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Central European Media Enterprises (NASDAQ:CETV)
Q3 2019 Earnings Call
Oct 17, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello. My name is Kenzie. I will be your conference operator today. At this time, I would like to welcome everyone to the Central European Media Enterprises' third-quarter 2019 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator instructions] As a reminder, this conference call is being recorded today October 17th, 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, Kenzie. Good afternoon and good morning everyone and welcome to CME's third-quarter 2019 earnings conference call. The earnings press release we issued today 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 our 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 will hand over the call over to Michael and Christoph.

Michael Del Nin -- Co-Chief Executive Officer

Thanks Mark and thanks to everyone for joining us on the call and webcast. As we head into the final months of 2019, we have an outstanding set of results to report today, marking our 24th consecutive quarter of improved profitability. Q3 saw our businesses continue to generate top-line growth and increasing amounts of cash allowing us to repay additional debt and driving further deleveraging. In fact it was a quarter marked by several important highlights. Although typically a low season for advertising spending, the ad markets remained generally robust across the countries in which we operate. Our Czech and Slovak operations saw another quarter of significant growth continuing their impressive run while Romania continued its recovery with another quarter of improving top-line performance driven by stronger market conditions there. But not all growth was related to advertising.

We also saw another quarter of double-digit increases in carriage fees and subscription revenues led by a 24% improvement in Slovenia which contributed to a remarkable 10 percentage point expansion in that country's OIBDA margin. Altogether net revenue increased 7% at constant rates and even after considering the negative impact of FX headwinds caused by a stronger dollar, our topline still grew in the quarter at actual rates to $139 million. While lower year-to-date costs increased slightly in the third quarter. Nonetheless, we saw a significant improvement in OIBDA which increased 16% at actual rates and 23% at constant rates to $41 million. All the businesses have seen strong margin expansion on a year-to-date basis with four or five improving significantly in the third quarter. In fact the consolidated OIBDA margin was 30% in Q3 nearly 400 basis points higher than the same period last year. With this operating leverage and level of cash conversion, our unlevered free cash flow in the first nine months of 2019 was $171 million, an increase of 25% over the same period last year. The combination of these factors drove the company's net leverage ratio down to two and a half times at the end of September, one full turn lower than at the start of 2019. In fact, we were able to repay another 50 million euro of debt in the quarter taking total debt reductions since the start of the year to 150 million euro and leaving just 60 million euro outstanding on our nearest debt majority due in 2021.

This continues our remarkable run of deleveraging and highlights the cash-generative power of our businesses, which have helped us repay over $0.5 billion of debt in just the last two years. I'd now like to hand the call over to Christoph.

Christoph Mainusch -- Co-Chief Executive Officer

Thank you, Michael. Good afternoon and good morning to everyone. We saw a very successful start to fall season during the third quarter. This resulted in improved prime-time audience share in each of our country operations in the period and increased the gap between us and our competition in three segments. For our locally produced prime series in the Czech Republic Policie Modrava was a big driver of a better prime-time performance and of our main channel.

The second season of our locally adapted drama series in Romania increased share and its time slots this year. And we are also seeing great results from top entertainment formats in Slovakia, Bulgaria and Slovenia. This helped us to outperform the TV ad market in four countries in Q3, when our TV ad revenues increased by 6%. In Romania, we saw a growth of 3% in the quarter and spending has continued to normalize after the impact from the effect of taxes earlier this year. We anticipate additional spending from these advertisers and the fourth quarter will result in full-year growth in our TV ad revenues from this segment. In the first nine months of 2019, TV ad markets increased by 3% overall at constant rates, while our TV ad revenues increased by 4%.

An incredible start to the year, continued in the Czech Republic, where the market has grown 6% and our revenues increased 8% from stronger prices. In fact, we have seen strong increases in average prices in each of our country operations this year. This includes Bulgaria where we grew share while average market price declined. The growth of Slovakia included additional spending from government's information campaigns. The topline also improved from higher carriage fees and subscription revenues, which increased 11% at constant rates in the quarter and year-to-date period this year. Led by Slovenia, we have seen double-digit growth rates in three countries mainly from stronger prices, as well as overall growth in subscribers. And now, I'll turn things over to Dave for the segment results.

Dave Sturgeon -- Executive Vice President and Chief Financial Officer

Thanks, Christoph. Segment results begin on Slide 12 of our presentation. In the Czech Republic, the OIBDA margin expanded by 380-basis-points at constant rates in the third quarter, due to the growth in net revenue as already discussed. Costs increased by 3% at constant rates, as higher licensing costs and staff costs, including additional personnel to support our digital initiatives were only partially offset by broadcasting our cost-effective foreign programming compared to the schedule in 2018. The margin in Romania improved by 470 basis points.

In addition to higher net revenues, costs declined by more than 4% at constant rates, due primarily to a decrease in content costs as we utilized fewer hours and more cost-effective foreign content. In Slovakia, the margin expanded by 780 basis points from significant top-line growth. Costs were flat at constant rates, as slightly higher investments in both foreign fiction and local production was offset by savings in professional fees and lower transmission costs. In Bulgaria, the increase in net revenues was more than offset by higher content cost. The start of the fall season included more entertainment formats compared to the schedule in 2018. And such costs, together with higher charges related to foreign fiction, exceeded the savings from not continuing to broadcast last year's very successful locally produced telenovela.

