CTC Media, Inc Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 6.13 | About: CTC Media, (CTCM)

CTC Media, Inc (NASDAQ:CTCM)

Q4 2012 Earnings Call

March 06, 2013 8:00 am ET

Executives

Ekaterina Ostrova - Director of Investor Relations & Corporate Communications

Boris Podolsky - Chief Executive Officer

Nikolay Surikov - Chief Financial Officer

Analysts

Edward Hill-Wood - Morgan Stanley, Research Division

Anastasia Obukhova - VTB Capital, Research Division

Daria Fomina - Goldman Sachs Group Inc., Research Division

Anna Kurbatova - BCS Financial Group., Research Division

Olga Bystrova - Crédit Suisse AG, Research Division

Nick Robinson - Renaissance Capital, Research Division

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

Igor Semenov - Deutsche Bank AG, Research Division

Operator

Good morning, and good afternoon, ladies and gentlemen. Welcome to the CTC Media's Fourth Quarter and Full Year 2012 Results Conference Call. [Operator Instructions] This call is being webcast and an audio version of the call will be available on the company's website. The call is also being recorded for replay purposes. I will now hand over to the call to Katya Ostrova, CTC Media's Director of Corporate Communications and Investor Relations.

Ekaterina Ostrova

Thank you, operator. Joining me on today's call is Boris Podolsky, CEO of CTC Media; and Nikolay Surikov, our CFO. Boris and Nikolay will run through the key operating and financial highlights, first of all, and then, as always, we will move to the Q&A session.

We trust that you have received our earnings press release that was issued earlier today. If you haven't got a copy of the press release, it is available from our website at ctcmedia.ru. Please refer to the press release for the reconciliation of non-GAAP measures to the most comparable GAAP measures. And the live webcast of today's call is also available from the Investor Relations section of our website.

Before we begin today's call, we would to remind you that this call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, economic and competitive environment, regulation and availability of resources. Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements based on a number of factors and other risks, which are more specifically identified in our filings with the SEC. And now I will hand the call over to Boris for his comments.

Boris Podolsky

Good afternoon, everyone. Thank you for joining us today. We had a record year, with group sales, for the first time ever, exceeding $800 million. Our consolidated revenues were up 10% year-on-year in ruble terms, and we maintained our share of Russian national advertising market at 18%.

We also delivered a stable year-on-year adjusted OIBDA margin of 32%. We sold 97% of our Russian channels' advertising inventory for the year at higher prices than in 2011. We have a stable blended power ratio of 1.5.

Inventory levels were up due to the substantial audience share gains by our smaller Peretz and Domashny channels, as well as due to the overall increase in the TV viewership in Russia. All of our channels also were extremely successful in selling sponsorship to advertisers, with such sales significantly outperforming the advertising market and our total revenue growth.

So let's now look at our Russian channels' performance. Overall, fragmentation continued to influence television landscape in Russia, and the combined viewing share of the top 5 channels was down 10% year-on-year. CTC Network, as one of the 5 leading broadcasters, also lost somewhat in share. On the contrary, total share of cable channels increased by 9% last year. Nevertheless, in 2012, CTC Media, as a group of Russian channels, has moved to the second place in 6 to 54 audience share, up from #4 in 2011. In the 10 to 45 age segment, which is especially important for the advertisers, CTC Media maintained second place among the Russian TV colleagues.

Domashny and Peretz both had a record year and delivered their all-time high annual average audience shares. Those outperformed the Russian television advertising market in terms of revenue growth than [indiscernible]. In 2012, CTC Network launched several outstanding premieres, which were ones of the most successful launches in the past few years. Projects like Kitchen and the Eighties will be core for the CTC programming grid going forward, and we are very excited about discovering these new formats.

CTC Network's average target audience share decreased last year, which was primarily a result of absence of premieres in summer, as well as audience fragmentation and increased competition from the news channels. As you know, CTC has recently switched to a more narrow 10 to 45 target demographic. Notably, in this commercial-attractive age group, the channel maintained its position of the third most popular growth category in Russia last year.

Looking into 2013, the channel had a solid start, and its target audience share is stable compared to Q4 of last year. The new episodes of our Eighties series and rerun of our successful Kitchen series in January and February were the most-watched shows on the Russian television in their respective prime time slots. Due to the content investments we were making in the past, we now have a strong and diverse pipeline of premier projects for the remainder of the year, both for prime time and off prime time slots, which should enable us to build a competitive programming schedule and to strengthen CTC's network market position. We currently have close to 100% of prime time hours of content already contracted for 2013, which gives us confidence in terms of library capacity.

Revenues for -- now moving on to our other operations. Revenues for the CIS Group were up 33% in dollar terms. Channel 31 in Kazakhstan significantly outperformed the estimated 11% growth of Kazakh television advertising market and took further revenue share. Our sublicensing revenues were up 50% year-on-year, reflecting increased sales of content to broadcasters in Ukraine and Russia.

