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Edited Transcript of CETV earnings conference call or presentation 26-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Central European Media Enterprises Ltd Earnings Call

PEMBROKE Apr 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Central European Media Enterprises Ltd earnings conference call or presentation Wednesday, April 26, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Del Nin

Central European Media Enterprises Ltd. - Co-CEO

* Christoph Mainusch

Central European Media Enterprises Ltd. - Co-CEO, CEO of the Nova Group and Executive Director of the Nova Group

* David Sturgeon

Central European Media Enterprises Ltd. - CFO and EVP

* Mark Kobal

Central European Media Enterprises Ltd. - Head of IR

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Conference Call Participants

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* Matthew J. Harrigan

Wunderlich Securities Inc., Research Division - SVP and Senior Analyst

* Pavel Ryska

J & T Banka, A.S., Research Division - Analyst

* Richard Miratsky

Komercni Banka AS, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, my name is Allison, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Central European Media Enterprises First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, April 26, 2017.

It's now my pleasure to turn the floor over to Mr. 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, Allison. Good afternoon and good morning, everyone, and welcome to CME's First Quarter 2017 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 filed earlier today.

Forward-looking statements speak only as of the date, and we undertake no obligations 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 18 to our financial statements in the Form 10-Q.

And with that, I will 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 all of you for joining us on the call today. We're thrilled with the way the year has started. These great financial results, combined with the recent transaction to lower the cost of all of our outstanding debt, have made the first quarter one of significant progress and achievement causing us to be very optimistic about the rest of 2017. We're confident that we're on track for yet another year of strong earnings growth and significant deleveraging.

There's a lot to point to in Q1 that gives us reason to be optimistic about this year. We saw healthy growth in TV advertising in the majority of our footprint. This includes a truly remarkable achievement in Romania where 35% growth in our TV ad revenues at constant rates during the quarter drove significant margin expansion. This means that on a trailing 12-month basis, our TV ad revenues in Romania have grown 22%. While this rate of growth won't continue during the rest of the year, especially given difficult comps in Q2 and Q3 of 2016, it has established a much higher level of profitability for this business going forward.

Steady growth in TV ad revenues continued in the Czech Republic and Slovenia, and we were pleased to see a return to growth in Bulgaria. Our carriage fees and subscription revenues increased significantly, thanks to a surge in revenues from Slovakia and Slovenia now that our channels there have been distributed exclusively on cable, satellite and IPTV platforms since January.

Although we increased spending on programming to successfully attract larger audience shares in almost all countries, our disciplined approach to the cost structure, together with the impressive growth in revenues, resulted in a Q1 OIBDA margin that expanded over 300 basis points compared to last year and is nearly double that of 2 years ago.

Lastly, our net leverage ratio decreased to 6.3x, down more than half a turn from 6.9x in just the last 3 months.

Turning to the full results. Net revenues increased 8% at constant exchange rates during the first quarter to $135 million. OIBDA for the quarter was $22 million, an increase of 35% over last year. The resulting margin of 16% this quarter, up from 13% in 2016, means margins have been expanding continuously for more than 3 years now and was the highest Q1 margin in the last 8 years. The business generated unlevered free cash flow of $52 million in the first 3 months of 2017, an increase of 13% compared to last year, resulting primarily from an increase in cash collections following the improvement in net revenues we saw at the tail end of 2016.

Last month, we announced the repricing of the guarantee fees on all of our currently outstanding debt, introducing grid pricing across the entire debt structure from the beginning of March. This is the fifth refinancing we've done over the last 3 years and the second major repricing of our debt in the last 12 months. It speaks to how focused we are on taking advantage of our improved financial performance to reduce our borrowing costs, which have declined by an average of 450 basis points since the start of last year.

I'll now hand the call over to Christoph.

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO, CEO of the Nova Group and Executive Director of the Nova Group [4]

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Thanks, Michael. Good afternoon and good morning to everyone. Our popular local content helped to improve the competitive positioning of our channel portfolios with increasing audience performance during the quarter in all countries except for Slovakia, which was negatively impacted by the DTT transition and had some programming challenges, but even with that, we have maintained our all-day leadership through the quarter. The DTT transition in both Slovakia and Slovenia contributed to carriage fees and subscription revenues increasing 15% at constant rates during the quarter. During the remainder of 2017, we expect to maintain double-digit growth in consolidated carriage fees and subscription revenues. In fact, as more households transition to cable, satellite and IPTV platforms and additional contracts become effective, we think the quarterly revenue in Slovakia and Slovenia for the remainder of the year will be even larger than it was in Q1. This, together with remarkable cost savings, is expected to drive significant margin expansion in these countries this year.

