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Central European Media Enterprises (NASDAQ:CETV)

Q4 2013 Earnings Call

February 28, 2014 9:00 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

Daniel Penn - Executive Vice President, Secretary and General Counsel

Analysts

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

Jean-Yves Guibert - BNP Paribas Global Markets

Gavin McKeown

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

Vaclav Kminek - Erste Group Bank AG, Research Division

M. Umair Javed - BofA Merrill Lynch, Research Division

Operator

Hello, My Name Is Zack. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, February 28, 2014.

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.

Mark Kobal

Thank you, Zack. Good afternoon, and good morning, everyone, and welcome to CME's fourth quarter and full year 2013 investor conference call. We issued our earnings press release just a little while ago, a 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: The successful closing of the right offering and series of related financing transactions with Time Warner announced earlier today, our ability to access other external sources of capital as such financing transactions are not closed, and the impact of our efforts to increase our revenues and recapture advertising market share in the Czech Republic. 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 20 to our financial statements in the Form 10-K for reconciliation to U.S. GAAP financial measures.

This presentation does not constitute an offer to sell or the solicitation of an offer to buy any CME securities. Please also note that we have filed a preliminary proxy statement in connection with a special general meeting of shareholders. Shareholders are able to obtain a free copy of the preliminary proxy statement at the SEC's website, www.sec.gov, or on our website, www.cme.net.

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

Michael Del Nin

Thanks, Mark. Good afternoon, and good morning to everyone joining us today. On our last earnings call, just a few weeks into the job, Christoph and I expressed disappointment in the financial performance of the company, and laid out our initial plans to turn the operations around, reduce costs, and improve efficiency and focus. Just as importantly we identified the company's need for additional capital to fund operations going forward. Today, we'd like to update you on the considerable progress that has been made on each of those fronts.

We finished 2013 with the revenues of $691 million, and an OIBDA loss of $46 million. Significant contributors to the decline in OIBDA for the year were non-cash programming impairment charges amounting to $60 million, restructuring charges of $19 million and severance charges of $7 million. Free cash flow for the year was negative $94 million. Dave will walk you through these results in more detail shortly.

While 2013 was a difficult year for the company financially, we're encouraged by the way it ended. We have made significant progress in rebuilding our operations in the Czech Republic, and we are confident in a strong rebound in the performance of that business in 2014. In addition to stronger than anticipated ad sales in a number of our markets, in the lead up to the holidays, we are also pleased with the progress that was made securing carriage fee revenue over the last few months. We concluded significant deals in Romania without the sort of disruption to distribution that often happens in these situations and which we experienced in Bulgaria during 2013.

As promised, while continuing to look for additional efficiencies, we completed the previously announced restructuring that will result in $30 million of estimated annual savings compared to 2012. And we have very recently commenced the process of divesting certain non-core assets. Just as significant to the future of CME, today we announced a series of related financing transactions that, if closed, will comprehensively address the company's liquidity needs, improve our debt maturity profile, and set us on a path to being free cash flow positive starting next year. I'll provide additional detail on these transactions shortly, but first, I hand it over to Christoph.

Christoph Mainusch

Thank you, Michael. Good morning and good afternoon to everyone. I will give you an overview of our audience performance, advertising revenue and carriage fee development. Our results from 2013 demonstrate that we continue to be clear market leaders in terms of audience share in all of our territories in their respective target groups. And we expect to clearly maintain this position in 2014.

We will remain committed to our focus on the efficiency of our operation by identifying opportunities to reduce content and operating costs. However, we will not jeopardize our leading audience share position. We continue to make strategic and targeted investments in programming, to improve audience shares in certain time slots and countries.

All day and prime time audience shares in their respective commercial target groups were up in the Czech Republic, which recently celebrated its 20th anniversary, up in Romania and in Slovakia. Our all day target audience share in the Czech Republic increased by 2 percentage points to 36% in 2013, from 34% in 2012. And compares to a 22% audience share in 2013, from our closest commercial competitor. In addition, during the first 6 weeks of this year, the gap in audience share between us and our closest competitor increased by 5 percentage points further in all day.

This strong audience share performance in the Czech Republic compared to 2012 results from continued success of the 3 main pillars of our prime time schedules, local fiction, news and local entertainment. We continue to enjoy very good results from our long-running series in the Czech Republic, The Street and Rose Garden Medical Clinic.

