Central European Media Enterprises Ltd Q2 2009 Earnings Call Transcript

Jul.29.09 | About: Central European (CETV)

Central European Media Enterprises Ltd (NASDAQ:CETV)

Q2 2009 Earnings Call Transcript

July 29, 2009 9:00 am ET

Executives

Romana Tomasova - VP, Corporate Communications

Adrian Sarbu - President and COO

Charles Frank - Interim CFO

Anthony Choi [ph] - Vice President for Strategy and Operations

Analysts

John Charles [ph] - J.P. Morgan

Ben Mogil - Thomas Weisel Partners

Matthew Walker – Nomura

Mitch Resnick – Fortis Investment

Maria Levinskaya [ph] – Bank of America/Merrill Lynch

David Kestenbaum - Morgan Joseph

Merry Erington [ph] – Janco Partners

Peter Harvey – Cazenove Capital

Demetri Zuke [ph] – Citigroup

Puria Jennert [ph] – KCB [ph]

Operator

Good morning my name is Sara. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises second quarter 2009 earnings conference call. All lines have been place on mute to prevent any background noise.

After the speaker’s remarks there will be question-and-answer period. (Operator instructions) As a reminder this conference call is being recorded today July 29, 2009. It is now my pleasure to turn the floor over to Romana Tomasova, Vice President of Corporate Communications. Ms. Tomasova you may begin your conference.

Romana Tomasova

Good morning or good afternoon to each of you, and welcome to CME's second quarter 2009 investor conference call. During this call, we will refer to presentation slides, which you can download from our website www.cetv-net.com. You can find them on our homepage at the bottom left corner.

The participants of today's call will be Adrian Sarbu and Charles Frank who will give you the formal presentation. We are also joined today by our General Counsel, Daniel Penn and Vice President Anthony Choi [ph], Peter Wildok [ph], Marijan Jurenec, and Mark Wyllie who will be available to answer questions.

Before I turn to Adrian, let me read the usual Safe Harbor statement. Our presentation today will contain forward-looking statements. For these statements, we claim the protection of the Safe Harbor contained in the US Private Securities Litigation Reform Act of 1995, and refer you to the forward-looking statements section in our Form 10-Q filed with the Securities and Exchange Commission earlier today for a list of such statements and the factors, which could cause future results to differ from those presented in this call.

During this call, we will refer to our segment financial information. Certain of these numbers presented in local currencies are not US GAAP numbers. We do not provide reconciliation to these numbers in this presentation as the US GAAP amounts are expressed in US dollars in our financial statements.

Additional information on our segment data is provided in note 17 to our financial statements on page 40 of our 10-Q. And now, over to Adrian.

Adrian Sarbu

Good afternoon or good morning. 2009 has been a very tough year.

I invite you to turn to page four of our presentation. In quarter two, our core markets declined in line with quarter one, which is between 15% and 30%. The drop in TV ad spending followed the deterioration of GDP.

Inevitably our quarter two results reflect these downturn, but we expect to reach the bottom in the third quarter. In such a turbulent environment, we focused on preserving of leadership and brands in our core markets by maintaining or increasing audience and market shares. In the first half, we improved our liquidity position, resolved funding in Ukraine, stimulated ad spending with our stations, reduced operating costs and CapEx, and restructured corporate functions.

In 2009, our core advertising markets will reset at the level of 2007, with a stronger and larger portfolio of assets, we foresee the opportunity for growth. We are prepared for a recovery in 2010. By 2011, we expect TV ad expanding to return to the level of 2008.

Looking day by day to improve our operation performance, we are building on the lessons from the crisis. The integration of MediaPro Entertainment into a new content division of CME will give the other two operations segments broadcasting an Internet an unbeatable competitive advantage.

The diversification of our revenues from advertising to subscription, content sales, Internet sales, and management services is the goal of our new operation model. As a vertically integrated media company, CME will grow faster and more efficiently in the post-crisis environment with Internet as a new frontier. We believe we have the vision and the strategy that will create long-term value for our shareholders.

Let's move to slide five. In the second quarter, our core operations were profitable and delivered positive operating cash flow. Market conditions meant that our results were below last year. We delivered EBITDA of $69 million and a respectable EBITDA margin of 38%.

We maintained audience share leadership and importantly, we increased our market share in our core operations by up to 5%. Our Croatian operations performed stunningly and we sold EBITDA growth of 58% in local currency in the second quarter. Yesterday, we announced the acquisition of MediaPro Entertainment, which will strengthen our position as a vertically integrated media company, combining content, Internet, and broadcasting.

Let us look at slide six. In the Czech Republic, we increased our year-on-year market share to over 70%. TV Nova had an outstanding prime time audience share of 40% driven by successful local production such as Rose Garden Medical and the increase in audience share of Nova Cinema.

In Romania, our advertising market share increased to 55% from 51% year-on-year. The PRO TV group also maintained leadership with a 32% prime time audience share driven by Blockbuster series Regina on Acasa. Then news on PRO TV continued to deliver excellent audience share results.

In Slovakia, TV Markiza increased its advertising market share to 64% from 59%, and recovered audience share from first quarter with a successful launch of Let's Dance season three.

We are investing further to protect our brands and positioning Slovakia with the launch of our new female oriented channel DOMA this fall. In Slovenia, market share grew to 76% from 71%, and we continue to maintain outstanding EBITDA margins. Our Croatian business NOVA TV grew advertising market share to 37% from 34% year-on-year.

During quarter two, we had the number one prime time position with a 27% audience share and our evening news keeping a 33% audience share.

