Hungarian Telephone and Cable Q4 2007 Earnings Call Transcript

Hungarian Telephone and Cable Corp. (HTC)

Q4 2007 Earnings Call

March 12, 2008 10:00 am ET

Executives

Audrey Costa - Investor Relations Representative

Martin Lea - CEO

Rob Bowker - CFO

Analysts

Julia Campbell - Elgin Capital

Marco Guroni

Andre Grivel - Sidoti

Presentation

Operator

Good morning and good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Hungarian Telephone and Cable Corporation conference call to review the financial results for the fiscal year end of the 31st December 2007. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded today.

Right now I will turn the conference over to Ms. [Audrey Costa], Investor Relations Representative. Please go ahead.

Audrey Costa

Thank you, operator. Hello everyone and thank you for joining us on the Hungarian Telephone and Cable Corporation Conference Call to review the financial results for the fiscal year ended December 31, 2007.

Before we begin, I would like to read a brief Safe Harbor statement. This conference call may contain forward-looking statements. These statements reflect the current belief of Hungarian Telephone and Cable Corp.'s management as well as assumptions made by and information available to Hungarian Telephone and Cable Corp. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual future results and developments could differ materially from those set forth in these statements due to various factors.

These factors include among others changes in the general, economic and competitive situation, particularly in Hungarian Telephone and Cable Corp.'s businesses and markets. In addition, future results and developments could be affected by the performance of financial markets, fluctuations in exchange rates and changes in national and super national law, particularly with regard to tax regulations. Other factors may be found in the company's periodic filings with the Securities and Exchange Commission. The company assumes no obligation to update forward-looking statements.

I would also like to remind participants that we are webcasting today's call live. The webcast and presentation, which our presenters will review, may be accessed on the Hungarian Telephone and Cable Corp. website at www.htcc.hu on the Investor Presentations and Bondholder Filings page under Investor Relations.

The presentation has been filed with the U.S. Securities and Exchange Commission and is available on the SEC's website www.sec.com. An archive of today's webcast will be available on the Hungarian Telephone and Cable Corp.'s site for 30 days.

During today's call, Mr. Martin Lea, Chief Executive Officer, will share an overview of the business and financial results for the fiscal year ended December 31, 2007. He then will hand the call over to Mr. Robert Bowker, Chief Financial Officer, to review more specific financial information. Mr. Lea then will return to share some perspectives on the company’s strategy and markets going forward.

I would now like to pass the call over to Mr. Martin Lea. We remind everyone again, that the presentation that Mr. Bowker will address may be found on www.htcc.hu, on the Investor Presentations and Bondholders Filings page under Investor Relations. Please go ahead Martin.

Martin Lea

Thank you, and good afternoon or good morning to everyone on the call, thanks for joining. Rob and I are here in Budapest.

So I am going to talk through the presentation that hopefully you all have access to. So, we will start with the highlights of the financial performance for the year, ended 31st of December 2007. Our pro forma consolidated revenue in U.S. dollars increased by 6%, year-on-year. Obviously, when we say pro forma throughout this presentation, we're assuming that, HTCC, Invitel and Tele2 Hungary have been combined as of the beginning of the applicable period. So where we're drawing comparisons with 2006, we're assuming that those organizations have been joined from the 1st of January 2006.

Our pro forma consolidated growth margin increased by 10% for the year, compared to 2006, and our pro forma adjusted EBITDA grew by 17% in U.S. dollars. Our gross margin percentage for the year was 65%, which compared to 63% in 2006, and our pro forma adjusted EBITDA margin was 38% compared to 34% in 2006.

I think most importantly, and we'll see this in a little bit more detail later, is that our gross margin was very stable and consistent for the four quarter's during 2007. The Hungarian forint appreciated against the U.S. dollar by some 15% for the year 2007 compared to 2006, which obviously to an extent flattens our results in U.S. dollars. When we come to the detail, we'll look at that result in local operating currency or in the forint.

Others highlights: We continue to see good growth in the broadband segment, our broadband ADSL customer base increased by some 30%, up to a 122,000 as of the end of 2007. That certainly would represent a growth rate that was higher than the overall market growth rate. And finally, we conclude it is management that has internal control over financial reporting, which was effective for the year. Independent auditors concluded in their opinion that we've maintained, in all material respects, effective internal control over our financial reporting. In other words, we obtained a clean box opinion.

Moving on to the next page, just to reflect on the integration of Invitel into HTCC, the integration process is substantially complete. The head count has been reduced by some 20% since we started the process, about something in excess of 300 people.

The whole of our operation has been re-branded to Invitel, the only part that remains that isn't Invitel is we are still using the Tele2 logo, for the Tele2 customer base, and we'll probably do so to the end of this year. The integration of the physical networks will be complete by the end of this month, and that’s obviously one of the major cost-reduction drivers.

We rationalized the location for the two businesses specifically relocating everyone into a single headquarters. All of our financial reporting is now on SAP. We've created a single product portfolio which means that irrespective of who you are and which area you happen to be in, you will be receiving a standard set of propositions in the office, from the company. We've standardized all the employment terms, which means that level playing all of our people and we now have one single collective agreement with the trade unions and the worker councils.