The Street, in its 9th year of broadcast during 2013, was up 4 percentage points compared to 2012 to an audience share of almost 37%. We have also benefited from more recent additions to the schedule in the Czech Republic including the great results of Village Doctors.

The results from the start of 2014 demonstrate that we expect to sustain our audience share position in the coming year and we look forward to the schedule ahead, which will include the second season of The Voice, coproduced with our operations in Slovakia, commencing March 5. Our all-day audience share in Romania increased to 25% in 2013 from 24% in 2012, benefiting from the results of tenant shows The Voice and Got Talent. Slovakia increased to 34% from 32% in all-day and benefited from local fiction Taste of Love.

The audience shares in Bulgaria and Slovenia continue to face pressure from heavy investment by competitors, and we are making corresponding adjustments to our schedule to address this in 2014. Improved prime time audience share results in Slovenia during the fourth quarter of 2013 and in Bulgaria, already during the first 2 months of 2014, demonstrates the early success of these adjustments.

Turning to ad sales. The initial results of the changes made to the sales policy in the Czech Republic for 2014 are positive. The pace of advertising spend in commitments for 2014 is significantly better than last year, with $144 million in commitments signed as of middle of February, compared to $78 million at the same point last year, almost doubled. However, total commitments are behind that of 2012, when $172 million of commitments were signed.

This progress on commitments signed in the Czech Republic is also having a positive impact on the commitments for 2014 in Slovakia, with $49 million in commitments signed as of the middle of February compared to $33 million at the same point last year.

While the changes made to the sale policy in the Czech Republic have improved the volume of commitments signed so far, the average prices we expect to realize on these commitments are expected to be below 2013 level, but similar to 2012 level for advertising sold.

And finally, an update on carriage fees. We successfully concluded negotiations with all major cable and satellite operators in Romania. As a result of these deals, we expect carriage fees in Romania to increase further during 2014, compared to 2013. Carriage fees in the Czech Republic progressed more slowly than we would like, and we will continue negotiations during 2014.

Since we last spoke, we also hired new management in 2 of our countries. We look forward to working with our new colleagues in Bulgaria and Romania, and now feel very happy with the leadership in place at each country.

Now I'll turn it over to Dave to provide some more detail on our financial results.

David Sturgeon

Thanks, Christoph. As Michael said earlier, CME's overall revenues in 2013 was $691 million, which, at constant rate, is down 12% from 2012. This decline was due primarily to the adverse reactions of advertisers and agencies to our initiative to increase TV advertising prices in the Czech Republic. This resulted in their withdrawing or withholding advertising for more channels in that country, causing ad revenue to drop significantly. The negative reaction by advertisers and agencies in the Czech Republic also affected the behavior of clients of Slovakia who advertise in both markets. This decrease in television advertising revenues was only partially offset by increase in carriage fees in Bulgaria and Romania.

Other revenues were down 8%, primarily due to the loss of theatrical output agreements in the Czech Republic. The increase in revenues compared to the guidance provided in October 2013 is primarily due to unexpected improvements in TV advertising revenues across all our countries, particularly in the Czech Republic, Romania and Slovakia. In the Czech Republic, there was an increase in retail sales during the fourth quarter, driven by expectations of price increases on retail goods, following the unexpected devaluation of the Czech koruna in early November. This increase in consumer spending, combined with our efforts to strengthen relationships with advertisers, resulted in higher television advertising sales than had previously been forecast.

In addition, production services and exhibition revenues in Romania were also higher than previously expected. The 2013 results also benefited from the overall weakening of the dollar during the last 3 months of the year.

Looking at revenue country by country, on Slide 7 of the presentation, the Czech Republic and Slovakia were down 31% and 17%, respectively, due primarily to the decrease in ad revenues that we already discussed. Revenue in Romania was up 3%, due to increases in both the TV ad revenue and carriage fees. In Bulgaria, revenue was flat, as the decrease in TV ad revenue was offset by an increase in carriage fees. Slovenia declined 6%, driven by weak economic conditions. The 2% increase in Croatia, was due primarily to higher TV ad revenues, following a modest increase in ad prices in that market.

