Central European Media Enterprises Ltd. (NASDAQ:CETV) Q4 2016 Earnings Conference Call February 9, 2017 9:00 AM ET
Mark Kobal - Head of IR
Michael Del Nin - Co-CEO
Christoph Mainusch - Co-CEO
David Sturgeon - CFO
Peter - Wunderlich Securities
Hello, my name is Barbara. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises Fourth Quarter and Full Year 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, this conference is being recorded today, the 9th of February, 2017.
It is now my pleasure to turn the floor over to Mark Kobal, Head of Investor Relations at CME. He will be our moderator today. Mr. Kobal, you may begin your conference.
Thank you, Barbara. Good afternoon and good morning everyone and welcome to CME's fourth quarter and full year 2016 investor conference call. We issued our earnings press release earlier today, a copy of which is available on our Web-site, cme.net, along with a brief presentation that we will refer to during this call. On the call today are Michael Del Nin and Christoph Mainusch, Co-Chief Executive Officers of CME; David Sturgeon, Chief Financial Officer; and Daniel Penn, General Counsel.
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, the risk factors and other cautionary statements in our SEC filings, including the Form 10-K. Forward-looking statements speak only as of the date and 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 also refer to certain financial information that is not in U.S. GAAP. A description of these non-GAAP financial measures, as well as the reconciliations to the most comparable GAAP measures, is available on our Web-site and the appendix to the Earnings Call Presentation. Additional information may also be found in Note 19 to our financial statements in the Form 10-K.
With that, I will hand the call over to Michael and Christoph.
Michael Del Nin
Thanks, Mark, and thanks to everyone joining us for this call. As we have seen from the results reported today, we ended the year on a high note. In fact, Q4 was from an OIBDA perspective the biggest quarter the Company has had in five years. In several countries, we achieved impressive TV ad sales results and this helped drive our highest Q4 OIBDA margin in almost a decade.
But these results are just a part of another standout year for CME, one filled with highlights. The acceleration of revenue growth towards the end of the year combined with our focus on cost control led to a full-year OIBDA growth of more than 21% at constant rates, exceeding our guidance from October. We also exceeded the top end of our unlevered free cash flow guidance for 2016, generating $96 million, a 30% improvement over the previous year.
Our team in Romania kept up their momentum, finishing Q4 with TV advertising revenue growth of 20% at constant rates. This combined with the decline in total costs in 2016 led to a banner year there. OIBDA grew more than 50% at constant rates and margins expanded almost 1,000 basis points to 36%, levels not seen since 2008.
It was also another great year for our largest business, the Czech Republic, where OIBDA margins surpassed a remarkable 40% in 2016. Also contributing to the outstanding results were strong performances from Slovakia where OIBDA grew nearly 50%, and Slovenia which registered another year of robust TV ad revenue growth.
Carriage fees and subscription revenues grew at an even faster pace than TV ad revenues in 2016, and that trend is set to continue this year. Lastly, our net leverage ratio remained below 7x at year-end, an improvement of four turns in two years. The cost of borrowing on approximately half of our debt will again decrease automatically once our net leverage ratio falls below 6x, and in turn support further improvement in our free cash flow through lower guarantee fee obligations.
So altogether, our consolidated net revenues in 2016 increased 5% at constant rates to $638 million, driven by the growth in TV ad revenues and carriage fee and subscription revenues. While revenue growth was robust, our costs only increased by 1% at constant rates, resulting in full-year OIBDA of $150 million. That means that in three years we have grown OIBDA by almost $200 million, an achievement even more remarkable given the strong FX headwinds that we have faced during that period.
In 2016, the OIBDA margin of almost 24% represented an increase of over 300 basis points on the previous year, and the fourth quarter saw us extend our run to 12 consecutive quarters of year-on-year margin expansion. The progress made during 2016 and the continued improvement expected in the coming years positions us for even higher profitability of our operations going forward.
I'll now hand the call over to Christoph.