Revenues for CTC-International almost tripled in 2012, primarily due to the channels' footprint expansion. Our promising digital media segment also nearly tripled its revenue last year. Therefore, all these business segments are growing at a substantially higher rate than the television advertising market in Russia. They also increased their combined contribution to the group sales from 5% to 7% year-on-year.

Now talking about operational highlights. First of all, I would like to say a few words about a number of recent management changes. Over the past several months, we have strengthened the management team by hiring top-performing managers from the market, as well as via internal promotions. This includes the new head of content production; new head of Domashny channel; new head of strategy, our new CFO; new head of marketing; and new head of HR and IT.

Now switching gears to another very important issue of the digital transition in Russia. As you know, CTC and Domashny once wanted to be included into the second digital multiplex, and we paid a fixed license fee of total of $2 million in the end of last year. We are now in the advanced stages of discussing the details of the digital distribution agreement with Russian television and radio broadcasting network and are expecting to sign it in March. We also anticipate to start making payments for the multiplex distribution in the second half of 2013. Until the agreement is finalized, we cannot quote any specific numbers but estimate that the digital distribution cost this year will not exceed RUB 300 million combined for CTC and Domashny.

Also, 2 days ago, our Board of Directors approved the new equity incentive plan, which will be submitted to the stockholders for approval at the 2013 Annual Meeting. We plan to provide for the grant of stock options to acquire up to 2.5 million shares of common stock. The board also approved the initial round of 2 million shares or warrants. The guarantee -- the guarantees will be entitled to receive shares of common stock at no cost upon the satisfaction of performance-based vesting conditions over a period of 3 years from the grant date. Exercise will be subject to the condition that the closing price of the company's common stock has exceeded $12 per share or placed 10 trading days prior to exercise.

We believe that this plan will provide appropriate additional incentive to our key employee. In connection with the new stock option plan, the board has also approved an open market stock repurchase program for up to 2.5 million shares.

And finally, moving on to the outlook for the year. We currently expect the Russian television advertising market to grow by up to 10% year-on-year in ruble terms, and the Russian TV advertising revenues to grow in line with the market. Our Russian channels' national inventory is already approximately 80% contracted for 2013 at higher average prices than last year.

As for our sublicensing digital media, CIS and CTC-International revenue, we anticipate them to grow faster than our Russian TV advertising sales. We will continue to invest in content, but it's our objective to keep programming expenses under control and to grow them not faster than the revenues on the group level. We'll also expect to deliver an OIBDA margin similar to the 2012 level of 32%.

On that note, I will now hand the call over to Nikolay, who will walk you through our financial performance and position in more detail.

Nikolay Surikov

Thank you, Boris. Good morning, and good afternoon, everyone. First of all, I would like to highlight that currency fluctuations impacted our reported used GAAP results last year. The Russian ruble depreciated by 5% against the dollar during 2012. We, therefore, posted only 5% revenue growth in dollars, compared to the 10% revenue growth in rubles.

Now since Boris has already covered the top line performance, let's move on to the cost development. As you know, due to the expected transition to digital broadcasting starting from Q4 2012, we are amortizing the remaining value of our analog broadcasting licenses, so you will see additional increases in our amortization expenses over the next several years. Thus, in Q4, we recognized additional amortization expense of $4.6 million. More detailed information on the amortization schedules is available in our earnings press release that was issued earlier today.

Also, let me remind you that in the third quarter of 2012, we incurred $82.5 million of one-off noncash charges related to the impairment of our analog broadcasting licenses. Therefore, excluding the nonrecurring items, our total operating costs last year were up 7% in dollar terms and 12% in rubles. The adjusted operational expenses growth was mainly driven by the increase in the SG&A and programming costs, partially offset by lower stock-based compensation expenses. Since most of our expenses are ruble based, I will discuss changes from the cost items in our local currency terms. SG&A expenses were up 17% in rubles for the full year. The increase mainly reflected high compensation payable to Video International, due to growth of our Russian advertising revenues, higher payroll costs as a result of increased headcount and growth of advertising and promotion expenses. The latter was due to the CTC Channel logo redesign; more expensive Peretz advertising campaign; increased new media marketing expenses; and high promotion costs in Kazakhstan, associated with the in-house content launches.

Programming costs were up 14% in ruble terms for the full year. This reflected the more expensive content mix for CTC and Domashny and, to a lesser extent, Channel 31.

While we had fewer hours of prime time premieres on CTC in 2012 compared to 2011, we aired a high number of hours of foreign movies in response to increased competition and due to the expiration of certain licenses. We also saw growth in cost per hour for Russian series and sitcoms. High programming expenses for Domashny channel were mainly due to more expensive foreign series and new Russian content launched during the year to support the channel's increased focus on younger female demographics. This definitely resulted in audience share gains.