Let us turn to page 7 and look at the development of our new media or Internet business. We are continuing to grow traffic at a rapid pace and also to monetize this traffic. Even in a declining overall advertising market we delivered $2.4 million of revenues. We now have 1.6 million daily unique visitors, a 64% year-on-year growth.

We have top three market positions in Slovenia, Croatia, Romania, and Czech Republic. And we're delivering positive EBITDA from new media in Slovenia. We have extended our content from news and TV sites to include catch up TV and user generated content.

And now, we are seeing sales of video advertising as the highest growth segment of our Internet division. We intend to continue with our simple approach to monetize the traffic that our content generates through disciplined expansion. Now, let us talk about our developing operations on slide eight.

We have taken a very deliberate step to separate the financing of our developing operations, Ukraine and Bulgaria. We now have a special financing vehicle, currently holding $250 million, which should allow us to reach breakeven cash flows in both Ukraine and Bulgaria.

We will implement the necessary solutions to ensure that our assets in Ukraine and Bulgaria can be properly developed. Our first step was the agreement with Igor Kolomoisky to invest $100 million and just as importantly contribute the TET channel to our Ukraine operations.

You will have a 49% share in combined business. In order to retain flexibility, we agreed an unconditional put option of $300 million for one year after closing. In Bulgaria, we continue to develop our two channels with a re-launch and rebranded as PRO.BG and RING.BG.

Our programming line, up for the fall is impressive. Bulgaria remains highly attractive market with significant growth potential. We are also continuously evaluating different options to rapidly maximize our returns on this investment. On the next two slides, I will talk about our plans for the developing operations.

Let's turn to slide nine. We have a clear path to profitability in Ukraine. With the investment by Igor Kolomoisky of 100 million funding of our Ukraine operations is secured. In first quarter 2009, TV advertising market in Ukraine is expected to recover. We now have three national channels, free to air, Studio 1+1, Kino, and TET, which create a strong platform for fast audience increase.

The available funding should allow us to support rapid development of high-quality local production using our resources at MediaPro. As targets, we set prime time audience share leadership in 2011 and EBITDA break-even in 2012.

Now let's turn to Bulgaria on slide 10. In Bulgaria, we need to expand our local production capabilities and pursue multichannel strategy. We will continue to explore external funding opportunities although with the funding that we have now have in place for Bulgaria, we have a path that takes us to audience share leadership in 2012 and EBITDA break-even in 2013.

And now over to our CFO Charles Frank.

Charles Frank

Thank you Adrian. I would like to highlight some of the key items in the financial statement. Please turn to slide 11, which sets us our key operational performance figures for the second quarter. As we all expected, uncertainty among advertisers has prevailed in our core operations, which include the Czech and Slovak Republic’s Romania, Slovenia, and Croatia.

The US dollar revenues fell by 33%, while overall dollar revenues for all seven operations, including Bulgaria and Ukraine fell by 39%. This reflects the continued decline in television advertising spending in our markets and the continued impact of the stronger US dollar.

On a constant currency basis our core operations experienced a fall in revenues of only 19%. We decreased our total cost by 21% in the second quarter compared to the second quarter last year, excluding Bulgaria, which was acquired only in the third quarter of 2008.

A portion of this decline is the result of a decline in the dollar value of our local currency in which about 70% of our local costs are denominated. The net decline in total cost, excluding Bulgaria in terms of constant currencies is 10%, resulting from our headcount reductions, salary reductions, lower marketing expense, and lower programming costs except in the Slovak Republic, where we are recovering audience share after losing ground in the first quarter.

Moving to slide 12, we suffered an operating loss of $73 million in the first half of the year, after incurring an impairment charge of $82 million in the first quarter. We were not required to record any impairment charges in the second quarter, and excluding the impairment charges our operating income for the year to date fell by $135 million as a result of the difficult market conditions.

We made a net loss of $20 million in the first of the year, a decrease of $98 million. Net interest expense for the period was up by $11 million, as a result of higher average total debt, the full year-to-date impact of interest on the convertible notes, and a declining interest income.

We benefited from an $84 million gain in foreign exchange compared to a net loss of $34 million in 2008. Cash flow from operations fell to $6 million from $128 million for the six month period through June 30. We had a cash outflow of $18 million in respect of capital expenditures, which was 57% lower than for this same period of 2008.

Our free cash flow by which I mean cash generated from operations less capital expenditures for the six-month period was negative $12 million. However, our core operations with the exception of Croatia were all cash flow positive during the first six months of the year.

During the quarter, we closed our deal with Time Warner and received net proceeds of $234 million in respect of their investment. On July 2, we announced an agreement to set a 49% interest in our Ukraine operations to Igor Kolomoisky.

On closing, which we expect to occur in the third quarter, our liquidity will be enhanced by a further $100 million. This agreement also gives us a put option to sell our remaining interest in the Ukraine operations within one-year of closing or $300 million. At the end of June, cash and cash equivalents totaled $506 million and our total liquidity amounted to $542 million.

Our EBRD revolving facility amortized by 15% in May and we repaid $32 million from cash on hand. We ended the period with net debt of $828 million, which includes our convertible debt as the full $475 million, due to repay in 2013 rather than the balance sheet carrying value of $388 million.

This week, we announced our acquisition of MediaPro Entertainment. The cash consideration will be $10 million and we will issue 2.2 million shares of CME's Class A Common Stock and the warrant to purchase up to an additional 850,000 shares of Class A Common Stock at a price to $21.75.

In addition to consideration in terms of cash, shares, and share options we will also assume MPE debt and debt like obligations of 35.6 million and surrender our previous shareholdings of 8.7% in MediaPro management and 10% in MediaPro BV, the owners of MediaPro Entertainment. The total estimated value of the considerations is $96 million.

