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TV behemoth in CEE eyeing recovery
December 17, 2009, Czech Business Weekly,
With very strong market positions in as many as six CEE countries, TV broadcaster Central European Media Enterprises (CME) belongs among the major media companies in the region.
After a challenging 2009 the company cut costs, gained market share and now is positioning itself to benefit from the expected recovery. The Czech subsidiary, TV Nova (CET 21 spol.), should spearhead the new trend of improved financial results of the Prague Stock Exchange-listed corporation.
CME is the biggest CEE media corporation, its activities ranging from Slovenia to Ukraine. In the Czech Republic it owns TV Nova, the most popular local TV station and a major asset of the group. Apart from Czech operations, its Romanian business contributes significantly to the consolidated profit of CME. CME also has number one TV broadcasting operations in Slovakia, Slovenia and Croatia. In most of these markets CME holds a dominant position with market share exceeding 50 percent. In order to pursue the long-term growth of the business CME is also developing operations in the underdeveloped markets of Ukraine and Bulgaria.
In an attempt to improve its offering and diversify its sources of revenue, CME recently decided to venture more aggressively into the realms of content production and Internet advertising. Those adjacent activities are, however, not expected to contribute significantly to the company’s bottom line any time soon. CME obtains a majority of its revenue in exchange for broadcasting commercials on its TV stations between shows. As consumer-oriented companies slashed their marketing budgets in the aftermath of the economic crisis CME financials have suffered severely in 2009.
In the first nine months of the year the consolidated operating profit, EBITDA, declined by a staggering 86 percent, to $31 million (Kč 541.546 million/€21.042 million). The Czech division was one of top performers, yet the revenue there still fell by 20 percent, and EBITDA saw a 33 percent decline. The results of the whole holding have been hurt primarily by ailing divisions from Ukraine and Bulgaria, which together lost $70 million, despite significant investments. CME has an option to sell the Ukrainian subsidiary for a hefty $300 million in the following 12 months, yet is still deliberating whether the price is good enough to give up on the growth potential of that economy. The decision is made even more difficult as the company management expects a visible rebound in all of its markets next year, despite still sluggish macroeconomic forecasts. The forecasts are especially rosy particularly for Ukraine, which should display double digit market growth rate. The advertisement markets in the other countries should display growth rates in the range of 2 to 6 percent. CBW asked Petr Dvořák, general director of TV Nova, about the reasons for such an optimistic view on the future of the advertising market.
Q: Your forecasts of advertising market growth in 2010 exceed the expectations of a majority of research companies and brokers. What are the factors supporting your optimism?
A: There are a few reasons why we think that the ad market will grow at the level which we announced during our Investor Day meeting in Prague. First of all, we recognize a pattern in all our markets which is the correlation between the GDP growth and the growth of the ad market. There is a multiple of 3 to 4. If the GDP will grow about 1.5 percent, it means that the ad market will grow 4 to 6 percent. It is unfortunately the same also in the opposite direction. For this year we estimate the decline of the ad market between 20 and 23 percent in the Czech Republic. This pattern is based on our former experience.
Q: From our calculations, however, it is clear that between 2003 and 2008, when the GDP was growing by 5 percent annually on average, the ad market in the Czech Republic was growing only by 6 percent, so this does not match with your pattern?
A: You are talking about the total ad market; we focus on the TV market and this market has been growing faster than all the other types of markets. The print industry grew much slower than the TV market. There are basically two types of ad markets that grow faster and those are the TV and Internet market. The second reason why we think there is potential for growth is the behavior of our clients. Our client base consists of international clients. Eighty percent of our total revenues are based on international companies. What they did in the beginning of this year is they moved the decisions from local subsidiaries to headquarters in England, Germany or the U.S. and also significantly reduced budgets, focusing ad spending on their domestic, developed countries. However if the Western markets recover as expected then we expect them to come back to developing economies to fight for share in growth markets.
Q: What was the pace of TV ad market growth in the years 2003–08?