And finally at the end of last year, we actually integrated the Hungarotel, PanTel, V-Holding and Euroweb legal entities up into Invitel legal entity, which of course significantly reduces our administration.

We initially estimated that we would achieve some EUR14 million of operating cost savings as a result of the integration, I think that was the guidance we provided to everybody around April. We now believe that we'll actually see around EUR17 million of savings in operating expense by the end of 2008.

Moving to the next slide, I would just like to talk a little bit about Memorex, as I guess everyone knows that on the 20th of December, we signed an agreement to buy Memorex. That transaction was completed last week on Wednesday the 5th of March. Memorex is a leading provider of telecommunication services, specifically bandwidth-type services or capacity services in the region. They sell SDH services. They sell [wire line]. They sell dark fibers. They have a 12,500 kilometer network spanning 14 countries, a very blue chip telecommunications customer base, and typically long-term contracts. The estimated EBITDA for the year-end 31st, December 2007 is around EUR16.8 million.

The wholesale business already is a significant contributor to HTCC's overall EBITDA and is a growing part of our business. Once we add Memorex to that then the wholesale business will contribute around 24% of the total gross margin generated in the company.

The Memorex acquisition, the key terms of the deal, the purchase price was EUR30.1 million to acquire 95.7% of the equity, plus we assumed some of Memorex's debt. Of that EUR30.1 million of the purchase price, the equity EUR12.1 million will be held in escrow for six months, and around another EUR6 million will be held for further 12 months.

We refinanced the significant proportion of the Memorex's debt closing and the acquisition and that refinancing was financed through a subordinated bridge loan facility arranged by Merrill Lynch and BNP Paribas. It's our intention to subsequently replace that bridge with more appropriate longer-term financing. We also intend through a squeeze-out process to buy-out the remaining minority shareholders. Rob is going to cover some of the detail around that and we will look it later on in the presentation.

Moving to the next page, again talking about Memorex, just to reiterate what we probably said when we talked about this before, why did we think it was in the shareholders' interest that we acquired this business? As we said, Memorex is a leading provider of infrastructure-based services in the region. It is important to emphasize here that Memorex is not in the wholesale voice business, it's only in the business of providing data or capacity type services which tend to be higher margin and with longer-term contracts.

Memorex is benefiting from growth in the region. This is because, firstly, we tend to have higher GDP growth in Central-Eastern Europe than in Western Europe, but also the general increase in Internet usage continues to drive the growth in demand for capacity, both within the region and between the region in Western Europe and North America.

That customer base is high quality. They have around 135 customers, but they are not heavily dependent or anyone with the largest 20, only accounting for some 18% of the planned revenue. Their EBITDA margins are high around 40% over the last couple of years. They have also invested a significant amount in what is the high quality regional network and the whole Memorex business is very complementary to our own wholesale data business.

So in terms of our competitive positioning, when we put these businesses together we will be the number one provider of wholesale capacity services in Central and South Eastern Europe. We will provide the larger Western carrier people like BT, for example effectively with a one-stop shop solution for the region, this means that we can also standardize pricing and quality across the whole of the region that they can then reflect into the agreements they have with their corporate customers and of course we can provide them with the single point of contact in terms of ongoing support, account management and operational management of the network.

If you look at the next slide, this is just to show you the combined network infrastructure. I'm not going to go into lot of detail but this is just overlaying the, if you like the Invitel regional network and the Memorex's regional network, and you can see some of the areas where there's already expansion going on. But you get a good feel here of the coverage and also to the degree of resilience because of the number of potential forint reach between various points of presence.

If we move now back to Hungary. Firstly, on the next slide, take a brief look at the macroeconomic scene within the country. Over the last year, we've seen a pretty stable situation as far as the currency is being concerned. The budget deficit seems on track to fall to less than 3% of GDP by 2009. Inflation, which was quite high at the back-end of last year, is expected to fall significantly during this year and into 2009. And as a result of the improvement of the overall macroeconomic indicators, the Central Bank has cut its base rate from 8% to 7.5% since the middle of last year.

To the next page, and this refers to the specific to the telecommunications market in Hungary. Based on the latest information available from the regulator and the Central Statistical Office, I think the first thing I've highlighted is that the fixed-line penetration level is stabilizing. You can see the fixed-line penetration has fallen from around 75% to the high in 2001, and it gradually came down to 66% as of the end of 2006. At the end of the third quarter of 2007, it only fell one point down to 65%. So we are definitely starting to see some stability there. With that, probably part of the function is the fact that mobile penetration is now well over 100%, but also, as you can see broadband penetration per household continues to grow. It reached 31% of households by the end of the third quarter.

Two very important points here; firstly that broadband ADSL continues to maintain a higher share than cable. You can see ADSL represent some 58% of the market, but there is also -- in addition to that significant growth potential still, if you compare the level of penetration in Hungary with that of Western Europe which is over 50%.

