Central European Media Enterprises' (CETV) CEO Christoph Mainusch on Q1 2016 Results - Earnings Call Transcript

| About: Central European (CETV)

Central European Media Enterprises Ltd. (NASDAQ:CETV)

Q1 2016 Earnings Conference Call

April 27, 2016 09:00 ET

Executives

Mark Kobal - IR

Michael Del Nin - Co-CEO

Christoph Mainusch - Co-CEO

David Sturgeon - CFO

Daniel Penn - General Counsel

Analysts

Pavel Ryska - J&T Bank

Operator

Hello. My name is Wendy. I will be your conference operator today. At this time I would like to welcome everyone to the Central European Media Enterprises first quarter 2016 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. At that time, if you have a question, you will need to press the star, followed by the one on your phone. As a reminder, this conference call is being recorded today April 27, 2016.

It is now my pleasure to turn the floor over to Mark Kobal, Head of Investor Relations at CME, who will be our moderator today. Mr. Kobal, you may begin your conference.

Mark Kobal

Thank you, Wendy. Good afternoon and good morning everyone and welcome to CME’s first quarter 2016 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-Q 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 US GAAP. Please see the appendix to the presentation and note 18 to our financial statements in the Form 10-Q for a reconciliation to US 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.

We are happy to report that the year is off to a strong start. Net revenues increased 4% at constant exchange rates during the first quarter due to significant growth in television advertising revenues in the Czech Republic and Slovakia, as well as an increase in carriage fees and subscription revenues. There have been fewer FX headwinds this year, so even with some strengthening of the dollar compared to the first quarter of 2015 our net revenues still increased 2% at actual rates in the period.

This quarter's results reinforce our ability to drive continued margin expansion, as revenues improved while there was no increase in our overall cost base compared to last year. Competition for audience share remains significant and we made targeted investments in programming in certain countries which was partially offset by more efficient local production and savings on foreign programming, so content costs overall increased 4% at constant rates. However, as we continue to focus on controlling costs, the increase in content costs was offset by savings in other areas, driven in part by the restructuring actions we implemented last year. At actual rates, costs charged in arriving at OIBDA decreased 2% during the quarter.

By growing revenues while keeping costs flat, we managed to increase year-on-year margins for a ninth consecutive quarter. In fact, this quarter's OIBDA margin of 13% represented an increase of more than 400 basis points over the corresponding period last year. Given this significant improvement and our expectation that revenues will grow at a faster pace than costs for the next few years, we anticipate that our full year OIBDA margin in 2016 will exceed the 20% margin we achieved in 2015.

OIBDA for the quarter was $17 million, an increase of 44% at constant rates over last year. This growth in OIBDA, combined with lower payments for foreign programming and lower capital expenditures, produced a significant improvement in cash flow generation this quarter. Unlevered free cash flow, which reflects free cash flow prior to cash payments for interest and Guarantee Fees, surged 88% in the first quarter to $46 million, from $25 million in the same period in 2015. Free cash flow increased 44% to $34 million, as we paid more interest in cash and repaid $10 million of guarantee fees during the first quarter of 2016 that were previously paid in kind.

We closed our recently announced financing transaction a few weeks ago and we are beginning to see the benefit of the grid pricing for the new 2021 Euro Term Loan. Our net leverage ratio at the end of the first quarter already dropped below 8x, which will reduce the cost of borrowing on the new loan by a further 50 basis points to 10%, a full 500 basis points below the debt that we refinanced. There is some seasonality of cash generation over the course of the year, but we expect our net leverage ratio to improve further by year-end. Our interest expense during the first quarter increased compared to last year following the refinancing of the 2015 Convertible Notes last November, as well as higher principal balances from interest we have paid in kind. However, we expect our interest expense in the second quarter of 2016 will be approximately $20 million lower than it was in the first quarter as a result of the transaction we completed this month.

I will now hand the call over to Christoph.

Christoph Mainusch

Thank you Michael. Good afternoon and good morning to everyone.

We remain fully committed to maintaining and strengthening our clear audience leadership in all our markets. Therefore, we invested more in content during the quarter, which was partially offset by more efficient local production and savings on foreign programming. The resulting 4% increase in content costs was offset by savings in other costs so overall costs were in-line with last year. We will continue to invest in programming on a targeted basis to improve our competitive position as we focus on improving the profitability of our channels. The full roll-out of our spring season has improved our audience results since the end of March 2016. Several new local productions were launched towards the end of the quarter, and some are growing in popularity.

