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CETV > SEC Filings for CETV > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for CENTRAL EUROPEAN MEDIA ENTERPRISES LTD

Form 10-Q for CENTRAL EUROPEAN MEDIA ENTERPRISES LTD


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As used herein, the term "2016 Fixed Rate Notes" refers to our 11.625% senior notes due 2016; the term "2017 Fixed Rate Notes" refers to the 9.0% senior secured notes due 2017 issued by our wholly owned subsidiary, CET 21 spol. s
r.o. ("CET 21"); the term "Senior Notes" refers collectively to the 2016 Fixed Rate Notes and 2017 Fixed Rate Notes; the terms "2015 Convertible Notes" and "Convertible Notes" refer to our 5.0% senior convertible notes due 2015. The term "Time Warner" refers to Time Warner Inc. The term "TW Investor" refers to Time Warner Media Holdings B.V. The term "Rights Offering" refers to the distribution of non-transferable rights to the holders of our outstanding (a) shares of Class A common stock, (b) the Series A Preferred Share (allocated on an as-converted basis) and (c) the Series B Preferred Shares (allocated on an as-converted basis as of December 25, 2013). The term "Framework Agreement" refers to the framework agreement dated February 28, 2014 among TW Investor, Time Warner and the Company. The term "Purchase Agreement" refers to the standby purchase agreement dated March 24, 2014 between TW Investor and the Company. The term "TW Unit Private Placement" refers to the issuance by the Company and purchase by TW Investor of 581,533 Units in a private placement contemporaneously with the closing of the Rights Offering. The term "Backstop Private Placement" refers to the purchase by TW Investor in a private placement contemporaneously with the Rights Offering of units not purchased in the Rights Offering. The term "2017 PIK Notes" refers to the 15.0% senior secured notes due 2017 issued upon the closing of the Rights Offering. The term "2017 Term Loan" refers to a term loan by Time Warner pursuant to a US$ 30.0 million aggregate principal amount term loan credit agreement between TW Investor, Time Warner and the Company, dated as of February 28, 2014 (the "2017 Term Loan Agreement"). The term "2017 Revolving Credit Facility" refers to a senior secured revolving credit facility in the aggregate principal amount of US$115.0 million pursuant to a revolving loan facility agreement dated May 2, 2014 with Time Warner (the "2017 Revolving Loan Agreement"). The exchange rates used in this report are as at March 31, 2014, unless otherwise indicated. Contents
I. Forward-looking Statements

II. Overview

III. Analysis of the Results of Operations and Financial Position

IV. Liquidity and Capital Resources

V. Critical Accounting Policies and Estimates

I. Forward-looking Statements This report contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms "believe", "anticipate", "trend", "expect", "plan", "estimate", "forecast", "should","intend" and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report. Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors" as well as the following: our significant liquidity constraints following the closing of the Rights Offering and related financing transactions; the success of our efforts to increase our revenues and recapture advertising market share in the Czech Republic; decreases in television advertising spending and the rate of development of the advertising markets in the countries in which we operate; the effect of the economic downturn and Eurozone instability in our markets and the extent and timing of any recovery; our success in implementing our initiatives to diversify and enhance our revenue streams; the extent to which our debt service obligations restrict our business; our ability to make cost-effective investments in television broadcast operations, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; changes in the political and regulatory environments where we operate and application of relevant laws and regulations; and the timely renewal of broadcasting licenses and our ability to obtain additional frequencies and licenses. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes included elsewhere in this report.