Thank you, Michael. Good afternoon and good morning to everyone. We remained audience share leaders during 2016, and improved our relative position in all day in four countries. We did this by leveraging our competitive advantages and making targeted investments in local programming while facing heavy competition. And it was accomplished while keeping overall costs broadly flat at constant rates. These audience shares give us a strong offering for advertisers and we believe we continue to provide the most efficient medium to reach consumers.
So we controlled costs overall while spending more on popular local content by offsetting this investment with savings in foreign fiction as well as other costs, and our investments in local programming paid off with results for the fall season improving prime time in Q4 in four countries. This included strong performances from local versions of international entertainment formats such as The Voice in Romania, The Farm in Bulgaria, and Your Face Sounds Familiar in the Czech Republic, Slovakia and Croatia. In Slovenia, the station’s line-up included the most local programming in the last 10 years and was a driver of audience share increasing significantly during 2016.
Turning to TV ad spending, the markets of the countries in which we operate grew an estimated 6% at constant rates in 2016. Our TV ad revenues grew 5% driven by improvement in four out of six countries. In the Czech Republic, advertisers placed more advertising than in 2015 but average prices were lower due to the significant discounting by the competition to sell the incremental inventory. So the market increased an estimated 4%.
In Romania, the market maintained significant growth in the last nine months of the year. The combination of an increase in GRPs sold and higher average prices resulted in 13% growth in 2016. In Slovakia, estimated market growth of 8% was driven by an increase in average prices. Demand in the first half of the year was also influenced by an increase in spending on informational and political campaigns. But this spending declined year-on-year in the third and fourth quarters, so fewer GRPs were sold in 2016.
In Bulgaria, the market was flat as heavy competition for market share continued to negatively impact average market prices, offsetting an increase in GRPs sold. And the market growth of 2% in Croatia was due to an increase in both average market prices and GRPs sold. And in Slovenia, a more positive macroeconomic environment has encouraged advertisers to increase investments resulting in an estimated 7% market growth driven by higher prices.
Carriage fees and subscription revenues increased 9% in 2016, including an impressive 43% in the Czech Republic, due to growth in the number of subscribers reported by carriers as well as both high definition channels and new channels available exclusively on their platforms.
Looking ahead to 2017, the year so far has had an excellent start. In five out of six countries, all day and prime time audience share grew compared to the same period last year. And at the same time, we increased the gap between us and our closest commercial competitor in four of the countries, including the two largest markets, the Czech Republic and Romania. Soon, we will start the full rollout of our spring season and we are very confident this strong performance will continue after this promising start of the year.
We continually refine our program grids and intend to maintain targeted investments in local content in a cost effective manner. As a part of this strategy, a few days ago we rebranded our niche channels in the Czech Republic to bring them under the umbrella of our flagship brand, NOVA. We intend to expand our offering of local content on some of these smaller channels to make them more attractive to viewers. Although these investments will cause our content costs to increase in 2017, we expect much of this to be offset by other cost savings.
There will also be important development in carriage fees and subscription revenues this year. From January 2017, our channels in both Slovakia and Slovenia have been available exclusively on cable, satellite and IPTV platforms. We are pleased with the progress of this transition so far and our audience performance is doing well in their offerings. As a result, we expect non-advertising based revenues to increase further in 2017. Our transmission costs will also decrease, resulting in higher margins in each country.
We also expect increases in the number of subscribers across our markets to continue, which would benefit profitability in all countries. I'll now turn things over to Dave to walk us through the segment results.
Thanks, Christoph. Our segment results begin on Slide 11 of our presentation. TV ad revenues in the Czech Republic increased by 3% as advertisers bought more GRPs in 2016. However, our average prices were lower due to significant discounting by the competition. Carriage fees and subscription revenues increased significantly for reasons already discussed. Costs charged in arriving at OIBDA increased slightly due to an increase in content costs. Additional spending to introduce several entertainment formats in the program grid during 2016 was mostly offset by savings in local fiction, foreign acquired programming and other non-programming costs.
