Central European Media Enterprises Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.31.12 | About: Central European (CETV)

Central European Media Enterprises (NASDAQ:CETV)

Q3 2012 Earnings Call

October 31, 2012 10:00 am ET

Executives

Romana Wyllie - Vice President of Corporate Communications

Adrian Sarbu - Chief Executive Officer, President and Director

David Sach - Chief Financial Officer and Executive Vice President

Anthony Chhoy - Executive Vice President of Strategic Planning and Operations

Daniel Penn - Executive Vice President, Secretary and General Counsel

Analysts

Tim Hamby - Janco Partners, Inc., Research Division

Michal Potyra - UBS Investment Bank, Research Division

Vivek Khanna - Deutsche Bank AG, Research Division

Pavel Ryska - J & T Banka, A.S., Research Division

Andrzej Knigawka - ING Groep N.V., Research Division

Operator

Hello, my name is Zach. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises' Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, October 31, 2012. It is now my pleasure to turn the floor over to Romana Wyllie, Vice President of Corporate Communications. Ms. Wyllie, you may begin your conference.

Romana Wyllie

Thank you. Good morning, good afternoon or good evening to each of you, and welcome to CME's Third Quarter 2012 Investor Conference Call.

We are broadcasting our earnings call via a video webcast to enable you to see the management team in action. You can join us via the link on our homepage, www.cme.net. There, you can also download the presentation slides, which we will refer to during this call. You can find them on our Homepage on the left side.

The participants of today's call will be CME's President and Chief Executive Officer, Adrian Sarbu.

Adrian Sarbu

[Foreign Language] and good afternoon.

Romana Wyllie

Chief Financial Officer, David Sach.

David Sach

Good afternoon.

Romana Wyllie

Anthony Chhoy, Executive Vice President, Strategic Planning and Operations.

Anthony Chhoy

Good afternoon.

Romana Wyllie

And our General Counsel, Daniel Penn.

Daniel Penn

Good afternoon.

Romana Wyllie

Before I turn to Adrian, let me read the usual Safe Harbor statement. Our presentation today will contain forward-looking statements. Actual results may vary materially from those expressed or implied due to various factors. Important factors that contribute to such risks include, but are not limited to, those factors set forth under the Risks section in our SEC filings, including the Form 10-Q filed earlier today, as well as the following: the effects of the economic downturn and Eurozone instability in our markets and the extent and timing of any recovery; decreases in TV advertising spending and the rate of development of the advertising markets in the countries in which we operate; and our ability to access external sources of capital as needed.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in our filings. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise.

During this call, we will refer to certain financial information that is not in U.S. GAAP. Please see the appendix to the presentation and Note 16 to our financial statements in our Form 10-Q for a reconciliation to U.S. GAAP financial measures.

And now, please turn to Page 4 of our presentation, and I will pass you over to Adrian.

Adrian Sarbu

Thank you, Romana, and good morning and good afternoon, everyone. Our third quarter results and the prospects for the full year 2012 indicate that our markets have not recovered. In 2012, advertising spending has not matched our expectations. We were successful in addressing our capital structure and debt maturities, but we were unable to achieve our sales and free cash flow target.

In the third quarter, macroeconomic conditions remain difficult, and TV ad markets continued to decline. Advertisers spent less than last year, buying the same amount of GRPs. In these adverse conditions, we succeeded to maintain stable market shares as our audience leadership remain unchallenged in all markets.

We also continued to execute our own strategy: One Content, Multiple Distribution. With a focus on content as differentiating factor, Media Pro Entertainment growing revenues by 49% and New Media and Voyo growing revenues by 34% at constant rates confirmed the validity of this strategy.

During the year, we launched 4 new channels. Despite that, we succeeded to hold local currency cost flat not in our Broadcast division in the third quarter. But now, we see new challenges ahead of us.

David?

David Sach

Thank you, Adrian. Please turn to Slide 5. Real GDP in our territories was flat during the third quarter of 2012, which was down from the 1.8% growth rate reported for the full year 2011. This was the result of a combination of the slowdown in export growth and ongoing tight fiscal measures in some of the countries in our region.

Television advertising spending in our markets declined overall by 7% in the third quarter, driven by weakening GDP and private consumption compared to 2011 and lower pricing by our competitors. We believe that a full recovery of TV advertising markets in our region continues to be hampered by concerns surrounding the levels of European sovereign debt, uncertainty about the future of the euro and a general lack of confidence about economic growth in our countries.

Consensus forecast of GDP and private consumption for the fourth quarter indicate that they will both stay relatively flat, as exports and austerity measures remain unchanged. Given these relatively stable overall macroeconomic projections, we were expecting the rate of decline in the television advertising markets to improve in the fourth quarter.