Now back to Adrian.

Adrian Sarbu

Thank you Charles. Please turn to slide 13. In Eastern Europe, we are facing the reality though the crisis is not over. GDP will decline across our markets in 2009, compared to 2008. TV ad spending will bottom in the next quarter. From the fourth quarter 2009, we should see stable advertising markets.

Although most of our advertisers have yearly contracts in budgets, they remain extremely cautious and they are not confirming their commitment beyond the current quarter, but we will stay focused on our operation priorities for the next six months.

Those are; maintain leadership in core markets in the fourth quarter at minimum cost, to increase audience share in Ukraine and Bulgaria in the fall, to increase market share in all operations, to investigate opportunities to refinance debt, and to explore funding opportunities for Bulgaria.

We currently do not have enough visibility to give accurate guidance and we will try to give you full-year 2009 guidance at our Invest Day in October. Now on page 14, I want to talk to you about our strategy.

I can express strategy in one word, profit. To deliver our strategy we created a new business model, three operational divisions, with broadcasting at the core, joined by Internet and content. We look to diversify our revenue sources. First, advertising revenue; second, subscription revenues from cable and satellite; third, sales of content that reproduce; fourth, revenues from Internet operations; and fifth, the sale of management services.

Let's go to slide 15. We have a new business model with a new content engine to drive profitability. Following acquisition of MediaPro Entertainment CME will be the largest television content producer in the region and one of the largest in Europe; currently aggregated we produce more than 1000 hours of TV fiction per year, television TV fiction.

MediaPro brings immediate scale, cost synergies, and EBITDA to our operations. The integrated Content Division will not only supply the content needs of CME TV stations, but it will supply and distribute content outside CME territories. We will cooperate with Time Warner to maximize the benefits of our partnership.

Now let us turn to slide 16. That is the way we see our future. One Content, all possible distributions. Today, we know how to monetize within broadcasting. Tomorrow, we will deliver and monetize our content through Terrestrial Digital Multichannel, DTH, Digital Analog Cable, Portable Media & Mobile TV, and definitely Internet TV.

That will maintain CME as the leader of the region and as one of the strongest players in Europe as the highly profitable vertical integrated media company. And the future is not so far. And now I pass it back to Romana.

Romana Tomasova

And I would like to open the floor to questions. So, operator can you please invite questions.

Question-and-Answer-Session

Operator

(Operator instructions) And we will go first to the side of John Charles [ph] with J.P. Morgan your line is open, please go ahead.

John Charles - J.P. Morgan

Yes. Hello. Just, Adrian maybe first question though, what do you mean by -- you expect the market to stabilize in the fourth quarter 2009, do you mean stable year-over-year comparisons and what we assume that the comparison base eases in the fourth quarter, sort of reported growth should improve? And are you seeing any indications, you talked about Ukraine being the place where you expect the market to rebound in the fourth quarter or improve -- do you see any indications of real [ph] life at this point, you know any change of stats from your advertising clients?

Then the second question would be on costs, we are seeing still, I guess in some markets, some cost declines in local currency times in Romania and Slovakia costs are still reported up in local currency terms, for if I'm not mistaken year-over-year, what should we expect for the second half – are you cutting more there? And generically I know it is early to discuss 2010, but assuming some rebound, what would be a good place to start in terms of cost expectation on the cash OpEx side, would flat be your (inaudible) expectations?

Adrian Sarbu

I will need you to repeat 2010 question, in the mean time let me answer to you questions as I understood them. First-quarter market, when I say was stabilized means that will not be declined, higher declined than the first three quarters and I think I was very clear about the third quarter and we can see green shoots [ph] in some market.

In respect of Ukraine, we made the statement that we see Ukraine coming back to the level of local spending of 2008 fourth quarter in fourth quarter 2009. This is our expectation.

John Charles - J.P. Morgan

Okay.

Adrian Sarbu

And in respect of cost, you are right, Romania and Slovakia, they are two different cases. First of all, I want to remind you that we made very clear in the first quarter earnings call in April that our priority is maintaining our -- protecting our brands and the audience share. And this was after five months of constant, constant efforts to limit our costs and with some success in some markets in local currency.

So, in Romania the case is very simple, the operations, which are year-by-year tracked, they have allowed a cost, but we added new operations in the second half of the year and -- not in the second half of the year, I am wrong, in the second quarter of the year and that is why we have an increase in cost in local currencies. This is one issue.

Second, and very important, in Ukraine we don’t enjoy comfortable relaxed markets like let's say in Czech Republic in Ukraine there are 50 channels, which are fighting for the audience and for the advertising money and as in Slovakia the main priority in Romania is to maintain audience share and fraction of a point of audience is relevant in Ukraine that's why -- in Romania.

The same situation is in Slovakia. We announced to you in the previous call that we have an issue in Slovakia with our competitor (inaudible) over investing and increasing its audience share and our audience share decreasing. Now, we succeeded to stabilize our audience in Slovakia, definitely we were leaders and we are leaders, but you see one issue is to be leaders with a comfortable advance and to be able to achieve what we achieved in Slovakia an increase of four points of market share and completely another issue to be leader just on two or three points.

So Romania and Slovakia are cases, which we brought to you when the preservation of our audience and brand prevailed in front of necessary cost cutting or the cost cut reached a limit and that is why you don't see in local currency decreases in cost as you see in other markets from Czech Republic to Ukraine. I did not understand the question about the second quarter with the cost in this market.

