Grupo Televisa SAB (TV) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Grupo Televisa first quarter 2003 teleconference. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments following today's presentation.

Before we begin, I would like to draw your attention to page seven of the press release, which explains the use of forward-looking statements. Please familiarize yourself with this section, as it also applies to everything discussed in this conference call.

Now I'll turn the call over to Grupo Televisa's Chief Financial Officer, Alfonso de Angoitia. Please go ahead, sir.

Hi. Good morning, and welcome to Grupo Televisa's conference call to discuss our results for the first quarter of 2003. With me today is Jose Baston, our Corporate Vice President of Television.

First I'm going to take you through our financial results for the quarter. Then I will review the outlook for the second quarter of 2003. Afterwards, Pepe will discuss our operating results related to the divisions associated with television content. When Pepe's finished, we will be glad to take your questions.

We're very pleased with the company's overall performance during this quarter, especially considering the economic environments. Consolidated net sales for the quarter increased 4.8 percent to a total of 4.8 billion pesos, compared to last year's first quarter.

This growth was driven by a record increase of 27 percent in our programming licensing segment, generating -- generated by a substantial increase in the royalties we received from Univision, and double-digit revenue increased in our programming for pay television, publishing and publishing distribution businesses, the latter of which is mainly due to the acquisition of a distribution company in Chile during the second quarter of last year.

Television broadcasting revenues grew 2.2 percent, driven by an overall increase in volumes, a 17-percent increase in local sales led by Channel Four (ph), political advertising spending and the success of "Big Brother Two."

On the cost and expense side, we managed to keep television broadcasting costs and expenses flat, even considering our new comic (ph) strip (ph) at ten p.m., other new shows and the incremental cost associated to the war. As our result, our television broadcasting EBITDA grew 7.7 percent to over one billion pesos.

Programming licensing revenues and EBITDA climbed 27 percent and 208 percent respectively, driven by an unprecedented increase of 26 percent in royalties coming from our program license agreement with Univision and, to a lesser extent, to a favorable translation effect of foreign-currency-denominated sales.

Pay television revenues and EBITDA also experienced a double-digit growth of 13 percent and 38 percent respectively, driven by strong sales in Mexico. Publishing revenues grew 10 percent, due to an increase in the number of magazines sold and higher advertising sales in Mexico and from higher advertising sales abroad, even considering a 60-percent decline in circulation of our magazines in Venezuela.

EBITDA margins increased 3.2 percent as a result of higher sale that were partially offset by higher cost of sales and selling expenses related to the launch of new magazines. Sales from our radio division decreased five percent, but, importantly, we were able to generate a modest EBITDA contribution, and we expect a better second quarter, as we will benefit from the political advertising.

As I mentioned during our last conference call, during 2002, we restructured our publishing and radio businesses and implemented several initiatives that are generating positive results, and we expect to increase this positive momentum going forward.

During the first quarter, we generated a record consolidated EBITDA of 1.3 billion pesos, which represents an increase of 15 percent over last year's first quarter, and a margin expansion of 240 basis points, from 24.7 percent in the first quarter of 2002 to 27.1 percent in this quarter.

Net income for the quarter increased 257 percent to 250 million pesos, compared to 70 million during the same period last year. Higher operating income and the (ph) lower restructuring charges drove most of the growth in our net income line.

Let me briefly share some highlights of our pay television platforms and investments. Cablevision (ph) sales decreased 18 percent, as compared to last year's first quarter, due to the subscriber loss we experienced during 2002, driven mostly by an increase in prices, which led to an increase of subscriber piracy.

EBITDA decreased slightly further, due to lower sales and higher programming costs during the quarter. I want to point out that while we continued to lose subscribers during this quarter, our cancellation rate is going down. In addition, Cablevision's (ph) management has developed a plan to restore subscriber growth and fight piracy. Pepe will expand on some of the actions that are being taken.

