Central European Media Enterprises Ltd. (NASDAQ:CETV)
Q2 2016 Earnings Conference Call
Jul 26, 2016 9:00 AM ET
Mark Kobal – Investor Relations
Michael Del Nin – Co-Chief Executive Officer
Christoph Mainusch – Co-Chief Executive Officer
David Sturgeon – Chief Financial Officer
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 Second 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. [Operator Instructions] As a reminder, this conference call is being recorded today July 26, 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.
Thank you, Keith. Good afternoon and good morning everyone and welcome to CME’s second 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 also refer to certain financial information that is not in U.S. GAAP. A description of these non-GAAP financial measures as well as the reconciliation to the most comparable GAAP measures is available on our website in the appendix to the earnings call presentation. Additional information may also be found in Note 18 to our financial statements in the Form 10-Q.
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. Our performance in the second quarter contributed to a very solid first half of the year for us. Overall, the quarter exceeded our expectations and included a number of very positive highlights.
Romania had an outstanding quarter, with the surge in TV ad revenues helping to produce an OIBDA margin in the high-40s. Needless to say, given the last couple of quarters we’re extremely pleased with the way that business is performing, with TV ad revenues increasing 9% and margins expanding more than 1500 basis points compared to the first half of last year.
Likewise, we saw continued double-digit ad revenue growth in Slovakia and a strong swing back to market and ad revenue growth in Bulgaria during the quarter. And we did all that despite strong competition in almost all of our markets from the UEFA European Football Championship in June and while reducing overall costs in constant currency terms yet again.
Looking more closely at the numbers, net revenues increased 3% at constant exchange rates during the second quarter to $175 million, due to the significant growth in television advertising revenues in Romania and Slovakia as well as an increase in carriage fees and subscription revenues. The euro was stronger this quarter compared to last year. So our net revenues increased 5% at actual rates in the period.
Our resolve to improve the profitability of the company, remains evident. As revenues continued to improve while we managed to reduce overall cost by 1% at constant rates. Content costs increased 3% as we continue to make targeted investments in programming in certain countries and time slots, which was more than offset by 7% decrease in other costs. At actual rates, costs charged in arriving at OIBDA increased 1% during the quarter.
OIBDA for the quarter was $54 million, an increase of 12% at constant rates over last year. As OIBDA continues to grow so do margins for the 10th consecutive quarter; up to 31% this quarter from 28% in the same period of last year. The growth in OIBDA during the first half of the year, combined with lower capital expenditures produced a significant improvement in cash generation.
Unlevered free cash flow, which reflects free cash flow prior to cash payments for interest and guarantee fees, increased 70% in the first six months of the year to $62 million, from $36 million in the same period in 2015. As expected, free cash flow decreased significantly as we paid more interest in cash and elected to repay a total of $20 million of guarantee fees that were previously paid in kind.
In April we completed the refinancing of the 2017 PIK Notes and term loan and recognized a $150 million non-cash charge due to the early retirement of this debt. This accounting charge is essentially accelerated amortization of the costs for the warrants and the debt issuance, which otherwise would have been amortized through the end of 2017. As a result of this lower amortization, as well as the lower interest rate on the new debt, our quarterly interest expense decreased approximately $20 million when compared to the first quarter of 2016. Our net leverage ratio remained below eight times at the end of the second quarter. And therefore the cost of borrowing on about half of our debt is still a full 500 basis points below the debt that we refinanced back in April. We continue to expect that our net leverage ratio will be even lower by year end.
The overall macroeconomic backdrop in our countries remains positive, and includes an unemployment rate in the Czech Republic that was the lowest in the EU, as well as fiscal stimulus in Romania that contributed to significant growth in private consumption. We believe that the growth in real GDP and private consumption that is forecast for 2016 across all six of the countries in which we operate will be supportive of continued overall television advertising market growth during the year.
While the economic impact of Brexit on the EU and the euro is difficult to estimate at present. Current projections suggest the potential reduction in exports from our country would have limited impact on GDP growth, due in part to the improvement in private consumption in these economies since 2014. In addition, existing commitments for budgetary contributions and allocations among EU member states would not be affected, so there is not expected to be any impact on allocations to net recipient countries such as ours in the next several years.
I will now hand the call over to Christoph.
Thank you, Michael. Good afternoon and good morning to everyone. Our audience share leadership in all six countries continued during the second quarter, and we sustained increased investment in the local content that is popular with our audiences, while reducing costs overall in order to maximize profitability.
Our audience share in Romania benefited from broadcasting of UEFA European Championship matches there. But in the rest of the countries, the matches were aired primarily by the public broadcaster, which negatively impacted our audience shares during the quarter. This investment in local productions and a focus on effective programming during the second quarter set new audience records in our largest markets.
