Central European Media Enterprises Ltd. (NASDAQ:CETV)
Q4 2015 Earnings Conference Call
February 22, 2016, 9:00 am ET
Mark Kobal - Head of Investor Relations
Michael Del Nin - Co-Chief Executive Officer
Christoph Mainusch - Co-Chief Executive Officer
David Sturgeon - Chief Financial Officer
Daniel Penn - General Counsel
Matthew Harrigan - Wunderlich Securities, Inc.
Pavel Ryska - J&T BANKA
Hello, my name is Keith and I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises Fourth Quarter and Full Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, this conference call is being recorded today February 22, 2016.
It is now my pleasure to turn the floor over to Mr. Mark Kobal, Head of Investor Relations at CME, who will be our moderator today. Mr. Kobal, you may begin your conference.
Thank you, Keith. Good afternoon and good morning everyone, and welcome to CME's fourth quarter and full year 2015 investor conference call. We issued our earnings press release earlier today, a copy of which is available on our website www.cme.net, along with a brief presentation that we will refer to during this call.
On the call today are Michael Del Nin and Christoph Mainusch, Co-Chief Executive Officers of CME; David Sturgeon, Chief Financial Officer; and Daniel Penn, General Counsel. Our presentation today will contain forward-looking statements. Actual results may vary materially from those expressed or implied due to various factors. Important factors that contribute to such risks include, but are not limited to the risk factors and other cautionary statements in our SEC filings, including the Form 10-K filed earlier today.
Forward-looking statements speak only as of the date and we undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. During this call, we will refer to certain financial information that is not in U.S. GAAP. Please see the Appendix to the presentation and Note 21 to our financial statements in the Form 10-K for reconciliation to U.S. GAAP financial measures.
And with that, I will hand the call over to Michael and Christoph.
Michael Del Nin
Thanks, Mark and thanks to everyone for joining us on the call. Today we’re very pleased to make a couple of announcements that bode extremely well for the future of the company. Firstly, we’ve completed another year of strong financial performance, marked by 53% OIBDA growth in constant currency terms, which is at the high-end of the guidance we gave you in October.
Our positive free cash flow of more than $55 million, a significant improvement of almost $150 million over last year, exceeded guidance and was the strongest cash flow generation in seven years. We combined that with the announcement of a new re-financing transaction that will significantly reduce the borrowing cost on half of our balance sheet, improve the maturity profile of our debt and put us on a clear path to deleveraging. This transaction, which caps a remarkable two year turnaround in the fortunes of this company, is a big win for our shareholders. Securing this refinancing reflects our determination and ability to create shareholder value. 2015 was a noteworthy year for CME on many other fronts. A positive macro economic backdrop in all six of our countries for the first time since the 2008 downturn created the environment for 6% growth in both TV ad markets and in our television advertising revenues.
Continuing the broadening of our revenue base, carriage fees and subscription revenues increased 9% at constant rates. And this high margin income accounted for 12% of our overall revenues. At the same time we cut cost across the board boosting margins while maintaining our unrivaled market audience share leadership. And we completed the disposal of all non-core assets, freeing up management to devote our full attention to building our leading television businesses.
Our consolidated net revenues in 2015 increased 6% at constant rates due to the growth in TV ad revenue and carriage fee and subscription revenues. Similar to the trends each quarter this year, the strengthening of the dollar versus our currencies compared to 2014 more than offset this constant currency growth causing our net revenues at actual rates to decline by 11%.
Since our costs decreased by 2% at constant rates, while our revenues increased, OIBTDA grew 53% to $123 million. As promised, the OIBTDA margins improved for an eighth consecutive quarter and the full year margin of 20% was more than 600 basis points higher than it was the year before. We estimate that overall real GDP in the countries in which we operate grew 3% on average in 2015. And that level of growth is expected to continue this year. GDP growth in 2015 exceeded 3% in our three largest markets, including growth of more than 4% in the Czech Republic, partly due to spending on infrastructure from EU subsidies.
Real private consumption is also estimated to have increased 3% overall in 2015, supported by particularly strong retail sales growth in our largest markets. We believe that the growth in real GDP and private consumption that its forecast for 2016 across all six of the countries in which we operate, will be supportive of television advertising market growth during the year.
I’ll now hand the call over to Christoph.
