for your primary question.

Ben Mogil – Thomas Weisel Partners

For sure, thanks.

Adrian Sarbu

Can you repeat the question, please?

Ben Mogil – Thomas Weisel Partners

Sure, Adrian. Again, I said I’m not sure it’s sort of necessarily a great question for a public forum, but are there any markets which you believe are not core to you, in the sense that if you had someone who came by and gave you an offer, which kind of looked to be reasonable in this environment, you’d really study it hard?

Adrian Sarbu

You know, meaning in the way we presented to you our core markets are our five markets; Czech, Slovak, Slovenia, Croatia, and Romania. These are all core markets. And the other are labeled as developing markets, Ukraine and Bulgaria. After taking control of Ukraine, (inaudible) a lot, we treat Ukraine as a practically new operational startup.

Ben Mogil – Thomas Weisel Partners

Okay. I guess I mean, among the seven markets, are there any of those countries where you feel that if you were not to be operating in them, your overall business would be largely – I mean, are there any markets which you kind of are less wedded to than others?

Adrian Sarbu

To talk now about growing in new markets when everybody talks about compression may mean, in a way, weird.

Ben Mogil – Thomas Weisel Partners

No, I meant it the other way around, Adrian. Are there any markets that you guys would consider exiting, selling?

Adrian Sarbu

Selling?

Ben Mogil – Thomas Weisel Partners

Yes.

Adrian Sarbu

No, no. The answer is no. If you talk about our market, the answer is no.

Ben Mogil – Thomas Weisel Partners

Okay. And then maybe last question and I’ll seed [ph] the floor to someone else. Romania, we obviously saw revenue in local currency up, but EBITDA flat on local currency basis. Can you talk to sort of what the competitive dynamics in that market are? Are they changed sort of significantly? Should we be looking at the audience share on your end? It looks to have held up, so kind of curious what was going on there.

Wallace Macmillan

Yes, in Romania, it talks the most competitive dynamic, simply that Romania traditionally in years of very fast growth previously had had a strong sales boost in the fourth quarter because any additional advertising demand, and there was always very high incremental advertising demand in the fourth quarter, could be sold at a premium price. In the fourth quarter in Romania this year, really in December, starting in November, advertising demand fell sharply for these incremental points by comparison to previous years because of the increasing concern about the future state of the economy. And as a result, sell-out rates for us and I assume for our competitors were simply lower in Romania in the very end of the fourth quarter. And that’s what caused the lower than anticipated revenues there. These are factors, which affect us and all of our competitors.

Ben Mogil – Thomas Weisel Partners

No, I realize that. It was more actually the lack of operating leverage that I’m focused on. I can understand the revenue growth rate decline – the growth rate declined in the fourth quarter. And that makes sense given what the economy look like. It’s more that, you know, in most of your markets, you either were able to keep operating leverage up (inaudible) margins here you obviously at 17% local currency growth, but EBITDA being flat local currency, I’m curious about that particular dynamic.

Wallace Macmillan

Well, we had in Romania, as we had in most of our other markets as all broadcasters do normally, increased our production costs in the fourth quarter because that is normally the period of peak sales [ph]. The drop-off in sell-out rate was more sharply fell in Romania than elsewhere. And so that means that although we had invested more in programming and we’ve actually generated all of the ratings that we’ve anticipated, we weren’t able to monetize them as much. We should do what we’d like to do. And therefore, our revenues did not grow in proportion to the movement in cost, keeping our EBITDA flat year-over-year.

Adrian Sarbu

Let me remind you that to have a result in cost adjustment, you have to make a decision a couple of month in advance. So what happened in Romania in November or December is the precaution of the financial crisis, which emerged in the world in October. So it was quite difficult for us to foresee, to predict, and definitely once the program is scheduled, our main goal was to deliver audience. If advertisers set back with their spending in the second half of November and December, this was something which couldn’t really fight with. However, we reduced in December our spending – our programming spending.

Ben Mogil – Thomas Weisel Partners

Okay. Great. Thank you very much, guys.

Operator

The next question will come from Laurie Davison from Goldman Sachs. Please go ahead.

Laurie Davison – Goldman Sachs

Hi, guys. Just three questions from me. Can you give us the January, February local currency revenue growth for the major markets, as you think about Czech, Romania, and maybe Slovak Republic as well? Second was, do you have a new target gross debt-to-EBITDA, what you’re aiming for by end of ’09 or end of ’10? Third question is just a bit more detail, on the cost cutting you mentioned on the up to 20%. If you were to foresee that 20% cost-cutting, could you just give us a bit of a breakdown as to where that would come from? Thanks.

Wallace Macmillan

Let me take your questions, Laurie. Good to hear you on the call. First of all, we don’t give specific revenue figures for the New Year on this call, but as Adrian was saying earlier on, revenue generally in the first quarter are slow. We would normally expect – and this is our market condition rather than just a CME condition. We would normally have expected, because of our unusually seasonally strong first quarter last year, to have a difficult comparative year-on-year as we reverse [ph] normal seasonality. But because of the slowness of advertisers and taking their budgets for the year and the uncertainty at the start of the year, then in all of our markets generally they start, the New Year has been very slow. And that same slowness in fixing budgets for the year has also been reflected in first quarter revenues. We haven’t developed for issue a new target gross debt-to-EBITDA ratio. And the cost-cutting figure, I think you have to bear with us a little bit and I could give you more details on the next quarter call that I think that we’ve told you the areas that we want to cut costs in and we given you a good indication of the size that we are targeting. Let me pass you on to Adrian.

Adrian Sarbu

I understand you want to know where do we want to cut cost. My answer is very simple, everywhere. You start from those areas, which don’t affect directly what you see on the screen, which is programming. So we’d start with reducing the headcount. I might remind you that our operations were not fed even in the previous years. And they had to really – to really rethink the whole operation model in order to enable us to cut – to have such a dramatic cut as we had – as we made in headcount from October till the end of this quarter, we will have 20% of our headcount reduced, which is a lot, which is a lot. So normally we thought from headcount, then we address the marketing overheads, then we look in production deferring some local productions or compressing the budgets for local production. And definitely we reach at the end of the day at the core of our costs, which are the schedule cost where we, as I said, may use the tool of deferring some programs and delivering the – once we can deliver the audience with lower investment. This is an environment when also our competitors will reduce their investment in programming down to giving up some contracts or programming. And this is also an action, which will address our library and our balance sheet definitely. And this is more and more across the cash cost actually, which is not short-term, but medium and long-term.

