Central European Media Enterprises Q2 2007 Earnings Call Transcript

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Central European Media Enterprises Ltd. (NASDAQ:CETV) Q2 2007 Earnings Call August 2, 2007 10:00 AM ET

Wall Street Breakfast


Romana Tomasová - Director of Corporate Communications

Michael Garin - CEO

Wallace Macmillan - CFO

Adrian Sarbu - Regional Director

Marina Williams - EVP


David B. Kestenbaum - Morgan Joseph

Matthew Walker - Lehman Brothers


Good Morning. My name is Jennifer and I will be your conference operator today. At this time, I'd like to welcome everyone to the Central European Media Second Quarter 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]. Thank you.

It is now my pleasure to turn the floor over to your host, Romana Tomasová, Director of Corporate Communications of Central European Enterprises. Ma'am you may begin your conference.

Romana Tomasová - Director of Corporate Communications

Good morning and good afternoon to each of you and welcome to CME's second quarter investor conference call. During this call we will refer to presentation slides which you can download from our website www.cetv-net.com. You can find them on our home page at the bottom left corner. We hope that you will find these slides useful.

The participants of today's call will be Michael Garin and Wallace Macmillan who will give you the formal presentation. We are also joined today by our General Counsel Daniel Penn as well as Marina Williams, Adrian Sarbu and Marijan Jurenec who will be available for question.

Before I turn to Michael, let me read the usual Safe Harbor statement. Our presentation today will contain forward-looking statements. For these statements we claim the protection of the Safe Harbor contained in the U.S. Private Securities Litigation Reform Act of 1995 and refer you to forward-looking statements section in our Form 10-Q filed with the Securities and Exchange Commission today for a list of such statements and the factors which could cause future results to differ from those presented in this call.

During this call, we will refer to our segment financial information. These are non-U.S. GAAP numbers and they include our operations in the Slovak Republic on a 100% basis for all periods including periods prior to our acquiring control on January 23rd, 2006, may results when equity accounted in our U.S. GAAP consolidated statement. A reconciliation to our U.S. GAAP numbers is Note 16 to our account on page 28 of our 10-Q.

In the course of this call we will also be referring to anticipated revenue and EBITDA for the year through December 31st, 2007 for the broadcast operation of certain of our segments.

Again due to our non-GAAP measures, a reconciliation of the anticipated segment revenue figures to our anticipated net revenues can be found on our website at www.cetv-net.com. We do not present a reconciliation of anticipated segment EBITDA for the year through December 31st 2007. I said because we have a significant amount of debt that is denominated in euro and consequently our earnings are subjected to inherently unpredictable and potential immaterial foreign currency gains or losses. It would therefore be unreasonable for us to attempt to determine an expected figure of consolidated net income before taxes for the company on a projected basis for 2007 for purposes of reconciliating to the segment EBITDA figures that we will be referring to in this call.

Now over to Michael.

Michael Garin - Chief Executive Officer

Hello everyone and welcome to the CME's second quarter earnings call. During the second quarter, we delivered record results driven by the impressive performance of the Czech, Slovak and Romanian markets all under the supervision of Adrian Sarbu. For CME overall our segment revenues and EBITDA increased by 38% compared to the second quarter of 2006.

In addition to our record setting operating results in the second quarter, we also increased our ownership in our Romanian operations to 95% and in July, we acquired the remaining 20% minority interest in TV Markíza, our Slovak network.

Also, during the quarter we successfully completed a 150 million euro high yield debt offering which was heavily over subscribed. Given the current state of the debt market the offering was well timed.

In the second quarter five of our markets delivered outstanding performance. In Ukraine, Studio 1+1 faced a number of challenges that Wallace will talk about in greater detail. They include strong competition, a weak ratings delivery and unstable political environment.

As our outlook for Ukraine remains uncertain until the parliamentary elections scheduled for the end of September, we have decided to expand our guidance. The fact that we have achieved record performance for the quarter despite the Ukraine results shows just how powerful the CME earnings machine is.

It also underscores once again a value of a diversified portfolio of assets. We have net hostage to the results of the single network or single country as this quarter's results demonstrate.

Interestingly, this quarter and first half results give me great optimism for CME's future. I say this because while Ukraine now represents around 12% of our EBITDA, there's no doubt that several years into the future the country will become our largest market and thus powers the company to new levels of financial achievement.

I am also optimistic because of the success of Markíza, which shows what can happen when CME takes full operating control of its stations. Ukraine is the last remaining country where we do not have full operating control. I believe that the strong management resources and discipline that CME brings to each of its operations will significantly benefit 1+1 when we're able to do the same thing there.

Now let's take a quick look at the highlights of each country on slides 5 and 6. I hope most of you have those slides. TV NOVA reaffirmed its position as the most large network in all of Europe, and I emphasize this on each call, all of Europe, Eastern and Western Europe with 47% prime time audience share. Our EBITDA margin grew to a record 59% in the second quarter.