On the next page, I just wanted to explore a little bit in more detail, what's happening in our traditional In Concession Voice Business. So these are the areas of the country where we are the incumbent operator. That's around about 20% of the country in terms of population, and we've seen very interesting trends. Firstly, in the top chart you can see that the monthly line churn has steadily been decreasing throughout 2007, not only in the ex-Invitel, but also in the ex-Hungarotel areas. And we've been focusing a lot of attention in bringing the line churn down in the ex-Hungarotel areas through various methods, because the churn rate in absolute terms still remains slightly higher than in the Invitel areas. But the most important point here is that line churn is falling, and we're actually seeing more files for new customers in 2007 than we did in 2006.

The second important trend, which is shown the bottom graph, is that our voice traffic in our traditional Concession areas and this is measuring outgoing minutes stabilized very significantly during 2007. So you can see from those charts that growth in the ex-Invitel and in ex-Hungarotel areas from the middle of 2007, we've seen very little change in the level of outgoing voice minutes.

Both of these factors means that we are starting to see, and I believe we will continue to see, much more stability in terms of the gross margin contribution that's coming from the traditional In Concession Voice Business. There is much more stability than, for example, what we saw in the period between 2004 and 2006. And I would also add to that the fact that what we still are getting a very high proportion of our revenues from the monthly fee, something in excess of 60%. So we're seeing some very encouraging signs in what's happening in the old traditional In Concession Voice Business.

I'd now like to move on and talk about the results for the year ended December 2007. What we have got on the next chart, we got the results in forint on the left hand side and the results in dollars on the right hand side. As we have said already, the change in the exchange rates is slightly flattering the dollar results. I'm going to take this on the results in Hungarian forint, which is obviously our operating currency.

Revenue was down 8% year-on-year. Our cost of sales fell 14% and therefore our gross margin only declined by 4%. And although it went down 4% between the whole of '06 and '07, we will come on to see in a minute that actually during the whole of 2007, the gross margin was very stable.

Gross margin percentage increased from 63% to 65% comparing the two years, and our adjusted operating expenses, excluding certain non recurring items, you can see fell significantly by 11%, and that was obviously starting to demonstrate the benefits of the integration of the two businesses. Our overall adjusted EBITDA increased by some 2%, and EBITDA margin increased from 34% to 38%.

There are a number of, what we call non recurring items, below adjusted EBITDA and specifically, the cost of restructuring that was principally severance costs associated with the reduction in the number of employees. Other integration costs include bringing the franchise for the complete re-branding, the closing down of one of the two headquarters' buildings, and the cost of actually running the integration program of itself.

Other items include SEC-related costs, one-off provisions, bad debt that we talked about before, and various other smaller items in the last line, which would include things such as the due diligence works that we did associated with the acquisition of Memorex. So you can see below that, that's a clean EBITDA decline by about 7% year-on-year obviously because of those non-recurring one-off type items.

If we move on to next page, on page 13, this is providing a reconciliation between EBITDA that we just looked at and the net profit and loss, again comparing '06 and '07, in forints on left hand side and dollars on the right hand side. You can see that the depreciation charges, our net financing expenses, obviously largely related to the servicing of our borrowings, gains or losses related to foreign exchange movements.

(inaudible) very significant items, first the losses related to fair value changes of derivatives. This is principally changes in the unrealized fair value of hedges that were entered into in connection with the debt that was assumed by the company as part of the Invitel acquisition.

Then the second item, losses on the change in the fair value of warrants. This was a loss related to the or at the time of the exercise of certain warrants by one of our major shareholders, TDC. Underneath that you can see taxes and that brings us to the bottom, where you can see the net loss for the period of HUF19.3 billion compared with HUF11.2 billion for the prior year.

Next on the following slide, I would like to talk about what happened during 2007. And so, actually looking at our results quarter-by-quarter. And the reason for doing this, I think it gives you a much better indication as to what is happening in the business now, what was happening in the business during 2007, as compared to purely looking at '07 in total compared with '06.

So if we look at the revenue, you can see that we've had a high degree of stability during the year, HUF23.5 billion in Q1, HUF23.2 billion in Q4. Our gross margins were very, very stable. Increasing a little bit you could argue, HUF15 billion in Q1, HUF15.3 billion in Q4. Our gross margin percentage improved during the year, finished at 65% for the whole year but 66% in Q4.

Obviously, our operating expenses were falling because of the cost reductions coming through the integration of the two businesses, nearly HUF7 billion in Q1, down to HUF6.3 in Q2, and down to HUF6 billion in Q3. They went up again a little bit in Q4, which is purely seasonal. That's because we spent a lot of money in the period building up to Christmas, promoting particularly broadband and ADSL, because that's the biggest selling period of the year for that product.

And then after that, you can see our adjusted EBITDA growing very nicely during the year quarter-on-quarter. Obviously, in Q4 we see the effect of the slightly higher operating costs that we just talked about. But overall, the adjusted EBITDA margin climbed from 34% in Q1 to 38% in Q4, 38% for the full year. In effect, we obviously talked about the restructuring and the integration costs.