Content costs for Channel 31 were up primarily due to the diversification of the programming mix, resulting in an increased number of channels, loyalty and volume of locally-produced content. Our effective tax rate, when adjusted for one-off items, was 33% for the full year, down from 34% in 2011. This was primarily due to decreases in stock-based compensation expense as a percent of pretax income from the recognition of certain foreign tax credits that will be deducted from our U.S. income tax. In 2013, we expect our effective tax rate to be back to a more normalized level of approximately 35%.

Moving to our cash flow and balance sheet items. Our net cash flow from trade and activities in 2012 was up 36% year-on-year to $158 million and reflected the net effect of increased advertising sales and decreased income taxes paid, partially offset by increased programming payments. The level of our cash investments and programming rights was up 7% for the full year in ruble terms. This is below our previously expected growth rate of 10% to 15%, due to deferral of payment time for certain content for fourth quarter of 2012 to 2013.

Capital expenditure was down year-on-year at $16 million, which represents only 2% of our revenues. Key projects we have invested in this year include the refurbishment of our new office space in Moscow and purchases of additional cable connections from Mostelecom. In 2012, we acquired several regional television stations in Russia for $4 million and paid out cash dividends of $82 million. We, therefore, ended the period with net cash of $173 million, 54% higher than at the end of 2012 -- 2011.

Free cash flow was up 48% year-on-year to $142 million. The main reasons for the growth included increased revenues and deferral of payment for certain content that I have mentioned earlier. So all in all, we remain a highly cash generated business with high cash conversion ratio, strong balance sheet and low levels of capital expenditure. For 2013, we expect our CapEx levels to be similar to 2012 at around $15 million.

During 2013, we intend to pay our total dividends of $0.63 per share or up to $100 million in the aggregate, which is a 21% year-on-year increase compared to 2012. This reflects our philosophy to return surplus free cash flow to shareholders. The board has also approved a first quarter dividend of $0.15 per share, approximately $24 million to be paid out at the end of March. Now over to you Boris.

Boris Podolsky

Thank you, Nikolay. And we'll now -- we'll begin to open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Edward Hill-Wood.

Edward Hill-Wood - Morgan Stanley, Research Division

I've got 2 questions, please. Firstly, you say, as before, that you are expecting to agree -- or the transmission agreement with RTRS in March. Could you just confirm that you're 100% likely to sign Domashny and whether or not there's still -- or whether or not there may be a debate about that? Or debate of the issue is basically terms? I mean, is that the way very firm commitment to sign Domashny up? And secondly, could you give us more clarity now on the -- if you have one on the plan for Peretz in terms of the new plan for mitigating and protecting this audience in the absence of being signed up to the second multiplex? And secondly, just in terms of the guidance, the 10% broad advertising guidance, are you assuming in that, that all 3 channels have audience decline in the year and there is a further increase of power ratio at all? Or are we expecting to be broadly flat?

Boris Podolsky

Okay. Thank you, Edward. So the question on the first one, it's an easy one. At this point, we intend to sign agreements for the digital transmission for both of our channels, for CTC and Domashny, according to the terms of the license. And we have said before, we continue to evaluate the information as it comes forward. And at this point, we have no reasons to change the original decision, having those channels into the multiplex. On the guidance, actually, although we do not guide the audience share numbers per se, I have to say that we are not obviously counting on decreasing the audience share for any of our channels in 2013. Yes, this market is very competitive, and that's a very challenging task we have in front of us. But we are not in contemplating or we're not contemplating the decrease of audience share in our guidance numbers.

Edward Hill-Wood - Morgan Stanley, Research Division

Okay, great. And on the -- going back to the first question, have you had time to assess the new plan or plan for Peretz in terms of protecting its audience through the migration to digital?

Boris Podolsky

Well, yes. We are looking into the -- there are 2 options, basically, as I think we discussed before. One, the -- #1 is actually to switch totally to cable and satellite. And the real question is, what is the penetration the channel can get with this kind of sort of distribution? And the other alternative would be is, there is a certain multiplex, which, according to our understanding, is definitely going to be launched. And we are not disregarding the opportunity for Peretz to be part of the third multiplex channels. So both of those options are being considered at this point.

Edward Hill-Wood - Morgan Stanley, Research Division

Great. And one just one, if I may. Could you just give us an idea of when you expect advertising in the first quarter to be broadly similar to full year guidance?

Boris Podolsky

Edward, I don't think we actually have the numbers yet, but I think you're probably close to the truth. That should not be too far from what the full year should we expect, around 10%.

Operator

Your next question comes from the line of Anastasia Obukhova.