OIBDA decreased more than revenue to minus $46 million in 2013, from $125 million in 2012. Factors contributing to this included $60 million of programming impairments included in content cost, as our new management reassessed the likely future usage of our program library. There were also $19 million of restructuring charges and $7 million of severance cost.

OIBDA for the full year was below our previous guidance due primarily to the additional programming impairment just mentioned, out of which $46 million was recorded during the fourth quarter and that was not included in the October 2013 guidance. This more than offset the unexpected improvement in revenue.

During 2013, we also recognized non-cash impairment charges amounting to $80 million in respect of goodwill and intangible assets in our Bulgaria and Slovenia segments. Our negative free cash flow in 2013 was $94 million, compared to negative free cash flow of $62 million in 2012. The decline is largely due to the significantly low revenues we discussed and consequent decrease in cash receipts. We also made cash payments for restructuring amounting to $13 million. The impact of lower cash receipts and restructuring payments was partially offset by our efforts to conserve cash including among other things, delaying payments to studios for acquired programming.

We ended the year with cash of $105 million. This better than expected cash position was primarily attributable to the collection of certain receivables earlier than anticipated, as well as further deferral of the payment of a number of significant programming liabilities. As a result, our high cash balance at year end largely represents a timing difference, rather than an improvement in our overall liquidity position.

I'll now hand you back to Michael.

Michael Del Nin

Thanks, Dave. Today, we announced the series of transactions that we believe deliver a comprehensive solution to a significant liquidity problem for the company. We burned through over $94 million of cash during 2013, while aggressively managing our working capital, causing our payables to balloon to $296 million at December 31, 2013, from $256 million at same point in 2012, and $240 million in 2011.

As such, despite the expectation of significantly improved revenue and OIBDA performance in 2014, the weight of our cash interest cost and the need to relieve some of the pressure on our working capital, will result in a worse free cash flow performance in 2014.

Without additional capital, we will not be able to fund our operations in the middle of 2014. The deal had a number of components. First, Time Warner has agreed to backstop the rights offering. If it is successful, it will raise almost $400 million in new debt that will be used to repay our existing 2016 bonds, and replace them with new notes that mature in December 2017.

We will be offering units consisting of a note and a number of warrants. As these new notes pay PIK interest, we can reduce cash interest cost by approximately $44 million a year starting in 2015, and provide a significant boost to our free cash flow in coming years. Importantly, the rights offering will be widely available to existing CME shareholders.

Secondly, on successful completion of the rights offering, Time Warner has agreed to provide the company with a $115 million revolving credit facility to fund operations and a $30 million term loan that may be used to pay interest on the 2016 notes and transaction costs, as well as to fund general operations.

In addition, in the event that we are not able to complete the rights offering prior to May 29, 2014, we will draw on a bridge facility provided by Time Warner, in order to refinance the 2016 bonds and provide additional liquidity to the company.

The revolver will also be available if we draw the bridge. These debt instruments have similar interest rates as the new notes, including our ability to pay PIK interest. In connection with the foregoing, the company will issue a warrant to Time Warner to purchase 30 million shares of Class A common stock at an exercise price of $1 a share. We will be able to incur this new indebtedness following receipt of the consent of our holders of the 2017 notes. We announced earlier today the launch of a solicitation process to obtain this.

The transactions that we are pursuing provide a number of benefits to the company. We believe that these transactions provide a comprehensive solution to our significant liquidity needs. Taken together, they provide the company with access to over a $0.5 billion of new debt capital, allow us to refinance the 2016 Notes in full, provide a revolver that allows us more flexibility in managing our working capital and significantly reduce our cash interest cost in coming years.

We wanted an enduring solution to the problem, and we feel that the additional liquidity provided by this deal is enough to see us safely through to where we are cash flow positive again. In addition, we believe a rights offering provides an equitable way for our shareholders to participate in the transactions. Time Warner has committed to participate in the rights offering and further to backstop the offering by purchasing any units that remain unsold, which decreases the risk that we will not realize the expected proceeds.

It is also important to note that we have the ability to prepay this indebtedness without penalty, providing the company considerable financing flexibility. If our improving financial performance allows us to access the markets on better terms in the future, we will have the ability to do that at any time.

I'll now hand things back to Christoph.

