Central European Media Enterprises' (CETV) CEOs Michael Del Nin and Christoph Mainusch on Q3 2018 Results - Earnings Call Transcript

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About: Central European Media Enterprises Ltd. (CETV)
by: SA Transcripts

Central European Media Enterprises Ltd (NASDAQ:CETV) Q3 2018 Earnings Conference Call October 18, 2018 9:00 AM ET

Executives

Mark Kobal - Head of Investor Relations

Michael Del Nin - Co-Chief Executive Officer

Christoph Mainusch - Co-Chief Executive Officer

David Sturgeon - Chief Financial Officer

Analysts

Pavel Ryska - J&T Bank

Piotr Raciborski - Wood & Company

David Lamac - Fio Banka

Operator

Hello, my name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises Third Quarter 2018 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 call is being recorded today, October 18, 2018.

It is now my pleasure to turn the floor over to Mark Kobal, Head of Investor Relations at CME, who will be our moderator today. Mr. Kobal, you may begin your conference.

Mark Kobal

Thank you, Chris. Good afternoon, and good morning, everyone, and welcome to CME’s third quarter 2018 earnings conference call. We issued our earnings press release earlier today, a copy of which is available on our website, 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-Q.

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 reconciliations to the most comparable GAAP measures is available on our website in the appendix to the earnings call presentation. Additional information may also be found in Note 19 to our financial statements in the Form 10-Q.

One final note, we completed the sale of our Croatia operations during the quarter and the previously announced agreement to sell our operations in Slovenia remains subject to regulatory approval. Accordingly, the Slovenia business is classified as held for sale and both businesses are presented as discontinued operations for all periods. Our discussion today covers our continuing operations in the four remaining operating segments.

I will now hand the call over to Michael and Christoph.

Michael Del Nin

Thanks, Mark, and thanks to everyone for joining us today. Almost any way you look at it, it’s been a great quarter. Solid revenue growth, reflecting the strength of the advertising markets across our region and a continued emphasis on cost controls, combined to deliver our best Q3 results in over a decade. Together with the most recent progress we made on our deleveraging plans that sets us up, as expected, for a strong finish to the year.

Looking at the details, on a consolidated basis, net revenues reached $124 million for the quarter, an increase of 3% at actual rates and 4% at constant rates. With steady top line growth and the operating leverage in business, profit growth accelerated in the quarter, as we expected. OIBDA was $34 million in Q3, an increase of 34% at actual rates and an even more impressive 36% at constant rates.

Driven by the near doubling of OIBDA margins in Bulgaria and Slovakia, overall margins expanded more than 600 basis points in the quarter compared to Q3 last year, reaching 27%. Year-to-date margins have expanded almost 300 basis points compared to the same period in 2017. Our cash flow generation remains strong, with unlevered free cash flow from continuing operations totaling $126 million in the first nine months of 2018, an increase of 28% over the last year.

The quarter also saw the closing of the sale of our Croatian business with the proceeds of more than $100 million as well as additional cash on hand, used to repay debt and related payables, including the entire balance outstanding on our nearest maturity. This means that since the start of the year, we have repaid more than $300 million of gross debt pushing our net leverage ratio to 3.8 times. It’s lowest level in nearly ten years.

As a result, our average borrowing cost will decline again this month, falling to just 3.5% and putting us on increasingly solid financial footing, with annual run rate borrowing costs of less than $30 million going forward and no debt coming due until the end of 2021.

I’ll now turn things over to Christoph.

Christoph Mainusch

Thank you, Michael, and hello to everyone on the call. We launched the fall season in all countries during the third quarter and we maintained our audience leadership. From a particularly strong return of the the Farm in Bulgaria to the fresh schedule in Slovakia and another season of Your Face Sounds Familiar and the spectacular results in the Czech Republic, we remain by far the number one network in each of our countries. We continue to provide this premium reach for advertisers while keeping our focus on more efficient spending. In fact, our costs were lower overall during the quarter. Much of this was in Slovakia and Bulgaria and OIBDA nearly doubled in those segments compared to last year. TV viewership in the region remains strong and we believe the role of television here is unique in its ability to attract a wide audience.

