Central European Media Enterprises (CETV) Q2 2019 Earnings Call Transcript
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Central European Media Enterprises (NASDAQ: CETV)
Q2 2019 Earnings Call
Jul 23, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Hello, my name is Mariyama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded, today, July 23, 2019. 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 -- Head of Investor Relations
Thank you, Mariyama. Good afternoon and good morning, everyone, and welcome to CME's second-quarter 2019 earnings conference call. We issued our earnings press release earlier today, a copy of which is available on our website, cme.net, along with the presentation that we will refer to during the prepared remarks. 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 SEC filings, including the Form 10-Q filed earlier today. 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. And now, I'll hand over the call to Michael and Christoph.
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Michael Del Nin -- Co-Chief Executive Officer
Thanks, Mark, and thanks to everyone for joining us today. As we passed the halfway point of 2019, we're pleased to report yet another quarter of exceptional results that once again exceeded our expectations and demonstrate the extraordinary growth potential of our businesses. It was a quarter filled with highlights. At constant rates our biggest business in the Czech Republic continued its impressive run, recording double-digit growth in the quarter for both TV ad revenues and carriage and subscription fees. And recording the highest level of H1 revenue growth in five years.
Romania returned to solid growth after the first quarter was impacted by the introduction of new taxes on certain industry groups. And this improved performance, helped drive Q2 margins to over 50%. All of our country operations enjoyed an improvement in profitability and margins in Slovakia more than doubled over the corresponding period last year, as TV ad spending was strong and carriage fees and subscription revenues posted another quarter of double-digit increases. Overall, our top line improved 8% at constant rates, representing the highest level of second-quarter growth in four years. In fact, even with significant FX headwinds caused by the stronger dollar, our net revenues still grew at actual rates reaching $184 million.
This strong growth combined with a year-on-year decline in costs drove a 21% improvement in OIBDA at actual rates. And an even more remarkable 29% increase at constant rates to $73 million. In terms of constant currency revenue and OIBDA growth, this was the company's strongest Q2 in four years. Our margins have expanded significantly in both the quarter and year-to-date periods. In fact, margins have expanded in each and every one of our country operations this year, resulting in a consolidated margin of 40% in Q2, 650 basis point higher than it was in the same period last year. All combined, this has resulted in an impressive boost in cash generation.
With unlevered free cash flow for the first half of the year reaching $146 million, an increase of more than 50% over the same period in 2018. This allowed us to make another debt payment during the quarter, bringing total repayments so far this year to EUR 100 million. Together with the improved operating performance, this resulted in the company's net leverage ratio declining to 2.6 times at the end of the second quarter, nearly one full turn lower than at the start of 2019. That net leverage ratio pushes our average cost of borrowing down to 3.4%, its lowest level ever resulting in run rate debt service obligations of about $23 million per year going forward. I'll now hand the call over to Christoph.
Christoph Mainusch -- Co-Chief Executive Officer
Thank you, Michael. Good afternoon and good morning to everyone. Each of our businesses saw a strong finish to the spring season in the second quarter, and we maintained our audience share leadership in all countries. The main channel in each territory increased its audience share in prime time this year, and we increased the gap between us and our closest commercial competitor in prime-time audience share in four markets.
We did this while improving margins with more efficient spending on content. As always, we were selective and strategic when designing the programs which -- so you would see higher spending in certain countries and time slots, while content costs were lower overall during the period. I'll mention a few programming highlights. In terms of prime-time audience share, our main channel in Romania saw its best second quarter since 2012. This was helped by the debut season of our hottest new, fiction series, Vlad, which will return in the fall.
