Hungarian Telephone and Cable Corp. Q1 2008 Earnings Call Transcript

Hungarian Telephone and Cable Corp. (HTC)

F1Q08 Earnings Call

May 20, 2008 9:00 am ET

Executives

[Leslie Wolf-Kritsel] - Investor Relations

Martin Lea - Chief Executive Officer

Robert Bowker - Chief Financial Officer

Analysts

[Fred Kuji]

Camille McLeod-Salmon – Fortis Investment

[Thomas Hanson] – Muzinich

[Alex Yono – West Albene Malone Asset Management]

[Gustaf Lindivus] – Merrill Lynch

Presentation

Operator

(Operator Instructions) Welcome to the Hungarian Telephone and Cable Corp. Conference Call to review the financial results for the first quarter of fiscal year 2008 ended March 31, 2008. I’d like to turn the conference over to Ms. [Leslie Wolf-Kritsel], Investor Relations Representative.

[Leslie Wolf-Kritsel]

Thank you for joining us on the Hungarian Telephone and Cable Corp. Conference Call to review the financial results for the first quarter fiscal year 2008 ended March 31, 2008. 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. 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. 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 will be filed with the US Securities and Exchange Commission and will available on the SEC's website www.SEC.gov. An archive of today's webcast will be available on the Hungarian Telephone and Cable Corp. 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 first quarter fiscal year 2008 ended March 31, 2008. He then will hand over the call to Mr. Robert Bowker, Chief Financial Officer, to review more specific financial information. Mr. Lea then will return to share our perspective on the company’s strategy and markets going forward.

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

Martin Lea

This obviously is a call to discuss our first quarter results and I’m going through the presentation that is available on the HTCC website in the Investor Relations section. Starting with some highlights from slide four we’re going to talk about pro-forma results throughout this presentation. Just to be clear that means that we’re assuming that HTCC in of itself and Memorex have all been combined from the beginning of the applicable period. That’s what we mean when we say pro-forma.

Pro-forma consolidated revenue is dollars increased by 5% for the first quarter 2008 compared to the prior year. Our pro-forma consolidated segment gross margin increased by 10% and our gross margin percentage was 71% in the first quarter this year up from 68% in the first quarter 2007. Our pro-forma adjusted EBITDA in dollars increased by 21% to $58.6 million compared to the first quarter last year and our adjusted EBITDA margin grew from 36% in the first quarter 2007 to 41% in the first quarter this year.

The Hungarian forint appreciated against the dollar by 11% in the first quarter this year compared to the exchange rate in the same period last year but obviously somewhat flat to the dollar results but as usual we will look at results in more detail in local currency in a minute. On March 5^th we were very pleased to close the transaction to acquire Memorex, more about that in a minute. Also, during the first quarter effective at the beginning we completed the legal merge of Pantel, Hungarotel and Euroweb Hungary into the Invitel legal entity as part of our payroll integration program.

Moving on to slide five, this is to talk a little bit about Memorex and what’s been happening since we closed that transaction on the 5^th of March. As you know the total purchase consideration for Memorex was just over EUR 100 million and in connection with the acquisition we entered into a EUR 100 million bridge loan facility. This facility we will intend to replace with longer term financing in due course.

We also intend to buy out the remaining minority shareholders in Memorex and that part should be complete by the end of August this year. As you know we acquired 95.7% so far so we want to buy the remaining equity. We appointed two Invitel people, Gregg Betz and Shen Breckon and the CEO and CFO of Memorex. Memorex is now therefore under the same leadership of the rest of the Invitel Wholesale and International operations.

We’ve also changed the operating identity so the whole activities are now operating under the “Invitel International” brand. We expect to file the regular SEC financial information with respect to the acquisition in an amended 8-K filing prior to the filing of our second quarter financial report.

Moving on to page six of the presentation, the part of the overall integration process the combined Invitel wholesale and Memorex wholesale customer base is now being managed through a unified account management structure. Our pricing strategy and service portfolio have already been harmonized across the businesses.

To give you some examples of the sort of contracts that we have been won in Memorex in the first quarter you can see on the slide contract with AT&T was EUR 2.2 million, Dante EUR 2.3 million, UPC EUR 0.9 million, and KPN EUR 0.9 million. That’s just an illustration of the sort of contracts that have been written.