Index

II. Overview Central European Media Enterprises Ltd. ("CME Ltd.") is a media and entertainment company operating mainly in six countries in Central and Eastern Europe. We manage our business on a geographical basis with six operating segments: Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia. These operating segments, which are also our reportable segments, reflect how our operations are managed by segment managers, how our operating performance is evaluated by our chief operating decision makers and the structure of our internal financial reporting. We evaluate the performance of our segments based on Net Revenues and OIBDA. OIBDA, which includes amortization and impairment of program rights, is determined as operating income / loss before depreciation, amortization of intangible assets and impairments of assets. Items that are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their OIBDA, include stock-based compensation and certain other items. Our key performance measure of the efficiency of our segments is OIBDA margin. We define OIBDA margin as the ratio of OIBDA to Net Revenues. We believe OIBDA is useful to investors because it provides a meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or the operating results of our operations. OIBDA is also used as a component in determining management bonuses. Intersegment revenues and profits have been eliminated on consolidation. Free cash flow is defined as cash flows from continuing operating activities less purchases of property, plant and equipment, net of disposals of property, plant and equipment and is useful as a measure of our ability to generate cash. OIBDA, as defined above, and free cash flow may not be comparable to similar measures reported by other companies. Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures. For additional information regarding our business segments, see Item 1, Note 19, "Segment Data". The following analysis contains references to like-for-like or constant currency percentage movements ("% Lfl"). These references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. Given the significant movement of the currencies in the markets in which we operate against the dollar, we believe that it is useful to provide percentage movements based on like-for-like or constant currency percentage movements as well as actual percentage movements ("% Act") (which includes the effect of foreign exchange). Unless otherwise stated, all percentage increases or decreases in the following analysis refer to year-on-year percentage changes between the three months ended March 31, 2014 and 2013. Executive Summary
Our financial results for the first three months of 2014 reflect the progress made on management's top priorities: increasing and diversifying revenues, improving operating leverage, maintaining audience share leadership, and addressing significant liquidity needs.
Net revenues during the three months ended March 31, 2014 increased 15% compared to the same period in 2013 primarily due to increases in both television advertising revenue and carriage fees and subscription revenues. The changes made to the sales policy for 2014 in the Czech Republic have resulted in a significant increase in the consumption of advertising on our channels in that country when compared to the same period in 2013. The improved relationships with advertisers in the Czech Republic have also had a positive impact on advertising revenue in the Slovak Republic. Carriage fees in Bulgaria benefited from the full period effect of agreements with cable, satellite and IPTV operators that were concluded during the first quarter of 2013. Carriage fees in Romania also increased significantly following the successful negotiation of contracts with all major cable and satellite operators in Romania toward the end of 2013.
The improvement in net revenues during the period resulted in a similar improvement in OIBDA, as costs charged in arriving at OIBDA remained broadly flat year-on-year at constant currencies. The costs associated with the 2014 restructuring plan that commenced during the first quarter of 2014 amounting to US$ 5.9 million were offset by savings in operating and content costs. The 2014 restructuring plan is expected to result in a total charge of US$ 8.0 million during the full year 2014 and will further improve our operating leverage benefiting results in future periods as revenues continue their recovery from 2013. Due to the importance of our leading audience shares, this additional restructuring plan is being implemented carefully to avoid impacting the strength of our programming line-up. Despite additional content costs of US$ 2.7 million recognized during the first quarter of 2014 that resulted from a prospective change in estimate regarding the amortization of produced program rights, content costs declined during the first three months of 2014 compared to 2013 as a result of a 5% decrease in comparable costs from production, including costs associated with MTV Czech. The change in estimate will result in additional content costs for the full year 2014. However we expect these additional costs to be largely offset by further savings and content costs overall in 2014 to remain broadly in line with 2013 prior to that year's impairment charges.
Our focus on efficient and targeted investments in programming has continued to manifest itself in improved product performance with all-day audience shares up during the first three months of 2014 compared to the same period in 2013 in our four largest markets. Despite strong headwinds in certain countries, resulting from competitor's increased investment in programming and broadcasting of the winter Olympics, our all-day audience share increased one percentage point each in the Czech Republic and the Slovak Republic, and also increased in both Bulgaria and Romania. The main general entertainment channel in Romania, PRO TV, set a new record in that country for average monthly prime-time audience share of 28.8% during the month of March 2014.
We continue to make progress on the disposal of certain non-core assets, including our theatrical and home video distribution businesses, and we believe that the Company is better served by a focus on our core broadcast businesses in each country. We expect to complete the divestiture of Bontonfilm during the three months ended June 30, 2014 and therefore the results of this business have been included as discontinued operations for the periods presented. We are actively engaged in a process involving a number of interested parties to sell our other non-core assets.
We have also now closed the Rights Offering and series of related financing transactions. We received net proceeds from these transactions, after deducting fees and expenses, of approximately US$ 386.2 million, in addition to the US$ 30.0 million of proceeds from the 2017 Term Loan. We have applied the net proceeds, together with a portion of the proceeds from the 2017 Term Loan, to discharge the 2016 Fixed Rate Notes on May 2, 2014, including the early redemption premium and accrued interest thereon of approximately EUR 15.9 million (approximately US$ 22.0 million at transaction date exchange rates) and EUR 6.7 million (approximately US$ 9.3 million at transaction date exchange rates), respectively. Following these transactions, the proceeds from the 2017 Revolving Credit Facility are available for general corporate purposes and will be used primarily to improve our payables position. As a result, we expect negative free cash flow for the full year 2014 in an amount exceeding that of 2013. The redemption of the 2016 Fixed Rate Notes is expected to reduce cash interest costs by approximately US$ 25.5 million during 2014 because interest on the 2017 PIK Notes will be paid-in-kind until November 15, 2015 and may be paid-in-kind at our election thereafter.
We continue to expect a significant improvement in net revenues in the Czech Republic in 2014 when compared to 2013, but do not expect to reach 2012 levels this year as it will take more than one year for us to regain the market share lost during 2013. Given the significance of this segment to the Company, we expect a similar trend in the consolidated results. Following closing of the financing transactions, we believe we are positioned to be free cash flow positive beginning in 2015.