Christoph Mainusch

Thank you, Michael. With 2013 now behind us, we can focus on 2014 and what comes next. I mentioned earlier, that we expect to maintain our leading audience share. We anticipate a significant improvement in TV advertising revenues in the Czech Republic, when compared to 2013, but we do not expect to completely rebound within 1 year. We anticipate a similar trend in our consolidated results for 2014, and expect to build on them in 2015. We will also benefit from additional carriage fees in 2014 from Romania.

We will continue to look to optimize new cost of our operations and together with additional revenues, this will result in a positive OIBDA margin in 2014. And as a consequence of the series of financing transactions Michael just has mentioned, if closed, we anticipate positive free cash flow in 2015.

I'll now hand you back to Mark.

Mark Kobal

Thank you, Christoph. That concludes the formal presentation. We are now going to move to Q&A. So Zach, please open the lines for questions.

Question-and-Answer Session

Operator

The floor is now open for questions [Operator Instructions] And I'll now and you back to Mr. Kobal.

Mark Kobal

Okay. Our first question comes from Amit from ECM.

Unknown Analyst

I don't have enough time sort of to go through all the details, I am just curious on a fully diluted basis, what will be the number of shares outstanding, and what will the percentage owned by Time Warner?

Michael Del Nin

So, we will be issuing as we said, 30, a unit that comprises 30 million warrants to Time Warner in exchange for the -- backstopping the financing. And the rights offering in private placement contain an additional 84 million warrants, also stuck at an exercise price of $1 a share. So in essence, that is the bulk of the dilution and the additional shares that will be issued. Time Warner will go as a result from about 65% fully diluted ownership today to around 70% fully diluted ownership following the issuance of those initial warrants. And then, the rest is dependent on take-up by minority shareholders, that Time Warner will be anywhere between that 70% number and about 78.5%, as I said, depending on take-up.

Unknown Analyst

That's much clearer. And your total shares outstanding once fully diluted, I mean..

Daniel Penn

This is Dan. Currently, fully diluted basis is about 250 million outstanding. We filed an S3 earlier today and it has extensive disclosure about our capital position.

Unknown Analyst

It's just quite long and I only have an hour between earnings calls. I appreciate that.

Mark Kobal

Our next caller, Pavel Ryska from J & T Bank.

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

I have couple of questions. The first question is, I heard you speaking a few times about the reduced cash interest that you're expecting in the coming years, maybe I got it wrong, but I mean, where is this going to come from, given the fact that you are now issuing bonds that will yield 15%, while before you had lower yielding bonds, so how are you going to achieve reduced cash interest? That's the first question. The second question, if you could give us some color on the pricing in the Czech Republic because if I'm not mistaken, at the last call, you said that you were not going to lower prices given the stiff resistance from advertisers, but there is some speculation on the market that in the end you need to lower the prices, so if you could comment on that? And finally, you also spoke about possible divestments, so if you could maybe elaborate on that, if there are some concrete particular assets that you are thinking of divesting?

Mark Kobal

Thanks Pavel, we will start with Michael.

Michael Del Nin

So I'll -- Pavel, let me take the first and the third and then I'll hand it to Christoph on Czech. So the lower cash interest that we're talking about, fundamentally, is derived from the fact the new notes pay PIK interest and we also have the option to pay PIK interest on the revolver and the term loan. So what we're doing, you're correct in saying that obviously we're placing 11 and 5/8 with 15%, but it is PIK and, therefore, as we said earlier, that will allow us to save about $44 million a year in cash interest starting next year. And so that will lead to a significant improvement in our free cash flow situation on an ongoing basis. In terms of the divestments that we spoke about, so there's 2 different sort, and you talking -- I assume you're talking about not the non-core assets that we highlighted or the non-core assets? The -- so as we said earlier, we are planning or just very recently started a process to divest to those non-core assets. They include some of the distribution assets that we have largely in Romania, including some of the smaller businesses that we've got pieces of, including radio assets for example and cinema businesses. So that process follows a review of those assets. As we said in the last call, we believe that it is in the best interest of the company to focus on our broadcasting businesses, and we think that while those assets, in many cases are very good businesses and perform quite well, are probably more valuable in the hands of others. So that process, as I said, is about to begin and we expect to make a fair amount of progress on that in the coming months.

