CTC Media Q4 2008 Earnings Call Transcript

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CTC Media, Inc. (NASDAQ:CTCM) Q4 2008 Earnings Call February 26, 2009 9:00 AM ET


Anton Kudryashov - Chief Executive Officer

Boris Podolsky - Chief Financial Officer


Alex Kuznetsov - ING

David Ferguson - Renaissance Capital

Edward Hill-Wood - Morgan Staley

Elena Tymchenko - Credit Suisse

Laurie Davison - Goldman Sachs

Sohail Ahmer - Lusight Research

Alexander Wisch - S&P Equity Research

Benjamin Shapiro - Thomas Weisel Partners


Good morning and good afternoon, ladies and gentlemen, and welcome to CTC Media's Fourth Quarter and Full Year 2008 Conference Call. Today's call will be hosted by Anton Kudryashov, Chief Executive Officer of CTC Media, and Boris Podolsky, Chief Financial Officer. At this time, all participants are in a listen-only mode.

We will be conducting a question-and-answer session towards the end of the call. This call is being webcast, and an audio version of the call will be available on the company's website for two weeks. As a reminder, this conference is being recorded for replay purposes.

You should all have received CTC Media's fourth quarter and full year earnings release that was issued earlier today. If you have not receive the copy of the press release, it is currently available on the company's website at www.ctcmedia.ru. Please refer to the earnings release for the reconciliation of non-GAAP measures to the most comparable GAAP measures. A results presentation and a live webcast to company today's call are also available on the website under the Investor Relations section.

Before we begin today's call, CTC Media would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, the competitive environments, regulations and availability of resources. Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements, based on a number of factors and other risks which are more specifically identified in CTC Media's filings with the SEC.

And now, I would like to turn the call over to Mr. Anton Kudryashov. Please go ahead, sir.

Anton Kudryashov

Thank you, operator. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us today. 2008 was a highly productive and successful year for CTC Media.

Both our revenues increased by 36% to $640 million, while adjusted OIBDA grew by 27% to $280 million with a 44% margin. Adjusted net income was up 30% to $176 million. These results have been adjusted for the non-cash impact of a $233 million impairment charge in the fourth quarter. This charge relates to the impairment of the intangible assets of DTV Group in Russia, Channel 31 in Kazakhstan, and our Growth Custom Group in Moldova. We will comments survey on these later in today's call.

Organic operation revenues which comprise the combined operation revenues of CTC Network and Station Group and Domashny Network and Station Group were up 25% year-on-year to $588 million in 2008. These growth was broadly in line with independent estimates for overall Russian TV advertising market growth.

2008 was a transformational year for CTC Media. We have grown into a truly international company with three complimentary networks in Russia and broadcasting operations in Kazakhstan, Uzbekistan and Moldova.

We also successfully integrated the two Russian production companies, Costafilm and Soho Media, which requires in the second quarter. This is enabling us to develop our in-house production capabilities and create a proprietary content library.

We have continued to invest in our programming schedules in order to maintain a well balanced mix penetration (ph) and foreign entertainment content. As well as to develop high quality, a regional programming with Russian producers.

Before directly reflected in increased ratings and audience share gains for each of our networks. Our combined 4+ audience share in Russia increased from 11% in 2007 to 13% in 2008. We also increased the technical penetration of our networks in Russia in 2008, with DTV up from 54% to 61% and Domashny from 65% to 71%.

The power ratios for each of our networks increased year-on-year in 2008 and the blended ratio for the Russian networks increased to 1.34.

The overall Russian advertising market and the activities in advertising market in particular grew strongly during the first half of the year with total price increases.

However, the global financial crisis and the wider economic slowdown negatively impacted the development of the advertising market due in the second half of the year. This both compounded by the substantial depreciation of our ruble operating currency against our U.S. dollar reporting currency.

Let me now provide you with some indication of how each of our key business divisions performed during the reporting period. Our flagship CTC Network achieved an average 11.8% share of June in its 6 to 64 year old target group into 2008 compared to 11.3% into 2007.

CTC consolidated its position of the fourth most watched channel in Russia and the premier of the Daddy's Girls sitcom and Ranetki series, is among the key prime-time audience share drivers on the CTC Network.

Both shows will produced in-house by Costafilm, and Ranetki, (inaudible) was actually the most searched name on Russian Google last year.