A: Between 2003–08, the average growth rate of TV advertising in our core markets [Czech Republic, Romania, Slovakia, Slovenia, Croatia] averaged approximately 13 or 14 percent, depending on the market. For our non-core markets Bulgaria and Ukraine, the growth rate of TV advertising averaged 24 percent and 32 percent respectively during these years. There is still potential for growth here as measured in advertisement cost per capita. In Eastern Europe this ratio is much lower than in Western countries. The prices which they charge for different products—FMCGs [Fast Moving Consumer Goods], detergents—are, in turn, almost the same and sometimes even higher here than in Western countries. Those are reasons why we think the situation will get better. We expect modest recovery already in the first part of the year and slight growth in the second half of 2010. The main recovery is expected to come in 2011 and 2012.
Q: How about the share of TV in the whole ad market in the Czech Republic?
A: If we consider all countries in which we operate, the TV constitutes around 60 percent on average, in the Czech Republic it was 48 percent before the crisis and currently we expect that it is higher as we increased our market share, so it could be now over 50 percent.
Q: When do the multinational companies budget for the upcoming year?
A: It depends on their accounting policies. There are some companies with a fiscal year from January to December but there are also companies with the accounting year staring from July to June. There is no general rule. Most of the companies already know how much money they would like to spend and we want to convince them to spend it here and we are negotiating the conditions with them for the next year.
Q: Do you already know their advertising budgets and how much of this money will flow through your P&L?
A: With some of them we are already conducting negotiations, but there are different patterns in each country CME operates in. Normally we start to negotiate the conditions in the Czech Republic then we continue in Romania and Slovakia. For other countries like Croatia or Slovenia, Ukraine and Bulgaria the negotiations take place in January or February. We have already started the process in the Czech Republic and expect to follow on in Romania and Slovakia in December this year. Unfortunately at this moment I cannot comment on the expectations towards the final result of our company.
Q: You said in your presentation that the forecasts regarding the pace of growth of the ad market were based on the negotiations with your partners? Now you say you are only starting the talks...
A: We opened the negotiations after Investor Day in Prague [Oct. 15], so after we released those forecasts. Those numbers are mostly based on macro analysis that we have done based on general information which we get from the market.
Q: What if your forecasts regarding the ad market are overshot?
A: We try to be reasonable; we do not have overoptimistic or overambitious targets for the next year in terms of revenues. We also try to drive our performance based on the costs—we continue keeping costs at a very low level. We are investing just in case we feel we are losing our market share, but in the case that we manage to keep our market share then we focus on cost containment.
Q: However, a few weeks ago you issued a profit warning which sent your stock price down 20 percent.
A: That was not technically a profit warning. We just gave a full year profit guidance that was far from the analysts’ consensus.
Q: How about the cost cutting measures?
A: This year we promised to decrease the costs which we achieved in all of our markets apart from Slovakia. In Slovakia however we faced a uniquely severe competitive fight in the first half of the year. We won it and defended our leadership position; however it required a temporary increase in costs.
Q: What are the most important cost elements?
A: Almost 70 percent of our cost is programming, therefore we need to be very cautious in planning the programming. Moreover most of the time we know the revenue in advance and can adjust. For example, in the Czech Republic we prepared three new series, however we didn’t publish all of them because of the declined revenue potential. This year we introduced very tight cost control, however we haven’t cut the programming cost to the possible minimum, which slightly underestimates our profits, but more importantly position us excellently for the coming recovery. This year we came back to all our contracts and tried to renegotiate the conditions. Actually we succeeded in achieving sizable price reductions because of our number one market position in all of our core markets. Our competitors were not able to negotiate such good conditions, which further improved our competitive position.
Q: What was the reason you faced such stiff competition in Slovakia, and not so much, for example, in the Czech Republic?
A: The key difference is probably the ownership structure of our competitors. In the Czech Republic it is a reasonable international company which is playing a role of a strong number two player on the market and reduced their costs in a similar way to us. In Slovakia though we compete against a locally owned station, which strongly over-invested this year. I have a reason to suspect that the intention of this action was to gain market share at any cost and dispose of the business. Moreover, this action was limited only to one season and didn’t repeat in autumn this year.
Q: Recently you restated Croatia into the group of ‘developed’ or ‘core’ markets. Why did you do it?
A: First of all our Croatian station is expected to be market leader this year, moreover in the fourth quarter this year it broke even and is expected to deliver positive profit next year. These are features which characterize a mature business.
