Hungarian Telephone and Cable Corp. Q2 2008 Earnings Call Transcript

Aug.19.08 | About: Hungarian Telephone (HTC)

Hungarian Telephone and Cable Corp. (HTC) Q2 2008 Earnings Call Transcript August 19, 2008 11:00 AM ET

Executives

Andrea Costa [ph] – IR

Martin Lea – CEO

Robert Bowker – CFO

Analysts

Michael Garone [ph] – Credit Suisse

Mitch Reznick – Fortis

Alexias Renault [ph] – West Albene [ph]

Operator

Good morning and good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Hungarian Telephone and Cable Corp. Conference Call to review the financial results for the second quarter of fiscal year 2008 ended June 30, 2008. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. As a reminder this conference is being recorded.

I would now like to turn the conference over to Ms. Andrea Costa [ph], Investor Relations representative. Please go ahead, Ms. Costa.

Andrea Costa

Thank you, Mary. Hello everyone and thank you for joining us on the Hungarian Telephone and Cable Corp. conference call to review the financial results for the second quarter of fiscal year 2008 ended June 30th, 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.’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.’s 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 is 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 second quarter of fiscal year 2008 ended June 30, 2008. 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 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 at www.htcc.hu, on the ‘Investor Presentations and Bondholder Filings’ page under Investor Relations.

Please go ahead, Martin.

Martin Lea

Thank you and good afternoon to everybody or good morning depending upon where you are, from Rob and I. We will start on Page four of the presentation with the highlights of the performance for the quarter.

Before going into that I think three points to make. Firstly, the Hungarian forint appreciated against the dollar by 16% during the quarter and 14% during the six months compared to the average exchange rate to the dollar during the same period in 2007. That’s obviously flattering our results in dollars. We are talking here about our pro forma results. That assumes that all of the entities including Memorex and Tele2, HTCC and Invitel were combined from the beginning of 2007.

Having said that we are pleased to be presenting what I feel are a very strong set of results and tending to support the strategies that we have been implementing up to now. So, our pro forma consolidated revenues in U.S. dollars increased by 10% in the quarter compared to the same period in the prior year, 7% for the first half. In forint terms, our consolidated revenue decreased by 6% and I am going to come on to explain that in a minute.

Our pro forma consolidated segment gross profit in U.S. dollars increased by 18% for the quarter and 14% for the six months compared to the same periods during 2007. And in forint terms our pro forma consolidated gross profit was flat for the quarter second quarter 2008 compared to the second quarter 2007 and for the six months period.

That is a very significant turning point for us and as you know previously we have reported declines in gross profit and we have always said that our goal was to try and turn gross profit into growth by getting the growth paths of our business outperforming the declining parts. This is very encouraging set of results from that perspective.

Furthermore, our gross – pro forma gross margin percentage was 72% for the second quarter, up from 71% for the six months period, a significant improvement on the 67% gross margin that we saw in the same period in 2007.

Our pro forma adjusted EBITDA in dollars grew by 24% for the six month period ending 30th of June and by 28% for the quarter compared to the prior year and in forint our pro forma adjusted EBITDA grew by 9% for the six months ending 30th of June and 7% for the quarter, again, a very, very pleasing set of results.

Our pro forma adjusted EBITDA margin was 44% for the quarter, up from 43% for the first six months, and significantly up on the 38% and 37% for the respective periods in 2007.

Moving on to the next slide, I just would like to touch on Memorex. As you will be aware, on March the 5th, we closed the transaction to acquire 95.7% of the outstanding equity of Memorex. The preliminary purchase consideration for Memorex was EUR102 million, which included the payment of EUR17.9 million of cash, and the payment of another EUR12.1 million of cash into an escrow account. We assumed net debt of around EUR70 million and we incurred transaction costs and other directly related expenses of EUR2.4 million.

We have subsequently entered into a Settlement Agreement with the shareholder selling the company to us pursuant to which the Escrow Agent has returned to us EUR11.2 million. The remaining EUR0.9 million was paid to the selling shareholder. We received these funds in July.

After the refund of the amount from escrow, the final purchase price for Memorex was EUR90.9 million. We – currently the process to buy out the minority shareholders is underway and that is on track and expected to be completed by the end of August or September.

