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Central European Media Enterprises (NASDAQ:CETV)

Q3 2013 Earnings Call

October 30, 2013 10:00 am ET

Executives

Mark Kobal - Head of Investor Relations

Michael Del Nin - Co-Chief Executive Officer

Christoph Mainusch - Co-Chief Executive Officer

David Sturgeon - Acting Chief Financial Officer and Principal Accounting Officer

Analysts

Torsten Achtmann - JP Morgan Chase & Co, Research Division

Vivek Khanna - Deutsche Bank AG, Research Division

Tibor Bokor - WOOD & Company, Research Division

Stanley Martinez - Legal & General Investment Management America Inc.

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

Daria Fomina - Goldman Sachs Group Inc., Research Division

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

Steven Roth - GLG Partners LP

Oliver Burgel - Babson Capital Europe Limited

Operator

Hello, my name is Leo. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, October 30, 2013. It is now my pleasure to turn the floor over to Mark Kobal, Head of Investor Relations at CME, who will be our moderator today. Mr. Kobal, you may begin your conference.

Mark Kobal

Thank you, Leo. Good afternoon and good morning, everyone, and welcome to CME's third quarter 2013 investor conference call. We issued our earnings press release earlier this morning, local time, copy of which is available on our website, www.cme.net, along with a brief presentation that we will refer to during this call.

On the call today are Michael Del Nin and Christoph Mainusch, co-Chief Executive Officers of CME; David Sturgeon, acting Chief Financial Officer; and Daniel Penn, General Counsel.

Before we hear from Michael and Christoph, I will highlight a few things. Our presentation today will contain forward-looking statements. Actual results may vary materially from those expressed or implied due to various factors. Important factors that contribute to such risks include, but are not limited to, those factors set forth under Risk Factors in our SEC filings. This includes the Form 10-Q filed earlier today, as well as the following: our ability to access external sources of capital in light of our current significant liquidity constraints and poor financial performance; the impact of our efforts to increase our revenues and recapture advertising market share in Czech Republic; and decreases in television advertising spending and the rate of development of the advertising markets in the countries in which we operate. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in our filings.

Forward-looking statements speak only as of the date, and we undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. During this call, we will refer to certain financial information that is not in U.S. GAAP. Please see the appendix to the presentation and Note 18 to our financial statements in the Form 10-Q for a reconciliation to U.S. GAAP financial measures.

And with that, I will hand the call over to Michael and Christoph.

Michael Del Nin

Thanks, Mark, and hello to everyone joining us today. I'll get us started this afternoon. First of all, Christoph and I want to express how excited we are to be at the helm of this company. We only wish that in our first opportunity to speak to you, we would have delivered better news on the quarter and the outlook for the year. We want you to know that we understand how disappointed you must be with these quarterly results and our revised guidance. We find this level of performance unacceptable and have directed all of our energies since starting here a few weeks ago to addressing the major reasons for these financial results and making changes to improve them going forward.

Revenue for the quarter was $136 million, a 3% decline over the corresponding period last year, driven by decline in ad revenues in the Czech Republic and Slovakia, largely offset by an increase in carriage fee revenues in Bulgaria and Romania. The OIBDA loss for the quarter was $32 million compared to positive OIBDA of $4 million in Q3 2012. This decrease reflects the declines in ad sales I just mentioned, as well as severance and restructuring charges and noncash accelerated amortization of programming inventory in Romania.

Given these results, let me outline exactly what we've been doing since our appointment to improve our financial performance. First, our top priority has been improving the performance of the Czech Republic. As Christoph will walk you through in detail, we are making changes to our approach to ad sales in the Czech Republic that reflect the lessons learned over the course of this year. We are also taking a harder look at the cost structure across the company and identifying ways to become leaner and more efficient.

As a start, in the last few weeks, we had accelerated and expanded the company's previously announced restructuring plans. By the end of this year, we are targeting to have approximately 1,000 fewer employees than we had at the start of 2013. We expect that this will result in approximately $30 million in annual run rate savings compared to 2012, but will also cause us to take a larger-than-anticipated restructuring charge this year. We now expect restructuring charges for the year to approximate $20 million, and we will also incur severance costs of approximately $7 million in total for the third and fourth quarters.

Going forward, we plan to focus our energies on building our core TV broadcasting assets in each country. As such, we are in the process of reviewing alternatives for some of our noncore businesses, such as theatrical and home video distribution, including potential divestitures of some or all of these assets. While some of these businesses have been solid performance, we believe that the company is better served by a sharper management focus on its core businesses.

I now turn it over to Christoph to walk us through the operations in greater detail.

