Central European Media Enterprises Ltd. Q3 2007 Earnings Call Transcript

| About: Central European (CETV)

Central European Media Enterprises Ltd. (NASDAQ:CETV)

Q3 2007 Earnings Call

November 1, 2007, 11:00 AM ET


Romana Tomasova - Director of Corporate Communications

Michael Garin - CEO

Wallace Macmillan - CFO

Adrian Sarbu - COO

Marina Williams - EVP


Gregory Kolb - Janco Partners

Matthew Walker - Lehman Brothers


Good morning. My name is Biana and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Central European Media Third Quarter Earlier 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] Thank you.

It is now my pleasure to turn the floor over to your host, Romana Tomasova, Director of Corporate Communications. Ma'am you may begin your conference.

Romana Tomasova - Director of Corporate Communications

Good morning or good afternoon to each of you and welcome to CME's third quarter investor call. During this call, we will refer to presentation slides which you can download from our website www.cetv-net.com. You can find them on our homepage at the bottom left corner. We hope that you will find these slides useful.

The participants of today's call will be Michael Garin and Wallace Macmillan, who will give you the formal presentation. We are also joined today by our Chief Operating Officer, Adrian Sarbu; General Counsel, Dan Penn as well as Marina Williams, Regional Director, who will be available for questions.

Before I turn to Michael, 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 our segment financial information. These are non-U.S GAAP numbers and they include our operations in the Slovak Republic on a 100% basis for all periods including periods prior to our acquiring control on January 23rd, 2006 when their results were appropriately accounted in our U.S. GAAP consolidated statements. A reconciliation to our U.S. GAAP number is in Note 16 to our accounts on page 29 of our 10-Q.

In the course of this call, we will be also referring to anticipated revenues and EBITDA for the year to December 31, 2007, for the broadcast operations of certain of our segment. Again these are non-GAAP measures. A reconciliation of the anticipated segment revenues figures to our anticipated consolidated net revenues can be found on our website at www.cetv-net.com. We don not present a reconciliation of anticipated segment EBITDA for the year to December 31st, 2007. This is because we have a significant amount of debt that is denominated in euros and consequently, our earnings are subject to inherently unpredictable and potentially material foreign currency gains and losses. It will there fore be unreasonable for us to attempt to determine an expected figure of consolidated net income before taxes for the Company on a projected basis for 2007 for purposes of reconciling to the segment EBITDA figure that we will be referring to in this call.

And now let me give the floor to Michael.

Michael Garin - Chief Executive Officer

Thank you, Romana. Hello everyone and welcome to our third quarter earnings call. It's a particular pleasure to join Adrian, Wallace, Marina, Dan and Romana to report to you on one of the best quarters in CME's history. This was a period in which every one of our operations grew by more than 25%, while our super star performers as you will hear, achieved results nearly double that mark. It was an incredible performance across the board and one in which we take justifiable pride.

Overall segment revenues increased by 55% and segment EBITDA by an amazing 147%. Our new media initiatives also showed impressive results, attracting 10 million unique users to our various sites during the month of October. That's more than 10% of the entire population of our region. While this is an excellent performance, we are still in the early days of executing our strategy and we have very high ambitions for our eminent and intermediate future.

During the quarter, we also entered a critical step in the path toward assuming control of our Ukraine network by securing a 60% ownership in the 1+1 license, equal to our economic interest there. During the period, Igor Kolomoisky, one of Ukraine's most successful business leaders made a $110 million investment in CME and joined our Board. Given Igor's understanding of the Ukrainian market and the country's prospects of growth, investors should take this as a very positive indicator of the future outlook for the largest country in our 6 nation portfolio of networks. Ukraine, as you know, represents about half the total population of the CME footprint.

Two weeks ago, we met in Bucharest with more than 50 investors and analysts for our annual investor conference, where our country managers and regional directors give detailed presentations about our markets and prospects. It was particularly appropriate and somewhat poignant to have held our conference there, since the evening before the conference opened we announced the appointment of Adrian Sarbu as CME's Chief Operating Officer. Adrian's employment will help further integrate all CME operations, giving us even greater confidence and our ability to meet CME's continuing high growth objectives. To the best of our knowledge, Adrian is the first person from Romania to become COO of a NASDAQ listed company.