Romania continues to deliver amazing results with 38% revenue growth and 43% EBITDA margins. In the second quarter, our Slovak station achieved 48% revenue growth, a fantastic 40% EBITDA margin and prime time audience share is now consistently reaching 38%.

Illustrating the point I just made, what can happen when we are able to assert full management control? As I've already mentioned in Ukraine we faced strong competition and a period of political uncertainty. In the second quarter, we did not manage to maintain our audience share leadership in our target demographic, and consequently, our weak ratings had a negative reflect on 1+1's second quarter results. Wallace will provide you more details in a moment and Marina is on the call to answer your questions.

Despite weaker results on Studio 1+1 we are pleased with the progress in both our news channels Kino and Citi. Ukraine is financially our smallest market but with its 50 million population the country remains the engine for future growth. We will continue to expand our operations there wherever prudently possible.

In Slovenia, our revenues grew by 26% and EBITDA by 27% despite stronger competition from State TV and TV-3 which was acquired by NTV last year.

In Croatia, we are making steady progress with breakeven by the end of next year. In the second quarter, our revenues grew by 84%, and we are very pleased with the continuous improvement in our audience shares and revenues. In July some of our shows were the best rated in the country and the most watched in prime time, achieving audience shares of up to 31%.

Let's have a quick look at the progress that we've made in new media in the second quarter.

Please turn to slide 7. As you know our goal is to be one of the top Internet destinations in each of our market. Here are some examples of how we are progressing.

In the second quarter we acquired the largest blogging site in Croatia and that combined with our new site generates 32 million page views per month, 32 million page views in a country of 4.5 million people and positions ourselves as the number one Internet player in the market.

In Romania, we have seen a number of unique visitors growing almost 10-fold from 300,000 to 2.7 million in the last 10 moths heavily assisted by TV growth promotion. Our experienced Slovenian Internet team under the leadership of Marijan Jurenec who oversees the Bulkan as well, we are closely with our Ukraine colleagues on the launch of our Ukrainian new portal, iplus.com.ua. And with the upcoming parliamentary elections we are preparing to launch a political blog site and offer [ph] all political parties an opportunity to participate. To my eye this site is as impressive as any Western news site and I hope you have a chance to visit it to judge for yourself.

In Slovenia, we had huge success with our local Big Brother series and in the second quarter we generated over $1 million in new media revenues. I mentioned at the outset that we are slightly revising our guidance.

Because of the uncertainty we are not changing the upper limit of our guidance but we are adding the possibility that we may do slightly less well at the bottom end of the range. Therefore our current guidance is for segment net revenues 460 million to 790 million, which represents between a 26% and 31% increase over last year's actuals. And on the EBITDA line our guidance is now $280 million to $306 million which would represent between 28% and 40%. I know this is a fairly large range but as you know and I hope you understand we've always tried to share with you advance making [ph] as it's available to our shareholders.

Our results on Studio 1+1 this year will depend on our ability to improve our ratings and success really to compete against strong programming on inter-channel and on the level of political advertising placed with Studio 1+1 during the parliamentary elections. We still remain completed committed to Ukraine and will continue to pursue opportunities to strengthen our presence there further. We're convinced that in the next few years, Ukraine will become the largest market in which we operate. The expanded guidance enables us to share with you our best current thinking about the year and underscores, as I just mentioned, our commitment to keep you well informed with better prospects and challenges.

Now over to Wallace.

Wallace Macmillan - Chief Financial Officer

Thank you, Michael. I am going to talk to you through the results of broadcast operations in each of our market. These don't include our non-broadcast and Internet operations. This has been a strong results quarter.

Starting with slide 9 on the Czech Republic, TV NOVA which is our largest profit contributor had a great second quarter. EBITDA grew 62% to $47.8 million resulting in an EBITDA margin of 59% compared to 53% in the second quarter contested last year.

Our prime time audience share was 47% from our TV demographic group which is 15-54 up from 45% in the same quarter last year. And our new digital broadcast news facility has been completed on time and within budget and the equipment installation is currently underway. This will create the first operational high definition television facility in the Czech Republic and will also improve content [ph] quality and this is a competitive advantage to us. It will be completely figured out by the end of Q3. It will be in full daily use in the final quarter of this year.

To Romania on slide 10, Romania had another outstanding quarter with both sales and EBITDA growing 38% to produce a 43% EBITDA margin. In a market with a total prime television audience is more than 13% by comparisons to the same quarter last year as fragmentations reduce the audience share of all major channels, our multi-channel strategy and firm pricing together delivered these exceptional results.

TV Sport was re-launched as sports.ro during the quarter. The channel is performing ahead of budget and has successfully introduced two news program the 6.00 p.m. and 9.30 p.m. which have increased audience share in those slots by 30% and 10% respectively. We have created a studio dedicated to sport.ro in our new digital broadcasting facility to a lot of greater number of locally produced magazine and talk shows to be aired in addition to news.