Christoph Mainusch

Thank you very much, Michael. Hello, everybody. Beyond the disappointing results just highlighted, we do see a positive message. Free TV remains strong, and the audience performance of all our channels is very strong. We are clear market leaders in all of our territories, and we expect to maintain this position in 2014.

Our daily prime time audience shares in the respective commercial target groups across our networks are up in all of our 2 markets, except 2 [ph], with the strong increases in Romania, which is up to 4% over Q3 2012 in prime time and the Czech Republic and Slovakia, which are both up 5 percentage points over Q3 2012 in prime time. The good news in the Czech Republic is the continued strong performance of our programming lineup, and we are very pleased with the launch of our fall season. The strong performance of returning hits like prime time local fiction series, Rose Garden Medical and The Street, combined with the successful launch of new audience favorite, Village Doctors, has extended our prime time audience share lead this fall, so our share is now almost double that of our nearest competitor.

In our other countries, the fall season also started with strong results with locally produced television blockbusters such as reality and entertainment shows, The Voice in Romania, Africa: Stars Must Be Crazy in Bulgaria, Restaurant Looking for a Boss in Slovenia, and as well as fiction series Taste of Love in Slovakia and Stellar [ph] in Croatia. These audience shares give us strong advantage of our -- over our competition, and we intend to capitalize on this by concentrating our efforts on improving the monetization of our audiences.

Improving, as Michael has said, the performance of the Czech business is our top priority. In the last few weeks, we have done a number of things to begin that process. Firstly, we have spent time visiting these agencies and advertisers, listening to their concerns about our current sales policy, which resulted in the downturn of advertising revenues. We have overestimated their willingness to accept the pricing at the levels we were seeking, which has led to their resistance this year in booking advertising in the volume of previous years. So one of our major tasks is to rebuild a trustful and reliable long-term relationship with agencies and advertisers to build on the price level that we have achieved with moderate price increases in 2014, but also, we target to simplify how we cooperate with each other. In that respect, we have introduced at the beginning of this month already a new sales policy in the Czech Republic, which has been well received by the market so far. We, therefore, believe we now have a policy in place that balances our need to protect prices, on the one hand, with providing our clients with additional flexibility they desire on the other hand. That said, we don't think that the impact of this policy will be felt in any meaningful way before next year.

The combination of a weak demand in the TV advertising market in Czech this fall, and the fact that many clients have already committed their TV advertising budget to competitors through the end of this year means that the rollout of our new sales policy and approach will be unlikely to result in a significant uplift in our sales before this year ends. While the TV ad market in the Czech Republic remains weak this fall, even before the formalization of our new sales policy, we already have over $40 million, 4-0 million dollars, in commitments for our 2014. Having launched our sales policy earlier this year, we expect additional spending commitments for 2014 already before the start of the year.

We anticipate that our new sales policy and approach in the Czech Republic will also benefit our sales performance in Slovakia. Ad revenues remain for sure a key driver of our business, but we also need to diversify our revenues to be less dependent on television advertising. As Michael has mentioned, we want to focus primarily on our core broadcasting and networks businesses in each country and so diversification for us will come largely in the form of carriage fees.

As you know, we have been in discussion all year with cable and satellite providers in several of our markets, most notably in Bulgaria and Romania. As a result of the finalized deals, carriage fee revenue is already significantly up this quarter. The signing of some of additional deals in Romania is taking longer than had previously been expected and consequently, carriage fee revenues in 2013 may be lower than previously estimated. As a result, however, we expect additional increases in carriage fee revenues will be delayed to early 2014. Furthermore, negotiations of carriage fees for our main channel in the Czech Republic are unlikely to be concluded before the end of this year.

As you can see, we have a lot of work ahead of us, and I'm especially pleased to have new members of the leadership team in the Czech Republic and Slovakia. Now I'll turn it over to Dave to provide some more details on our results.

David Sturgeon

Thanks, Christoph. As you just heard, CME's overall revenues were down 3% in the quarter year-on-year to $136 million. At constant rates, the decline was nearly 8%. TV advertising led the decline, down 10% year-on-year at constant rates. This was largely offset by a 32% increase in carriage fees and subscription revenue, driven by growth in Bulgaria and in Romania. Other revenues were also down, declining 14% at constant rates, due primarily to the loss of theatrical agreements in the Czech Republic.

Looking at each of the countries, which you can see outlined on Slides 6 and 7 of the presentation, the biggest declines in revenues came from the Czech Republic, which was down 26% at constant rates, and the Slovak Republic, which there were 29% decline at constant rates. These were for the reasons that both Michael and Christoph highlighted earlier, as the situation in Czech Republic is also impacting demands to TV advertising in the Slovak Republic. Weak economic conditions drove a 3% decline in revenues in Slovenia. In the other 3 countries, we saw increases in revenue. Both Romania and Croatia grew primarily as a result of increases in advertising revenues, while Bulgaria, driven by higher carriage fees, saw revenues increase by 12% in the quarter.