As part of the integration of Memorex into Invitel we said at the beginning when we announced the transaction that we expected to enjoy some EUR 3 million of cost savings. I’m pleased to report that we’ve already executed the actions that were realized around EUR 1.9 million of those savings. Those savings are coming from reductions in headcount as well as network cost savings and obviously we’ll be continuing to take further actions to get to our EUR 3 million.

We talked at the time of the acquisition about a large project to build network in Turkey. I just wanted to report on the progress which is good. The Istanbul, Ankara section of the network is complete. The Istanbul, Izmir section is largely complete and the Izmir, Ankara section we anticipate at the moment to be completed towards the end of the summer.

Moving back to Hungary specifically on page seven, just a quick look at what’s happening in the macro economic scene. The forint weakened a little bit during the first quarter against the Euro 265 HUF/EUR compared with 250 HUF/EUR during the last quarter of last year. Although it has rallied somewhat during April and May and is currently trading at around 247 HUF/EUR.

The Hungarian Central Bank increased its base rate in two installments from 7.5% to 8.25% during April and in addition, the Central Bank removed the trading band of the forint allowing free movement in the expectation of a strengthening.

Overall, the government economic recovery plans seem to be showing signs of success. The current account deficit narrowed to 3.5% in 2007 a big improvement compared to the 6% in 2006 and the indications are there will be further improvement this year. The budget deficit declined to 5.5% in 2007 and seems to be on track to fall to less than 3% of GDP by end of next year. Inflation has gradually decreased from a high of 9% in March last year to 6.6% in April this year and is expected to fall to 3% to 4% by the end of the year. On the whole, an encouraging picture.

Looking at slide eight, the trend in the telecommunications market not much change to report here. Mobile penetration has now reached the 110% level. Fixed line penetration at the end of last year was 64%. As we said before that’s showing signs of stability. That stability is partly coming through the continued growth in broadband ADSL internet access.

You can see that by the end of 2007 internet had penetration 34% of households and the larger part of that being provided on ADSL as opposed to cable and there’s still plenty of opportunities to further growth in that segment as you compare Hungary at 34% with Western Europe at 54%.

Moving on to page nine, we now are looking at the pro-forma financial statements for the first quarter. We’ll look at local currency, that’s on the left hand side of the chart obviously the results in dollars slightly helped by the change in exchange rate we referred to earlier. In local currency our revenues decline by 6% and I want to specifically talk about that in a little more detail in minute.

Our cost of sales reduced by 15% and our segment gross margin was broadly flat down 1% but our gross margin percentage strengthened from 68% last year to 71% in the first quarter of this year. Our adjusted operating expenses, when we say adjusted that’s after we extra any one off items which are listed below but our adjusted operating expenses showed a significant reduction of 12%, that’s obviously the result of the synergies from the combination of HTCC and Invitel.

Those factors together mean that we’ve shown an adjusted EBITDA increase of 9% year on year and our adjusted EBITDA percentage has increased from 36% to 41%. In terms of non-recurring cost items there are obviously costs associated with the integration and the restructuring of the business just over HUF 1 billion, due diligence expenses, some vacation accrual which will as before largely disappear by the end of the year. Some startup costs in Memorex and some other one off items.

Overall our clean EBITDA was HUF 290 million down year over year for the first quarter but a much stronger EBITDA margin percentage up from 34% to 35% and obviously that’s flat reduction in clean EBITDA coming because of the cost of the integration restructuring of the two businesses.

If we move on to the next slide which is page 10, this is reconciling EBITDA to net income as we reported so you can see at the top EBITDA HUF 8.7 billion, depreciation and amortization of HUF 4.8 million, financing expenses is HUF 5.3 million, foreign exchange losses of HUF 2.7 billion and that relates to unrealized losses due to the revaluation of our Euro denominated borrowings because of the weakening of the HUF against the Euro.

Gains on derivatives HUF 5 billion, that relates to changes in the fair value of our hedges. Taxes on net income of HUF 1 billion slightly higher than prior year due to an increase in deferred tax expense. Not overall given for net income of HUF 72 million up HUF 11 billion compared to the prior year.

Moving to page 11, I wanted to just go through the revenue in a little more detail to explain what’s happening underneath the 6% reduction. The first point I would make is that we tend to manage the business by looking at the gross margin rather than the revenue so what often is referred to as the net revenue in telecommunications business. The revenue itself, the gross revenue we saw a reduction of 6%. This has essentially come through a reduction in certain areas of low margin business.