Anastasia Obukhova - VTB Capital, Research Division

I have a question on the following. Have I understand correctly that you are -- in your 32% EBITDA guidance for 2013 already also include this RUB 300 [ph] million of digital licensing or transmission costs? And are these costs should be aided to 2000 -- to $25 million charges for analogous signal you already incurred? So I have to sum it up, actually. And in terms of the your top line, do you -- or for the fourth quarter, what are the sources of this license revenue's pick up? Did you find new partners? Or do you think this trend is recurring or not? And the third question, actually, this is kind of follow-up from the first one. I took your EBITDA guidance of -- margin guidance of 32%. And assuming the rest costs growing like 10% and the additional charges for the digital licensing transmission costs, it means that your programming costs should be growing single digit or high single digit, if you want. Do you think it's realistic, given that you're operating in a very highly competitive niche, both audience wise and both format wise?

Boris Podolsky

Speaking about the first question, yes. We included these expenses for the digital transmission to our guidance, and we still have to incur expenses for analog transmission. So for the first question, both answers are, yes. We included them into our guidance.

Nikolay Surikov

Yes. Anastasia, sorry, on your second question, the top line growth, you are breaking up, so I'm not quite sure I heard you. Can you repeat that one?

Anastasia Obukhova - VTB Capital, Research Division

Sublicensing -- I am -- the sublicensing revenue source, was it like a grow some long-term contract concluded for sublicensing revenues? Or is it -- can be a recurring item? Do you think that it's going to last for this trend to be pronounced in 2013 as well?

Nikolay Surikov

Yes, I understand. With sublicensing revenues, there is no unfortunate such thing as a long-term trend, I mean, although we would like to set one. Basically, the one you have to understand, this is a very opportunistic source of revenue to us as we have more successful projects or the projects that may be of an interest to our counter-parties. Obviously, this line is broad. But I would not expect that to have an exponential growth in 2013 versus 2012. And I definitely would not use any given quarter as a representative for the model or anything of that nature, so it's always opportunistic. We definitely have more projects in 2013. We will market them in Ukraine, which is our major source of sublicensing revenue and in Russia as well. I think you, at least, should be counting on the sublicensing revenue to be stable. And if we can't, to move our growth.

Anastasia Obukhova - VTB Capital, Research Division

Yes. And the third one, please?

Nikolay Surikov

Yes. The third question was with respect to programming expense and its predicted growth for the next -- for 2013. Yes, we believe that it's realistic to maintain single-digit growth with these expenses. So we believe in it, yes.

Anastasia Obukhova - VTB Capital, Research Division

Can I have a follow-up question? Do you think -- or are you afraid to repeat the story of 2009 or '10, when the company was heavily under-investing into the programming expense. Thus, of course, delivering strong margins, but it was really -- the impact was, of course, delayed and resulted in a disastrous top line 2011.

Boris Podolsky

Yes. Anastasia, it's Boris here. No, we are not. Because if you want to talk about investment as the programming, the line you should be looking at, actually, the cash spending. Because when you're looking at the P&L, the way the financials work, we show in P&L only what we have on air. It has nothing to do with the development and pipeline of products we have in the works and on the shelves. So there are 2 separate things. And in terms of spending cash, investing in development of new shows, we definitely are not decreasing anything there.

Operator

Your next question comes from the line of Daria Fomina.

Daria Fomina - Goldman Sachs Group Inc., Research Division

I have 2 questions. First one is on your digital segment, which is, I'm thinking, why is it [ph] your low share of your revenues but is growing quite rapidly? I have a question on your monetization strategy. How does the -- where are you generating the growth and -- of revenues? How are you monetizing the portals? Where do you see that changing? And also, where the growth is at the moment is -- this year, sorry. It happened on the back of traffic growth, or you tweaked the monetization there of the portals? And the second question is, I'm sorry, on the guidance as well, on the profitability. As I understood, in those 32%, you include the cost of DTT as you just mentioned. So where do you expect -- what segment in your businesses do you expect to offset this incremental RUB 300 million costs, so that you could maintain the margins at this stable level? That's it.

Boris Podolsky

All right. On your first question, the new media strategy, as I noted in my opening remarks, we actually have a new strategy person, and that's one of the questions we will be obviously debating over the coming months. But in -- generally, I suppose I can answer it at this point as well. If you look at the combined unique users, all of our sort of online users we currently have, and that includes the Videomore, Domashny portal and the websites of our channels. It's over 8 million unique users a month, so -- which represents fairly interesting to the advertisers in terms of size of the audience. So our strategy, going forward, will be grow this number as much as we can, so we can obviously build a bigger base of loyal users of all of our Internet sources, whether it's the Videomore or the portals or the channel sites by all means possible. And by that, grow our revenue from the Internet segment, which is obviously outperforming the total growth of the Russian TV advertising. So I think, in a very simple word, that's -- it seems to be what we will be trying to do over this year and going forward. As we develop this in more details, we will obviously keep investors updated on our plans.

Nikolay Surikov

Yes. Talking about the -- our cost structure. In order to offset the net effect of these additional digital expenses, we are planning to optimize all our other cost lines, like SG&A, direct operating as well as programming expenses to be more efficient in them. So this is our intention for this year.