Our local production of market share in the Czech Republic saw its most successful season ever. And we also saw the successful launch of our new studio in Bulgaria during the quarter, with state-of-the-art technology and a new 360-degree set that empowers bTV's journalists to present the news and current affairs programming in the most visually appealing and an interactive manner. Turning to TV ad markets, we estimate spending of the countries in which we operate increased overall by 2% at constant rate in the first half of 2019, which would have been higher if not dragged down by lower spending in Q1 in Romania. Our largest market in the Czech Republic grew 6% and we outperformed with our TV ad revenues going 8% from stronger pricing. The market also saw higher average prices in Slovakia and together with an increase in government informational campaigns TV ads spend there also increased by 6%. The picture in Romania is significantly better than three months ago. Q1 reflected lower spending by advertisers, directly impacted by new incremental taxes imposed in the first quarter of 2019 on certain sectors of the economy. The market returned to growth in Q2 and we also increased market share.
As modifications were made to the legislation, spending by certain clients impacted by the sector taxes began to recover in the second quarter and we anticipate the trend will continue in the second half of 2019. Based on the overall level of spending commitments, we believe the market will grow over the full year. In Bulgaria, the market was broadly flat as a slight increase in GRPs sold was mostly offset by lower average market prices. And in Slovenia, fewer GRPs were sold due to lower spending by larger multinationals, which was mostly offset by higher average market prices, reflecting more spending from smaller advertisers. Lastly, consolidated carriage fees and subscription revenues increased 11% at constant rate in both the second quarter and first half of 2019. Three of our segments posted double-digit growth as the subscriber base continued to grow and average prices increased. I'll now turn things over to Dave for the segment results.
Dave Sturgeon -- Chief Financial Officer
Thanks, Christoph. Our segment results begin on Slide 12 of our presentation. In the Czech Republic, TV ad revenues increased by 11% at constant rates in the second quarter, significantly higher average prices reflected in part the later timing of Easter this year. Carriage fees and subscription revenues increased by 17% due to an increase in the number of subscribers, as well as price inflation in existing contracts. Cost increased primarily from client content costs as we broadcast newer releases of foreign programming, compared to the schedule in 2018.
We also saw higher staff cost, including additional personnel to support our digital initiatives. Our TV ad revenues in Romania increased by 8% at constant rates in the second quarter. Prices increased significantly and higher spending in the period from the later timing of Easter in 2019 more than offset reduced spending by advertisers directly impacted by the new sector taxes in the first quarter. Carriage fees and subscription revenues increased by 2% primarily due to an increase in the average number of subscribers. Content cost declined by 9% at constant rates, as we utilized more cost-effective foreign content and broadcast fewer sports rights, which was mostly offset by the reversal of a legal accrual that had benefited the second quarter of 2018. In Slovakia, TV ad revenues increased by 7% at constant rates in the second quarter. We saw a continued benefit on pricing from the higher prices in 2019 sales policy, and the later timing of Easter also positively impacted sales volumes during the quarter. There was also a boost from additional spending on government informational campaigns, which was partially offset by less spending on sponsorship and product placement. Carriage fees and subscription revenues increased by 11% from higher prices in new contracts.
Costs decreased by 13%, primarily due to lower content costs from broadcasting fewer locally produced formats in 2019. There was also a decrease in professional fees. In Bulgaria, TV ad revenues increased by 1% at constant rates in due to higher average prices, which was partially offset by selling fewer GRPs. Carriage fees and subscription revenues increased by 8% due to price inflation in existing contracts. Costs decreased by 12%, primarily due to lower content costs. We replaced our locally produced telenovela broadcast in 2018 with a more cost-effective foreign fiction title in 2019.
Content costs also declined from a planned reduction of the volume sports rights in the schedule. The quarter also saw a benefit from lower bad debt charges. And in Slovenia, TV ad revenues decreased due to a shift in the phasing of spending by larger multinational compared to last year, as well as lower spending by telecommunications operators. Carriage fees and subscription revenues increased by 26% due to price inflation in existing arrangements, as well as growth in subscribers. Costs decreased slightly due to more efficient spending on foreign programming. And with that, I'll hand the call back to Michael.