John Charles - J.P. Morgan

No, I'm sorry just I was – asking more about 2010, I know it is early days to start discussing about 2010, but do you -- would you've like to stabilize your cost across the road will there be a reasonable starting point of expectation?

Adrian Sarbu

We had a review of course every week. And if we can squeeze a little bit week-by-week, month-by-month our cost, some of our costs are on the dynamic control, some of them represent the mid-month of four in programming, which have to be amortized.

So, following the priorities, which we communicate it will be able to squeeze costs in the second half of the year even the markets like Romania and Slovakia. It is unlikely to do it Slovakia wise once we announce the launch of a second channel, we will do it, but expect from us to focus on audience share preserving our brands, let us not forget that starting with October, the advertisers will look for contracts for 2010 and it is expected that their request will be quite high in respect of discounts for 2010. And following the trends of the market, we will need to have strong audience share in the fourth quarter.

John Charles - J.P. Morgan

Okay. When you talk about green shoots what are you referring to? And just again, in the fourth quarter when you see stabilization again, you had a slow down in the fourth quarter of 2008, so do you see stabilization in the market would imply in reported terms of little bit of an improvement versus street shoots, right?

Adrian Sarbu

Definitely, definitely. And as you know we don't give guidance country-by-country, so I cannot tell you which country -- I cannot give you any country where we see green shoots, but I can tell you that we see green shoots.

John Charles - J.P. Morgan

Okay. Thank you.

Adrian Sarbu

Thank you.

Operator

Thank you and we will move next to the side of Ben Mogil with Thomas Weisel, your line is open, please go ahead.

Ben Mogil - Thomas Weisel Partners

Hi guys good morning and thanks for taking the call. A few questions. First question is, in terms of the put in Ukraine for $300 million next year, is there a certain amount of capital or in programming investments that you need to make from now until then in order for the put to be sort of held validate, I want to get a sense of sort of how much you sort of anticipate having to spend in the market in order to sort of execute that put?

Charles Frank

No there is no -- it is an unconditional put. We can exercise it when we want to as long as we do within the next year.

Ben Mogil - Thomas Weisel Partners

Okay. On the corporate expense from a little bit higher and thing and -- than we saw this on in the first quarter where there any sort of one-time fees related to sort of Ukrainian investment and the Time Warner investments and if so what sort of a good run rate to be looking at say from 3Q onwards?

Charles Frank

Anthony will give that answer.

Anthony Choi

Ben I will give the answer on that. In terms of the corporate cost, it was impacted by development costs in relation to the MediaPro Entertainment acquisition, but the quarter-over-quarter we expect the decline of distributing that out is around about 30%.

Ben Mogil - Thomas Weisel Partners

So we should go back to about the 9 million run range or so?

Anthony Choi

I think that we expect them for the full year to have a 30% cost saving corporate cost during the one-time development cost.

Ben Mogil - Thomas Weisel Partners

Okay. And then I think lastly and Adrian obviously you spoke at length about the (inaudible) to keep ratings, you know stable if not growing and I certainly understand that. In terms of programming from local suppliers realized the Hollywood and Western European studios are more sticky, but in terms of local suppliers are you seeing any kind of content pricing relief?

Adrian Sarbu

Local supply has been our art.

Ben Mogil - Thomas Weisel Partners

Okay.

Adrian Sarbu

And will be more and more art. In fact our prices are our cost.

Ben Mogil - Thomas Weisel Partners

Okay. And then maybe switching a little bit in terms of -- switching of a little bit, are you seeing any kind of relief when you've sort of talked to the Hollywood studios in the Western European studios, are you seeing any kind of relief there on the programming front?

Adrian Sarbu

On the contrary.

Ben Mogil - Thomas Weisel Partners

Okay.

Adrian Sarbu

I'm sorry but that is just – there is still competition, maybe I didn't repeat this, I am repeating continuously, there is still competition for in American programming. Americans do this programming in our market and it is not the case of decreases of prices of their product and however, if we talk today about decrease of price, the impact will be two years from now. If we talk about the revenue-visiting, the contract which we signed two three years ago, the answer is no.

Ben Mogil - Thomas Weisel Partners

And then I think so -- and lastly sort of you led into the question, in terms of the competitive environment are you seeing government broadcasters in the markets were the Government broadcast was strong like Romania or some of the private broadcasters like say modern times in RTL, do you see any difference of approach between the Government broadcasters and the private broadcasters in terms of how they are -- what they are spending, how they are spending, how aggressive they are willing to be?

Adrian Sarbu

As you know Government broadcasters have no control on their spending and the markets where we face heavy fund in Government broadcasters like in Croatia, even in Czech Republic, not so much in Romania or Slovenia, we have a strong competitor in respect of spending and they are bidding for commercial programs. Among private broadcasters, we didn't see in the first half of the year, reluctance in investing.

We didn't see. Maybe they are slower and in Slovakia, we just pointed out the case when a competitor over spend would significant the results in audience, not the ability to monetize this. So, we have always to pay attention to what our competitors do and it is obviously that one of the reasons we didn't achieve higher costs, decreases because our competitors are spending more than last year.

Ben Mogil - Thomas Weisel Partners

Okay. That makes sense. Okay thank you very much.

Operator

Thank you and we will move next to the side of Matthew Walker with Nomura, your line is open these go ahead.

Matthew Walker – Nomura

Thanks. Hi Adrian hi everybody, just a couple of questions. The two questions are, one on the revenue visibility and the other one on the production asset which has been acquired. Could you give us the revenue and EBITDA for ’08 and ’09 projections for the asset that has been acquired? And the second question is, most of the broadcasters around Europe can't even tell us how August advertising is going to be, so I just want to ask you about your projections, TV advertising will return 2008 level by 2011, which strikes me as somewhat sanguine, could you just whether that is in local terms, in dollar terms and whether it applies also to CME whether they're going to capture that growth.