The Domashny Network also continue to grow its audience share during the year from 2.4% in 2007 to 2.8% for 2008.

The networks prime-time audience share was supported by re-runs of CTC's Born Not Pretty series, as well as Agatha Christie's mysteries at weekends.

The CTC Media house was service transcend by the acquisition of DTV Group in April 2008. The shows that we'll launched on DTV during the full season have successful increased the networks 11+ audience share to 1.9% in the fourth quarter.

The Silent Witness, CSI and also the detective show Marital Fiction were among the most successful prime-time shows on DTV.

As we have announced, we're already positioned DTV as a crime, investigation and action channel focused on the 25 to 64 demographic. And this process is expected to be completed by the end of 2009. The Channel grid will improved quality Russian and foreign series and movies, includes in-house produced content.

Our objectives is to maintain and transition DTV's share in 2009 and then to increase it to 5% over the longer-term.

We also significantly expanded our geographical footprint in 2008 with the acquisition of Channel 31 in Kazakhstan and the broadcasting group in Moldova.

Channel 31 is currently the second largest channel in Kazakhstan in terms of leadership, with an average audience share of 13.4% in the target demographic of 6 to 54 year old into 2008.

CTC content already count for two-thirds of Channel 31 programming with local content contribute in the remaining third. TV (ph) in Moldova is the other new addition to our channel portfolio with CTC content accounting for over 90% of the programming schedule.

The channel is currently number four by viewership with an average audience share of 7% amongst this same target group of 6 to 60 (ph).

We became the owners of the Costafilm and Soho Media, Russian production companies in April 2008. The integration of these companies enables us to produce a proportional of our Russian programming in-house and build-up our own library, which is reducing our dependence on third-party content suppliers.

These in turn will enable us to manage our content production cost in the more efficient manner. About 20% of the total content cost in 2008 was for content from Costafilm and Soho Media, and we plan to increase this proportion of in-house sourced content in 2009.

We are focused on optimizing the mix of Russian and international programming. We have programming agreements in place with the major Hollywood Studios. Sony Pictures Disney, Paramount, Universal and Warner Brothers.

At the same time, locally produced television series and shows are critical drivers of audience share development for our Russian Networks.

Therefore in addition to develop in our own in-house production capabilities. We have entered into license agreements with Russian studios and distributors to secure broadcasting rights for Russian feature films and other programming.

Furthermore, we became the first Russian media company to sell license and rights to regional Russian production to western broadcaster. When German channel does (inaudible).

Our efforts will once again acknowledged by Russia's National Television Academy in September 2008, when CTC Media received nine of Russia's most prestigious television award. In categories include in best sitcom, best comedy show and best infotainment program.

In another area of our business, we also received a recognition with the Standard & Poor's Credit Rating Agency, vote in CTC Media the most transparent Russian company of 2008.

We are committed to continuously enhance in our transparency and disclosure levels and it is in these context that we have made further changes to today's results announcement structure.

As you will have seen, we're not providing formal earnings guidance for 2009 at this stage. The rationale is clear, first the markets are uncertain at this time with the slowdown at a negatively effected advertising budgets and spending levels.

And secondly our ruble operating currency has depreciated significantly against our U.S. dollar reporting currency, which makes any forward estimation of the results highly subjective.

However, general curtailing are emerging. In ruble terms, revenues are expected to be down approximately 10% year-on-year in January and February. This reflect the effect that advertisers have been holding back on decisions and negotiations are ongoing.

However the outlook is more positive moving forward. We had a much better level of visibility for the year now. We have approximately 75% of our 2009 new majorities (ph) now booked with advertisers by Video International.

These bookings have been made a similar ruble pricing levels to 2008. We do also expect TV as the only national region impact media in Russia to significantly increased it share of the overall advertising market in 2009.

On the cost side of the business, we obviously exercise a greater degree of control and the currency devaluation creates a positive effect when ruble expenses are reported in dollars.

We have already opted during the second half of last year and the beginning of this year to optimize our cost base in order to adjust to the new economic environment and protect profitability levels as far as possible.

The steps that we have taken include a 20% reduction in head count, a hiring freeze the elimination or reduction of all non-essential expenditure, adjustments to programming mix, and the ongoing renegotiation of as many as possible of our supplier contract.

The key element here is programming cost which accounts for approximately 60% of total cost. We are actively negotiating with our domestic and international content suppliers in order to reduce our programming cost, while at the same time maintaining quality levels.

