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Central European Media Enterprises Ltd. (NASDAQ:CETV)

Q4 2009 Earnings Call Transcript

February 24, 2010 9:00 am ET

Executives

Romana Tomasova – VP, Corporate Communications

Adrian Sarbu – President & CEO

Charles Frank – CFO

Petr Dvorak – SVP, Broadcasting

Anthony Chhoy – SVP, Strategic Planning & Operations

Analysts

Dmitry Zhuk – Citibank

Ben Mogil – Thomas Weisel Partners

Laurie Hill – Goldman Sachs

Matt Walker – Nomura

Vijay Singh – Janco Partners

Robert Doca [ph] – Saning Capital [ph]

Gavin McKeown – Pioneer Investments

Alexey Surkov – D&T

Margaret Kalvar – Harding Loevner

Leszek Iwaszko – KBC Securities

Andrzej Knigawka – ING

Dave Kestenbaum – Morgan Joseph

Scott Kinam [ph] – O’Connor [ph]

Mark Kuduroni [ph] – Credit Suisse

Vivek Khanna – Deutsche Bank

Operator

Hello, my name is Missy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises full-year 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions) As a reminder, this conference is being recorded today, February 24th, 2010.

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

Thank you. Good morning or good afternoon to each of you, and welcome to CME's fiscal year 2009 investor conference call. For the first time, we are broadcasting our earnings call via a video webcast to enable you to see the management team in action. You can join us via the link on our homepage www.cetv-net.com. There you can also download the presentation slides, which we will refer to during this call. You can find them on our homepage at the bottom left corner.

The participants of today's call will be CME’s President and Chief Executive Officer, Adrian Sarbu; and CME’s Chief Financial Officer, Charles Frank who will give you the formal presentation. We are also joined today by Petr Dvorak, Senior Vice President, Broadcasting; Anthony Chhoy, Senior Vice President, Strategic Planning & Operations; and our General Counsel, Daniel Penn.

Before I turn to Adrian, let me read the usual Safe Harbor statement. Our presentation today will contain forward-looking statements. Through 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-K 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 certain financial information that is not in US GAAP. Please see the appendix to the presentation for a reconciliation to US GAAP financial measures. In addition, our segment financial information that is presented in local currencies is not in US GAAP. We do not provide a reconciliation to these numbers as the US GAAP amounts are expressed in US dollars in our financial statements. Additional information on our segment data is provided in note 19 to our financial statements on page 172 of our 10-K.

And now, over to Adrian.

Adrian Sarbu

Good afternoon or good morning. In 2009, an unprecedented economic crisis hit our region and reset TV ad spending levels to 30% below those we saw in 2008. $800 million of TV ad spend vanished in one year from our markets. Facing an event of such magnitude, we responded. We focused on defending our audience leadership in our core markets. We gained market share at the lowest cost possible. Inevitably, our revenues suffered. Our EBITDA for the full year was only $75 million.

Today, we face questions with difficult answers. When will our markets start recovering? How fast will TV ad growth return? When will Central Eastern Europe convergence with Western Europe resume? Here are the answers.

We expect recovery of our TV ad spending in the second half of 2010. In the first half of 2010, our markets will be flat. Advertisers will remain cautious and opportunistic. At the beginning of this year, we have made the necessary corrections to our portfolio to achieve positive EBITDA in all our operations in 2010. We have agreed to sell our Ukraine operations for $300 million. We have agreed to acquire a market leader, bTV in Bulgaria for $400 million. We expect that these changes will bring significant benefits to our bottom line in 2010 and beyond.

And now, our strategy is to focus all our energy on increasing profitability in broadcasting, on growing and monetizing internet audiences, on growing MediaPro, and on diversifying our revenue sources. CME today is reloaded with energy, self confidence and cash. Our track record demonstrates that we will achieve our goal, to outperform the markets.

I invite you to turn to slide 5 of our presentation. In 2009, we accomplished a number of actions. We attracted Time Warner investments of $240 million. It endorsed our capabilities to operate successfully in our markets. We strengthened our operations by maintaining audience share leadership and increasing market share. We increased our liquidity to $500 million and extended debt maturities beyond 2013. We acquired MediaPro Entertainment and now we are redefining ourselves from a broadcaster to a vertically integrated media company in order to face the challenges of our industry in the future.

We laid foundations for revenue diversification, advertising, channel subscription, content, new media and management services. We agreed to buy bTV in order to achieve positive EBITDA and a leading position in Bulgaria in 2010. We decided to sell cash negative Ukraine for $300 million. We preserved the power of our brands, product and spirit of our people.

Let’s move to slide 6. In the Czech Republic, we increased our year-on-year market share to 71%. TV Nova delivered outstanding prime time audience share of 49% and in a very difficult environment of 2009, it achieved 49% EBITDA margin. In Romania, our advertising market share increased to 55% year-on-year, and again in a very competitive environment, we delivered 32% prime time audience share.

In Slovakia, TV Markíza increased its advertising market share by 4% to 65%. Our new female-oriented channel, Doma TV has performed strongly since its launch in August and became a leader in its target group of women 12-54, with an average all day audience share of 3%. In Slovenia, our market share grew to 78% from 72%. We remained an undisputed leader in the market with 49% prime time audience. Our Croatian business, Nova TV grew advertising market share to 36%. We have achieved prime time audience leadership with 27% and in 2009, Nova TV in Croatia was EBITDA breakeven for the first time in its history.

And now, over to our CFO, Charles Frank.

Charles Frank

Thank you, Adrian. I would like to walk you through some of the key items in our financial statements. Please turn to slide 7, which sets out the key operational performance figures for the year. Overall, our US dollar revenues fell by 30%, from $1.02 billion in 2008 to $714 million in 2009. This decline was a result of both the decline in local advertising markets and weakness of our local currencies relative to the US dollar.