Because in ’08 the revenues were about just over $1 billion, that didn't include really much as much from Bulgaria and so in theory if you're capturing your share of growth you should be achieving over $1 billion of revenue in 2011, Can you just maybe expand on those things? Thanks.

Adrian Sarbu

For the question related to production assets, Anthony Choi our Vice President for Strategy and Operations will answer to you.

Anthony Choi

Matthew in terms of the revenues for MediaPro entertainment for 2008 year was $95 million, we expect at this stage (inaudible) but we expect for 2009 to be a similar levels to that.

Matthew Walker – Nomura

95, okay.

Adrian Sarbu

Yes.

Matthew Walker – Nomura

And on the beta?

Anthony Choi

On EBITDA, the EBITDA for 2008 was $13 million, but obviously you cannot give that guidance at this stage, Matthew.

Matthew Walker – Nomura

Okay thank you.

Adrian Sarbu

In respect of visibility, if I understand your request is, if we see 2011 reaching the level of 2008 in spending in local currency? Yes, this is what we foresee. This is what we foresee as head markets. We are not talking about our operation market, we are talking about ad market. The way ad market will behave in two years from now, it is quite premature to predict. We also made it very clear that we do our best to preserve our assets and also in our presentation we wrote a sentence when we said, we think we are stronger today than one year or two years ago. This is what we can tell you today.

Matthew Walker – Nomura

That means your share of that revenue that local revenue should be larger in 2011 then it was in 2008, which even given the slide in local currency versus the dollar implies, you know numbers, well north of – in dollar terms and what people are looking for at the moment. I just want to know -- I just wonder given there is any visibility, what gives the company confidence they can make their projection about 2011?

Adrian Sarbu

First of all the assumption and our share will be the same in 2011 as in 2009. I will not support. Why? We are looking for price increases. So, the normal sequence of event is, once market starts to grow, we will leverage our dominant position in the frame of the low in each country and we have various media lows in every country. In order to achieve price increases because we gave up a lot of our gains in prices, achieved in 2007 and 2008. So, I cannot say that the old market share of ours into -- definitely our market share of ours in 2011 will not be the same. I would love to be the same. I would love to be the same, but it is definitely, our targets to convert market share into higher prices in the next years once the first signal of stabilizations of our markets will appear market by market.

Matthew Walker – Nomura

Okay, thank you.

Operator

Thank you. And we will move next to the side of Mitch Resnick with Fortis Investment. Your line is open, please go ahead.

Mitch Resnick – Fortis Investment

Hi, thanks for taking my question. Most of them have been answered and that was mostly centered on visibility in the 2011 number. But one question I have was on, you made a comment about Time Warner being able to help with distribution, can you expand on that and what aside from the improvement in liquidity, what are the kinds of benefits do you expect from the association with Time Warner?

Adrian Sarbu

We have Time Warner today as an investor. We have Time Warner today as a supplier of foreign programming of studio programming, which we acquire on (inaudible) the base, but also following the criteria of acquiring this type of programming which are Time Warner criteria. We have Time Warner today committed to co-invest in us in development of cable and satellite channels, and it is a part of what we mean distribution. And once we could reveal today that MediaPro entertainment, it’s a part of CME, it’s obviously that we have plans with Time Warner for co-development of television content to be distributed mostly in Europe, mostly in our region but also outside our region. These are our expectations from Time Warner and also we can imagine that with our very strong base in this part of the world, the Time Warner products not only television product will find a strong distribution channels which means more revenues for them and for us and higher profitability for both parties.

Mitch Resnick – Fortis Investment

Okay. To have to come back to the green shoots comment in Q4, I know you said you wouldn’t comment on specific markets, that is something that’s coming that you see in terms of, is it just more conversations, is it pricing, is it pickup in activity or in volume? What is it about?

Adrian Sarbu

In the last weeks, I answered to various questions coming from colleagues as well as huge investors that we will have visibility in our core markets somewhere at the end of August. The message which we gave for Ukraine comes following discussions with advertisers and advertising agencies in Ukraine. As you very well know, the drop in Ukraine was unprecedented. Total spending in Ukraine in the first half of the year is somewhere between 600 million and 700 million (inaudible) spending in 2008 first half. So for the other markets, we have discussions with advertisement agencies. There are hopes for recovery in some markets, but we really cannot make a statement in this respect. We will try to give you this message as soon as possible even earlier than September.

Mitch Resnick – Fortis Investment

Okay. So what you describe in Ukraine, it sounds like you just overshot and its coming back.

Adrian Sarbu

Absolutely. It’s a normal coming back, but let’s not forget that Ukraine in the last quarter 2008 was hit starting with mid of November. Please Anthony.

Anthony Choi

Let me just add on the Ukraine situation just to give you a bit more flavor, but in the first half of 2009, half of the advertisers that went on air in 2008 were not done advertising. So especially we made this in the month May, June in terms of the orders that were booking couple of weeks, whereas for the month of July to August it sold out and we got folks within three hours. So we are starting to get some encouraging signals in that most of the advertisers will go on air in the second half of 2009 for Ukraine.

Mitch Resnick – Fortis Investment

Okay. Thank you very much.

Operator

Thank you. And we will move next to the side of Maria Levinskaya [ph] with Bank of America/Merrill Lynch. Your line is open, please go ahead.