And then at the bottom, we can see clearly that which again that's even after the one-off cost exhibiting a pretty stable performance throughout the year.

On the next page, again looking quarter-by-quarter during 2007, this is just reconciling between EBITDA and the net profit loss. We've already talked about most of these items, but you can see that the foreign exchange gains in the first two quarters changed the losses in the second half of the year, mainly due to the weakening of the forint against the Euro rate. Equally, the losses on the fair value changes of the hedging instruments we talked about in the first half became gains in the second half. Again, for the same reason, because of the change in the forint/Euro exchange rate and the loss from the exercise of the TDC warrant with only something happened obviously at the beginning of the year, so that shaped up in Q1.

So overall, when you get to the level of net profit, what you can see even after all of the one-off costs and so on that the net profit in the second half was a much smaller loss than we saw in the first half of the year which obviously we think is encouraging as well.

On the next slide, as we've done before, we are going to take a look at the -- we're just looking at the growth margin in each of the business segments and we'll focus on the product chart which is in forint. You can see that our Mass Market Voice business margin in '07 was 7% lower than in 2006, but as we have already demonstrated, whilst we were seeing fairly steep declines during 2006, this accounts to some of that change during 2007 itself. We've seen significantly improved stability and therefore, going forward, we would expect to see that the rise of decline there tone down.

Mass Market Internet continues to show good growth. In the [BCP] segment we saw a reduction of 8% year-over-year that was around HUF1.8 billion. But as we said before on earlier calls, about HUF1 billion of that reduction was as a result of two significant contracts in PanTel being accounted at the beginning of 2007. Which meant the '06 over '07 comparisons for the whole year were somewhat exaggerated by that event. So the reduction would have been probably 4% if you excluded those.

Wholesale, as we said continues to show growth. So our overall gross margin declined by 4%, if we exclude the effects of those two contracts I refer to, then the gross margin year-on-year will probably have gone down around 2%. But as we saw earlier actually during 2007 we've seen very, very stable situation as far as the gross margin is concerned.

Final word from me for the moment, on the next slide just I wanted to talk about capital expenditure, obviously something that you had offer, as to include in the presentation. On the left hand side we've got a chart showing the breakdown of CapEx in '06 compared to '07 and then we've got numbers in the table to the right. Let's look at the table and this is again in forint. We can see our variable CapEx increased by some 27% year-on-year.

These are CapEx costs associated with new customer acquisition and so this is really being driven by increased customer acquisitions helped by our traditional Concession areas, but also it's an extent because we actually saw an increase in the number of new customers acquired in our traditional Concession areas as we touched on earlier on. Fixed CapEx not much changed, that's sort of core backbone CapEx in the network. IT CapEx a little bit lower in '07, that's probably because we have to focus more attention on the integration related activities and capitalize operating expenses relatively stable.

So looking at the subtotal there, you can see that the CapEx in terms or related to what I call normal operations was around HUF12.6 billion, and that represents some 13.5% of our revenue in 2007. Then underneath that we've got CapEx specificity related to the integration process. This is, relates mainly to the -- obviously network CapEx and IT CapEx. We then got CapEx related to our IPTV project and I am going to talk a little bit more about that later on in the presentation and that's effectively a new service development cost. And then we've got CapEx associated with the new billing system and this is a project whereby overtime we are gradually going to migrate from all of our legacy billing systems onto a single unified billing system and for the whole company.

So, that's a breakdown of the CapEx. Obviously we try to distinguish between these, what I call ongoing operational CapEx requirements of the company, and the one-off type of items, associated principally with the integration process. But in 2008, I think that the kind of operating CapEx level would expect to see similar level in some percentage of revenue to that which we have seen in 2007. And then the integration related to CapEx will probably be a bit lower in 2008 than it has been in 2007 and we should be back to normal operating levels as we set the course in 2009.

So, that’s the stuff that I wanted to cover right now. I will now hand over and introduce Rob, who is going to talk a bit more about some of the financial aspects before I return to talk about the strategy.

Rob Bowker

Thanks, Martin. Good afternoon and good morning, ladies and gentlemen. We are on slide 19. Slide 19 sets out the good corporate structure, plus the acquisition of Memorex, which we closed last week and incorporates the various pieces of debt within the group corporate structure. Now, beneath the listed company in the U.S., we have HoldCo I, were our PIK notes sit, the EUR125 million PIK notes and that’s excludes accrued interest. And beneath that we have the Magyar Telecom B.V., where the EUR100 million Bridge Loan that we have now incurred, to finance the Memorex acquisition sits, together with the existing EUR200 million floating rate notes and the old high yield bonds of EUR142 million.

In the operating company Invitel in Hungary, we have the EUR110 million, Amended Senior Facility. And as Martin mentioned, many of the old operating companies have now been merged into Invitel. And we're only left but PanTel Technocom which has been renamed Invitel Technocom and Tele2 which has been renamed Invitel Telecom. Both of those two existing Hungarian companies will be merged into Invitel during the course of 2008.