Operator

The next question comes from the line of Anna Kurbatova.

Anna Kurbatova - BCS Financial Group., Research Division

May I ask a question, again, about your guidance for the next year, revenue guidance? Well, you are saying that you expect Russian television ad revenue to grow in line with the overall Russian market at 10% year-on-year, approximately. And I wonder, assuming that your channels, Domashny and Peretz, continue to increase audience shares and revenue ahead of market and, for example, then why do you assume in line with market growth through these some declines again in CTC Channel. Or do you see any other factors?

Boris Podolsky

Thank you, Anna. Thanks for your question. There are a couple of factors you have to consider when you're talking about the growth of sales in absolute terms. The most fundamental of them are the sellout level, the pricing, the CPT [ph] and amounts of GRP. Only one of those, mainly GRP, relates to the audience share. The 2 others, being CPT [ph] and sellout, is basically totally driven by demand of the advertisers. We sort of forecast in our models obviously different dynamics on all 3 factors. As I mentioned in my earlier comment, we do not expect or, obviously, we're working hard not to lose audience share for any of our channels. And quite opposite, we're hoping to gain some. But obviously, you have to understand that there is some elasticity of the market in terms of the pricing and absorbing the new inventory. So it always works as a combination of factors. So -- and that's how we got this estimate we quoted earlier.

Anna Kurbatova - BCS Financial Group., Research Division

And my second question, please. Could you be deliberate on the first results of your switch of CTC Channel and Peretz channels reach into audiences? Are you happy with revenue performance in the first 2 months of the year other than your target audience shares? Does it meet your initial expectations with advertising revenue or -- and what challenges do you see?

Boris Podolsky

Well, the answer is yes to all your questions. And as far as what benefits, we see obviously, we see the products like Kitchen, [indiscernible] and some of the Peretz shows are actually much better working in this new target audience. So if you look whether this is an absolute number in terms of its audience share or the number you calculated to their ratings -- the actual ratings the GRPs, it's actually performing quite well. So on this front, the switch works and been justified for most of the channel so far.

Operator

[Operator Instructions] And your next question comes from the line of Olga Bystrova.

Olga Bystrova - Crédit Suisse AG, Research Division

I wanted to ask you what is the breakdown of your growth for 2013 between pricing and inventory increase? And if you could elaborate also what kind of price increases you see so far for 2013, how it compares to 2012? The second question is you mentioned in your presentation that sponsorship revenues have -- you have seen quite impressive trends in sponsorship revenues. I was just wondering if you could talk a little bit about what growth rates you see there, what proportion of revenues they currently contribute? And finally, on the cash acquisition of programming, those have decreased a little bit in 2012, particularly in the fourth quarter. You mentioned something that I wasn't sure if that's related to amortization or it was related to cash payments so that some of the payments will be postponed in 2013. So I wanted to ask you conceptually, first of all, where is the sustainable level of cash spending on programming? And secondly, how much of a cash impact we could see in 2013 from the delayed payments?

Boris Podolsky

Olga, thanks for the question. As far as the first one concerned, you asked what is the breakdown of revenue growth between the various drivers. I actually don't believe we are getting into this level of details at -- for our public calls. What I can tell you, generally speaking, we obviously expect the pricing to increase on average for all of our channels. And we also expect to have increase in sellout levels. So I suppose commenting on the drivers for the revenue growth, I would say that the sellout and the revenue and the CTC, obviously, the GRP growth will probably be the main driver for the CTC Channel. So positive it will be sellout in pricing. And on the sponsorship question. Well, the sponsorship is very opportunistic story. And it's very much driven by the lineup of the channels programming, because you obviously have to sort of bring the sponsors to the specific program or to the specific shows. Having seen such unprecedented levels of sponsorship sales increase in 2012, to grow them at such a pace in 2013 is impossible, unless you fundamentally change the lineup, sort of the programming lineup. So we do expect the sponsorship to continue to grow. But obviously, at much more modest pace as than it had been in 2012. And sorry, your last question was on cash acquisition and the timing? So I will give this one to Nikolay.

Nikolay Surikov

Yes, speaking about cash [indiscernible] and probably right, you're right. We experienced the decline in 2012, and this decline was mainly attributable to delay in payments of some products to 2013. In this year, we -- our intention is to restore cash amortization ratio at the normalized level of around 1.3.

Olga Bystrova - Crédit Suisse AG, Research Division

Okay. A follow-up on that cash amortization ratio, that's clear. But cash spending on programming, are you expecting it to decelerate going forward or accelerate going forward from 2012 level?