Thank you, Michael. Good afternoon and good morning to everyone. Although competition for audience share remain significant. We maintained our clear audience share leadership in 2015. During the year, we made several targeted investments in certain time slots to combat this competition, offsetting this additional spending with savings from foreign acquired content. We will continue to invest on a targeted basis to improve our competitive position and we have demonstrated our ability to make incremental investments without increasing cost overall.
The full spring season will roll out in our countries in the coming weeks and we are excited about the number of new shows that will be introduced on our channels. In fact, we have new shows starting in each of our countries to address increased competition for audiences. Including the introduction of Your Face Sounds Familiar in several countries, expanding the masterchef franchise and launching additional fiction series with two new series in the Czech Republic.
Turning to TV Ad market, we estimate television advertising spending in our markets increased by 6% overall at constant rates in 2015, compared to the previous year, the fastest rate of growth across our region in seven years. Our TV advertising revenues also increased 6% at constant rate and our share of the television advertising market increased in three countries. The television advertising market in the Czech Republic increased an estimated 4% in 2015, due to an increase in GRPs sold, which more than offset lower average prices resulting from heavy competition for advertising budgets.
Once again, we outperformed the overall market growing our Czech TV ad revenues by 6% for the full year and increasing our market share from 60% to 61%. While the market grew on a full year basis, we estimate spending in the fourth quarter was lower year-on-year due to the turnaround in our operations last year and the strength of Q4 2014. Additionally, tough negotiations with a particular agency over pricing led to a shift of much of their clients ad hoc spending in the quarter to the competition at lower prices, which impacted the size of the market.
If you were to remove that one agency from the calculation, our TV ad revenues from all other clients actually increased 5% in the quarter and this offset the lower ad-hoc spending. So our TV ad revenues were flat year on year in the fourth quarter. Also even though our rate of growth slowed in the final quarter of 2015, it rebounded strongly in the start of 2016. We expect our Czech TV ad revenues will increase at least mid-single digits year-on-year in the first quarter of 2016.
Growth in private consumption supported a demand for advertising on television on Romania and Slovakia and led to market growth of 8% and 16% respectively, resulting from increase in both GRP sold and average prices. Slovakia also benefited from an increase in spending on informational campaigns by the public sector. In Bulgaria, spending on television advertising was higher in 2014 than in 2015, primarily due to election campaigns in 2014 and also reflected some reduction budgets from certain advertisers in 2015. Excluding spending on election campaigns the market in Bulgaria was essentially flat year-on-year.
The market growth in Croatia was due to an increase in average market prices as improving macro-economic conditions encouraged advertisers to increase their investments. The macro-economic backdrop in Slovenia has improved significantly, compared to 2014 and this will lead to an acceleration of spending on television advertising during the course of 2015. Carriage fees and subscription revenues are now approximately 12% of consolidated net revenues and approximately 25% of net revenues in Bulgaria and Romania.
Continuing the recent trends in the countries in which we operate, the number of subscribers to cable and satellite platforms in our market increased during 2015. This led to growth in our carriage fees and subscription revenues and we expect that to continue in 2016. Additionally, the launch of Nova Sport 2 in the Czech Republic during 2015 is expected to improve carriage fees and subscription revenues in that segment since the channel is available only on cable and satellite platforms. During February 2016, we also launched Nova International and Markíza International, which will allow us to better monetize our content.
I’ll now turn things over to Dave to walk us through the segment results.
Thanks, Christoph. Our segment results begin on Slide 11 of our presentation. Net revenues in the Czech Republic increased by 6% on a constant currency basis due primarily to a 6% increase in television advertising revenues. The volume of our GRPs sold grew faster than the market and together with stronger relative pricing, our market share in the Czech Republic increased to 61% in 2015 from 60% in 2014.
Carriage fees and subscription revenues increased by 11% as high definition versions of our channels are now included in most cable and satellite platforms. Costs decreased by 7% in 2015 led by a 9% decrease in content costs from better use of the program library, more efficient own production and broadcasting more cost effective format. We also incurred restructuring charges in 2014 that were not repeated in 2015 which also decreased personnel cost in 2015. These savings more than offset some additional investments in local productions.
The combination of higher revenues and lower costs improved the OIBDA margin for the segment almost 8 percentage points to 39%. In Romania, net revenues increased by 5% at constant rates. Our TV advertising revenues increased 8% on a constant currency basis due to increase in GRPs sold and we maintained our market share. Net revenues also benefited from an increase in carriage fees and subscription revenues as we saw an increase in the number of subscribers as well as higher prices from certain contracts that only took effect during the first quarter of 2014.