If we look at it segment by segment, in mass market voice we saw a reduction in revenue 10% that was principally driven by the planned reduction in the number of lower margin Tele2 carrier select customers. That accounted for some HUF 600 million of the reduction. We said at the time we acquired Tele2 that we expected to let go a number of lower value carrier select customers in t-com area. You can see as a result of that gross margin rate improved from 73% to 78%.

Mass market internet revenue obviously growing and the margin improving from 77% to 82%. In the business segment, a reduction in revenue 4% that was driven by firstly a reduction in the business voice revenues in our traditional concession that accounted for some HUF 200 million.

Secondly, in Invitel Technocom, that’s the business that’s serving Mold Petrol Company there was a reduction of around HUF 200 million compared to the prior year. They were offset by growth in our data and internet business and outside our concession areas therefore the net reduction was around HUF 270 million. Again you can see the improvement in the gross margin percentage from 75% to 77%.

In the wholesale business where revenue was down by 5% this was driven by the planned reduction in the low margin wholesale voice revenue which went down to HUF 3 billion for the period from HUF 3.6 billion in the prior year. That’s been partially offset by increase in the higher margin wholesale data business which we talked about before but you can see the grow margin rate improving from 55% to 57% as a result of that change in the mix.

If we move to slide 12, this is where we’re look at what’s happening with gross margin at a segment level. This is the key measure for us and our goal as we have said before is to drive this into growth. I’m very pleased to report the gross margin was broadly flat for the first quarter compared to the prior year but obviously our objective is to drive that into growth. Having said that this is a much stronger performance than were seeing during last year.

In the mass market voice segment we saw reductions of 4% that’s partly due to having to carrier select customers going down which I talked about also due to the decline in our mass market in concession voice business albeit that decline is stabilizing. The 4% reduction in gross margin for the first quarter of 2008 compared to 2007 if you recall we look back at 2007 compared to 2006 that would have been a reduction around 7% or 8% so we are seeing much more stability in the mass market concession.

Mass market internet still exhibiting strong growth. In the business segment a reduction of HUF 92 million or 2% in the first quarter of this year compared to 2007. That’s much improved compared with the 8% reduction that we saw during last year and I see we will turn that into growth in the near future. In the wholesale segment it was flat looking at the first course of year on year but that was specifically due to a particularly strong first quarter in Memorex during the 2007 due to some private sales.

We’re also seeing good growth in the wholesale business. That’s just to give you some indication as to what’s going on segment by segment. We’re obviously very near to turning the corner whereby we can see consistent gross margin growth in this business.

A number of you have asked for us to go into a little bit more detail into some of these segments and what we decided to do is just take a slightly closer look at what’s happening in the mass market segment for us. On page 13 we’re looking here at the mass market voice segment. The top half of the slide talks about how in concession area and what we can see here on the chart is first the number of lines for those of you looking in color that’s the red line on the chart.

What this tells us is that of course number of fixed lines continues to decline but you can see that since the third quarter of last year we’re starting to see a decline in the rate of reduction. We talked about that before but I thought it would help to show it on the graph. At the same time if you look at the number of outgoing minutes you can see that pretty much over the last year the number of outgoing minutes from our in concession voice customers in the residential segment has been pretty stable.

If we look at what’s happening outside of our concession and what we’re talking here is the number of carrier pre-select customers and the number of carrier select customers. For those of you who may not recall carrier select means that the customer has to key in a prefix before making the call if we are to get that traffic in Invitel. Carrier pre-select customers we also have to get all of the traffic whenever that customer makes a call.

Typically carrier pre-select customers are more important and more valuable because they’re working on longer term contracts than carrier select customers. Carrier select customers typically won’t use the service unless you can remind them to do so through advertising. That was the Tele2 model which wasn’t really working because the operating expenses were far too high versus the gross margin.

Our strategy has largely been select; the carrier select customers gradually go down. We’d like to convert the higher value carrier for that customer to carrier pre-select. As you can see, the number of carrier pre-select customers was continuing to gradually grow during last year. You can see a reduction during February and March of this year though that was largely to do with the factor every now and then we clear out those customers where we are seeing zero usage. In other words, they’re not using the telephone and reset our numbers to reflect active users.

I can tell you during that period we continued to acquire new customers at the same rate that we had been during the last year. Our general strategy being to improve the mix with a higher relative number of carrier pre-select customers at the expense of lower value carrier select customers is a strategy that we said we would adopt after we acquired Tele2 and that’s what we’ve been doing.

