CTC Media's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 3.13 | About: CTC Media, (CTCM)

CTC Media, Inc. (NASDAQ:CTCM)

Q1 2013 Earnings Call

May 02, 2013 09:00 am ET

Executives

Ekaterina Ostrova – Director or Corporate Communications and Investor Relations

Boris Podolsky – Chief Executive Officer

Nikolay Surikov – Chief Financial Officer

Analysts

Anna Lepetukhina – Sberbank

Boris Vilidnitsky – Barclays Capital

David Ferguson – Renaissance Capital

Alexander Vengranovich – Otkritie

Olga Bystrova – Credit Suisse

Anastasia Obukhova – VTB Capital

Operator

Good morning and good afternoon, ladies and gentlemen. Welcome to CTC Media’s First Quarter 2013 Results Conference Call. At this time, all participants are in a listen-only mode. 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 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, as usual, will first, they will run through the key operating and financial highlights, and then we will move to our traditional Q&A session.

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

Before we begin, we would like to remind everyone that this call may contain certain forward-looking statements based on the environment as we currently see it. And, as such, they include certain risks and uncertainties. So please refer to our SEC filings for more information on the specific risk factors that could cause actual results to differ materially. And, now, I would like to hand the call over to Boris for his comments.

Boris Podolsky

Good morning and good afternoon, everyone. Thank you for joining us today. It’s actually a beautiful day in Moscow, and it’s a public holiday. So we’re particularly thankful to all of you who are calling us from Russia. With that, let us begin our second – our first quarter conference call.

Overall, the first quarter was in line with our expectations. Our Russian TV advertising revenues were up 7% in ruble terms. This was below the estimated 11% to 12% growth in the market, but this growth level should not be indicative of the full year dynamics.

The market is still expected to grow by up to 10% this year, and we are on track to meet the previously provided outlook to increase our Russian TV advertising revenues in line with the market for the full year. Market underperformance in Q1 is explained by very tough year-on-year comps.

This specifically relates to the CTC channel audience share, which reached its two-year peak level in first quarter of 2012. As you might remember, in Q1 of last year, we outperformed the market by nearly 10 percentage points. So we indeed had a very high base. Comps are getting easier in Q2 and Q3. Plus, the condition of the first quarter is historically smaller in terms of the advertising sales. So, overall, we remain confident that our full year performance will be in line with market.

Russian channels’ national inventory was fully sold out in the first quarter at high year-on-year prices with a broadly stable power ratio. Domashny and Peretz revenues outperformed the market growth, despite certain year-on-year softness in their audience shares. Both channels saw increase in prices, sellout levels and sponsorship sales. Domashny revenues were up 13% year-on-year in rubles, and Peretz sales were up 22%, significantly better than the market.

Our total operating revenues were up 4% year-on-year in ruble terms, below our Russian channels’ sales dynamics. This was primarily due to the lower growth of Channel 31 and decline in sublicensing revenue. Decrease in sublicensing is purely explained by timing of content sales to Ukraine broadcaster last year, which was heavily weighted to the first quarter.

Revenues from the CTC-International were up 25% year-on-year in dollar terms, while digital media revenues were up 1.5 times primarily due to increased reach of our platforms and higher advertising sales.

CTC Media continues to be on the cutting edge of the entertainment media in Russia. We are very pleased and encouraged with the success of our recent transmedia project, Real Love, which reached over 50 million of the CTC channel viewers and Internet users combined. So we are planning to further develop our initiatives in the cross platform space.

As announced previously, for the full year, we expect our international, digital, and sublicensing revenues to grow ahead of the Russian TV advertising market. CTC Media’s OIBDA was down year-on-year, from 29% to 26% in the first quarter. The decrease was primarily due to growth in programming expenses ahead of the revenues. Nikolay will later talk us through the drivers in more details.