E-Nova (ph), however, had a remarkable performance during the first quarter of the year. Gross (ph) active subscribers increased 11 .2 percent to 779,000, as compared to the first quarter of the previous year, and EBITDA increased 20 percent to 260 million pesos. Not (ph) only (ph), E-Nova (ph) has not required shareholder funding for the last 12 months. We are very pleased with E-Nova's (ph) performance and the value it is creating for Televisa and its shareholders.

OCESA Entretenimiento, our live entertainment venture in partnership with CIE, is performing in line with our expectations, and it is also important to mention that we recently finalized the transaction and made the final payment to CIE for about -- for our 40-percent stake in the company.

Our board of directors approved today -- yesterday a related-party transaction that involves an acquisition by Televisa of a company, which assets consist of one million CPOs (ph) with a market value of approximately $2 million and net operating losses of 6.4 billion pesos. This transaction is part of our tax planning and will substantially increase the cash flow generation capability of the company during the next few years.

From a balance-sheet perspective, we continue to have a strong position with more than 10.2 billion pesos in cash at the end of the quarter, as compared to seven billion pesos we had at the end of the first quarter last year.

As part of the repurchase program we announced last September, we have bought back 11 million CPOs (ph) for an aggregate amount of 146.7 million pesos. Additionally, we're delighted to be in a position to propose a 550-million peso dividend payment at our shareholders meeting today.

Moving to guidance, as we have mentioned, we continue to believe that political advertising and addition of sales relating to our new programs will compensate last year's World Cup revenue, which should enable us to meet our full-year guidance for television broadcasting of low, single-digit revenue growth and television broadcasting and consolidated EBITDA margins to be at 40 percent and 30 percent respectively.

Now I would like to turn the call over to Pepe.

Thank you, Alfonso, and good morning everyone. I will begin by running through the highlights in our television division, and, then, I will discuss cable and sky (ph).

I am pleased to report that in the first quarter, Televisa aired 93 of the top 100 most watched programs, and we continued to sustain the highest ratings and audience shares across the board.

From sign on to sign off, we achieve (ph) an average audience share of 71.7 percent, and our primetime audience share increased to 72.8 percent, compared to last year's 69.8 percent. Our (ph) restructure (ph) and novellas continue to fuel our primetime lineup.

During the first quarter, our nine p.m. novella, "Las (ph) Via (ph) del (ph) Amor (ph)," achieved an average audience share of 37.5 percent. And our recently launched eight p.m. novella, "Nina (ph) Amada (ph) Mia (ph)," had an average audience share of 34.6 percent.

We continued (ph) target the teenage demographic with our successful seven p.m. novella, "Classe (ph) Quatrocientoseis (ph)," and, in mid-March, we launched our new children novella called "De (ph) Pocas (ph) Pulgas (ph)," and ratings and shares are encouraging.

In early March, we began airing the second season of "Big Brother" to capitalize on the valuable 18-to-34 demographic. This franchise has again proven very successful in attracting new advertisers.

I am pleased to report that we expect to surpass last year's tremendous commercial success.

Grupo Televisa provided its viewers with full coverage of the war in Iraq. Televisa was one of the few broadcasters in the world to have a journalist onsite in Baghdad throughout the war, reporting the daily events -- reporting the daily events. The quality of our work proved that, once again, Televisa's high level of dedication and commitment to our viewers, and our newscast audience share is testimony to that.

On a personal note, I would like to take this opportunity to thank and congratulate our news team for their exceptional work throughout this conflict.

As Alfonso mentioned, television broadcasting revenues grew 2.2 percent, and, during the first quarter, we continued to implement our strict cost and expense controls and managed to find savings that enabled us to keep costs and expenses flat, even with the higher costs associated with covering the war.

As a result, out television EBITDA grew 7.7 percent during the quarter to over one billion pesos.