Spending for advertising on television in our markets increased an estimated 3% in the quarter and our TV ad revenues were also up 3%, driven by price increases in our three largest operations. In the first nine months of 2018, we estimate spending to advertise on TV in our countries increased by 4% overall at constant rates compared to the same period of last year. In the Czech Republic, estimated market growth of 3% was driven primarily by selling more GRPs, particularly due to higher spending outside peak seasons. The market grew by 4% in Romania due to higher average prices as well as more GRPs sold overall.

In Slovakia, 3% market growth resulted from higher average prices, which were partially offset by the competition selling fewer GRPs. And in Bulgaria, we estimate the market grew by 7% due to selling more GRPs, which was partially offset by lower average market prices.

Investments that make our channels popular with audiences also make them valuable for television distributors. And the subscriber base in our territories has again grown. This, together with higher prices, increased carriage fees and subscription revenues by 7% in the quarter and by 5% so far this year.

And now I will turn it over to Dave, to walk us through the segment results.

David Sturgeon

Thanks Christoph. Our segment results begin on Slide 12 of our presentation. In the Czech Republic, TV ad revenues increased by 4% at constant rates in the third quarter, from higher average prices. Carriage fees and subscription revenues increased by 21%, due to an increase in the number of subscribers, as well as higher prices.

Costs decreased by 2% in the quarter, due to a decline in content costs as savings from fewer local entertainment titles in the fall schedule this year compared to 2017, more than offset the cost of additional acquired programs.

In Romania, TV ad revenues increased by 2% from higher average prices, which were partially offset by selling fewer GRPs due to lower ratings. Carriage fees and subscription revenues increased by 4% due to an increase in the average number of subscribers.

Costs increased due to higher content costs, resulting from new localized versions of entertainment formats in the fall schedule, which was partially offset by savings on foreign acquired program runs.

Our TV ad revenues in Slovakia increased by 4% due to higher average prices for GRPs. There was also higher spending on sponsorship compared to the corresponding periods of last year, since sellout rates remain elevated. Costs decreased significantly during the quarter due to lower content costs, as the fall season started later than in 2017, and last year included local fiction and entertainment formats during the summer months. There was also a decrease in personnel costs.

In Bulgaria, TV ad revenues were broadly flat compared to 2017, as an increase in GRPs sold was offset by a decrease in average prices, reflecting a different mix of advertisers in the quarter.

Carriage fees and subscription revenues increased by 7% due to increases in both prices as well as the overall subscriber base. Costs decreased primarily due to lower content costs, which resulted from both lower sports rights and savings from foreign-acquired content. There were also lower bad debt charges.

Now I hand the call back to Michael.

Michael Del Nin

Thanks, Dave. As mentioned earlier, we were very pleased to complete the Croatia transaction during the quarter as it marked an important step in the deleveraging of our balance sheet. The sale of our Slovenian operations, however, remains subject to regulatory approval and last month, we agreed with the buyer to again extend the long-stop date this time to the end of October. Unfortunately, we still don’t have a great deal of clarity on the duration or the regulatory review and are frankly surprised that this process is not yet complete.

Our continuing operations are clearly performing well, and following the surge in OIBDA that we experienced in Q3, our year-to-date results are right in line with the level of growth we expected for 2018.

We anticipate a strong Q4, particularly in Slovakia. As a result, we believe OIBDA growth at constant rates for the full year is currently tracking towards at the high end of our mid-teens guidance range. At actual rates, this would translate into OIBDA of around $200 million for 2018 or about 20% growth over the last year, assuming current FX levels hold through the end of December.

Based on this level of anticipated OIBDA growth, we also expect full year unlevered free cash flow growth to be the high end of the 20% to 25% guidance range at actual rates or around $140 million. This strong free cash flow generation will result in a further reduction in our net leverage ratio before the end of the year. And assuming we close our Slovenian sale before then, we continue to expect that we’ll finish up with net leverage around three times our 2018 OIBDA by the end of Q4.