Finally, we completed the filing to the SEC with respect to the Memorex acquisition in an amended 8-K filing, which included audited financial statements for Memorex for the year ended December 2007.

Moving to Slide six, and as always a quick look at what’s happening within Hungary. As we have already referred to the forint has strengthened against the dollar and against the euro compared to when we were looking at it before and is currently trading at around 236 forint to the euro.

The National Bank hiked its base rate by 25 basis points to 8.5% in May and has kept the rates unchanged since then. And the government’s economic recovery plans continue to show positive signs of success as you can see from the main indicators, and in particular inflation gradually decreasing from 8.5% that we saw a year ago down to 6.8%, and is confidently expected to fall to 5% or sub-5% by the end of 2008.

On Page seven, we are looking at the trends in the telecommunications industry in Hungary. Not much to report here in terms of change. Clearly, we can see continued growth in the broadband market and we can see that ADSL continues to maintain the major market share in that segment. And perhaps mostly significantly we can see the impact that that is having on fixed line penetration per household, which has remained stable now for the whole of 2007 and into the first quarter of 2008. So, overall, a stable theme with respect to fixed line penetration, and good continued growth prospects for the broadband business.

Turning to our pro forma financial statements for the first [ph] quarter, this is on Slide eight, we can see revenues in forint declining 6% which I will come on to talk about as I just mentioned. Our segment gross margin flat. Our gross margin percentage up from 67% to 72%. Our operating expenses down 9% and that’s the result our adjusted EBITDA, just to remind people that our adjusted EBITDA after deducting certain one-off or non-recurring items, adjusted EBITDA was up 7% year-on-year for the quarter and our adjusted EBITDA margin had grown from 38% to 44%.

After a number of one-off and non-recurring items, we also showed a significant improvement in our clean EBITDA for the quarter rising 15% to 8.6 billion and our clean EBITDA margin increasing significantly from 30% to 36%.

On Page nine, we have the results for the quarter. I apologize, I think the Page eight was for the six months and Page nine is for the quarter (inaudible) one heading. Sorry, my apologies, I am confusing myself.

Page nine, I have moved on to the – I thought we are moving on – Page nine is the reconciliations from EBITDA, which as we all know is a non-GAAP financial measure, to our net income. So you can see our depreciation charge, 5.2 billion forints, our financing expenses, the non-cash gain, and that’s the unrealized gain due to the revaluation of our euro-denominated borrowings. Non-cash losses due to the changes in the fair value of our – principally our hedging instruments. Some small level of municipality local taxes and at the bottom a net loss for the period of 4.6 billion forints, 6% down from the same period in the prior year.

Now, we are moving on to Page 10 to look at the six months similar profile, 6% decline in revenue. Flat gross margin but obviously the gross margin percentage improving from 67% to 71%. A 10% reduction in our operating expenses and 9% increase in adjusted EBITDA and a significant 6% improvement in our adjusted EBITDA margin.

After one-off or non-recurring items again our clean EBITDA increased by 5% and our clean EBITDA margin increased from 32% to 36% and then on Page 11 we have got the reconciliation again from EBITDA to net income and I am not going to go through all of those items again.

So let’s go on to look at our revenue profile. This is on Page 12. So we are comparing the quarter 2008 second quarter with same period 2007. Mass Market Voice declined by 13%. That was principally due to a reduction in the revenue that we got from the ex-Tele2 customers. If you recall, when we acquired Tele2 as well as recovering all of the traffic that they were taking from us in our traditional concession areas, we gained a lot of customers in T-Com area. Whilst we have been focusing on retaining and migrating the higher value customers to Invitel contracts, we deliberately planned to allow the lower value customers to run down. And the bulk of that revenue decline, probably 800 million of that is a result of the decline in that Tele2 out-of-concession business. If we put that to one side and we look at the – like the Invitel core business then it was only down 3.7%.

Gross – Mass Market Internet grew by 1% although we achieved a 3% improvement in our gross margin percentage and that’s because we are generally lowering the access costs of connecting customers outside our concession areas.

Our Business revenues were down 5%. That was almost entirely due to firstly the ongoing reduction in our in-concession B2B voice business, which we fully anticipated. And it was also due to the fact that when we renewed one of the contracts in the old PanTel TechnoCom we saw a reduction in the revenue associated with that contract. Otherwise, our B2B business is broadly flat. We will come back to talk about that again in a minute.