Our consolidated OIBDA loss for the quarter, as we've said, was $32 million, compared to positive OIBDA of $4 million last year. The significant revenue declines in the Czech Republic drove that country's OIBDA to a loss of $4 million from an OIBDA of $11 million last year. OIBDA also fell in the Slovak Republic, declining to a loss of $6 million from a loss of $3 million last year, as declining ad revenue was only partially offset by lower programming costs. OIBDA also declined in Romania, primarily due to $9 million of accelerated amortization of program rights, and in Slovenia, primarily due to an increase in transmission costs. OIBDA improved in Bulgaria, and there was also a modest improvement in Croatia.

Corporate costs increased largely due to severance and restructuring charges of approximately $11 million. Free cash flow for the 9 months ended September 30 was negative $77 million, broadly unchanged from the same period in 2012. This reflects an improvement in working capital and the deferral of programming payments, both of which are unlikely to repeat in future periods. We expect capital expenditures for the year to be consistent with the level of spending in 2012. We ended the quarter with a cash balance of $123 million.

I'll now hand you back to Michael.

Michael Del Nin

Thanks, Dave. As you may have seen, this morning, we lowered full year guidance. We now expect revenues to be between $640 million and $650 million, and OIBDA to finish the year between negative $40 million and negative $30 million. That is significantly below the previous guidance given in the last earnings call. The primary reason for the reduction in the top line is the lower-than-anticipated TV ad revenue in the Czech Republic. The previous guidance was based on an expectation the consumption of GRPs by advertisers in the Czech Republic during the fall season of this year, with returns to levels similar to those of 2012.

Based on the combination of the current level of commitments, the continued weakness in demand from advertisers during October as the fall season rolls out and ongoing feedback from advertisers and agencies on expected GRP consumption for the remainder of the year, we no longer believe this will be the case. In fact, we expect that our TV ad revenues in the Czech Republic will be significantly below 2012 levels through the end of the year. However, based on conversations with advertisers during October, as well as 2014 commitments signed to date, we anticipate a significant improvement in our TV ad revenues and market share in the Czech Republic in 2014 compared to expected results of 2013, although we do not expect to reach 2012 levels in 2014. We anticipate a similar trend in our consolidated results through 2014 and expect to build upon them in 2015. In addition to the lower revenues expected in the Czech Republic, TV ad revenues in the Slovak Republic may also decline during this fall season. And so the carriage fee revenue increases in Romania and the Czech Republic are not likely to come into effect until next year.

In addition to the revenue shortfall, other major contributors to the lower guidance for OIBDA include higher-than-expected restructuring charges, previously unanticipated severance costs and unanticipated noncash accelerated amortization of the programming library in Romania. The new guidance is based on current foreign exchange rates and does not include the impact of any unplanned restructuring or severance charges, the impact from the potential sale of operating assets or any further accelerated amortization of programming assets.

As a result of this revised guidance, we now expect to finish the year with approximately $60 million in cash. Given the expected cash burn this year and the amount of cash with which we expect to end the year, the company will need additional capital. And we are currently reviewing all of our alternatives, including public or private debt and equity financings, asset sales and the negotiation of payment obligations with a number of our major suppliers. In this respect, we are in discussions with Time Warner regarding a possible capital transaction, including debt, to address our liquidity position. These discussions are preliminary and there are no assurances regarding the ultimate outcome, and we will not be able to discuss any more details at this time.

I now pass it over to Christoph for a few closing words.

Christoph Mainusch

Thank you, Michael. As you have heard, we are facing some considerable challenges, but we are confident that we are taking the right path to improve the performance of the company. The priorities are clear. We will improve assets in the Czech Republic. We expect to diversify revenues by increasing carriage fees, restructure the company to reduce the cost base and sharpen our focus on the core broadcast operations in each country. Beyond results in Q3 and the outlook for the entire year 2013 and beyond the need of cash, we believe in the future success of the company, being on the right path to turn the business around and to deliver positive OIBDA in 2014.

I'll now hand you back to Mark.

Mark Kobal

Thank you, Christoph. That concludes the formal presentation. We're now going to move to Q&A. So Leo, please open the line for questions.

Question-and-Answer Session

Operator

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

Mark Kobal

Thanks, Leo. Our first question is coming from Torsten at JPMorgan, Torsten?

Torsten Achtmann - JP Morgan Chase & Co, Research Division

The first question would be on the Czech Republic. How do you try to rebuild the trough of that [indiscernible]?

Mark Kobal

Sorry. Torsten, can you repeat that, please? I think we've lost him. Let's move on to Vivek. Vivek Khanna, Deutsche Bank.