Michael Del Nin -- Co-Chief Executive Officer
Thanks, Dave. As you've heard today, this unique set of assets continues to deliver impressive growth and that momentum gives us even more confidence in the results expected for the remainder of the year. This is partly based on the strength of the macroeconomic environment in the region with the economies of the countries in which we operate remain resilient, with historically low unemployment fueling domestic demand and in turn driving some of the highest growth rates in the EU. And it also results from the role of television in this part of the world.
With this unparalleled capacity to produce the highest quality informative and entertainment programming, providing a unique growth proposition within the global industry. Its favorable environment combined with the high degree of operating leverage in the business, it allows us to invest strategically for the long term, while still continuing to improve results. Our financial performance in the first half of the year has consistently exceeded our expectations. But as you recall, growth in the second half of 2018 was particularly strong.
So we're headed into a period with difficult year-on-year comps. Nevertheless, today we are raising our full-year guidance for the second time in as many quarters. Based on the results from H1 and our outlook for the remainder of this year, we now expect OIBDA growth at constant rates to be in the 14% to 16% range for full-year 2019. And with the significantly improved cash generation in H1 of this year, we also believe unlevered free cash flow will be better and increase by a similar 14% to 16% at actual rates. This means that after considering the impact of FX in the first half of the year and assuming today's rates endure through the end of 2019, those guidance levels would equate to more than $245 million of OIBDA and around $180 million of unlevered free cash flow.
After accounting for cash interest payments, free cash flow for the year should be around $155 million. This level of cash generation is unprecedented in the company's history and reflects our focus on value creation for shareholders. As the previously announced strategic review is still under way we do not have any further comments to make on that today. And I'll now turn the call back over to Mark so that we can take your questions.
Mark Kobal -- Head of Investor Relations
Thank you, Michael. That concludes our prepared remarks. We will now move to the Q&A portion of the call. So Mariyama, please go ahead and open the lines for questions.
Questions & Answers:
Operator
[Operator instructions] And I now hand you back to Mr. Kobal.
Mark Kobal -- Head of Investor Relations
Thank you. Our first question today is coming from Pavel Ryska at J&T Bank. Please go ahead.
Pavel Ryska -- J&T Bank -- Analyst
Congratulations on a very strong quarter. I have three questions for today. So the first one touches the Czech Republic, our biggest market. So your comment involves the statement that there was pretty sized growth in TV ad spending in the Czech Republic in the first half of this year.
So I was wondering what's your view of rest of the year. Were there some specific factors which accelerated the rate of growth? Or do you think that this can be maintained for the rest of the year? Because to be honest, it kind of surprised me because given the maturity of the current cycle, I wouldn't expect the TV ad markets to be so quick or to have such a momentum in this part of the cycle. So basically, that's the background of my question. The second question is related to the programming costs. So I -- earlier today I saw in your statement that programming costs decreased in absolute numbers pretty fast.
So now you commented that it was partly due to the sports, in particular, UEFA football programs. Is this the only factor? Or are there are some factors which could affect programming spending? And if you could simply provide more color on what's really driving this sizable drop in programming costs? And if it can be maintained? And the third question, I noticed a few weeks ago, there was the news that the top management of TV Nova in the Czech Republic was changed and that Christoph Mainusch stepped down from the role, and that he was replaced by two senior managers of TV Nova, could you maybe provide reasons for this? Or what it means for the TV stations? What was the background of this change?
Mark Kobal -- Head of Investor Relations
Thank you. OK. Thanks. We'll start with Christoph.
Christoph Mainusch -- Co-Chief Executive Officer
Pavel, I will take all your three questions. So starting with your first one on Czech Republic. As you have said, market in H1 was very strong, it's the best market growth we have seen since 2015. We mainly outperformed due to the fact that we -- that the sales policy we have implemented with the intended price increases took well of, it was largely accepted by the market.