To the Slovak Republic in slide 11, TV Markiza too had a tremendous second quarter. Our sales grew by 48% and EBITDA by 52%, generating an EBITDA margin of 40%. This is an auspicious time for us to take full ownership in this company. Our prime time audience share in the quarter jumped from 34% to 38%.

TV Markiza has recently launched a local adaptation of Rose Garden Medical, a popular format developed by TV NOVA in the Czech Republic, which generates over 60% audience share in both markets. The local production neighbors generated a huge average audience share of 58% and have introduced a new 5 p.m. news slot which generated immediate results at an average share of 38% since the launch in April of this year.

A new digital law has been passed in Czech Republic and Markiza is working together with the other broadcasters on the actual transition plan. Markiza has guaranteed additional items with the option to launch new Symantec channels when additional transmission network is fully operational. And this is currently expected or proposed to take place in 2012. And of course on July the 13th we acquired the remaining 20% minority interest in TV Markiza for approximately $79 million. And we now own 100% of our Slovak operations.

Slide 12 describes Studio 1+1. Studio 1+1 in Ukraine is having a tough year. After the heavy price cut in the first quarter, a time when advertisers withheld their budgets in the uncertainty following the falling-offs between the President and Prime Minister.

The market recovered to some extent in the second quarter. In fact, in value terms for the first half in its entirety the market is probably up from the same period last year. Unfortunately, our audience share continued to fall with our target audience in prime time share averaging 17.4% in the quarter against over 24% last year. And so we have had fewer ratings to sell in the quarter when prices recovered.

However, prices did recover in the quarter and so our sales was still up 8% from the same quarter of last year. A number of factors have contributed to the audience share issue. I have mentioned several times before the overwhelming impact of strong Russian series in Ukraine market. You may remember that throughout the first half of last year we had incredibly strong Russian version of Agitati [ph] getting shares in the high 40s and five nights a week.

This year it's a turn of INTER our main competitor, who have seen similar success with this series called Russ Tatyana's Day, a Russian series that will run through to first quarter next quarter. This disparity became more pronounced when our successful CTC series Cadence [ph] came to an end in early June. We've had trouble finding the best way to schedule to run Tatyana's Day and we're disappointed with the CTC series Mothers and Daughters which we put up against this initially.

We had always anticipated heavier spending this year on programming as a simple function of the heavy inflation especially for Russian product. However, in these difficult and very competitive conditions, our need to reschedule to boost ratings added significantly to our programming costs and we have also taken a $2.2 million write-down against the programming library primarily against second run for the American series that would not get sufficient audience in the current market conditions to air them. And as a result of this, our EBITDA fell sharply in the quarter.

The outlook for the second half of the year is uncertain in that there are a wide range of possible outcomes depending on combinations of ratings recovery and market development. We are redesigning our second half schedule to improve our ratings, and we are pleased that this will entail some additional costs. The greatest impact on the market is likely to arise from parliamentary elections which are scheduled for September 30th.

If these take place as planned we will expect to see a benefit not only from political advertising in the third quarter but also from advertisers releasing some of their withheld budgets in the fourth quarter. In the best case scenario if the government is formed quickly after the elections the return to political stability could generate very strong advertising demands with high prices being paid for available ratings.

I want to put Ukraine in context. This market is less important to us today for what it is today than for what it will be in the future. In all 2006 as Michael pointed out, in a strongest year ever, our combined Ukrainian business contributed only 12% to our segment EBITDA. While it is relatively a small contributor today in the next few years, Ukraine will become the largest market by far in which we operate and we will continue to take the necessary steps to support our position there going forward.

Slide 13 shows Kino and Citi, are smaller second channel and third channel in Ukraine. During the second quarter we were very pleased with the progress with our two niche channels made in growing audience share. In the six months, Citi achieved prime time audience share of 1.5% in the channel group Pro Plus in the Kiev region.

And as of the end of the June we have increased the technical reach of Kino channel to approximately 53% in Ukraine population. As well on June the 21st, for $3 million, $2.2 million we acquired 60% interest in Toy [ph] and DISA, two additional regional broadcasters.

Kino's prime time audience share in Kiev region grew to 2.2% of target group and on a national basis we've almost reached the 1% audience target we have set ourselves for the end of this year.

Slide 14 gives you some insight of the Slovenian operations. The combined prime time target audience shares of our two channels have remained over 47% in the quarter. Hence Slovenia delivered good second quarter results.

Sales grew 26% driving EBITDA growth of 27% and an EBITDA margin 42%. Our Internet portal 24ur.com strengthened its position of number one Internet player in the market with over 350,000 unique visitors and over 18 million page views per week.

In Croatia on slide 15, Nova TV has continued making huge progress in the quarter. Our broadcast prime time audience share grew from 15% to 19% against Q2 last year. Increased audience share and improved sell-out resulted in 84% sales growth increase in the second quarter. In the market where all day ratings which measure the total number of people watching television fell nearly 20% in the quarter against the same quarter last year.