Let me now comment on our Russian channels audience share performance. In the first quarter, CTC Media as a group of Russian channels has maintained second place among Russian TV holdings in the 10 to 45 age segment. Overall, fragmentation continue to influence television landscape in Russia in Q1, and combined viewing share of the top five channels was down 4% – 4 percentage points year-on-year in the 10 to 45 demographics. At the same time, total share of cable channels increased by 3 percentage points in the first quarter.

Domashny and Peretz posted some year-on-year declines in ratings after delivering their all-time record results in 2012. Last year, we were focusing on grow – our small channels’ audience shares and broadening their viewership base. In 2013, we are focusing on retaining the newly joined viewers, while further refining the demographic profiles of our channels.

I am pleased with the CTC channel year-to-date rating dynamics. Its audience share was up to 11.3% in the first quarter, compared to 11% in the fourth quarter of last year. It was also consecutively growing in each of the months of Q1, as we were launching our spring premiers. New seasons of The 80’s, Traffic Light, Kitchen delivered audience shares in line or higher than our expectations. The last episode of the second season of the Kitchen had the remarkable share of over 30% in Moscow, which is the highest result for the past three years.

Most recently launched comedy series Think Like a Woman, also had a strong start and delivered audience share well above the channel’s average. It is also important to note that the CTC’s target viewing share in April was up year-on-year compared to 2012, which underpins the overall positive trend for the channel. Despite fragmentation, it is our objective to grow CTC average audience share for the full year.

Now a few words on the digitalization process in Russia. In mid-March, CTC and Domashny signed agreements with Russian Television and Radio Broadcasting Network, which will provide digital distribution services for the channels in the second multiplex. According to the terms of the agreement, digital distribution costs in 2013 will be approximately $6 million combined for the CTC and Domashny. We have already started paying some satellite fees in the end of the first quarter, but the main costs will be incurred in the second half of the year.

Fees payable for 2014 and beyond will be calculated on an annual basis according to the rates that RTRS will set by October 1 of the prior year and will depend on the multiplex infrastructure rollout progress. As before, we estimate to pay up to $26 million in digital distribution fees per year per channel, when the digital network is fully completed and less amounts in the transition period.

And, finally, I would like to reiterate our outlook for the year. We continue to expect the Russian television advertising market to grow by up to 10% year-on-year in ruble terms and our Russian TV advertising revenue to grow in line with the market. Our channels’ national inventory is already approximately 90% contracted for 2013 at higher average prices than last year.

As far as sublicensing, digital media, Channel 31, and CTC-International revenues we anticipate them to grow faster than our Russian TV advertising sales. We will continue to invest in content, but it is our objective to maintain our programming expenses stable as a percentage of advertising revenues for the full year compared to 2012. Please, note that the growth in programming cost is expected to be weighted to the first half of the year. We also anticipate to deliver an OIBDA margin similar to 2012 levels 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 note that, starting from this quarter, we have changed our reportable segments, which you will see in the press release and in our quarterly filings with SEC. From now on, we will be reporting results of our Russian broadcasting operations by channel instead of breaking them down into networks and station groups. We will also show Channel 31 as a separate segment.

The results of our other CTC-International operations, as well as digital media projects and corporate office, will be reported under All Other segments. This change reflects the way our Board and management evaluate and manage the performance of CTC Media, and we hope that our shareholders, investors, and analysts also find this convenient. To facilitate comparison, we have published comparable basis historical segment information on our website.

Another thing that I would like to highlight is that the currency fluctuations impacted our reported U.S. GAAP results for this quarter, as the Russian ruble depreciated by 2% against the dollar in Q1 of the current year. Now, since Boris has already covered the top line performance, let’s move on to the cost development.

Our total operating costs were up 8% in dollar terms and 10% in rubles. The growth was mainly driven by the increase in programming costs and depreciation and amortization expenses, partially offset by lower direct operation costs, SG&A, and stock-based compensation expenses. Since most of our expenses are ruble based, I will discuss changes in the cost items in our local currency terms. Direct operating expenses were down 3% in rubles, largely due to decrease in headcount, partially offset by higher transmission costs related to annual tariff raises and increased maintenance costs for our digital broadcasting facility.