If we move on to the next slide this is looking at the residential mass market internet segment. On the top chart you can see here first in red the number of broadband ADSL customers we’re very pleased to be able to report that continues to grow very nicely. I also show you on here in blue what’s happening with ARPUs. You can see that during last year the ARPU in this business remained relatively stable.

There’s a drop down from the end of last year into the beginning of this year and that’s of course because we tend to reset our prices towards the end of the year and we have a lot promotions over the Christmas period because that’s when we acquire a lot of new customers. Overall the ARPU trend is relatively stable and I think we should be pleased with those results as we show in that graph.

If we look at the bottom of the page what this is telling us, this is comparing our growth in Invitel in a acquiring new mass market broadband internet customers compared with the growth in the total ADSL market in Hungary. We are red and the total market is blue. You can see from this chart that we have consistently been continually managed to grow our ADSL customer base at a higher rate than the market obviously the implication being that we are increasing our share for total broadband DSL market.

We talked in the past about the need to expand our broadband customer base particularly our in concession broadband customer base. One of the potential competitive threats comes from cable whereby cable companies can provide a triple play offering i.e. voice, internet access, and telephony. For that reason we decided we needed to introduce an IPTV service into our existing broadband customer base initially.

On page 15 there’s a summary of the progress with our project. I’m pleased to be able to say that we will start to proactively sell this service the end of the month and on the next slide on page 16 there’s just a very quick summary of our proposition. We have the basic offering, we have an extended offering and we have premium packages and a number of thematic pools each of which have five our six channels within them.

The real UST for us apart from the flexibility and the package structure is a network PVR, personal video recorded, the ability to provide people with time shift TV around 15 key channels and also the electronic program guide. We’re very excited about the fact that we’re bringing this to market and obviously we will be able to share with you the results of the first month or so when we have our call at the end of the second quarter.

That’s it for me just at the moment in trying to providing an overview of what’s happening in the business and our results. I’d now like to hand over to Rob who is going to talk a little bit more about some of the financials.

Robert Bowker

I will go through some balance sheet and cash flow information. We’re on page 18 of the presentation. All my numbers are in Euro. I’ve put them in Euro because our debt is largely denominated in Euro. Looking at the table on page 18 at the end of March we had EUR 30 million of cash. Our third party debt was EUR 709 million and our cash pay third party debt was EUR 565 million which excludes our PIK notes.

Our annualized adjusted EBITDA was EUR 162 million and that is converted from Hungarian forint convenience translation using current exchange rates. Our cash interest expense was around EUR 65 million and our net third party debt which is third party debt less cash and cash equivalents was EUR 679 million and our cash pay net third party debt which is cash pay third debt less our cash and cash equivalents was EUR 535 million.

This equated to a cash interest ratio of adjusted EBITDA to cash interest expense of 2.5 a ratio of net third party debt to adjusted EBITDA or 4.2 times and a ratio of cash pay net third party debt to adjusted EBITDA of 3.3 times. That EUR 162 million does not reflect any impact of significant synergies around the Memorex transaction as well as project in Turkey as of yet.

Moving on to page 19 there was some interest on the last call on our interest expense. Page 19 lays out entire interest expense by each debt instrument so in the left hand column you can see all the debt instruments and notional amount of debt. In the next column you can see the interest rate that we pay on each of those instruments and the column thereafter labeled effective interest rate as a result of hedging is the actual interest rate we pay if you take into account the effect of our cost current interest rate hedge.

Then we have the maturity date of the instruments and then the final column calculated cash interest expense based on the effective interest rate inclusive of the swap that we are paying. From that you can see that our cash pay third party debt interest per annum is EUR 65 million and if you include the non-cash pay interest on the PIK note our interest charge for per annum is around EUR 83 million.

Page 20 is the maturity of all of our debt on the table there was also some interest on the last call. The table here takes each piece of the debt and by year showing when it needs to be repaid. In 2008 we are due to repay EUR 19 million and that’s in the right hand column of the table, EUR 19 million of senior debt. In 2009 we are due to repay an addition EUR 27 or 28 million of principle loans on our senior and in 2010 we have EUR 42 million due in terms of cash out in order to repay our senior debt.

Moving on to page 21 is sets out our capital expenditure for the last five quarters. The left hand box is in million of HUF and the right hand box is in thousands of EUR. I’ll focus on the right hand box, the Euro amount. The table is split into two sections the first is sort of run rate CapEx or reoccurring CapEx which has a subtotal and the second includes three specific projects.

