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Edited Transcript of CETV earnings conference call or presentation 24-Jul-18 1:00pm GMT

Q2 2018 Central European Media Enterprises Ltd Earnings Call

PEMBROKE Jul 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Central European Media Enterprises Ltd earnings conference call or presentation Tuesday, July 24, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christoph Mainusch

Central European Media Enterprises Ltd. - Co-CEO

* David Sturgeon

Central European Media Enterprises Ltd. - Executive VP, CFO & Principal Accounting Officer

* Mark Kobal

Central European Media Enterprises Ltd. - Head of IR

* Michael Del Nin

Central European Media Enterprises Ltd. - Co-CEO

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Conference Call Participants

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* Piotr Raciborski

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Hello, my name is Michelle, 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 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, July 24, 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.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [2]

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Thank you, Michelle. Good afternoon, and good morning, everyone, and welcome to CME's Second 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.

Lastly, following the previously announced agreement to sell our operations in Croatia and Slovenia, these businesses are classified as held for sale and presented as discontinued operations for all periods.

Our discussion today relates to our continuing operations and the four remaining operating segments.

And with that, I'll hand the call over to Michael and Christoph.

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [3]

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Thanks, Mark, and thanks to everyone for joining the call. There are several topics for us to cover today. So let's quickly hit the headlines before getting into the details.

In terms of our financial performance, the second quarter finished right in line with our expectations as indicated on our last earnings call.

Our outlook for the rest of the year is also unchanged, and we continue to expect that growth in profitability will accelerate sharply in the second half of 2018, leading to another full year of outstanding results and strong free cash flow generation.

We made progress on the asset divestitures, receiving regulatory approval to complete the sale of our Croatian business, which we expect will happen in the coming days.

The proceeds from that transaction will be used to immediately pay down our debt. And pro forma for the sale, the company will have the lowest amount of gross debt on its balance sheet than at any point in the last decade.

That allows us to reap additional benefits from the debt repricing that we put in place in April, setting us up to reduce our average borrowing rate to just about the lowest level that the company has ever known.

Looking more closely at the second quarter and first half results. On a consolidated basis, net revenues reached $160 million for the quarter, an increase of 9% at actual rates.

As expected, due to a number of factors, our operations maintained their financial performance from last year at constant rates. Some of that was due to an ongoing shift in advertising spending towards Q1, exacerbated this year by the timing of Easter.

But also playing a part this year were the disruptions to viewing patterns caused by major sporting events like the World Cup and an unusually warm spring season in the bulk of our markets.

Over the entire first half of the year, with some of these factors balancing out, net revenues increased 16% at actual rates and 3% at constant rates.

Due to continued success in controlling costs, OIBDA in the second quarter was $56 million, an increase of 8% at actual rates and flat constant rates.

In H1, with the effects of this phasing minimized, OIBDA growth was stronger, increasing 19% at actual rates and 8% at constant rates.

Thanks to this growth, OIBDA margins expanded by 130 basis points over the same period in 2017.

This also led to higher cash flow generation with unlevered free cash flows from continuing operations of $89 million in H1, an increase of 39% on last year.

As I said, these results fall right in line with our expectations for the quarter. But clearly, they also reflect something of a slowdown in the sort of advertising revenue growth that we have experienced in recent quarters, especially in Romania, which has been a driver of growth for some time.

We anticipate that TV ad revenues will pick up again in the second half of the year, particularly in Slovakia, and that costs will be lower overall as investments in local content are more than offset by other savings.

Therefore, we expect that growth will improve significantly, both in terms of topline and profitability over the next couple of quarters.

Continued strong operating performance will ultimately enable us to benefit from additional improvements in our capital structure.

Since we last spoke to you, the warrant exercise window closed, and our largest shareholder now AT&T's Warner Media exercised their $101 million warrants, taking the total number of warrants exercised prior to their expiration to nearly all $114 million. We immediately put the proceeds from these latest warrant exercises to work, and together with cash generated by the business, we repaid EUR 110 million debt in early May.