Although Q1 cost will grow year-on-year in ruble terms due to the consolidation of the businesses acquired in 2008. We still expect to be able to keep our total cost base stable year-on-year in 2009 in ruble terms.

There are further cuts that we can make if the market situation deteriorates further. It should be noted that the flow through of a number of a cost savings that we have implemented does not come immediately, especially amortized programming spend.

In summary, we have deliver a robust set of results, proven with our business is on the right track and that we have efficiently executed for our strategic objectives.

We are committed to our goal of Transcend and CTC Media's market shares and overall position in both the Russian and CIS market. By increase in the technical penetration of our networks and growing our target audience unit shares.

I will now hand the call over to Boris Podolsky, our Chief Financial Officer for his comments on our financial performance and position.

Boris Podolsky

Thank you, Anton. I will now take you through our financial results for the fourth quarter and full year 2008 in more detail.

Total operating revenue were up 16% year-on-year $287 million in the fourth quarter and up 36%, to $640 million for the full year. The growth -- near the growth since the Russian Television advertising market during the first half 2008.

Television advertising prices in 2008 in Russia increased 50% to 60% in ruble terms. This increase what partially driven by decrease in the amount of advertising permitted to be broadcast according to Russian regulation from the beginning of the 2008.

Our results were also positively impacted by the consolidation of the DTV and production company grew in Russia, which added a combine total of $20 million at the rating revenues in the fourth quarter and $52 million for the full year.

There were the Russian ruble, against the materially depreciate against the U.S. dollars in August 2008 and loss 20% of ruble (ph) against the U.S. dollar over the last five months of year. This exchange rate movement negatively impacted our year-on-year revenue development in the fourth quarter by approximately 9%. However, the full year impact of this exchange rate movement was actually margins were positive and contributed approximately 2% to the year-on-year growth.

Moving onto the expenses now. Our total consolidated at the rating expenses before the impairment charge were up 23% year-on-year to $95 million in the fourth quarter and up 34% to $373 million for the full year. When excluding the DTV channels and production companies in 2008. Total cost were up 7% year-on-year, $23 million in the first quarter and up 18% to $328 million for the full year.

The rating expenses increased by 88% year-on-year in the fourth quarter and by 80% for the full year, which was primarily due to the consolidation of DTV Group and CIS Group, which had $2 million and $1 million of expenses in the quarter and $6 million and $2 million for the full year respectively.

The fourth quarter increased also reflected higher transmission and maintenance cost as Domashny and CTC Network and Stations, as well as provision by CTC Network which related to prepayments with certain programming right that we have not driven to be in the recoverable.

Selling, general and administrative expenses were up 44% year-on-year in the first quarter end up 40% for the full year, which reflect the consolidation of our non-organic businesses.

The DTV and CIS Groups added $2 million of expenses each ends a quarter and $6 million each for the full year. The production company at about $500,000 (ph) in the quarter and $4 million for the full year.

Salaries and benefits goes in line with inflation and the increase in overall head count well as expenses related to corporate conversation programs (ph) increased year-on-year due to the new options during 2008.

Programming amortization cost increased by 25% year-on-year in the first quarter and by 44% for the full year due to higher programming cost at CTC and Domashny.

For foreign movies and Russian produced series and shows as well as impact of the consolidation as a newly acquired broadcasting company. The results also include a $2 million impact in the quarter and $9 million impact for the full year, as a result of the change in the amortization port if Russian produced series with 20 more episodes from the second quarter of 2008.

Impairment charges increased year-on-year from $3 million to $5 million in the quarter, and from $6 million to $17 million for the full year. These charges mainly related to the under performance of three Russian series launched by CTC in the first half of 2008, One Night of Love, Heartbreakers and I Cure (ph), as well as the vision of our expectations for the revenues that will be able to generate from programming moving forward in the current economic environment.

Depreciation and amortization decreased 50% year-on-year in the quarter, and for the full year, which was principally due to change in '08 -- in the current increased of our broadcasting licenses. With this effect from the beginning of 2008, we amortize our broadcasting licenses on a five year basis, as we use to, but treat them as intangible assets with them in definite light and subject to annual impairment tax.

Now, I would like to specifically adverse an impairment charge which have recognized in the fourth quarter.

We cutback impairment at the end of each year and latest of this task (ph) had led us to the recognition of the $233 million non-cash charge arising from the impairment of intangible assets and DTV Group, Channel 31 and our broadcasting group in Moldova.