However, a number of large advertisers have, very recently, indicated to us that they will not fully honor their annual spending commitments this year or spend on additional ad hoc campaigns as they have previously intended. Consequently, we have lowered our expectations, and now believe that the rate of decline in the fourth quarter will be close to negative 7%.

Moving to Slide 6. At constant rate, our consolidated net revenues decreased by 2%. We managed to partially offset the decline in Broadcast revenues with the growth in third-party revenues from Media Pro Entertainment and the New Media division. At actual exchange rates, our consolidated revenues decreased by 15% due to the significant impact of movements in foreign currencies on our results. Our currencies have depreciated against the U.S. dollar by almost 13% compared to the same quarter last year.

Our costs were lower by 13% at actual rates. At constant rates, overall cost was slightly up with Broadcast costs flat and higher costs in our growth divisions, MPE and New Media. Consolidated OIBDA in the third quarter decreased by 53% to constant currencies compared to the same period last year or by 61% at actual rates.

Adrian will now present the Q3 operational highlights for our Broadcast division.

Adrian Sarbu

I invite you to turn to Slide 7. In all our markets, we continue to be the undisputed audience leader and generating the majority of the advertising inventory. To match the expectations of certain demographic segments and advertiser's demand, we successfully launched 2 male channels: Fanda in the Czech Republic and Dajto in the Slovak Republic. The new channels will help us strengthen our audience share leadership in this market.

We will continue to invest in local content, programs or channels in order to satisfy the increased demand of our viewers. Market share was solid and stable at 63%.

David?

David Sach

Turning to Slide 8. Broadcast revenues declined 8% at constant rates, in line with decline in television advertising spending in our markets. At actual rates, revenues decreased by 20%.

Broadcast costs were down by 13% at actual rates and flat at constant rates, even with the launch of 4 new channels in 2012. Broadcast costs have declined or remained flat for the past 5 quarters at constant rates.

Our Broadcast OIBDA of $8 million is down from $20 million in the third quarter of 2011.

And now, back to Adrian.

Adrian Sarbu

Let's move to Slide 9, and let me point to a few highlights from our content division, Media Pro Entertainment. The growth of Media Pro Entertainment has proven the validity of our business model: One Content, Multiple Distribution. Every quarter, Media Pro have reported growth in third-party revenues.

It has also delivered to our channels a number of fiction blockbusters with outstanding performance. The new season of Rose Garden Medical and brand-new drama series Gympl in the Czech Republic, Top Notch in Slovenia, Lara's Choice in Croatia and Las Fierbinti in Romania. Some of our reality entertainment boosted our prime time audience share, such as MasterChef in Croatia or The Voice in Romania.

David?

David Sach

Please move to Slide 10. The Media Pro Entertainment segment increased its net revenues by 49% at constant rates. This was an increase of 27% at actual rates. We generated approximately half of the MPE revenues from third parties.

MPE's costs were up by 18% at actual rates and by 39% at constant rates, reflecting the growth in this division. OIBDA increased from $200,000 to $3.4 million, largely driven by the higher third-party revenues.

Adrian?

Adrian Sarbu

Thank you, David. Please turn to Slide 11. Voyo, our leading subscription video-on-demand service has been growing its subscriber base. As of today, Voyo has attracted 90,000 subscribers across our 6 markets.

During the third quarter, we completed the rollout of a leaner channel, Voyo Cinema in all our countries. We continue to enlarge the Voyo library with over 1,000 titles available in Czech Republic and aim to offer the same number of titles in each of our territories.

Our website traffic grew by 19% year-on-year and attracted almost 12 million visitors per month. We launched a number of new sites and portals in all our countries, and we are aiming to achieve, as quickly as possible, at least a top 3 position in all our markets in terms of website traffic.

David?

David Sach

Thank you, Adrian. Please turn to Slide 12. Our New Media segment increased net revenues in the third quarter by 34% at constant currencies or by 17% at actual exchange rates. This was -- this result was achieved in an Internet advertising market that increased by 2%. These positive results were driven by our Voyo business.

The growth in New Media costs of 43% in constant currencies or 24% at actual rates reflects the launch of our subscription VOD service on Voyo in all our territories. We recorded an OIBDA loss of $1.4 million in the third quarter, which was $500,000 higher than last year.

Please move to slide 13. During the past 9 months, we have reduced our debt by $185 million through an equity raise and improved our short-term maturity profile through several refinancings, such that there are no senior debt maturities due until November 2015.

Our free cash flow for the 9 months was negative $78 million. The lower free cash flow is mainly the result of lower cash receipts, resulting from the year-on-year decline of the television advertising markets.

In addition, there was a higher net investment in programming, which represented the difference between cash paid for programming and the amortization expense, due to higher foreign programming payments and investments in local content productions. We ended the quarter with a cash balance of $126 million.