SG&A expenses were down 3% in rubles in the quarter. The decrease mainly reflected the lower advertising and promotion expenses, mainly due to the latest timing of the advertising campaigns at CTC and Domashny channels in 2013 compared to 2012. Programming costs were up 17% in ruble terms in the first quarter. This reflected the more expensive content mix for our Russian TV channels.

While, in the first quarter of 2013, we had delayed the launch of our high-rating premiers on the CTC channel compared to 2012, we aired more expensive foreign movies to support the channel’s audience share in response to increased competition. High programming expenses for Domashny channel were mainly due to more expensive Russian series and movies and an increased volume of Russian shows to support the channel’s increased focus on younger female demographics.

Content costs for Peretz were up primarily due to an increase in the volume of locally produced and to a lesser extent due to an increased cost of foreign content to support Peretz’ position as an edgy, comedy-focused channel. Depreciation and amortization expenses were up 65% year-on-year in ruble terms in the quarter. As you know, we have recently started amortizing our analog licenses due to the reassessment of their useful lives from indefinite to finite as a result of the planned transition from analog to digital broadcasting.

Our effective tax rate was 36% in the first quarter of 2013, up from 34% last year. This was primarily due to the recognition of one-off foreign tax credits that were deducted from our U.S. income tax in 2012. Overall, for 2013, we expect our effective tax rate to be back to a more normalized level of approximately 35%, but there may be some quarterly fluctuations.

Moving to our cash flow and balance sheet items; our net cash flow from operating activities was down year-on-year to negative $13 million and, primarily, reflected increased programming payments, which were up 20% in dollar terms. This was partially offset by high advertising sales. As we told you at our full-year 2012 conference call in March, we’ve deferred some payments for content from the fourth quarter of last year to the first quarter of this year. Some of the negative operating cash flow is the result of the timing effect.

We had no M&A activities in the first quarter of this year. And capital expenditure was down year-on-year from $3 million to $1 million and included, mainly, purchases of cable connections and broadcasting equipment. As a result, we have negative free cash flow of $14 million in the first quarter, but this purely has to do with timing of cash payments for content, which I explained earlier.

Overall, CTC Media remains a strong cash-generating company. During 2013, we intend to pay out 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. We have already paid the first quarterly installment of $0.15 per share, and the Board has also approved the second quarterly dividend of $0.16 per share, or approximately $25 million in total, to be paid out at the end of June.

Now back to you, Boris.

Boris Podolsky

Thank you, Nikolay. We will now be happy to open the floor to any questions you may have. Operator, over to you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Anna Lepetukhina from Sberbank. Please ask your question.

Anna Lepetukhina – Sberbank

Hello, actually, I have three questions. My first question is regarding quarter-on-quarter fluctuations and seasonal fluctuations. I mean, in first quarter, you had good pattern as a result of this – we saw kind of growth below what is expected for the full year. Should we expect an improvement already in the second quarter, or you think it will be later? My second question is about free cash flow generation, because it was negative in the first quarter of the year. And I just want to understand, was it due to an increase in acquisition of programming expenses, which was the result of the delay in payment – was in place in the fourth quarter of last year? And, also, can you, please, split growth? What was the result of the delay, and what attributed to this year? And my third question is regarding your pipeline of series for this year. There is a long pipeline of premiers that we expect this year. But, out of all these premiers, for which series do you have the highest hope that it will be another hit similar to Kitchen? Thank you.

Boris Podolsky

All right, Anna. Thank you for your questions. I was worried for a second as you know, there is no questions out there. All right, so I was writing them down, so just correct me as I go along. I believe your first question was on quarter-on-quarter fluctuations, and I wasn’t quite clear on this one. I presume you refer to revenue, right?