Vivek Khanna - Deutsche Bank AG, Research Division

A couple of questions, if I may. The first one is, I think you mentioned that you might consider selling some operating assets, and I think you mentioned 1 or 2, but are there any sort of countries or regions or subregions as a whole which potentially you might consider to divest in order to raise or in order to increase liquidity? And another question, again, this is with regards to amortization of programming assets, and I'm wondering if next year, there could be yet another further acceleration of that amortization trend until we see a recovery on the top line towards the back end of the year?

Michael Del Nin

All right. Vivek, this is Michael. I'll take the first question. Look, in terms of the assets that we identified, which are the distribution assets, theatrical and home video, for example, that is ultimately a strategic decision. I think that the new management team believes, as we said earlier, that it is important to focus on the core TV business. So irrespective of the liquidity situation, that is something that we would pursue, and we believe that those businesses may be more valuable to others than they are to us. And so fundamentally, I think what's driving that decision, although we could see some cash on the potential transaction, is a strategic decision to focus on the core TV business. In terms of broader asset sales, I think that we're not taking anything off the table in terms of what we're considering given the liquidity situation, but don't really have any more details on that.

Mark Kobal

All right, and second question on programming amortization, Dave?

David Sturgeon

Yes, programming amortization. Vivek, I mean, as we said, we took a $9 million noncash charge in Romania this quarter on expiring programming that we determined that we wouldn't be able to properly monetize next year when we -- when it's expiring. In general, as a policy, we write down the value of programming whenever we're certain we're not going to be able to do that. As we look to the future and where we see now, we look and see what we're going to be using in '14 and beyond, it's quite possible that further inventory might not be able to used profitably, and we might have to do it. But at this stage, it's too early to tell.

Mark Kobal

Thanks, Vivek. Our next question is coming from Tibor at WOOD. Tibor?

Tibor Bokor - WOOD & Company, Research Division

Coming back to Czech Republic, just help me understand the fourth quarter guidance. If I strip from the full year guidance just the fourth quarter, my understanding is that you guys don't expect to pick up in Czech Republic from the third quarter into fourth quarter. Now typically, we see fourth quarter to be almost double the revenues than the third quarter, and you already reached sort of 50% market share on my estimates in third quarter in Czech Republic. So why exactly are you coming back to sort of 30% market share that you are guiding? Is there any specific reason?

David Sturgeon

I'll take that. We expect in the Czech Republic, specifically in ad revenues, we think the decline will continue at the rates we've seen earlier in the year. And there was a slight tailing off at the rate of decline in Q3, but Q4, we're not counting anything before we actually see it. There are other things in the Czech Republic other than specifically ad revenues. There has been a drop-off in our distribution business in the Czech Republic that's quite marked compared to Q4 of last year, which actually was reasonably well performing in Q4 of last year. So that has a fairly big impact there as well.

Tibor Bokor - WOOD & Company, Research Division

Can you tell us the sellout rate in Czech Republic for the third quarter? I mean, last number that you guys mentioned was around 30%. Has it improved in the third quarter, and what sort of levels you guys see in the fourth quarter so far?

Christoph Mainusch

So in Q3 -- Christoph is here. In Q3, we had a sellout rate above the first 2 quarters, which was around 50%, which adds up on a 9-month result of around 36%. It's -- we do not have full visibility for Q4, but I estimate that the sellout rate in Q4 will be similar to the one of Q3.

Tibor Bokor - WOOD & Company, Research Division

Okay, so that means -- sorry to bother you to elaborate again on this, but that means year-over-year, Czech Republic should be higher compared to fourth quarter last year, right? Because the prices are up, sellout rate will be 50%, so I don't really see why -- where the downgrade comes from.

Michael Del Nin

Yes, year on -- there's a -- obviously a significant decline in the consumption of GRPs year-on-year, and we anticipate that to be the case in the fourth quarter as well. And that decline in GRP volume more than offsets any pricing increases. So we will see, as we said before, a significant revenue decline year-on-year in the fourth quarter as well as we've seen the year-to-date.

Tibor Bokor - WOOD & Company, Research Division

And if I take it from a different angle, last year in the fourth quarter, you guys had around $250 million revenues. Now you're guiding for $200 million, so there's $50 million gap. You said the majority comes from Czech Republic, but could you just be more specific? Let's say, tell us 80% comes from Czech Republic, and the rest is Slovakia and Romania? And also, if you could quantify out of this $50 million gap, what portion of the revenues are sort of delayed that we will see them coming, but later in 2014, and what proportion are just the lost opportunities due to low sellout.