Now in the bottom left hand corner, the green is Memorex. We have three small pieces of debt to elect in Memorex, $11 million of bonds, $12 million of finance leases, and a project loan of $10 million in Turkey, that is incurred to finance some CapEx for a major customer we have in Turkey. In occasion, now we'll just point out that Standard and Poor's have reaffirmed our rating of B+.

Moving on to page 20, which sets our capitalization table immediately before the acquisition of Memorex, and immediately after the acquisition of Memorex, and that table is in Euro and not dollars. The left hand table which sets out our capitalization structure immediately before the acquisition of Memorex is based on a adjusted EBITDA number of EUR150 million, the calculation of which we will see on the next slide.

And that leaves us with a leverage ratio up to total net senior debt level of 0.7 times prior to the acquisition of Memorex, the cash paid debt, total net cash paid debt of 2.9 times and including the PIK notes at a leverage ratio of 3.9 times and in private equity cushion of around 27% which is based on a multiple of 5.5 times the adjusted EBITDA number, you see below the table there.

On the right hand side, the capitalization structure post the acquisition of Memorex and that reflects additional cash we've taken on, so we've increased our cash balance and it also shows the seasonal pieces of debt that we took over from Memorex so that we didn't refinance during the closing of the Memorex transaction.

Post the transaction, our total net senior debt is 0.6 times, our total net cash paid debt is 3.2 times and our total net debt including the PIK note 4 times and that is based on an adjusted EBITDA number of a EUR175 million.

Moving on to page 21, is our pro forma combined adjusted 2007 EBITDA, the top table is in Euros and the bottom table is in dollars. So those who want to work in dollars, I'll go through the Euro table. The calculation of our pro forma adjusted EBITDA is in the first column, we took the second half pro forma actual numbers of an adjusted EBITDA of EUR71 million. We multiplied that by 2 to get to a EUR141 million. We added synergies still to come, i.e., that are not included in the run rate for the last six months of 2007 of EUR9.3 million. We expect total synergies up to the end of the 2009 of EUR21 million, the majority of which, i.e., EUR17 million as Mark mentioned earlier will be achieved by the end of 2008.

In addition, we had the EBITDA for 2007, the Memorex of EUR16.7 million, the EUR3 million synergies we expect from the Memorex transaction and in addition a signed contract in Turkey which is expected to contribute EUR4.5 million of EBITDA starting in around July of 2008 and that give us a combined pro forma adjusted EBITDA of around EUR175 million.

Moving on to page 22 is our balance sheet. This is in dollars and it compares the 30th September 2007 balance sheet with the 31st of December 2007 balance sheet. I won't go into a lot of detail here. The main changes over the two periods are related on the asset side to the completion of our purchase price allocation associated with the Invitel acquisition. On the liability side, it reflects the slight softening of the forint in the latter part of 2007 against the Euro, which resulted in an increasing debt in dollar terms, offset in part by reduction in (inaudible) liability.

That's all I have. I will now hand back to Martin for a wrap up.

Martin Lea

Okay, thanks Rob. Just the quick revisit of our business strategy, I think it's important to say that not much changed. Clearly operational products use to successfully complete the integration of Invitel into HTCC and then subsequently do the same with respect to Memorex. In terms of our market segments, we will continue to maximize the business from our traditional concession areas and we really are starting to see stability there as we talked about earlier. We will continue to focus on winning business customers nationally, particularly focusing on those where we can directly connect them to our network, backbone network.

Obviously though that gives us a higher level of gross margin. We will continue to focus on taking advantage of this natural growth in the broadband market and if possible maintain our increasing market share. We will take advantage of this excellent regional network that we've now got and continue to focus on obviously growing the wholesale data and capacity business. And to the extent that there are any further consolidation opportunities principally in Hungary or possibly Romania or in the wholesale business. Obviously if we believe those will genuinely increase shareholder value, then we will take a good look at them as and when any such opportunities arise.

The priorities for this year then I guess the successful completion of the integration, this is on the next slide. We are obviously working hard to try and make sure we see a continuation in this improving gross margin trend that we saw during 2007. There is a high level of focus on the project to gradually migrate from our legacy billing systems, onto a single unified system. That project will go on into 2009, a lot of work required during this year. The successful completion of the Memorex transaction, I guess we can kind of tick that box but we’ve now got to look at focusing our attention on the successful bringing together of that business together with our own wholesale business.

On the other interesting project, the [tree] in focus this year is introducing IPTV. A little bit more about that on the next couple of slides. The rationale for us introducing an IPTV service, this is focusing on our traditional In Concession business and this is really a measure to enable us to compete successfully with the cable operators. The cable operators obviously have a traditional business of providing TV services, in some cases they now provide broadband, internet access services and in a fewer cases they provide telephony services.

So they are starting to offer a triple play proposition. The introduction of IPTV really means that we can do the same and it will make sure that our broadband ADSL customers don't have any major [reservations] if they want to switch to the cable companies. That's the fundamental reason for doing it. You can see the structure of how the service is provided on page 28 and we're working with a company called [Smartcom], they provide some of the middle web also actively able system integrators. You can see on the right hand side, we’ve been actively engaged in this since 2006, you can see the various steps that we’ve been through in this project.