For our core operations, US dollar revenues fell 27%, or 18% on a like-for-like or constant currency basis. Revenues for developing operations fell 65%. In total, our operating costs declined 12% in US dollar terms. A substantial portion of this decline was due to the fact that many of our costs denominated in local currencies, which declined in value relative to the dollar.

For example, the decline in total US dollar operating costs for our core operations was 10%, but on a constant currency basis, total costs were flat year-on-year. In comparing revenues and cost between 2009 and 2008, one should take account of the fact that 2008 figures include only five months of our Bulgarian operations, which we acquired in August 2008. Our US dollar costs showed a decrease of 17% excluding Bulgaria.

On a Group consolidated basis, EBITDA for the year was $75 million, down 75% from the previous year. Our core operations generated EBITDA of $199 million, a decline of 49% and 43% in constant currency terms. In Croatia, our operations achieved full-year breakeven EBITDA for the first time despite the challenges of the crisis. The EBITDA margin of 29% for our core operations is 13 percentage points slower than in 2008. Our developing operations suffered an EBITDA loss of $85 million, almost double the EBITDA losses of 2008, but includes a full-year loss in Bulgaria in 2009 compared to five months during 2008.

Let’s move on to slide 8. Our operating income was a negative $83 million in 2009 compared to a negative $128 million in 2008. The losses in both years were mainly the result of impairment charges to our Bulgarian and Ukrainian operations. Excluding these impairment charges, the operating loss would have been $1 million in 2009 compared to an operating income of $209 million in 2008. Our operating free cash flow, by which I mean cash generated from operations less capital expenditures was negative $82 million in 2009 compared to a positive $57 million in 2008.

We had a cash outflow of $50 million in respect to capital expenditures, which is 36% lower than in 2008 following delays or cancellations of certain capital expenditure projects. Despite our overall operating cash outflow, our core operations in aggregate remained cash flow positive during 2009. At the end of December, cash and cash equivalents totaled $459 million and total liquidity including undrawn facilities were $482 million. Net debt remained constant at about $1 billion between 2008 and 2009. On February 1st, 2010, we received $30 million in connection with the sale of our Ukrainian assets to Igor Kolomoisky.

We expect to receive the remaining cash of $270 million plus reimbursement of net cash requirements between signing and closing on completion, which is expected to occur in the second half of April 2010.

And now, let me turn back to Adrian.

Adrian Sarbu

Thank you, Charles. Please turn to slide 9. Through 2009, we worked to build a stronger company in all dimensions. And now, in February 2010, we are in a far stronger position than we were at the beginning of 2009. We emerged from the crisis with leadership undamaged and increased market share. The decision to sell our Ukraine operations will eliminate EBITDA losses and increase our liquidity by $300 million. The acquisition of bTV in Bulgaria will take our Bulgarian operations from negative to positive EBITDA in 2010 and to audience share leadership. We anticipate that all our broadcasting operations will end 2010 as leaders in audience share and market share.

MediaPro will feed our broadcasters with premium content and will generate third-party revenues. Our new media audience is growing every month, and we are already capturing non-TV advertising budgets. By dramatically improving our EBITDA, we are positioned to deleverage. Solid financial resources will allow us to explore accretive growth opportunities. We are the best positioned in our region to grow by leveraging our traditional and new strengths.

Please turn to slide 10. And now, allow me to refer to two hot topics. Our market in 2010 and convergence of Eastern Europe with Western Europe. We expect TV ad spending to grow during the second half of 2010. GDP and TV advertising is expected to grow low single digits. We see TV ad markets in the first quarter flat or even weaker than last year. Contrary to our competitors, we can match advertisers’ expectations and maintain our market share. We will adjust the volume and prices subject to depending on market recovery. The priority for us still remains market leadership.

Our markets did not start to grow, but the future is predictable. Advertising spending in Central Eastern Europe will converge with advertising spending in Western Europe. Over the coming economic cycle, growth in Central Eastern Europe is expected to be between 3% and 4% compared to 2% expected in the Eurozone. All our economies start at a low level, with GDP per capita significantly below Western Europe. Our markets will enjoy benefits of EU membership. Dependent on country, EU funds available to Central Eastern Europe are worth 2.8% to 5% of GDP each and every year between now until 2013.

This ease of significance shows the funding. Our low labor cost and low consumer credit will continue to attract foreign direct investment and credit expansion once global conditions normalize.

On slide 11, we have highlighted the few recent quotes from financial press economists about expected recovery in our markets. Let’s move to slide 12. For 2010, we have an action plan. In 2010, we will continue to protect our leadership position. We aim to operate with lower costs than in 2009 and increase profitability in broadcasting. We will adjust our product to changing conditions of our markets. We are planning to diversify our revenues in content, internet and management services.

We will expand distribution of MediaPro products and services outside CME markets. In 2010, we will focus on creating value by organic growth and we will only pursue profitable acquisition opportunities accretive to our business. We are very conscious of our high leverage and we will address it in 2010.

Please turn to slide 13. We strongly believe in our capability to create shareholder value. Many of you have been long-term followers of CME. And you know that our markets are a proven opportunity. We have a history of outperforming the markets. Our leadership position in broadcasting maximizes margins and returns. We are the strongest team of media professionals in the region. Our vertically integrated operational model is open to diversification and will be resilient to the future challenges in our industry. We are building leadership in content and internet with low investments. We are uniquely positioned to take advantage of recovery in Central and Eastern Europe. In the current new cycle, our markets will grow faster and converge with Western Europe. CME has rebuilt the foundation for the company through a very volatile period and has come out stronger. Our team is now tasked with improving our operations in a tough economy and driving new businesses that should result in greater operating leverage.

