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Central European Media Enterprises (NASDAQ:CETV)

Q3 2011 Earnings Call

October 26, 2011 9:00 am ET

Executives

Anthony Chhoy - Executive Vice President of Strategic Planning and Operations

Adrian Sarbu - Chief Executive Officer, President and Director

Daniel Penn - Executive Vice President, Secretary and General Counsel

David Sach - Chief Financial Officer and Executive Vice President

Romana Wyllie - Vice President of Corporate Communications

Analysts

Daria Fomina - Goldman Sachs Group Inc., Research Division

Andrzej Knigawka - ING Groep N.V., Research Division

Tim Hamby - Janco Partners, Inc., Research Division

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

Vivek Khanna - Deutsche Bank AG, Research Division

David B. Kestenbaum - Morgan Joseph TriArtisan LLC, Research Division

Unknown Analyst -

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

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 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, October 26, 2011. It is now my pleasure to turn the floor over to Romana Wyllie, Vice President of Corporate Communications. Ms. Wiley, you may begin your conference.

Romana Wyllie

Thank you. Good morning, good afternoon, [Slovakian] to each of you, and welcome to CME's Third Quarter 2011 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.cme.net. There, you can also download the presentation slides, which we will refer to during this call. You can find them on homepage, at the bottom-left corner.

The participants of today's call will be CME’s President and Chief Executive Officer, Adrian Sarbu.

Adrian Sarbu

[French], and good afternoon.

Romana Wyllie

Chief Financial Officer, David Sach.

David Sach

Good afternoon.

Romana Wyllie

Anthony Chhoy, Executive Vice President Strategic Planning & Operations.

Anthony Chhoy

Good afternoon.

Romana Wyllie

And our General Counsel, Daniel Penn.

Daniel Penn

Hello, everyone.

Romana Wyllie

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 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 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 a 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 29 of our 10-Q. And now, please turn to Page 4 of our presentation, and I will pass you over to Adrian.

Adrian Sarbu

Thank you, Romana, and good morning, and good afternoon, everyone. When the markets are not generous, you need strong people in business to outperform them. This is CME today.

In the first 9 months of 2011, our TV ad markets declined by 1%. While we doubled our OIBDA from $43 million to $86 million. We have been growing. Although the business environment remains challenging, we decided to give you specific guidance for 2011.

So we expect to generate revenues of $850 million and OIBDA of $166 million, assuming constant exchange rates. Audience leadership and free cash flow generation are and will be our priorities this year.

David will now walk you through macroeconomic development and our consolidated financial results.

David Sach

Thank you, Adrian. Please turn to Slide 5. In the third quarter, the consensus forecast shows that GDP grew in all of our markets with aggregate growth of 2%, driven mainly by external demand. Concerns about European debt impacted consumer confidence. As a result, private consumption continued to trail GDP growth, ending flat across our markets.

TV ad spending grew in 4 out of our 6 markets. The Czech market experienced a sixth consecutive quarter of growth rising to 7%. In Slovenia, the market grew 5%, making this the fifth quarter of growth in the past 18 months. TV ad spending also increased in Bulgaria and Croatia by 2% each.

In Slovakia, high unemployment has continued to impact the recovery of private consumption, leading to a decline of 4% in the TV ad market. In Romania, private consumption is estimated to have returned to growth only in the third quarter, and the TV ad markets are still lagging this recovery.

Recently published estimates indicate that GDP and private consumption growth in all markets are expected to be similar in the fourth quarter to that in the third. Consequently, our current outlook for the fourth quarter is 2% growth in aggregate TV ad spending across all of our markets. As the growth in TV ad markets gradually catches up with the growth in GDP and private consumption.

Moving to Slide 6. Our consolidated net revenues in the quarter increased by 23% to $165 million, equating to a 12% increase in constant currencies. All 3 segments contributed to this increase. Total costs increased by 13% to $157 million. But this was almost completely due to the appreciation of our currencies against the U.S. dollar. In constant currency terms, the cost increase was 2%.

All our segments reported increases in OIBDA, reversing the third quarter loss of $4 million last year, with the profit of $9 million this year.

And now, back to Adrian.

Adrian Sarbu

I invite you to turn to Slide 7 of our presentation, highlighting the achievements of the broadcast division. In the third quarter, we strengthened our overall prime time audience leadership with lower costs. In Slovakia, we managed to increase our prime time audience share by 1 percentage point to 37%. We also strengthened our prime time audience leadership in Croatia by 5 percentage points to 32%.

Our operation generate the majority of their inventory in their market with more than 60% in the Czech Republic, Slovakia, Bulgaria and Slovenia. We strengthened our overall market share leadership, Slovakia, Bulgaria and Croatia increased their market share by 3 to 4 percentage points. In the Czech Republic, we retained strong market share leadership of 67%, which is an improvement from 60% in the second quarter. We have gradually started to increase our CPT levels, which we believe will benefit us in the fourth quarter and next year.