If we go on to the next page then the situation today is that basically the delivery in integration of the IPTV infrastructure is complete. Any necessary network upgrades and integration of the network with the IPTV solutions has been done. Our IT or operational support systems to the extent they need some work to support the new service has been completed. And we have now got a full line up of content all those relevant agreements have been signed.

So what we're doing at the moment is we have actually started what we call friendly user testing which we will do over the next couple of months. And then subject to any necessary [perfect] signal or anything coming out of those friendly user tests, it will be our intention to introduce the service at some stage during the second quarter.

So that's it as far as the time of the formal presentation is concerned, hopefully provided you with pretty good indications to what's been going on in the business, what's behind some of the numbers. And obviously, as normal, we would now be happy to take any questions that anyone may have. If on any condition, I'm not prepared to talk about any more detail around the IPTV business front because obviously it's reasonably a high degree of competitive sense to the same.

That said, let's go for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of (inaudible). Please go ahead.

Unidentified Analyst

Hi. Good quarter. Just a couple of questions. First, could you talk a bit about how you expect the revenues and the DA to perform in local currency this year, they do at a particular focus on the business segments, and we can now show that's performance and as strong as maybe, you've imagined, it could have during 2007? And second question is what is the total of restructuring instead of integration costs you expect during 2008? Thanks.

Martin Lea

Okay. Let me just talk about the business segment first and then Rob will try to pick up on the integration costs point. The B2B segment, if you look at, let's just talk about in Invitel, [price] had been acquired by HTCC, we cited lot of attention on the customer acquisition, passed by our traditional concession areas. We had a very clearly strategy to focus on the SME segment. We've created a pretty much new sales and marketing organization, a new product portfolio and we were very successfully gaining and acquiring new customers.

And we started to see or we start to get to the point where the growth been acquired because of the new custom acquisition was bigger if you liked in the lawful decline that was occurring in our traditional concession area mainly due to the reduction in voice traffic.

If we look at the situation at the beginning of 2007, first, I've mentioned a number of times that these two large contracts which were ceased in (inaudible) and that obviously meant for the whole of '07 compared to '06. The numbers reflected those two contracts going away.

Secondly, we had to really do the same sort of work for the whole of the group during 2007 that we got in the part in '06. In other words, we have to really focus the sales and marketing organization as an integrated unit that really start to go out and focus on new customer acquisition again how far our traditional confession areas. It was one of our key strategic focus areas during 2007.

My expectation is that during 2008 we will see a cessation of the downturn in gross margin in the B2B segment. We will start to see stability and I would hate that at some stage during the year that we will actually see the whole B2B segment turn into growth. And that's obviously helped by growth you factored in B2B segment, although we didn't look at it in the presentation, the rate of decline in traditional voice traffic in our concession areas is of course slowing as well, which helped us in addition to the growth how far our traditional confession areas. So we're at B2B, it's being tough areas for us during '07 then I would expect to see a significantly improved scene during 2008.

Rob Bowker

Hi. (inaudible) onto your question, we would expect adjusted EBITDA of around EUR145 million to EUR150 million during the course of 2008, based on the forint exchange rate 250 to 255. And then your final question around the one-off costs, we expect that to be significantly less during the course of 2008, but nevertheless we will incur one-off costs during 2008, because the integration of the companies is not complete and there will be integration of Memorex. And in addition there are still some headcount reductions to come during the course of 2008.

Unidentified Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Julia Campbell from Elgin Capital. Please go ahead.

Julia Campbell - Elgin Capital

Yes, I have two questions. First one is on CapEx. I think you said that for '08, you are still expecting a high level of (inaudible) in '09. But I know that, can you give us a bit more guidance on that provided the percentage of revenues or absolute figures that you are expecting? And the second question is on the bridge facility that you have, just how do you intend to refinance that and of course if you can give us some idea of it in external terms, in other words just the maturity interest rates and whether if there is any ratchet in terms of interest as well?

Martin Lea

Okay. Let me talk to the CapEx. Just one thing, I mean, the guidance that Rob provided on the adjusted recurring EBITDA just now that was obviously pre-Memorex, just to be clear. As far as the CapEx is concerned, yeah, I mean what I said was that we would expect what I called upon business as usual and the operating CapEx in 2008 to be similar to what we saw in 2007, so 13% to 14% of revenue.

And as far as total CapEx is concerned which obviously includes CapEx associated with the integration, the billing project and so on. What I said was I would expect to see that go down during 2008, but then should go down further in 2009, as we pretty much have completed all of those kinds of projects. So specifically if you look at the total CapEx to revenue ratio in '07 it was around 17.5%. In '08 I think we could probably expect somewhere between 15% and 16%, and then dropping off significantly in '09. And that's exactly what we said at the beginning of the year, so that's very consistent with our expectations when we first talked about these integration costs in April.