A strong start to the spring season benefited our prime-time and all-day audience shares, increasing our lead over the competition in 5 countries as our teams remained focused on improving our existing titles and developing new and more attractive formats to provide more variety in our program offering.

The improvement in the Czech Republic was driven by stronger performance of original content on the main channel as well as higher audience shares from our portfolio of niche channels, which were rebranded at the beginning of February to align them under the Nova brand umbrella. In Romania, an outstanding performance from both local fiction and entertainment programming including Got Talent and our comedy series, Las Fierbinti, led to record results for the month of March. Strong brands in Slovakia such Your Face Sounds Familiar and The Farm launched toward the end of the quarter helped restore our prime-time leadership after an initial decline.

In Bulgaria, a strong mix of blockbuster formats such as The Voice and MasterChef, combined with improvements of some of the niche channels, resulted in stronger performance of the whole portfolio.

We strengthened the schedule in Slovenia, which maintained our ratings during a smooth transition of our channels to cable, satellite and IPTV platforms.

And in Croatia, that has benefited from the success of international brands on the main channel as well as from improved programming on the niche channel.

Turning to TV ad markets. We estimate that spending in our countries increased by 9% on average during quarter. In the Czech Republic, our TV ad revenue grew 4% while the market grew 6% as more advertising was sold and average prices increased slightly.

The market in Romania grew 32%, and our TV ad revenue outperformed with 35% due to a continuation of strong demand for advertising that started in the second quarter of 2016.

In Slovakia, the market declined following the end of spending on our informational and political campaigns that took place from the second half of 2015 through the first half of 2016. If this spending in the first quarter of '16 is excluded, we estimate the market grew 7% reflecting continued strong demand by the private sector.

In Bulgaria, we estimate that all commercial broadcasters increased their average prices, leading to a market growth of 6%.

In Slovenia, the market grew 7% as higher spending reflected the anticipation of faster growth in private consumption during the year resulting in higher average prices.

The market decline in Croatia related to lower spending from the largest private company and advertiser in the country as it addresses significant issues with its liquidity and associated potential restructuring as well as market consolidation in the retail segment.

I'll now turn things over to Dave to walk us through the segment results.

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David Sturgeon, Central European Media Enterprises Ltd. - CFO and EVP [5]

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Thanks, Christoph. Our segment results begin on Slide 11 of our presentation. TV ad revenues in the Czech Republic increased by 4% at constant rates in the first 3 months of 2017 as we sold more GRPs at slightly higher average prices. Carriage fees and subscription revenues increased by 8% due to an agreement for high-definition versions of our channels that became effective subsequent to Q1 2016. Costs increased primarily due to a 3% increase in content costs as the mix of programming shifted to reality and entertainment formats. This was partially offset by decrease in costs for foreign content and local fiction.

In Romania, TV ad revenues increased by 35% due to the increased demand we have seen for the last several quarters and reflected in part a flat market in the first quarter of 2016. Carriage fees and subscription revenues grew due to an increase in number of subscribers. Costs increased primarily due to a 12% increase in content costs as we invested more in local productions of a popular entertainment formats.

TV ad revenues in Slovakia decreased by 7% following the end of spending on informational and political campaigns. If this spending in the first quarter of 2016 is excluded, our TV ad revenues actually increased by 1%. This was slower than the market due to the DTT exit, but this change in the way our channels are distributed delivered a significant increase in carriage fee and subscription revenues and a cost reduction from significantly lower transmission costs. However, these cost savings were more than offset by an increase in content costs as we made targeted adjustments in the programming lineup during the transition period. There were also additional expenses from related marketing activities.

In Bulgaria, TV ad revenues increased by 1% at constant rates due to higher prices in our sales policy for the year, which more than offset a reduction in the volume of inventory sold. Carriage fees and subscription revenues increased due to higher reported subscribers. Costs were lower as content costs declined by 2% primarily due to savings in foreign fiction. We aired more cost-effective titles during Q1 2017 because our lineup of local content increased ratings during the period and improved both all-day and prime-time audience share.

Our TV ad revenues in Slovenia increased by 4%, reflecting price inflation from strong demand, which more than offset a decline in the volume of GRPs sold. Carriage fees and subscription revenues increased significantly due to new agreements with cable, satellite and IPTV operators following the DTT exit in that country. Costs increased primarily due to an increase in content costs from more popular foreign titles aired during the transition period, which was partially offset by savings from entertainment programming.