The charge comprises $96 million at DTV Group in Russia, $133 million in Channel 31 in Kazakhstan and $4 million at the broadcasting group in Moldova. This non-cash charge comes as a result of changes in the market conditions and the long-term outlook in the time since we acquired these assets.

The charges relates to the broadcasting license to increased (ph) DTV Group. The broadcasting licenses and goodwill assets to Channel 31, and the broadcasting licenses with Moldova.

The principle factors and calculating the charge reductions in the projected future cash flows of the companies as well as increased in the discount rates applied to these cash flows, which reflect the current economic and stability in Russia and other senate (ph) countries.

However no other assets impairments have been necessary across alterations including our core schedule at CTC.

Adjusted consolidated OIBDA before the impairment charge increased by 4% year-on-year to $97 million in the fourth quarter end by 27% to $280 million for the full year.

Our consolidated OIBDA margin therefore declined year-on-year from 57% to 52% in the Q4 and from 47% to 44% for the full year.

In the fourth quarter, we reported $17 million of foreign exchange and also spend $29 million for the full year as the weakening of the ruble impacted on the translation of the company's U.S. dollar denominated liabilities.

The year-on-year change from net interest income of $4 million in Q4 of 2007 and $11 million was a full year to net interest expense of $2 million and $3 million for the full year respectively.

Reflected the increased borrowing levels following the arrangements and draw down on $135 million credit facility in April 2008 to finance the acquisition of DTV Group as well as the reduction in our cash flow on deposit during the year.

The adjusted effective tax rate was 2% in the fourth quarter and 21% for the full year. The lower rate, primarily, reflects a decrease in the statutory income tax rates in Russia and Kazakhstan from January 1, 2009. And this affect on our deferred tax assets and liabilities which resulted in the recognition of a $19 million income tax benefits in the Q4 of this year.

If you exclude this impact, the tax rate would have been 28% for the quarter and 29% for the full year compared to 28% for the fourth quarter of 2007 and 31% rate for the full year.

Adjusted consolidated net income was up 8% year-on-year to $65 million in the first quarter and up 30% to $176 million for the full year.

The impact of the impairment charge on reported net income was $154 million. The company's adjusted fully diluted earnings per share is therefore increased year-on-year from $0.38 to $0.41 in the first quarter and from $0.86 to $1.11 for the full year. The impairment charge reduced the fully diluted earnings per share by almost $1.

Moving on to our cash flow and balance sheet. Net cash flow from operations increased by 18%, year-on-year, $286 million in 2008. We spent $409 million on the acquisitions of new businesses during the year including $331 million paid in cash for DTV while our CapEx remained low at $10 million or 1.6% of total revenues. All numbers recorded on the net of cash acquired basis.

Cash flow from financing activities amounted to $21 million and included the net charge and borrowings of $25 million. This primarily reflected the drilling down of the $135 million loan in June 2008 which was used to finance the acquisition of DTV.

Principle amount under this two years goes in agreements and repairable in four semi-annual installments starting December 2008. The remaining outstanding principle of $91 million on these facilities payables in 2009 and the remainder balance in June 2010 in the month of -- of $28 million.

Our cash and cash equivalent amounted to $98 million as at 31st, December 2008. So we are in a net cash position. The majority of our cash is found in dollars and the ratio of total debt projected 2008 or OIBDA in very low at approximately 0.3.

With that, I will now turn the call back to Anton. Anton?

Anton Kudryashov

Thank you, Boris. We will now be able to open the floor to any questions you may have. Operator over to you.

Question-and-Answer Session


Thank you, gentlemen. (Operator Instructions). We'll take our first question today from Alex Kuznetsov from ING. Please go ahead.

Alex Kuznetsov - ING

Good afternoon. Thank you very much for the detailed presentation. I have just a couple of questions. First to all, could you comment on the adjusted pricing trend in fourth quarter and if possible what changes you've seen this year so far. And also a few comment on your cost optimization program please. I know you're going to negotiate them pricing with both local studios and international providers. Could you update us on the progress of the development? Thank you.

Anton Kudryashov

Okay, I will try to answer this question. Well there wasn't much of a change in GRPs trends during the first quarter. As you know most of the business for the first quarter is constructed during the year, during the earlier part of the year. Speaking about the current trends we've seen for GRPs we seem slight to slightly down may be 3% down trend on the current GRPs sales for January and February.

