Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David Sach - Chief Financial Officer and Executive Vice President

Adrian Sarbu - Chief Executive Officer, President and Director

Anthony Chhoy - Executive Vice President of Strategic Planning and Operations

Daniel Penn - Executive Vice President, Secretary and General Counsel

Analysts

Vivek Khanna - Deutsche Bank AG, Research Division

Pavel Ryska - J & T Banka, A.S., Research Division

Till Heimlich

Ajay Agrawal - Nomura Securities Co. Ltd., Research Division

Daria Fomina - Goldman Sachs Group Inc., Research Division

Marco Gironi

Central European Media Enterprises (CETV) Q1 2013 Earnings Call April 29, 2013 8:30 AM ET

Operator

Hello. My name is Leo. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises' First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, April 29, 2013. It is now my pleasure to turn the floor over to David Sach, Chief Financial Officer of CME, who will be our moderator today. Mr. Sach, you may begin your conference.

David Sach

Thank you, operator. Good morning, and good afternoon, everyone, and welcome to CME's First Quarter 2013 Investor Conference Call. You can join us by the link on our homepage, www.cme.net. There, you can also download the presentation slides, which we will refer to during this call.

As most of you already know, Romana is on medical leave, and we wish her a speedy and full recovery. We are hosting today's call from New York, and joining me is President and Chief Executive Officer, Adrian Sarbu.

Adrian Sarbu

Good morning, and good afternoon.

David Sach

Head of Strategic Planning and Operations, Anthony Chhoy.

Anthony Chhoy

Good morning.

David Sach

And our General Counsel, Daniel Penn.

Daniel Penn

Good day.

David Sach

The following is our usual Safe Harbor statement. Our presentation today will contain forward-looking statements. Actual results may vary materially from those expressed or implied due to various factors. Important factors that contribute to such risks include, but are not limited to, those factors set forth under Risk Factors in our SEC filings, including the Form 10-Q filed earlier today, as well as the following: the effect of the economic downturn and Eurozone instability in our markets and the extent and timing of any recovery, decreases in TV advertising spending and the rate of development of the advertising markets in the countries in which we operate, our ability to access external sources of capital in light of current severe liquidity constraints and the successful completion of equity offerings we have announced or may undertake.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that included in our filings. Forward-looking statements speak only as of the date, and we undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

During this call, we will refer to certain financial information that is not in U.S. GAAP. Please see the appendix to the presentation and Note 16 to our financial statements in our Form 10-Q for a reconciliation to U.S. GAAP financial measures.

And now please turn to Page 4 of our presentation, and I will pass you over to Adrian.

Adrian Sarbu

Thank you, David. We told you in February that 2013 would be a tough year, a year in which we are determined to reverse the trend in TV advertising spending. As previously outlined, in the first quarter, we took actions to restore the value we received for our products, in simple words, that means increasing TV advertising prices and carriage fees. For this to be accomplished, we needed a stronger product. And in the first quarter, we succeeded to increase our audience shares in key markets. Before audience share trends we have seen in April continue, we hope to report further improvement in our audience shares for the second quarter.

We achieved double-digit advertising price increases in the Czech Republic and single-digit increases in the other markets on the annual commitment signed today. We successfully concluded the majority of negotiations for carriage within Bulgaria and intend to increase them twofold this year. We also started negotiations in Romania and expect to conclude on these towards the middle of this year.

Increasing prices have never been easy. The results of the first quarter reflect the initial phase of the execution of our pricing strategy. In the Czech Republic, we met significant resistance from certain media agencies and advertisers, who reacted by limiting their spending or holding back their advertising budgets. That led to a decrease in a number of GRPs consumed in our stations, which negatively impacted on our revenues.

We believe the reduction in GRP consumption in the Czech Republic in the first quarter of 2013 is mainly due to a temporary market reaction to our pricing initiatives. During the remainder of 2013, we expect the consumption of GRPs to return to similar levels as 2012. This should result in improved revenues and earnings in the second half of this year.

Earlier today, we announced public and private equity offerings from which we look to raise gross proceeds of $400 million. A successful completion of these offerings will provide us with sufficient liquidity to fully execute on our pricing initiatives, invest more in local content and deleverage.