Anna Lepetukhina – Sberbank

Yeah, both to revenue and to EBITDA margin section that we saw in the first quarter, whether we’ll see an improvement already in the second quarter?

Boris Podolsky

Okay. Well, first of all, I guess, talking about revenues, one should not forget that’s – it is a seasonal business to us. So, historically the second quarter and the fourth quarter combined, actually, have in excess of, well, almost close to 60% of contribution to our revenues for the full year. So that’s one thing.

Second of all, I guess, commenting on the growth of our Russian revenues in Q1, the revenue from our Russian advertising has grown 6.5%. And, according to our preliminary estimates – well this is the numbers available to us currently the markets have grown somewhere close to 12%. So, as I said, the main reason for that underperformance versus the Russian TV advertising market is actually very high comps base for, mainly, CTC. Last year in Q1, CTC audience share, if I’m not mistaken, in 10 to 45, had been 12.7% versus 11.3% in this quarter. So, naturally, on this front, CTC on a comparable basis had been growing below the Russian TV advertising market pace of growth.

Now, for the full year, basically, what we do expect is that we will be in line with the market over the Q2 and Q3, and we should be outperforming, according to our estimate the market, in the Q4. Again, one should be careful evaluating this because we obviously base our statements on the assumption that the market growth is seasonally spread in a certain pattern, and, overall, for the year, it will grow up to 10%.

For example, in Q1 of this year, the market has outperformed what we have expected it to be, we – again, speaking to our estimate for the 10% growth – up to 10% growth, ruble terms, for the full year. So, obviously, we will update you on this as we go along. OIBDA margin obviously will more or less seasonally follow the revenue line. As I indicated in my remarks, we have the programming growth skewed towards the first few quarters, and then it will slowdown in Q3 and Q4. So, therefore, we expect the higher contribution margins in, basically, Q4 on a year-on-year basis. And, overall for the year, as I mentioned, we expect to be at 32%, which is a comparable number to last year.

So that, I think was your first question. On the cash flow, I will skip it for a second. I will let Nikolay to comment on this one. On the pipeline of series, basically, when we’re talking about the series, obviously we, first of all talking about the CTC because our smaller channels are mostly depended on the programs. They do work on some of the unique series that we actually may show on air. But, again, that’s sort of a very hard, selective process and we’ll see how it goes.

As far as the CTC is concerned, obviously, the most successful ones we had in years is the Kitchen sitcom. It was the second season this year and we would expect it to be on air again in the autumn. As far as the new premiers, what we just launched is a new sitcom with Basharov. He is actually a very known Russian actor, very acclaimed. And the performance of Think Like a Woman, I think is the English translation and it also was very successful on air. It’s now on break for the holidays if you wish, but then the sitcom will be returning back on air.

There are a few new projects actually, we are going to be seeing in our autumn season, which will start as early as, actually, August. So we want to start to warm up the audience earlier this year. One of them, I guess – one of the premiers probably, I would want to mention is called (inaudible), it’s a premier of ours. It’s promised to be actually very interesting project.

It’s about a group of young hockey players, so it’s sort of our preview on the upcoming Olympics. The cast is great and the sitcom is turning out to be actually quite interesting. So we really do have high hopes for this one. As far as other ones, I probably will stop from naming them because the names probably wouldn’t tell much to the audience, but the pipeline of products is 100% contracted for the CTC and the shows are being already produced and just sitting on the shelf waiting for their turn. So we’re fairly confident as far as the pipeline is concerned for the rest of the year. So, that’s, I think on your third question on cash flow, I will turn it back to Nikolay.

Nikolay Surikov

Yeah, can I ask just to repeat me with the question because – to ensure that we’re properly answering it?

Anna Lepetukhina – Sberbank

Yes. In the first quarter, free cash flow was negative. And, as far as I understand, it was due to – percent increase in amortization of programming – in the acquisition of programming rights. And, as far as I understand this increase is attributable due to the payment delay from the fourth quarter. So whether I am correct and also, is it possible to split this growth, which was attributable to the business and which was attributable to the delay in payment?