Christoph Mainusch

To the pricing in the Czech Republic, as mentioned also last time, our primary goal in the Czech Republic is to win back market share, which we have lost in 2013, and the results of Q4 begin to show success in doing that. So we expect the advertising market in the Czech Republic to grow during 2014, compared to '13, due to an increase of the consumption of GRPs year-on-year from our channels. So in order to achieve these goals, we made changes to the sale policy during '14 designed to the incentivize the cooperation of our clients and to give on denominated prices by higher volumes, additional volume discounts. So clients are taking advantage of the incentives by bringing larger volume of spending back to Nova, which you can see is happening based on the improvement in the level of spending commitment this year versus last year.

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

But [indiscernible] position?

Christoph Mainusch

Yes. As we mentioned previously, the average price of commitment signed for 2014 is expected to be similar on 2012 level, but of course below 2013 levels for advertising sold. So the price -- the achieved price level for the entire year we expect to be lower than 2013 but on 2012 levels.

Mark Kobal

Our next question comes from John-Yves Guibert from BNP Paribas.

Jean-Yves Guibert - BNP Paribas Global Markets

Question on your new indebtedness, so with respect to the new PIK notes, the RCF and term loan, in term of the ranking, I mean, first, could you tell us specifically, which entity is going to be the issuer and the borrower under this new indebtedness? In term of ranking, are the new notes, the RCF and term loan, ranking pari passu between themselves? In term of the lien, are they going to benefit from a CME NV and CME BV, it is going to be the same force ranking security that's benefited also the 2016 notes and which also benefit to the existing 9% 2017 notes, does that mean that the 17 notes will still be as the sole beneficial of the first ranking security over the ownership in CET 21 and it's assets.

Christoph Mainusch

Sure, I can handle that. The issuer and the borrower under the new indebtedness will be CME Limited, the top holding company that we have. And it's a similar structure that we've used with other of our senior indebtedness incurred by CME Limited, the guarantors will be 2 of the subsidiary holding companies, CME NB and CME BV. And there will be pledges as with these -- with our other indebtedness, the shares of CME and they will be pledged to the new competitor group. The rankings, I actually don't think are critical, because as you probably know, there is an intercreditor agreement among the secured parties that effectively elevate all the creditors to a pari passu status, so whether, A, you have a ranking that's earlier in time or later in time, the effect of the intercreditor agreement is to sort of equalize everybody in terms of rights on the collateral. I think, that answers your question.

Jean-Yves Guibert - BNP Paribas Global Markets

If I may come back on the intercreditor agreement, here you're referring to the CME intercreditor agreement, but as part of the consent, so the [indiscernible] is 9%, and there is no plan to amend CET 21 intercreditor agreements.

Christoph Mainusch

No. The CET 21 collateral structure is more expansive than the one CME Limited has used. The only collateral affected is what we call the CME collateral, which is basically the shares of the 2 principal holding companies.

Jean-Yves Guibert - BNP Paribas Global Markets

Okay, and if I may, I think you indicated that there would be no penalties in case of prepayments of this new indebtedness. Does that mean that the deferring from -- the new PIK notes could be repaid without any called premium prior to December 17?

Michael Del Nin

Yes, that's correct.

Mark Kobal

Our next caller is Gavin McKeown from Pioneer Investments.

Gavin McKeown

Can you just clarify on the, so I missed part of what you said to Jean-Yves there in terms of the CET 21, and the ranking versus these and I have a follow-up question on the intercreditor?

Christoph Mainusch

Sure. I think -- I'm not sure how many people on the call are familiar with the security factors, but there is a separate set of assets that are used to secure CET 21 bonds that were issued in 2010. And that go beyond what CME Limited normally uses. So the principal security for CME Limited are the shares of the 2 holding companies that are owned by Limited, and the remainder of the security from the CET 21 deal is not affected at all by the transaction that we're undertaking. So the sort of first ranking pledges of CET 21 creditors over this other security, including like the shares of CET 21, are completely outside this transaction. And the intercreditor only relates to these 2-share pledges on the principal holding companies and that's those 2 pledges are the ones that are -- the rights of the very secured parties are kind of equalized through the intercreditor, but only with respect to those 2 share pledges, not the entire -- which is completely independent of the collateral package around the CET 21 notes.