The decline in the Wholesale revenue was almost entirely as a result of the reduction in Wholesale Voice. This is a very, very low margin business that we are gradually trying to reduce in terms of the contribution it makes to our overall activity. But you can see the very strong growth in the Wholesale Data market.

That overall accounts for the 6% reduction in revenue.

On Page 13, we have a similar analysis for the first half and I won't go through every line again because the key drivers and the overall picture is very much the same. I would instead rather move on to Page 14 where we are looking at gross profit. And we’ll focus on the top part of the chart because that’s in forints. Obviously the bottom half in dollars. This is flattened because of the exchange rate changes.

First the Mass Market Voice a 7% reduction in gross margin contribution. That is almost entirely as a result of the planned reduction in the Tele2 out-of-concession Carrier Select customer base. Without that then the call business broadly flat.

Mass Market Internet continuing to grow, 5% improvement for the quarter compared to the prior year. The B2B gross margin down 5%. That, as I explained earlier, was due to a reduction in the value of certain PanTel, ex- PanTel, now Invitel Technocom contracts on the annual renewal. If we put that to one side then the underlying Business segment activity is very nearly now growing and as we have said it was always our ambition to get that business into growth and I think we are almost all the way round the corner in terms of turning that business around.

Wholesale Voice, we have already talked about the decline there. That’s because we are deliberately trying to reduce the level of low value short contracts, low margin PanTel voice business that we do. And obviously we are enjoying very strong growth in the Wholesale Date segment.

Overall, as I said in the very beginning, our gross margin for the quarter flat year-on-year, which is the first time we have been able to report that since we started having these calls after the combination of HTCC and Invitel.

If we look at the pro forma segment gross margin for the first half, again, this is on Page 15, a very similar pattern, exactly the same drivers, net result being a 142 million forint improvement in our gross profit.

Just to get a feel for what’s going in the various segments, first on Page 16, our Mass Market Voice. We saw – when we looked at the macro telecom scene that we are seeing stability in terms of lines. If we look at the chart at the top we can see that line churn in our concession areas has substantially slowed and what’s more interesting we can see that even over the last year we have seen pretty stable levels of traffic in terms of outgoing minutes. And that’s tended to be reflected in the stability of the numbers that we see for that segment.

Outside our concession in the residential voice business, you can see the decline in Carrier Select customers. That’s associated with the run down of the Tele2 base and you can see that Carrier Pre-Select customers although we had a significant reduction in the early part of this year in Q1, which was s deliberate revision of the reporting by us to eliminate any non-active CPS customers. Overall, our CPS customer base has remained very stable.

Mass Market Internet on Page 17, we are seeing a strong and consistent growth in our ADSL customer base and ARPUs they tend to be reset towards the beginning of the year because we have a lot of promotional campaigns around the end of each year. But during this year, as you can see, they have remained relatively stable.

And what remains very encouraging on the bottom half of this page you can see that our growth, in other words, HTCC Group’s ADSL growth continues to be higher than the overall ADSL market in Hungary, i.e., we continue to increase our market share.

Moving to Page 16 [ph], I would like to just talk briefly about IPTV. We talked about this in some detail in the last presentation and we launched the service in 2008 and so fundamentally we are offering IPTV initially to our existing broadband customers in our traditional concession areas. We believe that we have and our customers are telling us that we have a superior product proposition to the cable supplier with whom we are competing. We therefore feel very confident that this initiative will serve to protect our existing broadband customer base from cable competition, and will serve to continue to foster the growth in the ADSL business, going forward.

The concentration, from our perspective, will be in the concession to start with. We’ll move out of our traditional concession areas probably during next year when we will deploy this service over broadband connections that we will deliver to customers over unbundled local loops.

Currently we have around 1700 customer of which some 800 or 900 are actually live today and we can currently deliver IPTV to 45% of our current broadband ADSL customers without having to put any further investment into the local loop infrastructure.