In the Czech Republic, the popular entertainment show, Your Face Sounds Familiar, averaged 51% audience share in the second quarter reaching an incredible peak share of almost 60% in its ninth episode. This format also significantly improved results in its time slot in Slovakia and even managed to outperform last year in Slovenia.
In Romania, the matches of the UEFA European Championship averaged 43% audience share during the quarter and the tournament opener set a viewership record of 71% audience share.
We were also pleased with the results of Got Talent and Masterchef in both Croatia and Bulgaria. With the spring season now behind us, we look forward to new hits coming this fall including the popular reality formats, Survivor, in several markets, as well as returning favorite including, Your Face Sounds Familiar and Masterchef.
Turning to TV ad markets, we estimate spending in the countries in which we operate increased by 5% on average in the first half of the year. In the Czech Republic, the market grew 2% in the first six months of 2016. As we highlighted on our last call, advertisers allocated more of their budgets for television to the first quarter of 2016 at lower season prices resulting in a significant market growth. We expected that would negatively impact spending in the second quarter and our Czech TV ad revenues were down 6% reflecting the market decline.
Significant discounting by our competition to sell their incremental inventory also put downward pressure on average prices. In addition, the ice hockey world championship reduced spending in the month of May 2016 compared to 2015, since last year it was hosted in the country and had a positive impact on spending in the market. Despite this, we still expect our revenues for the full year to grow faster than the 1% growth in the first half of the year and we are already seeing signs of this in July and August.
In Romania, demand for advertising drove average prices higher since the market was largely sold out during the second quarter. Overall, the number of GRP sold in the first half of 2016 was essentially flat, so the best inventory available was sold at much higher prices, and our TV ad revenues increased 9% in the first six months of this year. Also contributing to the demand for advertising was the broadcasting of UEFA European Championship by our main channel, since the games have historically been aired by the public broadcaster.
In Slovakia, the market maintained significant growth in the second quarter and grew 20% in the first half of 2016 primarily due to higher prices. Demand was also influenced by an increase in spending on informational and political campaigns. Excluding the spending on campaign, we estimate the market grew 13% during the first half of 2016. Growth is expected to be lower for the full year as these campaigns spending will be lower in the second half of 2016 according to our estimates and year-on-year comparisons will also be impacted by the significant volume of such spending in the second half of 2015.
In Bulgaria, spending on television advertising rebounded during the second quarter as sentiment regarding the macro-economic environment in the country improved. This increase nearly offset the market decline experienced in the first three months of the year. The market growth in Croatia continued to be driven by an increase in average market prices. In Slovenia, a more positive macro-economic outlook and improvement in the growth of private consumption encouraged clients to increase their investments in advertising.
Lastly, carriage fees and subscription revenues increased 6% at constant rates during the second quarter. We continue to see growth in the number of subscribers to cable, satellite and IPTV platforms. Carriage fees and subscription revenues again 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 and the new Nova International channel introduced in Slovakia. Due to the timing of negotiations for carriage fees in the Czech Republic last year, we continue to expect the growth rate for carriage fees and subscription revenues in the segment for the full year to be even higher than the 26% growth in the first half of the year.
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 decreased by 5% on a constant currency basis during the second quarter, due primarily to a decrease in television advertising revenues from lower prices and phasing of spending we already discussed. This was partially offset by higher carriage fees and subscription revenues which increased by 26%.
Content costs were flat at constant rates as higher expenses for our popular reality format, Your Face Sounds Familiar, were offset by savings from broadcasting fewer hours of local fiction, and additional costs from the launch of Nova Sport 2 last year were offset by savings in other sports programming. Total costs decreased by more than 3% during the quarter due to savings from personnel costs. As net revenues decreased more than costs; the OIBDA margin for the segment fell by 1 percentage point to 45%.
In Romania, net revenues increased by 10% on a constant currency basis. Television advertising revenues increased by 14%; due to an increase in average prices. Carriage fees and subscription revenues also grew slightly due to an increase in the number of subscribers.
Even though content costs increased by 3%, due primarily to the cost of the UEFA European Championship, total costs decreased by 10% at constant rates during the second quarter, primarily reflecting a decrease in bad debt expense and lower professional fees for tax and legal advisors. This improvement in the cost base together with the increase in revenues caused the OIBDA margin to increase by 12% percentage points to 47%.
In Slovakia, net revenues increased by 9% during the quarter. Our television advertising revenues grew by 11%, due primarily to higher prices, which remain elevated in part from spending on informational and political campaign. Costs increased by 15%, due primarily to an 18% increase in content costs, as we broadcast more hours of local programming in the spring season of 2016. Higher costs caused the OIBDA margin to fall by 4 percentage points to 14%.