Costs decreased by 2% in 2015, due to a decrease in content costs from fewer hours of foreign programming in the schedule and a reduction in the cost of abandoned development projects, which more than offset an increase in the number of hours of local programming in the schedule compared to 2014. There were also fewer restructuring charges in 2015. This all resulted in OIBDA margin expansion of more than 5 percentage points to 26%.
In Slovakia, net revenues increased by 11%. The advertising revenues grew by 10% on a constant currency basis due to a combination of higher prices and an increase in GRPs sold. The second half of 2015 also saw an increase in spending on informational campaigns by the public sector and we expect some additional spending by the public sector in 2016. This is contributing to an increase in demand for television advertising and as a result we expect average prices to increase in Slovakia in 2016.
Costs increased by 3% in 2015 due to an increase in the quality and number of hours of own production in our schedule following recent increased competition for audience share which was only partially offset by savings from lower transmission and marketing costs. The OIBDA margin for the segment increased more than 7 percentage points to 12.5%.
In Bulgaria, net revenues were broadly flat on a constant currency basis. Even though our market share increased to 58% from 57%, television advertising revenues decreased during the year primarily due to spending on election campaigns in 2014 and also reflected some reduction in budgets from certain advertisers in 2015. The lack of spending on election campaigns in 2015 impacted the market more than it did our results. Therefore excluding that spending, our television advertising revenues increased almost 1% year-on-year due to an increase in GRPs sold which more than offset lower average prices.
The decrease in TV advertising revenues during 2015 was offset by an 8% increase in carriage fees and subscription revenues primarily due to growth in the number of cable, satellite, and IPTV subscribers. Costs decreased by 11% at constant rates which drove the largest OBIDA margin expansion of the group at more than 10 percentage points to 21%. This was primarily due to lower bad debt expense, restructuring charges we incurred during 2014 that were not repeated in 2015 and lower transmission costs as two of our niche channels are now distributed only by cable and satellite.
In Croatia, net revenues increased by 8% at constant rates. Television advertising revenues increased by 6% at constant rates driven primarily by an increase in average prices as advertisers have been spending more since the country exited recession in the second quarter of 2015. Cost increased by 6% reflecting higher content cost from including additional entertainment formats in the fall schedule and other targeted investments made to address an increase in competition for audience. And in Slovenia, net revenues increased by 6% on a constant currency basis primarily due to increase in TV advertising revenues. Following recent growth in private consumption, the demand for television advertising accelerated during 2015.
Costs increased by 3% due to investment in more hours, own produced programming which was partially offset by savings in other costs. Free cash flow in 2015 was more than $55 million compared to negative free cash flow of $94 million in 2014. This increase in free cash flow reflects both the improvement in OBIDA and lower cash interest payments. Additionally, the level of payments for programming was more normalized in 2015 than in prior years. We ended the year with cash of $62 million compared to $34 million at the end of 2014.
I’ll hand the call back to Michael.
Michael Del Nin
Thanks, Dave. I’d now like to walk you through the financing transactions announced today in more detail. First, we entered into a €469 million loan agreement that is guaranteed by Time Warner. The structure is similar to recent refinancings with a low rate of cash interest payable to the lenders and a guarantee fee payable to Time Warner, a portion of which may be paid in kind.
We plan to draw the loan on April 07, 2016 and will apply the proceeds of this loan to redeem the 15% PIK notes and the 15% Time Warner term loan. We have issued a redemption notice for the PIK notes today and expect the refinancing to be completed on April 08, 2016. The 2017 term loan and the 2017 PIK notes are our most expensive debt and were put in place two years ago when the company was facing a severe liquidity shortfall in order to stabilize the company’s financial position and allows us to focus on the operational turnaround.
The all-in rate applicable under this refinancing will range from 10.5% to 7% depending on our net leverage ratio. Based on our current net leverage, we expect the initial all-in rate will be 10.5%, an immediate improvement of 450 basis points in the cost of approximately half of the outstanding principal amount of our debt. As our leverage decreases, our cost of borrowing under this instrument automatically decreases. Accordingly, we anticipate that during the course of 2016 as our net leverage falls below eight times, that rate will decrease further. In fact when the net leverage ratio reaches five times, the all-in rate will be 7%. This new euro term loan matures in 2021.