This is an important step for Romania as well as for CME and Adrian. As the Romanian Prime Minister noted in his talk to the conference, it is just one more indicator of how the newest members of the European Union are playing increasing important roles in international activities. We are proud of Adrian's accomplishments and of the achievement of the other 3400 CME employees, less than 30 of whom come from outside the region.

In the third quarter, each of our six countries turned in strong performances. TV NOVA in the Czech Republic maintained its position as the most watched network in the world as measured by audience share. Segment EBITDA increased by 53% and broadcast margins reached 51%.

Romanian revenues grew by 51% and EBITDA by an amazing 67%. TV Markíza's revenues grew by 45% and EBITDA by an incredible 130%, I am sort of running out of superlatives here, but I think they are appropriate for this kind of performance.

In Ukraine, 1+1 revenue increased by 156% and the network produced an all-time high EBITDA margin of 42%.

In Slovenia, revenue grew by 27% in the face of strong competitions, both from State TV and MTG's newly acquired TV3.

Croatia's revenue grew by 63%. Audience shares continue to improve and we remain on track to reach breakeven by the end of fourth quarter of next year. Because of these impressive results, we increased our guidance for 2007. We now expect to end the year with total segment revenues between $795 million and $820 million, and total segment EBITDA between $285 million and $305 million, which includes the $8 million of operating expenses we're investing in our non-broadcast efforts this year. With the strong audience shares, the impressive revenue and EBITDA growth we are delivering, CME continues its role as the fastest growing multinational broadcaster in the world. Now, over to Wallace.

Wallace Macmillan - Chief Financial Officer

Thanks Michael. The third quarter is the slowest season in the year for all broadcasters and so I am pleased to be able to report very strong results as Michael has introduced. I am going to start by taking you through the results of our broadcast operations in each of our markets, highlighting performance changes against our third quarter last year. These changes exclude the results of our non-broadcast or new media operations, and I am going to refer to the slides that Romana introduced on our website.

Turning to slide 8, which depicts the Czech Republic, TV NOVA in the Czech Republic continues to be one of the best performing broadcasters in the world. We had another excellent quarter. TV NOVA has a 44% audience share in prime time in its target 15 to 54 audiences. Despite modest levels of programming spend in our hot summer season. Our broadcast EBITDA therefore increased by 53% to $26 million, resulting in a broadcast EBITDA margin of 51% compared to 43% in the third quarter last year.

Our new digital broadcast, a news facility was completed on time and within budget and on October 14, we started broadcasting our news from there. This is the first high-definition quality broadcasting facility in the Czech Republic and reaffirms our leadership position while also underscoring our commitments on-air quality and the transmission to digital broadcasting.

The Czech parliament has approved a new law on digital broadcasting and this is also approved by the senate earlier today. This draft still has to be approved by the President by the end of 2007, so further amendment is possible, but unlikely. Under this draft, the TV NOVA license may be extended for 8 years until 2025, if TV NOVA signs up to the analog switch off, which is not expected to occur before the end of 2010 and is likely to be later.

State TV will retain the limited amount of advertising until analog switch off. CT1 is allowed 10.8 minutes per day and CT2 7.2 minutes per day.

Turning to Romania in slide 9, you will see the pace of growth accelerated in the quarter with broadcast revenues growing 51%, broadcast EBITDA growing 67% and margins jumping from 40% to 44%. From seasonally slowest quarter in the year, these results are quit remarkable. The sport.ro website attracted 2 million unique visitors in September, becoming the leader in the sports space. Taken together, our Romanian websites attracted 4 million unique visitors, ranking them collectively among the top internet destinations.