The growth rates that the company, as a whole, has seen over the last few years have been largely unmatched across our industry. And we expect strong growth to persist in the coming years as we remain on course for continued deleveraging. Given the progress that has already been made in reducing debt and the relatively low borrowing costs that we’re already enjoying, we expect further improvement in our operations will lead to even more free cash flow generation. This should allow us to delever to an appropriate level in the near term and provides additional opportunities to improve shareholder returns beyond that.

I’ll now turn things back over to Mark, so that we can take your questions.

Mark Kobal

Thank you, Michael. That concludes our prepared remarks. So we’ll move to Q&A, Chris, could you please open the line for questions.

Question-and-Answer Session

Operator

Certainly, the floor is now open for questions. [Operator Instructions] Thank you. And I now hand you back to Mr. Kobal.

Mark Kobal

Thank you. Our first question today is coming from Pavel Ryska from J&T Bank. Pavel, go ahead.

Pavel Ryska

Thank you, Mark. Good afternoon to everybody. So first of all, it was a very good quarter. Congratulations on it. I’m just wondering, a large part of the improvement in the OIBDA margin is thanks to a decrease in programming or content costs. So the question I want to ask is, to what extent do you think it is sustainable to keep the content growth also in the future at the same level or even decrease it as you did in this last quarter? So if we should expect some gradual increase in content costs overlay to stay at the similar level going forward?

My second question regards Slovenia, maybe I missed that part when Michael discussed it. What’s your view now of the possible sale of your Slovenian assets? Do think it is probable that it will be completed before the end of the year? Or do you think, there is too much uncertainty related to all this matter, so you cannot make any predictions? And finally, my third question regards Slovakia, you noted in your report for the second quarter that there was a certain judicial problem going on with some alleged promissory notes dating back to 2000. Do you think there is a certain risk that you could have to – you would have to take some charge on this? Or what is the current situation regarding this? Thank you very much.

Mark Kobal

Okay, thanks. We’ll start on the content cost with Christoph.

Christoph Mainusch

Hi, Pavel. So on the cost side, as you stated correctly, the margin expansions mainly came in Q3, when you look into Slovakia and Bulgaria, from lower costs, which will amount minus 4%, both on content cost and other costs. And specifically to your question of content costs, you have seen it as well in the last quarters that we always operate in a very cost efficient way. It’s obviously now too early today to give you an outlook, but generally speaking, I would not expect that the content costs, what you’ve seen in the development of Q3, would significantly change the trend in Q4, so that in – overall in the full year, we would see a similar picture.

Mark Kobal

Okay. And on Slovenia, Michael?

Michael Del Nin

I would just say that before I answer it, one more thing on cost development. Pavel, as we’ve discussed in the past, I think, you’ve got to be very careful about extrapolating too much from any given quarter, obviously, content costs driven by scheduling and I think this one benefited both from comps versus last year also from some very efficient use of programming over the summer, which helped drive margins. If you look though at cost development over the course of the year-to-date other than nine months, it’s probably more indicative of where we’re going. I think, we’re very pleased with the fact that costs overall are essentially flat year-on-year, and that, I think is a very good sign.

On Slovenia, as I said in the speech and I don’t have if I had that much more to add, there is not a lot of clarity on the timing. So in terms of answering your question on the probability of closing between now and the end of December, it’s hard for us to give any indication on that. I think, as we said, we’re surprised that it’s taken this long. We do continue to think that we will get the transaction done, obviously, and remain committed to doing that. But in terms of the timing, it’s very hard to give any further outlook.

And then the question on the promissory notes. Promissory notes, I mean, it’s something that has been appearing in our disclosures for quite some time, not just in the second quarter, but basically going back two years. This is a situation where claims were filed in a court in Slovakia, relating to some notes that were allegedly issued back in 2000 and supposedly guaranteed by our Slovak subsidiary. We say allegedly because we said in the disclosure that we don’t believe that those promissory notes are valid and we believe that it’s forged.