Nikolay Surikov

Okay. Understood. Yes, for the transfer of schedule of payments from the last year and you are right, you understood correctly. The approximate amount of transfer was around $20 million from the last year. And, for this year, as we already told on our last conference call that the growth of acquisition is expected to be more or less in line with the growth of our depreciation or programming expense that is expected for this year. So the growth of acquisition is more or less the same as the growth of programming expense in the P&L.

Anna Lepetukhina – Sberbank

Okay. And can I just ask a follow-up. So, if I heard it correctly, it’s $20 million. But should we expect more in the second quarter, or basically, this whole kind of cash that you had to pay was paid?

Boris Podolsky

I think the most part was paid in Q1. Yeah, you’re right.

Anna Lepetukhina – Sberbank

Okay. Thank you very much.

Operator

Your next question comes from the line of Boris Vilidnitsky from Barclays. Please ask your question.

Boris Vilidnitsky – Barclays Capital

Hi, good afternoon. A couple of questions from me, first, could you guys comment on the macro, have you seen any effect there?

Second, on programming expenses, should we expect them from now on to grow ahead of operating revenues? And, last, then, the depreciation, over how many years are you depreciating the analog licenses? Thank you.

Boris Podolsky

Okay. Well, thanks for your question. As far as the macro is concerned, I guess, outside what is publicly available, per se – just recently, the state – the Russian state government has decreased the forecast of the GDP growth for the year. But, outside that, we really haven’t seen anything unusual or, per se, negative which would, I suppose, be the most concerning, so, no, not really.

As I mentioned, we are over 90% sold out for the year. In Q1, the market growth – the TV market growth actually outperformed what we have expected. So, if nothing else, it’s I suppose it’s a positive sign. We still don’t see any fundamental reasons, why? For the full year, it should be above what we estimated, up to 10%. But there have been, so far, nothing negative on our horizon. Now, on the programming expenses, basically, no, we do not, as I mentioned and I think – for the full year, we do not expect the programming expenses growth to outperform the revenue growth. And in the subsequent quarters, it actually will be slowing down.

Nikolay Surikov

Speaking about analog licenses depreciation, we amortize them based on the region-by-region schedule of digital signal rollout. So – and the last region should be until 2016.

Boris Vilidnitsky – Barclays Capital

Got you. Okay. Thank you so much.

Operator

Your next question comes from the line of David Ferguson from Renaissance Capital. Please ask your question.

David Ferguson – Renaissance Capital

Hi, good afternoon, everyone. So, two questions, please. Firstly, you said that April audience share for the CTC network was up year-on-year. Can you tell us what that was in the target demographic? And then, probably more, how does the programming lineup in May and June compare with April? The improvement that you saw in April, should that continue in May and June? That's the first question. And then, secondly, in terms of the digital rollout or the switch off of analog, that sort of 2016 timeframe that you just mentioned on the last question – do you think enough is being done to ensure that that is a workable and realistic timeframe? Or should we probably less – you’re thinking that for a longer period of time? That's it.

Boris Podolsky

Okay, David. Thanks for your question. As far as April audience share is concerned, I think, for the channel it was 11.4% in the target demographics. So, and as far as the dynamics of the audience share, obviously, as I said, it’s a seasonal business. But, in general, we expect the audience share to be higher than these levels in Q3 and Q4, which are seasonally sort of better for the channel.

Now, on your second question about the digital rollout and the plans to have it completed on January 1st, 2016, at this point, it’s sort of hard to tell really. Obviously, we’re familiar with the program, and we hear from the regulator that they’re very much committed to stick to the schedule which was originally announced. However, I think there are two things that need to be taken into consideration, when we’re talking about the digitalization.

One of them is obviously the rollout of the network itself. And this one seems to be fairly realistic as far as how many towers and the base stations and the other stuff have to be built in regions. So I think this part was really that the proper planning and financing appears to be rather realistic.