Thank you. Romana?

Romana Tomasova

So, now it’s time for you to ask questions. We have the first question from Dmitry Zhuk from Citibank. So, I pass to Citigroup, so I pass you back to operator to open his line.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Dmitry Zhuk. Please go ahead.

Dmitry Zhuk – Citibank

Thank you for taking my questions. I have three questions please. My first question is on Bulgaria. What is your strategy in this market once you deconsolidate bTV, and would it involve further investments or will you rather focus on the profitability given that bTV already came on to 60% of the TV out markets in Bulgaria? And also, what losses should we expect from your existing Greenfield operations in Bulgaria? My second question concerns advertising markets. Which markets are you most optimistic about for this year based on the price and volume trends that you are currently seeing, and which markets are you most pessimistic about? And my last question is on the Romanian operation. The fourth quarter margin performance was disappointing. Do you attribute this to the macroeconomic pressures or rather to the intensification of the competitive dynamics in this market? Thank you.

Romana Tomasova

So, let’s start with the first question about Bulgaria, and let’s have Adrian answering the questions.

Adrian Sarbu

Dmitry, we have a strategy quite detailed. We are in Bulgaria since years, and we worked a lot to achieve this deal with News Corp. Unfortunately until closing, we are banned from disclosing this strategy and you can understand why. I can promise to you that in the next call after we will close, we will roll out a full strategy of ours and you will have as many details as our legislation will allow you. Sorry and thank you for understanding.

Romana Tomasova

The second question, Petr Dvorak, can you answer that?

Petr Dvorak

As we discussed during the presentation, we don’t expect the Q1 to give us a big surprise, I mean big positive surprise. But taken into account all our markets, we feel that the fastest recoveries will come in Slovenia, which will be followed by Czech Republic, Romania, Croatia and then Slovakia, and Bulgaria.

Romana Tomasova

The last question, Anthony?

Anthony Chhoy

Just on Romania, Dmitry, the weaker EBITDA margin in Q4 is entirely due to the decline in the local TV advertising markets, which we estimated to be 33% in the quarter, resulting in our local currency revenues to drop by 27%. Having said that, we managed to reduce our local currency cost by 2% for the quarter and also maintained a high audience share despite the competition from the intact group.

Romana Tomasova

Thank you, Anthony. Next question comes from Ben Mogil from Thomas Weisel Partners. So, I pass it back to the operator to open the line.

Ben Mogil – Thomas Weisel Partners

Great. Thank you very much for taking the call. On Bulgaria, was the amount of News Corp or Fox programming the channel aired, bTV aired significant, and are you able to keep any kind of those output deals if you guys want post the transaction?

Adrian Sarbu

Ben, sorry again?

Ben Mogil – Thomas Weisel Partners

Sure. I will, you want me to rephrase it?

Adrian Sarbu

We are not able to answer to questions about Bulgaria until closing. Please understand me.

Ben Mogil – Thomas Weisel Partners

Totally understandable, totally understandable. Let me switch gears. Does the electoral issues currently, you know sort of outplay in the Ukraine? Does that potentially delay or even potentially scuttle your deal like do you need government approval for this license for the sale of the TV license?

Romana Tomasova

Adrian?

Adrian Sarbu

I will start with the end of your question.

Ben Mogil – Thomas Weisel Partners

Sure.

Adrian Sarbu

Our buyer and partner got already the approval for anti-monopoly committee in Ukraine to buy. This was cleared. And we didn’t see any obstruction to our deal and we are looking forward to close the deal in the parameters, which we agreed with our partner, Kolomoisky.

Ben Mogil – Thomas Weisel Partners

Okay. And then I think last question is sort of more a broader question. You know, when you look at say you know, today versus two years ago, at the beginning of ’08, clearly the world has changed, and we all fortunately or unfortunately know that, what I am more curious about is, from a competitive perspective, what difference, I mean, are you seeing radio and newspaper operators literally got a business, I know that you have mentioned in the past a lot of the smaller cable channel sort of startups didn’t get funding or the advertising they helped for, and they ultimately ended up folding. Can you talk competitively about what the world looks like today versus what it looked like, you know, a couple of years ago, both the TV competitive landscape and the overall media landscape in your markets?

Romana Tomasova

Again, Adrian?

Adrian Sarbu

You said ten years, so thank you for this question, Ben. I am quite, quite loud saying that we are much stronger than last year, not thinking or talking about ten years ago. Ten years ago, most of our markets were in the very beginning, some of them after a couple of years of commercial television, today compared with – in comparison with ten years ago, we see a less appetite of our competition to not of our competition of too many possible competitors to invest in media. So, there is a consolidation in our markets, and it’s not only consolidation, there is certain type of diminished appetite for adventures, on one side. On the other side, the existing competitors learn more. Historically, we were the drivers of know-how and the promoters of what is new in commercial television in these markets. Our competitors learned a lot, our competitors used a lot of people which we released in the last ten years. So, in fact, we are competing with teams of people who work for us.

In respect of the media which you referred to, radio and press, it’s obvious that radio and especially print media is much weaker, and one of the reasons we are pushing so much internet is because we see in the segment of print media opportunities to attract more advertising money. So, today we are stronger. Our competition exists in some markets. It’s stronger, but it’s not so, so large as number of players with the exception of Romania and maybe a little bit Bulgaria, but on the other side, the opportunities for us to leverage our revenues beyond the TV advertising share of the pie are more.