Q: You expect the Ukraine business to break even in 2012 and the Bulgarian in 2013. Today both divisions are deep in losses. Can you elaborate how you want to achieve the profitability targets?
A: Unfortunately I cannot disclose details of our strategy because it would help our competitors to derail our plans.
Q: Can you then disclose under which circumstances you would sell the rest of the Ukrainian division to Igor Kolomoisky?
A: The deal with Igor Kolomoisky, who at the same time is a board member of CME, is structured as follows. By the end of this year he is obliged to subscribe to a 49 percent stake in the Ukrainian business for $100 million in cash and the contribution of his TV station, Telekompanija TET. Moreover, for a year after the finalization of this transaction CME will be entitled to sell the missing 51 percent stake to him for a further $300 million. The latter part is called ‘put option.’ If we exercise the option it depends on many variables, among them the economic developments and ad market dynamics in Ukraine in the following months.
Q: How about Bulgaria? There were speculations that you would buy your competitor?
A: The situation in Bulgaria is that there are three main players on the market, and our conviction is that the market can handle only two. Therefore we are ready to merge with any of our competitors on fair conditions or alternatively sell our business there.
Q: Recently CME decided to diversify the revenue stream from advertisements into Internet and content production. Can you give us a reason why you think you would be successful in this enterprise?
A: We firmly believe that we achieved huge success in TV broadcasting in Europe, therefore we were looking for new business in adjacent sectors and this is how we started those enterprises. The Internet we use primarily as an additional distribution channel for our news programs and other video content, so called ‘catch-up TV.’ It works especially efficiently with big productions of high popularity as people can access more details and information on the Internet or simply watch the show again. We earn from sponsorship and ads shown during the shows as well as ads displayed on the websites.
Q: How about the content division?
A: We have always produced some part of our local TV programs and movies. Currently we want to increase the share of our own production leveraging on valuable know-how and experience we have developed so far. Therefore, currently we are strengthening content production teams so they could produce more and better content. In the future we want to sell our content to other broadcasters.
Q: What will be the share of Internet and content production on your future revenues?
A: Internet will always be a single digit contributor. … While for content we expect 20–30 percent in 3–5 years.
Q: Do you feel comfortable with the current debt level and what is its limit? Why are you so determined to extend debt maturity by four years at the cost of a much higher coupon?
A: We saw an opportunity in the market to raise substantial financing and extend the maturity profile of our debt at acceptable conditions. We are fully aware that such opportunities can disappear as quickly as they emerge and by that time we had significant debt to refinance before the end of 2012. Although the current coupon is higher compared to our previous debt, still the weighted average cost of our debt is approximately 7.5 percent. Moreover, we believe that now we have sufficient cash to allow our management to focus on the growth of the business.
Q: Do you visibly differentiate the content for the different countries you operate in?
A: First of all we have joint content structures for countries of similar origin (Croatia and Slovenia, Romania and Bulgaria, Czech Republic and Slovakia). We have already achieved some success in using the same series ‘Ordinace’ in both countries. Both series had the same scripts, but were produced separately in local languages and with local actors, but allowed us to leverage on one asset.
Q: To what extent are consumers alike in your countries of operations so that you can sell them similar products?
A: The cross-border synergies are very important for us. In fact we believe that a good entertainment idea should work for all of the market. I think they are more similar to each other than they would like to think. However, the real challenge is to have good timing, meaning to broadcast the project when the market wants it and is prepared for it. Moreover the program value or expenditures should be adjusted for a specific country. The cultural differences play a role but they are only in third place. Currently we are experimenting a little bit and use a ‘trial and error’ approach, whereby we learn from our experiences in applying successful ideas to other countries.
Q: How would you describe your target audience?
A: The Czech audience is more similar to German or Austrian. Romania and Bulgaria is similar to Italy. I would also not say that GDP or education plays an important role. What matters is good TV, and if a program is done on the basis of good knowledge of the media, entertainment and audience needs it should be successful in any country.
For additional information, please contact:
Romana Wyllie
Vice President of Corporate Communications
Central European Media Enterprises
Krizeneckeho nam. 1078/5
152 00 Praha 5
Czech Republic
+420 242 465 525
romana.wyllie@cme-net.com