Nova TV was the only broadcaster to show ratings growth. Stronger ratings and improved sell-out led to the large sales growth in the quarter, but due to continued planned investment in the programming schedule to support further growth, our EBITDA loss down by only 19%. We are very pleased with the progress of Nova TV and we still expect it to breakeven in the later months of 2008.

On June the 26th, we acquired the 76% interest in the largest blogging website in Croatia called blog.hr for approximately $700,000. This site attracts 370,000 unique visitors per month. Combined with our news portal dnevnik.hr in June, we were attracted the number one Internet site in Croatia with 540,000 unique visitors in the month.

Please remember Croatia has the population of only some 4.5 million, so this is a big number.

On slide 16, there's no review of our segment results for the quarter. And these reflect the combined broadcast and non-broadcast results for each segment. The segment net revenues of our established markets grew 36% against the second quarter last year with particularly strong growth in the Czech Republic, Romania and the Slovak Republic as I have already described.

Total segment net revenues grew 38% assisted by leap in our Croatian revenues. Segment EBITDA in our established markets grew 37%. Despite the significant downturn the Studio 1+1 which was more than compensated by the dramatic increases in the Czech and Slovak Republic, and in our other established markets. Total segment EBITDA grew 38% and our overall segment EBITDA margin was 40%.

Looking at slide 17; to the segment results for the half year against the same... against the first half of last year our segment results showed revenues growing 31% and EBITDA growing 32%.

Slide 18 is a summary consolidated U.S. GAAP income statements and it shows the 43% increase in first half operating income against last year. Below operating income the most significant item is a positive movement of $40 million in foreign currency gains and losses and derivatives. This more than offset the increased interest expense which grew as a result of one-time charges incurred in redeeming our 2012-13 notes and increased taxes.

Net income from continuing operations in the first half improved by more than $41 million to $34 million, from the loss of a little over $7 million last year.

Slide 19 contains our summary balance sheet, our net debt at June 30 to the $436 million, during the quarter we redeemed all of our 125 million euro 2012-13 rate notes which bore interest at durable plus 5.5% and we issued a 115 million euro of 2014 floating rate notes, interest of durable plus 1.625. This well over subscribed offering increases our financial flexibility and reduces our average cost of financing which was 8.48% at March 31st down to 7.3% to June 30th.

Slide 20 is our summary cash flow, despite the significant improvements and profitability operating cash flow for the quarter of 22 million was down from some 37 million in the same period last year. And this reflects the timing and level of investment in our programming library in particular in Ukraine and Croatia where we are investing to boost ratings.

It is dangerous however, as I said in the past to look at these numbers on a quarter by quarter basis.

In closing remarks I would like to provide updated guidance on CapEx and corporate cost for your modeling purposes. We expect to invest between $75 and $80 million in CapEx this year, and we anticipate the corporate costs excluding charges for stock-based compensation to be in the region of $28 million. And on the new media front, we expect to invest approximately $10 million this year between CapEx and OpEx. Our goal as Michael stated earlier is to be one of the three leading Internet destinations in each of our six markets.

And now back to Michael.

Michael Garin - Chief Executive Officer

Thanks Wallace. I would like to remind everyone of the strategic objectives we laid out for CME at the beginning of this year and summarize our achievements in the first half.

Our number one priority has been to pursue organic growth. In the first six months of this year both of our segment revenues grew by 31% and EBITDA by 32%. Another key strategic objective has been to increase ownership in our core stations. We are happy to report that we now own a 100% of our Czech, Slovak, Slovenian and Croatian operations and have increased our interest in Romania to 95%.

Ukraine remains the only country where we own 60% of our operations and we are in ongoing discussions with our partners to buy them out. As I always tried to point out during this presentation, the timing is determined by our partners, not by us but we're poised and ready to act.

The third objective has been to focus on the expansion of our multi-channel offerings which is key to our strategy to maximize profitability in each country. We're very happy with the development of our latest Romanian additions, sport.ro and our two niche channels as we mentioned in Ukraine.

We've already plugged the battery [ph] of progress in Romania, and I am looking forward to giving you further updates and in a full presentation at our investor day in Romania.

And finally we have continued to look at opportunities to expand our footprint in the region and I emphasize with in the region with Central and Eastern European Media Enterprises. And there has not been a single deal in our region that we've not known about and considered. We're in an unusually fortunate position as we told you several times with 19... over 2006 as our base year, we expect to double our earnings, our EBITDA and our revenues over the next four to five year period. And we still believe that's a reasonable goal for us.

Therefore we're not going to do deals necessary in other companies to power earnings growth unless they make both strategic and financial stuffs. And therefore as we told you many times you cannot expect to open the paper and see a bad deal from CME. You may not see a deal but you won't see a bad deal.

Before I open the floor to questions I'd like to remind you that you're invited to our investor conference in Bucharest on October 18th and 19th and we hope as many of you who can will attend I think those who have attended our investor days in the past have found it enormously valuable. This will be a great way for all of you to get better insight into our operations, our strength and future aspirations than we're just able to provide on these calls.