Also you were asking about the content negotiations. We are still engaged in a number of negotiations for international and local content providers. In general, we managed to achieve improvement in both contract terms and cash flow schedules for in this negotiation. As far as the GRPs content providers go, we managed to keep ruble prices flat and therefore benefiting from our ruble depreciation we witnessed in the last few months.

Alex Kuznetsov - ING

Thank you very much. May I ask you just a couple of follow-up questions. When we talked about pricing trends, I assume taking in ruble terms.

Anton Kudryashov

Yes. We commence in ruble terms.

Alex Kuznetsov - ING

And also your previous guidance that in the third quarter we are likely to see revenue 5% to 10% down. Are we talking in ruble term as well?

Boris Podolsky

Yes, this is correct.

Alex Kuznetsov - ING

Thank you very much.


Thank you. We'll now move to our next question from David Ferguson from Renaissance. Please go ahead.

David Ferguson - Renaissance Capital

Hi, good afternoon everyone. You talked about Video International having contracted around 75% of the year's inventory at around prices. I was just wondering how realistic do you think it is those contracts will hold, I guess what we're seeing, in northern market is that as soon as agreement reached the advertisers are then going back and changing their commitments asking for lower prices. So just kind of ensure why the situation would be different in Russia.

And then on the cost base, could you talk a little bit you said is that the average for the year or why you expect to get to at the end of the year and maybe you could break it down by each of the cost lines that you report in terms of why you see the most flexibility the expensive cost cuts in each of those lines? Thanks.

Anton Kudryashov

As far as the contracts with the advertisers, we've been working and we've been selling on the basis of this contracts due in January, February and obviously there's no change of terms there whatsoever. As you may know that our most of this contracts are multi-year contracts that have been on this embedded the most contracts for changes of terms and so far we do not seen any indications for any modification in terms of this contracts.

Then the question on cost, perhaps, Boris will give a few comments.

Boris Podolsky

Yeah, I'll take your question. First of all, we have undertaken number of measures starting, I guess, third quarter of last year to optimize our cost base. The subject we have taken included 20% reduction in head count, higher increase, elimination or reduction of full amount essential expenditures, adjustments to programming needs and ongoing renegotiations as many as possible supply quarter.

We obviously undertook those actions with an aim to reduce our cost base as seen in our immediate controls to the extent possible, trying to prepare the business for the challenges we had expected at the time, in 2009.

So going back to your question, we expect first in global terms, total operating expenses to stay at least flat on ruble terms year-on-year on average. As far as the quarterly trends in Q1of this year, we obviously would see some marginal increase quarter-on-quarter due to the non-organic piece of our business by DTV and CIS as well as production companies which we consolidated in the second quarter of 2008.

David Ferguson - Renaissance Capital

Okay. That's sounds great. Thank you very much.


Thank you. We'll now move to our next question today from Edward Hill-Wood from Morgan Stanley. Please go ahead.

Edward Hill-Wood - Morgan Staley

Hi. I was just -- for the question on your comments about trading in January, February; I think you said that revenues were down 10% in ruble terms. I just wonder if you could just define what that is. Is that 10% in total revenues or is it underlying revenues excluding the acquisitions made last year? Is it mainly coming from CTC Network, was this a breakdown of that.

Anton Kudryashov

Basically we will comment in on advertising revenues for the whole group.

Edward Hill-Wood - Morgan Staley

Okay. I mean, does that include the DTV and...

Anton Kudryashov

Yes, that includes all of our networks in Russia and (inaudible).

Edward Hill-Wood - Morgan Staley

So what was the underlying number for the CTC Network.

Anton Kudryashov

It's the same, there is no major division between the channels.

Edward Hill-Wood - Morgan Staley

So all the channels are -- so the whole group, everything in the group is around 10%.

Anton Kudryashov

Around 10%. Yes

Edward Hill-Wood - Morgan Staley

Okay, great. And the second just question, just related to sort of competitive situation on programming. Are you seeing any changes in how competitors approaching programming in terms of pricing or renegotiating their content deals? Are you seeing any pullback or spends in the market, it's just an opportunity to take the market share to go through this year.

