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Central European Media Enterprises (NASDAQ:CETV)

Q3 2010 Earnings Call

October 27, 2010 09:00 am ET

Executives

Romana Wyllie - VP of Corporate Communications

Adrian Sarbu - President & CEO

David Sach - CFO

Anthony Chhoy - SVP, Strategic Planning & Operations

Petr Dvorak - SVP, Broadcasting, CME

Analysts

Vijay Singh - Janco Partners

David Kestenbaum - Morgan Joseph

Ben Mogil – Stifel Nicolaus

Leszek Iwaszko - KBC Securities

Sasha Balasnin - Goldman Sachs

Andrzej Knigawka - ING

Ankur Agarwal - Nomura

Vivek Khanna - Deutsche Bank

Gavin McKeown - Pioneer Investments

Operator

Hello, my name is Michael I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be an question and answer period. [Operator Instructions] as a reminder this conference call is being recorded today October 27th 2010. it is now my pleasure to turn the floor to Romana Wyllie, Vice President of Corporate Communications. Ms. Wyllie you may begin your conference.

Romana Wyllie

Good morning, good afternoon to each of you and welcome to CEM’s third quarter 2010 investor conference call. 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 CEM’s president and Chief Executive Officer Adrian Sarbu, Chief Financial Officer David Sach and Anthony Chhoy, Senior Vice President, Strategic Planning & Operations; Petr Dvorak, Senior Vice President, Broadcasting. And joining us on the phone call we have 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. For this statements, we claim the protection of the Safe Harbor contained in the U.S. Private Securities Litigation Reform Act of 1995, and refer you to the forward-looking statements section in our Form 10-Q filed with the Securities and Exchange Commission earlier today for a list of such statements and the factors, which could cause future results to differ from those presented in this call.

During this call, we will refer to certain financial information that is not in U.S. GAAP. Please see the appendix to the presentation for reconciliation to U.S. GAAP financial. In addition our segment financial information that is presented in local currency is not in US GAAP. We don’t provide reconciliation to this number as the US GAAP amounts are expressed in US dollar in our financial statement. Additional information on our segment data is provide in note 16 through our financial statements on page 32 of our. And now over to Adrian.

Adrian Sarbu

Good afternoon or good morning. It is a funny day here in progress but almost three years our advertising markets have been clouded. Despite adverse condition we stayed firm on our strategic to evolve from broadcaster to a vertical integrated media company. We solely the focused on the EU and new work section market, we brought the leading channels in Bulgaria and the integrated media for entertainment making CEM the largest content provider in the range.

I’m pleased to say that this strategic is working, our result today are stronger. One year ago our reported EBITDA was minus $14.4 million. In the third quarter 2010 our OIBDA increased by almost $10 million. The recently financing has improved our liquidity position and we have started to repurchase that opportunity. We have built four pillars for our future, audience leadership, market share leadership, operating leverage and from liquidity. As our market are expected to improve next year this will enable us to increase cash generation and further reduce growth debt and interest cost.

With recovering continuing in the Czech Republic, Romania and Croatia in the fourth quarter we are on track to deliver full year OIBDA guidance of 100 to $115 million. During the busy last few months, we received from you many questions about the short term and medium term future of our TV advertising market. We think it is improving. The folio is not only our strongest season but the moment when I start negotiation with advertiser for next year. Our key focus on the restoring price to 2008 levels, this will be a key step in growing our business. Now over to David, we will give you an overview of quarter three macroeconomic indicators and our consolidated performance.

David Sach

Thank you Adrian. We are closing monitoring the key macroeconomic for our operations. GDP prior to consumption consume confidence and the TV ad market of the statistic most relevant to our business. Overall you will see continuous improvement year-over-year in this statistic. Please turn to slide five, GDP improved year-over-year in all our markets driven by exports and industrial production particularly in the Czech Republic, Slovakia and Slovenia however private consumption and consumer confidence the indicators that drive advertiser investment continue to lag behind GDP growth. The Czech Republic and Slovenia saw miles TV ad market growth in the third quarter as a result of moderate growth in consumption level. In Slovakia the TV advertising market improved from the 5% decline in Q2 driven by positive consumption but still stays slightly negative due to continuing high level of unemployment.

In Croatia the TV ad market is finally poised to grow having remained flat following 6 quarters of decline. This represents a considerable improvement over the 7% decline in Q2.

The austerity measures in Romania, including public sector wage cuts and an increase in the rate of VAT continues to impact the macroeconomic indicators resulting in the TV addition market drop of 14%. The situation is similar in Bulgaria, which saw 10% fall in Q3.

Please turn to slide 6 where we have provided a comparison of the year-to-date results against the reported results last year, which included the results of our former Ukrainian operation. Against last years reported result revenue increased 8% and our EBIDTA increased 25% showing the benefits of selling the Ukrainian operation and acquiring both a new Bulgarian operation bTv and the Romanian content business Media Pro Entertainment. This is the first quarter this year our reported revenues and our EBIDTA exclude our former Ukrainian operation which is now shown as a discontinued operation.

Please turn to slide 7 for a summary for our reported operating results. Consilidated revenues increased 5% in the third quarter or 14% in constant currency terms. And cost increased by 6% or 15% in constant currency terms as a result of the acquisitions of bTv and Media Pro Entertainment. On a constant currency basis and excluding the impact of these acquisitions our broadcast division limited its cost increase to 2.5%, and our new media division reduced its cost by 31%.