One obviously the integration CapEx we incur with combining all the companies. The next is the IPTV and finally there’s the billing system which is the combing all the billing systems of the various companies who have come together to form HTCC as it stands now. Looking at the total CapEx amount you can see during the course of the last year we had a steady increase largely driven by integration CapEx and IPTV and the billing system project at the normalized recurring level with reasonably flat at around 14% or 15% of revenues.

During the first quarter this year our CapEx has come down again to around EUR 9 or 10 million that’s reoccurring level and around EUR 12 million including integration and our billing project. That’s all I have I’d like to hand back to Martin for a brief summary of key priority in 2008.

Martin Lea

Obviously our overall strategy hasn’t changed since we discussed it when we had our call for the end of 2007 and also when we talked about the Memorex acquisition. I don’t want to reiterate the strategic picture. Just to highlight where as management our priorities and our focus are. First, we obviously still have activities to complete the integration of HTCC and Invitel and as respect Tele2 we have completed, by far on the way, the vast majority of the actions that we set for ourselves and we will deliver the cost savings that we had originally indicated and some more.

There are still some things that are ongoing specifically in the area of IT where migrating lots of different systems on to a common platform as an example will continue with us throughout this year and the beginning of next year as well just because the complexity as a result of the fact that we are a number of companies that have come together over the years.

Secondly, we obviously have synergies to realize as a result of the combination of Memorex with Invitel. That process has gone very well up to now but we still have more things that we have to do.

Probably the most important thing is to continue to really drive this improvement in the gross margin so that we can get to a point where we’re able to see consistent year on year growth. The turnaround in the business segment which obviously showing very positive results looking at the first quarter in comparison to last year but we still have work to do.

Preparation for the migration to new integrated billing system, that’s really part of the completion of the integration process that I just talked about. The successful introduction of IPTV we’ve talked about that earlier today, that’s very important activity for us in making sure that we defend and protect our existing broadband ADSL base.

We also have to be mindful of the need to consider mobility; obviously we’re a fixed line operator at the moment. In the converged world of the future we can’t ignore mobile and obviously there are a number of potential options for us as far as that’s concerned we’ll be spending time looking at that as a management team.

We will also maintain the tight control we’ve exhibited in the past over our capital expenditure and we’ll continue to provide you with an update on our CapEx in each of these calls going forward. Finally, from a SEC perspective we were very pleased to be able to report a clean SOX opinion as it related to the 2007, that was a challenge particularly when you’re putting two companies together we obviously have to make sure that we maintain the right level of focus on our compliance and our financial reporting and we’ll continue to do so in the future.

That’s pretty much it as far as the formal presentation is concerned. As usual we’d be very happy to turn the meeting over to you and try and address any questions that anyone wants to ask at this point in time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Fred Kuji]

[Fred Kuji]

Three questions please, on the IPTV do you have any target for EBITDA break even, can you give us an idea as to how that’s going to perform coming out of the block the first couple of quarters on the EBITDA line? The second question is on the amortization schedule it doesn’t seem too on risk but on the other hand is there any, do you see that being an obstacle to your normal course of business? The third thing is on your derivatives you’ve got five billion forint is there anything that you can do with this?

Martin Lea

I’ll address the first question which related to IPTV. As far as EBITDA is concerned we expect it broadly to be EBITDA mutual in 2008 and then positively additive in terms of EBITDA from 2009 going forward.

Robert Bowker

The second question would see no obstacles in our debt to amortization but bear in mind we have EUR 30 million on hand as well. Third question, around the derivatives I wasn’t quite clear on that, are you referring to the derivative liability?

[Fred Kuji]

I guess I’m mixing things up. I guess I just wanted to understand exactly where you are on your currency hedge and if you’re going to potentially make a gain on that given the possibly unexpected strength of the forint so far this year.

Robert Bowker

We made a large gain in the first quarter because the currency weakened but obviously the currency is now strengthened. As it stands now we would have made a loss. Conversely we would have made a gain on the translation of our Euro denominated debt. It just moves in the opposite direction.

Operator

Your next question comes from Camille McLeod-Salmon – Fortis Investment.

Camille McLeod-Salmon – Fortis Investment

I have three questions. My first question it relates to line item about deferred income on the balance sheet and I just wanted to know if this is from IIU?