With that, I'd like to invite you to ask questions, as Romana mentioned at the outset, Adrian, Marijan, Dan, Wallace, Romana, Marina are all available, and now you can ask your questions.

Question And Answer


[Operator Instructions]. Your first question comes from David Kestenbaum of Morgan Joseph.

David B. Kestenbaum - Morgan Joseph

Okay thank you. Michael you said in the past that one of your goals is here is to buy back some of the minority interest in the Ukraine. Can you just talk about what -- having that minority interest does as far as your ability to react to the market? Obviously you've had tremendous success in Slovakia when you moved down your minority, you eliminated your minority interest, can you just talk about, compare the two markets and what benefit you will get from doing that?

Michael Garin - Chief Executive Officer

Yes, of course, that's a very good question. In the Slovak Republic as you know our partner there was the Vice, Prime Minister and the Minister of the Parliament. And his objectives were necessarily always the same as ours since we have local political situation taking to account. And this impacted programming decisions, staffing decisions and new decisions in many other matters involving and the matters [indiscernible] decision.

And so last year when we were able to acquire control we installed a brand new management. And as Wallace and I explained ratings always precede revenues and we've started to see some of the benefits that came from having a single management focus. And this year the revenues have followed, and following the sort of management oversight and leadership that Adrian provided an enormous amount of that revenue has fallen to the bottom line.

Now turning to the Ukraine, I don't think there is anybody more talented [indiscernible] broadcast. He is an outstanding guy who did enormous amount to build 1+1 and now has done a great deal to build CTC. For those of you who were on the call yesterday or the other day with CTC understand that that company has its own challenges. And Alex is under enormous pressure to deliver results that investors and its Board expect something.

Television broadcasting is a 7 day a week, 24 hour day business and can be phoned in from Russia. So, it's not that Alex is in the great executive, he is just not our executive, he is CTC's executive. And without clear lines of authority management doesn't really know who they work for all of us. Alex phones in from Moscow, makes some suggestion, they sometimes take it as an order and it creates enormous confusion within the station. If he wanted to leave CTC and come back to Studio 1+1 we will be thrilled but I don't think anybody expects that. Therefore it's incumbent on us not just for financial reason but for operational reason to try to get control of the station as soon as we can so that there is a clear line of leadership, there is a clear line of decision making and a single vision of how the station is run. Does that answer you question Dave?

David B. Kestenbaum - Morgan Joseph

Yes it does. Earlier in the year you said, you though the market growth 30% to 35% in Ukraine, where do you see that this year if the election happens on September 30?

Michael Garin - Chief Executive Officer

Well, that's also a good question. The honest answer is we are not sure. What we have seen and we have heard from the two main sales houses because you understand in Ukraine we have a similar structure to rush up so that station generally represented by sales houses as opposed to themselves. They are giving us indications that while advertisers have withheld their advertising in the first half, they haven't necessarily changed their budget yet. As the year progresses and their net spending either becomes a little harder to believe that all that money will be allocated, but if you remember last year, the December month provided a great deal of our -- even though you couldn't see it because we report quarterly an enormous amount of our 2006 financial performance.

And so -- as well as that if there is the elections if they are on time, we, not just 1+1 but the combined stations may get a bit of a windfall because none of us had allocated the political advertising in our planning when we planned for the year. And the political advertising also doesn't count against the overall advertising filling. So we could be fortunate but we are trying to be prudent as I think investors have come to expect from us to share a sense of uncertainty there.

David B. Kestenbaum - Morgan Joseph

Okay. And then in your press release you said that you are still confident in the Ukraine market and you're still looking in that market for acquisitions. How would you...

Michael Garin - Chief Executive Officer

We very much like to expand our footprint within Ukraine.

David B. Kestenbaum - Morgan Joseph

Would you do a deal if you had another minority partner or how would you address that issue?

Michael Garin - Chief Executive Officer

Well, I think my answer to your first question sort of address is that we don't mind minority partners. It's been -- I think the secrete to our success quite frankly has been our ability to find people like Adrian and Marijan and join with them to provide the resources to build what they've created. I think as the time is gone on and CME has transitioned from a owner of broadcast assets to an operating company, manned actively and effectively managing those assets. We want to make sure that we can exercise management control but the idea of sharing in the success that people will help us create is part of the tradition of CME. And I would like to just remind you and the others on this call that while we do own 100% of TV Nova in Czech republic, PPS owns 3.5 million shares which is somewhere around 7% or 8% of our total outstanding shares. So they are... anyway they own 3.5 million shares outstanding, trying to do quick [Indiscernible] percentage. So they remain our partner. They're just a partner of theirs [ph]. So the principle of local partnership is very important one and therefore we would be happy to continue that in Ukraine as I said as long as the management reporting lines are clear.

David B. Kestenbaum - Morgan Joseph

Okay. Thanks.


Your next question comes from Matthew Walker of Lehman Brothers.