In the Czech Republic, Your Face Sounds Familiar averaged 55% audience share in its latest episode, and even though there are still a few weeks left in the spring season, we have already decided to continue the format in the fall.

We introduced the gameshow Family Feud in access prime in the Czech Republic, and audience share for both our evening news and long running series has since improved.

In Romania, Family Feud has improved audience share in its timeslot compared to last year. And Las Fierbinti and Got Talent continue performing well.

The introduction of Your Face Sounds Familiar was also well received in Slovakia, and the format is outperforming last year in Slovenia.

We introduced a couple of new formats in Bulgaria, and returning hits Masterchef and Got Talent continue performing well, both there and in Croatia.

We are also increasing audience engagement with our brands by expanding catch-up services beyond our larger markets with the introduction of advertising video on demand platforms in Bulgaria and Croatia.

Turning to TV ad markets, we estimate spending in the countries in which we operate increased by 6% on average in the first quarter. Our television advertising revenues grew 4% at constant rates and we gained market share in our two largest markets.

In the Czech Republic, the market grew an estimated 10%, while we outperformed, as advertisers allocated more of their full year budgets for television to the first quarter of 2016 at low season pricing. This is expected to result in a significantly lower growth rate for the full year. We think growth will slow as early as the second quarter due to this phasing, as well as lower spending in the month of May related to the ice hockey world championship that was hosted in the country last year, which had a positive impact on spending in the market overall.

In Romania, the overall number of GRPs sold and average prices were in-line with last year, reflecting in part the negative impact caused by the timing of Orthodox Easter, which is later in 2016 compared to 2015, although there may be limited benefit from Easter in Q2. There were also changes in the measurement panel in Romania from the beginning of the year, which is shifting available inventory from larger channels to smaller channels. So the decrease in GRPs sold on the larger channels at higher prices is offset by higher volumes at lower prices on the smaller channels. We slightly outperformed the market and grew our share to 60% to 59%. In Slovakia, market grew 20% due to both higher prices and strong demand for advertising.

This continued to be influenced by an increase in spending on informational and political campaigns ahead of elections that took place in March 2016. So the rate of growth is expected to be significantly lower for the full year. Excluding the spending on informational and political campaigns, we estimate the market grew 11% during the first quarter of 2016.

In Bulgaria spending on television advertising was lower in 2016 as certain advertisers reduced their budgets overall, in some cases by shifting spending to the competition for lower prices.

The market growth in Croatia continues to be driven by an increase in average market prices.

Demand for television advertising in Slovenia led to market growth from an increase in GRPs sold by the competition.

Lastly, carriage fees and subscription revenues increased 6% at constant rates during the first quarter. We continue to see growth in the number of subscribers to cable, satellite and IPTV platforms. Carriage fees and subscription revenues increased 26% in the Czech Republic due to the HD channel packages now available as well as the launch of Nova Sport 2 last year. We are also starting to see carriage fees from the new Nova International channel introduced in Slovakia. Due to the timing of negotiations for carriage fees in the Czech Republic last year, we expect the growth rate for carriage fees and subscription revenues in the segment for the full year to be much higher than it was in the first quarter.

I'll now turn things over to Dave to walk us through the segment results.

David Sturgeon

Thanks, Christoph. Our segment results begin on slide 11 of our presentation.

Net revenues in the Czech Republic increased by 11% on a constant currency basis during the quarter, due primarily to an increase in television advertising revenues from selling more GRPs, which contributed to a slight increase in market share. Carriage fees and subscription revenues increased by 26%, reflecting the high definition versions of our channels now available, the impact of the launch of Nova Sport 2 in the second half of 2015, and the launch of Nova International in February 2016. Costs increased by 16% during the first quarter, due to an increase in content costs from more local productions, and more foreign movies compared to the same period of last year. There were also additional costs for broadcasting Nova Sport 2. Since OIBDA was broadly in-line on higher revenues, the margin for the segment decreased three percentage points to 26%.

In Romania, net revenues were flat on a constant currency basis. Television advertising revenues were in line with the first quarter of 2015, as a decrease in the volume of GRPs sold was offset by an increase in average prices, which contributed to an increase in market share to 60%. Carriage fees and subscription revenues grew slightly during the quarter, due primarily to an increase in the number of subscribers, which helped offset a decrease in other revenues. Costs decreased by 21% at constant rates during the first quarter. Content costs decreased by 12%, primarily as a result of not airing a local entertainment format in 2016 that was introduced as a lead-in to the spring season in 2015, but also due to some savings from foreign programming. The remaining decrease in costs resulted from lower personnel costs following restructuring efforts in 2015, lower professional fees for tax and legal advisors, and savings on satellite transmission costs. This improvement in the cost base caused the OIBDA margin to increase 19 percentage points to 29%.