Cost control remains positive across all divisions, with measures including cost benchmarking to identify opportunities to drive efficiency. Salary constraints, the deferral of certain expenditures and managing our broadcast schedule to reduce the rate of programming cost growth. The group recorded an EBIDTA loss of $4.5 million for the third quarter compared to its EBIDTA loss of $2.5 in the third quarter of 2009.

And now, back to Adrian.

Adrian Sarbu

I wanted to turn to slide 8 of our presentation highlighting the achievement of the broadcast division. The Czech Republic which successfully launched the fall season with our locally produced serial, Rose Garden Clinic and new (inaudible) while broadcasting a very efficient low cost programming schedule during the low season.

NOVA CINEMA delivered 5% audience share. NOVA GROUP delivered almost 60% of commercial GRPs on the market.

In Romania we maintained a stable prime time audience share of 31% in a very competitive environment, and won all prime time slots in the third quarter. The main news kept it's leading position with every Jordian share of 28%. Our TV group delivered almost 35% of commercial GRPs on the market.

In Slovakia, we increased our prime time audience share by 3 percentage points during the low season. We had a strong start of the fall season with our locally produced serial Rose Garden Clinic and the demon shows Best Wishes and In a Good Company. Our female oriented channels TV DOMA remains the leader in its target audience.

Markíza group delivered almost 55% of commercial GRP’s on the market. In Slovenia, we remained the undisputed leader with the prime time audience share of 47% driven by outstanding results of the main news and our locally produced serial It's Nice to be Neighbor.

At the beginning of September, we re-launched TV Pika as a female oriented channel Pop Brio. Our Slovenia channels delivered 60% of commercial GRPs on the market.

Our Croatian business TV NOVA maintained its prime time audience share driven by some results of the main news and local production Super Talent and Crazy, Confused and Normal. Both delivering over 30% audience share. NOVA TV delivered over 45% commercial GRPs on the market. We also received the terrestrial digital license for DOMA a female oriented channel. It will be launched at the beginning of next year.

In Bulgaria, we are the undisputed prime time leader with a combined audience share of over 46%, led by a locally produced serial Blood [ph] House and entertainment shows, The Comedian and The Slavi Show. Our combined Bulgarian operation delivered almost 55% of commercial GRPs on the market. The integration of bTV and PRO.BG is in its final stages. Most important, all our CME broadcast operations launched successful full programming schedule and are maintaining the audience leadership. David?

David Sach

Thank you Adrian. Please turn to slide 9. The broadcast division reported net revenues of $123.5 billion and increase of 7% on constant currency basis. The increase was primarily due to acquisition of the bTV group in Bulgaria. On a constant currency basis, (inaudible) cost increased by 6% attributable to the acquisition of the bTV group as well as the cost associated with new channels launched in the last year. MTV in the Czech Republic, NOVA in Slovakia and POP BRIO in Slovenia.

Broadcast division generated (inaudible) of $8.2 million and the increase of 29% on the constant currency basis and back to Adrian again.

Adrian Sarbu

Let’s move to slide 10 and let me go into adjust few highlights of our content division media for entertainment. We completed into ration of our production and production services unit in five CME countries. With Bulgaria to be into waited in the fourth quarter. During the third quarter media for entertainment produced 197 hours of fiction and 308 hours of reality and entertainment.

Most of this production was delivered to CME both castle supplying them with flagship show for the full season. So 34 independent title with third parties. Our cinema admissions grew to 280,000 and our home video business. So 331,000 units of DVD’s and blue ray V. As content development is the key priority of our business we added 58 new projects to outplace in the third quarter. David.

David Sach

Please turn to slide 11; this segment comprises the remaining and meeting approved entertainment business acquired in December last year and the production assets that use to managed by CME broadcasters. Video Pro entertainment reported net revenue of $26.5 million in the quarter. An increase of 54% in constant currencies over the comparable for the last year.

The increase in revenues was primarily attributable to the revenues of the operations that were required which consisted the remaining fiction, production services and distribution and exhibition business. The third quarter of year includes the traditionally slow summer season and this is reflected in the significant reduction in the number of hours of completed products that was delivered to our broadcasters. During the third quarter approximately 31% of revenues were generated from third parties. May be (inaudible) provide some time of increment at the cost of $29 million a major EBITDA loss of $2 million in the third quarter.

The decrease the EBITDA from last year is still (inaudible) are building in this new division. A process which we have now substantially completed.

Adrian will now present the highlights of the new media division.

Adrian Sarbu

Thank you David. Please turn to slide 12. Our new media (inaudible) continues to grow. In the third quarter we attracted over $8.5 million (inaudible) per month which represents 27% year-on-year growth. We launched two new sites and key product statement and we have (inaudible) the launch (inaudible) TV entertainment portal endplay. We reduced cost by 31% year-on-year and increased the number of exclusive online clients by 17%. We strengthen our leadership in (inaudible) with a 28% market share and we had aggressively increased in our market share in other markets.

Now over to David.

David Sach

Thank you Adrian. As shown on slide 13 a new media division reported net revenues of $2.1 million which will roughly flat with less year on the constant currency basis. The changes that we made to the organization of our new media segment in the first half of the year restructuring the technical development function and establishing a dedicated (inaudible) and bare with us to reduce cost by 31% in constant currency terms during the third quarter. Consequently, our EBITDA loss of $1.6 million represents a decrease of 53% on a constant currency basis. We are moving fast towards the break even position for the new media division which we are targeting to achieve for the first time in the fourth quarter. Please turn to slide 14. As of September 30, we had liquidity of $326 million and net debt of under 1.2 billion. Our year-to-date free cash flow was negative 74 million and we are targeting negative free cash flow of less than $100 million for the full year. On October 21, our wholly owned subsidiary CET 21 which holds our operations in the Czech and Slovakia Republics issued a 170 million euro or 237 million of senior secured notes. By refinancing at the CET 21 level we were able to reduce the interest rate by 2.6% points from our previous debt issued at CME group. From the proceeds we used $159 million to fully repay the Earthsave facility. In addition we recently repurchased $46 million of senior notes and we will continue to buy back debt as opportunities arise. We intend to repurchase at least another $54 million of that senior notes which will give us access to a 60 million euro revolving credit facility. This facility has an interest rate of 4.5% over the Czech based rate. The total (inaudible) at present. This refinancing has significantly improved our medium term liquidity position and extended our debt maturity profile. Please turn to slide 15 for an update of TV ad spending for the full year. We project growth rates of between 4% and 8% in Slovenia, the Czech Republic and Croatia during the fourth quarter as the recoveries in these market take hold. This will result in full year market growth of 5% in Slovenia, 15 in the Czech Republic and a negative 2% to Croatia plus or minus of percentage points. In our remaining territories we expect to TP at markets to begin with covering during 2011. On average we forecast our TV advertising to be flat for the fourth quarter resulting in an average decline of 4% for the full year.

Please turn to slide 16 for our full year guidance. As just mentioned we now expect TVS market to decline by 4% which is at the bottom end of the range anticipated in July. Our local currencies have strengthened versus the US dollars since our previous guidance which will benefit our results. But this impact is mainly limited to the fourth quarter and will have a far greater impact on revenue then on (inaudible).

Consequently we continue to expect that revenues will be between 710 and $725 million and Oyster (Point) to be between a $100 million and $150 million for the full year. And now back to Ramona.

Romana Wyllie

Thank you David lets open the floor for questions. Operator can you please turn to our questions.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you and now I will hand it to back to you Miss Ramona.

Romana Wyllie

Thank you the first question comes from Vijay Singh from Janco Partners. Vijay.

Vijay Singh - Janco Partners

I have a couple of questions. One is the first one is on Bulgaria. As you have indicated in the past that at full recovery there'll be you could realize 40% margins. At this point, it obviously is a it's a soft spot. Are you looking to continue with your investment in Bulgaria? Or are you at this point looking to maybe curtail some costs and see when the market recovers that you can be you could realize the full potential of the 40% margin business? And the second one I have is on inventory sellouts. For Q4 in the Czech Republic, where are you currently? You indicated that you had some inventory and you were looking at price increases. So if you can give us some color on that, that would be great. And then, lastly, on MediaPro, I wanted to just ask if, at what point do you, after all your costs are well-defined, at what point do you see the MediaPro business turning into a positive OIBDA contribution? And that's it.

Romana Wyllie

So the first question Adrian.

Adrian Sarbu

As you pointed out in Bulgaria, we are on an integration stage. The Big TV business continues to perform very well and but as they don’t given any type of guidance as the segments of the business in Bulgaria, you will see that the four months of the business next year once they will fully integrated. Definitely, this integration means cost restrictions due to the synergies of the two operations. Though we still believe that even in our outlook which is not very relative for Bulgaria in the next year and those are in the reality of the market was not so optimistic, not so pleasant.

Our investment made sense and again the segment in BTV is going according to expectations.

Romana Wyllie

Next question is about the Czech Republic and inventories sell out Petr.

Petr Dvorak

In Czech Republic sell out rate which we expect for this quarter will be somewhere around 70% which is higher than we had in the last year. In last year we had around 60% and the sell out is bigger or is larger in October and November. December will go a little bit down because the season will finish sometime around 20 or 24th of December. Definitely we tried to increase the prices a little bit and because it is high season we succeeded to increase the prices in single digit terms.

Romana Wyllie

Thank you Petr. And last question about media PRO Anthony.

Anthony Chhoy

In terms of media PRO if you look at the third quarter the banking and loss from that and that's because the third quarter is traditionally low summer season with the broadcast and mining of the high rating local content is reduced so that's the impact of results but we've also this year as David mentioned before North Asian created a central division management and content development function just to integrate in few of these divisions. So I think in the future this is going to allow us to develop and simultaneously implement strong new format and products in all our territories and by sharing these content development also production expertise and resources this is going to enable us to reduce the unit cost of hard rating local production of the time where we see increased competition for popular content but also we will be out to exploit the product that we develop and produce to third party which would drop this business going forward.

Romana Wyllie

Next question comes from Dave Kestenbaum from Morgan Joseph. Dave?

David Kestenbaum - Morgan Joseph

First, can you talk about the where you are in the cost-cutting in Bulgaria? How much cost do you think that you've taken out of the merged entity? And do you think you'll still be EBITDA positive there for the first fourth quarter?

Romana Wyllie

David?

David Sach

Okay. If you look at the results there you see that the result in Bulgaria went from 12 million bucks last year to 3 million this year. So there is 9 million of cost that came out of that business this quarter. In terms of OEBITDA we’re still guiding to be OEBITDA positive in Q4.

David Kestenbaum - Morgan Joseph

Okay. And Adrian, you talked about the fall selling season approaching. Is that still as important to the business as it once was? Because I thought we were going more short-term-oriented on the contracts, but are now looking to go back to the old days?

Adrian Sarbu

It still is in our (inaudible), it still is. As the second quarter, these are all big seasons. And we are telling our strategy according to the demands of these advertisers.

David Kestenbaum - Morgan Joseph

Okay. And then, finally, can you talk about Slovakia? You made a management change there. Can you just talk about what your approach going forward is in that market?

Romana Wyllie

Petr?

Petr Dvorak

In Slovakia we are facing competition there and we are protecting our audience share and market share. We invested a little bit more than we are used to into the local productions and it proved to be successful because our audience share is still really high. We have good results especially in the last month, two weeks ago. We have the most successful week in audience share in the last years. So, we expect to keep our leadership position there and after the market will recover we will built on it.

Romana Wyllie

They worked also about the management changes so.

Adrian Sarbu

Yeah, generally management performance the rise of the presidents of management in this company David.

Romana Wyllie

Okay, next question comes from Ben Mogil from Stifel Nicolaus.

Ben Mogil – Stifel Nicolaus

Good morning and thanks for taking the question. So just two very quick questions. Adrian, sort of conceptually, we've obviously seen advertising now lagged GDP growth for a couple of quarters in your markets. What's your perspective on what's changed? I mean, obviously and historically, it's always been the reverse, so I'm kind of curious to see what you're seeing as changing from that front.

Adrian Sarbu

Can you repeat the question, I didn’t understand properly.

Ben Mogil – Stifel Nicolaus

Of course. Historically, advertising was always stronger than GDP; it always grew at a rate faster than GDP. Clearly, the last couple of quarters, that hasn't happened. Do you view this as temporary? Or do you expect in your markets for a little while now we'll start to see advertising not necessarily be negative, but continue to lag that of GDP growth?

Adrian Sarbu

David is prepared to answer to your question.

Ben Mogil – Stifel Nicolaus

Sure, thank you.

David Sach

Yeah, when GDP is growing consistently then advertising spend does, it grows faster then GDP because of convergence of both GDP and as intense to these a relationship is a wide spent to GDP because the add intense to the in our markets is physically less then Western Europe and therefore you did expect see continued conversions when GDP grows and what’s happen recently obviously is as GDP is (inaudible) then the (inaudible) spend is pulled in more because there is a multiplier effect there with that. But now we are seeing that the GDP growth is leading to the price of consumption growth which is really the component of GDP that drives advertising spends so now GDP one second system grows for a couple of quarters like we see in the Czech Republic, Slovenia and some of our other markets. We expect advertising spend again to accelerate and grow faster than GDP.

Ben Mogil – Stifel Nicolaus

Okay. That's great and that's helpful. And then I think, lastly, just on the sort of attempt or not attempt, but the desire to purchase another $54 million of senior notes to get yourself to $100 million of repurchase am I right that allows you to then tap that $60 million revolver? Is that correct?

David Sach

Yeah, it’s a 60 million euro revolving credit facility and as you can see that's going to have an interest rate of 5.25% when we tap it assuming interest rates don't move. So yes we are motivated to buy back that for $64 million.

Ben Mogil – Stifel Nicolaus

And is your intention to draw down that full revolver?

David Sach

Sorry I didn't hear that.

Ben Mogil – Stifel Nicolaus

Is your intention to immediately draw down on all EUR60 million of that revolver?

David Sach

No we have sufficient liquidity so it will depend on the uses for the cash and obviously we would want a much better yield on that cash than the 5.25% we would pay so depending upon that opportunities which we think there are many we will have to take it as it comes.

Romana Wyllie

Next question comes from KBC Securities, Leszek Iwaszko.

Leszek Iwaszko - KBC Securities

Right. As I see the market still continues to surprise you on the downside, your full-year ad market forecast published three months ago in a few markets now is lower than what you published now versus what you published three months ago, especially on the Romania, Bulgaria, and Slovakia. I'm not trying to say that you're a bad forecaster because as a market leader, you're clearly the best qualified to forecast, but I think it proves that the markets are really still unpredictable and very weak. And I just wonder, what makes you confident that saying that you expect all markets to grow in 2011? I particularly ask about Romania and Bulgaria.

David Sach

Yes correct forecasting the market has been difficult particularly when we gave that guidance last quarter some of this austerity measures were just being put in place. So it was very difficult for us to gauge what was going to be the impact of the 25% cut in the public wages in Romania or an increase in the DAT rate there. So what happen obviously we are three months on and we can clearly see what those austerity measures have done, yes they slowed the markets a little bit more than we thought back three months ago. But obviously now we don’t think that austerity measures are going to have a continuing future impact and once they are observed into the economy we definitely expect those economies to grow so to hinder our guidance in 2011.

Leszek Iwaszko - KBC Securities

Right, I mean, economies to grow, yes, but ad markets do not dramatically follow headline GDP growth. So I'm still kind of I mean, please convince me that you really think that the markets in particular like Romania or Bulgaria are poised to grow. Because like a no-growth scenario seems equally probable to me at this point, seeing the performance of these markets in Q3 and taking into account that these austerity measures will have a full-year impact in 2011. They were introduced in mid-2010. So I still see some negative GDP forecast for Romania from some and the economies consensus is [above] zero but still I think the situation there is quite volatile.

David Sach

A couple of things one the IMF just wanted to remain into the reasonable clean [bill] account. Also what makes this confident is although we’ve been – since this is happened with contracting these key economic indicators very, very closely we’ve been tracking the components of GDP of what really drives that with time span and its undoubtedly its the private consumption, the drives, the advertising market and private consumption has steadily been clearly the GDP growth by a couple of quarters. But once that GDP export driven growth occurred, the private consumption undoubtedly comes a couple of quarters later and then the advertising spend comes with it. Going forward getting that timing right is difficult because what our advertisers it goes about the advertisers reacting to that growth in private consumption. Unfortunately its been a little bit lagging in terms of the private consumption where historically advertisers have unusually spent ahead of the private consumption or in anticipation of the private consumption without seeing a coverable section (inaudible) confidence but now that confidence is coming back and we see it in the consumer confidence surveys. We are becoming more and more confident that when GDP growth returns in remaining both area the private consumption will follow up and the advertising will spend (inaudible) so we are reasonably comfortable with that [impact] (inaudible) will follow up unless they get some offer with mix thus in 2009 we specifically call Romania the MTV (inaudible) that we set far 30% lower in 2008 level. And 2010 we expect to reset but another 10%, (inaudible) call the 2011 thousand points I think with over about 40% it's already see that high level. So, (inaudible) and some confidence that some things will we improve in 2011. Leszek if you need more details we can give access to our analysis where as many data is able to pick up.

Leszek Iwaszko - KBC Securities

Okay. Thank you very much. One more question, if I may, actually. On performance in Q3 in markets of Czech Republic and Slovakia, I saw that actually local currency revenues lagged the market, both in the Czech Republic and Slovakia. And I thought the margin in the Czech Republic was particularly weak, it seemed to me. And the cost in local currency I'm referring to cost in Q3 were almost unchanged from Q2. How does it correspond to what you're saying that you were kind of cost efficient in terms of programming in the Czech Republic in the third quarter?

David Sach

That I have in front of me says that the local currency growth was less of the decline then the actual growth. So Czech Republic.

Leszek Iwaszko - KBC Securities

Well, you had clearly the lost market share, right, in Q3, in? It's clearly on your for representation, I mean, the market grew by 1% while your local currency revenues dropped by 5%.

Anthony Chhoy

(inaudible) in Q3 although the TVR market in Czech Republic grew above 1%. (inaudible) that is always the impact of (inaudible) mark able we had a type of that because of our flight increases strategy which we expect to have the nation impact on our market share and revenue in the third quarter. That is the rational for the VM low the decline in the Q3 revenue. Now in terms on the cost side. Year on year our total cost in Czech Republic grew by around about by 5% but I think if you exclude the launch of the MTV channel talking about a flat I mean year on year cost which is actually quite I really thought of performance from our end. Given the fact that we still have a strong audience leadership (inaudible).

Adrian Sarbu

To clear your, your point to the decrease in market share we explained. We one side, we broadcasted low cost programming on the other side we push prices up in the third quarter which we comment in the second quarter conference and this normally the first impact is special indicator of revenues other operators in the market severely discounted in the third quarter.

Leszek Iwaszko - KBC Securities

So you would expect them to follow you in Q4 and then in Q4, you should just maintain your share year-on-year?

Adrian Sarbu

As we pointed out the key priority for ours is to restore the prices to 2008 level. So we will monitor market share, it’s a result of an action which drives revenue. So should it be more successful in appreciating the prices. This will be perceived as sudden dynamic of our revenues which is of course the CPT for which for us is crucial for establishing the flow for next year as negotiation of the contract. One or two points I've share in Czech Republic are not relevant that’s the way we see once with recoveries started the restoration of the price is the most important. I don’t know if we give market share guidance for fourth quarter.

David Sach

Not by individual companies, no.

Adrian Sarbu

We cannot but I will try to explain when we can in market share but it was an increase in CPT.

Romana Wyllie

The next question comes from Sasha Balasnin from Goldman Sachs. Sasha

Sasha Balasnin - Goldman Sachs

I have a very quick question on your guidance basically. As you mentioned at the very end of the presentation, the euro dollar is way stronger now than it was at the time of the previous call, which suggests you may be inclined to raise your guidance if the market environment stay the same as it was in August. And I just wanted to hear your thoughts basically how you think about your guidance in the stronger local currency environment than they were three months ago. Did you see something which made you more cautious than you have been? Or you just want to be on the conservative side?

David Sach

All right. There was two factors impacting the guidance that kept it as it was which obviously the markets were on the low ends of our range, okay which obviously impacted guidance but then as you say there was the strengthening of the currencies but the currency is really strengthened at the end of September so it strengthened roughly 10% than where it was when we gave our Q2 guidance but that 10% has only impacted the fourth quarter. And fourth quarter revenue is roughly a third of total revenues so you are talking a 3% increase on total revenues and something similar on EBITDA which obviously is a huge amount of increase for us. So the two factors that impacted the guidance.

Romana Wyllie

Next question comes from Andrzej Knigawka from ING.

Andrzej Knigawka - ING

Two questions. What discount are you getting on the purchased debt? And the second question was about David mentioned 2.6 percentage points. Do we (inaudible) coming on the new (inaudible)? Can you just explain where this 2.6 percentage points is coming from?

Romana Wyllie

The line is quite bad can you repeat the first question. Its all about the purchase of gas but what was the specific question.

Andrzej Knigawka - ING

Yes, I was wondering what kind of discount are you getting on the purchased debt. Are you getting some kind of discount to the par value of the debt?

David Sach

Yeah the discounts on each of the notes are different. Right now the 2016 are yielding 11.3% whereas the converts, the 2013 are yielding less 9 so what we did obviously we borrowed a 9% coupon that was 2.6% lower than the 11.6 coupon of 2016 so that’s where that 2.6 came from and obviously when we look to repurchase we want to repurchase debt with a higher yield than the 9% in which we borrowed from that’s the mechanism rising out of repurchasing.

Andrzej Knigawka - ING

Can I just have one final question on the Czech Republic? When you talk to your key advertisers in that market, are you getting any kind of indication of whether they are going to there's going to be an increasing marketing budgets for 2011 in Czech Republic? Are your key advertisers willing to increase marketing budgets for next year low single digit, high single digits? Are you getting any kind of feeling at that point?

Romana Wyllie

Petr Dvorak.

Petr Dvorak

We didn’t start certain negotiation clients for the next year. We are just now in separation of our business conditions for the next year but definitely we can see the result of the fourth quarter and more clients are increasing their budgets than decreasing their budgets and we expect the same behavior for the next year. Definitely it will be dependent also on our condition but we feel that we will able to give the right conditions for our product which will be appreciated for our clients.

Adrian Sarbu

And honestly I didn’t say in my life a client or an advertising agency telling you in October that they plan to increase the spending next year in such a environment when everybody feels it’s because of the crisis. Favor which we gave you for the next year comes from our complex methodology of analyzing the dynamics of the market next year.

Romana Wyllie

Thank you (inaudible) question. Okay thank you. So, can you [post] for a question before we go to that one?

Romana Wyllie

Thank you. Next in the queue is Ankur Agarwal from Nomura.

Ankur Agarwal - Nomura

This is Ankur Agarwal from Nomura. Just two questions, please. The first one is on Bulgaria. I believe you had a content supply agreement for the existing Pro.bg operations in Bulgaria, which resulted in higher cost in 2009 and '10. So could you please give us some details as to what are your obligations under these agreements and some absolute numbers in terms of how much amount of content that you need to buy? That's the first question on Bulgaria. The second one is on MediaPro. I have seen that you have given a guidance for the New Media division that you'll be targeting to break even in Q4. Could you give us some similar guidance for MediaPro as to when do you expect to break even for this division? The third one is regarding [SCF]. I guess I missed that bit in your presentation regarding the SCF. So if you could give us some guidance regarding when do you expect to turn SCF neutral? Thank you.

Romana Wyllie

What was the third question (inaudible)? What was the third question about (inaudible) line with buyback can you – just the third question.

Ankur Agarwal - Nomura

Third question the third was regarding the [FC] of guidance because I think I missed that in the presentation. So could you please tell us as to when do you expect to turn [SCF] neutral?

Romana Wyllie

Free cash flow over (inaudible), okay. So the first question David?

David Sach

We obviously with segments now are the broadcast division, the constant division and new media division so going forward we won't be giving any detail on the commitments for each of the country so we are just not giving that information out obviously for the further reasons as well. In terms of Media pro…

Adrian Sarbu

Just a second. But it's reasonable to imagine them to once you have a larger distribution range with five channel in Bulgaria. Our commitments can be absorbed much better than in the past. We have five primetimes and we are talking about commitments for high quality and good rating delivery programming.

David Sach

Media pro, yes we would be expecting media pro entertainment to be breakeven for the fourth quarter and in terms of the free cash flow guidance I was guiding, targeting less than a 100 million of outflow for the current year and then we are targeting to reach breakeven for 2011.

Romana Wyllie

Thank you (inaudible). Next question comes from Vivek Khanna from Deutsche Bank. Hi, Vivek.

Vivek Khanna - Deutsche Bank

Listen, just one quick question. A little bit of color if you could please provide on your rationale [PS] how to apply proceeds or cash rather liquidity for debt buybacks going forward. I see in the prospectus the convertible bond was had been highlighted. Where we are today going forward, what are the drivers which decide which of the credit instruments you intend to purchase with the remaining buckets which you have? Is it driven by a lessening of maturities? Is it driven by reducing interest bill? Or is it really driven by buying debt at a discount and therefore creating a P&L gain?

David Sach

Yes, we would like to reduce that maturity profile as possible and by the 2013, but obviously it’s driven by the economics as well. So then we got the 2016 (inaudible) a 11.3 and the convert is yielding less than the nine which we’ve borrowed at. So we have to play both of those against each other. And obviously I am not going to comment on which will do, because that could impact the pricing.

Vivek Khanna - Deutsche Bank

But can I ask you a question then just to clarify and understand better why you chose to in what had already been done or disclosed, as to why you chose to eat away at the convertible bond as opposed to some of them may be higher yielding 2016 notes, for example?

David Sach

Sure, we had an opportunity to buyback the converts at a price of 88 in the quarter which was a yield that was slightly above the nine that we borrowed. So obviously we took the ability to improve our maturity profile. We can continue to do that at decent prices, we will. If we can’t then we will fix the other notes. So it’s all the matter of weighing the economics against the maturity profile as I said before.

Romana Wyllie

Thank you, Vivek. And the last question comes from (Inaudible).

Unidentified Analyst

Good afternoon, I may have invested on the call earlier but was it just the converts that you brought back. And second I noticed you had a fairly large increase at a cost (inaudible) on a year-to-year basis, that was mainly involved in industry and between in the market share?

David Sach

Well let me take the first one which is now it was mainly conversed with the majority of it but the person would repurchase from also had some other notes so we took advantage of some decent pricing on the other notes as well and took it as a package.

(inaudible). Can you repeat the second I didn’t understand?

Unidentified Analyst

Yes, can I have a quick follow-up first as you've provided a very good amount transparency on where you (inaudible) you do the same on the 16s.

Adrian Sarbu

Sorry, in terms of what transparency.

Unidentified Analyst

Whereas you were very kind in saying, telling us where you brought the converts to (inaudible).

David Sach

Yeah I think we both are at the 2016 I think we are yielding 11.5 or something which obviously was a good yield for us, whatever that is in terms of the price 101 or something. Its out there so, its in the AK I think we filed.

Unidentified Analyst

Okay, thanks. And then secondly I had noticed some large increase in the cost of programming on the year-to-year basis and I was wondering was that mainly the investment to retain the market share.

David Sach

I think the cost of programming number that you are looking attributed

Unidentified Analyst

(inaudible)

Romana Wyllie

Yeah, its you include BTV and also need (inaudible).

David Sach

So its same type to the acquisitions of BTV and Media Pro entertainment as long as obviously something recent programming to continue to build our audience in market share.

Unidentified Analyst

Can you give any sort of (inaudible) items, will that be on a like to like basis?

Anthony Chhoy

I think we there is (inaudible) to reaches that Our cost program, programming cost in the broadcast division that represents about 60% to 70% of our total cost so I think and a key strategy is to protect the audience and the brands and the possible costs for managing the broadcasting and programming schedule but this is obviously dependent on what the competitors do as well. So but then we have managed to protect our audience lead issue and (inaudible)

Unidentified Analyst

but if we take out the new project (inaudible) looking back to 2010 you will not see a significant increase in programming cost. You can give you its.

Anthony Chhoy

Yeah the best way to see that is there's a table in the (NDNA) section of the 10Q that will break down the programming between the broadcasting companies and the rest of the company so there's good table in there if you look at.

David Sach

And the cost is really single digit, low single digit.

Unidentified Analyst

Okay I am trying to get an understanding of how expensive is it in your markets to retain market share but I can look at those figures.

Anthony Chhoy

You look at this and we see we maintain our market share by increasing low single digit of programming cost. How expensive it is depends on the dynamics of the market. We have markets like in Slovakia where the competitors increased double digit their investments in programming or high double digit so we had to react to maintain our market share.

Romana Wyllie

We have two more questions in the queue. Gavin McKeown - Pioneer Investments.

Gavin McKeown - Pioneer Investments

Firstly a follow-up on Richard's question about costs? Just simply, simple arithmetic, excluding Bulgaria, I calculate that cash cost total cash costs increased by about 13% $430 million compared to [$380 million] for the first nine months of the year. Should we read into that that the real driver of that is mostly launches of new TV channels? And can I ask what new channels are you planning to launch next year?

David Sach

So you would have to back out Media Pro entertainment would be

Gavin McKeown - Pioneer Investments

I’m comparing like to like because I think in your quarterly segment you include Media Pro in the previous year in your quarterly segment disclosure. I’m pretty sure in comparing like to like.

David Sach

You wouldn’t have the Media Pro Romania businesses in that like-for-like because MediaPro was purchased in December 2009 so you going to have adjust to MediaPro as well.

Gavin McKeown - Pioneer Investments

Exclude those and then I got a cash cost 5 million versus 317 million it’s still (inaudible) 5 to 6%/

David Sach

Yes, it would be 5 or 6 and then you will back out the new channels and then you get to a low single digit number that Adrian was referring to.

Gavin McKeown - Pioneer Investments

Okay, for next year then guys in terms of mobile cash cost excluding TV new launch of what should we be expecting.

David Sach

We’ve been guiding people to single digit total increases in the programming. As you know over the past of couple of years we have changed our mix in terms of the local and the foreign programming and that is obviously driven up the cost because the local programming tends to be more expensive than the foreign because it drives the prime time audience share so change in the mix is obviously driven high cost for us. But now that we have an ideal mix for us then going forward the local program is much easier to contain the cost inflation because obviously we controlled that cost versus the (inaudible) that we do so we believe that we can control those cost going forward, makes us comfortable that we can keep those cost increases to single digits

Gavin McKeown - Pioneer Investments

Okay and In terms of new channel launches next year anything material that we should be expecting?

Romana Wyllie

Alright (inaudible)

Adrian Sarbu

We will launch new channel in line with the capacity of the market in each country to absorb them. we gave it just one channel in Croatia where we got the license so today we can say we launched NOVA in Croatia. Otherwise we have a lot of channels on the shelf, will the market absorb them. Will the competition put pressure on our audience share should they need to diversify the effort to the audience in order to maintain audience share then we will do it but today this is what they continue doing to [determine] Croatia

Gavin McKeown - Pioneer Investments

Can you say whether or not the market will have or the audience will have capacity to absorb it, presumably it also only intends to launch these channels when you've got revenue growth to observe the additional costs?