Ben Mogil – Thomas Weisel Partners

Is your expectation that going forward, the government or state broadcasters will continue to sort of have reduce share either because, you know, legislatively they are having – they are being sort of capped in terms of how many ad minutes they can sell or more importantly that they simply, the government no longer views you know television broadcasting is something for the state and use it more as a commercial enterprise?

Adrian Sarbu

Some governments behave really responsible in the interest of the viewers and reduce the spending of the commercial advertising spending in public stations and this is a case of Czech Republic and Slovakia and we hope most of the government in the region will follow. These stations are financed by state subsidies and by mandatory subscription, which we consider also unfair. But that’s sliced and that’s the pie. Compared with Western Europe, we are in a much better position because the force and the power of commercial television and the success of ours push the ratings, the share of the public stations very, very low and they had no choice according to our view, but to go back to the main meaning of the main mission of that which is to serve the public interest and not to compete for advertising money and not to compete for commercial television products. We hope and we are quite optimistic that the government will understand the wish of the TV viewers.

Ben Mogil – Thomas Weisel Partners

Great. Okay, thank you very much. I appreciate the update.

Romana Tomasova

Thank you, Ben. Next question comes from Laurie Davison from Goldman Sachs. Laurie?

Laurie Hill – Goldman Sachs

Hi guys. Thanks for taking the question. This is Laurie Hill from Goldman. First question is you mentioned lower costs for 2010, is that local currency and what kind of cost cuts can we be expecting? Second question is what’s going to be the impact at MediaPro on external revenues and EBITDA in 2010? Third question is what’s your target leverage level? How should we think about what’s the target level you think about 2010, ’11, perhaps even beyond that? Thank you.

Romana Tomasova

Thank you, Laurie. For the first question, Anthony Chhoy.

Anthony Chhoy

Laurie, we plan to operate under costs of 2009 in local currency terms, and we will continue to optimize the operations through all categories, marketing costs, general expenditures, I know it’s optimized and used as well. We plan to manage our broadcasting schedule in order to limit the growth of the rights of growth of programming, but then at the same time to try to maintain our high audience of brands.

Romana Tomasova

Thank you, Anthony, and I think you should also answer the question regarding MediaPro?

Anthony Chhoy

In terms of MediaPro, the biggest contribution in third-party revenues is expected to come from our distribution exhibition units. We plan to generate, I cannot give obviously the full-year guidance number, but we plan to generate at least up to 40% to 60% of third-party revenues from the division. Maybe Adrian wants to comment further on that.

Adrian Sarbu

Now, this is an answer for 2010. We have a long-term strategy for MediaPro, and we several times we had announced to you that we want to become one of the largest players on the content market of Europe. Practically, couple of years from now, we will have a significant revenue coming from production, TV production and cinema. So, abroad, a larger share of distribution all rights market in our region and abroad. And we also hope that our very strong production services assets will be monetized beyond the needs of our broadcasters. So, about MediaPro, you could expect just good news, even if for this year, we will have to operate disciplined first to look through support with very low cost product and very low cost services our broadcasting operations.

Romana Tomasova

Thank you, Adrian, and last question about leverage, Charles?

Charles Frank

Thank you, Romana. Well, let me point out that the sale of the Ukraine and the purchase of bTV combined will have a major positive impact on our leverage. As we have stated before, we will eliminate $85 million of negative EBITDA and even more in terms of negative cash from our results by making that acquisition and that disposal. So, that will be a positive effect. We will only use net $100 million of additional cash, which will increase our net debt by roughly $100 million, so that we envision an enormously improved ratio of both gross and net debt to EBITDA, which will be further enhanced or is further affected by the recent increase in the value of the US dollar, which has driven down some of the value of our US dollar value of our debt. So, all things considered, we think that the ratio will get well below 7, closer to 6 in terms of pro forma, just pure pro forma analysis, and that can go even lower as the results improve overtime. We would like to aim for a four times leverage ratio or lower.

Romana Tomasova

Thank you, Charles. Have we answered all your question Laurie?

Laurie Hill – Goldman Sachs

Yes. If I could just come back on MediaPro, you mentioned generally 40% to 50% of third-party revenues, since this was confided, what would you be hoping for, just very rough ballpark for third-party revenues in 2010, I mean, (inaudible) significant external EBITDA contribution in 2010?

Anthony Chhoy

In terms of third-party revenues, we are looking at the range of – am I allowed to provide the range – I think the range of around about $50 million.

Laurie Hill – Goldman Sachs

Okay. That’s very useful. Thanks so much.

Romana Tomasova

Thank you, Anthony. So, next question is coming from Matt Walker from Nomura. Matt?

Matt Walker – Nomura

Hi, good afternoon everybody. Just a couple of questions if I can. The first one is on the guidance. I think before you had indicated sort of 6% to 8% revenue, ad revenue growth for 2010. Are you sticking with that figure? And the second question is related which is you are indicating a flat, if you were on off comparison which is almost minus 40. Comparisons get tougher in the second half of the year. So, I am just curious, just your logic about why growth in the second half of the year is going to be back, because I would have expected that growth in the first half, you know, easier comparisons would be easier. And the third question is on the Ukraine and Bulgaria, are you not able to give an even historic numbers for Bulgaria, because it’s otherwise impossible to assess what’s the transaction, and why also have you decided to swap the Ukrainian market, which was supposed to be your larger eventual market with the most people in it, for a market which is actually relatively small and you know, I am not saying it’s uninteresting, I am just saying, it’s much, much smaller than the potential of Ukraine, even though they have got some local at the moment.

Romana Tomasova

Okay, thank you Matt. We have few questions, few strategic ones. So, let’s go to the first. So, Adrian, the question, the first one and the question about Ukraine?