Please turn to Slide 5. Our business model, One Content, Multiple Distribution, reflects how we have evolved from a broadcaster to a media and entertainment company. It is based on powerful local content, which is aggregated and monetized through multiple distribution platforms. Beginning in January 2013, we replicated this model in each country and now report by geographic segments. We believe this will enable us to strengthen leadership in content and distribution in all our countries and use local resources for growth.

David?

David Sach

Thank you, Adrian. Please move to Slide 6. As sovereign debt tensions eases and Eurozone economic activity appeared to stabilize in the fourth quarter of 2012, GDP in the countries where we mainly operate could stop contracting in the first quarter of 2013. Nonetheless, tight fiscal policies, difficult credit conditions and high unemployment continue to hamper economic activity across the region. Slovenia, in particular, saw private consumption contract in late 2012 and early 2013, and we continue to view the situation cautiously as the government attempts to stabilize the banking industry. Overall, across the region, we expect GDP and private consumption to stay flat or grow slightly for the rest of the year.

As Adrian mentioned, we have seen a reduction in the consumption of gross rating points by advertisers in the Czech Republic and Slovakia for the first quarter of 2013. This has had a significant impact in our consolidated financial results, causing our overall TV advertising market share to fall to 58% in the first quarter from 65% last year. This resulted in TV advertising revenues declining by 22% at constant rates. This reduction in consumption is primarily attributable to a number of our large multinational clients that have held back spending, waiting for us to abandon our efforts to increase prices.

It is not possible for us to continue to deliver a similar level of gross rating points to advertisers at ever-decreasing prices. We do not believe that this is in the best interest of advertisers either, as television is the most efficient medium for them to communicate with their customers. Furthermore, we have signed or agreed annual commitments in the Czech Republic with the majority of our customer base at double-digit price increases compared to last year. These agreed annual commitments represent roughly 50% of our expected revenues for the full year.

During the quarter, we succeeded to significantly increase carriage fees and subscription revenues. These revenues from our cable, satellite and IPTV operators increased by over 30% at constant rates in comparison with the prior year, primarily as a result of the successful negotiations in Bulgaria. We are also aiming to increase carriage fee revenues in our other countries where negotiations are still ongoing. Other revenue primarily includes Internet and radio advertising, as well as distribution revenues. Total consolidated revenues fell 17% at constant rates or 18% at actual rates.

Turning to Slide 7. The bridge graph shows the decline in revenues for the Czech Republic and Slovakia that I mentioned previously and the decrease in Bulgaria that I will explain later. Overall, costs increased by 4% at constant rates, mainly reflecting higher amortization of foreign programming costs in the Czech Republic due to the launch of 3 new channels since mid-2012.

We have begun the process of restructuring our operations and have agreed the organizational structures that will be implemented in each of the countries. We expect to book a restructuring provision at the end of the second quarter covering a majority of the estimated cost. As a result, the savings will mainly be reflected in the second half. There are likely to be additional provisions booked in the second half as we make further system and legal entity changes that enable us to reduce headcount even further. We expect annual savings of up to $25 million once completed.

Consolidated OIBDA for the first 3 months of 2013 was negative $21 million in comparison with positive $14 million last year.

I give you back to Adrian.

Adrian Sarbu

Thank you, David. My following comment refer to the country product performance slides, which shows some of the leading products in each of our countries in line with our new operating model.

During the first quarter, we strengthened our product performance and audience in key markets with our content and new channel launches. Our own content continues to drive leadership in television. We produced a number of fiction blockbusters with outstanding performance: Rose Garden Clinic in the Czech Republic; Las Fierbinti in Romania, and Top Notch in Slovenia. Some of our reality and entertainment shows boosted our prime time audience shares, such as Got Talent in Romania and Slovenia and The Voice in Bulgaria.

Our main news and main general entertainment channels in each of our territories of operations are unchallenged leaders. Voyo, our leading subscription video-on-demand service, has been growing its subscriber base. At the end of the first quarter, Voyo exceeded 125,000 subscribers across our 6 markets. Our website traffic also grew in each of our territories of operations.

During the first quarter, we also successfully launched Telka, a new Nova classic channel in the Czech Republic, and Fooor, a comedy channel in Slovakia. The new channels will help us improve our audience shares in these markets. Improving our audience share will support the execution of our pricing initiatives.

David?

David Sach

Thank you, Adrian. My following comments refer to the country financial performance slides. As explained previously, there was a significant reduction in the consumption of gross rating points by advertisers in the Czech Republic, which impacted the TV advertising market, our market share and, consequently, our revenues.