In Slovakia, net revenues increased by 11% during the quarter, as our television advertising revenues grew significantly due to both higher prices and very strong demand for advertising. Excluding spending on informational and political campaigns, our revenues grew 6% during the first quarter and our market share would have been higher since a lower proportion of these campaigns is placed on our channels. Costs decreased by 3% during the first quarter, due primarily to a decrease in content costs, as savings from foreign content more than offset increased investment in local production. The OIBDA margin for the segment increased from break-even to 13%.

In Bulgaria, net revenues decreased by 3% on a constant currency basis. Television advertising revenues decreased during the quarter, because certain advertising clients reduced the size of their budgets, and our average prices were lower due to heavy competition. Additionally, our market share was negatively impacted because some clients shifted spending to our competitors for lower prices. Carriage fees and subscription revenues increased due to growth in subscriber numbers. Costs increased by 4%, due primarily to an increase in content costs. We increased our investment in local production during the quarter, and incurred higher costs for sports rights. This was partially offset by lower costs for foreign programming.

In Croatia, net revenues decreased by 2% during the quarter. This was the result of a decrease in television advertising revenues due to selling fewer GRPs, mostly offset by an increase in average prices. Costs increased by 3% due primarily to an increase in content costs from including an additional entertainment format in the schedule in 2016, compared to the same period of 2015.

And in Slovenia, net revenues increased by 4%. Television advertising revenues were essentially flat, as certain clients shifted spending to our competitors for lower prices, which was offset by spending from new clients both on television and online. Carriage fees and subscription revenues increased primarily as a result of an increase in the monthly price for our SVOD product, Voyo. Costs increased by 14%, due primarily to an increase in content costs from broadcasting additional hours of local programming, and an earlier start to the spring season.

We ended the quarter with $98 million of cash, reflecting the improvement in free cash flow already discussed. Subsequent to period end, we used $57 million of cash in the recently completed refinancing transaction, primarily for accrued but unpaid interest and transaction fees. And as a reminder we expect to take a $150 million non-cash debt extinguishment charge during the second quarter as a result of that transaction.

I'll hand the call back to Michael.

Michael Del Nin

Thanks, Dave.

Over the last couple of years, as we overcame our liquidity issues and addressed our overdue payables we opted to pay in kind as much of the interest and guarantee fees as we could. As we signaled on our last call with the announcement of our new refinancing transactions, that phase is now behind us and the priority is now to pay down our debt, focused, at least initially, on our nearest maturity, the 2018 Euro Term Loan. Our cash interest payments will be higher this year, and we will also pay more guarantee fees in cash this year than we have in the recent past. Furthermore, we will use cash to pay back guarantee fees previously paid in kind, a process we commenced with a $10 million repayment in the first quarter of 2016. Because of this, free cash flow will be lower this year than it was in 2015. Given that, to compare the cash generated by our operations to previous periods, we think it makes more sense to look at unlevered free cash flow.

Unlevered free cash flow in 2015 was $74 million and this year we would expect to generate between $85 and $95 million at actual rates, as the anticipated growth in OIBDA will be partially offset by increased investment in new local productions. This year we are obliged to pay at least $55 million of interest and guarantee fees in cash, a $36 million increase over 2015. In addition, we already paid $10 million of guarantee fees previously paid in kind, the effect of which also runs through free cash flow. As we aim to use free cash flow to reduce our debt, we are targeting free cash flow for the full year to be approximately breakeven, which means paying anywhere from $20 to $30 million of additional guarantee fees in cash.

We expect yet another year of strong earnings improvement in 2016, with anticipated OIBDA growth of low to high teens at constant exchange rates. While FX was a slight drag on our revenues in Q1, the Euro has strengthened recently and is now above the average exchange rate of last year. If the current FX rates were to persist for the full year, it would obviously have a positive impact on our financial performance when translated into dollars. As you do your modeling based on your own expectations of FX development this year, it should be noted that a one percent movement in the Euro / Dollar rate this year will have an estimated full year impact of $1.75 million, higher than 2015 due to the larger OIBDA base in local currencies.

With that, I'll turn things back over to Christoph for a few closing words.

Christoph Mainusch

As the market leader in all of our countries, we look forward to continuing our success in local productions and increasing audience engagement. We will continue to invest in programming to improve the reach we provide for advertisers and our focus remains on growing the profitability of our operations.