There was one instance, one judge ignored evidence we presented and ruled against us in one case, involving one of the four promissory notes and we have – we’re in the process of appealing that judgment. In June, just as importantly criminal charges for counterfeiting securities and destruction of justice were filed against two of the gentlemen who are involved in that situation and one of them, I believe, is currently in prison.

In October, just recently several proceedings related to one of the other notes were terminated because the plaintiff failed to continue to pursue the claim and the plaintiff is able to appeal that decision. So where – our subsidiary Markiza is seeking to have the civil proceedings either suspended until the conclusion of the criminal proceedings or dismissed. We don’t believe those notes are authentic, and we will continue to vigorously defend those claims wherever we can.

Pavel Ryska

Okay. Thank you.

Mark Kobal

Thanks Pavel. Chris would you mind refreshing the dial in instructions please.

Operator

[Operator Instructions]

Mark Kobal

Okay. We have a follow-up question from Pavel. Pavel go ahead.

Pavel Ryska

Thank you. So if there are no other questions, there’s maybe one more from my side. It relates more to the current performance of the stock price. So there has already been discussion on the calls and elsewhere about the possibility that, for example, from the next year or I mean, from the earnings of next year, you could start paying out dividends. And now the question is, given the – that the stock price has been sliding in most of this year, despite the good performance, the good operating performance of the company, is there a certain possibility that you have thought about of maybe considering share buybacks in the future, which are usually designed for such situations when the company deems the stock price too low for its current operational performance?

And maybe the advantage would be that it is usually a framework program, which doesn’t commit to any regular payout, but is used in such situations. So the question, of course, doesn’t assume from my side any soon decision by CME of anything like this, but just the idea or the consideration or something like this in the future. Thank you.

Michael Del Nin

Thanks, Pavel. Look, I think, you – the implication in your question is that the share price is cheap at the moment, I think, that they are – if you look at, for example, our guidance of around $200 million OIBDA for this year, and you look at where the share price is, we’ve, I think, slipped below a 10x multiple on EBITDA in terms of overall enterprise value. And that, despite the fact that at actual rates, we’re guiding towards 20% OIBDA growth and mid-teen growth, at constant rates and with unlevered free cash generation of 20% to 25%.

And additionally, if you look at just trailing 12 months OIBDA, it’s about 25% higher than it was a year ago and yet the share price is almost 20% to 25% lower than it was a year ago. So there is definitely a disconnect at the moment between what I would view as a very strong performance and the performance of the share price. And what I would say is this, as we’ve reiterated before, we need to get to total debt of 2.75 times OIBDA in order to start considering some of these things. It is one of the things that we are looking at, together with dividends. What we’ll ultimately decide, which direction we’re going will be basically what we think creates most value for shareholders and we’ll have to analyze that when we’re in a position to actually act. But I would say that it’s clearly one of the options that we are reviewing. When we’re ready, we’ll come back to you with some thoughts on capital allocation most likely next year.

Mark Kobal

Okay. Thank you.

Operator

Next question coming from Piotr Raciborski from Wood & Company. Piotr?

Piotr Raciborski

Hello. Firstly congratulations on very good quarter. I have three questions. First maybe a technical one. When it comes to the content costs, what share of the content is foreign and what share is local in 2018? And how do you expect that to change in next years?

Christoph Mainusch

To your question, so we usually do not disclose the ratio of the content cost by segments of local and foreign programs. But what we have seen so far [indiscernible] for Q3 that there is a tendency of that we are investing more in local fiction, at the same time, reduce foreign – local content and to reduce foreign content cost. So that is actually the case for Q3 as well in order to further improve the quality of our productions.

Michael Del Nin

It’s fair to say that it’s – an increasing majority of the cost is local. But we don’t really break down much.