In September, we launched POP NON STOP in Slovenia, a bouquet of 6 subscription channels distributed through cable, DTH and IP TV platforms. In the broadcast division, we achieved our main goals, maintained audience leadership and strengthening market leadership. David?

David Sach

Let's turn to Slide 8. The broadcast division delivered a 16% increase in revenues at actual exchange rates or 5% on a constant-currency basis in markets that grew just 1%.

Czech revenues were up 5% to constant currencies. Now we are starting to see the benefits of our decision not to discount earlier in the year, and an increasing CPT levels. Bulgaria, Slovenia and Croatia all generated double-digit revenue growth driven by market share gains. Slovakia also improved its market share, enabling it to deliver revenue growth of 4% in a market that fell by 4%. In Romania, our revenues declined by 4% in a market that dropped 8% by increasing our non-advertising sales.

In the third quarter, we rigorously attacked our cost base. We continued to look for savings in programming, but as Adrian mentioned, maintaining our strong audience leadership position remains our critical priority.

At actual rates, broadcast cost decreased 7%, but with 3% lower at constant rates, our Broadcast segment generated OIBDA of $20 million in the third quarter, more than double the OIBDA reported in the same period last year.

Adrian will now discuss the MPE operations.

Adrian Sarbu

Let's move to Slide 9, and let me point to a few highlights of our content division. In the last 2 years, you witnessed the evolution of our business towards a new model: One content, multiple distribution.

Media Pro Entertainment is now the core of our new content foundation. It powers our prime time through outstanding local productions, and acts as an additional revenue engine for our group. Following the acquisition of Bontonfilm, the share of third-party Media Pro Entertainment revenues will reach 40% for the full year.

I'm proud to highlight our best performing fall production or fiction productions: Expozitura in the Czech Republic, Headnuts in Slovenia; Lara's Choice in Croatia, Zita in Trouble in Slovakia and A Bet with Life in Romania. And reality and entertainment shows like The Voice in Romania, Let's Dance in Slovakia, Minute to Win It in Slovenia or Croatia's Got Talent.

Media Pro Entertainment's products are now distributed in all traditional and digital content windows in our market, and licensed worldwide in more than 50 countries. David?

David Sach

Please turn to Slide 10. Media Pro Entertainment's third quarter revenues increased by 33% at actual exchange rates or 21% on a constant-currency basis compared with the same period in 2010. The integration of Bontonfilm during the third quarter made a significant positive impact on the results of MPE.

Third-party revenues increased 63% excluding Bontonfilm, but 135% in total, with Bontonfilm included. As a result, more than half of our MPE revenues came from third-party this quarter compared to 31% last year. Cost increased by 22% at actual exchange rates or 11% in constant-currency terms as a result of the higher third-party activity including Bontonfilm.

Media Pro Entertainment segment reported OIBDA of $0.2 million for the quarter, resulting in a year-to-date OIBDA of $2 million. As such, MPE remains firmly on track to achieve our target of positive OIBDA for the full year. Over to Adrian again to discuss our New Media operations.

Adrian Sarbu

Thank you, David. Please turn to Slide 11. The most important piece of news about our New Media business is the rollout of VOYO in all our countries. VOYO is a digital distribution platform covering transactional subscription and advertising finance, video-on-demand. The growth of VOYO will be mostly driven by CME content and our strong marketing voice. With VOYO, our New Media business boosts its user base and the expense from advertising to paid and subscription revenues. David?

David Sach

Thanks, Adrian. Let's turn to Slide 12. Our New Media segment increased revenues by 54% due to an expansion in the number of websites, and improved non-advertising revenue through VOYO. We achieved this growth with minimal cost increase. Overall, traffic grew by 21% year-on-year and reached $11 million average monthly visitors, including 1.2 million customers on VOYO. New Media reported an OIBDA loss of $1 million representing an improvement of 34% over the prior year.

Please turn to Slide 13. In these difficult market conditions, improving our free cash flow position has been our top priority. In the first 9 months, we saw a significant improvement of free cash flow of $70 million through strong OIBDA growth, the benefits of our initiatives to improve working capital and lower capital expenditures. We still expect to deliver our full year target of positive free cash flow, and ended the quarter with liquidity of $261 million.

Let's turn to Slide 14. In the current to September 30, we refinanced $261 million of our 2013 convertible notes, extending these maturities to 2015. We also repurchased $50 million of these notes due in 2013 at $24 million of our fixed rate notes due in 2016. These actions have resulted in a significant improvement to our maturity profile.

At the end of the 9 months, we had net debt of $1.2 billion. Our current liquidity is sufficient to manage our debt maturities over the next 2 years. But we will continue to prudently manage and extend on the maturity profile in a cost-efficient manner. We are focused on deleveraging and we'll look at opportunities to repurchase our debt, should they appear attractive to us.