Page 19, just a few indicators in the Business segment. As I said earlier on, one of our challenges is to make sure we turn the business segment into sustained growth. We spent a lot time during the back end of last year and the beginning of this year on the reformation of our business sales force following the combination of the two companies. And we are starting to see very positive results. If you can see on the top chart, the growth in Business Internet lines and also you can see ARPUs where again we see a kind of step down around the beginning of the year, but generally ARPUs are remaining very stable.

If we look at our Business Voice segment out of concession, again you can we are achieving consistent growth in the number of direct access lines, those customers who directly connect in to us and again relatively consistent level of outgoing minutes.

So, that’s the summary of the results and indication of some of (inaudible) I will come back to just touch [ph] on strategy towards the end but I’d now like to pass over to Rob.

Robert Bowker

Good morning or good afternoon, ladies and gentlemen. A brief financial overview on balance sheet data and our leverage ratios. Cash and cash equivalents as of the end of June 30th was EUR20 million. That excludes the 11 million that Martin mentioned earlier that we received back from escrow in July. Our third-party debt was around EUR708 million. And our cash pay third-party debt was EUR559 million. That excluded the PIK Notes.

Our annualized adjusted EBITDA, which is just basically our forint EBITDA for the six months using – translated into euros using the exchange rate for convenience purposes of 240, was around EUR173 million. Our annual cash interest expense was around EUR64 million. Our net third-party debt, which is the gross third-party debt you see above at the top of the table less cash, was EUR688 million. The equivalent net cash pay third-party debt was EUR539 million. And therefore we had an interest cover of 2.7 times. Our ratio of net third-party debt to adjusted EBITDA was four times and our ratio of cash pay net third-party debt to adjusted EBITDA was 3.1 times.

Moving on to Page 22, it is just a table more for your convenience. The left-hand column shows the face value of the debt of EUR559 million in total as it relates to cash pay third-party debt and EUR708 million if we include the PIK Notes. The next column gives you the interest rate, the following column gives you the effective interest rates that we are paying as a result of the hedging. And the final column is the calculated annualized interest expense, which corresponds the EUR64.5 million we spoke of on the previous slide. And if you add the PIK Notes that brings you to an annualized interest of around EUR83 million-EUR84 million.

Moving on to Page 23, which is just a repayment schedule of senior cash pay debt and I guess the intention being to show that our liquidity is in good shape. For the balance of 2008 we need to make around EUR13 million of payments on our senior credit facility and for 2009 we need to make around EUR28 million repayments. So our current cash position and future cash generation is sufficient to ensure that we have enough liquidity.

Moving on, the last slide from me is CapEx and perhaps looking at the right-hand table is our CapEx on a quarterly basis from Q1 2007 through Q2 2008. It shows our sort of recurring CapEx and then breaks out integration, IPTV, and billing as separate items to get to total CapEx. Our intention is to keep our recurring CapEx at around 13% of revenue on at least on an annualized. For Q1 we had 10%, for Q2 we had 14% and we would expect to be a level of around 13% excluding the three items I mentioned, i.e., integration, IPTV, and billing for the year.

That’s all I have and would like to hand back to Martin briefly to sum up.

Martin Lea

Okay, thanks Rob. I will just like to refer you to Page 26. We were asked to just touch on the sort of strategy for the Group. I don’t think there is anything particularly new here but just to reinforce the point that what we are focused on is clearly maximizing the revenues and cash flows that we enjoy from our traditional in-concession voice business. Overall, I would say that competitive intensity in that business has reduced as a result of market consolidation. We will continue to capitalize on the growth in broadband. Up to now we tend to focus principally on our in-concession areas. Increasingly, we will focus outside our historical concession areas and increasingly we will use local loop unbundling in order to be able to improve our out-of-concession margins and be competitive.

And you can see, as we saw from the slide earlier on, we have been very effective in that market by growing our share faster than the overall market growth.

We will continue to focus on the Business market. This is really leveraging our national fiber optic backbone. We are focused on the SME market, and you can see from the earlier charts that we are experiencing good growth in terms of new customer acquisition.

Top right hand corner, the regional Wholesale Data market, as you are aware, following the integration of our business with the ex-Memorex business we enjoyed a market-leading position. Obviously, that’s based on our extensive infrastructure. That presents us with continuing opportunities and it is a growth market.