The one factor which concerns us, as well as the industry at large, I think, is when the analog will be actually switched off, because this will be rather fundamental to our business, as well as to business of other broadcasters. And if, together with the rollout the state will stick to the originally announced switch off plan, I think this will work just fine. But, the longer period of time we will have a parallel broadcasting in both digital and analog, this actually will be a problem. So, on that front, again, we besides what’s publicly been announced by the state, have no update.

David Ferguson – Renaissance Capital

Okay. That’s very helpful. Thank you.

Operator

Your next question comes from the line of Alexander Vengranovich from Otkritie Capital. Please ask your question.

Alexander Vengranovich – Otkritie

Hi, guys. Good afternoon. I have a question regarding your digital media broadcast. So, you posted rather good growth for revenues in the first quarter. But it's still growing from a very long base. So my question is actually, do you plan to introduce some sort of a big change in the amortization for your digital projects just to bring them on the next level, just to make it not $1 million, a more substantial figure like $10 million or $20 million, which could be visible in your financials as we see that the amount of the users, the amount of the viewers on your digital portal is actually comparable to the viewers of your TV channel. So do you – is anything on the agenda for this year or going forward or you will just continue to develop the current business model, the digital project? Thank you.

Boris Podolsky

Okay, Alexander, thank you for your question. And, indeed, obviously, the whole digital strategy is actually one of the very important areas for us. We currently are discussing this with board of directors. And the management had put forward number of, in my opinion, very interesting and exciting initiatives, which actually can take us on the forefront of the story, definitely in Russia and maybe even in Europe. Some of those plans are rather ambitious and require further discussion, so I, unfortunately, I am not able to share those with the audience at this point of time. But, just, I guess, you’re going to have to take my word for this. This is something we’re actually working on and hoping with board participation to present it to you and other investors later during the year. So that very much remains a focus of ours.

At the same time, we obviously are developing the platforms and the initiatives we already have. That includes the Domashny portal, which I personally believe is actually a very interesting and exciting project of ours. It could be an eminent source of additional revenue and initiatives, and that’s what we’re doing right now. We also will be developing and do those channel’s websites, and that’s also on our agenda. We, of course, will continue to use video more as a platform to play our content and, actually, to earn some money out of this.

We have in our digital platforms, all together, 8.2 million users right now, and that’s not a bad number. But that’s not, definitely, a number we’re happy with, so we will do what we can to increase this number and get as much revenue out of the growing digital space as we can. This quarter, I think we have shown almost 50% growth from the new segments, from the digital segments of our business. You’re correct. It’s growing from the small base, but it has a great potential. So we really look forward to developing those initiatives.

Alexander Vengranovich – Otkritie

Thank you. That was helpful.

Operator

And your next question comes from the line of Olga Bystrova from Credit Suisse. Please ask your question.

Olga Bystrova – Credit Suisse

Yes, good afternoon. I want to ask about some of the cost items that have actually had very good trends in the first quarter. Specifically, about direct operating expenses, you’ve been doing some headcount reductions and other sort of optimizations. Is this something that will continue in 2013 in other quarters? What does it relate to? Does it relate to potential optimization of costs ahead of additional costs for digital transmission, et cetera? So basically, the reason I’m asking is because I want to understand whether there would be any further offsets of additional costs that you will see for digital transmission. And the same, basically, for sales and SG&A, which were also down 5% in rubles – or 3% in rubles – whether you’re expecting this trend to continue in 2013? Thank you.

Boris Podolsky

Thank you for your questions. Basically, as far as the cost optimization is concerned, that’s something what we always is looking at. So, this year, for example, and I think I mentioned it on our previous call, we have done something rather unique for the company.

So we have done so-called zero-based budgeting. So, instead of budgeting from zero plus – sorry – from last year base plus whatever inflation which is more or less traditional way of budgeting, we have said that the budget is zero, and every single line of expenses has to be justified.