Our business in Slovenia saw a remarkable improvement in profitability. In addition to the growth in carriage fees, costs declined by 3%, primarily from lower content cost due to more cost-effective foreign programming being broadcast in the summer compared to the schedule of last year. And with that, I'll hand the call back to Michael.

Michael Del Nin -- Co-Chief Executive Officer

Thanks, Dave. These outstanding results improved our outlook as we head into the final months of 2019. Even with difficult year-on-year comps in this period, after growth of 23% in Q4 2018, we now expect to deliver OIBDA growth at constant rates in the 15% to 17% range for full year 2019. Together with a significant improvement in cash generation already realized so far, we continue to believe unlevered free cash flow will increase 14% to 16% at actual rates. This means that, assuming today's rates endure through the end of 2019, those guidance levels would equate to around $245 million of OIBDA and around $180 million of unlevered free cash flow. And after considering cash interest payments, free cash flow for the year should be around $155 million.

CME has an unrivaled competitive position in our markets and our conviction in the value of these businesses is as strong as ever. As we continue to successfully execute on our business plan, we remain optimistic in the ability of television as a medium to invest in the best content and reach audiences in this part of the world. Our previously announced strategic review is still under way. We remain focused on the best opportunity to deliver value to our shareholders and we do not have any further comments to make on that today. I'll now turn things back over to Mark so that we can take your questions.

Mark Kobal -- Head of Investor Relations

Thank you, Michael. We will now move to the Q&A portion of the call. So Kenzie 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

OK. Thank you. Our first question today is coming from Pavel Ryska at J&T Banka. Please go ahead Pavel.

Pavel Ryska -- J&T Blanka -- Analyst

Good afternoon everybody. I have three questions for you today. The first one again touches, Bulgaria. I pretty much understand why there was this sharp growth in EBITDA in the third quarter.

So these investments in programming are they going to continue in this volume in the fourth quarter? Or was it rather a one-off -- a preparation for the season and profitability in Bulgaria should recover in the fourth quarter? My second question touches Romania. Could you comment a little bit more on the situation there whether in your view the markets and your clients have completely recovered from the sector taxes that were imposed at the beginning of the year? Or whether you still see some subdued expenditures on their side which could continue for the rest of the year? And the final question is concerned with the dividends. So the drop in net leverage is pretty fast since the beginning of the year, a whole point down. And I know you said before that if gross debt to EBITDA is below 2.75 then the company theoretically may pay out dividends.

So do you think that the company will be in such a position at the end of the year, so that the first dividend could be paid out of the profit of this year? So that's it. Thank you.

Mark Kobal -- Head of Investor Relations

OK. Thank you. We will start with Christoph on the Bulgaria and Romania questions.

Christoph Mainusch -- Co-Chief Executive Officer

Hi, Pavel. Thanks for the questions. On Bulgaria as said, revenue growth in Bulgaria was more than offset by higher content costs in Q3. And your assumption is actually right.

The fall season included more entertainment format compared to the schedule in 2018, so we do now here Got Talent which we haven't done in last year which together with some higher charges related to foreign fiction exceeded the savings from not continuing to broadcast last year's successfully locally produced telenovela. Also keep in mind that Q3 is traditionally a smaller period of costs, so it's kind of very sensitive even with small numbers deviation. So these higher costs we consider when you look into nine months that actually total cost are below last year. So when you look then forward into Q4 we expect due to the entertainment program, we just have a slightly higher cost, but overall total cost will be more or less in line for Bulgaria on the full year. So that is more a phasing issue from this entertainment show than a specific issue that something would have changed.

On Romania, first of all we are pleased that our TV ad revenues grew by 3% in Q3. And you saw that already in Q2 that we have rebound our advertising and that spending started to normalize in Q3 as well year-on-year from clients in these sectors. So on a year-to-date basis, we are still below the level of 2018, but we expect that additional spending on advertising in the fourth quarter from those advertisers who were affected by sector taxes will overall result in full year growth of the television advertising revenues in Romania.

Mark Kobal -- Head of Investor Relations

And the third question Michael?

Michael Del Nin -- Co-Chief Executive Officer

Hello, Pavel. Look we've made significant progress as you pointed out on reducing our net leverage ratio, which stands at 2.5 times at the end of Q3. It's less than half of what it was two years ago and down a full turn since the beginning of the year. That's net leverage.

If you look at gross leverage, it's about – I think finished the quarter at about 2.6 times as we made another debt payment in September and had minimal cash on hand to finish the quarter. As you're aware, the trigger for the ability to issue dividends is 2.75 times gross leverage. But also keep in mind that, the threshold included in the covenant must also be satisfied subsequent to any distribution so it has to be pro forma for any distribution under 2.75 times. Look, clearly a few things. The business is converting cash at a very high rate and as a result we're deleveraging very quickly. But cognizant of the fact that we need to articulate a plan for the utilization of that cash going forward one way or the other.