Maria Levinskaya – Bank of America/Merrill Lynch

Hi, just coming back to the point about the put option Ukraine, can you just clarify what would make you not put that back to Kolomoisky, first question. Secondly, why didn’t you stay the 100% to start with if you are intending to exercise its option? And I have a few questions after that.

Adrian Sarbu

First question, Maria, it was extra caution which we asked as to [ph] -- relation to Kolomoisky. In the event, the market in the next six to 12 months will not behave as we expect it to behave, which means recovery in the fourth quarter, steady trend -- growing trend in 2010 and so on. That’s why based on this expected scenario, we gave you some points about our path to profitability in Ukraine. So it will decide that our future in Ukraine is a good one, but on a very long term, we may decide supported by our Board to exercise this put. The value which we can get from Ukraine is that event would be higher than the value which we can get waiting years and years for Ukraine to recover.

Maria Levinskaya – Bank of America/Merrill Lynch

So basically if Ukraine recovers, you might consider not putting that option back to Kolomoisky. Is that correct?

Adrian Sarbu

We made a deal with Kolomoisky in order to strengthen our operation to have extra funding to support our growth. We believe in the Ukrainian market. And what happened there was just an objective event the drop of that market, it’s not something which we did.

Maria Levinskaya – Bank of America/Merrill Lynch

Great. Thanks for that. And could you also may comment on Bulgaria, are you still in talks with DTV about potential kind of joint venture there?

Adrian Sarbu

We cannot disclose. First of all, we should ask DTV because it’s not our decision about DTV. It’s the decision of News Corp, if they want to sell. Definitely we are looking and we are hoping this market will become, let’s say more clear in the next months and this is subject to the decision of News Corp in respect of their assets. So far, we did our work. The market at Bulgaria shows that future and we restarted our operation with a delay of almost nine months, we restarted our operation in July, it’s unusual to restart in summer but we want to gain a good position and the result so far encouraging.

Maria Levinskaya – Bank of America/Merrill Lynch

Okay. And finally on MediaPro, you disclosed financials for 2008, can you give us an idea if what the revenue dynamics are for the first half ’09 versus first half ’08.

Adrian Sarbu

Anthony will answer.

Anthony Choi

Maria, in terms of again based on the year-to-date for the six months through June 2009 order [ph], we expect the revenue to be at very similar level to the 2008 level. So based on that, we expect the full year to be relatively in line with 2008.

Maria Levinskaya – Bank of America/Merrill Lynch

What about EBITDA? Same?

Anthony Choi

I can’t provide the EBITDA projection, Maria.

Maria Levinskaya – Bank of America/Merrill Lynch

Okay. Thank you.

Operator

Thank you. And next, we will move to the side of David Kestenbaum with Morgan Joseph. Your line is open, please go ahead.

David Kestenbaum – Morgan Joseph

Okay. Thanks. Adrian, you talked about avenues into growth going forward, can you just talk about the management services, what you plan to do there and what have you done so far?

Adrian Sarbu

David, we think one of the most important assets of ours and this is not the statement for press, it’s the people and the knowledge which we created and accumulated and retain in the people, which we have in this station. Then the last three years showed that we can operate more efficient than other competitors of ours. Now with limited availability of investment funds for us and with our disciplined approach to funding, as you very well know also we have some best to service and to refinance. In the future, we are looking to leverage this expertise by entering into operational contracts with broadcasters which we will not buy, we will not even share however the results or -- we look to acquire a minority position as a shareholder. Let’s compare this with a type of selling management services of the large hotel chains which started at Hilton tens of years ago and we have hopes, imagine that we already started discussion, we have hopes that we can sell our services outside our region. I am not talking about servicing competitors of ours knowledge, I am talking about other opportunities outside Center, Eastern Europe. That’s the way we see selling our management services.

David Kestenbaum – Morgan Joseph

Is this something that we could hear about this year?

Adrian Sarbu

I would love to be able, but again this is a piece of guidance. I would love to be able to communicate to you one or two contracts this year. Definitely there will be nothing at the revenue side or bottom line this year, but this is not which -- these aspects [ph] which we made already.

David Kestenbaum – Morgan Joseph

Okay.

Adrian Sarbu

As you know, we have to serve other points which appear, but the crisis emerged.

David Kestenbaum – Morgan Joseph

Right.

Adrian Sarbu

We feel Ukraine now content and so on [ph].

David Kestenbaum – Morgan Joseph

Okay. Can you talk about what your percentage of production now is in-house and how this acquisition might change that potentially?

Adrian Sarbu

All our production is in-house. All our production and I mean news production, the reality and entertainment production are non-fiction or non-scripted as you feel that was in America and fiction, its all in-house.

David Kestenbaum – Morgan Joseph

Okay.

Adrian Sarbu

Once to MediaPro, its brought to CME.

David Kestenbaum – Morgan Joseph

Even the Ukrainian not buying externally anymore.

Adrian Sarbu

No, no, Ukraine is buying from Hollywood Studios and from Russia is buying from Russia much lower amount of programming and need to buy less and less. We buy only the best programs in Russia. Don’t forget that in Russia, the prices of programming didn’t decrease in the country. They increased in the last year. And the quality of the product is not the same as two years ago, they are less and less high quality product. So this was, we foresaw this and you remember we started 1+1 production long though and this year, we succeeded introducing the first long run series or Telenovela in Ukraine, Ukraine language was Ukrainian talents and we plan to show it really in the next month. And this is our first step to organize a fiction production in a country which had no resources, where almost nobody did this for tens of years. It’s a process which may last from one year to five years. So we will try to speedup and to allocate resources from our markets. What we do with the first Novela in Ukraine and below its practically taking format of MediaPro and CME, and we should think there with the stronger systems, stronger resources brought from Romania.