Adrian will now provide some closing remarks.

Adrian Sarbu

Let's move to Slide 15. In the near future, we expect the operating environment to remain challenging, but we are prepared to face it successfully. Today, we are stronger than ever. In the last 4 quarters, we have demonstrated our ability to grow even when the market did not.

We generate outstanding content, which powers our broadcasting, distribution and our New Media business. We operate in emerging markets that have significant room for convergence with Western Europe. We have the best people, loyal audience and an expanding customer base.

In 2012, we will continue to maintain financial discipline. We will continue to deleverage and focus on further revenue diversification. Organic growth will remain our top priority.

And now, I will pass you 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

Operator

[Operator Instructions]

Romana Wyllie

Thank you. The first question comes from the Janco Partners, Tim Hamby.

Tim Hamby - Janco Partners, Inc., Research Division

First question is on your VOYO platform. What's the revenue mix there between paid and subscription revenues to more of a advertising base revenue?

Romana Wyllie

Okay, Anthony, can you answer the question?

Anthony Chhoy

Just a lever it a bit more on VOYO. We currently -- I'll provide the transactional and also a subscription video-on-demand there, that's plus the advertising finance video-on-demand. So and we rolled out the -- I mean, the Phase 1, which is predominantly the advertising supported video-on-demand and transactional video-on-demand. And we have the subscription video-on-demand service in Slovenia, which currently attracts over 12,000 subscribers where we're charging EUR 5 per a monthly fee there. So for now, the mix is more geared towards the advertising and finance video-on-demand there. But as we rollout, the subscription, video-on-demand sales [ph] in the remaining 5 territories, we expect the mix to substantially move towards the subscription and paid revenue zones.

Adrian Sarbu

And also, Tim, I would like to emphasize that the driving force beyond subscription or transaction is our local content, our CME content. And we will rely on this for the Stage 2, the Phase 2 of rollout.

Romana Wyllie

Next question comes from Andrzej Knigawka from ING.

Andrzej Knigawka - ING Groep N.V., Research Division

I have one question, on Czech Republic. If I look at your OIBDA margin, Czech Republic, in broadcasting of 38%, this is pretty robust margin. Now what was kind of driving that margin improvement year-on-year. I mean, last year, you had 29%. Was it because some of the successful programming like Expozitura is below average cost to produce or what's -- what drove that margin expansion in Czech Republic in the third quarter?

Romana Wyllie

Anthony, will you answer?

Anthony Chhoy

Yes, Andrzej, the -- I mean Asian -- Adrian and both Adrian and David mentioned already in their speeches, our priority is to remain the strong audience leader, but also to briefly reflected on cost control. And you see in the third quarter in Czech Republic, we retained a strong audience share of 41%, from some audience share there with them, while, reducing the cost by 9% with local currency. We've also managed to retain our market share, 67%, and again grew our revenues there about 5%. So the combination of those 2 elements allowed us to substantially improve upwards the margins to 38%.

Romana Wyllie

Next question comes from Robert Freebill [ph] from RKO.

Unknown Analyst -

I'm wondering if you could just review the revenue and/or the numbers for the CET 21 credit?

Romana Wyllie

David?

David Sach

I don't have those in front of me. But obviously, CET 21 is a combination of the Czech and the -- and Slovakian businesses. So if you just take a look at those businesses combined, you should get a good feel for those numbers. And we do obviously, publish the CET 21 numbers, in accordance with that debt agreement, we'll be publishing those separately. So you will be able to see those when they get published.

Romana Wyllie

And also, we can take it offline after the call and give you the specific numbers.

Next question comes from Vivek Khanna from Deutsche Bank.

Vivek Khanna - Deutsche Bank AG, Research Division

Listen, a quick question please. Clearly, you've done a lot of work on working capital this year. I was just wondering looking into next year and just how the business is developing, do you think you'll be able to generate working capital next year, also in 2012 on a group basis?

David Sach

No, I don't think we can continue to generate the kind of working capital improvement that we're seeing this year. But I do believe that we can definitely sustain the improvements that we've made. So I would expect a slight improvement in working capital next year but not as much as this year.

Vivek Khanna - Deutsche Bank AG, Research Division

But you're not -- it's not going to be an unwind of what you've done this year clearly [ph]?

David Sach

No, it's going to be difficult to repeat what we've done in terms of improving the working capital. Particularly, if the business grows next year, which we're expecting it to grow, it would be difficult to replicate the improvements this year. But again, we definitely believe the improvements we've made, we'll hang on to and possible slight improvements next year.

Romana Wyllie

Operator, can you please prompt for further questions?

Operator

[Operator Instructions] .

Romana Wyllie

Our next question comes from Goldman Sachs, Daria Fomina.