Anton Kudryashov

Well generally most of the broadcasters proclaim their intensions to negotiate down the cost of programming and that thing it is happening in sort of industry wise at least for Russian content. As far as pullback the series (ph) from programming commitments, we do hear all sorts of rumors about certain programming commitments being put on hold or some pullbacks. However looking at January, deals (ph) of the main broadcasters we do see a fairly large number of premiers and new shows put on air. So, I would say the competitive environment in terms of programming remains quite intense.

Edward Hill-Wood - Morgan Staley

Okay perfect and just wanted to make just -- one more -- just on the FX impact on the cost base. I mean I was wondering if you could just give us a sense of if the exchange rate remain where it is today, bear in mind the difference spilt between how you pay on the ruble and the dollar side. This is just sort of aggregate number of what you would expect the impact on the cost line to be? If that some case?

Alex Kuznetsov - ING

Yeah, it would be very speculative I guess on our side because answering this question involves as you can imagine so many judgments you have to make. So I probably would stop short of giving any exact numbers if it was a closely, we gave basically trying to maintain our ruble cost flat. You can use the exchange rates obviously and in dollars this will create a significant decrease in our cost base. But, what exact percentage is that going to be obviously will depend on the exact rates.

Edward Hill-Wood - Morgan Staley

Great, thank you very much. That's very helpful.


Thank you. We'll now move to our next question today from Elena Tymchenko from Credit Suisse. Please go ahead please.

Elena Tymchenko - Credit Suisse

Good evening. Elena Tymchenko from Credit Suisse. I have some questions, could you please tell us what margin growth rate now given the 5% to 10% revenue declines that you're seeing in January and February this year. And what's your medium or short-term target and how fast could you get there. Basically how fast can you manage your cost? And second question is related to your audience share, could you just share what interest pattern in audience as to now whether people switch currently towards the sitcoms, movies or news channels probably was there any dynamics in that? Thank you.

Anton Kudryashov

So as we indicated earlier, we are not providing guidance for the year therefore we want be able to comment on the margins situation. Then I think you had a question in both audience share dynamics. Well, we do not see any major changes in audience preferences if you're talking about the first couple of months of this year.

As you know, our prime-time grid consist of movies and sitcoms and some programs so. It is fairly equal weighting in terms of the audience shares among the key programs on a prime-times. So I don't -- we do not see a sort of shift and preferences towards news or something out. So the general patterns of viewership are similar to what we have seen during last year.

Elena Tymchenko - Credit Suisse

Thanks. And to clarify from the first question, it's not asking for a guidance could you please tell us what where you operate now, based on January and February performance?

Anton Kudryashov

Once again I'll have to repeat myself. I mentioned that January and February we've seen that roughly 10% down in ruble terms and we have even used comments on our cost space.

Elena Tymchenko - Credit Suisse

Okay. Thanks.


Thank you. We'll now move to our next question today which comes from Laurie Davison from Goldman Sachs. Please go ahead.

Laurie Davison - Goldman Sachs

Hi, there. Few questions, one on tax rate; given the change that you're talking about what kind of tax rate do you expect ineffective in 2009?

Second question is just on uses of cash. Obviously you got to pay down the outstanding debt that you commented on and outside of that would your priority be maintain liquidity or are you looking to actually capitalize on any acquisitions that could pop up in the next 12, 24 months? Thanks.

Anton Kudryashov

Thank you, Laurie, for your question. As far as the tax rate, obviously, the Q4 tax ... effective tax rate, as I mentioned in my speech, is unusually low due to the changes in the regulation that's introduced. Lower profit tax rates for our businesses in Russia and Kazakhstan. So that's a one of tax rate which was seen when the tax rate for the full year.

Now moving on to the 2009 obviously we have yet to do fairly complicated analysis on the group results because of the group structure. The effects on those are straight forward but my expectation is that for 2009 in average the tax rate will come down.

I probably would still stop from commenting on exactly where it would be at this point but I would imagine that at least by 2 to 3 percentage points should be lower than in 2008 in average.

Anton Kudryashov

Let me handle the question about the use of cash. We have basically three priorities for our investments of cash this year. First one we are looking actively for acquisitions particularly in regional television stations to further consolidate and grow our technical penetration through owned operating stations for all of our Russian Networks. We are also watching closely the developments in certain CIS regions, in particularly Ukraine. Looking forward interesting opportunities to emerge there now as valuations have comedown significantly.

Secondly, we have a program of technologically expenses to boost our broadcasting and technology. And thirdly, we obviously would like to maintain a good level -- health level of operating cash given high level of unpredictability in the revenues streams this year.