David Kestenbaum – Morgan Joseph

Okay. Thanks.

Operator

Thank you. And next we go the side of Merry Erington [ph] with Janco Partners. Your line is open, please go ahead.

Merry Erington – Janco Partners

Yes. Thank you. I wanted to ask to expand a little bit on the content distribution opportunity and may be comment some more on how to help us get our arms around addressable market there and may be speak to the content that you have, how should we look at if you have 5,000 hours of content, how much of that do you view as high quality content and is that kind of a AB-20 or 9010 [ph] rule where most of the money will be made off a little bit of the content. Can you just provide some color on that?

Adrian Sarbu

We will give you hope in the next call more comprehensive picture or view about our content division. We are actually, we just acquired, we will aggregate a content division from assets of CME, which we develop in CME to markets of MediaPro. Basically, what we see is mostly selling TV products which we produce for CME outside our market and we have a history, MediaPro distribution sells this product of MediaPro already. We don’t only talk about television, but also cinema mostly for television which we produce already in various market and this is one source of distribution and definitely acting as a regional distribution for the moment doing what a distributor does, buying rights and repackaging and reselling them in various markets. And this will apply also for our markets. Its not irrespective media for distribution, there is no knowledge fiction for these units to sell even in our market those products which our stations, our broadcasters decided not to buy. So there is a normal distribution business of all rights, split window-by-window in all these markets and also TV product of ours where MediaPro distribution will add the sales agent worldwide.

Merry Erington – Janco Partners

Okay. So I guess one of the things I am trying to understand is, is this a process where you will sit down and go through all the content and over a period of months and quarters, start to sell it in or do you think do you have a handful of assets that you can take and parley into some revenues may be sooner rather than later.

Adrian Sarbu

It’s -- this is a business which is run by MediaPro distribution, so we don’t need months and years to do this.

Merry Erington – Janco Partners

Okay. All right. Thank you very much.

Operator

Thank you. And we will move next to the side of Peter Harvey with Cazenove Capital. Your line is open, please go ahead.

Peter Harvey – Cazenove Capital

Hi, my question relates to the $506 million cash position on Page 12. Does that June reported cash figure already include the $240 million from Time Warner? And secondly, how much of that $241 million will be applied to debt repayment?

Charles Frank

Yes, it does include the Timer Warner money which actually net of transaction cost, was around $234 million. We will use the cash for general or corporate purposes, not necessarily to repurchase debt. Remember that the price of the debt has gone up substantially as we kind of improved our credit standing, so it becomes less and less attractive to buy debt in the market and also we feel we have increasing opportunities now to refinance our existing debt without having to buy it in. Our yield on our senior notes and convertible bonds have gone for around 17% on it month or so ago today to what’s in the 10% to 11% range. So we feel we have increasing opportunities to refinance the debt rather than use the cash to pay it down.

Peter Harvey – Cazenove Capital

Okay. And the $100 million sale or 49% of the Ukrainian division to Igor Kolomoisky, forgive my pronunciation, how much impairment did that generate? How much of goodwill write off did that generate in the second quarter and should we expect any further write down in the third quarter as a result of that transaction?

Mark Wyllie

It’s Mark. We didn’t take any impairment anywhere in the second quarter. We had impairments in the first quarter in Ukraine at the backend of last year. The $100 million didn’t generate any impairment.

Adrian Sarbu

And it’s not a sale, it’s a capital increase on the operation -- Ukrainian operation.

Peter Harvey – Cazenove Capital

Okay. So you have effectively given somebody 49% of that, 49% interest in that business for $100 million kind of gets some sense of what the book value of that division was or you actually paid for it and--?

Adrian Sarbu

We explained in our 8-Q accompanying the transaction and the press release. We gave access to 49% following a capital increase where Kolomoisky brought $100 million and the full station set which is a national free-to-air station in Ukraine with a 3% audience share.

Mark Wyllie

John [ph], for the second half of your question, our total investment cost since 1997 to get 100% of Ukraine was just over $350 million.

Peter Harvey – Cazenove Capital

Okay. Thank you.

Operator

Thank you. (Operator instructions) We will go next to the side of Demetri Zuke [ph] with Citigroup. Your line is open, please go ahead.

Demetri Zuke – Citigroup

Thank you for taking my questions. And my first question is on MediaPro acquisition. You have mentioned earlier in the call that you expect revenue to be flat compared to last year. What percentage of this year sales are likely to come from inter-company and also what is the $36 million debt, a positive (inaudible) to mature. My second question relates to the special financing vehicle you have mentioned which I think holds $250 [ph] million, what’s the purpose of setting up this vehicle? And my last question is on Ukraine, your audience here in the country slipped a little bit in the second quarter compared to the first quarter despite an increase in the programming costs. Could this be due to the rush of the aggressive spending by competitors or is this due to DTV acquiring less programming from Russia? Thanks.

Adrian Sarbu

I will take the first question on the MediaPro. In terms of revenues to sales to CME operations, its 40%.

Demetri Zuke – Citigroup

Right. I think 40% was the figure from 2008 is this likely to change until this year?

Adrian Sarbu

Demetri, in the next six months we aggregate this division, this company with our production assets. We don’t know exactly which is either percentage. We tell which was percentage, with which MediaPro entertainment came.