We have done a lot to consolidate the industry here, the fixed line industry, and that’s obviously shown improving our performance but there are still some further consolidation opportunities and to the extent that we are able we will obviously look to capitalize on those but in any event we will continue to manage our cost base very effectively and maximize our EBITDA by minimizing our operating expenses.

And finally, we are clearly the #2 player in this market in Hungary. We are the #1 operator in the regional Wholesale market in Hungary. We are the #3 fixed line player. We are the #1 alternative player. At some stage we will need to address ourselves to being able to provide converged solutions, i.e., a blend of fixed based services and potentially mobile based service be that voice, be it data, be it Internet access, be it conference. And clearly that’s something that we are focusing increasingly on so that we can ensure that in the longer term we are able to participate in the market as a converged service provider.

So, that’s pretty much it from Rob and I in terms of the formal presentation. We’d like to turn it over to questions and before I do so I understand there are a number of questions regarding the strategic review but as we made it very clear in the press release that we issued on the 30th of June, we don’t expect to have any comment on that subject until the review is complete. So, I won't be addressing questions at this time on the subject of the strategic review, but obviously we will be very pleased to take any other questions related to the presentation or our public results.

Question-and-Answer Session

Operator

(Operator instructions) Michael Garone [ph] with Credit Suisse. Please go ahead.

Michael Garone – Credit Suisse

Yes, good afternoon. I have a couple of questions and the second one I hope you will be able to answer. Firstly, with regards to revenue and EBITDA growth, I am interested in understanding at what rate should I say the clean Invitel grew in the first half both in revenue and EBITDA terms? And by that I mean excluding the items that you have mentioned in your presentation such as Tele2 (inaudible) contacts. I appreciate if you could give me those couple of numbers.

Secondly, I appreciate the difficulty in commenting on the strategic review. Are you also not prepared to comment on timeline as in where are you with the process? And secondly I just wanted to mention your majority shareholder earlier this afternoon mentioned that the strategic review process has seen a good level of interest from basically potential buyers. Could you mention whether how many are involved in this process and whether they are private equity or industrial buyers or both? Thanks.

Martin Lea

Okay, thank you. I mean unfortunately as I am sure (inaudible) I am not prepared to comment at all on the strategic review process although if someone has said with a lot interest in this business it wouldn’t surprise me. But going to your third question, it’s difficult to answer that because obviously we are showing you pro forma combined results. But if you look to for example the HTCC Group before the combination with Memorex then we will be looking at broadly flat gross profit and single-digit EBITDA growth but I can't stop the split down (inaudible). We just don’t have that information available.

Michael Garone – Credit Suisse

Can I just come back to that? Then if I was – when you are thinking of the business as it goes into 2008 what would your expectation be of the growth in EBITDA once this cleanup is finished.

Martin Lea

2009?

Michael Garone – Credit Suisse

’09, sorry, yes.

Robert Bowker

I mean I think once you have taken all the cost out I think we’d be happy with single-digit, low-single digit growth.

Michael Garone – Credit Suisse

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Mitch Reznick with Fortis. Please go ahead.

Mitch Reznick – Fortis

Thank you for taking my questions. Some housekeeping issues – questions. For the quarter and for the six month period what were the cash taxes in dollar terms?

Robert Bowker

We need to go to the Q, which I don’t know if you have that in front of you.

Mitch Reznick – Fortis

Yeah. I don’t see in this. I must have missed it.

Robert Bowker

So you need to go to the Q, and you need to go to the tax reference (inaudible) at the – I’ll say you need to actually go to the MD&A and it gives you the, what we call, the local business tax, which is the tax we pay to municipality. And that’s effectively the cash tax. We are actually not paying any income tax and the local business tax that we paid for the quarter ended or should I say three months ended 30th June was $2.1 million.

Mitch Reznick – Fortis

Okay.

Robert Bowker

And you want it for the six months?

Mitch Reznick – Fortis

Yes.

Robert Bowker

For the six months the cash taxes, which is again the local business tax was $4 million.

Mitch Reznick – Fortis

Okay. What pages are that? I missed it.

Robert Bowker

Yeah, this is printed off I think so it’s Page 54. It’s in the MD&A in the 10-Q, Page 54.

Mitch Reznick – Fortis

I have the same questions for cash interest expense and for the changes in working capital. Is that all in the same spot because I couldn’t find them.