In Romania, fiscal stimulus was credited with increasing demand for advertising on television during 2016. Since we sold more GRPs at significantly higher prices, our TV ad revenues increased by 15% during the year. Carriage fees and subscription revenues grew slightly due to an increase in the number of subscribers. Costs were lower, primarily from lower bad debts, savings from restructuring efforts and lower transmission costs. This more than offset an increase in content costs as we invested more in the schedule to generate additional inventory.
Our TV ad revenues in Slovakia grew as a result of higher prices, since the market remained largely sold out. Lower spending on informational and political campaigns resulted in fewer GRPs being sold in 2016 than in 2015, which reduced the benefit of the increase in prices. Carriage fees and subscription revenues increased as we entered into new agreements with a number of carriers and launched MARKIZA INTERNATIONAL during the first quarter. Costs increased slightly compared to 2015 due to increases in various non-programming costs. Content costs were flat year on year as investments in local content were offset by savings from foreign acquired programming.
In Bulgaria, television advertising revenues declined as significant competition for market share flooded the market with inexpensive inventory, which negatively impacted our average prices and more than offset an increase in the volume of GRPs sold. Carriage fees and subscription revenues increased because the number of subscribers grew during the year and a distribution agreement was renewed at higher prices during the third quarter. Costs increased, due primarily to a bad debt charge during the fourth quarter related to our decision to cease cooperation with one agency and instead start working directly with the clients that agency represented. Content costs decreased almost 4%, which was driven by savings in foreign acquired programming that more than offset a slight increase in sports rights.
Our TV ad revenues in Croatia decreased as we sold fewer GRPs, albeit at a higher price. There was also a decrease in sponsorship revenues. Content costs decreased by 1% as savings in foreign acquired content more than offset the cost of having more local entertainment in the schedule. There was also a decrease in non-programming costs.
And in Slovenia, TV ad revenues increased due to a combination of higher average prices and a slight increase in GRPs sold. Carriage fees and subscription revenues increased due to an increase in the monthly price for our subscription video-on-demand offering as well as an increase in the number of cable and satellite subscribers. Costs increased, primarily due to a 10% increase in content costs from having more local programming in the schedule.
And with that, I'll hand the call back to Michael.
Michael Del Nin
Thanks, Dave. While it's early to issue specific OIBDA or unlevered free cash flow guidance, let's talk a little bit about our plans and expectations for 2017. Analysts estimate that GDP growth in the countries in which we operate will continue to outpace that of developed markets, and the IMF expects Romania to have the highest GDP growth rate in the European Union again in 2017.
In fact, we anticipate the TV ad market in each of our countries will grow this year. This includes Bulgaria, where a weak market contributed to soft results there in 2016. This segment was also impacted by a $3 million bad debt charge we incurred related to our decision to cease cooperation with one agency in the market. We have however recently changed senior management there and we expect stronger results going forward.
While TV ad sales remain extremely important, we continue to focus on reducing our dependence on that revenue stream. This year, based on deals that we have completed in several markets, we expect carriage fees and subscription revenues to grow at double-digit rates, driving margin expansion especially in Slovakia and Slovenia for the reasons already discussed. These trends should lead to top line growth continuing to outstrip any increase in our cost base, resulting in further margin expansion this year.
I previously mentioned the rapid growth in unlevered free cash flow in 2016, primarily reflecting the increase in OIBDA. It is also important to note that for the first time in five years, this metric was greater than our run rate annual debt service obligations at the end of the year, signaling the start of a period where the Company is in a position to reduce its debt.
During 2016, we paid more interest in cash and elected to pay a total of $37 million of guarantee fees, including guarantee fees previously paid in kind. That drove down free cash flow, but we still ended the year with $43 million of cash and liquidity of $158 million.
We will continue that strategy and anticipate using all of our available and growing cash resources, including expected proceeds from outstanding warrants and savings from lower debt service obligations, to substantially repay the €250 million facility that matures in 2018. We intend to start doing that with available cash from November of this year.