Laurie Davison – Goldman Sachs

Okay. Is it possible to come back on the January, February point? I understand you don’t want to break down by individual markets. Is it possible you could quantify that comment about slow in local currency just for the group [ph] to give us a rough idea?

Wallace Macmillan

Not at this stage. These operations are still under negotiation with our advertisers at the moment. And the way this year will develop would depend very much on how the first quarter negotiations go. So I think that you can certainly understand that the revenues we’d expect it to be lower this year in the first quarter. But what we are looking for is to develop relationships and contracts and, as Adrian said, put incentive schemes into place with the modification of our sales strategy that would develop projects for later in the year. So there is an element of timing stakes [ph] in this. And the quarter isn’t through yet. I don’t want to comment on that any further.

Adrian Sarbu

Yes. When I talked about slow, it was a general word. Each market has its own conditions. You have one market where an advertiser is committed and we had quite a significant amount of contracts committed before the end of last year. And now they are slow in starting spending. We had to incentivize them. There are markets where advertisers usually decide in January and February that’s also slow, and we have to incentivize them and we created for short-term various tools to have them spending. And then I would use help by mean help. It’s obvious that advertisers, our clients, are reluctant to spend now because they don’t know how the market will react.

So our action, which I would compare more with the actions which at a scale the government do in order to incentivize spending in their markets. It’s an action, which we took voluntarily. And when you see price adjustments, flexibility in prices, that doesn’t mean the whole pricing system of ours is to be abandon, but we are trying to help advertisers to invest now with less money in the first quarter, higher share of voice [ph], and we assure that they will see the benefit, they will be encouraged their numbers – sales numbers will show the real behavior of the market, and in our markets people still consume.

I would like you to take this into account. And if this will happen, definitely the advertiser will start spending more. Our advantage is we have large, large quantities of inventory. We are by far in our core market, even in Croatia, we started to be a significant provider of inventory. So we can really play with this inventory and optimize every day. That was from now on, yearly contracts, seasonal contracts.

Now there is a very, very active relationship between us and advertisers everyday. So I cannot say slow in this market, maybe slow in this market this week, but next week an action which we put in place would trigger consumption or we may say it’s predictable in this market or was predictable in this market. And one large advertiser decides that we have to pay for his mistakes in assessing the markets or hedging his currencies as it happens in some of our markets and then we have to decide if we really take this job or let him do by his own. The slow is a general word compared to last year. Let’s not forget that last year we had the most spectacular year – season, first quarter in spending due to other incentives which we put in place in the fourth quarter 2007.

Laurie Davison – Goldman Sachs

Okay, thanks very much.

Operator

The next question will come from David Kestenbaum from Morgan Joseph. Please go ahead.

David Kestenbaum – Morgan Joseph

Okay, thanks. Just following up on that last question, can you just talk about where you are in the whole pre-sales cycle? And the Czech Republic a few weeks ago I think you were saying you were 70% sold. But can you quantify where you are now there and also in the other markets?

Adrian Sarbu

David, I just said that nothing in 2009 is like 2008. We were in Czech Republic quite comfortable with a number of contracts signed, but some clients decided to postpone their campaigns. So we had to come back and incentivize them to start earlier. Generally in the other markets, with the exception of Ukraine, we see a slower pace but the same pattern in signing contracts, committing and spending for the first quarter. There is one – there are two exceptions. In Bulgaria we didn’t relaunch our station, which we plan to relaunch in the second quarter. So for us, the spending there is very, very low.

And in Ukraine, where there is no rule today where the currency devaluated dramatically. And as I said, the markets seem to drop. There is no consistency. And it’s absolutely, absolutely subject to talent – ability of your sales force to sell every day as much as possible. And in Ukraine, we have already implemented key principles, which is 100% allowed ratio. So that’s the only way in such a market, which lost completely any rule to sell – to sell at any price. And luckily, we have enough inventory to sell. Unfortunately, the volume in this market is very low.

David Kestenbaum – Morgan Joseph

Okay. And since you’ve started cutting costs, I mean, how have your ratings performed? Can you just comment on that? And then secondly –

Adrian Sarbu

The ratings performed very well, over-performed in these two months. We have just one country where the ratings deliberately were kept low, because we decided to invest less in January and in the first half of February, which is Slovakia. In all of the other markets of ours, we over-performed compared with last year – in the event when we compressed investments in programming. And this is the simple result of the strength of our brand. And very good – I would say, very good, especially in prime time programming decisions.

David Kestenbaum – Morgan Joseph

Okay. And then can you talk about your assumptions? What’s behind your assumptions in the Ukraine? You said a 50% decline in revenue in that market. Are you assuming further softness in your ratings in that market, or are you just assuming that the overall market will decline 50%?

Adrian Sarbu

My statement was about the market. And I said over 50%, not about ourself. In Ukraine, as I said in one of the answers to Wallace’s questions, we are looking to increase our ratings and share starting with the prime time because the Ukraine this year would be a battle of prime times. There are tens of channels, which put their prime time in the market. And there is quite large excess of inventory. So we are targeting increase of our prime time.

We – as you probably know, we made the number of bold moves there from taking the sales in-house, changing the whole management, and changing the philosophy of the programming schedule. And today – and also changing the sales target. We had to deal with incumbents in the markets, which were not interested in changing the sales target or what is in the interest of the advertiser, which is 18 to 54. We did it on our own. And in this target we saw even in February spectacular increases. Year-by-year we have already 3% increase in Ukraine in prime time in this sales target, which is the overall sales target all over the world, 18 to 54.

David Kestenbaum – Morgan Joseph

Okay, thanks.

Operator

The next question will come from Matthew Walker from Nomura. Please go ahead. Again, the next question will come from Matthew Walker from Nomura.