David Sturgeon

Okay. I mean, there's obviously some FX noise in there, the course lead [ph] comparisons year-on-year. I mean, we had an FX benefit of 5% this quarter. And compared to last year, it's very variable. Leaving that aside, of the revenue reduction from Q4 2012 to what we expect 2013, roughly 75% would be ad revenues, not just in the Czech Republic, but obviously in Slovak as well and a slight weakening in a couple of the other markets. About 15% of the reduction would be in distribution. So the [indiscernible] I mentioned and then there's about 10%, the remaining 10% is in other revenues that aren't in that. The carriage fee part, particularly, I think we said in Q2 that we were expecting an increase for 2014 compared to 2012. We're not actually expecting that to be -- and there was due to be a benefit in Q3 and Q4, we're not actually seeing much of that benefit coming through now.

Mark Kobal

Thanks, Tibor. We're going to move to the next caller, Stanley Martinez, Legal & General.

Stanley Martinez - Legal & General Investment Management America Inc.

First, if I could just start on the free cash flow. Without discussing in detail the manner of capital raise [ph] think you may be looking at, could you just discuss in terms of sizing whether you would target a total capital increase in whatever form relative to a year end 2014 cash balance or are you looking to have funding that will get CME back to positive free cash flow and dealing with some of the debt amortizations in '15 and '16 potentially? That'd be my first question.

Mark Kobal

All right, thanks. We'll start with Michael.

Michael Del Nin

Thanks, Stanley. Look, as I said, we're reviewing all options. And as part of that, determining what those options may be and what our alternatives are will obviously influence the amount of capital that we raise, but it is way too early to answer any of those questions, I'm afraid.

Stanley Martinez - Legal & General Investment Management America Inc.

Okay. Well I'll wait for an update on that, hopefully, in a public forum soon. If I could just talk about the business then. Michael, you talked about the new covenants, I suppose you would say, with advertisers and with agencies. And it sounds like more of, perhaps, a multi-platform type of framework as opposed to just trying to take pricing on demand for GRPs on broadcast television. And you gave some guidance in terms of how that would play out in the Czech Republic and Slovak Republic. What do you think the timing is in terms of potentially getting back to the traditional sort of 1.7 type of power ratio that CME has been able to index in that country? Because your ratings are still quite good. And then same with the Czech Republic and Slovak Republic. There had been some thought about potentially taking affiliates fees higher, meaningfully higher, in 2014 or late '13. Is that plan now deferred while you try to improve your indexation of just pure advertising spending in the market?

Christoph Mainusch

So to the first part of the question. Let's say, when you look into the current situation where we came from, in 2014, we do not expect to come back on the levels of 2012. You had [ph] -- let's say for the previous or current policy, we have 3 components which caused the downturn. First, we were too late last year with announcing our sales policy. We were too rigid from the policy to design collaboratively with clients or a corporation, and we overestimated the willingness of the market to absorb the significant price increases in 1 year. So what does it mean from now? We believe in 3 things. First, the budget will be lower all in all again in 2012. We have this time moderate single price increases, so this will create turnback to us. And there's one significant thing that there are no mandatory prepayments any longer, which are now incentivized, and we have simplified the sales policy. So on the bottom line, you will see the trend for that we increase, but we won't be able to do that in 1 year. So therefore, we don't see the -- in the combination of that, we don't see the 2012 leverage. Does it answer your first part of the question?

Stanley Martinez - Legal & General Investment Management America Inc.

It does, Christoph. I'm interested though in what proportion of advertisers in the market never acceded to the higher pricing. So what pool are you able to draw from that has completely left the market for your channels that you might be able to recapture in some form in 2014? That will help me to dimension some of the potential upside that we flip over to getting back toward but not at 2012 levels.

Christoph Mainusch

Well generally -- please understand that I don't go client by client and agency by agency, but generally, you can see that from the first feedback which we received, I do not see any specific clients who wouldn't, let's say, come back to the market. It's depending on, let's say, of how they will revert to us, but I wouldn't say that there is a specific group of clients who wouldn't be, let's say, be able to be targeted for us to come back.

Mark Kobal

Okay. And the second question on carriage fees in markets, Christoph?

Christoph Mainusch

So from the carriage fee increase is what you expect. We do not earn carriage fees currently for our maintenance in Czech and Slovakia. We have commenced negotiations in the Czech Republic, but they are taking longer than anticipated with a limited progress, so it's unlikely that they will be concluded before year end. And there are pan-regional [ph] operators involved, so the negotiations in other countries are also affecting these markets.

Stanley Martinez - Legal & General Investment Management America Inc.

So it sounds to me like you're not going to take a hard line on the fees, though, at least this year and run the risk of the channels getting carriage pulled. Is that a safe assumption, Christoph?

Christoph Mainusch

No.