Matthew Walker - Lehman Brothers

Hi, good afternoon. I have got a couple of questions for you. One is on the Czech Republic. How do you see that the situation in digital going forward in the Czech Republic? And I thought a bit to the same question for you mentioned, I think one of the other markets as well as set-up a digital in maybe Slovakia. Do you get an extra channel when the analog signal is switched off or do you receive extra channel before the analog signal is switched off? And the second question is on Ukraine, if you could just say included in the new guidance, what have you really assumed for your performance in Ukraine? I mean I guess you have eliminated the political advertising but on the other color around what sort of incorporated in the guidance for Ukraine would be helpful.

Michael Garin - Chief Executive Officer

Adrian, do you want to take the first...

Adrian Sarbu - Regional Director

Yes, Matthew, I have the pleasure to remind you that we are already broadcasting digitals and in Romania -- we are in Czech Republic and Romania, in Romania we are broadcasting an HD signal for one of our channels possibly. For us the only goal in this process switching from analog and then you start distribution means because let's remind ourselves, a part is always distribution consist in cable and DTH not only in Romania but also in other markets, and it's a strong [indiscernible] for analog through distribution.

So for us our goal especially in Czech Republic where there is a high degree of emotion about possibility of other players to enter the market is not to have competition because we operate now two channels. We plan to operate more channels in the future, all these channels will become digital as according to the new amendment if this possible after the switch over period which is somewhat as to 2012 the actual distributions will be totally free. For us it's good but in the meantime we are the only real growth factor of digital signal and multi-channel in Czech Republic and Romania.

So What we are looking for in negotiating with government is this process not to reduce the access of our signal to the homes of Czech, Slovaks or Romanian because our main goal is to offer each Czech viewer the benefit of watching Innova digital as they have the benefit of watching Innova analog and digital today for a part of the Czech Republic. So we have no other issue with any of these markets, if the switch over is tomorrow we are prepared to deal with it. If the switch over is in 2012 we are also prepared. As you know we have now analog license in Czech Republic until 2017 and nothing in the actual amendment to the media law gives us bad thoughts [ph] in respect of our ability to communicate and to reach every viewer which we have today in Czech Republic. It' all about content distributed by various channels, by various distribution means and here we proved we are present and we are the strongest in all these three markets. The remarks regarding Slovakia are also more encouraging because there the law which was passed gives us enough confidence that our main goal to maintain the communication to all the views which we have today, the reach of all the viewers is guaranteed.

Michael Garin - Chief Executive Officer

One thing I would just add to that Matthew is that I think Romania is actually a great indicator of what is likely to happen in the Czech republic because I think what practically is going to occur is that as digital rolls out which I think everybody should understand this much further into the future than is often reported in the press, in lot of the presses which I think was an accurate reporting.

What you are going to see is as you have in Romania is that our power ratios will increase. If you take any reasonable assumptions and you could build any model you want, of course will help you, you end up with an audience for most of these new channels of about 25,000 viewers given the penetrations of DTP [ph] plans given what news channels are getting on cable and getting -- in Czech Republic and else where. And obviously they can put on some programs that small quantities of viewers might enjoy but this is a little bit of advertisers. And what you see is a lot of public negotiations of air rates in the press but in fact as Adrian said TV Nova, State TV and TV Prima will be the principal beneficiaries, although it's new technology.

Adrian Sarbu - Regional Director

And with regard to this question Matt, with regard to Ukraine we have made some assumptions about political advertising. It's currently expected as being very probable if elections will go ahead. However, even bringing in number of political advertising that these are -- just product item alone with the range problem because this is really very hard to see at the outset and what that number is going to be if there is a reasonably wide range of possible incomes for that. They remind that the formal election period this year would be about half of the length of time than was the case last year.

On the other hand it could be very exciting elections and that of course would increase the demand for advertising. And in approaching the full guidance of a -- the level of Ukraine within our full year guidance and Ukraine really is the reason why we have broadened the range of the guidance because, as I talked of Spain earlier on there are quite a large number of variable factors whether they will be and to what extent they will be political advertising, quite how far the market is going to grow in the second half of the year which could be very strongly if the elections lead to the quick formation of a new government and also our abilities to participate in that growth depending on our ratings generation in that period.

And I think you can imagine we've said that we've got a lot of different models to create different combinations of events and there are a wide range of outcomes. But we have within those made assumptions that there will be political advertising at different levels within that range and is that range which has led us to broadening of our guidance.

Michael Garin - Chief Executive Officer

The other thing I'd add Matthew is, as you watch the situation unfold clearly sooner the election takes place the better for us and all broadcasters because the later in the year when the election might occur the fourth quarter is traditionally in every country in the world the most important for a commercial advertising and even though there is a limit... there may not be a legal limit to the amount of political advertising that we can expect, there is a practical programming decision that we need to make. And so, we hope that the election will take place as scheduled because that would be the best as I said for all broadcasters and just for 1+1.