Management remains focused on long-term value creation. As our business continues to expand, we expect our net leverage ratio to decrease in the coming years. And with the flexibility afforded to us from previous financing transactions, we continue to look at ways to further improve our capital structure.
And with that, I'll turn things back over to Christoph for a few closing words.
Thank you, Michael. Operational and financial results in 2016 reflect significant progress in executing our strategy and position the Company for continued growth in 2017 and beyond. We thank you for taking the time to join us for this call, and now I turn things back over to Mark so we can take your questions.
Thank you, Christoph. That concludes our prepared remarks and we will now move to the Q&A portion of the call. So Barbara, could you please open the lines for questions?
[Operator Instructions] I will now hand you back to Mr. Kobal.
Thank you, Barbara. Our first call is coming from Wunderlich Securities.
This is Peter for Matt Harrigan. Just wondering, what's the product composition looking like for advertising, and what are you guys seeing kind of broken down by market?
In which period do you refer to, to 2016?
Yes, 2016, and then also do you have any outlook for 2017?
Okay, Peter. Generally speaking, when you look to market trends and spending by sector, Q4 was very similar to the past few quarters. So we are continuing to see an increased spending from retail clients in virtually all countries, which you would expect given the positive macroeconomic backdrop. But these increases are being somewhat offset by other dynamics which varies country by country. So, in Bulgaria for instance we have a decrease in FMCG, whereas in the Czech Republic we have an increase on beverage, household equipment and retail. In Romania, we saw increases from bank and finance and retailers and food and beverage, whereas we saw some decreases in Romania from automotive and telecom, so just to mention the bigger countries. Possibly Slovakia to mention as well, increase from retail and pharma, and decrease from info and political campaigns and telecom.
Great. Thank you.
Thank you, Peter. Barbara, would you mind prompting for questions one more time?
Certainly. [Operator Instructions]
We've got one from [Pablo Smolik] [ph] from [Erste Group] [ph]. Pablo?
You already mentioned [integration] [ph] in Slovakia where you changed the way of distribution of your content. You mentioned that you expect significant increase of territory. But do you see any significant drop in [release] [ph] for Q1 of 2017 in Slovakia as a result of this?
So generally, in Slovakia the situation is, you might have seen that, that the audience now went down in the last couple of days. So we maintain our market leadership there. But in a couple of times our competitor passed us. This has two reasons. One is that we are talking about around 200,000 households in Slovakia which would have to switch from DTT to other operators like cable, satellite and IPTV. There is a good progress on that. So you see already that the ratings again go up. And secondly, the panel in Slovakia must first be adjusted in order to reflect the new situation on the market.
When you look into that financially, I am very much confident that we have overcome that through the mid of the year. Let's say then the panel is adjusted and the houses have been finalized to transition. And secondly, the increase in carriage fees and the decrease of the transmission cost overweighs or more than compensates the possible loss on advertising, but so far we do not see any negative impact.
Michael Del Nin
Just I'll add one point to Christoph's. If you look at the audience results for households that are on this satellite, cable and IPTV, those results obviously have us even further ahead of the competition and are much more indicative of the results that we had this time last year and I think are indicative of where we'll be as soon as that transition period that Christoph is talking about is complete. It's a transition that takes place not just in the households having to come on, and I think there's obviously as you would expect waiting periods as the distributors get those people online, but also as Christoph notes, it's the panel has to catch up with the reality. That takes a little longer. If you look specifically at those households that are already hooked up, the results are even more impressive.
Okay, thank you.
Thank you, Pablo. Thanks to everyone for joining us today. As a quick reminder, you can keep up to date and follow our progress between earnings calls on our Web-site, cme.net, because we routinely post important information about Company and its operations. We're also available for your feedback and additional questions anytime. Hope you enjoy the rest of your day.
Thank you. This concludes the Central European Media Enterprises Fourth Quarter and Full Year 2016 Earnings Conference Call. Please disconnect your lines at this time and have a wonderful day.
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