So this is a very useful exercise for any company at any given year. And, obviously, we have had some results of this. As far as the headcount optimization is concerned, we at this point of time don’t have any specific initiatives to decrease the headcount for the company. We do, however, and as we always have, always look at the efficiency of our organizational structure. And that’s almost an ongoing process.

So, and whenever something basically surfaces, we will - on this one. Also, in this quarter, we had some reallocation of costs to the later quarters. Again, that’s more or less normal process for us. So some of the advertising campaigns for our smaller channels, for Domashny and Peretz, costs have been either decreased or moved to the subsequent quarters. But, overall, as I said, I think you would be better off looking at our full year expected margin, which we have said to be at the level of last year around 32%.

Olga Bystrova – Credit Suisse

Okay. Thank you very much. And maybe sort of a follow-up on some of your estimates for the market growth, obviously, there was – trend was better than expected. Why do you think it was the case? Why, first quarter, overall advertising revenues grew above 10%? And do you think there is a possibility that it will continue in the second half this year? Thank you.

Boris Podolsky

Okay. Let me think. Really, and I mean, we’ve been trying to answer this question internally as well. I think as a result of our sort of internal thinking, there are a few thoughts we have. And, please, don’t take them for the statements because to be honest with you, we don’t really know what the reasons are, but one should consider what happened last year. And, if you remember, there was a change in TNS panel, which resulted in the increase in viewership in the first quarter of last year. That increase in viewership in the first quarter of last year resulted in significantly to sell because no one actually planned for this inventory.

So, obviously, this year, because once, for a change, we didn’t have anything – any major changes in TNS panel, the levels of the inventory on the market were more or less what sales houses and channels have planned for and, therefore, sold them. So I think one of the reasons for the higher market growth is actually a higher level of sellout for all of the channels versus the comparable period in Q1.

Also, we know some anecdotal evidences that some of the advertisers actually had leftovers of the budgets, if you wish, which they have pushed forward to the market. So there have been some unexpected, per se, additional budget – advertising budgets brought to the market. But, besides that, there have been no other fundamental movers for this trend, at least to our knowledge. So, therefore, we continue to stick with our full year forecast, up to 10% in ruble terms.

Olga Bystrova – Credit Suisse

Okay. That’s great. Thank you so much.

Operator

Your next question comes from the line of Anastasia Obukhova from VTB Capital. Please ask your question.

Anastasia Obukhova – VTB Capital

Good evening. And I have a few questions for you, if I may. First of all, this cash spend on the content in the first quarter – to which periods of the potential content airing it relates; i.e., when will the content you assumed in the first quarter, and given it's very high amount, like record-high amount, will be aired? Is it in the second quarter, the second half of this year or maybe even in 2014? The second question, the new series you're coming with, Think Like a Woman, (inaudible) is this a regional series, or you already picked up some ideas from other countries? So did they show very good performance or bad performance in another nation, in other countries? Also, would you please, reveal the payments to Video International you made in the first quarter? And the fourth question, the last one. You now upgraded a bit of your potential expense in the digitalized signal transmission costs. Do you believe that you're not going to upgrade it further during this year and for the – in 2014 also? Thank you.

Nikolay Surikov

Thinking about the payments for content, the payments made in the first quarter of this year is actually evenly split for the projects to be aired in the current year, in the 2014, and 2015. So there is not any significant trend or share of these payments related to some years. So there are actually many projects evenly split.

Boris Podolsky

I will try to answer the rest of the questions. As far as the new series, which I had spoke about earlier, were they original or something developed by us, they actually – also it wasn’t informant. No. They are original. So there’s no such informant. So they’re purely developed and produced by us. And, historically, as we have seen on our channels and on others as well, usually the products which are unique and original generate most of the ratings. Sometimes you, by accident, actually do come across good working segment, but the most successful ones are the unique products.