Daria Fomina - Goldman Sachs Group Inc., Research Division

I've got a question regarding, basically 2012, obviously, you don't know the growth and you can't give any guidance on that. But in terms of the cost base, how sustainable were the achievements on the non-programming based cost that you managed to get this year? And the second question is on the programming, are you -- what is the strategy? Are you planning to step up for the programming next year? And whether you expect the margins to be under pressure of that?

Romana Wyllie

That question, David, do you want to address it or Anthony?

David Sach

Anthony.

Anthony Chhoy

Daria, I mentioned already, previously, yes, one of our key priorities again is to remain the strong audience leader in the market, without increasing our overall cost. But having said that, we will continue to invest in local programming to maintain the strong leadership and deliver the necessary apple of GRPs. I mean, in line with the demands of the market. So you've already seen in quarter 3, in the broadcaster division, we strengthened this leadership with 3% lower cost. So we'll still remain focused on this for the next year.

Adrian Sarbu

In respect of programming investment, I think Anthony's answer is quite clear. We don't plan to overspend on programming. Our main focus is to control costs. And we think we discussed, we can deliver the audience, which we plan.

Daria Fomina - Goldman Sachs Group Inc., Research Division

That's very clear. And in terms of the non-programming cost dynamics?

Romana Wyllie

David?

David Sach

We will again, continue to keep those flat or slightly down, if we can. So again, cost is the key priority for us, because that's where we get those operating leverage. So if we can grow our revenues and keep our costs flat or slightly down as we've been doing, then you see it in those -- it's improvements in the margins that we discussed and checked before, so that's our priority.

Romana Wyllie

Our next question comes from Ajay Agrawal from Nomura.

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

Just one question regarding your guidance of 2% growth in the advertising markets in Q4 that you're expecting. If I have to specifically focus on Czech Republic and Bulgaria, could you tell us whether this growth will be more driven by prices or more by demand?

David Sach

I mean, the GDP is going to be driven by the -- their export-driven economies and these export-driven economies will obviously -- we expect those to continue and slightly improve in Q4. So that's what's driving the GDP. I mean, what's pleasing though is the private consumption now is catching up with GDP. It was lagging, it is now catching up, and the TV markets that we've seen are then catching up with the private consumptions. So yes, the increase -- continued increase in GDP is obviously, a good news for us.

Romana Wyllie

And Adrian wants to add something.

Adrian Sarbu

No. No. Anthony.

Anthony Chhoy

Ajay, it's worth also -- I think you mentioned on the prices that, especially in Czech Republic, I think David mentioned in the speech earlier on, that we have gradually started to increase our CPT levels, that which we see this as a -- this will benefit us in the fourth quarter and also in 2012.

Adrian Sarbu

For sure, Ajay, the answer is both. The private [indiscernible] will drive the increase and as the fourth quarter is the fourth -- the quarter of heavy spending, definitely we'll-- the prices will follow.

Romana Wyllie

Next question comes from David Kestenbaum from Morgan Joseph.

David B. Kestenbaum - Morgan Joseph TriArtisan LLC, Research Division

I guess, the first question, it's been widely reported Time Warner is bidding for TVN. Is there any opportunity for CETV if they were proved successful or if they were to enter into any other markets, central and eastern Europe?

Adrian Sarbu

David, allow us not to make any comments in this respect.

David B. Kestenbaum - Morgan Joseph TriArtisan LLC, Research Division

Okay. And then, as far as the Media Pro, can you talk about areas what you're selling the external content to? Is it all in Europe or you're selling it to the other markets today?

Romana Wyllie

Anthony?

Anthony Chhoy

We're selling them worldwide. I think, it was mentioned earlier by Adrian, that we even sold our MPE product to over 50 countries at this stage.

Adrian Sarbu

These are South America, North America, Africa, Middle East, mostly. And definitely Europe.

Romana Wyllie

Next question, it's from J & T Banka, Pavel Ryska.

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

My question is, a few days ago, the advertising on the Czech television ended. Can you tell us more on whether you already feel the effect of this legislation change on the demand for your advertising time? And whether you think this will affect substantially the fourth quarter on your revenues?

Romana Wyllie

Adrian?

Adrian Sarbu

Pavel, we expect to see this positive impact. It started -- ended just on the 14th of October, de facto on 24th. And the answer is yes, for this quarter.

Romana Wyllie

Have we answered your question?

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

Yes, thank you.

Romana Wyllie

There are no more questions in the queue. So let me thank you for joining us today. We hope that you enjoyed our video webcast, and we welcome your feedback and comments. I'd like to also remind you that you can keep up-to-date and follow our progress between earnings call on our website, www.cme.net or as always, I'm available for any additional questions any time. We look forward to seeing you all shortly. Goodbye.

Operator

Thank you. This does conclude today's Central European Media's Third Quarter 2011 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.

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