Charles Frank

I will answer the second question about the special financing vehicle. The main purpose of that was to remove Bulgaria and Ukraine from the calculation of our leverage ratios and our debt service coverage ratios, and restrict the calculation of our ratios to the core operations only. Since the core operations generally have much higher EBITDA and are generating a lot more cash, we are more likely to be able to reduce leverage more quickly if we exclude the Bulgarian and the Ukrainian operations. And we can finance off the core operation separately from Bulgaria and Ukraine.

The other major reason for doing it was to put an upper limit on the amount of funding that we will take from core operations and put into the developing operations and that upper limit is the $250 million minus $100 million that we will take out when we get the Kolomoisky $100 million. So that’s a $150 million net, plus an additional $50 million that we can put in over time. So there is a limit on how quickly -- there is a limit on how much we can put in and this has given I think the debt market a lot more confidence that we will not allow Ukraine and Bulgaria to suck cash out of the core operations.

Adrian Sarbu

Yes, for the third question, Demetri, we had to run an operation in the first weeks of this year in Ukraine with a lot of attention paid to the costs. We invested in programming, mostly up to end of April when we decided to lower our investment in programming and that’s why our audience made -- was -- and the doing was not as higher towards March, April while we are looking for a peak. Obviously, our competitors (inaudible) Ukraine is putting a lot of money in programming twice to take more audience share from each other and from us. This is one issue why our audience share is not exactly what was perceived, but I want to make a remark. Prime time audience here, which is our focus, we focus in Ukraine on prime time. Year-by-year, 18 to 49 is around 12% in 1+1, it’s not a dramatic decrease, maybe a couple of fractions. The event which we had to preempt and which we had to face was the association (inaudible) in selling advertising and we had to fight with two stations which together control more than 60% of the audience and the result is as it is in respect of news have failed. Let’s not forget that starting with 1st of January, we rebuilt our sales operation without any support from the private sales house which worked for us last year.

Charles Frank

Adrian, I think there was another question about the $36.5 million debt that we are assuming in MediaPro and well, let me -- of that $36.5 million, roughly $29 million to $30 million will be repaid because we cannot take on that debt under our current covenant restrictions. So we will repay that debt, the balance is being offset against a shareholder loan that MediaPro entertainment had. So there is no cash impact of the additional $6.5 million, but the $30 million will be repaid.

Demetri Zuke – Citigroup

Thanks very much Charles and Adrian. Just a quick follow-up question on Ukraine, Adrian, you mentioned that you are now offsetting your advertising inventory using your in-held sales team, do you not regret those decision or do you intense to do going forward? Thanks.

Adrian Sarbu

This is more question in front of the divorce judge. It’s obviously that we will benefit in working with Visa International in the past, which end to be benefit and that’s why we decided to split this relationship and the fundamentals are that our operation model implies full control of our -- all our resources including our clients. That’s the way we were successful all around our region. So it proves that we will not be successful giving up our inventory to a sales house.

Demetri Zuke – Citigroup

Okay. Thanks very much.

Adrian Sarbu

It’s more a matter of principle; it’s not a matter of relationship.

Demetri Zuke – Citigroup

Thanks.

Charles Frank

Demetri, I think the Ukraine you tried and mention about the cost for Q2 and just to highlight to you that the cost for 2Q in Ukraine was 42% lower. So we rationalized our program investments in Q2 because -- in terms of producing, we didn’t need to produce GRP because (inaudible).

Demetri Zuke – Citigroup

So the costs you are referring to compared to the second quarter, is that last year’s or first quarter?

Adrian Sarbu

Its last year Q2.

Demetri Zuke – Citigroup

Just I was looking sequential basis and I think first quarter in line, the costs were slightly less in dollar terms.

Adrian Sarbu

In terms of Q2, we had some programming impairment obviously because of the revenue expectation on it. So that’s where it’s been a bit skewed by that Demetri.

Demetri Zuke – Citigroup

Thanks very much again. Thanks.

Operator

Thank you. And we will move next to the side of Puria Jennert [ph] with KCB [ph]. Your line is open, please go ahead.

Puria Jennert – KCB

Hi, just a short question on your sell out ratios. I would like to ask you what was the combined sell out ratio in Q2 and (inaudible) quarter-on-quarter and year-on-year, and also what was the sell out ratio in Bulgaria and Ukraine. Thank you.

Adrian Sarbu

Can you repeat that question please.

Puria Jennert – KCB

The question is on sell out ratios, what was the combined sell out ratio in 6.25 [ph] and how it changed quarter-on-quarter and year-on-year, and what was the sell out ratio in Ukraine and Bulgaria?

Adrian Sarbu

It’s difficult to combine sell out ratio. But we can tell you that in the second quarter, we had the highest sell out ratio in our core operations which is obviously once we supported our advertisers was incentives. This was also a part of our strategy to keep control of the supply of GRPs in the market. In respect of Ukraine, our sell out ratio in the second quarter was 89%, quite high, this was also a must for us to ran with a very high sell out ratio and have paid the prices. In Bulgaria, it’s not relevant for the simple reason that we kept Bulgaria since October until July on a very low level of investment, so we can talk about sell out ratio in Bulgaria after September. Today, we are fueling programming, we are investing in marketing, and we expect to have sellable audience in September.

Puria Jennert – KCB

Okay. Thank you.

Operator

Thank you. And it appears that we have no further questions in the queue at this time.

Romana Tomasova

So we would like to thank you for joining us at this call today and I would like to remind you that on October 15th and 16th, we are having our Investor Day in Prague. So we are looking forward to seeing many of you here or talk to you anytime if you need us. You know our number, so looking forward to talking to you soon. Good bye.

Operator

This does conclude today’s teleconference. Thank you for your participation. You may disconnect at any time and have a wonderful day.

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