Boris Podolsky

Well, from -- in 2013, we expect it to be -- if you normalize it, as Nikolay said, to be slightly lower than in 2012. Going forward, I think at this point, it's a little bit difficult to sort of forecast, but I think we, at this point, are counting on a gradual decrease, but definitely will stabilize at a certain point. And I don't expect it to sort of decrease forever. You just have to maintain a certain ratio. If you look at the history of this ratio, I think the company had always been between 1.1 and 1.3, I think, in terms of the relationship of cash spending to the amortization. So I would imagine -- so unless there is some fundamental changes into the business, it will stay at those levels.

Olga Bystrova - Crédit Suisse AG, Research Division

Okay. And can I also ask a follow-up on the question that some of my colleagues asked? You will experience additional cost both in operating level and also on the depreciation level from this multiplex. And you have mentioned absolute level of the increase, basically additional absolute level of additional costs. But can I -- may I ask you to quantify how much the historical recurring costs would decrease and if historical recurring depreciation would decrease as we go into couple of years of multiplex deployment? I don't know if I asked the question clearly, I can try to elaborate a bit more.

Boris Podolsky

Sorry, we just want to clarify something. I guess as far as the costs are concerned, I think it's fairly easy to answer as soon as the analog broadcasting is switched off, and we're left just with the digital transmission, we will have 0 cost related to the analog and no cost will be related just to digital broadcasting. We have 74 that -- currently our analog transmission costs are around $25 million, if I'm not mistaken, for all 3 channels. So you can basically assume that if the analog broadcasting is switched off on January 1, 2016, basically 80% of this cost will go to 0. And we will just keep paying for digital transmission for 2 of our channels, which are in multiplex. On the second part, that's where you lost us a little bit. What kind of amortization or depreciation you were talking about?

Olga Bystrova - Crédit Suisse AG, Research Division

Yes, you were mentioning that -- I mean, you mentioned several times in 10-Qs and in, to this press release any additional amortization expense will be, let's say, $18.6 million in '13, $18.6 million in '14. How -- this is an additional one, how -- what is the base of amortization we need to add this number to, to forecast the full depreciation, total depreciation, expense? By how much the other depreciation -- the historical recurring depreciation expense could decrease, or will it stay the same? Okay, in another way, $18.6 million, it was -- historically, your depreciation expense was about $18 million to $20 million. Is this correct that we just need to purely add the $18.6 million in 2013 to the historical depreciation expense or there will be some offsetting impact?

Nikolay Surikov

Sorry, you're talking about the licensed amortization?

Olga Bystrova - Crédit Suisse AG, Research Division

No, no, no, depreciation. Yes, exactly, yes, broadcasting licenses.

Boris Podolsky

Okay. Yes, because you lost us here. We were talking about -- can we come back to this offline to you because we just don't have the numbers in front of us?

Olga Bystrova - Crédit Suisse AG, Research Division

Okay, sure. And clarification on this additional multiplex cost. I was mostly interested not when you finish transmission -- transition from analog to digital. But I mean, in a transition period for the next couple of years, you're saying this year, it will be maximum RUB 300 million for 2 channels. Will you still incur 25 million roughly for the analog costs or of analog costs or those costs will be lower in the transition period as well, particularly within '13, in '14?

Boris Podolsky

Well, we believe that we will incur in 2013 the same, roughly the same, amount of expenses with analog broadcasting.

Operator

Your next question comes from the line of Nick Robinson.

Nick Robinson - Renaissance Capital, Research Division

You talked a lot, quite a bit about the cost side of the digital transition. And I was wondering if you could possibly give us some idea of what you're thinking in terms of revenues, particularly for things like the station group revenues, assuming they disappear over time as the analog signals are switched off? Is there some -- have you got sort of broad strokes thoughts on how that happens and on over what time scale? And then obviously, how that -- is that transition just straight into revenues for the CTC channels? And that's the first one.

Boris Podolsky

Okay. On the revenue side, I guess, we obviously have modeled the transition situation. And unfortunately, it still remains a number of uncertainties in there or a number of assumptions we had to make. I will try just to highlight some of them and then maybe get to the answer. For example, if you look at the technical equation [ph] right now, the way it's measured, it's just measured for the cities with the population of 100,000-plus people. If you look at the digital story, basically, the penetration is going to be, from what I understand, is 99% for the entire country. So it means that we will have ability to broadcast in every single household as opposed to just broadcasting for the households and cities with a population -- being measured, in the households with cities 100,000 plus. Now the one has to make some assumptions as how that's going to transpire into the revenues. And if you do that, there has to be change in the measurement panel, which is not yet, first of all, decided; and second, not yet calculated either. So in our models, the only thing we could have assumed being on the conservative side that there's going to be an increase in the audience share because of their channels not being on to the multiplex of the technical multiplex. We would effectively have the transition, if you wish, their audience share to the existing channels. So I would -- to be honest with you, very hesitant to talk about any absolute numbers or percentage growth because the modeling investigation is rather an interesting exercise. But I think you have all the reasons to believe that regardless of the scenarios, the revenue should increase. It's just very difficult to. And we can arrange for that obviously, but I would be hesitant to sort of make this data public. On the cost side, obviously, one has to understand that while we -- the most challenging parts for us is going to be when we have double-cost period, meaning that when we're paying for the analog transmission and when we continue to make or when we started making payments for the multiplex, so the shorter this period is, it's actually more beneficial for us. And this point in our assumptions and models, we obviously assume that the programs that the state has announced and the terms of the program, including the switch-off of the analog January, 1 2016 is going to be upheld. So if this will be moving or changing, obviously, we're going to have to sort of remodel the situation. But that's how we'll look at it at this point.