Robert Bowker

Yes it is.

Camille McLeod-Salmon – Fortis Investment

Over what period will revenue be recognized?

Robert Bowker

Over the period of the contract, number of contracts, varying lengths.

Camille McLeod-Salmon – Fortis Investment

Is this an indication of the kind of length we’re looking at 20 years or so?

Robert Bowker

Sometime five, sometimes 20 and anywhere in between.

Camille McLeod-Salmon – Fortis Investment

Moving on to the income statement and you’ve got the foreign exchange losses and as the gentleman before me was talking about that. Is that going to be a one off that 13, the foreign exchange gain losses net.

Robert Bowker

No, its not one off. Remember that what Martin’s talking to is Hungarian Forint, that’s our functional currency whereas our debt is denominated in Euro so every period going forward we would always have a gain or loss non cash as it relates to translation of our debt from Euros into Hungarian Forint and conversely we would have a profit or loss in the opposite direction to the previous line items on our derivatives or hedges on those on that debt.

Camille McLeod-Salmon – Fortis Investment

I wanted to get a sense of how you guys meet your obligations this year, I know you mentioned the 30 million that you’ve got on hand so liquidity wise you’re feeling quite okay?

Robert Bowker

Yes, we don’t have a lot of amortization and bear in mind that a significant amount of our interest is non-cash so that our cash interest is only around EUR 65 million.

Camille McLeod-Salmon – Fortis Investment

Do you think that your August refinance kind of consolidate all those debt and use that to issue new debt?

Robert Bowker

It’s certainly something that we’re giving consideration to.

Operator

Your next question comes from [Thomas Hanson] – Muzinich.

[Thomas Hanson] – Muzinich

I’m just going to go back to the slide 20 with your repayment of senior debt and the first question is what is the timing for 2008, 2009 is it more at the end of the year or is a leverage repayment.

Robert Bowker

It amortizes evenly every quarter.

[Thomas Hanson] – Muzinich

Regarding 2009 and 2010 you are confident that you will be able to generate enough cash to repay those payments or would you consider refinancing those?

Robert Bowker

We are confident that we would meet those amortizations.

[Thomas Hanson] – Muzinich

To get some kind of benchmark because you have been, there has been quite a few changes in the payment of the company if we look at just 2007 could you tell us before acquisition to what extent you were a free cash flow positive for 2007?

Robert Bowker

For 2007 we were not free cash flow positive ex acquisitions because of the significant one off charges both from a capital expenditure point of view and an operating expense point of view we’ve incurred with integrating the companies. Off the top of my head I couldn’t give you the number but certainly it was marginal not by a great extent.

[Thomas Hanson] – Muzinich

The one off CapEx and one off expense you mentioned how large were they?

Robert Bowker

They were significant you can see on the CapEx you can see it laid out on the slide 21. In the second column there you can see that we spent around EUR 6.2 million on integration. We also put in the core elements for IPTV as such of EUR 4 million and another EUR 3 million around our billing system and I guess around probably a couple million Euros a quarter on one off expenses last year associated with integration.

Going forward certainly there will be less from a CapEx point of view you can see that in the last column in that total on page 21 labeled quarter one 2008 but they certainly will be those types of expenses during the quarter of 2008 as we finalize the integration of the Hungarian companies and Memorex as well and they will also be continued one off operating expenses associated with the integration in particular in 2008 of Memorex.

[Thomas Hanson] – Muzinich

So you’re saying you feel very confident with meeting the 2008 to 2010 bank payments. Could you just elaborate a little bit on this because we just went through the one off of 2007 and it sounds like they will be also some smaller one off in 2008 but could you give us some more color?

Robert Bowker

You can just throw a light our you can’t really miss with EBITDA of 160 million; you’ve got cash interest of 60 million and CapEx of 50 million.

Operator

Your next question comes from [Alex Yono – West Albene Malone Asset Management].

[Alex Yono – West Albene Malone Asset Management]

I have two questions one on liquidity; you are $47.5 million of cash and what the level of unused committed lines that is my first question. My second question relates to your amortization of your in local currency which in hedge US. When do you expect to stabilize them off your business?

Martin Lea

Your first question we have EUR 30 million of cash in the presentation or around $47 million. We also have an unused revolving credit facility of EUR 20 million and whatever the dollar equivalent of that is. The second question I didn’t fully understand.