I’d also like to point out that as part of these transactions, we agreed to extend the maturity date of our €251 million term loan by one year to November 2018. As a result, following the drawdown of the 2021 euro term, our nearest debt maturity will be almost three years away. Furthermore and this is very important, we expect that our free cash flow generation in the coming years combined with the anticipated proceeds of the warrants that we issued as part of our 2014 rights offering will allow us to substantially pay down that loan when it comes due. If we are successful, we will not have another maturity we need to address until the end of 2019, almost four years from now. However, that does not prevent us from seeking to access the markets opportunistically before then if it benefits us financially.
Our revolving credit facility remains undrawn and we currently have access to $115 million in funds. In connection with the refinancing, we negotiated amendments that benefit us in a couple of ways. Firstly, following the drawdown of the 2021 Euro Term Loan, the interest rate applicable to any balances outstanding under the facility previously fixed at 10% will also decrease gradually with reductions in our net leverage in a manner similar to that of the all-in rate on the new 2021 euro term loan.
And secondly, we agreed to extend the term of the revolver from the end of 2017 to early 2021, and we still have access to $50 million in liquidity from the beginning of 2018 until its maturity. As you know, refinancing our most expensive debt was a priority for us and we think these transactions provide the company with a number of benefits as we move forward focused unlocking shareholder value after completing the operational turnaround in 2015. Once completed, all of our senior debt outstanding will be denominated in euros, significantly reducing our FX exposure.
Given our credit profile and the current market environment, we think the pricing was extremely attractive. And since the borrowing rate decreases as the company’s net leverage ratio improves, it provides us with the unique opportunity both lock in an immediate benefit by significantly lowering our borrowing cost now while still allowing us to profit in the future from further improvements in our results. This is something not typically available in public market debt transactions, especially for companies like ours.
Most importantly these deals by pushing out almost $1 billion of debt maturities will provide us with the necessary time and tools to responsibly de-lever the Company. In fact, perhaps more than at any other time in almost a decade, there is a clear path to reducing the size of our debt and the cost associated with servicing it so that more of the benefits of our work will accrue to our shareholders.
With that, I will turn things back over to Christoph for a few closing words.
Thank you, Michael. Improving operational results along with refinancing transactions reinforces the financial position of the company and ensure that we have the resources necessary to execute on our long-term plan. We remain committed to maintaining our leadership position in all of our countries in which we operate.
And I will now turn it back over to Mark so we can take your questions.
Thank you, Christoph. That concludes our prepared remarks and we will now move to the Q&A portion of the call. So, Keith, please open the lines for questions.
[Operator Instructions] I will now turn you back to Mr. Kobal.
Okay, thanks, Keith. Our first question is coming from Matthew Harrigan from Wunderlich Securities. Mathew.
Thank you. I was curious, I follow some companies that primarily have their capital structure in euros but they have some Eastern European exposure and recognizing that the forward market for the Romanian leu and all that isn't all that liquid, are you tempted to do a couple – a few – five or six multiples of hedging on the Eastern European currencies into the euro just to be perfectly safe given all the turmoil going on in the EU right now? And then secondly, can you talk about product categories for advertising, where you are seeing a lot of growth and prospectively where you see the growth is going forward? Thank you.
Okay, thanks. We will start with Michael.
Michael Del Nin
Thanks, Matthew. Look, on the hedging front, I think what you said is absolutely right. That’s – the markets are not that deep and therefore, it will be quite expensive to do some of the hedging that you are asking about. I think if you look back certainly over the last few years, the currencies of the countries that we trade that aren’t the euro remembering that two of the countries do use the euro and one is pegged to the euro essentially, that they trade largely in sympathy and so we think while not a perfect hedge of course but we think that based on the cost associated with dealing those hedges, we think that we are fairly protected with the position that we currently have.
What’s important to know is that if you look back just a couple of years, the vast majority of that debt was denominated in dollars, right and that’s – this transactions completes the path that we’ve been on for the last two years with the refinancings that we’ve done and we stated publicly that it was very important for us to significantly reduce that FX cost and FX exposure. And this transaction completes that process because now the other half of the balance sheet that had previously being denominated in dollars will now be denominated in euros going forward and we think that that is an extremely important step.
Okay, thanks. And then the second question on ad spending, Christoph?