In Bulgaria, net revenues increased by 3% during the quarter. Television advertising revenues increased by 4%, as improvement in the macro-economic environment in the country, led to advertisers purchasing more advertising, albeit amid continuing pressure on our prices. Carriage fees and subscription revenues increased due to growth in subscriber numbers.
Costs decreased by more than 7%, due primarily to a 7% decrease in content costs, driven by savings from foreign programming, which more than offset additional hours of local programming. Since revenues increased while cost decreased, the margin improved more than 8 percentage points to 29%.
In Croatia, net revenues decreased by 2% during the quarter. This was the result of a decrease in television advertising revenues from selling a lower volume of GRPs at a higher average price compared to same period in 2015. Costs increased by 3% due primarily to an increase in content costs from including an additional entertainment format in the schedule in 2016. This increase was partially offset by lower cost for foreign programming.
And in Slovenia, net revenues increased by 5%. Television advertising revenues increased by 4% at constant rates during the quarter, as a growth of private consumption has encouraged clients to increase their investments in advertising. Carriage fees and subscription revenues also grew largely as a result of an increase in the monthly price for our SVOD product, Voyo.
Costs increased by 1%, due primarily to an increase in content costs from including additional hours of local own produced programming in the spring schedule, which was partially offset by savings from foreign programming. The higher cost of local programming was also mostly offset by savings from cost cutting measures, mainly due to lower personnel costs.
I’ll hand the call back to Michael.
Michael Del Nin
Thanks, Dave. As you all know, we issued a number of warrants as part of a rights offering in 2014. And the two year period to exercise these warrants opened in May of this year. To-date, approximately 6 million of these warrants have been exercised at an exercise price of $1 per share. This represents almost half of the total amount of issued warrants not held by Time Warner.
Last week we elected to repay the full $7.5 million of guarantee fees on the 2018 Euro Term Loan previously paid in kind, primarily with the proceeds from these exercises. As we’ve discussed in the last few calls, the proceeds from the warrant exercises have been earmarked for paying down our debt in order to responsibly delever the company.
Our initial focus continues to be on guarantee fees and interest related to the 2018 Euro Term Loan as we intend to substantially repay this nearest debt maturity when due rather than refinancing it, using the proceeds from future warrant exercises together with cash generated by the business. With the $62 million of unlevered free cash flow in the first half of 2016, we remain on a track to generate between $85 million and $95 million this year at actual rates, an improvement from $74 million in 2015 as the anticipated growth in OIBDA will be partially offset by investment in new local productions for next year. Since we still expect to be free cash flow neutral for the year, on slide 18 of our presentation, we have outlined exactly how we intend to deploy the cash generated by the business this year.
We already paid approximately $28 million of accrued interest as part of the refinancing transaction completed in April. And as already mentioned, we elected to repay $20 million of guarantee fees in the first six months of the year. We are obliged to pay about $16 million of interest in cash together with about $11 million in related guarantee fees. This leaves $10 million available to pay the guarantee fee related to the 2018 Euro Term Loan due in November in cash.
Looking ahead to the rest of 2016, we remain upbeat, very upbeat in fact, about our prospects in the second half of the year. Clearly the decision by the United Kingdom to exit the European Union creates a greater level of uncertainty about the future macro-economic environment but we’ve not seen any appreciable impact on our business at this stage.
With that in mind and given OIBDA growth of 18% in the first half of the year, we remain confident that we can achieve constant currency, OIBDA growth for 2016 in the low to high teens. You would have seen that FX benefited our results at actual rates in both the three months and six months ended June 30.
FX rates have since moved as a result of macro events and Central Bank policies and we still expect that a 1% movement in the euro/dollar rate this year will have an estimated full year OIBDA impact of $1.75 million.
With that, I’ll turn things back over to Christoph for a few closing words.
Thank you, Michael. We remain committed to the pillars of our programming strategy and will maintain investment in programming on a targeted basis to improve our competitive position as we continue increasing the profitability of our channels. We wish you all with a restful summer break and look forward to speaking with you again when we report third quarter earnings. And now I’ll turn back things 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.
Certainly, the floor is now open for questions. [Operator Instructions] Thank you. And I’ll now hand you back to Mr. Kobal.
Keith, would you mind prompting for questions again?
Certainly. [Operator Instructions]
Okay, I guess we answered all the questions in the speech. So thanks everyone 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 at any time. Have a great day.
Thank you. This concludes the Central European Media Enterprises second quarter 2016 earnings conference call. Please disconnect your lines at this time and have a wonderful day.
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