Index

Market Information
The following table sets out our estimates of the year-on-year changes in real
GDP, real private consumption and the television advertising market, net of
discounts, in our countries for the three months ended March 31, 2014:
                                              For the Three Months Ended March 31, 2014
                                                             Real Private         Net TV Ad
                                                              Consumption            Market
Country                                 Real GDP Growth            Growth            Growth
Bulgaria                                            1.3  %            0.0  %             (1 )%
Croatia                                             0.0  %           (0.7 )%              8  %
Czech Republic                                      1.7  %            0.0  %              7  %
Romania*                                            3.0  %            1.8  %              5  %
Slovak Republic                                     1.7  %           (0.1 )%             (7 )%
Slovenia                                           (1.5 )%           (1.1 )%             (3 )%
Total CME Markets                                   1.6  %            0.3  %              3  %

*Romanian market excludes Moldova.
Source: CME estimates based on market consensus for real GDP and real private consumption, and internal estimates for TV ad market growth.
After adjusting for inflation, we estimate that GDP in our territories grew slightly overall during the three months ended March 31, 2014. Real private consumption is estimated to have remained flat overall during the three months ended March 31, 2014.
We estimate that the TV advertising markets in our countries increased by 3% on average in the three months ended March 31, 2014 compared to the previous year. The most notable increase was in the Czech Republic where the market was estimated to have increased by 7% due in large part to an increase in the consumption of GRPs from our channels following the changes made to our sales policy in that country. These changes also had a positive impact on the consumption of television advertising in the Slovak Republic, however the television advertising market there is estimated to have decreased overall due to lower average market prices. The magnitude of the increase in the advertising market in Croatia is not expected to persist for the duration of 2014. Romania benefited from increased demand for advertising while Bulgaria and Slovenia remain very competitive.
Segment Performance
Our total Net Revenues and OIBDA by segment are as follows:

                                              NET REVENUES
                            For the Three Months Ended March 31, (US$ 000's)
                                                                   Movement
                               2014                2013       % Act       % Lfl
Bulgaria              $      19,276       $      16,424        17.4  %     12.7  %
Croatia                      13,497              12,093        11.6  %      8.0  %
Czech Republic               39,033              32,083        21.7  %     25.0  %
Romania                      49,659              42,031        18.1  %     15.9  %
Slovak Republic              18,146              16,923         7.2  %      3.1  %
Slovenia                     14,261              14,476        (1.5 )%     (5.3 )%
Intersegment revenues          (822 )            (1,315 )    Nm (1)      Nm (1)
Total net revenues    $     153,050       $     132,715        15.3  %     13.4  %

(1) Number is not meaningful.