Robert Bowker

I’d go back to slide 12 where we were talking about gross margin and said gross margin in the key measure so that’s the gross revenue minus the direct costs which tend to be typically what we pay to other carriers through the interconnect regime or where we’re leasing circuits. This is often referred to at net revenue so that’s the real key measure.

We saw a 1% reduction in the first quarter of this year compared with the first quarter of last year that is typically contrasted with a reduction of between 4% and 5% that we were seeing during last year so I feel that we’re on the right track to bring this back.

[Alex Yono – West Albene Malone Asset Management]

What do you expect for ’08 as far as this segment gross margin?

Robert Bowker

What I’m saying is that our objective is to get this to start to grow and I think we’re partly around the corner is the best way of putting it. Obviously we’re seeing much more stability than we were seeing last year. It’s taken us, we announced the putting together or the completion of the transaction to put Invitel and HTCC together but that was at the end of the first quarter or in April last year. We’ve been not only driving cost synergies out but we’ve been trying to improve the performance of the sales operation and that’s starting to show through.

I think that we should start to see some growth coming through into the gross margin this year but I’m not going to give you a date and we’re doing that primary objective.

[Alex Yono – West Albene Malone Asset Management]

In terms of your MVNA strategy from mobile should we expect any significant investment or acquisition?

Martin Lea

I don’t think to implement an MVNA strategy here would require massive investment. Typically an MVNA would be relatively investment light but of course that is only one of the strategic options.

[Alex Yono – West Albene Malone Asset Management]

When do you expect to decide something?

Martin Lea

As I indicated I think it’s something that we probably should determine the way forward during this year. To the extent that it’s a long term issue and it’s obviously not a simple issue and is an area where we do have a number of options. Whilst I think its something that has to resolved during this year I’m not prepared to put a time scale on it down to a month or anything.

Operator

Your next question comes from [Gustaf Lindivus] – Merrill Lynch.

[Gustaf Lindivus] – Merrill Lynch

Could you give us some color on the broadband and voice situation in your historical concession area and perhaps in particular on penetration rates, market maturity and also competition?

Martin Lea

The first point I guess we need to look at page 14 where we talked about this. In terms of broadband internet we’ve got currently 130,000 customers and all of which probably 110,000 would be in our traditional concessionaries. Let’s say 110,000 broadband ADSL users out of a total of 380,000 lines in our traditional concessionaries. That’s to give you some indication of the level of penetration.

The main point is obviously the market overall we believe will continue to grow because penetration in Hungary is somewhere behind the rest of Western Europe. We’re also encouraged because ADSL thus far has maintained a higher proportion or higher share of the overall broadband market than has cable. We’re optimistic and we’re particularly optimistic because of our points on page 14, our growth has been at a slightly higher rate than the overall market growth.

Our penetration of our concessionary is slightly lower than the national average but that’s because the national average is distorted by obviously much higher levels of penetration for example in Budapest which is not in our traditional concessionaries but none the less we are continuing to grow our share. So that’s the first point.

With regard to competition the real competition is from the cable operators. They started by providing TV services, then they started providing internet access and now they’re providing in some cases voice. That’s why we are in the process of introducing IPTV so that we can offer our customers the triple play proposition and specifically to protect our existing broadband ADSL base in our traditional concessionaries.

I think we have a slight benefit here in Hungary because of the fragmented nature of the cable market. There is not one completely dominant operator as for example you’d find in the UK. There are a number of operators and about 50% or 60% of the cable market is a very large number of very small operators using very old technology. That none the less is where we see the competition coming from and that’s what we have to step up to. Thus far we’ve been very pleased with the results.

[Gustaf Lindivus] – Merrill Lynch

Would you say that competition from cable operators are more fierce or at the same or less fierce in your concessionary as compared to the rest?

Martin Lea

Probably marginally less fierce because penetration of cable nationally is around 50% to 55% and in our traditional concessionary it’s slightly lower, it’s between 40% and 45%. If I have to generalize in that way it’s less fierce.

Operator

I show that we have no further questions at this time. Please continue with any closing remarks.

Martin Lea

That is probably one of the longer calls we’ve had. Thanks for those who asked questions and participated. Thanks to the rest of you taking the time to listen. The presentation and the recording will be available on our website and of course as always if any of you think of questions subsequent that you want to ask then by all means give Rob a call. Thank you again and good morning or good afternoon wherever you happen to be.

Operator

That does conclude our conference for today thank you for your participation you may now disconnect.

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