This brings the total amount of debt already repaid so far this year to EUR 160 million, leaving about EUR 40 million of principal on our nearest maturity and resulting in about $910 million of net debt at the end of June.

Together with the improved operating performance, this resulted in a net leverage ratio of 4.4x at the end of the second quarter, down about a half a turn since March.

With this leverage, our average cost of borrowing is approximately 4%, which is thanks to the repricing transaction completed at the end of April, is about 190 basis points lower than what we were paying just a few months ago.

I'll now hand the call over to Christoph.

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO [4]

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Thank you, Michael. Good afternoon, and good morning to everyone. With the conclusion of the spring season during the second quarter, CME has confirmed its status as the audience share leader in all 4 territories.

While big sporting events on public TV channels, such as the FIFA World Cup, can have some impact on our program performance, there's less disruption in the commercial TV advertising market. And it is clear that the TV audiences in our region continue to demand more local high quality content.

CME has long been setting high standards for content development, and we're very proud of our success with new productions.

This year, we introduced new telenovelas in Slovakia and Bulgaria that became important additions to the evening lineup. They ran 5 nights a week, benefited the programs following them and also increased traffic across our digital properties. We have always invested in our core assets, and will continue to strengthen our programming lineup with new formats in addition to local favorites when the opportunity is right.

Turning to the TV ad market development, we expected the second quarter to match the results of last year. Most of the weakness was isolated to the month of April, when advertising markets across the region were down. Growth has generally returned since then, and we believe that most of the downturn in April can be attributed to the phasing of spending compared to last year.

Based on full year commitments, we anticipate higher levels of spending in the remainder of 2018.

In the first half of the year, we estimate TV ad markets in our countries increased by 4% overall at constant rates compared to the same period in 2017.

In the Czech Republic, estimated market growth of 2% was driven primarily by selling more GRPs as advertisers spent more during the first quarter, including more advertising around the Olympics while the market was broadly flat in the second quarter.

The market grew by 5% in Romania due to higher average prices as well as more GRPs sold related to a new prime-time format on a competing channel.

In Slovakia, 4% 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 9% due to selling more GRPs, which was partially offset by lower average market prices.

We expect television to remain a cornerstone of building awareness for existing brands and new product launches and we will continue to expand our offering with complementary products to improve the reach we provide for advertisers and diversify our revenues.

In fact, the teams in each of the countries have been busy in '18 with the redesign of our AVOD services in preparation for their relaunch this year.

You've already seen more diversified revenues so far in 2018 as carriage fees and subscription revenues increased by 4% in the first half of 2018, reflecting the continued trend of overall subscriber growth in the region as well as higher prices.

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

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David Sturgeon, Central European Media Enterprises Ltd. - Executive VP, CFO & Principal Accounting Officer [5]

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Thanks, Christoph. Our segment results begin on Slide 13 of our presentation.

In the Czech Republic, TV ad revenues were broadly flat at constant rates in the second quarter of 2018, reflecting a decrease in average prices that was mostly offset by selling more GRPs.

Carriage fees and subscription revenues increased by 22% due to an increase in the number of subscribers as well as new contracts with higher prices.

Costs increased due to higher content costs, which reflected higher quality local fiction productions this year compared to the schedule in 2017. This was partially offset by spending less on foreign-acquired programs.

In Romania, TV ad revenues decreased at constant rates from selling fewer GRPs, which was partially offset by higher prices.

Carriage fees and subscription revenues were also lower, primarily due to subscriber audits that benefited the prior year.

However, our OIBDA margin improved during the second quarter as costs also decreased. There were savings on content costs in both production costs for locally produced format this year when compared to the schedule in 2017 as well as savings on foreign-acquired programming.

The quarter also benefited from lower bad debt charges and the reversal of a legal accrual.