Turning to the Slovak Republic on slide 10, TV Markíza had a tremendous third quarter. Broadcast revenues grew by 45% and broadcast EBITDA grew by 130%, generating an EBITDA margin of 28% as against the 18% in the third quarter last year. In the quarter, Markíza maintained the very high audience share established earlier in the year. Our 12 to 54 target group prime time audience share in the quarter was nearly 39%, jumping from 35% in the third quarter last year. These outstanding results are a consequence of our gaining control of the station last year. Since July, we now own 100% of our Slovak operations following the acquisitions of the remaining 20% minority interest in TV Markíza for approximately $79 million.

Studio 1+1 in Ukraine is showed on slide 11. We have enjoyed a strong quarter in Ukraine, thanks to significant price increases, both for commercial and political advertising. Our revenues for the quarter grew 154% and led to 42% EBITDA margin. In September, we built our pre-election schedule around news, fiscal debates and talk shows, and this allowed 1+1 to charge premium prices, and attract $18 million worth of advertising from political parties. Our full schedule and in particular new entertainment shows launched in October has proved to be a success so far, enabling 1+1 to achieve number one audience share position in the 14 to 49 demographics in a number of slots.

The new government should be formed by November 15th and after this, we should gain a clear picture of how the market will develop in the coming months.

Slide 12, gives an overview of KINO and CITI channels in Ukraine, and there we continue to build our multi-channel strategy. And we are pleased with the progress of these stations.

Slide 13, shows Slovenia, where POP TV and Kanal A together are market leaders both on air and on line. With the 45% audience share, in our 18 to 49 target market, and our website access by 75% of internet users. Slovenia delivered good third quarter results. Broadcast revenues grew 27% and broadcast EBITDA was up 49%.

Croatia is shown on slide 14. NOVA TV has continued to make strong progress in the third quarter. Our prime time audience share grew from 19% to 21% against quarter three last year. Increased audience share and improved sell out resulted in broadcast revenue growth of 63% in the third quarter, and our broadcast EBITDA loss fell by $1.5 million. We are still on track to reach breakeven in the later part of 2008.

Following the acquisition in the second quarter of 76% of blog.hr, the largest blogging website in Croatia, we successful integrated this site with our new portal, Dnevnik.hr, to become the number one internet site in the country, with a combined total of over 2 million unique visitors per month.

Slide 15 shows our segment result for the quarter. These reflect the combined broadcast and non-broadcast results for each segment. Our segment net revenues grew 55% against Q3 last year with particularly strong growth in Romania and the Slovak republic and especially Ukraine. Total segment EBITDA grew 147%. Our overall segment EBITDA margins grew to 37% from the 23% reported last year.

Our year-to-date segment results are shown on slide 16. And against the same period last year, these show segment revenues growing 38% and segment EBITDA growing 57%.

Slide 17 shows our summary consolidated income statement. Our GAAP consolidated income statement shows $54 million of operating income increase in the first nine months against last year. Below operating income, the most significant movements are increased net interest expense, which include $7 million charges incurred in redeeming our 2012 floating rate notes in the second quarter, an increased non-operating expense, which include accruals in anticipation of a settlement of outstanding disclosed litigation in Croatia and increased taxes reflecting our profit growth.

Net income from continuing operations for nine months was nearly $16 million against a loss of $1 million last year. Interesting to note, the same weakening of the U.S. dollar that called for $25 million charge per derivatives and foreign currency losses on the conversion of our euro-denominated senior notes, all caused the $81 million benefit from currency translation adjustments, you can see at the bottom of the slide. This shows the increased value in dollar terms of our net investment and assets there in other currencies such as TV NOVA and Markíza.

Slide 18 shows the picture of our summary consolidated balance sheet. Our net debt at September 30 totaled $396 million. During the quarter, we increased our facility with EBID, ING, Ceska sporitelna by €50 million by reducing the interest net payable on our existing €100 million facility from 2.75% to the same spread of 1.625%. This increases our financial flexibility and reduces our average cost of financing. Also in September, Standard & Poor's upgraded our corporate credit rating from B minus to BB.

Cash flow is shown on sub slide 19. In this summary, you can see this operating cash flow for the nine months of $96 million is an increase of 41% over the $68 million generated in the same period last year. This is despite a significant increase in programming investment and reflects our improved operational performance.