Adrian Sarbu

As far as the question about the guidance on the market, so I think we were quite clear, Matt. We see first quarter flat, or maybe weaker, first half flat or maybe weaker than last year’s first half. And we foresee, we expect an increase in the recovery to start, which means increase year-by-year in the second half. In respect of the dimension, we, I think guided single digits. That’s what we see today, one year ago, we are not able even to see this type of or this type of information. Now, we are willing to give you as much as much information as possible for this year. I will switch to Charles for the question about Bulgaria and then I will come back to you to talk about Ukraine, the decision on Ukraine.

Charles Frank

Matt, as you probably know, in our 8-K, we did disclose the fiscal year results for the bTV group. Fiscal year ending 30th June, 2009, the total revenues were Lev 150.6 million, EBITDA was 64.5 million, EBITDA margin was 43%, and US dollars at roughly current rates, that translates to revenues of $105 million, EBITDA of $45 million and the same EBITDA margin of 43%.

Matt Walker – Nomura

And is that, that was annualized to June, or is that just part of your –?

Charles Frank

Yes, that’s June 2008 to June 2009.

Matt Walker – Nomura

Okay.

Adrian Sarbu

Now, about Ukraine, I hope you don’t imagine, we left Ukraine, because we are into the (inaudible) but we learned a lot in the last 12 to 15 months about the impact of a global crisis on our region, about the way we should define the priorities, and the priority for us is to stay as the largest media company in Central Eastern Europe, and one of the reasons we decided to physically to leave Ukraine was because we wanted to focus on CE country and CE exception country and subsequently we entered into negotiations with News Corp to buy bTV. Ukraine market still has potential to grow, but this potential is unquantifiable in time and value today. We have to deliver value to our shareholders every day, week, month and especially quarter when they meet you, and we try to listen to the voice of the market we said, focus on what you can do, get stronger and leverage your operations. That’s the reason we left Ukraine, not because Ukraine is not a big market. It’s a big market. We may come back once, but today, we have to focus on Central Eastern Europe.

Matt Walker – Nomura

Okay, thank you very much. Thanks.

Romana Tomasova

Okay. Next question comes from Vijay Singh from Janco Partners.

Vijay Singh – Janco Partners

Thank you. Couple of clarifications, I was wondering when do you expect Ukraine to be deconsolidated from your financials, that’s number one. And number two is on your commentary on debt levels, I am wondering if – so there is no deleveraging in terms of paydown of debt, it is basically because of the currency issues and also the fact that your EBITDA is going to get better, so your ratios are going to get better, is that my understanding, just correct me?

Romana Tomasova

Questions for Charles and Anthony.

Charles Frank

Yes, I mean, nearly all of the improvement in the leverage ratio and for that matter in the coverage ratio is a significant improvement in EBITDA. We have no plans at the moment to make any major significant changes in the amount of debt outstanding other than perhaps raising some debt, modest amount of debt at the local level, which we are allowed to do under our indentures. So, therefore the main positive effects come from the EBITDA effects of the purchase and the sale. Now, deconsolidation, let Anthony answer that question.

Anthony Chhoy

Okay, in terms of – we will report the Ukraine losses as a discontinued operations from the date of signing and the transactions when we close it. I think we will only deconsolidate it after we close the transaction, which we expect to happen in April this year.

Vijay Singh – Janco Partners

Okay. Thank you.

Romana Tomasova

Okay, thanks Vijay. Next question is from Robert Doca [ph] from Saning Capital [ph].

Robert Doca – Saning Capital

This is Rob Doca. My questions have already answered, so I have no more any questions. Thank you.

Romana Tomasova

Okay, thank you Robert. So, let’s take next one. It’s Gavin McKeown, Pioneer Investments.

Gavin McKeown – Pioneer Investments

Yes, hi. Thanks for taking the questions. Just first question to –

Romana Tomasova

Can you speak up a little?

Gavin McKeown – Pioneer Investments

Yes, in terms of liquidity –

Romana Tomasova

Thank you.

Gavin McKeown – Pioneer Investments

I am assuming that’s $482 million; is there any undrawn lines that are abatable on top of that and also what is the portion of that from the escrow if any?

Romana Tomasova

Okay, Charles.

Charles Frank

There are undrawn lines as we said earlier. We have like 400 and – I will go back to the presentation – our liquidity as of the end of 2009 was $487 million of which $459 million was cash. So, the undrawn facilities are the difference between those two or roughly $30 million to $35 million. By escrow, what do you mean by escrow, the escrow that we put in to the as an – in an unrestricted subsidiary?

Gavin McKeown – Pioneer Investments

Yes.

Charles Frank

Yes, that money is, I think it’s around 189 million, that’s still in that unrestricted subsidiary. Once the Ukrainian transaction closes, we will probably not need all that money and we will have the ability to withdraw that money and bring it back into the restricted group. Whether or not we do it will depend on a number of other factors, but I would imagine at some point we will bring some of that money back into the restricted group.

Gavin McKeown – Pioneer Investments

Okay. I am just speaking of the 189 million included in your 482 million at yearend and also how much do you expect to be able to bring back into the restricted group?

Charles Frank

Yes, it is included in the cash and liquidity numbers that I gave you. What we will do is we will leave enough money in that account in order to take care of all of the Pro.bg group obligations, which we have to make a full estimate of that. I can’t give you the exact amount we will bring back now, but it will be a substantial portion of that 189 million I would expect.

Gavin McKeown – Pioneer Investments

Okay.

Romana Tomasova

Gavin, any more questions?