I'll now turn things back over to Mark so we can take your questions.

Mark Kobal

Thank you, Christoph. That concludes our prepared remarks and we will now move to the Q&A portion of the call. So, operator, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Thank you, I will now hand you back to Mr. Kobal.

Mark Kobal

Okay. Thank you, Wendy. Our first question is coming from Pavel Ryska at J&T Bank. Pavel?

Pavel Ryska

Good afternoon, thank you for taking my questions. The first question is I would like to clarify a bit of the situation a bit with the interest payments, if or what part would paid in cash and what part in kind? So basically this year are you planning on paying all of your interest that we will see in the P&L in cash or if not then what part of this will be still paid in kind? And my second question is if you could maybe repeat a little on the situation in Romania where we saw a stagnation of revenues but still quite a big improvement in OIBTDA, maybe I didn't catch it properly? Thank you.

Mark Kobal

Okay, we'll start with Michael on interest payments.

Michael Del Nin

Thanks, Kobal. Look it's a little bit tricky so let's walk through it again. The guidance we have given is on unlevered free cash flow right so we said we would generate about $85 million to $95 million of unlevered free cash flow. We are obliged to pay $55 million of cash interest and guarantee fees this year so that includes $28 million of interest that was related to the 2017 peak nodes and 2017 term loans.

It was caved in the transaction to be completed upon April 8 and it also includes a minimum of 5% on the new 2021 Euro term loan which is about half of our outstanding debt as you know and the rest is you know effectively the cash portion that we pay directly to the banks on the other loans we have. So you got the $85 million to $95 million, you do snap by the $55 million which is the minimum amount that we have to pay in cash. That leaves you with $30 million to $40 million, right? Then we said in the first quarter we paid an additional $10 million. This was guarantee fees that we previously picked right so it's an accumulated product that we would consider debt.

That was through our free cash flow, that's the treatment. So take that off $30 million to $40 million, that leaves you with $20 million to $30 million so we would expect we would then spend another $20 million to $30 million paying guarantee fees as they do and guarantee fees that have previously been accrued and picked in the past so what we are targeting as we said s basically breakeven pre cash flow.

We want to spend as much as we can to pay as much of the debt as early as we can and even though cash flow is going down, I am sure you would agree with me Pavel, it's a good thing because what we are doing is cognizant of Benjamin Franklin's warnings on compounding interest, we want to pay this as quickly as we can so we are targeting the 2018 maturity, that's the first one. And we said that that is something we expect substantially pay off when it's due at the end of 2018 and we will use all of the surplus cash we have in order to achieve that goal.

Pavel Ryska

If I can, I think I understood all of this, maybe I will restate my question, my question was rather related to your plans now, whether now given that you have a completely different financing situation since April, with now the plans to pay all the interest that you are supposed to pay or pay it in cash or whether there will still be several portions which will not be paid in cash, which will still be accrued because I understand that you are, you need to pay a certain minimum which is you said the 5%, I understand that but now from the new financings there will still be a portion of interest which will accrue and will not be paid in cash?

Michael Del Nin

Yes, so above and beyond what we are obligated to pay and above and beyond the $10 million we already paid we think based on our guidance on unlevered free cash flow we will have another $20 million to $30 million of capacity there to pay cash guarantee fees so to that extent if there is more than that and there will be that will be paid.

Pavel Ryska

Okay.

Mark Kobal

And on the second question on Romania, Christoph?

Christoph Mainusch

The macroeconomic sector of Romania was very positive and as I said earlier onset of Easter had some impact on the Q1 results on the data in the previous year. So overall the volumes were flat so at least there was an improvement in the market considering after the additional spending on the first quarter as of March as did last year.

And the second aspect that was change in the measurement in Romania from the beginning of the year. It was shifting inventory from larger to smaller channel so the increase in GRP slot of other channels at lower prices was offset by lower volumes at higher prices on the larger channels. So despite the timing issue as was mentioned earlier there may be a limited benefit in Q2 due to the lack of writings and the third aspect of this is the significant decrease in spending but year-over-year during the quarter of the full year budget are consistently shifting so expect this to improve in growth rate in the remainder of the year.

And coming to your question of strong OIBTDA, there were two main factors, one was that there was certain program in Romania in last Q1 which we didn't broadcast this year, which was I am a Celebrity, Get me out of here. Which we invested in last year we didn't have the program cost space and there was some other celebrity star related cost etcetera which we lower cost base so that was the major drivers of the heavy improvement of OIBTDA of Q1.