Gavin McKeown

So the collateral package on the new notes will be similar to the existing 11 5 8 16?

Christoph Mainusch

Correct.

Gavin McKeown

And do you plan to revise and re-draft the intercreditor agreement? My understanding of that is that it's been spontaneous -- very strange and quite uncertain as to how the ranking would work especially versus the convertibles?

Christoph Mainusch

Well, I think, I mean the ranking is really driven by the calendar, and it has to do with when in time somebody secures a pledge, but the purpose of the intercreditor is to equalize different creditor parties and so the ranking becomes not particularly important, because the parties of the intercreditor agreement have agreed effectively to pari passu status and the intercreditor is basically a collateral -- I mean sorry, a proceed sharing document.

Mark Kobal

Next question from Ajay Agrawal from Nomura.

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

Just 2 questions. Sorry I missed your part on the free cash flow, I mean if you can just repeat what your view on the free cash flow in 2014? The second bit is regarding operating expenses. As I noticed, I mean, you have mentioned some $60 million of accelerated programming impairments in 2013, and around $90 million of restructuring charges. So I mean, we can reasonably expect the reduction of operating expenses was around $150 million? Am I right in assuming that?

Michael Del Nin

Sorry, could you just repeat that last bit again, Ajay?

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

The last bit on the operating expenses, I think you have mentioned around -- can we assume around $150 million of reduction in your operating expenses in 2014?

Michael Del Nin

You said 1-1-5 or 1-5-0?

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

1-5-0.

Michael Del Nin

Okay. On the free cash flow front, well I think, we just reiterate what we said earlier and that is that despite the fact that we'll see what we think will be a significant improvement in revenue and OIBDA in 2014, relative to 2013, because of the need to alleviate some of the pressure on working capital that's built up over the last few years, we think that we will burn more cash this year than we did last year. But I think that's the magnitude of the guidance that we can give at this point, and Dave on the operating expenses.

David Sturgeon

Yes, on the operating expenses, I think we've already flagged a couple of a few individualized the $60 million of program impairments we took, of which $46 million was in Q4, the $18 million, $19 million of restructuring and the $7 million of severance. And we've reiterated that we expect to make cash cost savings of $30 million a year in '14, compared to '12. Now the $30 million, we didn't -- we already enjoyed some of those in 2013. But the $30 million is a '14 on '12 comparison. So yes, you shouldn't all of that together to get to 150.

Mark Kobal

The next caller Aria Cole [ph] from Cole [ph] Capital.

Unknown Analyst

One question at a time, just to repeat on the number of potential shares outstanding, fully diluted. Just to make sure I understand the numbers. If all shareholders take up the -- participate in the rights offer, what I'm trying to understand is, we're going to have 30 million warrants issued to Time Warner, another 24 -- another 84 million to -- warrants to other shareholders, plus the 250 million fully diluted shares. If you add those 3 numbers together, you come up with 364 million shares assuming everything works out the next couple of years, with no additional financing and operations recovering, is it correct that would be the total shares outstanding, 364?

Michael Del Nin

I am actually glad you asked that. I misspoke something earlier, the current fully diluted number is around 210, just over 210 -- 210 million, may be 212. So the 30 million and the 84 million you would add on top of that. The other feature you should be aware of is that there is series B preferred stock that we issued last year that accretes so that's kind of a moving target.

Unknown Analyst

And what's -- and what did -- that converts into how many shares of preferred, or does it never convert?

David Sturgeon

It does. How it converts depend on where the transaction lands. At present, it converts -- the others convert mid-2016 and it would result in the issuance of I'm not exactly sure, but it was around 80 million shares.

Unknown Analyst

Okay. So 80 plus 210 plus 30 plus 84.

David Sturgeon

No, no. The series B as of today is -- part of that conversion is reflected in the 210, about 65 million. I think the capitalization I know that one of the other speakers said it was quite long, but the S3 does contain the detailed information about the capitalization, which might be useful.

Unknown Analyst

Okay. I will take a look at that. So on that preferred, which you're alluding to, is there might be an extra 15 million shares that are not included in our prior discussion, so...

David Sturgeon

15.

Unknown Analyst

Because the 65 is already in that 210 number from the preferred?