Nick Robinson - Renaissance Capital, Research Division

Okay, understood. So from your perspective, obviously, from a modeling perspective, you're looking at 2016, January 1. How realistic do you think that is, judging by the speed of transition, we've seen another markets for digital? It seems like delays are inevitable.

Boris Podolsky

Well, yes, I understand the question. I'm sorry. Basically, there are 2 pieces to this. One is where there's a -- the state will be able to roll out the network to transmit the signal. And this one is based from what we're seeing. We are quite positive that this is going to happen. So the network is going to be there in place and ready for broadcasting and actually working. The second has more interesting question is whether there are going to be sufficient amount of devices or changes done on the end part of this with the viewers, so they can actually receive the signal. And that is, I think, is a big question. At this point, the state has not made public any statements sponsoring-ship, any kind of set-top [ph] boxes for the end users. If you talk about the large details, the rate at which the population is actually changing or updating their TVs for the new ones, we actually have the capability to receive the signal. It's there fairly high. So by January 1, 2016, you could realistically expect that majority of the household will transmit -- sorry, will change and will have an ability to receive the signal. It is very difficult to sort of estimate what's going to happen in the cities with the population of 100,000 and less. So at this point, we don't have any data going any direction. So we just assumed what's stated in the programs at analog will be switched off January 1, 2016. And as we have more data, or there will be more information on the transition or the state sponsoring potentially, the devices, I guess, we're just going to have to adjust our estimates as we go.

Nick Robinson - Renaissance Capital, Research Division

Okay, great. Just 1 small question. I think you mentioned earlier that you've got almost 100% of your primetime content contracted for this year. Was that -- I understood that, correct?

Boris Podolsky

Yes.

Nick Robinson - Renaissance Capital, Research Division

So you know what the content is going to be for -- you've got enough content to cover your entire primetime for this year? Does that give you sort of more certainty around what your program expenses -- for the programming expenses for the year?

Boris Podolsky

The answer to the first part, yes. We definitely have enough content in the pipeline that covers the primetime for our lead channel, the CTC. So all those projects are in development or in production. So that is, I think, a very good achievement on behalf of the group and the channels management. As far as the programming expenses, yes, we obviously have our budget we intend to maintain, but one can never guarantee the performance of the shows. So obviously, if some of the shows are underperforming, we may have to make certain adjustments to our programming, including the programming expenses. But at this point, obviously, we have a secured pipeline of products and amortization under control.

Operator

Next question comes from the line of Alexander Vengranovich.

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

Actually, I'm also referring to your guidance. And does your current guidance for the EBITDA margin assume any decrease of the selling expense? As far as I can see, for example, that your sell-out ratio this year is rather high. So do you like the performance of your own sales house or is fully supported or fully provided by the good performance of Video International? And what's sort of your future expectations, your agreements with Video International? Do you assume that, as you guided approximately more than the year ago, you will gradually decrease the percentage of the consulting expenses that you pay to Video International?

Boris Podolsky

Okay, Alexander, thanks for the question. I guess, just couple of statements. So we absolutely, truly own this one. First of all, we continue our partnership relationship with Video International, and we're very happy with them as a partner. The level of service they provide to us and support -- we have obviously helped us enormously. And this we will continue. Second of all, their rate, the compensation or commission rate we pay to International has remained unchanged, it's 12% as it was in 2012. So that's the same level. Now there are however, certain changes in our relationship, including our own sales house, which is gaining additional experience and becoming more and more effective. And for us, obviously, economically and to justify the cost, we're encouraging certain type of services and certain type of work being taken in-house. So what we are planning on doing in 2013, we're planning to perform certain tasks where we, in the past, used the systems of Video International to be done in-house. Obviously, depending on the level of revenues associated with those services, we expecting that the [indiscernible] commission we are paying to Video International will decrease in 2013 versus 2012 levels. But that has only to do with our own sales house effectiveness and taking certain services in-house.

Operator

And your next question comes from the line of Anastasia Obukhova.