Pavel Ryska

Okay.

Mark Kobal

Wendy, would you mind for additional questions?

Operator

[Operator Instructions]

Mark Kobal

Okay, looks like Pavel has a follow-up question, Pavel?

Pavel Ryska

Yes, I don't mind asking one or two more. We seemed pretty sharp growth in audience shares this last quarter. Their current level, is it fine for you? Can you do on with these levels or do you see the need to increase your audience especially in the Czech Republic where they sell? And the second maybe you've already covered it a little but the rise in carriage fees, you are expecting them to keep rising this year as pretty much the same rate in the first quarter or even quicker? That will be it.

Mark Kobal

So we will start with Christoph on audience?

Christoph Mainusch

As we previously have said there is no specific target set for audience for us, important is that we are leading the audience performance in our market and even though we have seen the drop in Q1 audience we believe that we maintain our clear audience leadership position. Let me explain you the reasons behind this. There are couple of various reasons why that happens. First is we started this year our schedule a little bit later than last year. Secondly, that's the overall development across all of our markets, you see it always stays 100% and there is a continuing segmentation in the market so that leads to lower audience share across the markets, so on those smaller channels don't benefit obviously from advertising income that we keep our relative audience leadership.

The other thing is when you compare April to Date figures with Q1 since we have at the March, fully rolled out our Springlet [ph], you see strong backdrop in April so more than half of that what we love in Q1 is back on the main channel. So overall there are three key messages. First we need to have the key leaderships in overall markets and if you look for it in the Czech Republic we are in April to date actually on the level which is by far higher that what is seen by our competition. The second message is in all of our markets we have seen in this month the significant presence in Q1 and that leads us to a position which we believe is necessary for us to stay and secondly when you look into the advertising revenue especially in our two largest markets we have even in the situation, we have outperformed the markets.

Michael Del Nin

Chris, I just want to make one other point on that, one thing we have to remember is which I think we have discussed in the past is we don't manage the company to maximize ratings, we manage the company to maximize profitability. So let's look at Romania for example, as Christoph on a Celebrity last year at this time around in February, we used that program to launch the spring schedule, which at that time was made up, to a certain extent its' a new programming and that was therefore riskier.

We didn't do that show this year. If we had done that show would our audience share been higher? Almost certainly, would our profitability been lower? Almost certainly so maybe a time in the future wherein that programming makes sense but to increase our margins to 29% in Romania in what is traditionally a low season quarter, I mean I don't know how many years you have to go back to get a margin like that in Romania but that is an example of managing the audience in a way that we wake up every morning and look at the ratings.

We are maximizing the profitability. The other thing we have to remember is if you would ask us six months ago where we were perhaps unhappy with audience trends, we would have said Slovakia and Slovenia. If you look at post the roll out of the full spring season, so April to date, they are two countries where our audience share year-on-year is up. And what's important in that is one, it shows our determination to invest to maintain audience leadership and two just as importantly, it shows our ability to translate that investment into results so that when we spend the audience metrics go up so that is extremely a positive sign.

When you are managing as we do 36 networks, I can guarantee you we would always at every point have audience issues we are going to have to deal with. But I think the history that you are seeing especially in those two countries speaks for the fact that we are able to deal with them as they come up.

Pavel Ryska

Thank you no question about the fact that the main goal is profitability, I was just wondering that you would probably agree that the downtrend in audience shares cannot go forever, there is a certain minimum that has to be pulled there and the second one on..

Christoph Mainusch

Pavel as long as you see the remarks Michael has just mentioned on audience and audience leadership that exceeds the competition by 50% it's actually not that relevant as plus one or minus one, it varies by season. But to receive when do we have to invest, we always target our investment to keep our clear leadership and secondly, to monetize it when the market actually has budget in order to monetize it.

On your second question, the secret to growth in Q1 as we said further in the remainder of the year the growth rate will be higher especially in the Czech Republic we had due to full roll out of the HD and Nova Sports 1 and 2 plus our international channels. So this is roll out for the full year which will lead to higher growth rate.

Pavel Ryska

Okay. Thank you.

Mark Kobal

Okay. Thanks, Pavel. Thank you for everyone for joining us today. As a quick reminder you can keep up to date and follow our progress on our earnings call on our website www.cme.net because we routinely post important information there about the company and the operations. We are also available for your feedbacks and questions at any time. Enjoy the rest of your day.

Operator

Thank you. This concludes the Central European Media Enterprises first quarter 2016 earnings conference call. Please disconnect your lines at this time and have a wonderful day.

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