Matthew Walker – Nomura

Hello, can you hear me?

Adrian Sarbu

Yes, we can.

Matthew Walker – Nomura

Sorry. I think that operator sort of confused. Can you – well, first of all, good afternoon. Secondly, can you just answer a couple of questions? One is, the 20% cost cuts that you referred to in the presentation, are you thinking about making those – I'm presuming you’re meaning those are in local currency terms rather than dollars, if you could just confirm that. The second thing is on the 4.5 times debt-to-EBITDA, if you go over that, I guess what you’re saying is that – does anything happen at all when you go through that level? And the third question is, you talked about your potential filing coming up. In terms of the amount of equity that you might need to be able to – I mean, you told about a two-year downturn. You’ve also got the debt repayable in 2012 and 2013. How much equity will you need in order to be safe to keep the whole thing going?

Adrian Sarbu

For the first question, Matthew, the answer is yes, local currency.

Matthew Walker – Nomura

Local currency, great.

Adrian Sarbu

Wallace?

Wallace Macmillan

For the second question, you asked if we hit the 4.5 times debt-to-EBITDA ratio, does that mean nothing. It’s not quite nothing. It does constrain us from taking on additional head office debt. But we are allowed under our covenants still to take home significant amounts of local station debt or to refinance head office debt that’s already pre-existing. So in practical purposes, it doesn’t have any likely impact on that.

Matthew Walker – Nomura

Right. And on the equity side?

Wallace Macmillan

On the third point, the filing is – simply that is a precautionary measure. We haven’t made any decision to issue debt or equity at this stage. But it’s quite possible that at some stage during the course of the next 12 months we may wish to do so. And in the event that we do want to do so, then it’s going to be much easier to go through the process, as you know, you could just watch us through this in the past, with the benefits and with these status, which among things means that we don’t have to go through SEC review, which changes the timing structure of the entire process. So at this stage, it’s simply a technical precautionary measure.

Adrian Sarbu

And let’s not forget the matter that this is an action, which we have to think about in an environment when statements like predict the unpredictable are more and more valid. It’s not about an intention. Today – normally we would not need cash, as we said, but we don’t know what will happen tomorrow and we have to be prepared.

Matthew Walker – Nomura

Okay, many thanks.

Operator

The next question will come from Lisich Glaskow [ph] from KBC Securities. Please go ahead.

Lisich Glaskow – KBC Securities

Hi, good afternoon. A couple of questions. If you talk about corporate costs – I mean, if you talk about cost cutting, does it also refer to the corporate costs shown under the segment EBITDA or the potential for capital these costs is higher? And just confirm that these costs are predominantly incurred in US dollars.

Wallace Macmillan

Well, certainly corporate costs will also be affected by our intention to cut costs. There is no area of the business, as Adrian spoke to, that is unaffected by this. In terms of the structure of our corporate costs, it exists in a variety of currencies. We have, as you know, a London administrative office. And the costs of that office are predominantly in sterling. It also includes a number of other executives, which are based in different markets around our region. And those costs are going to be predominantly in a mixture of local currencies, or in some cases, dollars. External cost that we incur, such as SEC-related legal counsel and – or a variety of other costs that at the corporate headquarters we need to incur as part of in the different markets, can also be in US dollars. But the bulk of the costs at the moment are probably in sterling.

Adrian Sarbu

And one more remark. The indicative 20% doesn’t apply to corporate costs. And the corporate costs will take much deeper cost, much deeper cost.

Lisich Glaskow – KBC Securities

Okay, okay. Deeper meaning like, I don’t know, 30%, 40%, something like that?

Wallace Macmillan

We haven’t got it to a significant –

Adrian Sarbu

I said much deeper.

Lisich Glaskow – KBC Securities

All right. All right. So if your costs any one for 2008, cash costs, excluding the stock option program, were about $44 million. So you can go to $25 million or $30 million in 2009.

Adrian Sarbu

We will do our best to optimize our cost – to minimize our cost, not optimize. We cannot give you a figure. When we give more precise guidance in May, probably we will be able to give a figure for you.

Lisich Glaskow – KBC Securities

Okay. Two more questions. One is, you mentioned answering to one of the earlier questions there was some $20 million one-time cost in Ukraine in the fourth quarter. Does it mean that we shouldn’t believe extrapolating? And if we want to compare the EBITDA loss that you incurred in Ukraine in the fourth quarter, we should kind of take out these costs?

Wallace Macmillan

In fact, yes. We have in Ukraine, in fact, cut our underlying cost in the fourth quarter. The incremental cost that you see there relates to in the main write-down of programming library and also relates to the cost that we had for exiting our relationship with our external sales hubs. And these really are one-time costs in their nature.

Lisich Glaskow – KBC Securities

All right. Great. And the last thing, you mentioned in the presentation that around 70% of costs are in local currency. Is there any differentiation between the markets or we can like apply it for all your current markets?

Adrian Sarbu

Can you hear us?

Lisich Glaskow – KBC Securities

Yes. Hello?

Adrian Sarbu

Yes. We can say we have from 55% (inaudible) depending on the market. There are markets, which use more foreign programming and lots of – the difference is made by the number of hours of foreign programming.

Lisich Glaskow – KBC Securities

And in which markets there is, I would say, the lowest percentage of cost in local currency that you can indicate?

Wallace Macmillan

I don’t have that numbers in front of me just now.

Adrian Sarbu

Probably just to give you an answer, which is not supported by strong – nation, Croatia.

Lisich Glaskow – KBC Securities

All right. Okay, thanks.

Operator

The next question will come from Murray Arenson from Janco Partners. Please go ahead.

Murray Arenson – Janco Partners

Thank you. Good morning. Just a couple of questions. One is, I wondered if you would provide some more detail on the incurrence covenants. It sounds like from your comments that there shouldn’t be any hurdles there with respect to shelf offering on any additional deals to get more liquidity.

Wallace Macmillan

That’s correct. The difference only would be that if we went through the 4.5 times ratio, we would be constrained in taking on additional debt at head office level, at corporate level, at holding company level. And we would still be able to take on debt at local market level.