Anastasia Obukhova - VTB Capital, Research Division

I want to ask a follow-up question on [indiscernible] rates. Boris or your colleagues, please explain to me in your like performing fourth quarter, your programming costs, I mean amortization over 14% versus top line, TV top line growth of over 8%. Over the whole year again, the programming costs were up 14% versus some 8.1% of overall TV ad top line growth. So as far as I see from the content posted in the first quarter, this is continuation of the results, right, that you already seen, for example, in the fourth quarter and maybe some more content? So how -- I mean, based on the reach, based on, what do you assume that you will be able to achieve 10% growth in top line on the back of this some 8% to 9% growth in programming costs? I mean this is a good result in stable margins given increase in the transmission costs and more or less stable growth in Video International commission cost? This is -- this question do not get -- if you could explain it to me. Maybe the second question, do you -- have you seen any discount towards, from the advertisers towards your new audience, selling audience, like back in November for 2013 or no?

Boris Podolsky

All right, Anastasia, on your amortization question, obviously when you look at the inflation of amortization cost in terms of the 2 measures, cost revolver and cost [ph] effectiveness. So for example, and one of the reasons why we believe that we can sustain the level of amortization expenses and didn't bring them down year-on-year for the channel is actually effectiveness and composition of the programming grid. For example, we have our very successful show, Kitchen, which now is actually on air with its third rerun and repeat. Their repeats give our ratings, give us ratings, which are almost similar to the levels of the premier and significantly higher than the average audience share for the channel. That means that they genuinely have substantial revenues. At the same time, the cost of rerun is, obviously, only a fraction of the cost of the premier. So by having such shows on air, we increase efficiency in terms of the amortization. And at the same time, we're generating very sufficient amount, a substantial amount of revenues. So things like that, so basically the programming grid is a living animal and you try to manage it. Obviously, the more successes you have, the more sort of control over the cost you have. Because for the channels like CTC, the only way to sort of quickly fix the rating problems are either take over the air something, which is usually in the primetime, and therefore, expensive and replace it with an equivalent, which also will be expensive, or replace it for the limited time with some expensive Hollywood production. So the reason again, just to sum up, why we believe that we should be able to control the cost better is because we can have a high visibility of our pipeline for 2013, and we had successes with the core projects in last year. So that makes us believe that we also would be successful in 2013. So that's, I think, on the grid story. And your second question was whether we're seeing any discounts towards the new target audience. So I guess you can say no to that, although it's a more complicated answer because obviously, every advertiser recalculates the audience through its own and calculates the price for the [indiscernible] ratios they need. But as I said in my, I think, opening remarks or to answer to some of the questions earlier, we actually have an inflation, price inflation for all 3 of our channels at this point.

Anastasia Obukhova - VTB Capital, Research Division

Can I ask the last question? Do you see your cash spend on programming increasing as percentage of revenues this year or not?

Boris Podolsky

We usually calculate it as a percentage of amortization not as a revenue. I don't even think I have the number. But as a percentage of amortization, we actually expect it again on the normalized level. Nikolay was answering before, slightly lower than it was in 2012. To revenue, I guess we're going to have to recalculate and come back to you later, just don't have the numbers.

Operator

And your next question comes from the line of Igor Semenov.

Igor Semenov - Deutsche Bank AG, Research Division

You actually just answered my question. I was going to ask you about this cash expense on program rights, but maybe also a bit on the cash side. Can you comment on your CapEx for this year? Obviously, this is not a huge expense, but I mean it continued to decline over the last couple of years. Do you see this continue to trend down, or you think it'll pick up? And maybe as you go towards digital, do you think there's going to be material increase in CapEx in 2014, 2015?

Boris Podolsky

Thank you for your question. We think that we, in 2013, our capital expenditure levels will be approximately the same as in 2012. And as of now, we do not have any information, which will result in any significant deviation of this amount in the future years as a result of transfer to digital.

Operator

There are no more questions registered at this time, so please continue.

Boris Podolsky

Thank you, everyone. To summarize, I would like to highlight the following points. We had a record year in terms of sales, maintained our Russian national revenue share despite continued fragmentation of TV market, improved combined audience share positions as a group of channels and sustained high levels of profitability in 2012.

As for the 2013 outlook, the Russian TV advertising market is expected to go up to 10% in ruble terms. We have now contracted 80% of our national advertising inventory for the year and at higher prices than in 2012 and expect our Russian television advertising revenue to grow in line with the market, while revenues from other business segments should continue to grow faster than that. Our CTC and Domashny channels have received digital licenses, and we expect to start making payments for digital signal distribution in the second half of the year. Despite these additional costs, we plan to maintain our group OIBDA margin similar to 32% level we saw in 2012, and we expect to achieve more operating efficiencies. We are in the strong net cash position and are intending to increase our dividends by more than 20% year-on-year to 63% shares in 2013.

Thank you for joining us today's call. And we'll look forward to seeing you or speaking to you over the coming weeks and months. Goodbye for now.

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CTC Media (CTCM): Q4 EPS of $0.41 beats by $0.02. Revenue of $264.2M beats by $7M. (PR)