TV ad revenues in Slovakia increased by 1% during the quarter due to higher sponsorship revenues, which were partially offset by selling fewer GRPs related to the timing of Easter this year compared to last year.

In addition, there was some impact of phasing on the part of advertisers, who spent more in the second quarter of 2017 following our exit from DTT in the beginning of last year, while campaigns were started earlier in 2018.

Costs increased due to higher spending on content, as there were more costs associated with a new series launched this year. We also incurred significant legal and professional fees.

In Bulgaria, TV ad revenues increased by 8% due to higher average prices. This was partially offset by selling fewer GRPs as a result of the timing of some campaigns which started earlier this year when compared to the timing of bookings in 2017 and therefore, already reflected in the first 3 months of 2018.

Costs decreased due to bad debt charges and lower professional fees, which was partially offset by higher content costs as we launched a new telenovela on our main channel in the acess prime-time slot.

Now I'll hand the call back to Michael.

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [6]

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Thanks, Dave. Looking ahead to the remainder of 2018, we expect even better financial results and continued progress on our deleveraging plans.

The latter starts with the repayment of the 2019 euro loan and a significant portion of accrued guarantee and commitment fees once we complete the sale of our operations in Croatia at the end of this month.

In early July, we agreed to allow for the sale of our Croatian and Slovenian operations to close independently of each other. And last week, the buyer received final regulatory approval required to complete the Croatian transaction.

Proceeds from Nova TV in Croatia will be EUR 85 million plus a working capital adjustment still to be finalized, which we expect to result in total proceeds of about $100 million.

If we had been able to repay debt with these proceeds prior to the end of June, our net leverage ratio would have been about 4x.

So with improved operating performance, we would expect to be under 4x at the end of Q3. And with this debt repayment, together with the EUR 160 million of debt already repaid so far in 2018, we will have repaid about 1/4 of our total gross debt since the beginning of the year, a remarkable transformation of our financial position in such a short period of time.

The sale of POP TV in Slovenia for EUR 145 million plus any working capital adjustment remains subject to certain closing conditions, including approval by the Slovenian competition agency. We've agreed to extend the Long Stop Date to the middle of September in order to facilitate completing that transaction.

Once this occurs, we continue to expect that we will end the year with a net leverage ratio of about 3x.

In terms of our financial performance for the rest of the year, as I mentioned earlier, we expect OIBDA growth rates to pick up in H2, allowing us to reiterate the guidance we gave on our last earnings call.

We continue to expect that OIBDA growth for the full year will be in the midteens at constant rates, which, following the weakening of European currencies against the dollar over the last few months, translates into OIBDA of around $200 million for 2018 or about 20% growth at actual rates, assuming current FX levels hold through the end of the year.

This anticipated OIBDA growth should result in unlevered free cash flow growth of 20% to 25% at actual rates. This keeps us well on track for continued deleveraging.

After cutting CME's average borrowing cost by nearly 2/3 in 3 years, our lower gross debt balance will result in run rate debt service obligations that are almost 1/4 that of their recent peak.

When combined with the increased operating performance, this will significantly benefit free cash flow, providing additional financial resources to sustain investments in our core operations and allowing us to begin considering uses of cash other than solely using it to repay debt.

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

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [7]

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Thank you, Michael. That concludes our prepared remarks, and so we'll move to the Q&A portion of the call. So Michele, please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And I now hand the call back over to Mr. Kobal.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [2]

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Okay. Thank you. Our first call is coming from Piotr Raciborski from Wood & Company.

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Piotr Raciborski, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [3]

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Yes, my first question mostly relates to Romania. Could you please elaborate on the weakness in the market a little bit more because we have a considerable drop here? And my second question is, could you please elaborate on the competition in whole of your markets? Where do you see like the biggest pressure on prices? And who seems to be like the most aggressive player in your markets? And my first question, you mentioned that you might consider using your funds in other aims deleveraging at some point of time. Could you please give some more information on that? Whether and when could we expect some more comment on potential dividends from CME?