Murray Arenson – Janco Partners

Okay. And then I wondered in your presentation you took a look at the advertising outlook expecting flat to single-digit declines. And I know you just commented that you’re living in a world where you have to predict the unpredictable. But I just wondered with budgets not being finalized, how comfortable you are with that and what you’ve baked into that, and if you have any assumptions in there in terms of how those percentages would flow throughout the year, if you think it’s going to be pretty steady, if you’re expecting things to pick up later in the year, that sort of thing.

Adrian Sarbu

One of the, let’s call it, specificities of this year is that advertisers didn’t announce budget. Or if they announced budget, they announced that those budgets will not be the budget. So we have to deal with a type of short commitment. And that’s why I tried to explain that for us, every day is a year, because we have to achieve our goals in respect of sell-out rates and every day, week or month, and we have to achieve our goals in respect to targets and sell-out rates and share of budgets. So we cannot say today that advertisers committed to budget, we can rely on it. And based on this budget, we re-forecasted our budget.

We have scenarios with a downside and the upside, and we try weekly to manage our operations inside the scenarios. And as you could see in one chart, which – where we showed the GDP, the GDP – the slide number 10, the range – the range which we foresaw in GDP growth in October, November changed in January, February. The same happened with the advertising budget of the client. When we said, we expect a decline of the market in total spending of 10%, it’s more or less a number which we achieved by really researching the behavior of the advertisers today. Tomorrow, they may get from headquarters other instructions, the market may – the strategies on their decisions on a short term may change, and then we will have to reset these models of ours.

Wallace Macmillan

Just adding to that, what Adrian is really emphasizing is the fact that visibility is very low at the moment. We can look into all of the external predictions about what’s going to happen to the general economy. We can get these uncertain views coming back from the advertisers today, and we are really trying to second guess what this is going to mean for the overall advertising markets in the year. But really, because both we negotiating the contracts in our markets and also the advertisers who are trying to workout what they want to spend, we are accustomed to a period of strong growth, or having to learn new tricks. And that means that this is taking a bit longer to get any real sense of where it’s going. So the figures we are giving you are directional estimates based on a lot of high level information, but less low level and others that we would normally hope to be able to give at this stage of the year.

Adrian Sarbu

And the information differ from market to market. What we can tell you for sure is those numbers will not be better.

Murray Arenson – Janco Partners

Right. So if I could try to ask a follow-up this way, is it fair to say that on a run rate sort of basis that you are in the middle of that range you painted? And if it is, is a run rate even a meaningful number at this point in time?

Wallace Macmillan

I think that it’s really a very difficult question to answer. Lack of visibility means lack of visibility. And we have given you a direction of what we currently believe to be our best information given what we know at this moment. But if economic conditions continue to deteriorate, then the conditions can worsen. We have to take a snapshot of where we are today based on what we have.

Adrian Sarbu

And then we may revisit even our main decision in respect of ratings once the conditions will deteriorate. Probably our competitors will lower their investment; we will lower our investment too. We’ll restructure the way. We schedule – we schedule our programs. We mix our programs and we will go deeper in restructuring our cash cost.

Murray Arenson – Janco Partners

Okay. Fair enough. I appreciate the additional explanation.

Operator

The next question will come from Barry Konig from Cumberland Associates. Please go ahead.

Barry Konig – Cumberland Associates

Good afternoon. Thank you for taking the call. Going back to slide number 12, when you mentioned maximum cash losses in those three countries at $100 million, does that include CapEx and operating losses?

Wallace Macmillan

Yes, it does, Barry.

Barry Konig – Cumberland Associates

And have you –

Adrian Sarbu

And programming costs.

Barry Konig – Cumberland Associates

How do you balance all of those when you start seeing operating losses occur? And how do you balance that with CapEx throughout the year?

Wallace Macmillan

Well, as you – as I said earlier on, we have already in 2008 substantially cut back on the CapEx that we guided to even late last year, saving about $30 million. And we are expecting that our CapEx this year will be below $60 million. And most of that frankly will not be in those two developing markets. The current issue that we have is more a matter of revenue management and cost management. We cannot really decide how much we want to spend on costs, and it is the level of revenue that is going to determine the absolute cash costs in those markets. And so, looking at what we believe to be pretty conservative outlook gives rise to our ability in those markets to our intention, our projection that is unlikely to go beyond the $100 million.

Barry Konig – Cumberland Associates

Can you give us a relative feel for how that compares to 2008 for those three countries?

Wallace Macmillan

Those are just a hunch [ph], but it would have been much less. For Ukraine, the cash costs of course would be substantial because ultimately the overall results in Ukraine ends up being very poor in the year. They would all require some funding, but I don’t have those numbers in hand –

Barry Konig – Cumberland Associates

Okay. When you get a chance, could you give that to us, please? The next question is, in 2009, would Ukraine report in local currency?

Wallace Macmillan

That’s something that we are evaluating, but it’s possible that we may go that way because we are looking at putting our sales contract in local currency instead of in US dollars. And that’s reachable, probably meaning that we have to evaluate a functional currency in local currency (inaudible) rather than US dollars as we have in the past.

Barry Konig – Cumberland Associates

Okay. And then just anecdotally, are there any stories you can tell us about how competitors have been responding to your own cost-cutting and programming changes?

Wallace Macmillan

How competitors have been responding to our cost-cutting changes? We had a similar question on that earlier on, Barry. It’s really a little bit early to tell. I think that all of our competitors are a little bit in the same place as we are in terms of trying to cut costs and trying work out what the revenue base is going to be for this year. We have got one solid advantage in most of our markets, which is that the leadership position that we have give us a lot more leverage and high margins that we have to play with is a much better place to be than the much lower margins that many of our competitors are currently enjoying.

Barry Konig – Cumberland Associates

Okay. Well, thank you very much and good luck in 2009.

Wallace Macmillan

Thank you, Barry.

Operator

The next question comes from Andrew Gunwich [ph] from ASB. Please go ahead.

Andrew Gunwich – ASB

Good morning, a couple of questions. The reduction in cash on the balance sheet from third quarter to the fourth quarter, how much of that was currency as opposed to operating changes?