Robert Bowker

I mean cash interest is more difficult but I think that actually maybe available in the cash flow statement. Let me just quickly check for you.

Mitch Reznick – Fortis

In this report cash from operations that there isn’t detail. So for example on Page seven on the cash provided operation you just have the number and not changes in working capital or interest expense. Hello?

Robert Bowker

I don’t have the number in dollar off the top of my head. I typically work in euro. But I suggest you do is look at Page 22 of the analyst presentation and it actually gives you what the cash interest expenses per annum would be there of EUR 64.4 million and you can see exactly how it’s calculated from that table. So – and it’s inclusive of the hedging. So for example the – in the first row the 2007 Notes is EUR200 million times the effective interest rate of 10.68% gives you EUR21.367 million. If you want it quarterly or biannually you obviously just divide by four, by two as you wish. But that’s effectively giving you your cash interest expense in euros and you need to convert it to dollars at an exchange rate you think applicable.

Mitch Reznick – Fortis

Okay. And then the last one is the changes in working capital again for the second quarter and for the six month period?

Robert Bowker

Working capital, that I don’t have off the top of my head. I am sorry about that and I know it’s the Q, it’s not actually shown in the cash flow statement but I mean as a general rule there are fluctuations from quarter to quarter but I mean we would expect working capital on a full pro forma basis to be reasonably flat.

Mitch Reznick – Fortis

Okay. And I mean if I may just going forward, if you could just break out the full cash provided by operation expenses that line. That might provide more color for the analysts.

Robert Bowker

Sure.

Martin Lea

We can do that for you in the coming future.

Mitch Reznick – Fortis

Thank you. And okay, and then just related to liquidity, what – I mean you’ve got decent cash balance and you have got the amortization coming up and into ’09, but you also have – it looks like from the Q you going forward you have to start settling some of these hedges that are in place with cash. And it looks like there are cash outflows, cash obligations based on what we see today. So – and it looks like all that (inaudible) cash balance what I guess (inaudible) what is your exact liquidity position would be cash on the balance sheet.

Robert Bowker

Well those derivatives don’t – I mean we can just roll that – those contracts forward so they don’t necessarily have to be settled in cash. And they come due towards the end of 2009. So I guess that would be the first point. So I mean we have around—

Mitch Reznick – Fortis

If they are out of the money do you – when you roll them will you have a cash obligation in resetting them?

Robert Bowker

No, we just roll them forward out of the money.

Mitch Reznick – Fortis

Okay. So (inaudible) cash obligation—

Robert Bowker

(inaudible) hedge I mean we I mean if you look on the face of the P&L you can see that we have got a big positive and non-cash amount on the revaluation of the (inaudible) from euros into Hungarian forint, which is our functional currency. And then dollar is our reporting currency. And at the same table you can see a big loss on the hedge. Now depending on exact exchange rates and average exchange rates through the period sometimes the loss on the conversion of the debt, more so the profit on the conversion of the debt is more or less than the loss – profit, which is already in inverse relationship on the hedge.

Mitch Reznick – Fortis

Okay. And then what’s your available credit?

Robert Bowker

We have another EUR20 million under our revolving credit facility that we could drawn down if we so wish. Also, bear in mind we got EUR11 million in July from escrow from our acquisition, which Martin mentioned. So our actual cash balance currently now is a little over EUR30 million.

Mitch Reznick – Fortis

Okay. And then what is the total facility size because I didn’t see that in the Q.

Robert Bowker

It’s 30 million. I think we have drawn down 10 million, so if you go to I guess the Slide number – just bear with me – Slide number 23, you can see that that is the tranche “D,” which is payable in 2010.

Mitch Reznick – Fortis

Okay. And total size is 30 on that, okay. And then on the strategic review, I know you can't comment, did anyone approach the Company outright or who took the initiative on the strategic review?

Martin Lea

Just can't comment. Didn’t make the U.S. rule I am afraid. Sorry about that.

Mitch Reznick – Fortis

Okay. Alright. So one more and then I will get out and let others guy get on. The buyout of minority shareholders, what’s anticipated cash outflow on that one?

Robert Bowker

Sorry again, question is?

Mitch Reznick – Fortis

Regarding the buyout of the minority shareholders at Memorex, have you commented on what it–?