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [4]

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Right, thank you. So we'll start with the operations with Christoph.

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO [5]

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Thank you, Mark, and thank you, for the question. So the TV ad market in Romania, as you know, in the last 2 years, has grown significantly with double-digit growth in each of the last 2 years. This has calmed down as there were couple of factors why we saw a lower growth rate in the Q2 and hence, in H1. The first is, as we have said at the speeches at the beginning, there was a phasing between the quarters so -- but even if you take the quarters together, the market growth in Romania is lower than what we have seen last year. There's a second item to be mentioned here that was due to the good weather, there was a lower demand as there was less total TV. So there was less ratings, so lower volume, which had led to lower advertising. And we had on the third channel, [Kanal D]. In one of our commercial competitors, there was one new format which as well had taken some GRPs away from us. So that's to your Romania. When you've been, I would like to give you an outlook for the remainder of the year. We believe that the growth in the second half of the year in the market will be in line with H1, possibly a bit better, but it won't be worth in that what we've seen at the beginning of the year, resulting in a signal of profitability on that country. Generally on your question on competition on pricing, due to the fact that we are clearly audience leaders and this applies as well to Romania, which we just talked about, don't forget that our next competitor, we are more than 50% in audience higher than our next commercial competitor. So we follow our premium pricing strategy, and therefore, I believe that we can hold this position due to our strong performance. Of course, there is -- when there are more GRPs in the market, the pressures on pricing is always higher. But we have seen that as well in the past that we could maintain our pricing level and even could grow that.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [6]

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Okay. And capital allocation and dividends, Michael?

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [7]

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Yes. Capital allocation. We're just reviewing where we're at the moment, right. As we said if you pro forma our existing capital structure for the proceeds that we are about to receive in Croatia, that would put us, basically, in the cusp of about 4x leverage. We think that we'll be under 4x leverage by the end of Q3, and that obviously benefits us because it triggers a further reduction in our borrowing cost. And that once we get Slovenia done, that takes us into the ballpark of about 3x by the end of this year. So as we think about capital allocation and diverting funds to other things other than just paying back debt, I think that is not a 2018 consideration because as we said, at the end of the year, we'll still be about 3x levered. There are under our existing financing agreement restrictions on our ability to issue dividends unless we have total leverage below 2.75x trailing OIBDA. And so from that perspective, we don't anticipate to be there by the end of this year. I think that if you look at the increases in profitability that we're seeing, if you look at the increases in free cash flow generation that we've experienced and that we anticipate to see going forward, I think obviously we continue to expect that we will delever and that ratio will come down. That did -- does set us up for an opportunity at some time in the not-too-distant future to consider something like dividends. We don't have an exact timing for that. We also don't -- we haven't articulated, and won't today, a target leverage ratio that we're going to live within in the long term. But I think that as we get towards -- as the divestitures happen and as we get towards those sorts of leverage ratios that I've just spoken about, then we will say something about our expectations for what target we expect to hit going forward, and what the use of funds would be at that point.

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Piotr Raciborski, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [8]

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Okay. So yes, do you have like no incentive to go below 2.7x net debt to EBITDA? Can we say that, it's like your target -- long-term target ratio? Or would you still feel safer at that lower leverage?

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [9]

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Yes, I'm not -- I want to clarify, I didn't say we had no incentive to go under2.75. I think that the analysis of the appropriate target leverage ratio is something that we are still working on internally. And as I said, we haven't disclosed publicly yet, we will do that in the future. All I'm saying is that under the existing loans that we have, we can't pay dividends until we're -- until our gross leverage is 2.75x. So as to whether or not that is the right long-term target or not, I'm not sure. But dividends are not going to happen until we at least get to those levels.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [10]

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Okay. 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 anytime.

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Operator [11]

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