So for this year it's too early to break it down by the various industry for our growth. What we can see, as I have said earlier, there is a significant increase in ad spending year to date, especially in the Czech Republic which we have seen. And when you look back in 2015, for instance, when you go to the biggest markets, Czech Republic we had increases in food, retail, pharma and decreases in cosmetics and telecoms and we see a similar picture in Romania, the banking and finance decreased, but food and beverage, pharma was up. So I believe at the next earnings call when we present you, we can provide you with a better picture of which industries in the various territories have increased their spending versus the others.
Okay, thanks. Our second question is come from Pavel Ryska with J&T BANKA. Pavel?
Hi, good afternoon. My first question is for Michael. You said that you are expecting the funds from the exercise of the warrants to be available before 2018. My question is pretty straightforward, are you expecting these funds to be available already this year, that means the bulk of it’s from Time Warner to be exercised already this year? And my second question is rather for Christoph. We’ve seen some growth in your audience shares in the last quarter of last year, so I would be expecting some maybe some more investment in programming. Now the question is do you expect your constant costs to rise this year compared to last year? Thank you.
Okay, thanks. We will start with Michael.
Michael Del Nin
Pavel, thanks for the question. As you know, there is a two-year window for exercising those warrants, the warrants that were put in place as part of the rights offering a couple of years back. The window opens essentially in the middle of this year and closes in the middle of 2018. So it’s up to the individual holders of those warrants. There is about a 114 million of them as you know and about 100 million in the hands of Time Warner’s as we know. So, no, the assumption we are making is obviously at some point the warrant holders will decide to exercise.
I'm not making any assumptions as to the timing of that other than that it happens by the end of the window and that window closes before we would have pay down the nearest debt maturity. And that's why we believe, and this is very important that we can use those proceeds together with the anticipated cash flow generation from operations to substantially pay down that debt.
And Pavel, as we have discussed a lot about the balance sheet situation of the company, and you know better than anyone why that’s important is because what we are doing is pivoting away from a situation where there is a liquidity crunch of the company or where we simply refinance the debt as it comes to. And what we are seeing now is that we are pivoting towards the situation where we’re actually paying down and retiring debt. And that is an extremely important change in the situation of the company and demonstrates a huge amount of progress in a relatively short period of time.
Okay ,thank you.
And content costs, Christoph.
In general, Pavel, the general market at the beginning of course one of our biggest assets is our leading audience shares in all of the territories. And our focus is on maintaining a significant gap between us and our commercial competitors particularly on the main channels, so in order to manage the channels to maximize profitability. And coming to the cost, yes, we did targeted investments during 2014 and 2015 and we increased spending on program in certain segments at times to counter the increased competition. But at the end in 2015, we were managing reducing the content costs overall.
So we expect this trend to continue. However, we expect to keep overall content costs from arising by using up our existing program library more efficiently, implementing more efficiencies in local production and realizing cost savings from foreign programming. When you take that overall for this year it's too early to give you a clear guidance of how content cost will develop, but we believe that what we have seen in 2015 as well our policy of 2016.
Okay, thank you.
Thank you. Keith will you mind prompting for more questions.
Looks like a follow-up question from Pavel Ryska with J&T. Pavel?
Yes, yes, one more for me. Actually I read that you still have the payment in kind option for your new loan from BNP Paribas. Do you have any – can you give any guidance or do you have any idea how much of this option will have to be used this year? That means actually how much of the interest to be paid you will opt not to pay in cash and you will rather prefer to pay in-kind?
Michael Del Nin
So on free cash flow, obviously the situation has changed with this refinancing and when we give guidance in a couple of months with Q1, we will try and provide a little more clarity on our expectations in free cash flow, but I think what’s important to say is that it relates to the nearest maturity. We will be targeting all available resources and cash generated from the business towards paying that down so that we can reach out target of retiring that debt. When it matures, so that would mean that we would prioritize on cash interest payment on that instruments in addition to when possible paying down previously compounded guaranteed fees and the amount outstanding under that loan. So that’s I think where we would target excess cash going forward. We will give a little bit more insight into our expectations for free cash flow as I said when we do Q1.
Okay, thank you.
And thank you to everyone else for joining us today. As a quick reminder, you can keep up-to-date and follow our progress between earnings calls on our website, www.cme.net, because we routinely post important information about the company and its operations. We’re also available for your feedback and additional questions any time. Enjoy the rest of your day.
And this does conclude the Central European Media Enterprises fourth quarter and full year 2015 earnings conference call. Please disconnect your lines at this time and have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!