Revenues in the Czech Republic were down 36% on a constant currency basis compared to the prior year. Costs in the Czech Republic increased by 25% in the first quarter 2013 compared to the same period in 2012, reflecting higher amortization of foreign programming costs due to the successful launch of 3 new channels since mid-2012. These new channels have contributed to the improved audience share that we're seeing in the Czech Republic. As a result of the above, our Czech Republic segment reported an OIBDA loss of $7 million for the first 3 months compared to positive OIBDA of $23 million in the same period in 2012.

In Romania, we were able to increase our market share to 65% in a TV advertising market that fell by 7%. As a result, revenues fell by only 1% on a constant currency basis. We have signed annual commitments representing slightly less than 70% of expected full year revenues at higher average prices, which is slightly above the percentage of commitments signed at this stage last year. We managed to reduce costs by 1%.

Similar to the situation in the Czech Republic, certain agencies and multinational advertisers in Slovakia have also held back spending. This impacted the TV advertising market, our market share and, consequently, our revenues. First quarter revenues declined 12% at constant rates. We have signed annual commitments of approximately 70% of expected full year revenues, which is significantly lower than the previous year at slightly higher average prices than in 2012. The commitments are below the level of last year because some of the multinationals mentioned previously have not yet signed. In Slovakia, cost increased by 4% because of 2 new channels launched since the third quarter of 2012.

As mentioned before, in Bulgaria, we have concluded negotiations with the majority of operators to increase the carriage fees. During these negotiations, the broadcast of our channels were temporarily suspended on one of the operator's platform, which led to a drop in advertising revenues during this period. Consequently TV advertising revenues in Bulgaria for the quarter fell by 26% at constant rates, driving a 15% decline in total revenues. We have signed annual commitments of 65% of expected full year revenues, which is slightly less than the previous year, at higher prices compared to 2012. In Bulgaria, costs were reduced by 8% in the quarter compared to last year.

In Croatia, the level of annual commitments signed to date is slightly higher than last year, and in Slovenia, the level is slightly less than the previous year. The commitments are at higher average prices.

Please move to Slide 20. Our negative free cash flow in the first 3 months of 2013 was $11 million compared to negative free cash flow of $40 million in the same period in 2012. This improvement is largely due to our strict cash management and an improvement in working capital. The improvement in working capital comes from prepayments we have received under the new sales policy related to the annual commitments. We ended the period with cash of $123 million. We continued to take steps to conserve cash, including our restructuring of the operating model and renegotiation of foreign programming deals.

We have no principal debt repayments until November 2015, but must continue to deleverage the company. We're looking to raise $400 million from the equity offerings announced this morning and expect to use $300 million of the proceeds to redeem or repurchase a portion of our 2016 notes. These notes carry a coupon of 11.625%, so annual interest costs should fall by $33 million. Net debt should fall to approximately $700 million, resulting in a leverage ratio of more than 6x net debt to OIBDA based on the midpoint of our full year 2013 OIBDA guidance.

I now give you back to Adrian for final remarks.

Adrian Sarbu

Please turn to Slide 21. The power of our brands, leadership in audience share and capacity of generating successful content are our trends. Leveraging these trends, we are determined to reverse the trend of declining TV advertising prices in our region.

We think the strategy used by media entities and advertisers, particularly in the Czech Republic, of holding back consumption of GRPs is not sustainable. With the support of our major shareholder, we believe we will be successful in securing sufficient liquidity to support our pricing initiatives, invest in local content and deleverage.

Based on our view today, the TV advertising markets will continue to be challenging in 2013. Assuming current exchange rates remain constant, we expect in 2013 revenues of $750 million to $770 million and OIBDA of $100 million to $120 million.

Thank you, and now back to David.

David Sach

Thank you, Adrian. That concludes the formal presentation. We're now going to move to the Q&A.

So operator, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And now I hand you back to Mr. Sach.

David Sach

Thank you, operator. Our first question comes from Vivek Khanna of Deutsche Bank.

Vivek Khanna - Deutsche Bank AG, Research Division

Just a couple of points for clarification, and I apologize if I haven't been able to go through all the documents this morning. It's been quite busy out here in Europe, too, today. First of all, on the capital increases, which you've indicated, the $200 million of Series B preferred shares, those are -- just to confirm, they're not conditional on the $173 million of normal stock issuance?