Mark Kobal

Okay. Thanks, Stanley. Our next question comes from Ajay at Nomura. Ajay?

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

Just a couple of questions. As some of your competitors and some of the agencies have hinted that you will be going less aggressive on prices going forward in Czech Republic. So in that case, I mean, what happens to the contracts that you have already signed with some of that [indiscernible] where you have double-digit increases? So will those contracts be renegotiated in lesser prices? So if you can just give some color on that. The second question is on your free cash flow. Is it around $77 million free cash flow -- free cash outflow in 9 months and you expect it to reach $140 million for full year. So I mean, what's driving the free -- I mean, such a big outflow in cash in the Q4, if you can just give some color on that?

Mark Kobal

Sure. Thanks, Ajay. So let's start with the pricing in the Czech Republic.

Christoph Mainusch

So you mentioned the commitments of 2014, which were all concluded. So these commitments, prior to the new sales policy which we have introduced, were renegotiated under the current policy in place. And we believe that these deals are good for both the clients and for us, so there is no reason currently for us to believe that this will change.

Mark Kobal

Okay, and the question on free cash flow, Dave?

David Sturgeon

Yes, on free cash flow. As we said, we got $77 million negative this year on the -- largely on the basis of significant reductions in payments for programming and an awful lot more stretch on general working capital. Obviously, if you were looking at it, the OIBDA had gone down by a significant amount year-on-year, and we've offset all of that by these 2 measures. It is inevitable that there will be some reversal of those in the rest of the year, and we're expecting to have to unwind some of those. Other items, such as interest and CapEx, are broadly [ph] the same year-on-year.

Mark Kobal

Okay, thank you. Our next question comes from Daria of Goldman Sachs.

Daria Fomina - Goldman Sachs Group Inc., Research Division

My first question is on your relationships with advertisers in Czech Republic and ability to restore market share. I mean, in Europe with companies that try to do the same experiment in raising the prices, they managed to restore only half of their market share which they lost. What are your estimates -- from the current discussions with the advertisers, how much of the market share you would be able to bring -- take back? How much is lost for you if you made such estimates? And the second question is on the -- your profitability beyond 2013. What are the exact actions you're taking to -- for cost cutting and improving the profitability of the business apart from the programming expenses? And what are the further cost cuttings that you can deliver, if you have such estimates as well?

Mark Kobal

Okay, thank you.

Christoph Mainusch

So just to answer, Daria, the first part of the question, we do not have enough visibility to answer this question. So I believe, let's say from the feedback which we have received that we will have a good chance that there is an upturn in the advertising revenue, but to which extent this will happen and how the total entire market size will look like this year is much too early to answer.

Michael Del Nin

And look, as we said, Daria, I think, as Christoph has reiterated, we don't anticipate that the revenues in the Czech Republic will meet the 2012 numbers in 2014. But that said, we do expect a significant rebound and that will be the strongest driver of profitability in 2014. In addition to that, as we already articulated, the restructuring plan that we now have in place will generate a run rate of $30 million in savings relative to where we were in 2012. And so that will obviously also help improve margins significantly. And so while it is way too early to have a sense of exactly where we end up in 2014, they will be 2 of the largest drivers of profitability improvement next year.

Daria Fomina - Goldman Sachs Group Inc., Research Division

I'll -- just a one more separate question. Apart from Time Warner, are there any other options that you're reviewing now? Are there any opportunities for you all to solve your capital problems elsewhere, if you have any discussions at all?

Michael Del Nin

Daria, as we said, we're looking at absolutely every option, and we don't have any further information to share right now. But we are looking as broadly as we can.

Mark Kobal

Okay, thank you. Looks like we have Torsten back from JPMorgan. Torsten?

Torsten Achtmann - JP Morgan Chase & Co, Research Division

Hey, sorry, I got thrown out there. So the remaining of the question would be on free cash flow, given the extra cost cutting you do and the rebound you expect in 2014 on top line, do you think you can achieve free cash flow breakeven during 2014 or do you need additional capital and lower interest cost to get there? That would be the first one. And the second one, it seems Europe is even slightly improving in terms of consumer confidence and GDP. Shouldn't that help you getting advertisers back and getting the prices? So it seems the risk with your clients, so to speak, has been very, very deep. Any comments you could make there, and anything you could make on 2014 that could start to help you?

Mark Kobal

Okay, we'll go -- turn it over to Dave.

David Sturgeon

Yes. On the first question, I mean, as we said during the call, we do not expect 2014 OIBDA to reach 2012 levels. So that obviously gives you a starting point for that. As things stand at the moment, we obviously have significant debt service obligations, and our interest expense is $80 million, $85 million. And we're expecting -- CapEx has traded -- has trended at roughly $30 million, $35 million over the last few years. So when you put all those together, there's not too much left there. And obviously, as I've said, the benefit from the working capital and the net investment programming that we've seen thus far this year is unlikely to be repeated into the future. So when you put all of those together, it's pretty clear that we would actually need some more funding either way.