Index

                                                     OIBDA
                               For the Three Months Ended March 31, (US$ 000's)
                                                                      Movement
                                2014                2013          % Act       % Lfl
Bulgaria                 $    (2,746 )     $      (2,427 )        (13.1 )%    (12.2 )%
Croatia                          671                (607 )       Nm (1)      Nm (1)
Czech Republic                 2,713              (6,878 )       Nm (1)      Nm (1)
Romania                        5,413                 959         Nm (1)      Nm (1)
Slovak Republic               (3,162 )            (3,568 )         11.4  %     13.6  %
Slovenia                         515               1,837          (72.0 )%    (73.5 )%
Eliminations                     308                  19         Nm (1)      Nm (1)
Total operating segments       3,712             (10,665 )       Nm (1)      Nm (1)
Corporate                     (6,032 )           (10,175 )         40.7  %     38.6  %
Consolidated OIBDA       $    (2,320 )     $     (20,840 )         88.9  %     88.5  %


(1) Number is not meaningful.
Bulgaria
                                         For the Three Months Ended March 31,
                                                                     Movement
                                         2014          2013     % Act      % Lfl
Television advertising             $   12,716      $ 12,328       3.1  %    (1.0 )%
Carriage fees and subscriptions         4,944         3,305      49.6  %    43.9  %
Other                                   1,616           791     104.3  %    96.8  %
Net revenues                           19,276        16,424      17.4  %    12.7  %
Costs charged in arriving at OIBDA     22,022        18,851      16.8  %    12.6  %

OIBDA $ (2,746 ) $ (2,427 ) (13.1 )% (12.2 )%

Television advertising spending in Bulgaria declined 1% in the three months ended March 31, 2014 compared to the same period in 2013. The Bulgaria segment reported net revenues of US$ 19.3 million for the three months ended March 31, 2014 compared to US$ 16.4 million in the same period in 2013, an increase of 17% on an actual basis, or 13% on a constant currency basis. The increase in net revenues was attributable mainly to an increase in carriage fees resulting from the full period effect of agreements with cable, satellite and IPTV operators that were concluded during 2013. There was also an increase in other revenues due primarily to higher theatrical distribution revenue. These increases more than offset a decline of 1% at constant rates in television advertising revenues in the three months ended March 31, 2014 compared to the same period in 2013, which was in line with the decline of the market.
Costs charged in arriving at OIBDA for the three months ended March 31, 2014 increased by 17% compared to the same period in 2013. On a constant currency basis, costs increased by 13% due primarily to restructuring charges of US$ 3.4 million, which more than offset a decrease in operating and content costs. Our Bulgaria segment reported an OIBDA loss of US$ 2.7 million for the three months ended March 31, 2014 compared to US$ 2.4 million in the same period in 2013, worse by US$ 0.3 million.


Index

Croatia
                                         For the Three Months Ended March 31,
                                                                    Movement
                                         2014        2013      % Act       % Lfl
Television advertising             $   11,996    $ 10,408       15.3  %     11.5  %
Carriage fees and subscriptions           488         446        9.4  %      6.3  %
Other                                   1,013       1,239      (18.2 )%    (20.5 )%
Net revenues                           13,497      12,093       11.6  %      8.0  %
Costs charged in arriving at OIBDA     12,826      12,700        1.0  %     (2.1 )%
OIBDA                              $      671    $   (607 )   Nm (1)      Nm (1)

(1) Number is not meaningful. Television advertising spending in Croatia increased 8% in the three months ended March 31, 2014 compared to the same period in 2013. The Croatia segment reported net revenues of US$ 13.5 million for the three months ended March 31, 2014 compared to US$ 12.1 million in the same period in 2013, increases of 12% on an actual basis, or 8% on a constant currency basis. This primarily reflected an increase in our advertising prices coupled with an increase in the volume of GRPs sold during the quarter. Costs charged in arriving at OIBDA for the three months ended March 31, 2014 increased by 1% compared to the same period in 2013. On a constant currency basis costs decreased by 2%, primarily as a result of a decrease in content costs. Our Croatia segment generated OIBDA of US$ 0.7 million for the three months ended March 31, 2014 compared to an OIBDA loss of US$ 0.6 million in the same period in 2013, an improvement of US$ 1.3 million.