Robert Bowker

EUR1.5 million.

Mitch Reznick – Fortis

Okay. Alright. Thank you.

Operator

Thanks. Your next question comes from the line of Alexias Renault [ph] with West Albene [ph]. Please go ahead.

Alexias Renault – West Albene

Yes, good afternoon. Alexias Renault speaking from West Albene Malone Asset Management. I have a couple of question or so. I share the opinion on the previous question regarding the detail on the cash flow from operation that will help us a lot if you are able to provide more detail than only figure you have put in your cash flow statement of 55 million. This was helpful to certain aid [ph]. So for the next time if you could with more detail it would help us. Regarding the presentation Page five, the Settlement Agreement, is it a reduction of the price you paid for Memorex or is it anything else, this–?

Martin Lea

It is a reduction of the price.

Alexias Renault – West Albene

Of – it is only in euros.

Martin Lea

Correct.

Alexias Renault – West Albene

Okay. What was the reason for that?

Martin Lea

The reason was the number of items that we discovered post-closing, which hadn’t been clearly visible to us pre-closing, the results of which we negotiated with the seller. So the reduction in that – in the – tune of 11.2 million.

Alexias Renault – West Albene

Okay. Regarding Page eight, the pro forma adjustment, I notice that in 2007 Q2 you have around 12 million of pro forma adjustment. Again in Q2 2008 another around 11 million and I would like to ask some detail on the Turkey startup expense of 734,000 (inaudible) and other one-off items of 2.9 million (inaudible) and I would like to check or to make sure that it’s really one-off items.

Martin Lea

The – let’s start with the 2.9 million. That largely related to a vacation accrual, which is non-cash and seasonal in nature. So because under U.S. GAAP you have to make actually a quarterly accrual for holiday, people haven’t taken their proportionate leave for the whole year bearing in mind that we have a policy that you either use your leave or you lose it during the course of the year. So in Europe people take their holidays in July and August. So typically we have to make an accrual quarter one and quarter two, which is a negative to the P&L then it starts reversing out in the third and fourth quarter as people either take their leave or lose it. That’s what – what a large portion of that results to. Also in that is the mark-to-market of share options, which is non-cash and relates to previous people who used to work a the Company and is not increasing but that also is non-cash and what – it’s an expense because the share price has gone up, obviously.

Turkey startup expenses relate to the administration and associated cost, associated with the build out we have in Turkey where we only have just started invoicing principal or anchor tenant there. And therefore – so at once that invoicing starts, those expenses will be flipped up and matched with revenue. So it’s exactly what it says it its, Turkey startup expenses.

Alexias Renault – West Albene

But in the vacation accrual is it not what you expend what was in the other one-off item–?

Martin Lea

Yeah, sorry, and the other I mentioned the share based compensation, which is the mark-to-marketing of the shares, and we also have in addition to that we have a one-off bad debt expense associated with the purchase of Memorex.

Alexias Renault – West Albene

Okay. What I wanted to ask you was – that’s all. Okay. Thank you very much.

Operator

Thank you. (Operator instructions) and our next question is a followup from the line of Mitch Reznick with Fortis. Please go ahead.

Mitch Reznick – Fortis

Hi, thank you. In the release, sorry, in the 10-Q, there is a comment that TDC had exercised its warrant and – but it sounds like it – but it converted that into what looks like a note or a debt like piece of paper. Is that correct?

Robert Bowker

I mean that relates to 2007. It’s got nothing to do with 2008. So those – and those warrants, if I remember correctly, were exercised into equity and not into debt-like instrument.

Mitch Reznick – Fortis

Oh I thought – okay. (Inaudible) clear, I thought you made some comments that it was – that they (inaudible) debt obligation (inaudible) get that wrong. Yeah, that’s all from me. Thanks.

Robert Bowker

Sure.

Operator

Thank you. And Mr. Lea, that was your last question. You may proceed with any closing remarks.

Martin Lea

Okay, well, I just like to thank everyone as usual for joining. Thank you for the question. Sorry for confusing everyone with the P&L earlier but again thanks particularly for those who participated in the questions and obviously we will keep you informed going forward and look forward to the next quarter’s call. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that will conclude our call for today. You may now disconnect. Have a nice day.

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