David Sturgeon

Correct. There's also another preferred which is called the series A, which converts into about 11.2 million shares that we issued in 2012, that may be the big delta for you.

Unknown Analyst

Okay, fine. So, I didn't do very well in 2nd grade math. That's why I'm just asking this again. Just to kind of clarify. So it's 84 million warrants plus the 30 million, plus 210, and potentially another incremental 15, is that close to the total number of fully diluted shares by 2016 or '17?

David Sturgeon

Now I have to back up, that I am not that good in math. This might be better offline.

Michael Del Nin

Yes, we'll take it offline. The 15s and 212s, there's a page in our website if you want to refer to that, that would be helpful for you.

Unknown Analyst

Okay, fine. Second question on foreign exchange, can you just kind of clarify what the size of devaluation was in the Czech Republic in 2013 and just going forward for 2015, foreign currency across all these countries, and to what degree it a positive or a negative in the sense that you're recognizing revenue, obviously, in local countries but all your content costs are in US dollars?

Michael Del Nin

Well, I will take the first bit. The Czech National Bank depreciated the currency by about 5% beginning in November. We do actually publish some graphs in the MD&A in the K that can show the rather significant variability of all our currencies against the dollar. You need to actually look at the point-by-point thing, because if you just to take 1-year to another, it's been very small in impact. However, there was a fairly large impact in Q4, and I think we had already flagged it as a fairly reasonable impact on our revenue in Q4 because of the change in the dollar is downward on an aggregate basis. In terms of the sort of macroeconomic side, that's a sort of an ethereal one. There has been mixed opinion, say in, locally, in Czech that we benefited in Q4 from the anticipation that people would be seeing price increases that boosted -- it boosted demand at the moment. We haven't seen significant turbulence anywhere else. But then obviously the dollar and the euro moves around, but it hasn't been a significant thing that we used to see in the past. Yes, it is true that a lot of our foreign acquisitions of programming are in -- done within the underlying contract, but when it actually gets into our P&L, they've turned into local currencies when you actually sign the deal. So while the underlying cash, we're a dollar company and it goes in dollars and comes out in dollars, you will see either benefit or a loss on the income statement side and then a loss or a benefit on the balance sheet side as these things go through, as they retranslated into dollars.

Unknown Analyst

And then lastly, on [Audio Gap] through the -- Just a last question on the 2014 sales, given the increased visibility you've had from these larger commitments in various countries, would you hazard a range for where sales would be potentially in 2014?

David Sturgeon

No. I don't think we're in a position to say anything on that quite yet.

Mark Kobal

Our next caller Jason Ham from Silverback.

Unknown Analyst

What is your plan for the 5 converts, your first set due?

Unknown Executive

The 2015s?

Unknown Analyst

The 5% converts?

Michael Del Nin

I think, Jason, kind of one transaction at a time. Obviously, this transaction relates to the 2016s and they will be highest yielding, highest interest debt and I think that our expectations are that as the year goes on, and hopefully we're able to put some better financial performance behind us quarter after quarter, that we will be in a better position to refinance that -- those converts at some point further on. So obviously, they don't mature until towards the end of 2015. So we've still got a bit of time there.

Mark Kobal

Okay. Next caller Vaclav Kminek from Erste Bank.

Vaclav Kminek - Erste Group Bank AG, Research Division

I would like to ask you for the conditions of the warrants. If they are exercisable after 2 years or anytime during the next 2 years? Also, are they tradable or not?

David Sturgeon

Yes, the warrants when issued will be exercisable after the second anniversary of issuance until the fourth anniversary. Unfortunately, I didn't hear the remainder of the your question.

Unknown Executive

Are they tradable?

David Sturgeon

Yes, they will be tradable. We don’t have any plans to list the warrants, but they'll freely tradable once, once people have subscribed to them.

Mark Kobal

The next caller, Martin Arnold from ABG.

Unknown Analyst

I have 2 questions. First question is, regarding the expected improvement in OIBDA for 2014, does that include lower underlying program costs versus 2013 in your main markets? Second question, could you please, for the Czech Republic, could you please quantify the overall net price decline in 2014 versus 2013?

Michael Del Nin

Could you repeat that first question again?

Unknown Analyst

Yes, if the expected improvement in the OIBDA for 2014, if that includes lower underlying program costs versus last year?