It is rolled up in – in the strategic review that remains under way. And so until we have a formalized – a formalization of that capital allocation strategy it's just a little premature to discuss at this stage, whether that hits this year or not.

Pavel Ryska -- J&T Blanka -- Analyst

OK. Thank you.

Mark Kobal -- Head of Investor Relations

Thank you. Before we take the next question, Kenzie could you just remind people how to put themselves in the queue please?

Operator

[Operator instructions]

Mark Kobal -- Head of Investor Relations

Great. Thank you. The next question is coming from Matthew Harrigan from Benchmark. Please go ahead.

Matt Harrigan -- Benchmark Company -- Analyst

Two questions. One, are you seeing any opportunities or issues that might arise from Verizon acquiring the cable operations in – from Liberty Global in three of your markets? I mean, it might more to do on the mobile side. And then of course, when you're negotiating contracts you're dealing with a different partner there. And then secondly, when – actually secondly and thirdly any updates on your OTT strategy? I mean, I realized the market configuration is very different than the U.K.

or U.S. there. But it's probably – it might be more of an opportunity than a threat for you. And then lastly, any thoughts on possible value of your spectrum or if not value of the spectrum perspective alternative and additional uses for it? Thank you.

Mark Kobal -- Head of Investor Relations

OK. I will start with Michael.

Michael Del Nin -- Co-Chief Executive Officer

Matt, good to hear from you. On the first question on the M&A in the region and the impact on that I mean, I don't think we anticipate any material changes in the situation in the foreseeable future. Obviously, you're right. The discussions going forward with a different set of folks in some of the markets.

But as you know, these – the carriage agreements that we have in each of our markets are typically locked in for a number of years. And so from our perspective, we think that it's business as usual with no particular ramifications in the near term.

Christoph Mainusch -- Co-Chief Executive Officer

On the OTT strategy, Matthew, as you know, we are running for the last decade our Voyo SVOD service which has around approximately 100,000 subscribers in our markets. We have as you know as well introduced AVOD in four of our five countries very successfully, so that is actually accepted by the audience. When it comes to international players like Netflix, Amazons or others to come like Disney+, of course our markets are significantly different and not so much to be compared like in the U.S. So first of all, what you see in the U.S.

you have an high level of cost cutting simply due to the fact that first these kind of services are local and providing very high-quality local programs for a much better price than what the average cable subscription costs in that market. So that is significantly different in our market because these services are not local. There are localization with subtitling and possibly a couple of movies you saw that it's done in the Czech Republic that actually localizes its content to a higher extent. But still this kind of SVOD international services are more or less a niche product, but we are very much prepared for it and we have worked a lot on our further development of the -- also of our platform and there is more to come in both AVOD and SVOD in our markets. So I believe we are very much prepared and well-prepared also to compete or also to cooperate in the future as we have actually the top-quality local content, which you need to have to make those -- that platforms and offers successful.

Michael Del Nin -- Co-Chief Executive Officer

And just lastly and quickly, Matt. With regards to spectrum, which I think was your question Matt. Unlike in certain instances in the U.S. and some of the markets where broadcast is actually on the spectrum that's not the case for us in our markets.

The spectrum that we utilize is leased so to the extent that there are any additional use of that spectrum that would be exploited by the owners of the spectrum but not by us.

Matt Harrigan -- Benchmark Company -- Analyst

And then actually additionally I know I always ask this, but it's still fundamental to your story longer term. Are you seeing any variances in the category activity in advertising? Because I mean clearly as you've spoken before you've got a lot of financial services, technology et cetera very underdeveloped relative to the more mature European markets and certainly the U.S. and hopefully that gives you a very long runway?

Christoph Mainusch -- Co-Chief Executive Officer

Just to give you a little bit update on the spending. Just to give you a short update on the trends and spending by sectors. It's more or less similar to that what you've seen in Q2. So retail continues to do well in the most of our countries and they're encouraged by us spending our premium products in certain countries such as Thailand. When you look into country-by-country just to give you some highlights on that in Bulgaria we see retail growing at a slower pace has outperformed market in FMCG and Thailand and we see some decreases in food and telcos in Czech.

Clothing and cosmetics is going up, pharmaceutical is slightly going down. In Romania, we saw a huge increase in automotive and retailers and some decrease in food and beverage and in Slovakia and Slovenia. So its public sector automotive going up in Slovenia retailers and food and beverage and Slovenia now significant decrease worth mentioning here.

Matt Harrigan -- Benchmark Company -- Analyst

Thank you, Michael. Thank you, Christoph.

Michael Del Nin -- Co-Chief Executive Officer

Thanks, Matt.

Mark Kobal -- Head of Investor Relations

OK. Thank you everyone for joining us today. As a reminder you can get updates and follow our progress between earnings call 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: 24 minutes

Call participants:

Mark Kobal -- Head of Investor Relations

Michael Del Nin -- Co-Chief Executive Officer

Christoph Mainusch -- Co-Chief Executive Officer

Dave Sturgeon -- Executive Vice President and Chief Financial Officer

Pavel Ryska -- J&T Blanka -- Analyst

Matt Harrigan -- Benchmark Company -- Analyst

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