To close, I would like to confirm the updated guidance on CapEx and corporate costs we gave in our Bucharest investor conference two weeks ago. We expect to invest between $75 million and $80 million in CapEx this year and anticipate corporate cost, excluding charges of stock-based compensation to be in the region of $36 million.

And on the new media fronts, we expect to invest approximately $10 million this year between CapEx and OpEx in our non-broadcast operations. And now back to Michael.

Michael Garin - Chief Executive Officer

Thank you, Wallace. Our results speak for themselves, so without further ado I think I will go directly to questions and hopefully we will be able to address any thing that's on your mind that we didn't cover in our presentation. So operator, if you can now call for questions that will be great.

Question And Answer


Thank you. [Operators Instructions]. Our first question is coming from Greg Kolb with Janco Partners.

Gregory Kolb - Janco Partners

Hi thanks, great quarter guys. Question on... actually two questions I'll put it in. Ukraine, just any thoughts on the current situation, I know you said you are looking at November 15th as the day they might settle every thing but if you've read commission articles, it looks like a kind of uncertain situation at the Orange coalition being kind of shaky. Will you strike great numbers there? And then if you look at your guidance, you kind of plug it in, you subtract your current results, things work little conservative in Romania and Slovakia. I was wondering if you guys have any thoughts on that. Great quarter though, thanks.

Unidentified Company Representative

Okay. Questions here was on Ukraine, your assumptions are right, there is a certain degree of uncertainty in relation to the formation of the government by constitution they announcements of the... giving of support will happen in the weeks after their constitutional court recognized the validity of the election results. However, as we have seen Ukraine have been in this analog situation before and that's why we are... we've given a range of our results for the year. We could see some slow affinity in the first weeks of October in relation to the mobile operators in the country because usually they are the first ones to be affected by the political changes. However, we can see bookings from commercial plan in our booking system so you can see the range which we've given and we are still standing by this.

Michael Garin - Chief Executive Officer

Let me pick up the second point on guidance. As we have said, each of the markets, we are very much aware this stage in the fourth quarter or this has just given rise to both upside and downside and when trying to assess the overall guidance which we gave for the total company, we try and take an intelligent view across all of the markets of where and which side of the line some of these movements can fall and that's why we actually give a range on the overall guidance. The indicative guidance by markets, which we gave in the Bucharest Conference is as a single number only indicative and we therefore likely at this stage, if you succumb to the first... the first which is the overall corporate guidance by recognizing there can be some movements either way within each individual market.

Gregory Kolb - Janco Partners

Sure thanks a lot.


Thank you. Our next question is coming from Matthew Walker with Lehman Brothers.

Matthew Walker - Lehman Brothers

Hi guys, good afternoon. Just a couple of questions, if I can. One is... sorry, three questions. The first is on the FX and the derivatives of it, it's tricky and also the other expenses where you are obviously accruing for the litigation. If you can give any full year guidance on those items; that will be helpful. The second question is on the non-broadcast operation. I noticed that it cleared off the limited number -- a limited amount of revenue been generated so far. I think it's a couple of million in the nine month. The growth rate in the international, the non-broadcast operation seems to be slightly below what you achieving in TV and I was wondering if you could explain and what sort of steps you need to take to move monetization of the traffic, and any insight you can give us into advertising growth in some of these markets. And the third question was on, of the very strong revenue grade in the Ukraine, the audience in Ukraine in Q3 has gone down fairly significantly. And I was wondering if you could split that may be between sort of what's happening politically with the political advertising versus what was achieved organically and if the audience is actually improving in Q4 from that sort of 15.2% all-day level. Thanks.