Matthew Walker - Lehman Brothers

And just on the Ukrainian market again, if you -- when could that come back in the autumn, is it possible that it might reduce the appeal of the other INTER, are you planning for or not?

Michael Garin - Chief Executive Officer

I'll turn that over to Marina.

Marina Williams - Executive Vice President

As you know Codex [ph] ran successful year on 1+1, and in fact during their first quarter, even at the time when INTER had launched their high successful [indiscernible], their Studio 1+1 prime time was sustained in its position. So we do have very high hopes for the third season of Codex [ph] which we are going to launch starting September 3rd.

Matthew Walker - Lehman Brothers

Thank you very much.

Operator: [Operator Instructions]. Your next question comes from Caesar Taiwan [ph] of JP Morgan of London. Once again Caesar Taiwan of JP Morgan.

Unidentified Analyst

Yes hi. I would like to know if you can go one more time throughout the mechanics, which the news channels in the Ukraine have gained audience share because I think that's the only market where we see that in your markets and if you expect this type of audience fragmentation to continue in the future and also if you can give a little bit more details on what programs you want to launch in the fall. Thank you.

Michael Garin - Chief Executive Officer

Marina you want to take that.

Marina Williams - Executive Vice President

Yes, sure. Ukraine is indeed a very fragmented market. It's the market which have not very well cable however great number of dressed [ph] licenses have been granted for various TV stations in the last several years. So some of those opportunity came up for CME just over a year ago. We grabbed it gladly because we really feel that multi-channel strategy in Ukraine is very important.

We also see that the audience likes the clear definition and brand addition of the channel and mainly the channels which have very strong brand appeal and very clear demographics which are able to sustain and grow the audience. So there are small channels that we acquire just to remind you, we acquired two stations just in Kiev region, regionally and we have chosen the strategy of growing one of them to a regional network which is Kino. And we have been building distribution both via satellite, cable and terrestrial means and now we are using 53% [ph] of TV households in Ukraine. This is a combination of strategy by distribution in cable, signed affiliation agreement with regional stations and also acquiring regional broadcasters wherever possible.

The Kino channel, has quite niche positioning, it's targeting 14 to 49 age group. It's no new, it's light entertainment programming predominantly with movies and show biz products. Their second channel, the Citi TV is a key station and it's a daytime programming, it's pretty much over interactive and shopping window. We have a prime time geared towards Citi news, which is based mainly on key appliance mainly retail, clients and also will attract political advertisers in this quarter.

So these channels are growing. We obviously need to invest into the growth of the station. The Kino channel we have target to reach 1% national audience by the end of this year. We are glad that we managed to achieve it by now and in Kiev which is the most region I would say in terms of competition, so that Kino channel has moved up its revenue line and ahead of its competitors in the same filed. We have positioned prime time reaching quite often 2.8 close to 3%. Did I answer your question?

Unidentified Analyst

Yes and on the programming can you say a little bit on Studio 1?

Marina Williams - Executive Vice President

I am sorry, yes in whole our main goal is to reinforce both the schedule and promo strategy of support the strength of Studio 1+1 brand. This will include the launch of a whole production [Indiscernible] with Channel Five in Russia but in Ukraine this was the first time that we're quite using program is based on their script. One of our sister stations, Romania [Indiscernible] has been adopted and will be launched both in Ukraine and in Russia at the same time in September this year in Christone [ph] leading to our menu. We have recently upgraded their only look and hired a top talent in the market for also a new political summary program which will reflect the full election.

We also established our regional network of correspondence so that our renewal will look truly national and cover the opinions of the whole population during such important political timing. And in prime time we will continue with Cadet [ph] which depends only before the summer holiday break and... we can... we'll feature live song, conference program as well as continuation of dancing with stars which was a real keyblock here. So this will be our highlights.

Unidentified Analyst

Okay, Thank you and my final question on the... do you feel you're exposed to the outcome of the elections? Are the news on Studio 1+1 100% independent?

Michael Garin - Chief Executive Officer

Okay. Yes, I'd like to start on that. One of the things that's been very impressive to me watching the Ukraine in general, is that that these elections have resulted in the lack of a clear majority in the parliament. And they've resulted in very tough political sliding. You haven't seen a lot of allocations to vote it for and lot of issues that often occurs when politics or isn't natural to deal in Ukraine. Therefore I'd ay two things. First is that our news which is completely independent and maybe seen as the only real independent source of news and information which is why we have invested so much in building up our news rating. We think that an election that so important to the country will have a very positive impacts on the station's performance that has the potential to have it which is why we've invested both in news coverage and in our Internet sites. And what we really want is a result that everyone can accept as critical and if one party or collision of mergers that would be the best for us because then businessmen will have confident that the country will be able to move forward, who is in that collision isn't as important to us because we are not taking political sides.

Unidentified Analyst

Okay, thank you very much.

Michael Garin - Chief Executive Officer

Thank you.


Your next and final question comes from Andres Nigowa [ph] of ING.