Wallace Macmillan

The cash on the balance sheet is actually not a figure that we look at all that closely because we regard cash and the liquidity that we have in the form of – another form such as our access to revolving credit facility as being an interchangeable matter. In the course of the fourth quarter, we actually paid down some of the elements of the revolving facility that we have been carrying at the end of the third quarter. And so, we simply reduced some cash and reduced some debt during the fourth quarter. So the actual amount of cash on the balance sheet is which we hold in a number of different currencies, including in part of US dollars, is something which is not meaningful to look at on isolation.

Andrew Gunwich – ASB

Is it fair to say that most of that $107 million is either in pounds, euros or dollars?

Wallace Macmillan

Pounds, euros, dollars, and of course the local station cash balances, which should be held in the currencies of the markets which they use for working capital for cash purposely..

Andrew Gunwich – ASB

Okay. Thanks. The other thing – couple other things. On corporate overhead relating to the earlier question, it’s positive that you are going to cut that as far back as you can. Will you consider giving up the London office or is there a legal reason to keep London open? And the second question on that is, would you consider giving up your US listing and just be a European listed company?

Wallace Macmillan

Well, there is certainly no intention to give up the US listing. And the US listing gives us a lot of advantages in different arena. And with regard to the London office – Adrian would like to have some words on that.

Adrian Sarbu

In the last two years, we became more and more virtual corporate office center. We call ourself as central function. People from various operations and countries join the central office. So, we have a part of this function run from Prague, also (inaudible) from Slovenia. So we cannot – the way we will adjust the size of the London office will be in line with the way we will adjust the corporate costs. We cannot say that we’ll leave London. We may say that all the costs on the corporate side will be adjusted according to our strategy.

Wallace Macmillan

And just one point adding to that. The – certain functions, which are relevant to the London location, which are largely related to our US listings, and because of that we have some obligations from a legal and from an SEC financial reporting perspective, which requires certain skill which are frankly difficult to get in some of our local markets, but which are possible to get in London. And so we will always need to have some element of our London office for the foreseeable future in order to encompass those skill sets that are related to our US listings.

Andrew Gunwich – ASB

I understand, it makes sense. Just two other questions, a follow-up on the Ukraine and the $100 million of losses. If you were to reach $100 million of cash losses, would you still be free cash flow positive?

Wallace Macmillan

Well, that was part of our Q&A as well. What we are looking at simply because of the low visibility of results for next year, it’s a place where I can’t answer that question with any certainty. I think that the takeaway though at this stage is that we are quite confident because of the large liquidity base that we currently have, that we have enough visibility to see through the year and see through following periods. And as I said in my earlier part of the talk, four of our main markets are strongly cash flow positive. But how this year will develop in those markets is still subject to the low visibility we referred to earlier on.

Adrian Sarbu

And Andrew, to be very clear, with $100 million we talked about cash losses and investments in CapEx and programming, not only losses, operational losses.

Andrew Gunwich – ASB

Yes, I heard that question. It was a good question and a good answer. What concerns me on the Ukraine is that the expenses at least even if you back our the $20 million that you were referring to as one-time, the expenses here are above every other country except the Czech Republic and Romania. And of course the revenues are nowhere near there. So, there has to be a consideration and here’s the part of the question, for – if this goes for longer at some point doing any business in the Ukraine might not make sense, if you want your company to be able to grow on the other side of this storm?

Adrian Sarbu

First of all, we said Ukraine, Bulgaria and Croatia, not only Ukraine for $100 million. Second, Ukraine was perceived as the largest market of ours and with the highest potential until last year. Today it’s a market with problems where we have full control, we can operate it the best way we know, and the decisions about Ukraine will be made according to the development in the next month.

Andrew Gunwich – ASB

I understand. Let me ask one last question. If the euro would go to $0.80 against the dollar, what is your strategy for the converts?

Wallace Macmillan

Can you elaborate on the question, please?

Andrew Gunwich – ASB

My understanding is that the converts, which are US dollar converts, the principle is unhedged. So if the – obviously you are not going to produce enough cash flow to pay off that note. You probably will for the other notes, on the euro notes. But if you would have a world where the euro goes to $0.80, what happens? What’s your strategy to deal with that $475 million outstanding?

Wallace Macmillan

Well, the last time I looked, we didn’t actually have to repay the convertible notes for several years. And if the global credit conditions are the same in the four years time as they are today, then we’re probably talking about a whole set of different problems than the ones that we are discussing in this call. So I think that certainly currency fluctuation is something which is going to be affecting both our dollar-denominated result and a dollar denominated cash flows over the course of the coming year, but also over the course of the next four years. And I think it’s a little bit premature to be concerned about other than generate cash through a payment notice in four years time.

Andrew Gunwich – ASB

I see. Okay. Thank you.

Operator

The next question will come from Andrew Wallach from Cumberland Associates. Please go ahead.

Andrew Wallach – Cumberland Associates

Good afternoon, guys. By the way, I don’t think it’s too premature to consider that question. But what I wanted to ask you is on slide 15, you said we foresee EBITDA decline in summer of all of our markets. Could you be a little more specific since some of your – basically since the Czech Republic and Romania are so large relative to the others? And the second question I have is the cost cuts you mentioned, the up to 20%, how soon would that be noticeable on the P&L, or is there a significant lag time for that?

Wallace Macmillan

Andrew, let me take the first question. Just a general statement born of the fact that we have a low visibility at this stage and there are a lot of negative rumors around the marketplace. But depending on the level of advertising sales decline in our marketplace, that is conceivable that we will have EBITDA decline in any of our markets. But we have to say we have got low visibility in what we are doing simply is alerting to the fact that this is a real possibility.

Adrian Sarbu

We may say clear that we’ll have revenue decrease, but EBITDA and the level of EBITDA decreases, so it’s also driven by our ability to manage the cost. You asked about costs, I just said in my speech that in 2008 and 2009 first quarter we will operate under the level of 2008 first quarter, in the event where we have Bulgaria and we have other business units, which we added during the year 2008. So the way – and also I said and I repeat that I will – we are reviewing the cost every week, not month or quarter, and we will try to adjust this cost according to the capability of ours to sell. There is a kind of threshold which we announced here, 20% – if 20% is not to affect our rating. But as I said, again I repeat, it is possible to run our operations even with lower costs, but it is expected that our competitors will invest less, that we will invest less and the share of audience would stay where it is with the lower costs. So we are not restricting ourselves from going under 20% cost cut if there is necessary. But the major cost cut then will apply to the program. And these are commitments for long years and we have to restructure these commitments.