Laurie Davison - Goldman Sachs

Okay. So you come back to $0.02, $0.03 drop was that off the adjusted rates you spoke about which I think about 28% or 29% for the year '09. And just on your operating cash, just on stand up for the was your first priority increasing regional coverage, second priority in order of importance tax spend and then third priority maintain cash. Was that the right way to understand or early equal priority.

Anton Kudryashov

I would ensure to prioritize and will just the seen key priorities for our investments into regional company as to expand our technical coverage, looking opportunistically at situations in CIS and particularly Ukraine. Improving our technology, our broadcast technology, and maintaining healthy levels of operating cash.

Boris Podolsky

And to your first question. Yes, of course I was talking about the adjusted tax (ph).

Laurie Davison - Goldman Sachs



Thank you. And we move to our next question today from Julia Gordeyeva from Deutsche Bank. Please go ahead. Please go ahead, Ms. Gordeyeva. We will now move onto our next question today from Sohail Ahmer from Lusight Research. Please go ahead.

Sohail Ahmer - Lusight Research

Hi. Thanks for taking my question. I had actually three basic questions. You mentioned that there is a translation effect on your accounts from ruble to USD. I was interesting to finding up what percentage of your costs are actually nominated in USD in the sense that you have to pay USD for those costs.

Second, if you could, and you may have mentioned this I am not sure if I got it. But, if you could elaborate on any further impairments that you might expect. And finally if you could talked a bit about total advertising expenditure going into 2009. How you see the environment and do you expect to be flat or lower and if you do expect it to be lower, by how much. Thank you.

Boris Podolsky

Okay, thank you. Its Boris here, I will try to take your questions. The first one if I will go correctly was off the structure from expenses and (inaudible) lower expenses are to the FX movements. We operate in Russia and in Kazakhstan. So our cost structure is accessible to rates in those countries, and also in local currency as a respect with ruble and USD (ph).

As far as structure itself is concerned, the vast majority of cost is ruble based. The only noticeable portion of cost which is dollar denominated yields as foreign content we acquiring from major to this for U.S. dollars. That's approximately 20% of our total cost base. So obviously this part is sensible to movements of U.S. dollar against Russian ruble. At the end of the year, as I mentioned, we have accumulated approximately 98 new end dollars of cash on our books. Now this cash is over 90% comprised of U.S. dollars. So that is not entirely but to the significant extent covers our net U.S. dollar liabilities to be paid through 2009.

Obviously we will be on the net U.S. dollars liability position at certain period but amounts (ph) we do not expect to be significant. So we sort of if you wish due to large extent naturally hedged our U.S. dollar payments exposure for 2009.

Now I would probably just finish with your first question. The second one was on impairment charges and if we expect to have more charges of that nature in the future. Again, the impairment testing exercise is an annual test we do. We do it in October of this year and we do it based on the number of the macro economical conditions. So this time around we have reported an impairment as a result of the change -- significant change in various macro economical numbers or parameters as you well aware as crisis hit all countries around the world, Russia was not excluded.

So, shall the economic environment continue to worsen and shall there be other unfavorable macro economical trends going into the 2010. And these days will be worse than the ones we have as to this point we may have to report additional impairment charges. So I would not preclude this entirely. Although I do believe that this analysis was conservative enough. We've been prudent in our assumptions and our expectation at this point is we will not have to do it going forward. Again, we do it annually so at this point is difficult to give a definitive answer.

And on your third question, I think the answer was basically giving our outlook on both revenue and on the cost side. So we probably were still short of quoting exactly the OIBDA numbers.

Sohail Ahmer - Lusight Research

Okay, still a couple of clarifications then; you mentioned that you're reducing head count by 20%. Could you then perhaps tell us what your total operating costs are on employees? And on the impairment side does the accounting treatment of impairment allow you to perhaps write back some of them impairment if the economic situation improves?

Boris Podolsky

Yeah, well, your second question, if my memory serves me correctly, according to again my understanding of the U.S. GAAP accounting rules, you are not allowed to write back asset backup. It's a one way exercise, once you have impaired your assets there is no way to write it up, even if the macro economic situation improves. Now your second question was on how much -- the employees cost are in our P&L, right?

Sohail Ahmer - Lusight Research

That's right, yeah.