Michael Del Nin

To the second question on kind of the macro outlook. Look, I think that if you look at each of our markets and obviously all of them are performing in a different way, but generally speaking, I think that analyst forecasts predict modest recovery for 2014 in most of the markets. I think that the economic performance of the Eurozone and the stabilization of those markets and the de-risking of some of those markets has obviously helped consumer confidence not just in Western Europe, but in Eastern Europe. And I would expect that if there's improvement in Western Europe, that will be -- that will provide some growth stimulus especially in the export-oriented economies where CME operates. So I think that that, in conjunction with improved consumer confidence, should lead to a better macro environment for us to operate in, but most of those improvements and most of that growth remains on the modest side at least as best we can tell.

Torsten Achtmann - JP Morgan Chase & Co, Research Division

Okay. Maybe if I could just add one more quick one on the back. If on there, you have to decide in the future to, say, give -- make a better deal on prices or lose the customer, would you be softer in terms of that, making that you get the customer back, or is it more important to keep the prices where they are?

Christoph Mainusch

I think it's both. Let's say we have to keep the prices where they are, and I believe we have reached a reasonable price level. And therefore, we estimate for next year that the growth comes from both, let's say, a higher number of GRPs and increased prices. This depends as well on what our competition will do, but generally, both drivers will determine that.

Mark Kobal

Thanks, Torsten. Next question, Pavel Ryska. Pavel?

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

I have just one question. Earlier today, you mentioned that you are reviewing all equity and debt possibilities regarding your financing. So my question is could that really mean that you are, for example, considering raising your debt level? Because that wouldn't make much sense to me given the fact that earlier this year, you were focused on reducing your debt. Or could you elaborate a little more on how you meant it with debt?

David Sturgeon

No, I'm afraid I really can't elaborate much more than what I said. We are in the process of evaluating every possible opportunity to get additional capital. We're not limiting it to any one avenue, and it's too early to add anything more to that, I'm afraid.

Mark Kobal

Okay, thank you. Next question, Steven Roth from GLG Partners.

Steven Roth - GLG Partners LP

You guys spent EUR 305 million repurchasing your 11 5/8% bonds just a few months ago, and now you're obviously facing a liquidity problem. Is -- has things deteriorated so dramatically in the space of that time or did you have the support of your major shareholders when you made the decision to put this company at risk with that repurchase?

Operator

[Technical Difficulty]

Mark Kobal

Sorry about that. Let's try that again, Michael.

Michael Del Nin

I apologize. I don't know where I dropped off. But basically, the decision that was made to repurchase some of that debt was obviously done at a time when the expectations for performance were different than to what they are today, and that's what drove that decision. And obviously, those performance levels haven't played out.

Mark Kobal

Okay, thank you. Our next question Oliver of Babson Capital.

Oliver Burgel - Babson Capital Europe Limited

I'm just wondering if you could give us a little bit more color around Czech market. I mean, obviously, you guys have been able to maintain pretty good audience shares, but your advertising, kind of share wallet, has decreased. I mean, is that sort of -- clearly, they're moving to their competitors -- to your competitors, but has there been sort of agency and advertiser spend just go out of the market? Because if they're not coming to you with such good audience shares, they're clearly not spending their money through TV advertising. Is there a sense that they've moved elsewhere in the market? And I guess, on top of that, sort of how [indiscernible] competitors been reacting in Czech Republic in terms of their pricing policies? Have you seen any...

Mark Kobal

Sorry, Oliver, can you repeat your -- or pick up your phone and make sure you're speaking clearly in the phone?

Oliver Burgel - Babson Capital Europe Limited

Sorry about that. I guess on the Czech market side of things, just give us a little color around kind how the shape of the market in terms of maybe sort of TV advertising spend versus elsewhere, given clearly, your audience shares have been maintained sort of at the high levels, but your advertising share hasn't. Just sort of curious, obviously, most of that had gone over to your competitors, but has some of it sort of moved out of the market into other mediums? And then on top of that, I mean, what have you seen from your competitors in terms of their pricing policy through the year-to-date, and I guess, kind of how you see that going into next year?

Christoph Mainusch

So generally, the total advertising spend, we didn't see a shift from TV advertising to other media. In 2013, what we saw is that there was a significant downturn in sold [ph] GRPs, which lowered the market and mainly based on the, as I initially have said, on the double-digit price increase, which could not be absorbed from the market. Generally, as I said at the beginning with the items of the new sales policy, we believe that this is, let's say, to be reverted. We, of course, cannot comment on the pricing policy of our competitors.