David Sturgeon

So the program cost and operational costs are in line with previous year, we are further seeking for improvement on this cost. The OIBDA improvement mainly comes from the improved revenues in the Czech Republic. For the net prices in total 2014, it's too early to give you a clear answer on that, as we do not know exactly the mixture of the seasonality and day part mix of the client's book, but as previously said, the pricing is below 2013 and in line with 2012. But it's too early to give you a clear net price guidance at this stage.

Mark Kobal

Next caller is from Jahanzeb Hassan from Bluebay Asset Management.

Unknown Analyst

Couple of different things, one, what kind of estimate do you have for the size of the market decline for 2013 and then what do you expect, at a market level, for 2014 in the Czech Republic? And then just on your cost, I know you guys spoke a little bit about it, but just maybe to dig in a little bit in the 2 major geographies of Czech and Romania, if I back out from a EBITDA in your revenue numbers, your costs in Czech for the quarter, went from $50 million last year to about $70 million this year. I just want to understand what drove that $20 million increase? And then to a similar but to a lesser extent in Romania, they went from $57 million to $65 million, so just wanted to understand what's behind those moves?

Michael Del Nin

So, just to give you an explanation on the market size of the Czech Republic. In 2013, it obviously dropped compared to 2012. And the improvement mainly comes from the increase on the consumption of GRPs year-on-year from our channel in '14 compared over 2013.

David Sturgeon

On the cost side, both of those countries -- the largest impact is the programming impairments. When we saw $46 million in Q4, there was $11 million, $12 million in Czech and there was $15 million in Romania, and there were also some restructuring costs in both of those countries but the one-time programming impairments were the large contributors to that.

Unknown Analyst

So is it fair to say that -- well, how much of those programming impairments were cash and how much of those are recurring?

Michael Del Nin

The program impairments they're not -- always non-cash, so [indiscernible].

Unknown Analyst

And they are non -- well though you assess on a quarterly basis or on an annual basis?

Michael Del Nin

Yes. We you look at this every quarter, and we've -- hopefully with that new management in a lot of the countries, this quarter, we are looking with a fresh pair of eyes at this likely utilization of the library in the future as well as opportunities to streamline or restructure other non-programming costs, which they've done.

Unknown Analyst

Got it. And then, in Romania for the carriage fees, did you, I think, you had initially said that in Hungary, you got carriage agreements at about EUR 1 per subscriber. Can you give us a sense of where these new agreements were struck in Romania, were they at that price, lower or higher?

Michael Del Nin

So, we would not comment on individual deals on the average pricing on the carriage deal -- agreement we have done. But generally, let's say, the increase comes from an average increase compared to 2013. On the cost per subscriber. And what you see as well in Romania is there is an increase of the subscription base -- subscriber base and these 2 items determine the growth which we would see in 2014.

Mark Kobal

The last caller, Umair Javed from Merrill Lynch.

M. Umair Javed - BofA Merrill Lynch, Research Division

Just to hammer the point home on this. You guys talked about the collateral package on the new notes being similar to the existing '16s. I understand the PIKs and the term loan, but can you just confirm that the RCF which Time Warner is providing is also part of the same collateral package, i.e. the '16 and that it's there for -- contractually subordinated to the '17 notes?

David Sturgeon

That's correct.

M. Umair Javed - BofA Merrill Lynch, Research Division

And sorry, just one follow-up. And on the rights offering, I mean is it fair to assume that the timing is the May, I think it was 24, you talked about, is there a defined timeline on that rights offering please?

Michael Del Nin

There is not at this point. We just filed the registrations thing with the SEC, they have 10 days to decide whether to comment on it and then how it plays out after that kind of depends on that process. Once we're ready to launch, we expect the actual offering period to be approximately 3 weeks to my estimate. So I think it's hard to say at this point without knowing kind of how the review process will play out.

Mark Kobal

There's no more questions in the queue. So I'd like to thank everyone for joining us today. We hope you found the call informative. We welcome your comments and feedback. I'll also remind you, you can keep up-to-date and follow our progress between calls on our website, www.cme.net. And as always, we're available for any questions any time. Goodbye.

Operator

Thank you. This concludes the Central European Media Enterprises fourth quarter and full year 2013 Earnings Conference Call. Please disconnect.

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