Andrew Wallach – Cumberland Associates

Just one quick follow-up. I mean, you have an upfront type market in the Czech Republic, which breaks in the fall. Should I think about that market as any different than the other markets which have an upfront in the first quarter or do not have an upfront at all, or is it the same game as the rest of them?

Wallace Macmillan

Well, (inaudible) the same game because the – yes, you are right that the upfront starts much earlier in the Czech Republic and we had by the end of last year around 70% contracts under negotiation. Now these contracts have spent money at that time and a number of advertisers have come back to see if they could renegotiate contracts. Until advertisers stop spending significant amounts of money, it’s very difficult to actually foresee what will come in that market or in other markets in the course of 2009. And so, as they are revisiting what their spending tactics might be, we cannot be yet confident in the level of revenues we are going to have in that marketplace. I think that – I hope that by the time we talk to you in two months time at the end of our first quarter, we may be able to get some better visibility to give you an update then. But much as I would love to give you a clearer picture now, I can’t give you any more visibility than we actually have.

Andrew Wallach – Cumberland Associates

And just what recourse do you have if someone has a contractual obligation and just does not want to live up to it?

Wallace Macmillan

This varies by market. In some markets, there is a legal contract and you could theoretically go back to your customers and sue them and take them to court, although it’s generally not a good long-term measure to take with our customer base. And in the Czech Republic, in fact, it is not a legal measure, but the structure of the Czech Republic, as in all of our other markets, is that our pricing – the pricing that we offer under contract is contingent on the volume committed. If a customer then does not fulfill his contract and spends less, then the pricing increases significantly for the amount that he has already purchased. This is something which is very relevant once you get midway through the year they have already committed to with their spending. But in a market like the Czech Republic, it means that there is less of a constraint at the start of year before significant moneys have been spent.

Adrian Sarbu

Let me add something. This type of tool was valid until now. Today, we have different sales tactics, different sales qualities market-by-market. And as I said, we are interested in supporting our customers to spend, in encouraging them to spend. And if it’s necessary to give them an incentive for a short period of time in a month where they usually don’t spend, in a period when they have mixed feelings about spending or waiting a couple of weeks, we prefer to support them and encourage them to spend. Our main goal, and Czech Republic is an example for this, is to keep the market moving and to keep the advertising spending and to keep them and to encourage them to spend. And in this respect we made steps and we had very good, very good response from our clients. So it’s not about penalizing. Penalizing was – there are penalties. Clients are aware of this. We are with more incentives. We made the penalty suffer because we want to know more which will be the real budget. But the real economy shows us that we have to support these advertisers to spend. And once we have the inventory and once we are able to do this on a short term would be as flexible as necessary.

Andrew Wallach – Cumberland Associates

Could I ask one more question? The – how are you – is it realistic to think about local currency borrowing against station revenues? You’ve mentioned that a couple of times on the call. Is that something that’s feasible in this environment?

Wallace Macmillan

It is feasible. It’s certainly conceptually feasible and we think that it may be realistically feasible in some of our markets. We already have local currency revolving facilities in several of our markets. And in fact, it is conceptually much easier for banks to lend locally against station operations than essentially when they are further removed from the operating asset of the company.

Andrew Wallach – Cumberland Associates

And would you contemplate using such borrowing to buy back your converts?

Wallace Macmillan

We would certainly contemplate it, but there are a lot of things that we would contemplate. So that’s not something that I would be able to comment on as if it was an objective. But we are certainly aware that our converts and indeed some of our other debts [ph] is trading today at very favorable prices. And if we were comfortable we had adequate liquidity to see us through the next couple of years, then that is something which could be a good return on investment and a good way of managing our balance sheet.

Adrian Sarbu

Andrew, we made a statement here about liquidity and reducing gearing. I think this is enough answer for you.

Andrew Wallach – Cumberland Associates

Okay. Thank you, gentlemen. Good luck.

Wallace Macmillan

Thanks, Andrew.

Operator

The next question will come from Grange Johnson from LaGrange. Please go ahead

Grange Johnson – LaGrange

Hi, guys. Just a quick follow-up question. I just want to get a sense on sort of capital use and allocation. You filed yourself, I understand, for liquidity. But I think at least the question that I’m getting via email from some of the other investors is kind of why issue equity here when you could – there’s three countries losing $100 million. I mean there are ways to improve liquidity without issuing stock at $6. So I think a lot of your shareholders want to know is why you even consider. I understand there could be Armageddon. I understand we could be in the next Great Depression. But even though sometimes we feel like that we’re actually currently not in a next Great Depression. So, I really want to get a sense for how you balance that, given that you have countries that could be shut down, sold for nominal value that wouldn’t require shareholder dilution. So, it’s really a question for Adrian. And I think you show would need more clarity given that you just leave it as a bullet point out there. I don’t think you really adequately explained it yet why that bullet point is there, and I think you should. I think that’s what you need to do.

Wallace Macmillan

Grange, let me take that up, and then if Adrian’s got any follow-up remarks, I’m sure that he’ll make them. The purpose of this show is not in relation to any current plan to issue equity or debt. It is simply a tool that gives us flexibility where we to decide over the course of the next year that we wanted to issue equity or debt, having to shelf [ph] that would make it easier to do so. If we do not issue the shelf, we lose that flexibility in early March. It is purely a technical precautionary measure. In the event that we decided, we did need to raise additional funds, we would look at all of the different options and decide then on what the best way of doing so would be. I will pass you on to Adrian.

Adrian Sarbu

We tried to be quite clear in our statement, Grange, using the word core operations. And I think this is clearly understandable that in an event – an event when we will have to make a tough decision, we will protect our core operations.