Rob Bowker

On the Bridge Loan the interest rate is 11.5%, there is no [record] going forward because we are already at the cap. We expect to refinance if we will have, significant optionality in refinancing it, including refinancing through senior debt. Potentially our 2004 high yield bonds and the bridge will alternatively [tap] to one of the listing bond instruments or alternative to that I mean a new series of floating rate notes all of which will depend on market developments really. Just one final point, if we are unable to finance it the bridge just grows over into permanent financing.

Julia Campbell - Elgin Capital

Okay. Just to clarify, when you say refinance the senior debt through the existing FRNs and existing high yield notes?

Martin Lea

Is the senior -- sorry, the senior part is assumed.

Julia Campbell - Elgin Capital

I think you said -- you had, you were looking for refinancing in senior facilities. Do you mean that the Magyar Telecom through the entity so if the type has issued FRNs and the high yield notes?

Martin Lea

I think, we said if we could tap some of the existing instruments i.e., the FRN or the high yield, or what we could do is a separate series FRN. Yes, that would [kind of pursued] with the existing bonds.

Julia Campbell - Elgin Capital

Okay. And so what you're saying is if you can't access markets, it turns into the permanent financing, is that right?

Martin Lea

Correct, correct.

Julia Campbell - Elgin Capital

And is that at a higher interest rate presumably?

Martin Lea

No, at the current cap, which is 11.5%.

Julia Campbell - Elgin Capital

Right. Okay, thank you.

Operator

Thank you. And our next question comes from the line of Marco [Guroni]. Please go ahead.

Marco Guroni

Hi. Three questions if I may. First on cost savings, given the new target for December '08 and I guess what you've achieved in ‘07; could you just tell us what the absolute dollar uplift you're expecting in calendar '08? Subject one. Another question would be on the broadband side, and sort of market trend. Could you comment on what you expect in terms of ARPU dynamics in broadband for '08?

And lastly, just going back to the bridge details you just gave us to be absolutely clear. Guess the bridge were to covert into permanent financing would that be senior to the current high yield?

Rob Bowker

Okay. Sorry, could you -- I didn't quite understand the question related to the cost savings, could you just repeat that.

Marco Guroni

Sure. Given the new targets of savings, and I'm not quite sure what number has actually been already achieved in calendar '07, so what's already on the total on P&L. I was looking for the additional savings number that will hit the P&L in calendar '08 because I'm assuming that $26 million figure is a run rate dollar figure as of December '08?

Rob Bowker

You could just do it in Euro, because…

Marco Guroni

Euros yes.

Rob Bowker

Euro that's what we work in so, I think, we've said that and I'll refer you to page 21 of the presentation. We expect the total synergies to the end of 2009 to be EUR21 million. We expect the total synergies to the end of 2008 to be EUR17 million and on a run rate basis on page 21, bearing in mind that we have multiplied the synergies by two there, we expect and we've got EUR141 million of adjusted EBITDA based on that. We would expect an additional in the column next to that, EUR9.3 million minus EUR4 million so basically EUR5 million of incremental synergies to fall on top of the EUR141 million.

Marco Guroni

Okay, brilliant, thanks

Martin Lea

And talking about the broadband market and obviously, in line with trends everywhere, broadband prices are declining. It’s related to what's happened during 2007 than the average revenue that we get from our broadband customers in our traditional concession areas have declined by around 12% over the course of the year. So if you look at the average ARPU in December '06, it went down by 12% in December '07. And in fact the change in the ARPU from our broadband customers outside our traditional confession areas went down by exactly the same percentage. I guess I don't see that the market here is going to become anymore competitively intense than is now during 2008 particularly. So I guess we would have assumed that we have a similar level of authorization during 2008. I can't believe precisely what we would see, but I have that page in front of me, so I think it's about order based on what we've seen and happened during 2007.

Marco Guroni

Okay. Thanks.

Martin Lea

And then I think the final question, sorry what was the final question?

Marco Guroni

Sure. Just to be absolutely clear on the bridge, when it converts into permanent financing at 11.5%, would that be senior to the high yield offerings?

Martin Lea

I think broadly, (inaudible).

Marco Guroni

Okay. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of [Andre Grivel] from Sidoti. Please go ahead.

Andre Grivel - Sidoti

Hi. I understand the guidance you've just provided excluding Memorex, are you in position yet to give kind of rough numbers for '08 in terms of EBITDA and CapEx for Memorex?

Rob Bowker

Yeah, we can, again, I refer you to page 21. So I think sort of broadly speaking, we would expect to realize probably $2 million of synergies and hopefully around $1 million to $2 million of the signed contract which would be just add on to the estimated year end December 2007, EUR17 million of EBITDA number.

Andre Grivel - Sidoti

So there is no organic growth in Memorex EBITDA.

Rob Bowker

We certainly hope for some organic growth. But the signed contract in itself is organic growth obviously.

Andre Grivel - Sidoti

Okay. And on the CapEx side, how much incremental, CapEx?

Rob Bowker

CapEx, just going back to the slide that Martin went through, which probably was on page 17. I think we are looking at around sort of total CapEx of around HUF13 billion to HUF14 billion.

Andre Grivel - Sidoti

That's for the group. But is that including Memorex?

Rob Bowker

That excludes Memorex.