And in Croatia, TV ad revenues decreased, due to lower average prices and fewer GRPs sold. Costs decreased due to savings in foreign programming as well as a later start of certain local programming in the spring season compared to 2016.

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, David. So as you've heard today, we are very pleased with the performance of our business and remain encouraged by its future prospects. The economies of the countries in which we operate continue to improve, maintaining growth rates that exceed more developed markets in Western Europe. Indeed, Romania, our second largest market, continues to be a standout in the EU. We think this bodes well for growth in our TV ad markets and we anticipate overall improvement across the region.

Growth may not be realized in every market as financial difficulties with the largest advertiser in Croatia may result in less spending there.

In Romania, our main channel broadcast matches of the extremely popular European Football Championship in the months of June and July last year. And to give you a sense of its impact, the tournament contributed around 10% of Romania's TV ad revenues in Q2 and Q3 of 2016, making it more difficult to grow in those periods this year. But despite this, thanks to the robust market we have been seeing since then, we still expect to increase our revenues in Romania this year contributing to overall market growth for the full year.

The effect of FX fluctuations may be more of a factor than it was last year as a result of both the volatility of the euro over the last few months and the decision by the Czech National Bank to end its intervention in currency markets during April, which led to a modest strengthening of the Czech crown. While these conflicting factors make it more difficult to forecast earnings at actual rates, it should be noted that the euro is currently trading around 2% below the average of full year 2016, and each percentage point of difference in the average rate of the euro versus the dollar is worth less than $2 million of OIBDA over the full year.

Factoring in what we know today, we expect consolidated OIBDA growth at constant rates to be around mid-teens this year ranging from 13% to 17% off a base of $150 million in 2016. This reflects yet another year of strong earnings growth for the company. And this improvement in OIBDA will also benefit unlevered free cash flow generation, which we expect will reach between $105 million and $110 million at actual rates in 2017. That assumes CapEx spending this year will be similar to last year while cash paid for income taxes will increase to around $10 million, reflecting higher levels of profitability from our operations.

In terms of free cash flow, we are now required to pay a portion of the guarantee fees related to all of the senior term credit facilities in cash. However, we anticipate the total amount of cash paid for interest and guarantee fees will decrease significantly in 2017 to about $58 million. This leaves around $50 million of free cash flow and provides excess cash to begin making repayments of the principal outstanding on the 2018-euro term loan in November.

Furthermore, we believe there is a path to our net leverage ratio falling below 6x during the course of 2017, leading to an additional 125 basis point reduction in our borrowing costs to 6%, a rate that is almost half what it was in Q1 of last year. This will ensure that so much more of the increasing amount of cash generated by the business accrues to the benefit of our shareholders.

With that, I'll turn things back over to Christoph for a few closing words.

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO, CEO of the Nova Group and Executive Director of the Nova Group [7]

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Thank you, Michael. We are pleased to report a great set of results to you today, and we look forward to sharing the highlights of the second quarter and spring season with you in the summer. I'll now turn things back over to Mark so we can take your questions.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [8]

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Thank you, Christoph. That concludes our prepared remarks and we will now move to the Q&A portion of the call. So Allison, please open the lines for questions.

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Operator [9]

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(Operator Instructions) I will now hand you back to Mr. Kobal.

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

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Thank you. Our first caller today is coming from Pavel Ryska at J & T Bank. Pavel?

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Pavel Ryska, J & T Banka, A.S., Research Division - Analyst [11]

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My first question is pretty straightforward and that's Romania. I have some more detailed questions basically, but I would just like to ask how we should more closely understand what's going on in Romania because the rate of growth is really very fast and I'm not sure at the moment if one should consider this to be, let's say, a new normal for Romania, let's say, this year and next year and now of course excluding the special factors such as the championship last year, et cetera. But I mean like the underlying growth in the advertising market or if there are some one-off factors such as special campaigns by some big advertisers and the like. So that's my first question. And my second question is -- concerns of Slovakia where we see a drop in the OIBDA margin. And my question is, if I get it right, this should be reversed in the rest of the year, because you stated that the changes should lead to higher margins in Slovakia and Slovenia. So that will be the second question.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [12]

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We'll start with Michael on the first one.