For the rest of 2019 full year we expect, of course, as well in the Czech Republic a very strong year, but H2 won't see those growth levels as H1, and it might slow down because we had as well in H2 2018 a very high comparative -- for comparative reasons high period. So it will slow down, we will see an overall growth. But I would not expect that we see this growth in H2 what we have seen in H1. Just to give you one example, for instance, in Q3 last year, we saw a 23% OIBDA growth in -- from 2018, so comparables are a bit different in H2 than they were in H1. To your second question, the main drivers of the cost decreases.
As you know, we run all of our channels always in a sense but only to maintain and strengthen our audience leadership. And as you have seen, we have grown our results, as well as our GAAP to some of our competitors in some of the markets. But we are always seeking for the highest level of profitability and scaling the business accordingly. And there were two main drivers in H1 for the cost decrease.
The one was program in Romania and the other in Bulgaria. In Romania, this came mainly from foreign fiction as we have used in Romania less volume and to lower cost in H1, based on the planning we have done. There was an impact of UEFA, European League and Champions League, as in 2018 we had -- when we had this tournaments, we had higher cost on that front that led to the cost saving, and that was partly compensated by a bit higher costs for the mentioned series, Vlad, which is a Turkish adaptation of a very successful series Ezel there. And for additional episode of Las Fierbinti.
So overall, I think around 30% to 35% of cost decrease come from Romania. When you look in to Bulgaria, we had in the period H1 of 2018, still our local telenovela on air, which we have not continued with in H1 2019. So the strong result of the audience and the cost decrease came mainly from these comparables that there was no local program in access prime time, but we replaced with a Turkish telenovela. And we had some savings in sport and foreign fiction, as well as in Bulgaria. So that are the main drivers. For the TV Nova management, as you might recall, when Michael and me started in 2013, we were actually appointed co-CEOs of CME.
And at the time, we decided that I will take over as well the Czech operations. It was always clear from the beginning that I wouldn't do that forever. And as I wanted to maintain the team in a way that we don't bring somebody in from outside, but have a very strong local team in place, we made the decision already a couple of months ago to make this change, you know global director and financial director. They have been with me together as executive directors for the period.
And I further continue as chairman of the company. And -- so I think the Czech operation is very strong. And it's -- and I'm very happy that we have found such a strong management team leading this -- us into the future.
Mark Kobal -- Head of Investor Relations
OK. We before we take the next caller, Mariyama, can you please remind people how to get themselves into the queue?
Operator
[Operator instructions]
Mark Kobal -- Head of Investor Relations
The next question is coming from Matthew Harrigan at Benchmark. Please go ahead, Matthew.
Matthew Harrigan -- Benchmark -- Analyst
Thank you. Two questions. One, could you update on your OTT efforts, and that clearly looks like a marginal win for you rather than a threat, I mean, Netflix is talking about restraining its programming and obviously, it outweighs and obviously Bulgaria, Romania, Czech Republic aren't going to be the top priorities. But it feels like it's more of an opportunity than an issue for you at this point.
And then kind of getting to something I've asked about before, could you talk about product categories, I mean, clear of advertising, clearly you've got a long runway in technologies, financials, almost ten, fifteen years and you're very consumer, product oriented. But are you seeing any flux in the product categories over time?
Mark Kobal -- Head of Investor Relations
Thank you. OK. Thanks. We will start with Christoph.
Christoph Mainusch -- Co-Chief Executive Officer
On the OTT development, as you know, Matthew, we have introduced two years ago an AVOD service that's had advertising-based COD service, while when we started there was just an SVOD service in place. We have a very good feedback on this offer in the market. And of course, those revenues are still lower on an advertising than from the traditional core business. But at the end of the day, we always say that we are content providers and we make our content available in all platforms.
And when measurement digitally is done in an equal manner than it is done in TV, at the end of the day, we are competing for IVODs and viewers, where ever they are, whether that is on a mobile phone, on a tablet, on a computer, on the broadcast, delayed or live. So therefore, strategically it was very important to introduce into professional live box services. Although, and you are completely right, these do not play a big role since -- today, but it will further grow. And as you have said, this program offers like SVOD services like Netflix and Amazon.