Andre Grivel - Sidoti

Right. So how much?

Rob Bowker

Memorex around 10. No, sorry, I need to come back to you on that. Because I need to -- I have got the run rate number, but it excludes that contract. I need to add that on and have that to end.

Andre Grivel - Sidoti

Right. And overall for this year, do you expect to generate positive free cash flow?

Rob Bowker

In 2008?

Andre Grivel - Sidoti

Yes.

Rob Bowker

Yes.

Andre Grivel - Sidoti

Okay, thanks.

Operator

Thank you. And our next question comes from the line of (inaudible). Please go ahead.

Unidentified Analyst

Yeah, it's a friend calling in. Do you have any amortization on your senior debt?

Rob Bowker

Yeah, sure. It continues to amortize as it has done.

Unidentified Analyst

So it's about EUR25 million this year, how much of it?

Rob Bowker

Yes, EUR25 million to EUR30 million.

Unidentified Analyst

Is that towards the back-end of the year?

Rob Bowker

No, it could be amortized evenly every quarter.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of [Alex Renault] WestLB. Please go ahead.

Unidentified Analyst

Yes, (inaudible) speaking from WestLB Mellon Asset Management. Good afternoon. I have a couple of questions. First on the bridge loan. Is it the $100 million bridge loan at 11.5% cap? And if you translate what is the maturity and the repayment schedule of this bridge loan? That is my first question. My second question relates to the cash [operating] expense in '08, if you could use give (inaudible)? And last question relates to your growth in '08 in terms of turnover in local currency if you are expecting some growth or see the decline in growth, you are measurable going in '09, in '07?

Rob Bowker

Okay. Can we discuss that slowly again. So the first question was the bridge is a $100 million yes, as you see on page 19. Interest rate yes, is 11.5%. And if it rolls over into permanent financing and I speak under correction, but I believe it due after four or five years, I can't remember which, and there is no amortization on it.

Unidentified Analyst

So it's four to five year maturity?

Rob Bowker

Yes. At the end if you can just look and confirm that. And sorry your second question, you'll have to repeat again for me please.

Unidentified Analyst

The second question was well I think to your cash was between expense you would expect in '08?

Martin Lea

I wouldn't mind to give a specific number but we would expect it to be some significantly less than in 2007 for sure.

Unidentified Analyst

And '07 was $12 million?

Martin Lea

You can just calculate it on if you wanted in dollars. And just calculate on page 12 of the presentation.

Unidentified Analyst

But your official figure, is it around 12 million?

Martin Lea

Yeah, it's a little more actually $17 million, $18 million.

Unidentified Analyst

$17 million, $18 million in '07.

Martin Lea

Yeah.

Unidentified Analyst

And about asking to your growth in '08, official value [that you have done there] pro forma in local currency you had a decline of -- it was a decline of 8% in '07 against '06 in local currency pro forma. What do you expect in '08 pro forma?

Martin Lea

I think in '08, if you look at the underlying trends that we've talked about. Firstly there is the fact that during 2007 quarter-by-quarter we've seen an increase in the stability in revenue. Secondly, the fact that we've got pretty good indicators that the traditional In Concession Voice Business is stabilizing, that the line churn is going down, the traffic now is pretty stable and if anything it's gone up a bit. If we then take the fact that we expect to have kind of stop the decline in the BCP segment.

And then, phased together with the continued growth in the broadband business and in the wholesale business then , I think, 2008 is the year where -- what I say is we would not expect to see a continuation of declining revenues. So, we'd expect to see stable revenue and possibly later on in the year, a little bit of growth. So, probably, this is the year where, we are kind of turning around but the indicators obviously look pretty positive from where we are now.

Unidentified Analyst

Okay, and final question, what sort of interest expense, do you expect -- in your cash interest expense, do you expect in '08?

Martin Lea

Around, in broader terms, I mean, concentric with what we show in currently on the P&L, on page 15 -- I'm sorry, missed the point on page 13, around $85 million.

Unidentified Analyst

And that includes all the financing you have pro forma?

Martin Lea

Then incrementally, on top of that obviously, the bridge, around 12 million, EUR11.5 million.

Unidentified Analyst

Was [85] with towards Euros?

Martin Lea

Yeah, EUR11.5 million, yeah

Unidentified Analyst

Okay and if I go ahead out with 11.5 [on yours]?

Martin Lea

Around a $101 million, $102 million of cash interest expense.

Unidentified Analyst

Okay, thank you very much.

Operator

Thank you. And I am showing that we have no further questions at this time, please continue with any closing remarks.

Martin Lea

Okay. Right, well I think that's probably the longest call that we've had and we appreciate the number and the level of questions. There were a couple of things that Rob said he would get back on which you will. Other than that I just like to thank everyone for participating. Obviously, we'd look forward to having a call with you guys at the end of the first quarter to see how we're progressing during this year. And we will hopefully better report the continuation of some of the positive trends that we've seen during the quarter. So, thank you very much and good afternoon and good morning from me and Rob in Budapest. Bye for now.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, you many now disconnect.

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