Gavin McKeown – Pioneer Investments

Yes, just one final question on the cash, in terms of the cash that you are going to leave on restricted entity, a memory at the time of that (inaudible) I thought you were saying that most of the cash was going to be acquired to the Ukraine rather than Bulgaria, is that incorrect?

Charles Frank

I think it was roughly equal between the two and much will depend ultimately on the or would have depended ultimately on the recovery of the markets, but it’s really a moot question at this point, because we envision that the only money that we will need is the money to fund the obligations of the Pro.bg group subsidiary which will remain an unrestricted subsidiary, the acquired bTV group will be a restricted subsidiary.

Gavin McKeown – Pioneer Investments

Okay, thanks a lot. And probably if I missed this at the start of the call, but I am just wondering maybe could give some additional color as to why you are thinking of the recovery in growth in the second half, and what are drivers behind that, is just what you are seeing from your discussions with your advertisers or they are more tiered than that?

Romana Tomasova

Question for Anthony.

Anthony Chhoy

At the start of the year, we have seen the appetite of being quite cautious and stuffs but we do get some confidence that, you know, the second half, we will start to show some growth as we have seen some improvements from some large clients such as pharmaceuticals and retail business. I think that gives us some confidence in that regard.

Romana Tomasova

And Adrian?

Adrian Sarbu

We made quite a clear statement. That doesn’t mean that during the first half of the year, some markets may not start recovering. The normal pace of recovery is first GDP, assumption and then advertising. So, we are – we expect this steps to happen in all our markets on a different timing during 2010, but we see this happening in the second half of the year in most of them.

Gavin McKeown – Pioneer Investments

Okay, thanks a lot.

Romana Tomasova

Okay, let’s move on. Gavin, can we take your question after the call offline, because we have a big queue of people waiting for asking questions.

Gavin McKeown – Pioneer Investments

No problem, I am done. Thank you.

Romana Tomasova

Thank you. Thanks for understanding. So, next question comes from Alexey Surkov from D&T.

Alexey Surkov – D&T

Yes, good afternoon. Actually most of my questions have been answered in the sense that you are not going to provide any specific guidance for 2010 in terms of revenue and EBITDA. That’s one question, also as I understood, you are not going to specify how much of the restricted cash, which I understand was $189 million at the end of 2009 was going to be brought or is going to be brought back? If you can volunteer that, that would be useful. And also something I didn’t quite understand, I guess it’s a follow-up, what’s going to happen to the current unrestricted Bulgarian business? Is it going to be somehow merged with bTV or temporarily [ph] disposed off, what the logic is, unless again you are not supposed to comment on it?

Charles Frank

Well, the $189 million is in the unrestricted group, not the restricted group.

Alexey Surkov – D&T

So, you have to – sorry, I misspoke.

Charles Frank

And clearly, we can bring all of it back. How much we bring back will depend very much on what our eventual operating strategy is for all of our Bulgarian operations, which as Mr. Sarbu has indicated is something that we haven’t yet or not in a position to tell. All I can is that we will make sure that the Pro.bg, which will remain unrestricted will not suffer for lack of cash, and also I can tell you that we are hopeful that we can eventually bring back Pro.bg subsidiaries into the fold of the restricted group and we expect that, that could be accomplished in a year or two at the most.

Alexey Surkov – D&T

Right, and bTV was acquired on a debt-free basis, cash-free, debt-free, right?

Romana Tomasova

Charles?

Charles Frank

Yes, that’s correct.

Alexey Surkov – D&T

Okay, thanks.

Romana Tomasova

And we answered all your questions?

Alexey Surkov – D&T

Yes.

Romana Tomasova

Okay, great. Next question comes from Margaret Kalvar, Harding Loevner. Margaret?

Margaret Kalvar – Harding Loevner

Hi, yes. Thank you, good morning. Could you give a little bit more color on your current debt breakdown and whether you have been benefiting from the weakness of the Euro recently, and what’s your overall currency exposure looks like right now?

Romana Tomasova

So, again, Charles?

Charles Frank

Yes, well, of our total debt of roughly $1.5 billion, nearly $500 million, exactly $475 million is represented by the convertible note, which is denominated in US dollars. The balance of our debt is either denominated in Euros or in Czech Crown. So, as I indicated before, the fact that the dollar had strengthened than the Euro and the Crown have weakened have reduced our debt very substantially in the last six weeks or so in US dollar terms. But, you know, we don’t know where the Euro or Crown rate is going to go, and we have our own projections, but the amount of debt outstanding is highly variable depending on those exchange rates. Our overall currency exposure, we have looked at this in some detail, and while our revenues are very much affected by currencies obviously, our costs tend to move in the right direction, that is when our revenues go down, a substantial portion of our operating costs, roughly 88% [ph] in fact are denominated in local currency. So, we get a real positive effect on the cost side when the dollar strengthens and our local currencies weaken.

But another interesting aspect of the analysis that we did is when you take into account the effect of capital expenditures, you take into account the fact that we pay our taxes in local currencies, and the fact that we pay a large portion of our interest in local currencies and you take that all down to the bottom line in terms of cash flow available to service debt, it’s relatively little affected. There is a modest effect, maybe 10% improvement in the US dollar would result in, I would say, roughly 5% in deterioration of the eventual cash flow available to pay debt,

Margaret Kalvar – Harding Loevner

Okay, thank you very much. That helps.

Romana Tomasova

Thank you, Margaret. Next question comes from Leszek Iwaszko from KBC Securities. Hi, Leszek.

Leszek Iwaszko – KBC Securities

Yes, hi. Okay, I have two questions. First, it’s on interest cost, in Q4, which if I – they were above 40, almost $45 million, and they were substantially up quarter-on-quarter. Is there anything, you know, what’s behind such a huge growth quarter-on-quarter?