In our market, it is very important -- as in others as well that these programs are locally produced and that, let's say, makes a difference. And therefore, usership of those VOD services are limited and we see that as well with our service. We are prepared when market dynamics change but it will grow. But we do not see any big competition on that front, especially when you see it across our market how agile -- as our audience, viewership has grown over the last -- despite the fact that those services were introduced, we have a very stable performance in that, especially as we are in a position to offer this kind of premium local content, which also those services are interested to have. To your first point -- to your second point, just remind me the second question, it was of the sector taxes on spending.
So just to give you a short overview in general, the retail continues to do well in all countries. Food and beverage also did well in the quarter reflecting the timing of Easter. Automotive was particularly strong in Romania, continued to be encouraged the higher spending around premium products in certain countries, such as pharma. So if you would like to go more country-by-country, I can give you that as well.
Our we take that offline and we --
Matthew Harrigan -- Benchmark -- Analyst
Yes. I was just curious, I mean, I probably don't need that level of granularity. I was impressed with it, and off the top of your head. But sort of a bit more categories, I'm asking you how with some financial services component and some technology, but it feels like it's a big opportunity, a long ramp.
Are you seeing a lot of momentum in financial services and technology, I guess, slash telecom?
Michael Del Nin -- Co-Chief Executive Officer
Yes. Matt, it's Michael. On -- obviously, I think one of the longer-term opportunities here in our market, right, as you know, a lot of the spend from advertisers continues to be on, kind of, fast moving consumer goods. And as these markets develop from the advertiser perspective and that also that these markets from a wealth perspective brought about by the fact that GDP in these countries is growing and has consistently grown for the last few years at a faster rate.
And in Western Europe, we would expect that over time it begins to mirror a little bit more of what you see in Western Europe and in the U.S., where you have spending on categories like financial services, for example, a much larger piece of the pie than is the case today. So I think that you've identified it right. I mean there's certain categories associated with spending in Western Europe or the U.S. that I think over the longer term provides more of a growth opportunity in these markets.
Mark Kobal -- Head of Investor Relations
Thank you. Next question, a follow-up coming from Pavel Ryska at J&T. Please go ahead Pavel.
Pavel Ryska -- J&T Bank -- Analyst
So one more question just popped up in my head, which was related to the net leverage ratio and the potential dividend payment, or share buybacks, so I remember it was back on the conference call after Q4 or Q1, I'm not sure now. So I think Michael said that further down the road in the year you would be able to comment better on the potential to stand with a net leverage ratio below the level required by the debt covenants for a potential payment to shareholders. So given that this net leverage ratio declined so fast over the last two quarters, as you say, 2, 2.6 at the end of June, so do you find it likely that at the end of the year also the gross leverage ratio should stand below 2.75, so that theoretically a potential payment to shareholders would be possible?
Michael Del Nin -- Co-Chief Executive Officer
Thank you, Pavel. I'll take that again this time. The -- look, I think you're obviously right. And I've personally been surprised with the speed with which that net leverage ratio has declined just in the first six months of this year, right? Moving that by a turn, given where we're at, is significant.
And you're right, we've got a -- an ability to issue dividends once gross debt reaches 2.75 times. But our policy as it relates to dividend, obviously, is caught up in the strategic review that's under way. And so when we reach the tail end of that review, I think, that however it comes out, I think included in that would be a careful analysis of what target leverage should be, what we should do with excess cash. And I think that the expectation would be that we would be providing more clarity on that at that point.
Mark Kobal -- Head of Investor Relations
OK. 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
[Operator signoff]
Duration: 33 minutes
Call participants:
Mark Kobal -- Head of Investor Relations
Michael Del Nin -- Co-Chief Executive Officer
Christoph Mainusch -- Co-Chief Executive Officer
Dave Sturgeon -- Chief Financial Officer
Pavel Ryska -- J&T Bank -- Analyst
Matthew Harrigan -- Benchmark -- Analyst
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