Unidentified Analyst

Yes good afternoon and three questions if I may, this is Andres Nigowa [ph] of ING. On page 23 of your presentation there is 8 million segment EBITDA loss from non-broadcast operations. And now my question has that changed from first quarter '07 guidance and what that loss relates to which operations, non-broadcast operations do you guys remind in here? My second question is on Czech Republic since your local currency revenue grew by I think 25% in the first half or even 34% in the first half -- 25% in the first half what kind of growth in the TV advertising market are you predicting for 2007? I think there was a prediction of high single digit growth number for '07. Are you still sticking to that growth? And my third question would be again on I think Ukraine I am not sure you guys mentioned that there was a sign of price increases in the second quarter. And I am not quite sure whether that was mentioned for the Ukraine market. And if so I just wonder how it's possible to see price increases if you also said that the advertisers were redrawing advertiser -- advertising in Ukraine because of the political uncertainty. So maybe I am just mixing the markets up here if you could just cast some light on that. Thank you.

Wallace Macmillan - Chief Financial Officer

Andreslet me start off with this, Marijan Jurenec will take up the Ukraine parts later on. [Indiscernible] first of all, the 8 million EBITDA loss within our projection in the U.S. GAAP reconciliation for the full year is one element of the total 10 million cost or investment that I spoke about in my speech which is our expected total cost of the Internet strategy this year, which will be a combination of capital investments and operating cost of EBITDA investment. And so that 8 million projected EBITDA charge in the U.S. GAAP guidance reconciliation is comprised within that 10 million figure. And this is unchanged from the first quarter this year and this is unchanged from the statement we made at the end of last year when presenting our results then.

Unidentified Analyst

And are you guys going to consolidate that 8 million EBITDA loss from non-broadcast operations? Is it going to be consolidated in the numbers?

Wallace Macmillan - Chief Financial Officer

Absolutely, absolutely.

Unidentified Analyst

All right.

Wallace Macmillan - Chief Financial Officer

And remind me if your question on Czech Republic.

Unidentified Analyst

Given your 25% increase in revenue, are you still behind this high single digit growth in TV advertising market which I think you guys have been guiding for Czech Republic?

Adrian Sarbu - Regional Director

That is still our current estimate from the marketplace. We just seem to be growing a little bit faster than the market based on current production at this stage. And we do not in any of these markets get the same sort of detailed market statistics on a month by month visas as they're available and in the Western market but our best we did in this stage is that the market is still growing to be growing in total at high single digit rate and our growth has been a little bit faster than that.

And with regard to Ukraine prices, the story basically is the [Indiscernible] Marijan can come afterwards is that in the first quarter of this year, and really when the fall-out initiated between President's party and the Prime Minister's party in parliament and in that period of uncertainty prices fell dramatically but substantially below those in the first quarter in the previous year. And this was simply a matter of advertisers being very worried and deferring budgets and in particular local advertisers who probably make up about 20% of the market but also international advertisers hoped they cannot on uncertainty.

The situation is still in the second quarter that they are studying more cautious on budgets and they are releasing them more slowly than they had expected to but a lot more money has come back to the table in the second quarter. And that has led to a substantial recovery in prices in the second quarter, which allied with the number of ratings that were available to be sold that to by our estimation a reasonably sized jump in the market in the second quarter. So the market fell year-on-year in the first quarter and grew year-on-year in the second quarter.

Our view and it's again in the absence of detailed market statistics is just simply not available in Ukraine, this remains of you which our view is that at the half year the total market is probably a bit higher than it was at the end of the first half last year. But it is the incidence of the timing. And as far as the way that worked out for us unfortunately in the first quarter when we were doing well on ratings with a lot of ratings to sell, the prices were down. In the second quarter we had a fewer ratings but the prices were up and that's why you get us imbalance in our revenues in that period. Does that cover it?

Unidentified Analyst

It covers it very well actually and how much of your advertising revenues being sold down in Ukraine on gross rating points and how much is being sold on ad-hoc or price TRP [ph] basis?

Adrian Sarbu - Regional Director

The vast majority of our sales come through on straightforward GRP basis. And political advertising which will be coming we hope in the future comes through in sight in different basis. We also get revenues from sponsorship. It obviously doesn't work on the same GRP mechanism. But the vast majority of our revenues come through it simply on setting on a GRP basis.

Unidentified Analyst

That helps too. Thank you guys.

Michael Garin - Chief Executive Officer

That's a help.


At this time there appears to be no further questions. I will now turn the floor over to management for any finishing remarks.

Michael Garin - Chief Executive Officer

Okay.Well thank you very much everybody. I appreciate your patience we have been for exactly one hour. I would like to remind you one last time that October 18th and 19th is our investor conference in Bucharest. We have spend out some preliminary information. I hope to see as many as you as possible there and as always we're each available for any follow up questions you may have. Thank you very much for joining us and hope to see all soon. Bye bye.


This concludes today's Central European media conference call. You may now disconnect.

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