Boris Podolsky

Okay. It's -- I think again if it is both numbers adjusted for the head count reduction we have taken in going into the 2009, those costs will probably will be around 10% of our operating expenses.

Sohail Ahmer - Lusight Research

That is before the reduction head count.

Boris Podolsky

Going forward 2009.

Sohail Ahmer - Lusight Research

Okay. Thank you.


Thank you. And then we move to our next question today which comes from Alexander Wisch from S&P Equity Research. Please go ahead.

Alexander Wisch - S&P Equity Research

Hi, good afternoon gentlemen, just a couple of questions, one is from the advertising outlook for television in Russia in 2009, another tricky questions and forecasts are changing on a regular basis. But I wanted to know your view on this year advertising in TV and whether you're likely or unlikely to outperform the market. And the other question is a bit more guidance on your expenses. Your programming for 2009 that's already been committed I imagine, 60% of your costs are related to programming, is it right to assume that that's not flexible for 2009, and that's basically to confirm that.

Anton Kudryashov

As far the channel TV advisement market trends, we won't be able to give you any exact numbers. But the couple of comments what we have witnessing is the increase of the share of TV advertisement in the overall advertising markets in Russia.

And as far as the general program -- again I think you will be better for adjusting this question through reach (ph) international. We can only comment on what's been happening with us in January and February and we also mentioned that as of today about 75% of our adjusted inventory has been contracted for the current year.

As far the programming commitments, certain part of our programming commitments are fixed however this portion of the programming budget which is the income structure during the year. So we have located a budget for acquiring content during the year which hasn't been yet committed or constructed.

Alexander Wisch - S&P Equity Research

And you mentioned that what percentage that's what broker in part of this like 20% or more like 50%?

Anton Kudryashov

I would say approximately 25% hasn't been -- or the programming budget hasn't been committed to specific projects as yet. And talking about the existent commitment, we were able to negotiate down some of the commitments in particularly on the Russian content side. As I mentioned earlier roughly we are managing to keep our Russian content cost flow out in ruble terms and therefore benefiting from our devaluation against the ruble.

Alexander Wisch - S&P Equity Research

And one last question related to that, from your programming commitments, is it 100% dollar denominated or do you have some there is source in other currencies or even ruble.

Anton Kudryashov

Approximately 35% of our programming budget is denominated in U.S. dollars and which account for our concert with U.S. Majors. The rest about 65% ruble denominated concerts with Russian content providers.

Alexander Wisch - S&P Equity Research

Wonderful. Thank you, gentlemen.


Thank you. We'll now move to our next question today from Ben Shapiro from Thomas Weisel Partners. Please go ahead.

Benjamin Shapiro - Thomas Weisel Partners

Hi, it's Ben Shapiro filling in for Ben Mogil. Most of my question have been answered, however, and I do understand that a current operating environment quite difficult in visibility is obviously not great. Given that so I'm just wondering do you anticipate giving guidance for fiscal year '09 with next quarters results?

Anton Kudryashov

We will keep reviewing our position on a quarterly basis and if we see significant improvement on visibility on our contracted business and also a more stable outlook for the currency we will be happy to return to provide guidance.

Benjamin Shapiro - Thomas Weisel Partners

Okay, that's great. Thank you.


Thank you. We will now take our last follow-up question which comes from Alex Kuznetsov from ING. Please go ahead.

Alex Kuznetsov - ING

Well actually my questions have been answered by now. Thank you.


Thank you. As we have no further questions, I would like to turn the call back over to Mr. Anton Kudryashov for any additional closing remarks.

Anton Kudryashov

Thank you. To summarize I would like to highlight the following points. 2008 was a year in which CTC was success returns from international company with three Russian networks and broadcasting operations in three other neighboring countries. The addition of two content production companies is enabling us to develop our own content in-house.

We have expanded our technical coverage and increased our view in shares and network power ratios. CTC is expected to taken an even greatest share of the overall advertising markets in 2009 and we are well positioned to benefit from this. The market is definitely more challenging and less certain in 2009 but we have 75% of annual national GRPs booked at stable ruble price levels.

We have taken a number steps to reduce our cost base which will increasingly benefit the profitability of the business as we move through the year.

We continue to pursue our long term development strategy and will update you on our progress in key developments moving forward.

Thank you for joining today's call and we look forward to speaking to you and meeting with you in person over the coming weeks and months. Goodbye for now.


That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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