Mark Kobal

Okay, we're running up against time here, so let's move on to the next one. Elizabeth [indiscernible].

Unknown Analyst

Couple of questions from my side. Firstly, looking at your Slide 4 in the presentation and comparing Q3 '13 with last year, it seems that last year, you were able to achieve positive EBITDA with this level of revenue, $135 million, $140 million of revenue, whereas this year, you are dramatically in the red. So what's changed in your cost structure that's behind this move? My other question is regarding your financing measures. Can you talk about any constraints you have in your current capital structure on raising more debt?

Mark Kobal

Okay, start with Dave.

David Sturgeon

I'll take the first one. Yes, Elizabeth, as we said, revenues went down 4%, which is $4 million, which is broadly the ad sales decline in the Czech Republic not being offset fully by carriage fee increases everywhere else. But the story in Q3 was really about costs. Our costs went up from $137 million to $168 million, which is $15 million on programming, of which $9 million was the Romanian one-off write-down that we talked about, $6 million increase in programming from usage on additional channels and for the number of new channels this year that we didn't have last year. And the largest single part is $11 million of restructuring and severance charges. Everything else is pretty much where it was.

Unknown Analyst

Okay, so can you give us a clean EBITDA number for Q3, if stripping out the restructuring charges?

David Sturgeon

No. Sorry.

Unknown Analyst

Okay, I have bad line just so can you maybe repeat the amount of one-offs in Q3?

David Sturgeon

Sure, yes. Yes, $11 million of severance and restructuring, $9 million of accelerated amortization of programming and $6 million of other programming increases through having additional channels.

Michael Del Nin

To the second question, there are constraints in the indentures that limit how and how much debt we have, and that's laid out in the 10-Q for more details.

Mark Kobal

Okay, our next question is coming from Lars at Adelphi.

Unknown Analyst

One question coming on the cost side. You mentioned that, obviously, because of the restructuring, you can take $30 million constantly out of the business versus 2012. Now on the personal side, can you already give us an idea -- because obviously, your programming cost is, relatively to your revenues, too high. How much do you think you will bring down your programming costs?

Michael Del Nin

So I mean, look, generally speaking, we're in the process of reviewing our programming costs. I would say that fundamentally, we want to ensure that we're realizing the best possible return on our investment when it comes to programming and where we can identify opportunities to reduce cost while maintaining our leading audience share positions. We will consider those, but we can't give you specifics as to exactly how much cost there may be to take out at this point.

Mark Kobal

Okay. Thanks, Lars. We're really running up against time. Just time for 1 or 2 more. Vivek to follow up from Deutsche Bank.

Vivek Khanna - Deutsche Bank AG, Research Division

Two, if I may and they're quite short. The first one, when we are talking about working capital, I mean, clearly the 9-month figure has been quite strong, and you have said that it won't continue. I'm just trying to understand, should we expect, I think, like we saw last year an unwind off the $75 million, $76 million inflow in -- which we see in the first 9 months, just to try and get a feel for what the full year number may be? And then finally, considering the somewhat difficult operating environment and low visibility that you have in some of your key markets, until this restructuring process is not complete, I was just wondering what sort of cash interest would you be comfortable servicing on an annual basis, please?

David Sturgeon

Vivek, on the first one, yes, that's quite right. There would be an unwind -- partial unwinding of the working capital benefit. That's anticipated in the cash outflows that we were talking about to get to the $60 million of cash at the end of the year.

Mark Kobal

And the cash interest, debt service?

David Sturgeon

Clearly, we would like it to be lower first [ph] we were -- it is where it is at the moment. We don't really have any specific thoughts to the future yet.

Mark Kobal

Thank you, Vivek. Stanley, Legal & General.

Stanley Martinez - Legal & General Investment Management America Inc.

Yes, I think my follow-up questions have been answered. So thanks a lot, Mark.

Mark Kobal

Okay, great. Well we'd take our last question from Tibor at WOOD.

Tibor Bokor - WOOD & Company, Research Division

What is the outstanding liability towards Time Warner as of end of September, please?

David Sturgeon

The amount we owe Time Warner for programming at the end of September is just over $60 million. It's in the footnote of the 10-Q.

Mark Kobal

Okay, thanks. Because we're running up against time, so we're going to finish it today. This concludes the -- sorry, there are no more questions. So we like to thank everyone for joining us. We hope you found our earnings call informative, and we welcome your comments and feedback. We would also like to remind you that you can keep up to date and follow our progress between earnings calls on our website, www.cme.net. As always, we're available for any additional questions any time. Goodbye.

Operator

Thank you. This concludes the Central European Media Enterprises Third Quarter 2013 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.

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