David Sach

Dan will take that one.

Daniel Penn

Vivek, they're additional in raising at least $75 million of proceeds from the public participation and the public offering.

Vivek Khanna - Deutsche Bank AG, Research Division

So at least $75 million from the public side. And now, just to confirm out here, with regards to Time Warner subscribing to that increase, they would subscribe -- you would subscribe 49% of whatever the total proceeds, correct?

Daniel Penn

That's right. They have contractual preemptive rights, and they've indicated they intend to subscribe for 49.9% of it.

Vivek Khanna - Deutsche Bank AG, Research Division

49.9%, okay.

David Sach

Great, thank you. Okay. Our second question comes from Pavel Ryska at J & T. Pavel?

Pavel Ryska - J & T Banka, A.S., Research Division

I have several questions. The first one is you also talked about public equity issue last year in the summer, and in the end, too, you didn't do it. So what has change since then? I mean, do you have any indication that this time there is sufficient demand for a new stock, if you could develop on this? And the second question is do you have any plans therefore -- that maybe new bond issues, new ones used for refinancing of the current one -- current ones could be somehow guaranteed by Time Warner?

Adrian Sarbu

First question is why do you need to raise equity? I think we explained very clearly in our speeches. We need to strengthen our cash reserves, and we want to deleverage more, and David explained this. Do we think we'll be successful? Obviously, yes. In respect of intentions to raise equity, David will answer to you.

David Sach

And in terms of refinancing, obviously, we're staying a public company, and we are responsible for our own debts and refinancing ourselves. So yes, you could look for us to potentially do a refinancing later this year, and we will keep you informed if that happens.

Pavel, thank you. Operator, there's no further questions in the queue. Can you prompt people, please?

Operator

[Operator Instructions]

David Sach

And the next question comes from Till Heimlich of GLG Partners.

Till Heimlich

I was wondering what makes you confident that you will be able to recoup the lost revenues and earnings in the -- over the remainder of the year. I think you made a comment that you thought the situation will be better in the second half. Are you seeing something from your competitors confirming that your approach will be more successful than -- in terms of pricing environment?

David Sach

Adrian?

Adrian Sarbu

We guided -- we said we believe that the decrease in GRP spending in the first quarter will not continue. We're not, Till, talking about revenues. So as our competitors are sold out, as our -- as the consumption of GRPs in the first quarter year-on-year decreased 25% when the pattern is 2009, 2012, it -- the consumption increased 3%, we have some reasons, serious reasons to believe, significant reasons to believe that, that the consumption will come back. We also have indications from clients who held back their spending in the first quarter that they will be willing to come back and spend with us. These are the reasons.

Anthony Chhoy

Till, it's Anthony here. The only other thing to add to what Adrian indicated then is that I think -- yes, since February, our competitors have been sold out. And in the month of April, our audience share has continued to strengthen. We're approaching 40% -- 43% at the moment. So as we improve our audience share and our competitors remain sold out, we are very well positioned to improve our market share and revenues in the second half of this year.

David Sach

Thank you, Till. Our next question comes from Ajay Agrawal of Nomura. Ajay?

Ajay Agrawal - Nomura Securities Co. Ltd., Research Division

Just 2 questions for me. Is there any particular timeline, I mean, by which this transaction needs to be completed? And the second question, I mean, in terms of Czech Republic, the decline in the revenues that you have mentioned is because of the GRPs. I mean, would it be -- can it also be said that, I mean, some portion of the decline in Czech Republic is also due to the change in competitive landscape in Czech Republic?

David Sach

Okay. Dan will take the first one.

Daniel Penn

The -- on the timeline, Ajay, we've just announced the launch of the offering today, and JPMorgan is expecting -- the lead underwriter is expecting pricing after market close on Thursday. The -- that's for the public offering. On these -- what we're calling the Series B, the convertible, redeemable shares that we would issue to Time Warner, that's subject to a couple of conditions, in addition to the one I described earlier. One is a approval that's required under European competition laws for Time Warner, so expect to get there in June -- by the end of June. And the other is our shareholder votes, which in current timelines we're expecting to schedule sometime in the first half of June. So we expect the transaction to be completed in June.