As mentioned previously, we now expect a much higher decline in the TV advertising markets in the fourth quarter than previously anticipated, which will impact our revenues, OIBDA and cash receipts. Furthermore, our efforts to extend the payment terms on foreign programming were less successful than we had envisioned, and we will need to invest more in our local content library than previously forecasted to maintain our audience shares. Consequently, we now forecast full year free cash flow to be negative.

And now, I turn you over to Adrian for final remarks.

Adrian Sarbu

Let's move to Slide 14. Based on our view today that the TV advertising markets will continue to decline in fourth quarter 2012 and assuming current exchange rates remain constant, we expect 2012 revenues between $750 million and $800 million, OIBDA between $130 million and $140 million, negative free cash flow between $70 million and $90 million and cash balance of at least $130 million.

We are facing new challenges in the near future. Advertisers will look to buy the same amount of GRPs for lower prices. We will have to maintain our audience shares with lower operating costs. We will need to better manage our cash and increase liquidity.

In order to successfully address these challenges, we are executing on a number of actions. We are preparing to implement a new sales model in advertising in order to drive spending. We'll endeavor to expand faster Media Pro Entertainment revenues, Voyo and New Media.

We continue to take steps to conserve cash. These steps include targeted reductions of our operating cost base and continuing deferrals of foreign programming commitments and payments, capital expenditures and development projects.

In addition, we are exploring further options to improve our liquidity, including new equity financing, asset sales and the renegotiation of payment obligations with a number of major suppliers. We have been in contact with Time Warner regarding its possible participation in a public or private equity offering.

We are also in the early stages of evaluating the potential for asset sales, as well as other measures to further optimize or restructure our cost base. It is not possible for us to provide any further details at this point or to ensure that any of our actions to improve liquidity will be successful. We will provide additional feedback when we make further progress.

And now, I will pass you back to Romana.

Romana Wyllie

Thank you, Adrian. That concludes the formal presentation. We are now going to move to the Q&A. So operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And now, I hand you back to Ms. Riley.

Romana Wyllie

Our first question comes from Tim Hamby. Tim?

Tim Hamby - Janco Partners, Inc., Research Division

I just wanted to get a little update on your deleveraging initiatives. Want to see if the $300 million in debt-reduction target that you had set out is still your ultimate goal there?

Romana Wyllie

David?

David Sach

Yes. We would still like to achieve, at least, that much, Tim.

Tim Hamby - Janco Partners, Inc., Research Division

And I know you said you didn't want to discuss the equity options too much, but you did say that you were looking at doing both private and public placement options?

David Sach

We will look at all options, Tim. As Adrian mentioned, we have been in contact with Time Warner, but that's all we're going to say.

Romana Wyllie

The next question comes from [indiscernible] from [indiscernible].

Unknown Analyst

Just a quick question. Have you seen -- advertisers have been actually switching their ad spends from TV to Internet ad spending. Is that something that started to play out within your markets, or is that yet to occur?

Romana Wyllie

Anthony?

Anthony Chhoy

I guess the decline that we noticed, yes, since the beginning of October was that I think the large advertisers, yes, that indicate that they're not going to fully spend their annual committed volume, which I think as David mentioned in his speech. There is some shift to -- yes, to Internet. But at this point, yes, the multinationals are I think just cutting their spending due to cost-saving measures for themselves.

Romana Wyllie

Next question comes from UBS, Michal Potyra.

Michal Potyra - UBS Investment Bank, Research Division

I have one question regarding the audience shares. Could you please comment on the change, it's in the audience share, actually, on the Czech market? Are the decline a result of cuts in the programming spending or competition or market segmentation? And how do you see it developing in the future?

Romana Wyllie

Okay. Anthony will answer your question.

Anthony Chhoy

The -- I think during the third quarter, in the Czech Republic, our audience share was impacted to some extent by the Summer Olympic Games, where the Czech national team's done -- they performed quite well. We invested in reality entertainment shows. And just to minimize the impact of that games leading into the fall season, we also launched, yes, a male-oriented channel, Fanda. I think it's a -- which we will help strengthen our audience share leadership. So I think it's -- with all of that, yes, in essence, since the start of the fourth season, I think it's -- we remained a strong audience leader in the market. Our audience share is, yes, 39% at this stage. It's approaching 40%.

Romana Wyllie

And Adrian will amend that answer.

Adrian Sarbu

Michal, as indicating during the conferences during the year, in these times of strict cost control, we are targeting the prime time audience, what we call the minimum threshold of around 40%. During the whole 9 months, we're not very far from this.

Romana Wyllie

So, Michal, have we answered your question?

Michal Potyra - UBS Investment Bank, Research Division

Yes.

Romana Wyllie

Next question is coming from Vivek Khanna from Deutsche Bank.