Grange Johnson – LaGrange

Understood. I understand you want to protect the core operations. I’m just saying if you look at your market cap of $200 million, shutting down $100 million of burn, to me it seems a lot more protective to your shareholders than letting a $100 million of burn go on indefinitely. I mean it just seems to me that that’s a very efficient way effectively of raising capital.

Adrian Sarbu

I take this as a suggestion as we took everything you told us and be convinced that we all think of everything.

Grange Johnson – LaGrange

And then just as a follow-up question on the –

Adrian Sarbu

I cannot imagine you want me to tell you that based on your suggestion we’ll make a management decision tomorrow and recommend to our Board to shut down our operations. I don’t think you expect me to give you the answer. Our operation has a complex number of factors here and we are trying to optimize all the inputs and to preserve value for us and increase value. So, if you think it’s the simplest way to cut or sell assets, we think it’s a solution, but it’s not the solution today.

Grange Johnson – LaGrange

Well, I couldn’t agree with you more. I’m just saying you have a shelf – let me re-clarify. I think when investors see a shelf, they assume that equity will be issued, at least I think that’s what many investors see. So it’s not a question of shutting down now. It’s a question of should you get to the point later on and you’re still burning $100 million of cash through non-core operations and you’re faced with the choice of issuing equity or perhaps shutting down $100 million burning operation. My preference and I think a lot of other investors, but I’ll speak for myself, would be to shut down the (inaudible) operations rather than dilute our holding in your core operation. That’s all I’m trying – that's the only point I’m trying to make – only point I’m trying to make.

Wallace Macmillan

Thanks, Grange. We understand that. I can only reiterate that this is a technical matter to (inaudible) flexibility, but – so that’s it.

Grange Johnson – LaGrange

And just a question, was there some existing shelf you had to refresh or lose, just to be clear?

Wallace Macmillan

No, it’s not. It is the fact that – in the event that we have not – buy at some stage in March without a shelf, then we will lose the flexibility to do so with which we stated. That was simply a matter of going between the date of our filing of the 10-K and March. It is a purely technical matter. Please read nothing else into it.

Grange Johnson – LaGrange

Okay, thanks very much.

Operator

The next question will come from Andrzej Knigawka [ph] from ING. Please go ahead.

Andrzej Knigawka – ING

Yes, this is Andrzej Knigawka for ING. Good afternoon. Just two questions, maybe three questions. Are there any (inaudible) commitments on your part in 2009 that would represent drop [ph] on cash this year? I know that there are put options of Bulgarian partners for the Bulgarian station, but this is a record coming on only in 2003 – correct me if – 2014, correct if I’m wrong. But are there any other commitments coming this year that could represent a drop on the cash?

Wallace Macmillan

Hi, Andrzej, this is Wallace. We obviously do have commitments, but a lot of that time the commitments that we have, which we set us in note 21 on page 154 of our K, are predominantly station programming right commitments, some operating these commitments, that kinds of things. But these are all normal course of business commitments.

Andrzej Knigawka – ING

Right. And specifically on Bulgaria, can you give us like a full year EBITDA number for that station? And what was the CapEx and programming investment in Bulgaria for the full year last year?

Wallace Macmillan

For the full year last year, the EBITDA for Bulgaria – the EBITDA loss for Bulgaria was $10 million. And I don’t have a CapEx figure on these at hand [ph], but I’m being reliably informed that it was about $5.5 million.

Andrzej Knigawka – ING

Right. Just looking at the filings here – but the $10 million was for just four months, right, or like (inaudible) of the two consolidated Bulgaria? And I was asking about like entire 2008.

Wallace Macmillan

You can’t submit that extrapolation because this was very much a start of operation at the time which (inaudible). And we haven’t yet given guidance by station for 2009.

Andrzej Knigawka – ING

All right. And my third question is on informant loss for the fourth quarter, can you give us a breakdown of what was the major items that were written down in that impairment? And you also mentioned that you don’t rule out several impairments coming in later this year. Can you just give us an indication on which assets could be (inaudible), and on what condition this impairment could materialize?

Wallace Macmillan

A lovely question, Andrzej, but basically for the assets that were written down were predominantly goodwill and some other intangible assets in Ukraine and in Bulgaria. And if you – but the largest meat and potatoes of it was the goodwill in Bulgaria, Studio 1+1 (inaudible) which has all been written down to zero. And in terms of the potential for this happening in the future, I think every company in the world that is carrying any goodwill or intangible assets on the balance sheet knows the potential because this comes down to a valuation, which is a mathematical equation, which is a business forecast to which the cost of capital is applied. And if economic conditions would continue to deteriorate for any of our markets and we have to provide business forecast sufficiently negatively, then if the cost of capital in any of our markets were to rise sufficiently strongly will be possible in our case or for any other businesses that further assets would come under impairment. There is a new base line that’s useful to answer your question in more detail.

On page 97, 98, 99 of our K, the luminous [ph] document with a lot of information about the impairment, one of which is a table which goes through by market looking at various variables by market to see what additional types of assets may come under consideration for impairment, driven by different sensitivities of different elements of a calculation. It’s theoretical, but it’s indicative, center part of US GAAP presentation in these cases. But if you tell me by how much my current projections are liable to deteriorate, what’s going to happen to cost of capital, then we can do a calculation. So it’s a theoretical possibility.

Andrzej Knigawka – ING

Right, okay. I would certainly refer to these pages. And the final question is, I know you were kind of reluctant to give an indication of the sales figures for January and February. But in fact, in our region, it’s not that matters much more than January and February, and obviously you won’t be able to give a March revenue. But can you at least like give us some indication like what the bookings look like for the March season for Czech Republic and Romania, what kind of declines in the bookings are you seeing for specifically (inaudible) for your two most important markets?

Wallace Macmillan

Andrzej, I completely understand your anxiety with regard to getting more information about the first quarter. But it’s a slightly off situation where having (inaudible) our visibility is much weaker, that includes for the first quarter than it normally is at this stage, that we should be trying and giving more guidance than we normally do at this stage of the year. And so I really cannot grill down to that question, but I would take great joy in telling you what the answer at the end of April when we publish our results.