Wallace Macmillan - Chief Financial Officer

Let me start off with that math and pick up the... start with the first accounting type question. The foreign exchange gains and losses, in fact the number you see in the slide is a compound, you will see from the filed Q that the actual FX loss in the quarter was close to $29 million and we had a small gain in the variable derivatives of about 3.5. The vast bulk of that $29 million is determined simply by the retranslation of our euro denominated notes and occasionally other facilities at the end of each quarter back into U.S. dollar. And at the time of a weakening dollar, we get a hit. If the dollar were to strengthen, then we will get a benefit from that line. And so, in order to answer your question, you got to tell me whether dollar is going to weaken or strengthen by the end of the year and like a number it's the model and in that stage you will get as good as mine and probably better than most of our bankers. On the other part of that you asked about the accruals and I think that we have accrued what we believe is necessary at this stage for dealing with that litigation. I am going to pass you on for your second question on non-broadcast to Adrian.

Adrian Sarbu - Chief Operating Officer

Matthew, we need our best to set the table, now we are on a process to bringing the very good food and then we will lay it towards the guests. So you will notice that our growth in international revenues is shy, it was not our target. Our target is 58 stream of users to become constant users, consume more pages, more minutes and next year we will start to monetize... we will start monetizing the profits.

Matthew Walker - Lehman Brothers

And can you just shed a ray of light on what... may be what's happening with the internet ad growth in those markets. Is it very concentrated towards that or display or how is it working in those market?

Unidentified Company Representative

Romano can give you some answers.

Romana Tomasova - Director of Corporate Communications

If you look at internet advertising growth that grossed our markets there, it's growing pretty rapidly, but you have to realize that its growing to a very low base. So for example, in the Czech Republic, the internet advertising growth is around 30% for a year, in Ukraine it's probably more but the total Ukraine internet advertising market in 2006 was just $6 million. It's estimated at $10 million in 2007. So you will see high growth figures that's from a very low base.

Matthew Walker - Lehman Brothers

Right thanks.

Marina Williams - Executive Vice President

And in relation to Ukraine, I would like to remind you how specific this year and quarter was in relation to the political activity. We have made an intentional decision to delay our fall schedule crossover because September was the month where the channel was really full of political shows and there was a lot of efforts made in that area, so to track the maximum from there, political budgets of the country. So the October proves to be a very a successful month for us. We've launch most of our new entertainment shows and also the first season of Cadet [ph] and if you look on week-by-week basis, we would be actually sharing number position with Inter.

Matthew Walker - Lehman Brothers

And would that be just to put numbers on it, would that be sort of around 20% audience or something like that?

Marina Williams - Executive Vice President

No both general side around between 18 to 19%.

Matthew Walker - Lehman Brothers

Okay great. Thank you very much.

Marina Williams - Executive Vice President



Thank you. [Operator Instructions]. Our next question comes from Jim Lee [ph] from Morgan Joseph.

Unidentified Analyst

Hi gentlemen, I am here for Dave Kestenbaum. He just wanted me to ask you if you would give us an update on what's going on in Turkey at this point.

Michael Garin - Chief Executive Officer

Well as you know, Turkey is conducting an auction of one of the principle media assets that had been seized by the government, managed by a bank for the last approximately 18 months and now it's being re-privatized. The opportunities in Turkey are significant, which is why all media companies, CME included are looking at that. But since this is very competitive situation, other than to say that we are interested in Turkey, I think there is no appropriate comment that I can make at this time.

Unidentified Analyst



Thank you. At this time, there appears to be no further questions, I'd like to turn the call back over to management for any closing remarks.

Michael Garin - Chief Executive Officer

Thank you very much. Thanks so much for joining us. We had 97 to 98 people on the call. I think it's an indication of the interest that CME has attracted. I want to also thank the over 50 people that came to Bucharest, an impressive number from the United States, but Eastern Europe is far way away from U.S. where 74% of our shareholders reside. So next year's investor conference will be back in the U.S. and we hope we will have an even large turn out in the States. And as always, we are available individually for questions, I say this in every conference call. It may sound a little boring. But we honestly believe that our best investors are our best informed investors, so we are happy to answer any of your questions in any form they come. Thank you for your attention on this call, participation and we look forward to seeing you all again shortly. Bye-bye.


Thank you. That does conclude today's conference; you may now disconnect and have a wonderful day.

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