Romana Tomasova

Charles?

Charles Frank

It’s really. Well, quarter-on-quarter, it’s one thing and one thing only, which is the fact that we purchased roughly $160 million or $180 million – 180 million Euros, excuse me, of our 2005 notes at a premium of roughly $11.1 million or $11.2 million. So, that goes into our interest cost in the fourth quarter. That’s a one-off change, and that’s the reason for it being so high. On a year-on-year basis, that is the numbers for the fourth quarter of ’09 relative to fourth quarter of ’08 are also affected by the fact that we drilled down about $400 million in our credit facilities early in the year, which means that our interest cost in 2010 have been substantially greater than they were in 2009.

Leszek Iwaszko – KBC Securities

How much was this one-off in Q4 approximately?

Charles Frank

A little over $11 million.

Leszek Iwaszko – KBC Securities

Okay, right. My second question concerns to MediaPro result in 2009. Could you disclose full-year 2009 sales and EBITDA of these assets?

Romana Tomasova

Anthony, please.

Anthony Chhoy

In 2009 again under IFRS, MediaPro generated $72 million of revenue and $7 million of EBITDA.

Leszek Iwaszko – KBC Securities

$7 million of EBITDA?

Anthony Chhoy

Yes.

Leszek Iwaszko – KBC Securities

So, that’s roughly 10% margin which I believe lower or even much lower to what we saw in 2008, which was something like 14% or something. Can we see this margin to go up in 2010 you think?

Romana Tomasova

Adrian?

Adrian Sarbu

We cannot guide to on the number.

Leszek Iwaszko – KBC Securities

Yes, but was it some margin kind of affected by crisis as they naturally could some kind of recovery going forward?

Adrian Sarbu

That’s what I told you, we cannot guide you. MediaPro is not selling, it’s not selling advertising. So, we gave you a guidance on the advertising markets during 2010. MediaPro sells B2B and B2C, so we cannot give you any type of guidance and generally we don’t give guidance in February for the full-year 2010.

Leszek Iwaszko – KBC Securities

Okay.

Anthony Chhoy

The 2008 numbers were impacted by the local currency, the RON versus US dollar, which depreciated by around about 20% to 22 years.

Leszek Iwaszko – KBC Securities

Okay, thank you. My last question refers to Internet. On full-year basis, your EBITDA loss on Internet is roughly $10 million, what kind of perspective do you see for the Internet operations to breakeven on EBITDA? Is it in the line of 2, 3 or 5 years roughly?

Charles Frank

We cannot guide but we will definitely depending on the market situation, but we expect to breakeven within the next five years at least at a minimum.

Leszek Iwaszko – KBC Securities

And would you like considering now after you have made a major reshuffling in terms of your TV assets to go for some big acquisition in the Internet, that would also give you a scale, a proper scale with some kind of gift, larger weight of this media versus your TV assets? Do you consider anything like that?

Romana Tomasova

Adrian?

Adrian Sarbu

First of all, Leszek, if you know a company with good EBITDA and profits in our region, please let us know. Internet in our region is not so much developed. We are in couple of markets leaders in audience. I want to remind you that we indicated that we reached at the end of 2009 2 million unique visitors per day, which is quite a number. In respect of the principle which will guide our acquisitions, I think I was also very clear. We are looking only for accretive broadcast, which means we will buy EBITDA and earnings from now on.

Leszek Iwaszko – KBC Securities

Okay, thank you very much.

Romana Tomasova

Okay, thank you Leszek. So, let’s take the next question Andrzej Knigawka from ING.

Andrzej Knigawka – ING

Yes, good afternoon. Had a question on your sellout ratios for TV Nova in Czech Republic and PRO TV in Romania for the mainstream stations in two largest markets. The sell-out ratios in time where the sell-out ratios in 2009?

Romana Tomasova

Okay, thank you. So, the first question will be answered by Petr Dvorak.

Petr Dvorak

Okay, the sell-out ratio overall in our market is the same as in the last year, also a little bit higher, and it’s based on our sales strategy which we used for this year. We didn’t push for price increases too much as were used in the last year, but we are mainly focused on the volume.

Romana Tomasova

Any other – okay, Adrian.

Adrian Sarbu

Was the question related to 2009?

Andrzej Knigawka – ING

Yes, in terms of just trying to get a sense of stating how much headroom is there for your volume growth if markets recover say in second half, do you have room to draw your volumes? So –?

Adrian Sarbu

If I am right, then my colleagues are not or will not correct me. We are talking about 70% to 80% sell-out ratio all year. In Czech Republic and Romania, and as you could see, there is room and we also indicated in our page that we are able to please or to match the expectations about advertisers with volume, quality and inventory and if necessary prices.

Andrzej Knigawka – ING

And this 70% to 80% would be all day, sell-out ratio or prime time sell-out ratio.

Adrian Sarbu

Prime time, prime time, yes.

Andrzej Knigawka – ING

Okay.

Adrian Sarbu

Definitely all days lower.

Andrzej Knigawka – ING

Okay. And the second question is you probably cannot give company’s guidance for 2010, can you? Capital expenditure.

Romana Tomasova

Adrian?

Adrian Sarbu

I should repeat we know.

Andrzej Knigawka – ING

Okay. So, what was your capital expenditure last year excluding Ukraine, the total we see in presentation on page 218 is $50 million, and how much of that $50 million was to Ukraine?

Romana Tomasova

Anthony?

Anthony Chhoy

No, no. Wait, $3 million.

Andrzej Knigawka – ING

$3 million. Right then, and very last one, any reason why media on Pro entertainment [ph] was?