As far as your other question was concerned, payments to Video International in Q1, I may not necessarily understand it correctly. But I guess, in general, to answer this question, we continue our relationship with Video International as our partner, and we use their proprietary software to support our sales process. This year, the contractual effective commission we pay to Video International has remained unchanged. It’s 12%.

However, the scope of services we use has changed. So, some of the services that were previously provided to us by Video International are now done in house, and, therefore, this will impact the effective commission levels. But the main rate has been stable at 12% year-on-year. So, obviously, the fluctuations you see on our P&L quarter-on-quarter is a factor of changes in the scope of services, not the rate itself. And the last question on the digital transmission costs. I’m not quite sure I really catch the question. So maybe if you help me understand what is it you’re looking for?

Anastasia Obukhova – VTB Capital

You were saying that you expect RUB300 million for the additional costs for digital signal transmission. You were saying it in February. Now you’re saying that it is going to be higher, according to your press release. And I was wondering why?

Nikolay Surikov

Yeah, I think yeah actually let me clarify this. This RUB 300 million number actually is unchanged for this year, and sorry if I wasn’t quite clear. Yes, it’s still the same. This year, we expect to pay no more than RUB300 million for two channels. It will increase, however, going forward, meaning 2014 and 2015 as there’s going to be a rollout of the digital network. But what we do know is we know the upper limit of this number, which is approximately $26 million a year per channel. But we don’t know what exact number is going to be in between, meaning 2014 and 2015, because this will depend, as I mentioned, on the rollout.

Anastasia Obukhova – VTB Capital

Okay. And can you, please? Can I come back to my first question, please, regarding the cash spent? Have I understood correctly that you expect this amount of $109 million of cash spend to be amortized until 2015? It means within two years and nine months. And, according to your balance, actually, half of the programming is to be amortized within 12 months because of the (inaudible) and the rest within a bit more period. And, what is your like average amortization policy now. How long do you normally amortize your content when you acquire it or when you develop it. And, also, does this spend already include the third season or the second season of the Kitchen already? Thank you.

Boris Podolsky

Speaking about the amortization rates, it depends actually on the product, the type we are acquiring. So depending on the number of airings that we have, for some products, we require only two airings or for another, it can be even five. So I don’t think that it’s actually possible to split this $108 million just right now in terms of what will be the impact on other years.

So, depending on the projects – when I said that we are going to air these products in the next two or three years, I was referring to the first run of titles. So it doesn’t mean that all this $100 million will be amortized in these two and a half years. It can be even more for some products. For example, we have five rounds. The fourth and the fifth round can be even in 2016 or 2017. You also asked for Kitchen, correct?

Anastasia Obukhova – VTB Capital

Yes.

Boris Podolsky

Kitchen, right now we are preparing the contract for other episodes of Kitchen.

Anastasia Obukhova – VTB Capital

And so you haven’t invested in the filming in the first quarter, not for the second season or for the third season?

Boris Podolsky

No- from cash perspective, no.

Anastasia Obukhova – VTB Capital

Thank you.

Operator

We have no further questions. Please, continue.

Boris Podolsky

Thank you. To summarize, I would like to highlight the following points. We see positive audience share momentum for our flagship CTC channel and that we are very pleased with the performance of our spring season premiers. We also have a strong content pipeline for the remainder of the year, including summer.

The Russian TV advertising market, as before, is anticipated to grow by up to 10% in ruble terms. We have now contracted 90% of our national advertising inventory for the year at higher prices than in 2012 and expect our Russian television advertising revenues to grow in line with the market, while revenues from other business segments should continue to grow faster than that.

Our programming expenses growth will be skewed to the first half of 2013. But, for the full year, we plan to grow them at a rate not higher than revenues. Therefore, we expect to maintain our group OIBDA margin at levels similar to 32% that we saw in 2012. We also confirm our intention to pay higher year-on-year dividends to our shareholders this year with the next payment due at the end of June.

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

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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