Adrian Sarbu

Andrzej, keep in mind what we said that the first quarter would be weak.

Andrzej Knigawka – ING

Right. Okay, that’s fair enough. Thank you very much.

Operator

The next question will come from Lisich Glaskow from KBC Securities. Please go ahead.

Lisich Glaskow – KBC Securities

Yes. Actually my question has been answered already. Thanks.

Operator

The next question then will come from Andrew Gunwich from ASB. Please go ahead.

Andrew Gunwich – ASB

Yes, thanks for letting me ask one more. I noticed, Wallace, that you drew the Slovenia and the Czech local facilities to their maximum I guess in February – or January, February. Maybe you addressed it earlier, but if you didn’t, could you just confirm that and tell me what the cash was for, just an extra liquidity cushion I imagine?

Wallace Macmillan

Well, we actually drew down all of our facilities and – drew in all of our facilities in February. And the reason, we don’t have any desire in order to spend this cash. And we’ve simply been advised that it is in current condition and because of all of the discussions that’s out there based on banks around the world, we’ve been advised that – and it’s a good process to draw down revolving facilities everywhere. And so based on that (inaudible).

Andrew Gunwich – ASB

As usual. That would be another 86 million or so in local currency debt, which I assume you will keep in local currency cash. Is that the way to think about it?

Wallace Macmillan

It is local currency debt, which we will put into whatever currency we think is best and positive [ph], which is not necessarily local currency.

Andrew Gunwich – ASB

Understand. Good, thanks for the clarity.

Operator

The next question will come from Nancy Utterback from European Credit. Please go ahead.

Nancy Utterback – European Credit

Yes, hi there. A couple of questions from fixed income analyst point of view. Looking at the S&P report of last November when you were put on negative outlook, S&P says that you do have some maintenance covenants on your revolver, which I wondered if you could expand upon. And then secondly, it made mention of an EBRD loan that apparently having drawn on it, you are then restricted from using all of your revolver. Could you possibly provide some clarity on that? And then secondly, could you just take what your general hedging policy is with regard to interest and principal payments?

Wallace Macmillan

Sure, Nancy. It’s a slightly shaky line. So I might have some more clarity on the question later on. But just on the first one, yes, some of our local revolvers do have made them covenants based on ratios, based on the local markets where those revolvers are drawn out. And we have got plenty of headroom in each of those markets based on those revolvers, but it is not a constraint or an issue that concerns us. And –

Nancy Utterback – European Credit

It’s not just one revolver, it’s a series of revolvers?

Wallace Macmillan

Yes, our local revolvers have generally made them covenants in the local markets where they are drawn. But there is plenty of headroom. Our businesses, which are all based on local currency in those markets and therefore not impacted by the foreign currency issues that can affect our consolidated EBITDA we just put in US dollars, and are all performing strongly and with plenty of headroom under those covenants.

Nancy Utterback – European Credit

I see. That’s with local bank spend and – so that would be the perhaps the credit concern about those banks, which is why you are growing?

Wallace Macmillan

In theory, yes. Not for any specific bank that’s (inaudible), but it was a good point of process in the current condition of the world to draw down on the revolvers. And so that’s why we did it.

Nancy Utterback – European Credit

All right. So you’re not alone in there?

Wallace Macmillan

Sorry, you just asked a question something to EBRD, but I didn’t quite catch it, the lines are bit scratchy. Could you please repeat it?

Nancy Utterback – European Credit

Well, the way the S&P report reads, it says that having drawn on this EBRD loan for $115 million, you’re then limited to some extent on your revolvers. It doesn’t say any more than that. And I’m just trying to get some clarity as to what that meant.

Wallace Macmillan

This would be news to me. Maybe if you send to me that extract, I can have a look at it. But I’m not aware of that limitation that (inaudible).

Nancy Utterback – European Credit

I see, thank you. And then I was just asking the question about hedging.

Wallace Macmillan

Hedging – but basically we don’t do a lot of hedging. We try and take out – when we make investments where we can natural hedges for a balance sheet perspective by trying to in the main take out debt in the European currency, which is going to be moving more in parallel with the local currency than our operations generate cash in. The one piece of formal count of hedging that we have put in place is at the time of the Czech Republic, we took out effectively a piece of currency swap, which would cover, effectively [ph] fix the exchange rate for the interest payments on the euro debt that we have to make to – that we took out to buy the Czech Republic. And it pictures the Czech Republic to euro interest rate on the interest payments that we’re getting out funded by the Czech Republic to meet those euro denominated interest liabilities. So that interest flow is hedged. And beyond that, we don’t have any other form of hedging in place. We have looked at from time to time at hedging our, for example, dollar or, in some cases, euro programming commitments, but these are quite variable and volatile. And other than from time to time deciding to hold some of our surface constant dollar accounts, we haven’t any formal hedging structure in place to cover that.

Nancy Utterback – European Credit

All right. And so that applies to both the floating rate notes and the fixed rate bonds?

Wallace Macmillan

That’s right. In effect the – well, let me first cover the Czech Republic. We had a slightly smaller floating rate note, and we were looking at covering the interest costs of our – there has actually always been some horrendous detail within our K document that we have actually had covered. I would just say the bulk of the interest payments on our euro denominated notes in income coming from the Czech Republic and fixed exchange rate essentially as of the date that we put out those notes and bought the Czech Republic.

Nancy Utterback – European Credit

Thank you.

Wallace Macmillan

(inaudible).

Operator

This does conclude today’s question-and-answer session. I would like to turn the conference back over to Adrian Sarbu. Please go ahead.

Adrian Sarbu

Our conference is attended by 164 guests, which is a record for us. The lower is our share price, the higher is the number of guests. Thank you for joining us and I look forward to talking to you in the near future.

Romana Tomasova

We appreciate your interest and we appreciate your support. And as always, if you have any additional questions, we will take them online. So don’t hesitate to call me or Wallace or Adrian. Good bye.

Operator

Thank you very much for participating in the Central European Media Enterprises fourth quarter earnings conference call. This concludes today’s event.

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Source: Central European Media Enterprises Ltd. Q4 2008 Earnings Call Transcript

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