Piotr Raciborski

Okay. I see. And when it comes to cost as a whole, do you see some specific areas in which the cost might be cut or for sure will be or may remain flat in next years? Like you’ve mentioned about the personnel cost cuts in Bulgaria, do you plan such more in other countries as well?

David Sturgeon

Piotr, I think mention made of personnel costs savings was in Slovakia and there was some specific…

Piotr Raciborski

Sorry, it was Slovakia, yes.

David Sturgeon

Yes. That we’ve been – we’re closely aligning our Czech and Slovak operations over the last few quarters to optimize efficiencies and such like and remove redundancy. We don’t – we always look at those sort of things, but there are no specific plans on the horizon at the moment that we would make significant changes in that. And as Christoph said about the content costs, we’re always focused on efficiency, we don’t spend any more than we have to and content costs will go up and will go down depending on needs.

Piotr Raciborski

Okay. When it goes to the debt [indiscernible] and leverage, could you please remind me at which net debt EBITDA level would you reconsider your approach towards dividends?

David Sturgeon

Yes. So built into you recall we did this repricing of all our outstanding debt and extended the maturities of that debt earlier in the year, built into that is a requirement that we’d be at 2.75 times total debt-to-EBITDA, trailing EBITDA in order to start dividending money out or pursuing share buybacks. And so that’s basically the threshold that we have to reach before we could contemplate that. And as we’ve said, we’re probably assuming Slovenia gets done by the end of the year at about three times levered on a net debt basis at year-end.

Piotr Raciborski

Okay. And last question, do you have some outlook on 2019 from advertisers, like, they have some budget already for next year? Should we expect – you mentioned, that you expect the solid growth to persist in the coming years. But what does that mean? Should we expect the similar growth pace that we’ve seen in 2018? Or should it decelerate? Because, like, when we look at the macro forecast, it’s rather – the consensus is, is very conservative like everybody expects macro to slow down in the region from next year, and the business is highly correlated with macro, I mean the media business. Do you have some outlook for next year already?

David Sturgeon

So, when you look back the last couple of years of how the advertising revenue has developed and what kind of market share we have obtained to the strategy and when you look now into Q3 and nine months of the growth, which we have seen, mainly came from the price increases, we are now in the process of finalizing our sale policies for next year, always on the base that the performance and the key leadership we have on the audience market remains unchanged, which I’m very confident to say that we don’t expect any significant changes to that. It is too early now to say of how the markets now next year will develop. I think that we will better discuss it in the next earnings call, but generally, the sale policies, which we are now finalizing and introduce to the market, we are confident that we will achieve our target in this respect.

Piotr Raciborski

Okay. Thank you for your answers. Once again, congratulations on the results.

David Sturgeon

Thank you.

Mark Kobal

Thanks, Piotr.

Piotr Raciborski

Good bye.

Mark Kobal

Next question coming from David Lamac from Fio Banka. David?

David Lamac

Good afternoon. Congratulations guys again, for impressive numbers. Let me ask you a couple of questions. First, just a follow-up on Slovenia. Perhaps, can you give us – can you state what’s the last 12-month EBITDA in Slovenia, just to get a bit of more color of [indiscernible] operating profit is? My second question actually was already answered in relation to stock buybacks. And so I have one additional in relation to M7 Group, there was a court ban in summer to allow them broadcast Nova and Markiza on Skylink. So, I wanted to ask if there is any negotiation with this group again, to allow them broadcast Nova and Markiza channels legally at their platform? Thank you.

Mark Kobal

Okay. We’ll start with Michael.

Michael Del Nin

So on Slovenia, look they’re – it’s in discontinued operations and as a result, we don’t report OIBDA. I think there’s a number from memory in 2017, it was about $9 million of OIBDA. As said, we don’t have a lot of clarity on the timing of the approval process, but we remain optimistic that, that will get done.

Mark Kobal

And on Skylink, Christoph?