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [13]

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Pavel, thank you very much. Look, Romania, I think that we've -- obviously, we're thrilled with the way that, that business has developed especially over the last 4 quarters. As we noted, we've got, at constant rates, more than 20% television advertising growth there on a trailing 12-month basis. Margins have expanded very significantly during that period of time and that's been the result, I think, of an outstanding effort on the part of management in that country, but also benefiting obviously from an improved macro environment, which we saw growth pick up in GDP, which was followed by a pickup in demand by consumers, which I think has flowed into the advertising market. In calling out the difficult comps that we have obviously in Q2 and Q3, I think that we did want to signal that 35% growth is not a new normal that people should expect going forward. And as we point out, 10% of the revenues that we generated in that country in the middle 2 quarters of last year were in time periods where we aired the extremely successful European Football Championship on the main network. So factoring that in, obviously it makes it more difficult to achieve growth at all in Q2 and Q3, but we are in a situation where the markets are obviously very robust. And not only is the market strong, but we have been out delevering the market, a testament to the great job that the sales team are doing in Romania at the moment. So factoring in the bump that we saw in Q2 and Q3 of last year, I think you should also realize that Q1 is a relatively small quarter compared to obviously what we would expect in Q2 and Q4 in terms of overall television advertising spend. That may skew a little bit the growth rate that we see out of small quarters, so you don't want to extrapolate too much as well on that front. So look, bottom lining it, we're very happy with the progress of the business. We think that it is a very robust market. We're coming into a couple of quarters now where we're lapping strong growth and some one-off events that definitely benefited the top line even more than it did on EBITDA on those quarters. So we do think that we can grow overall revenues for the year despite that I don't want to send a signal that a new normal is that level of growth.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [14]

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And on the margins in Slovakia, Christoph?

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO, CEO of the Nova Group and Executive Director of the Nova Group [15]

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On your second question, Pavel, hello, as you know we have started in January to distribute our channels in Slovakia exclusively on cable, IPTV and satellite. And due to this transition period, we have invested more in program and the delivery of GRPs went down, the cost of the transition on program was higher. So if you look into the remainder of 2017, we anticipate even additional growth in carriage fees and subscription revenues of this market and at the same time you saw already the backdrop of the audience performance, so we expect that the margin improvement in Slovakia will be there in the remainder of the year so -- and we believe that the margins will be at least on the level of the last year.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [16]

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Thanks, Pavel. Next question is coming from Matthew Harrigan at Wunderlich Securities. Matthew?

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Matthew J. Harrigan, Wunderlich Securities Inc., Research Division - SVP and Senior Analyst [17]

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I was curious if you could provide a little bit more granularity on the inputs in the Czech market, which I don't think you spoke about as much, and I know you've got some anomalies in Romania and Croatia and all that, but since it's your largest market. And then, secondly, particular long-term macro driver, I'd be very interested in the category, advertising, performance, breaking that out, whether you have any commentary there? And then, lastly, out at NAB, guys like Greenblatt -- Bob Greenblatt from NBC were really talking a lot about social media integration and fostering a lot of interest in shows particularly reality shows, competition shows and certainly you don't have the competitive stresses that the U.S. networks have. But nonetheless, a lot of your shows lend themselves very well toward social media integration and even synchronicity. I'm curious if you could comment on that because it seems like something you could do holistically to could get even more traction for your viewers. Apologies for being a little verbose.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [18]

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Thanks, Matt.

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [19]

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So I guess starting with your question with Czech and Christoph and I will tag team this a little bit. But I think, generally speaking, the market in the Czech Republic we saw another solid quarter. We have seen, I think, very pleasing results both in terms of audience generation during the quarter. We saw our audience share improve. The gap between ourselves and the competition widened in Q1. And I think we're very pleased with the rollout of the spring schedule, which included the successful return of a number long-running shows, but also some very successful new launches, which have helped to refresh the schedules. So I think in the terms of the foundations of the market, in terms of the business, that whole seems extremely positive. And Christoph should point to some specifics in terms of that.

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO, CEO of the Nova Group and Executive Director of the Nova Group [20]

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In the Czech Republic, you had 2 drivers this year, which brought the significant increase not only in our absolute numbers, but also increased the gap between us and our commercial competitor. First, it is in the continuation of the strategy of improving our local content and to have a higher quality in the production and to have more local content in prime time, which has led to the increase of 2.4 percentage points. And secondly, we have recently rebranded, as I said previously, our niche channels and put them all under the brand of Nova and that brought and contributed to that 2 percentage points increase of the small channels. The advertising market, just to finish on the Czech Republic, went up by 6% and we could defend in that perspective our premium pricing policy so that we could grow by 4% and therefore we believe as well in the Czech Republic that we have a solid outlook.