Czech Republic
                                         For the Three Months Ended March 31,
                                                                    Movement
                                         2014        2013      % Act       % Lfl
Television advertising             $   34,503    $ 27,034       27.6  %     31.0  %
Carriage fees and subscriptions         2,199       2,908      (24.4 )%    (21.7 )%
Other                                   2,331       2,141        8.9  %     12.2  %
Net revenues                           39,033      32,083       21.7  %     25.0  %
Costs charged in arriving at OIBDA     36,320      38,961       (6.8 )%     (3.7 )%
OIBDA                              $    2,713    $ (6,878 )   Nm (1)      Nm (1)

(1) Number is not meaningful. Following the changes made to the sales policy for 2014 in the Czech Republic, the consumption of the volume of advertising on our channels in that country increased significantly in the first quarter of 2014 compared to the same period in 2013. As a result of this increase in GRPs consumed, the television advertising market in the Czech Republic is estimated to have increased by 7% for the three months ended March 31, 2014 compared to the prior year. Net revenues amounted to US$ 39.0 million for the three months ended March 31, 2014 compared to US$ 32.1 million in the same period in 2013, increases of 22% on an actual basis, or 25% on a constant currency basis. Carriage fees and subscription revenues decreased during the period because we stopped transmitting MTV Czech at the end of 2013. Nova Sport is now no longer carried by one cable operator, which will also impact the results of the second quarter of 2014. The results for Bontonfilm are not included in segment performance and are presented as discontinued operations for all periods. Costs charged in arriving at OIBDA for the three months ended March 31, 2014 decreased by 7% compared to the same period in 2013. On a constant currency basis costs decreased 4%, primarily reflecting lower content and transmission costs, including cost savings from stopping the transmission of MTV Czech. Our Czech Republic segment reported OIBDA of US$ 2.7 million for the three months ended March 31, 2014 compared to an OIBDA loss of US$ 6.9 million in the same period in 2013, an improvement of US$ 9.6 million.


Index

Romania
                                          For the Three Months Ended March 31,
                                                                       Movement
                                         2014            2013     % Act      % Lfl
Television advertising             $   24,436        $ 24,317       0.5 %     (1.7 )%
Carriage fees and subscriptions        10,742           5,093     110.9 %    107.8  %
Other                                  14,481          12,621      14.7 %     13.1  %
Net revenues                           49,659          42,031      18.1 %     15.9  %
Costs charged in arriving at OIBDA     44,246          41,072       7.7 %      6.0  %
OIBDA                              $    5,413        $    959    Nm (1)     Nm (1)

(1) Number is not meaningful. Television advertising spending in Romania increased 5% in the three months ended March 31, 2014 compared to the same period in 2013. The Romania segment reported net revenues of US$ 49.7 million for the three months ended March 31, 2014 compared to US$ 42.0 million in the same period in 2013, an increase of 18% on an actual basis, or 16% on a constant currency basis. Net revenues benefited primarily from an increase in carriage fees and subscription revenues following the successful negotiation of contracts with all major cable and satellite operators in Romania during 2013. We expect to continue to benefit from strong year-on-year growth in carriage fees in Romania, however, we began realizing the benefit of certain agreements concluded in 2013 during the second half of last year. The increase in carriage fees more than offset a slight decrease in television advertising revenues at constant rates. There was also an increase in other revenues due to the strong performance of titles distributed to theaters during the first quarter of 2014. Costs charged in arriving at OIBDA for the three months ended March 31, 2014 increased by 8% compared to the same period in 2013. On a constant currency basis costs increased 6%, primarily as a result of an increase in content costs related to the theatrical distribution revenues as well as restructuring charges. Our Romania segment generated OIBDA of US$ 5.4 million for the three months . . .

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