Christoph Mainusch

So, generally, we don’t comment on individual distributors and our relation to them, but in that case that it was – as it was as well in the press, we have a couple of years introduced with Nova International and Markiza International, two international feeds, where we have all the rights for to be broadcasted in this respective country. So Nova International in Slovakia and vice versa. And we have agreed that with all of the distributors and we were actually hit by surprise that, as I mentioned, distributor didn’t comply to that and changed that due to a different legal assessment we have actually in the discussion as well as in our court procedures achieved that the distribution of this channel that started, has been stopped and the process is ongoing. And I am confident that the situation will be soon clarified in that respect and that all legal rights are respected in that way.

David Lamac

Okay. Thank you.

Mark Kobal

Okay. We have one more question from Pavel Ryska from J&T Banka. Pavel?

Pavel Ryska

Okay. Thank you again. My very final question. Still looking at your slides, I want to ask again about Slovakia and Bulgaria in the last quarter, because the improvement in the OIBDA margin was really remarkable. And so I’m wondering, if this OIBDA margin that we saw in the last quarter is, let’s say, a new plateau, where you think you could stay, for example, next year in the third quarter to compare? Or were there some special reasons why you managed to increase the OIBDA margin so much in these two markets, maybe due to especially lower costs for some reason this summer because the jump is really big so just to give us an idea how to think about it, what is the sustainable rate of profitability in these markets?

David Sturgeon

Thanks, Pavel. It’s a good question. Look, once again, I would – rather than looking at it on a quarterly basis, let’s look at it over the course of a full year, I think, what you have seen in Slovakia is an absolute step-up in profitability, caused by the carriage fee revenues that we pursued post DTT switch-off and that are now part of our ongoing revenue streams. That was an important and very fundamental change in the ongoing profitability and the ongoing margin expansion in the business. So whereas last year was very much, kind of, a transition year, you remember that with the DTT switch-off, we lost some coverage that impacted the advertising revenues, especially in the first half of the year. We – in order to continue to make the networks as appealing as possible both to audiences to and to advertisers and to offset some of that loss of coverage, we also ramped up some original programming spending in that market.

And so what you’re seeing this year is there’s very much kind of a return to normal, both in terms of coverage levels and in terms of programming rhythms. But what is also benefiting us though is some risk built in now to the business on an ongoing basis and that’s carriage fees. So without looking specifically at this quarter, I think, as we said before, both in terms of Slovakia and Bulgaria, there are – some of those programming reductions were the result of the phasing of programming, the timing of programming and some of that being a little heavier in the first half of the year as opposed to second half of the year, some more expensive programs in one quarter as opposed to the other.

I think you’ve got to look at it as the year overall, I think, Bulgaria, if you look at the growth, especially in the revenues in the first half of the year, combined with some of the cost savings we’ve seen in this quarter, it’s shaping up to be a very good year for Bulgaria. And Slovakia overall, as we indicated in the second quarter, we’ve thought that second half of the year would see a significant improvement in profitability, you’ve seen that in Q3 and we indicated again in the speeches that a lot of the growth in Q4 would come from Slovakia as well. So that is overall good news for both of those countries.

Christoph Mainusch

And to add something on that, what counts for Slovakia and carriage fees and the change which we have done in profitability in this market, comes from Bulgaria from the fact that we managed in the last two years to increase pricing on the advertising after a couple of years’ decline. And as we see that [indiscernible] revenue front on digital, on advertising due to price increases as well as on carriage fees with having stable content cost. So we saw as well an upside in Bulgaria, whether that is now on a quarter-to-quarter basis sustaining in that way as Michael have said, we have to look that more on a full year base. But you are right, in both market, there was a significant improvement in margins.

Mark Kobal

Okay. Thank you. Thank you, everyone, for joining us today. As a quick reminder, you can keep up-to-date and follow our progress between earnings calls on our website, cme.net, since we routinely post important information there about the company and its operations. We’re also available for your feedback and additional questions any time.

Operator

Thank you. This concludes the Central European Media Enterprises Third Quarter 2018 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.