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [21]

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And then, I guess, on the question regarding the adaptability of our programming in a social media environment, it's something that we definitely spend a lot of energy and management time in the local countries not just in the Czech Republic, but across all 6 markets. You're absolutely right, there are certain programs that we have in the schedule, especially of the reality and entertainment type, that lend themselves very well to both promotion and increased engagement in social media. And in fact, we have a number of projects related to several of our hit shows in those markets. So it's absolutely something that we're focused on. I think at the moment, it's not something that we think we would flag as necessarily leading to any significant increase in revenues. But on overall engagement, on ensuring the people interact more intensively with those brands, we do spend a lot of time on that.

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Matthew J. Harrigan, Wunderlich Securities Inc., Research Division - SVP and Senior Analyst [22]

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And then (inaudible)

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [23]

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You're breaking up a bit, Matt. Can you start that last bit again?

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Matthew J. Harrigan, Wunderlich Securities Inc., Research Division - SVP and Senior Analyst [24]

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I'm sorry, Mark. And then, lastly, on the advertising categories, are you seeing any category you're doing particularly well other than traditional mainstays on the consumer products, I mean, that you see as an inflection point. When you look at a market like Romania, it's basically almost exponential growth at least for a little while. What categories really stand out in driving that type of growth phenomenally?

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Christoph Mainusch, Central European Media Enterprises Ltd. - Co-CEO, CEO of the Nova Group and Executive Director of the Nova Group [25]

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So we continue to see an overall increase in spending from retail as well as FMCG and automotive clients in certain territories. It is tied to the head of the economic growth and expectations for higher levels of private consumption. And with having said that, there was some consolidation in the retail sector in Croatia, which reduced budget there. And the lower level of spending in Slovakia was also influenced by lower spending on information campaigns that took place in the first half year in 2016.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [26]

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Our next question is coming from Richard Miratsky at KB. Richard?

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Richard Miratsky, Komercni Banka AS, Research Division - Research Analyst [27]

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I have one question. Considering that you're planning to start decreasing your leverage, which is something that probably most of us was -- were looking for, do you have any level of leverage that you would feel comfortable to start considering paying out dividends?

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [28]

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We never said publicly that what our target level would be. Clearly, the focus over the last few years has been, and we've seen as we mentioned earlier in the call, we've done 5 refinancings in the last 3 years, 2 major ones just in the last 12 months. And that's had a really significant impact on our average borrowing costs, bringing it down by 450 basis points since the start of last year. We see a further path to deleveraging this year to get below 6x, which has, as we pointed out, another 125-basis point impact on the cost of the entire balance sheet as a result of the refinancing that we did. So to get to the point we would be at a dividend stage, I still think that we have awhile to go, but what we want to underline is the enormous focus that, that gets in terms of management time. We have really worked to take advantage of the improved financial performance. We've done that both by being very active on the refinancing side, but also when we do refinance, we build in as much flexibility as we possibly can, that includes flexibility to refinance in the future. But also as we've seen from the grid pricing that we've managed to negotiate and announce about a month or so ago, we get an immediate benefit from further deleveraging. And so that excess cash that we will generate during the course of this year, we have earmarked for deleveraging we do expect that we will be able to start chipping away at the 2018 maturity in the fourth quarter this year. And so I think that we're very pleased with the progress that we've made with more than 0.5x in just 3 months. But there is still more to do. And so without putting a number out there, I think that let's just see how things progress in the coming quarters and maybe we can talk about that at some point in the future.

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Richard Miratsky, Komercni Banka AS, Research Division - Research Analyst [29]

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So even if you get into the low-end bucket of your refinancing matrix, you would still focus on deleveraging?

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Michael Del Nin, Central European Media Enterprises Ltd. - Co-CEO [30]

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Yes, so the lowest bucket would be at 5x. Below 5x I would still think that at that point we're focused on deleveraging, that's correct.

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Mark Kobal, Central European Media Enterprises Ltd. - Head of IR [31]

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Thanks, Richard. Thank you for the questions today. Thanks, everyone, for joining us. As a quick reminder, you can keep up to date and follow our progress between earnings calls on our website, cme.net, because we routinely post important information there about the company's operations. We are also available for your feedback and additional questions anytime. Have a great day.

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Operator [32]

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Thank you. This concludes the Central European Media Enterprises First Quarter 2017's Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.