Vivek Khanna - Deutsche Bank AG, Research Division

Sorry, I just wanted to get a little bit of color as to the weakness or rather the lack of recovery in the ad market in Q4. Clearly, Q4 is an important -- is the most important quarter, and visibility is low. But I'm just trying to understand, what of any particular sectors, which of -- or is where you thought advertising will rebound more than what it actually has? Or are there any particular sectors where you actually thought advertising was weaker than previously expected?

Romana Wyllie

Anthony?

Anthony Chhoy

Vivek, just -- again, I mentioned earlier, also, David mentioned it in his speech, I think it's the weakness that we're seeing in the fourth quarter and started, yes, at the beginning of October. I think it's mainly the multinationals, I think it's -- who have cut their spending, and also, they're not releasing the additional, yes, ad hoc spending, yes -- ad hoc campaigns as they previously intended. So I think it's -- yes, with that, yes, we've, yes, lowered our expectations to -- and believe the decline in the fourth quarter will be similar to the decline that we experienced in the second quarter and third quarter, which is around about 7%. I think it's -- yes, it's just to -- over the past few years, we've gradually changed our client mix from, I think, the top 20 advertisers, which largely comprised of the multinationals, now, and in Czech Republic, represents about 45% of our revenues, which was compared to over 50%, yes, a few years ago. So we will continue to optimize our client mix just to maximize our revenues in these -- I think it's difficult conditions.

Vivek Khanna - Deutsche Bank AG, Research Division

I'm sorry, just within the multinationals. I mean, are there, again, any subsectors there where you're seeing certain weakness? Like is auto is weaker than others than previously expected as FMC? Just sort of put some color as to what type of multinationals are retrenching from their advertising spend?

Anthony Chhoy

Yes. So I think it varies by market. But in general, the automotive and the healthcare sectors actually increased their annual commitments and their spending in 2012. The sectors that reduced that -- yes, I think it's, again, lower than -- a lot more than we expected was the telecoms and the nonfood FMCG clients.

Romana Wyllie

Next question comes from Pavel Ryska from J & T Bank.

Pavel Ryska - J & T Banka, A.S., Research Division

My question is there have been recent media reports that your Czech TV's Nova was actually raising its prices. So my question is, can you confirm this? Or how does this go together with your statement in the presentation that you are expecting lower prices in the future or at the moment as well?

Romana Wyllie

Anthony?

Anthony Chhoy

I think it's -- Pavel, I think it's, again, in the third quarter, I think it's -- I think the pricing, I think, element was extremely competitive, how competitive I think it's -- yes, continues to heavily discount their CPP levels to increase their market share. We obviously, yes, introduced a, I think it's a price increase strategy in September. These are our new campaigns. Obviously, with the cuts from the large multinationals, that I think get some price increase strategy did not, yes, speak, yes, as much as we would, yes, like. But in -- yes, to put the whole thing in perspective, our sell-out rate in the Czech Republic, in the 9 months and to date, is 80%. So we still have available inventory to sell, Pavel. But we're not going to -- I think it's a -- I think compress our prices to the level of our competitors because that's going to -- I think it's -- have a domino effect, where the market will continue to be depressed.

Romana Wyllie

Next in the queue is Andrzej Knigawka from ING.

Andrzej Knigawka - ING Groep N.V., Research Division

I have a question on Czech Republic markets. Because if we do the kind of calculations in the local currency terms, even for your operations there, it looks like the decline was about circa 10% in korunas. And NTG had their call last week, indicated that their revenue in Czech Republic was up 4% year-on-year at a constant exchange rate. Can you maybe give us some light, what was the reason for the divergence of your revenue going down and they going up 4%?

Romana Wyllie

Anthony?

Anthony Chhoy

I think it's -- Andrzej, the -- again, I mean, our view of the Czech, yes, TV ad market in the third quarter, it declined by 7%, local currency terms and gets -- our revenues declined by 10%. So a little bit more than the decline of the market and that's because I think it's -- all our market share went down from 67% to 65% in the third quarter, which is a very -- the weakest quarter, I think it's -- I mean, of the full year. I think it's really the image for the full year, I think it's -- our share of the TV ad market was 66% for the full year to the 9 months, sorry, compared to 67%. So even with the price -- yes, significant price compression from our competitors, we managed to, yes, stabilize the market share, yes, to some extent. I'm not going to comment on NTG's revenues because, yes, I think it's -- they could be quoting, yes, from a gross perspective, where we look at revenues from a net revenue perspective, so.

Romana Wyllie

So there are no more questions in the queue. So let me thank you for joining us today. We look forward to seeing you shortly. Goodbye.

Operator

Thank you. This does conclude today's Central European Media's Third Quarter 2012 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.

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