Adrian Sarbu

The other question has the following answer. If we want to look to a changing competitive landscape, it is not. Or if we want to say it is, our performance is stronger this year than the last year. The migration of spending from us to our competitors, I think -- the amount of money which the clients spent with our competitors in the first quarter, we explained, is driven by the resistance to accept our prices, but is not -- it's not a major move. The major move is the clients held back the money for the future months.

David Sach

Okay, Ajay, thank you. The next question comes from Daria Fomina at Goldman Sachs.

Daria Fomina - Goldman Sachs Group Inc., Research Division

I have several questions. The first one is on your TV channel launches. Do you have any in the schedule until the end of 2013? Any further TV channel launches? The second question is on programming expenses. If I read correctly, your 10-Q -- your free cash flow was supported by lower expenses on the -- cash expenses on acquisition of programming. Do you expect this to reverse in the second quarter so then you would renew your library? And my last question, what would be your action plan if you would not get enough demand for your commensurations [ph], I mean, $75 million outside of Time Warner and underwriters? That's it.

David Sach

So Anthony will take the first one.

Anthony Chhoy

Daria, in the -- in terms of TV channel launches, since mid last year, we've launched 3 in the Czech Republic and 2 channels also in Slovakia. And we feel that the channel portfolio in these 2 markets are -- yes, are quite complete, given the audience preferences and also the advertiser demand for specific, targeted demographics. In terms of any other plan to launch for the rest of the year, we are -- yes, we will continue to evaluate that. We might launch one other channel in another territory.

David Sach

So regarding your question on the programming deferrals in the first quarter, as you know, we are renegotiation or in the process of renegotiation contracts with the major studios. If we are successful in those renegotiations, then a lot of those deferrals, we think, we can keep in place through the end of the year, but we'll just have to see as we finalize those negotiations. And your third question, Daria, was -- I think something to do with if we didn't get the $70 million -- or didn't hit the $75 million threshold, is that correct?

Daria Fomina - Goldman Sachs Group Inc., Research Division

Yes, that's exactly the question.

Daniel Penn

Yes. Well, really we just announced the launch of the offering today, and we're confident that we can achieve the proceeds -- the gross proceeds objective that we set for ourselves.

David Sach

The next question comes from Marco Gironi at Credit Suisse.

Marco Gironi

I only have one question with regards to the Series B convertible shares. I apologize if it's in the documentation you sent out. I haven't seen it. But my question is, simply, what are the sort of main terms of those pref shares in terms of voting rights, conversion terms, dividend requirements? Could you just give me the summary terms?

David Sach

Over to Dan again.

Daniel Penn

The convertible, redeemable preferred shares, which is the new series we're creating, they are nonvoting shares. They're -- they'll be priced at a 15% premium to the public offering price, subject to a cap $5. So it accretes for the first 3 years from issuance at 7.5%, and that'll be a uptick accretion, 7, 8, 9. After year 3 they'll accrete at 3.75% for 2 years, and that will be at the company's option, either cash or pick, and so it sunsets after 5 years. However, they are convertible by Time Warner after 3 years, and they're redeemable by the company after 3 years. Those are the key features.

Marco Gironi

And the convertible price is it stock or they're market?

David Sach

It's market, effectively. They'll be priced off the public offering price, 15% premium to that.

David Sach

Okay, Marco, thank you. Pavel, again, from J & T. Pavel?

Pavel Ryska - J & T Banka, A.S., Research Division

I have one more question. You said during your presentation that you are accounting with $33 million of yearly savings on your interest cost. Can you say how much more that could be if you manage to refinance from other debt issues this year?

David Sach

Yes. Pavel, we don't know what kind of interest rate that we could get on a refinancing. So we would hope to be able to reduce that 11.62% financing further. And yes, you pick a rate yourself and I think you could do that calculation. So we've got just a little over $600 million of those 2016 outstanding. We hope to pay down $300 million of them. So $300 million left in whatever we could reduce the interest to.

Okay, thank you. There's no more questions in the queue, so let me thank you for joining us today. We hope that you found our earnings call informative.

Hold on, we do have one more, sorry. No? It disappeared. Okay, it disappeared.

And we -- okay, we hope you found our earnings call informative, and we welcome your feedback and comments. We would also like to remind you that you can keep up to date and follow our progress between earnings calls on our website, www.cme.net.

As always, we're available for additional questions anytime. We look forward to seeing you all shortly. Goodbye.

Operator

Thank you. This does conclude today's Central European Media's First Quarter 2013 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Central European Media Enterprises Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts