Central European Media Enterprises' CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.23.11 | About: Central European (CETV)

Central European Media Enterprises (NASDAQ:CETV)

Q4 2010 Earnings Call

February 23, 2011 9:00 am ET

Executives

Adrian Sarbu - Chief Executive Officer, President and Director

David Sach - Chief Financial Officer and Executive Vice President

Romana Wyllie - Vice President of Corporate Communications

Anthony Chhoy - Senior Vice President of Strategic Planning & Operations

Analysts

Vivek Khanna - Citi Global

Vijay Singh - Janco Partners, Inc.

Ajay Agrawal - Nomura Securities Co. Ltd.

David Kestenbaum - Morgan Joseph TriArtisan LLC

Romana Wyllie

Good morning, good afternoon or [Foreign Language] to each of you, and welcome to CME's Fourth Quarter and Full Year 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 CME’s President and Chief Executive Officer, Adrian Sarbu; Chief Financial Officer, David Sach; Anthony Chhoy, Executive Vice President, Strategic Planning & Operations; and our General Counsel, Daniel Penn.

Before I turn to Adrian, let me read the usual Safe Harbor Statement. Our presentation today will contain forward-looking statements. For these statements, we claim the protection of 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-K filed with the Securities and Exchange Commission earlier today for a list of such statements and the factors which could cause future results to differ from those presented in this call.

During this call, we will refer to certain financial information that is not in U.S. GAAP. Please see the appendix to the presentation for a reconciliation to U.S. GAAP financial measures. In addition our segment financial information that is presented in local currency is not in U.S. GAAP. We do not provide reconciliation to these numbers as the U.S. GAAP amounts are expressed in U.S. dollars in our financial statements. Additional information on our segment data is provided in Note 17 to our financial statements on page 120 of our 10-K. And now over to Adrian.

Adrian Sarbu

Good afternoon and good morning. 2010 was a difficult year, but the trend in our markets in the fourth quarter shows the end of the crisis in our region. From this perspective, 2011 looks today less challenging than the previous two years. In the very difficult year of 2010, when our TV advertising markets continued to decline, we did our best. CME full-year OIBDA for 2010 was $107 million. Let me remind you that in 2009, we reported OIBDA of $75 million. Our 2010 results reflect the benefits of restructuring our business, the sale of our Ukrainian operation and the acquisition of the bTV group in Bulgaria.

2010 was our first year of full operation of a vertically integrated media company. We now have leading broadcast operations in six countries, an integrated media division, Media Pro Entertainment; and the growing New Media division. We offer 23 channels to an audience of almost 50 million emerging market consumers.

In September, we successfully refinanced our term loan in the Czech Republic. At the beginning of this year we exchanged $206 million of our convertible notes due 2013, thus improving our maturity profile. We finished the year with a liquidity of almost $350 million. We see important that our fourth quarter results reflect the continued trend towards recovery in our markets. How do we see 2011? We expect growth across all our markets. We expect prices to return to 2008 levels over the next two years. As demonstrated in the past, we have high operating leverage and rigorous cost discipline, which will enable us to expand our margins as the recovery of TV ad spending progresses. And last but not least, our priority is to deliver positive free cash flow in 2011. And now over to David, who will give you an overview of the fourth quarter macroeconomic indicators and our consolidated performance.

David Sach

Thank you, Adrian. Please turn to Slide 5. In the fourth quarter of 2010, we saw TV advertising market growth of 17% in Slovenia, 10% in the Czech Republic and 1% in Croatia. Overall, our markets were flat with these increases offset by declines in Bulgaria, Romania and Slovakia. We expect all of our markets to grow in 2011. During the period when our markets were in decline, we grew our overall market share, putting us in a strong competitive position for 2011. Overall, including bTV, we increased broadcast revenues by 6% for the full year on a constant currency basis compared to a market decline of 4%, and we grew our broadcast revenues by 14% for the fourth quarter in flat markets. We are confident of continuing to outperform the markets in 2011. Please turn to Slide 6.

As a reminder, our consolidated continuing operations exclude the results of our former Ukraine business sold in April 2010. The sale of this business eliminated $40 million of OIBDA losses incurred in 2009. The headline for the 2010 results is that costs were flat on a like-for-like basis. Consolidated revenues for 2010 increased by 8% at actual exchange rates, or 11% on a constant currency basis, to $737 million. All three segments increased revenues, driven by the bTV acquisition in April 2010 and the Media Pro Entertainment acquisition in December 2009. Total costs increased by 11% to the actual rates, or 15% on a constant currency basis, primarily driven by these acquisitions and investments in new channels. Excluding these investments, costs were flat.

Consolidated OIBDA for the full year amounted to $107 million and was impacted by higher central costs of $6 million. Central costs in 2010 included more than $2 million of severance and lease-exit costs in connection with a further reduction of our presence in London, whereas the cost in 2009 included a credit of more than $3 million from the sale of a bankruptcy claim against Lehman Brothers.

In the fourth quarter, consolidated revenues were up 18%, and OIBDA was up 54% at constant rates compared to 2009. The consolidated OIBDA margin increased from 19% to 25%. Adrian will now introduce the Broadcast highlights.

Adrian Sarbu

I invite you to turn to Slide 7 of our presentation highlighting the achievements of the Broadcast division. In the Czech Republic, we maintained undisputed audience and market share leadership. Nova Cinema doubled its average primetime audience share for the year to 4%. Nova Group delivered almost 60% of commercial GRPs on the market. In Romania, we maintained a stable prime time audience share leadership. We increased our market share to 58% by providing advertisers with sales promotions and attractive incentives. In Slovakia, we maintained our audience and market share leadership. Markiza Group delivered almost 55% of commercial GRPs on the market. Most importantly, we entered 2011 with a spectacular average primetime audience share of 40%.

In Slovenia, we maintained unchallenged audience and market leadership. Our Slovenia channels delivered almost 70% of commercial GRPs on the market. Our Croatian business, Nova TV, strengthened its audience leadership position in the market and increased market share by five percentage points to 41%. At the beginning of January, we successfully launched a new female-oriented channel, Doma, delivering average primetime audience share of 4%.

In Bulgaria, we successfully completed the integration of the bTV group, which secured audience and market share leadership with a fully developed multichannel model. Our Bulgarian operations delivered OIBDA of $9 million with a margin of 31% in the fourth quarter and approached breakeven for the year. Most importantly, 2010 was the year of leadership in broadcasting in all CME markets. And now over to David who will walk you through Broadcast financials.

David Sach

Thank you, Adrian. Please turn to Slide 8. In the fourth quarter, Broadcast revenues were up 14%, and OIBDA was up 42% on a constant currency basis. For the full year, Broadcast revenues increased by 6% on a constant currency basis compared to 2009, primarily as a result of the bTV acquisition, which reported revenues of $58 million in the period since acquisition. We saw revenue growth of 8% in Slovenia, where the TV ad market returned to growth at the beginning of the year, and 11% growth in Croatia as a result of increased market share. Revenues in the Czech Republic declined by 2% in the flat market as advertisers increased their spending with our competitors, especially the smaller channels, as a reaction to our higher prices. We have seen similar temporary behavior in down markets in the past.

As the demand for higher audience GRPs increases, our market share will likely rebound. The revenues in Romania and Slovakia fell by 6% and 11%, respectively, due to the declines in the TV ad markets in these countries of 10% and 8%, respectively. Broadcast costs increased by 6% due to the bTV acquisition and the full year impact of investments made in new channels, including Doma in the Slovak Republic in August 2009, TV Pika in Slovenia, now POP Brio, in September 2009 and MTV in the Czech Republic in November 2009. Excluding the impact of these investments, we were successful in keeping costs flat while maintaining audience share leadership. Cost remained flat even though we increased our investment in programming to gain audience share in Croatia and Slovakia. We are continuing to see the benefits of these programming investments in early 2011.

Broadcast OIBDA for the full year increased by 7% in constant currency terms to $164 million. As a result of the bTV acquisition, there was a $40 million OIBDA improvement in Bulgaria on a constant currency basis. This was offset by OIBDA declines in Slovakia and Romania, where the markets were still declining, and the Czech Republic, where advertisers were cautious and looking for bargains. Adrian will now present the Media Pro Entertainment highlights.

Adrian Sarbu

Let's move to Slide 9, and let me point to just a few highlights of our content division, Media Pro Entertainment.

The content produced by Media Pro Entertainment is the driver of our audience shares in all our markets. It gives us the necessary brand power to maintain our leadership, leverage our market share and keep audience loyal to our stations. This content also differentiates us from other players in our markets. For Media Pro Entertainment, 2010 was the year of full integration and structuring. We now have, in each country, production units for fiction and entertainment, content development and production services units. In two markets, we already operate local distribution. International sales of CME programming took off last year with more than 2,000 hours of original fiction sold to the U.S.A., Brazil, Argentina, Italy, France, Ukraine, Dubai and South Korea. Media Pro Entertainment is the largest producer of fiction in the region with 890 hours of TV programming delivered last year to our broadcasters and to movies.

As the future is our priority, we used all our development resources to build a competitive regional and international production slate for television and cinema. It consists today of 148 original scripts and formats, which will be produced in the upcoming years. Now over to David who will give you Media Pro Entertainment financials.

David Sach

Thank you, Adrian. Please turn to Slide 10. This segment comprises the Media Pro Entertainment business acquired in December 2009, and the production assets that used to be part of CME's broadcasters. Media Pro revenues and costs are not fully comparable because of the Media Pro acquisition. In the fourth quarter of 2010, Media Pro Entertainment recorded positive OIBDA of $1.1 million. For the full year, Media Pro reported net revenue of $141 million, an increase of 35% in constant currency terms over last year. The increase in revenues was primarily attributable to the revenues of the operations that were acquired, which consisted of the Romanian fiction, production services and distribution and exhibition businesses. Approximately 25% of revenues were generated from third-party sales. Media Pro incurred costs of $144 million and made an OIBDA loss of $3 million for the full year.

The prior year results to Media Pro have been presented as if this segment had existed in its current form from the beginning of 2009. However, the prior-year OIBDA does not include all of the costs that would have been required to manage this segment with its current scale. This primarily accounts for the decrease in OIBDA from 2009. Furthermore, there were costs incurred in 2010 to integrate and build this new division, a process which we have now substantially completed. For 2011, we are targeting positive OIBDA for Media Pro. Adrian will now talk about our New Media highlights.

Adrian Sarbu

Thank you, David. Please turn to Slide 11. Our New Media audience continue to grow. Let me summarize my main highlights of New Media division. In 2010, our traffic grew by 26% year-on-year. The number of our online customers increased by 20%. We launched 21 new sites and two paid content portals: VOYO in the Czech Republic and POPPLUS in Slovenia. The VOYO platform will become the core of our New Media business in 2011 and going forward. It will enable us to distribute linear channels, offer catch-up TV and video-on-demand and will be financed from subscriptions as well as advertising revenues. In 2011, VOYO will be a pilot for our new strategy: one content, multiple distributions. If successful, as we expect, it will enable us to rapidly increase market share in countries where it will be implemented. Now over to David, again.

David Sach

Please turn to Slide 12. In the fourth quarter, our New Media segment reported a loss of $0.2 million, an improvement of 93% versus the fourth quarter of 2009, and was breakeven in the month of December. In the first half of 2010, we made changes to the organization of our New Media segment, restructuring the technical development function and establishing a dedicated sales team. As a result of these actions, our New Media segment reported full year revenues of $11.2 million, an increase of 17% on a constant currency basis. These changes also enabled us to reduce costs by 1% for the full year. Overall, we reported OIBDA losses of $6.5 million, an improvement of 22% compared to 2009 on a constant currency basis.

Now turn to Slide 13. Free cash flow for the 2010 full year was negative $96 million, which was within our target of negative $100 million. Cash flow from operating activities of negative $50 million was lower than in 2009 because of the lower OIBDA, higher net investments in programming and production and higher cash interest. CapEx of $46 million was $2 million lower than in 2009. We finished 2010 with $347 million of liquidity.

Please turn to Slide 14. The refinancing activities we carried out in October 2010 and February 2011 have improved our maturity profile and reduced our gross senior debt since the end of the third quarter. In October 2010, we issued $238 million of fixed rate notes and used the proceeds to repay existing debt. We received net cash proceeds of $225 million, and we repurchased approximately $265 million principal amount of our indebtedness. Since September 2010, our senior debt has been reduced by $48 million.

At the end of 2010, we had net debt of $1.2 billion. Earlier this month, we exchanged $206 million of our 3.5% senior convertible notes due in 2013 for the same principal amount of 5% senior convertible notes due in 2015. The deal improves our maturity profile by reducing the debt due to mature in 2013 from $440 million to $234 million.

Our cash interest costs for 2010 was $101 million. As a result of the two deals just described, cash interest will increase by $4 million in 2011. And now over to Adrian to discuss our views on 2011.

Adrian Sarbu

Let's turn to Slide 15. And now let's speak a little bit about 2011. We see this year as the year of turnaround in our markets and the year when our leadership, strengthened during crisis, will enable us to grow. As it is too early to give you a 2011 guidance, on this call, we can talk about macroeconomic as well as our expectations and priorities for 2011.

Macro consensus forecasts the GDP growth in our markets between 1.4% and 3.4% in 2011. Private consumption is expected to grow in all markets. In the first quarter, we expect CME markets to grow in aggregate by low single digits. As we previously said, we expect all our TV advertising markets to grow in 2011. We aim to maintain or strengthen our audiences and market shares. We are focused on keeping cost increases across CME at low- to mid-single digits on a like-for-like basis. We have high operating leverage, which will enable us to expand our margins as TV ad spending recovers. We aim also to reduce CapEx to below 2010 levels. And one of our important targets is also to achieve positive OIBDA for Media Pro Entertainment in 2011. And finally, the main priority is to deliver positive free cash flow in 2011. Thank you, and now I pass it back to Romana.

Romana Wyllie

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

Question-and-Answer Session

Romana Wyllie

Thank you. The first question comes from Vijay [Vijay Singh] from Janco Partners. Vijay?

Vijay Singh - Janco Partners, Inc.

I have a quick question on Bulgaria. It looks like you are approaching that $40 million annual OIBDA run rate in Bulgaria and that, I believe, was what bTV was posting before acquisition. I just wanted to see if you can give me some color on -- if you can achieve that this year with your expectation of late recovery in Bulgaria? And is there more cost-cutting likely in Bulgaria? Or are you completely streamlined and this is the cost run rate in Bulgaria that you have currently going forward?

Romana Wyllie

Adrian, do you want to start?

Adrian Sarbu

Vijay, I'm sorry to start with a negative answer to you, but as we pointed out, we cannot give guidance for this year, nor on CME, neither on any individual operations. I want to remind you that Bulgaria made $40 million in 2008. And since then, we past two years of crisis. So in respect of cost-cutting, we think we did our job in 2010 in Bulgaria. Streamlined the cost, integrated the operations very well, and this was very well seen in the fourth quarter when we operated Bulgaria with 31% EBITDA margin, if I'm right.

David Sach

That's correct.

Adrian Sarbu

Which is quite reasonable. Good, if not good achievement for a start or a restart in Bulgaria, a market which didn't perform so spectacular last year.

Vijay Singh - Janco Partners, Inc.

And then one more thing on the sell-out in the Czech Republic. The ad sell-out have been higher than last year, and I'm just wondering if there have been higher discounting in Q1 in 2011, or you see that this is a reflection of a noticeable improvement in the market that you can now have -- there's a higher demand?

Romana Wyllie

Anthony?

Anthony Chhoy

Vijay, just in terms of our pricing and policy, I think we obviously price our inventory according to the need of the advertisers and also the stage of the recovery of the market. So you will see that in Q4, for the Czech Republic, we have a relatively high sell-out rate. But I can't really go into too much detail on 2011, other than the fact that we have committed to date 65% of the annual volume for 2011 in the Czech Republic. So it's still early days, but we believe that some of our key advertisers, I think, will be waiting and holding back and to really try to get some to release their budgets in the coming months.

Romana Wyllie

Adrian, do you want to add something?

Adrian Sarbu

Yes, Vijay, I'd like to add something, because you touched an issue which will be probably the main topic of our calls this year, the pricing. We try to explain in the last two years that we looked to maintain the delivery of GRPs in the market in such a way advertisers will feel comfortable with the level of communication which we provided to them, and we will be able to adjust or appreciate or correct or tailor the prices according to the demand in the market. The coming back to the prices of 2008, which we've pointed out some times in the next two years -- but this will vary market by market, in some markets it would be closer -- will be a quite bumpy process. And as we started to see in the last quarter of -- second half of 2010, in Czech Republic, it's not easy to reset the prices to levels which were so comfortable in 2008. That's the reason we focused on maintaining our ability to generate the majority of the sellable, or commercial GRPs, in the market. And that's the reason we repeat to you -- I hope you're not bored -- why it's so important for us, audience leadership, which means the sudden level of investment. Because with such GRP output, we can really enable us with enough tools to adjust, correct or bring back the prices this year. And as I pointed out, we expect increases in these market, in our markets in this year, and you will see a lot of discussions and a lot of interesting evolutions of the prices. Not always going up, but definitely with a necessary and reasonable positive trend.

Romana Wyllie

Next question comes from Stifel Nicolaus, Ben Mogil or Adam Kepecs, whoever is on the line?

Unidentified Analyst

On Romania, which is the market that you look to have the most amount of operating sort of deleverage, can you talk about what's going on there competitively? I mean, the ratings have obviously been very strong, and your share of ad dollars is strong. Is this sort of one of these markets where programming costs are high in order to get that ad spend and that market share?

Romana Wyllie

Anthony?

Anthony Chhoy

I'll take that. I think, in Romania in the fourth quarter, see, we managed to increase our prime time audience share by 2.32% but at the same time, keeping our costs virtually flat. So I think we have witnessed that our competitors are still investing in programming spending, but we are managing our programming schedule accordingly. So to keep that leadership position, which Adrian keeps mentioning about there -- but also, we have through ourselves, policy. We did increase our share of the TV ad market by two percentage points to 58% in the fourth quarter.

Adrian Sarbu

So the headline was that we increased audience share without increasing the cost.

Anthony Chhoy

That's correct, yes.

Unidentified Analyst

And then sort of going over to -- just sort of more of a macro function of your markets. I mean, so you've got TV ads clearly improving in the fourth quarter in the aggregate. We're still seeing that lag, both GDP as well as inflation. Historically, they have kind of moved closely together. Can you talk a little bit about what you're seeing? Are you seeing sort of private investment returning but consumer sort of normal consumption not returning to previous levels, and that's why averages are holding back? I'm trying to get a sense of what you're seeing in terms of why the economy seems to be heading in the right direction but ad spend is not catching up as quickly.

Romana Wyllie

David?

David Sach

Sure. In the fourth quarter, real GDP growth -- in most countries, GDP grew. All of them except Romania. But as you know, a lot of that has been export-driven. But what we saw in Q4 that we haven't seen in most of the other quarters was real private consumption started to grow in Q4. In fact, real private consumption grew in all but Romania and Bulgaria, which as you just hinted, is the key to the TV ad markets growing. And that's why we ended Q4 with a TV ad markets flat. So we are expecting in Q1 2011 to have low-single digit growth in the TV ad market as this real private consumption continues to rebound and grow in all our markets.

Unidentified Analyst

Did you think we'll still see a couple of quarters where TV ad growth still lags that of, say, GDP or CPI? Like you still think there's still going to be a bit of a lag effect?

David Sach

Because in the Czech Republic and Slovenia, primarily in those two markets, I think you're going to see growth continuing in there. Although they could be impacted by some of the austerity measures that have been put in place in early 2011. But you had the austerity measures in Romania and Bulgaria in the previous year. So we would expect that even though those two countries, the TV ad markets weren't as strong in 2010, we would expect -- now that those austerity measures have been absorbed by those economies, we would expect them to start growing in 2011. So again, in 2011, there'll be some austerity measures that had been put in place in certain countries like Czech and Slovenia, which will unfortunately temper the growth there that might otherwise have happened. But as we said before, for the full year, we would expect all of those markets to grow.

Romana Wyllie

Adrian?

Adrian Sarbu

I just want to add one more point. It's expected or expectable that the appetite for advertising to grow this year. But as I pointed out earlier, the fact that the markets where the advertisers were offered enough GRPs in the last two years at low prices will create certain dynamics which we cannot predict now. And the growth of TV advertising market will not simple be driven by the growth of GDP and private consumption, but the way these markets can restore the right prices which existed in the past and which were heavily discounted in the last two years. So we have to take into account not only the relationship between GDP and TV ad spending, but also the ability of the broadcasters to adjust the prices upwards when it's clear that the advertisers would like to have the same offer, which means the same price for their needs which existed in 2010, which is also clear that it's not possible. So we'll have sudden developments in the next months, quarters, which will not be exactly linear like GDP private consumption ad spending, TV ad spending and so on. This will be a little bit of turbulence.

Romana Wyllie

Operator, can you reprompt for questions please?

Operator

[Operator Instructions]

Romana Wyllie

Next question comes from Ajay [Ajay Agrawal] from Nomura. Ajay?

Ajay Agrawal - Nomura Securities Co. Ltd.

Two questions on Czech Republic. First, you have said that you would like to increase your prices back to 2008 level over the next two years. Could you give us a hang of what your price levels are as of now in Czech Republic, if you compare that to 2008? The second question is, they have been coming from your competitor in the market that you are cutting prices in Czech Republic in order to gain some market share over there. So would you please like to clarify what is your competitive strategy in Czech Republic in order to gain back the market share? And another question is on Media Pro. This is kind of a long-term question. I just wanted to know what your -- what kind of percentage offered by the revenues or the external revenues that you would like to generate from Media Pro, and what kind of EBITDA margins that you're seeing in this division?

Romana Wyllie

Okay, so Adrian?

Adrian Sarbu

Ajay, we don't -- as I said, we don't give so many details about our pricing and prices. You can understand this. So this is quite an important part of our expertise and of our, let's say, secret tools to run this business. But Anthony can give you a little bit of information.

Anthony Chhoy

Again, we've mentioned that we price our inventory based on the need of the advertisers and also the situation of the market. So in 2008, the situation was different. Over the last few years, I don't want to go into specific details into how much lower it was in 2008, given the competitive situation.

Adrian Sarbu

Just a second. You wanted to know which is the pricing environment in Czech Republic. So it's quite complex, and I come back to certain type of announcement, which I'm making here, that in the next months, there will be certain dynamics in this market, which are a result of the actions of the market itself, of the advertisers and of the broadcasters, which will possible, I cannot say probable, the lawyers don't let me do this, reset the price toward the levels of 2008.

Romana Wyllie

And the last question was about Media Pro and percentage of external revenues that we expect in the future, Anthony.

Anthony Chhoy

David mentioned that in 2010, we delivered third-party revenues of around about $36 million, which is 25% of the total MPE revenues. So 60% of that is from our distribution, exhibition business. You asked about the margin, the margin is around about 20% there, the OIBDA margin in that business. But for 2011 and going forward, we plan to focus on increasing the third-party revenues. And through -- obviously producing more -- generating I think the slate of new original formats so that we can actually sell that not just to the broadcasters but also to other distribution windows. You expect to see that, at the portion of the 25%, to increase over the next few years.

Adrian Sarbu

Our target, Ajay, is 50% third-party revenues. The sooner we can reach it, the better for our Media Pro business.

Ajay Agrawal - Nomura Securities Co. Ltd.

And just one more question that's on the market share. Could you give us -- could you highlight any of your diligence that you have seen significant market share movement in the fourth quarter?

Romana Wyllie

Anthony?

Anthony Chhoy

In all our markets, we've managed to maintain or increase our share of the TV ad market in the fourth quarter with the exception of the Czech Republic, which reduced slightly to 69%. And again, David mentioned about the advertisers increasing their spending with our competitors, especially to the smaller channels, because they offered lower prices than us. But that is just a temporary behavior. So I think as our advertisers demand for I think higher quality GRPs, or higher reach GRPs, we expect our market share to rebound accordingly.

Adrian Sarbu

And let's not forget that the next in line has a market share of approximately 20%. So if we talk about the increase or decrease of our market share of 1% to 3%, it's not relevant as long as, as I've said, we continue to deliver the majority of GRPs, sellable or commercial GRPs, in this market. There is a clear focus of ours to increase our market share in Croatia, and you saw this trend in 2010. And this is practically the fulfillment of a promise that was made to the market years ago, when we said that we'll first become leaders in the Croatia in audience than in market share, which happened last year.

Anthony Chhoy

And just to re-emphasize Adrian's point in the Czech Republic, even though our share decreased slightly, we still have 69% share of the TV ad markets. Our closest competitor has 23% share of the TV ad market.

Romana Wyllie

Next question comes from David Kestenbaum from Morgan Joseph.

David Kestenbaum - Morgan Joseph TriArtisan LLC

First thing on the Media Pro business. Can you talk about how you're competing against your competition? Is it mostly on price, or are you customizing the content for the foreign entities?

Romana Wyllie

Anthony?

Anthony Chhoy

The first priority of our Media Pro business, other than sort of generate more third-party revenues, is to produce the high audience share content to our broadcasters. And you've seen that in our presentation slide that in most of the majority of our markets, the top-performing local production shows in 2010 were produced by Media Pro Entertainment.

David Kestenbaum - Morgan Joseph TriArtisan LLC

Can you talk about how you bridged that cost bridge growth? Obviously, last year, you grew -- the cost side of that business grew a lot faster than the revenue side. How does that turn around 2011, 2012 as you go forward?

Romana Wyllie

David?

David Sach

As I tried to explain, David, 2009, we had to -- because of the acquisition, we tried to present the results of Media Pro as if it existed from the beginning of 2009, which obviously, it didn't. Whilst we try to do it as accurately as possible, 2009 just didn't include the costs that would have been necessary to run that as a separate segment in its own right. So it's difficult, if not impossible, to try to compare the cost base in 2010 to the cost base in 2009. And furthermore, obviously, we incurred some cost in integrating and building that business in 2010 that obviously didn't exist in 2009 either. So there's just a different cost in OIBDA dynamic in those businesses. So I would use 2010 as a base for analyzing Media Pro going forward, stripping out the integration and building costs that we had in that business. And that's why we are confident that Media Pro, going forward, we will generate a positive OIBDA. Particularly, as Anthony mentioned, we'll grow those third-party revenues which come with a higher margin than the margin that we get from delivering the high quality content to our own broadcasters.

Romana Wyllie

Adrian wants to add something.

Adrian Sarbu

Yes. David, we see as a valid interest of all of you, the way Media Pro performs and will perform. And I want to just point out the way Media Pro is building its margins. So first of all, it's for original production. It's a margin on each window of rights sold. So is this product which is sold through all the windows? This is a case of cinema movie? Definitely. We have margin on which -- on each type of revenue. On the top of this -- and for sure there is a margin on the revenue which Media Pro has with our broadcasters. On the top of this, there are international sales of current production and library, which add also to the margins of Media Pro, which we couldn't really track and present to you in the previous year. But from 2011, you will see this more accurate, and we'll try to bring you more information, more detailed information. These are revenues coming from production. There are revenues and margins coming from production services, which are for third party in our region and international, including runaway productions of cinema, of movies and various other types of commercials or TV products. Plus, there are the pure third-party revenues, which are distribution revenues, coming from the products which we acquire in either full rights or certain windows, should they be theatrical or home video, and from where we also have profits. So that's the way Media Pro's margins are built. And maybe that helps you understanding how will the future of Media Pro look like, and why it's so important for us to have a strong slate for our broadcasters, which is also sellable internationally. This slate may mean one title for all our stations or one title for two, three stations or one title for one station. But definitely, sellable abroad. And if you look in the reports of ours, Media Pro distribution, our distribution arms and international sales arm, is doing this, and why it's also important to have a presence in distribution of all windows in all our countries where we just started with two countries so far and where we'll probably, for sure, expand in 2011.

Romana Wyllie

Next question comes from Mitch Reznick from Hermes.

Unidentified Analyst

Just wanted to sort of clarify some ratings, some of the points that you've made before. It sounds like what you're saying is that you're seeing some volumes coming back, but just pricing is being held back for the moment. Is that a correct summary from the comments you made?

Adrian Sarbu

No, I didn't say this. I said that our ability to increase the prices is also -- it's not a subjective action. It's an action in a concert of actions, which are objective events and actions of the players in the market. But definitely, this year, the prices have to follow the market trend, which is growing.

Unidentified Analyst

And then I guess stepping back and sort of bigger picture question. Your comments in returning to 2008 pricing, you said is going to be quite a bumpy ride. Is there anything sort of structural in the market that is different since 2007, 2008 period? Is there basically more competition for advertising overall in that period, something that -- the existence in the structure of the markets say that wasn't there sort of several years ago?

Romana Wyllie

Adrian?

Adrian Sarbu

Yes. The legacy of the last two years when advertiser, advertising or our inventory became more a commodity. And our efforts to value it properly in the next months and years will be devoted exactly to our needs of achieving higher value for our inventory. This is one element. And the second is we are diversifying our revenues. We are not looking only for advertising revenues. And you'll see more and more other sources, other revenues coming to our revenue top line. Plus, the advertising revenues are more complex today. If couple of years ago, we spoke mostly about sales, spot sales, now we talk about, generally, contextual advertising, which is advertising coming from product placements, sponsorships or any type of inclusion of the advertising message, commercial message in the content of the program. And that's another reason why we put so much emphasis on our content development and content division.

Unidentified Analyst

And then the last question is on the free cash flow guidance. Well, this year, shall we say, to get to free cash flow breakeven, I mean, that's $100 million improvement in recurring cash flow, and I think cash interest is pretty well known, you've kind of guided for lower CapEx but can’t get too much lower as expected. At least, kind of EBITDA or working capital generate cash flows. So just your thoughts, on -- is it your impression that free cash flow will come from operating cash flows?

Romana Wyllie

David?

David Sach

Yes, it will come from a combination of all the things you mentioned. So it will be a higher OIBDA. It will be some working capital benefit. And it will be also us looking at our programming payments and commitments that we have to the studios and others and looking to change the payment schedule of some of those programming commitments we have. So that will also be a piece of this. And as we mentioned and gave guidance, that we will keep the CapEx lower as well. So it will be a combination of those four elements that will enable us to hit that target.

Unidentified Analyst

And part of the programming commitments will be sort of more front-end loaded, that you'll take the cash upfront and sort of recognize the revenues over, I don't know, whatever period the contract is, something like that?

David Sach

No, we have programming commitments, and there's this payments associated with that. So we will look at rescheduling those payments and potentially give some additional commitments in outer years to reduce the payments that we currently haven't committed in 2011.

Unidentified Analyst

And then the last question, capital structure question. Obviously, this year, you've shown a willingness to issue, shall we say, higher cost debt to reduce the near-term financial risk of the maturities. You did that recently with the convert, you obviously did that with the CET 21 bonds. Which of you on that going forward, that balance you've seen reducing financial risk in higher coupon securities because you've got still a little bit of wood to chop through the next couple of years?

David Sach

I'm much happier with our maturity profile now. There's no debt due until 2013, and that debt now is standing at $234 million due in 2013. And if we can't easily pay that out of cash flow then certainly, starting with 2014 where we have $198 million, I think in those years, we'll be easily able to pay that kind of levels. So I think there's less pressure on us to continue to improve the maturity profile. So it will all be about the markets and the yields that are in the market in terms of considering whether we do some more.

Romana Wyllie

Next question comes from Goldman Sachs, Janel [ph].

Unidentified Analyst

I've got three questions. One is about your audience market share, the one you put on your website, fell materially in Q4. Does it mean that we should expect your market share in the beginning of 2011 to decline? I'm talking about the Czech Republic. Or was it because, last year, when you had the very strong market share in Q4 so it just had to come way, way higher? But how shall we look at your market share, advertising market share, in the first half of 2011 in Czech Republic, given what happened to the audience market share in Q4?

Romana Wyllie

Adrian, do you want to start?

Adrian Sarbu

Yes. So this our first question of three, am I right? We use the word audience share, not audience market share, to avoid the confusion of the revenue share, which we call market share. If you were to follow our communication about audience, you will see that we continuously talk about leadership in audience, which translates from our point of view in a minimum threshold of audience, which is comfortable for us in order to maintain our ability to value our audience and get -- to have brand power and get a higher power ratio. In Czech Republic, the case is we have an audience in the 40s and the power ratio in the high 60s. So as long as our audience varies in a band, which is acceptable for us -- and I can give you for Czech Republic, the minimum threshold for the whole group in primetime is 40% which, even at 40%, we have enough inventory to sell, to offer to the market when today or even in any moment in the next months. So we have more inventory than the market requests. So if you asked about Czech Republic, if it was one year ago, 48, 50, in January or February. And if today, it's low 40s, which is 43, year-to-date, this is not a matter of concern. To be very clear, it's enough GRP delivery by our channels to supply against the demand of our advertisers.

Anthony Chhoy

And it's also very important to highlight that we have to keep maintaining that minimum threshold, which is the 40%, over 40%, at the lowest possible cost. I think it's not just about delivering, I think it's high, high audience shares, which I think if the market doesn't need it. So in Q4 and also for the full year in 2010 in the Czech Republic, we managed to do that by keeping cost relatively flat. I think I just want to stress that point again.

Adrian Sarbu

And the way it should be judged is the relation between this audience share, which translates at the end of the day in the number of GRPs every day and the sell-out rate. So if the demand in the first quarter, especially in the first six weeks of the year, the demand is very low as in the weeks of full July and first half of August -- so in this period, an over-delivery of audience is completely unuseful. When in months like March, April, May or October and November, it's very important to have enough output. And also for Czech Republic, it's important to emphasize that any given moment, we have resources in the library, which means programs not launched, which will enable us to increase the audience or the GRP delivery.

Romana Wyllie

Have we answered the question?

Unidentified Analyst

Yes. That's clear. And to follow-up on that, is it possible as my second question to give guidance for the first quarter? 2011, you mentioned that it's too early for the full year. But for the first quarter, could you give a sense of where you think EBITDA will become?

Adrian Sarbu

Sorry, I said in my last remarks that we cannot give you guidance for the first quarter. We gave just a general guidance about the evolution of the markets, definitely not about our financial performance, sorry.

Unidentified Analyst

And last question is on the products, project exchange. So just to tool on the EBITDA, how it works. All your revenues will be local currency, I guess. Some of your cost will be in euro or dollar, having cost of programming. And most of the debt will be in dollar and euro as well, and on the sense that you don't hedge the debt exposure. Is it the correct way to look at your -- the project exposure at CME?

David Sach

Yes, that was quite close. All our revenues were in local currency but most of our costs are also in those currencies. So you have a match of the revenues and cost. The only exception to that, a material exception to that, is we have programming commitments in U.S. dollars. So the revenues and costs aren't perfectly balanced but most of those costs match up against the revenues. And as you mentioned before, most of that debt now is in euros or in Czech krone. And therefore, most of our currencies move in tandem with the euro. So there's somewhat of an actual hedge of the debt against those other currencies.

Unidentified Analyst

So you don't have that much cost actually in dollars?

David Sach

No, correct. Just the programming commitments to the major studios.

Romana Wyllie

Next question comes from Bavel Aniska [ph] from Atlantic [ph].

Unidentified Analyst

First of all, if we were to revert again to the market share questions in the Czech Republic -- however, one puzzling thing is we observed quite a sharp growth in the audience share. It was discussed quite a bit in the Czech Republic, especially in the fourth quarter. However, now you reported in your presentation that actually the market share didn't drop quite as much, only from two percentage points. Is it actually the case that actually the power ratio increased in the meantime? Or can you give a particular guidance on this power ratio, what it looks like now? Two more brief questions, one of them is you reported for the fourth quarter quite a sizable FX loss. Can you elaborate more on this, where it precisely came from? And finally, recently, you converted -- you exchanged some of your convertible bonds into new ones. What are the motivation behind that, given that it wasn't due yet? It's only due in 2013?

Romana Wyllie

Okay, so let's start with the first question. Adrian wants to...

Adrian Sarbu

If I understand right, you suggested that our audience decreased in the fourth quarter, and also our market share decreased in the fourth quarter, and the question was about the power ratio. So the power ratio is just an indicator, which shows the multiplication of the audience to market share. But as I pointed out, what is important is the availability of inventory in the market. If the audience decreases 5%, let's say, and the market share decreases 2%, it's clear that automatically, the power ratio goes up. But this power ratio is not a tool which we can use. It's just an indicator of our ability to price our inventory at the highest price possible. What is important is, for you to look, is the level of selling of the inventory in the market which we communicate quite open. It's not the case for other players in the market. And this will show you exactly the predictable or possible dynamics of the market as the real situation in the market. Still, even in the fourth quarter, there was inventory unsold in the first six, seven weeks of 2011 of the year. There is a massive amount of inventory unsold, and this sell-out rates will grow gradually to the peak season which we call, which is March, April, May, and October, November, part of December. So yes, if the audience decreases 5% and the market share decreased 2%, it's an automatic increase in power ratio.

David Sach

And also, I think with that multiplication there, it's also an indication of the strength of our brand. And I think in order to maintain that strength as well, again, we need to keep that minimum threshold in the primetime audience share, which is in the Czech Republic, 40%. So that's why you have not seen the steep decline in the market share as well as we declined the -- reduced the primetime audience share on that.

Romana Wyllie

The second question was about FX loss, David.

David Sach

The depreciation in the fourth quarter versus the prior year was roughly 8%, and that was 10% or so in the euro and most of the other countries except the Czech krone, which was down roughly 4% or 5%. So that blended out to about the 8% depreciation.

Romana Wyllie

And the last question about private exchange of convertible notes and motivation behind it?

David Sach

Well obviously the markets were open and available to us. As we said, we were looking at improving our debt maturity profile. So we've gotten that -- we don't have anything due until 2013, and we've reduced the amount due in 2013 to $234 million. So we did take advantage of markets that will open, particularly the convertible market, which was open, and the pricing was actually quite good because there was demand. And we could see that demand in terms of the ten investors we spoke to, who wanted to exchange into the new convert act -- what I think was good pricing for us. So you've got to take advantage of these markets when they open. So that's exactly what we did.

Romana Wyllie

And next question comes from Vivek Khanna from Deutsche Bank.

Vivek Khanna - Citi Global

Just a quick housekeeping question. I was just trying to understand, when I sort of look at your movements in cash, you've had at the unrestricted level, you've got $94 million of reduction from Q4 versus to Q3. And I was just trying to understand how much of that, if any at all, is a transfer from the unrestricted to the restricted group? And therefore, I can understand what the cash burn at the unrestricted group is on a run-like basis?

Romana Wyllie

David?

David Sach

Yes, most of it was a transfer. We have $24 million left in the unrestricted group. As you, I think, know, we're now winding up that unrestricted group. Basically, it just has the legacy Bulgaria business that we have. That will be merged in. And therefore, there will be no need for cash to hold in an unrestricted group. So as soon as that's wrapped up this year, then we will transfer the remaining $24 million into the restricted group. And therefore, we will only have a restricted group thereafter.

Vivek Khanna - Citi Global

So therefore, it's fair to say that the restricted group in Q4 burns $60 million of cash? Is that the right way to look at it?

David Sach

I would look at it just in total. I'd look at our operations in total and I would say, "Okay there was free cash flow of $95 million, $96 million going out the door" then obviously, we had the net investment in Bulgaria and in Ukraine.

Romana Wyllie

We do not have any other questions in the queue, so let me thank you for joining us today. We had about 65 people joining us for today's presentation. I hope that you enjoyed our video webcast, and we welcome your feedback and comments. I'd also like to remind you that you can keep up-to-date and follow our progress between earnings calls on our website, www.cetv-net.com. Or as always, I'm available for any additional questions any time. We look forward to seeing you shortly. Goodbye.

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