Anthony Chhoy

$3 million for the fourth quarter, but $6 million for the full year 2009.

Andrzej Knigawka – ING

$6 million?

Anthony Chhoy

Yes.

Andrzej Knigawka – ING

Okay. And was there any specific region why MediaPro entertainment was EBITDA negative in the fourth quarter. I mean, at least charging from, I know it was consolidated only for September, might be even the whole of September (inaudible) loss for that business, for that period. Was it any – was it like seasonal loss or just trying to get a feeling you know, because EBITDA positive for the whole year and that’s my question what would happen in the fourth quarter or might be specific between class time.

Romana Tomasova

Anthony?

Anthony Chhoy

Andrzej, I think we closed the MediaPro on transaction – December. So, the slides lost represents 21 days of a period which is very low volume.

Andrzej Knigawka – ING

All right. Thanks a lot.

Romana Tomasova

Okay, thanks Andrzej. Next question Dave Kestenbaum from Morgan Joseph.

Dave Kestenbaum – Morgan Joseph

Okay, thanks. I will just follow up on that question, can you at least give us directionally as CapEx going up in 2010 or going down in same with corporate overhead, just directionally, not the number.

Romana Tomasova

Anthony?

Anthony Chhoy

Well, our plan is to not spend more than 2009, but only to invest in projects that critical to operations and also for those that are needed in order to maintain our competitive advantage.

Dave Kestenbaum – Morgan Joseph

Okay. And then can you just talk about the MediaPro business? What is the seasonality, is it like your typical traditional broadcasting business or is it more even quiet throughout the year?

Romana Tomasova

Adrian will answer.

Adrian Sarbu

David, this is a business like the Hollywood Studio, like integrated production services and distribution company, there is none in Europe. So, it’s not affected by seasonality. There is a production business unit, there is a TV production, there is a cinema production mostly financed by self funds in the region. These are services which occupies the whole year and that’s in Italy, all right, and cinema distribution and exhibition, which maybe this part exhibition may be effective certain seasonality, but as you could note this last year, the full year was successful for all exhibitor. So, we cannot say MediaPro is affected by seasonality as our broadcasting business.

Romana Tomasova

Dave, any other questions?

Dave Kestenbaum – Morgan Joseph

No, that’s it. Thanks.

Romana Tomasova

Okay, thank you. Next question comes from Scott Kinam [ph] from O’Connor [ph].

Scott Kinam – O’Connor

Hi guys. I apologize if this has been addressed earlier but just given the improvement in the credit profile of the company, is there anything in your credit facilities or anything that restricts you from making repurchases of debt in the open market or through another transaction?

Romana Tomasova

Charles Frank?

Charles Frank

No, there is nothing restricting us from purchasing outstanding debt.

Scott Kinam – O’Connor

So, it’s something as you are looking at, I know your shortest term debt is kind of approaching higher than 10% yield?

Charles Frank

Well, we are not going to make any decisions on matters such as purchasing debt until after we close both the Ukraine and the Bulgarian transaction, then we will have some cash, and then we will have to decide what to do with it.

Scott Kinam – O’Connor

Okay, thank you.

Romana Tomasova

Thank you. Next question, Mark Kuduroni [ph], Credit Suisse.

Mark Kuduroni – Credit Suisse

Good afternoon. My question on leverage sort of already been answered. Thanks.

Romana Tomasova

Okay, thanks. Next, Vivek Khanna from Deutsche Bank.

Vivek Khanna – Deutsche Bank

Hi, good afternoon. I just had one quick follow-up of question for Mr. Frank, if I may. Charles, I think you said that you expect leverage and your course to come down to about six times. Is it fair to say that pro forma right now in the back of, you know, because it’s successfully completing both Bulgaria and Ukraine would be really little over 7 [ph] at present, on a pro forma basis?

Romana Tomasova

Charles?

Charles Frank

On a pro forma, we did the calculations that came out at 6.4. If you show me your calculations, I can – we can see what discrepancy has been. That’s where we are at.

Vivek Khanna – Deutsche Bank

Okay, fantastic. Thank you very much.

Romana Tomasova

Okay. Thanks Vivek. And we have last question in the queue from Alexey again from D&T.

Alexey Surkov – D&T

Hi, a very quick follow-up. The Bulgarian acquisition contingent upon the closure of the Ukrainian disposal?

Charles Frank

No.

Alexey Surkov – D&T

Right. So, they are two independent transactions. And Ukraine is expected to close, 30th of April is deadline or –?

Charles Frank

Second half of April or –

Alexey Surkov – D&T

Second half of April, and you know I am convinced, do you have any difficulties in that respect.

Charles Frank

So, far I explained our partner – got the most improvement approval, which is anti-monopoly or completion cancel approval two weeks ago.

Alexey Surkov – D&T

Right, okay. Great, thank you very much.

Romana Tomasova

Okay. I don’t see any other questions in the queue. So, I will pass it back to the operator to re-prompt it for questions.

Operator

Absolutely. (Operator instructions)

Romana Tomasova

So, it seems that nobody else wants to ask other questions. So, I will pass it to Adrian for final remarks.

Adrian Sarbu

A quick word of thanks. Charles Frank has been with us for last eight months as Interim Chief Financial Officer. Yesterday we announced the appointment of David Sach, our new CFO. I would like to take this opportunity to personally thank Charles for his contribution and support through a particularly challenging period. Thank you, Charles. Romana?

Romana Tomasova

Thank you for joining us today. We had 88 people on the call; I think it’s an indication of an interest that CME attracted. I also hope that you enjoyed our video webcast and we welcome your feedback.

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Source: Central European Media Enterprises Ltd. Q4 2009 Earnings Call Transcript
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