Adrian Sarbu

Can you repeat the – can you speak louder please?

Gavin McKeown - Pioneer Investments

You're saying that you would only launch these channels if there was an audience or a market to absorb those new channels. Presumably a consideration would also be whether or not you have revenue to absorb the additional cost of launching these new channels.

Adrian Sarbu

So with exception of Croatia we are multi channel in our markets. So, today or for next year will be multi channel in all market because we have to channel in Croatia. From this moment on the reason to launch more channels is driven by the actions of competition. The appetite of audience for a most segmented channels and definitely by the capacity of the market, the growth of the market, the capacity of the market to absorb these channel. We cannot launch channels just for the sake of increasing audience when the money existing on the market will not help us to monetize this audience. We are already a multi channel operation of the country. This is a fact that condition in the last ten years

Gavin McKeown - Pioneer Investments

I'm not really sure I follow that. Can I just ask, what's the cost of the two channels that you mentioned Doma and I missed the second one?

Adrian Sarbu

No there is just one channel, DOMA in Croatia.

Gavin McKeown - Pioneer Investments

So what's the cost, cash cost of getting that up and started in the first year or so?

Anthony Chhoy

It will be a couple of million. We are not talking about tens of millions that all the I'm gathering, its because then we have lot of the mass control room with [Naidus] that this is just the you can track our channel in Slovak which cost the single digit in the launch. But the key thing is that we have to maintain our leadership position and by launching (inaudible) in Croatia that gives us a numbered platform number two to attack [competitive] in terms of another (inaudible) flow. That gives us (inaudible) as the market grows; we can use our operating leverage to draw that out and gets that revenue from the market shares and also our EBITDA margins. I think that is really the key principal while we do.

Adrian Sarbu

We can talk about MARKIZA talk more about (inaudible) but if you look at dynamics of our operation you saw that increase our audience here and our markets here. So we are in a growing trend in Croatia. And our strategic target to strengthen our leadership in audience is serviced by the decision to launch a successful format in other markets. DOMA is named ACASA in Romania is named DOMA in Slovakia and is proved to be successful and in each beginning it not a high cost channel.

Gavin McKeown - Pioneer Investments

Just my second question was thanks a lot, my second question was in relation to Romania. Adrian, you gave us some useful color earlier on. Just looking back, at the end of the second quarter, you're expecting the ad markets in Czechoslovakia to grow by 6% to 9%. I think you're now saying something like 2% to 3% in the second half and 1% for the full year overall. I know you mentioned the impact of you guys having to increase your prices compared to some of the competition discounting, but I was wondering how the overall demand dynamic in Czechoslovakia developed as you expected it to in the second half?

Adrian Sarbu

So that (inaudible) is about DOMA or Czechoslovakia.

Gavin McKeown - Pioneer Investments

No about Czechoslovakia?

Adrian Sarbu

In the Czech to get to that I think it was a 1% growth for the full year in Czech it was 17% down in the first quarter. I think it was 4% up in the second quarter I guess I think 1% in the third, so in order to get to a 1% to the full year you have to be growing faster in both quarters and the number you gave us. So they will be a health growth in the fourth quarter. I said that Slovenia and Crotia and the Czech Republic will drawn between 4% and 8% in the fourth quarter. So that unites healthy growth in the forth. We were expecting a little higher in the third but advertisements pushed the money into the fourth quarter. again, exactly getting this timing is the recovery of private consumption is not easy but yes, we’re now confident that the Czech Republic is private consumption is coming back and advertising spend is following. So we’re comfortable with the Czech recovery growth.

Gavin McKeown - Pioneer Investments

Okay, thanks, but my question was more in relation to how is the market in the last whatever four months since you reported second quarter numbers or three months, has the market developed in the way that you thought it would? Because it is clearly not you're clearly not getting the growth in Czechoslovakia that you expected three months ago. So my question is, is that just due to the dynamic that you increase your prices, whereas your competition were discounting? Or is it just because of overall demand is not as strong as you expected it to be a few months ago?

David Sach

No. Again, we’re getting exactly what we expect it, just a little bit later than what we had thought. So Q4 is definitely as we expected and similar to the guidance we gave for H2. it’s just that it happened later than we expect it but for us, it’s well on its way.

Gavin McKeown - Pioneer Investments

Sorry, just last question on it. Then presumably to get to the number that you're talking about, you need to probably have about 10% revenue growth in dollars in the fourth quarter, somewhere like that? Is that the kind of growth that we should expect on a full-year basis going into 2011?

David Sach

We haven’t given any specific revenue guidance for the Czech Republic. So obviously, there’s a combination of market and market share that drives the revenue. So we haven’t, we’re not specifically count in. all I'm saying is it’s between 4 and 8% growth in Czech in the fourth quarter. that’s the guidance we’ve given.

Romana Wyllie

Thank you Gavin and so we don't have anyone else in the queue so let me finish this call. Thank you for joining us today. We had more than 70 people on the call and over 120 webcasts here. I hope that you enjoyed the webcast and we welcome your feedback and comments. I would also like to remind you that you can keep up-to-date and follow our progress between the earnings calls on our website www.cetv/net.com or as always I am available for any additional questions anytime. We look forward to seeing you all shortly. Good bye.

Operator

This does conclude today's Central European Media’s third quarter 2010 earnings conference call. Please disconnect your lines at this time and have a wonderful day.

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