As you know, we collect royalties from our programming licensing agreement with Univision. I want to point out that royalties from Univision for the first quarter increased 26 percent, in dollar terms, from 16 to $21 million, driven by growth in the revenues of Univision and Galavision, and the royalties (ph) we started to receive from Telefortura (ph) network.

By the way, our content has already proven to be very successful, beating Telemundo in several timeslots with programs like "La (ph) Oreja (ph)," our game show, "Cien (ph) Mescano (ph) De (ph) Jeron (ph)," and our children novella, "Viva (ph) Los (ph) Ninos (ph)."

For the second quarter, we expect that the mid-term election campaigns and sales related to our new programs will generate revenues, which, together with our cost-containment measures, should enable us to reach our television broadcasting sales and EBITDA goals for the year.

Turning now to our pay television services, Cablevision's (ph) new management team is focused on restoring subscriber growth. During the past months, piracy has made these tasks very difficult, particularly because of the lack of law enforcements in this regard. Accordingly, management is executing a new strategy to effectively reduce this impediment to the kind of growth we think Cablevision (ph) should generate.

We are -- we are accelerating our plans to convert our analog service to digital, since digitalizing our network will -- significantly reduces the possibility of piracy and will enable us to substantially increase our current penetration rate.

We expect this strategy to begin boosting profitably in the fourth quarter of this year. As a result, we anticipate additional loss in subscribers during the following six months until the division starts to rebound.

On the other hand, as Alfonso mentioned, we are very pleased wit the performance of E-Nova (ph). Active subscribers increased 11.2 percent to 779,000, and EBITDA increased 20 percent to 260 million pesos.

Subscriber growth has been fueled by aggressive marketing and exceptional sports and entertainment programming, such as exclusive broadcasts of certain soccer matches of the Mexican and -- of the Mexican soccer league (ph) and Copa (ph) Libertadores (ph) soccer tournaments and the exclusive 24-hour broadcast of "Big Brother Two."

In addition, direct TV Latin America, E-Nova's (ph) competitor, recently filed for Chapter 11. We expect this situation to benefit E-Nova (ph), since it will likely have an effect on direct TV's programming and service. Now we will be glad to take your questions.

Thank you. The floor's now open for questions. If you do have a question, you may press the number one, followed by four, on your telephone keypad at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question to please utilize your handset to provide optimum sound quality. Once again, that is one, followed by four, for any questions or comments at this time. One moment while I poll for questions.

Our first question is coming from Matthew Kolped (ph) of UBS Warburg. Please go ahead with your question.

Thank you. Good morning, Alfonso, Pepe. I have three, small questions. The first one -- what is the impact on free cash flow for 2003 and 2004 for Televisa for the tax vehicle you are planning to acquire?

My second question is on political advertising. Do you have an estimation how (ph) much with benefit the second quarter versus the third quarter? And, finally, on spot sales and the primetime utilization rate. Thank you.

Well, first of all, as to the related-party, that transaction that you mentioned, thank you for your question, because it allows me to give you additional information.

The consolidated tax loss carry-forwards generated in the previous years by Televisa have been fully used. The tax losses that Televisa acquired as a result of the purchase of Alameda (ph), the transaction that we concluded in 1998, were fully used in 2002. Therefore, starting this year, Televisa was projecting to generate income taxes in an -- in amounts substantially higher than the ones we have paid in other years.

The effective tax rate in 2001 was 20.8 percent and in 2002 was 27.8 percent. For 2003, since we have used all the previous losses, both Alameda (ph) -- that -- the ones that we acquired as part of Alameda (ph) and the ones generated by Televisa in the previous years, we were projecting an effective tax rate of almost 34 percent.

So, as a result of this transaction, we think that the effective tax rate will go back to the mid-20s, which is a very good result for us. And also -- and the net effect of this transaction means the reduction of income taxes on a consolidated basis in the amount of 2.1 million pesos -- billion pesos, with a cost to Televisa of 81 million.

We believe that the tax losses will be used in 2003 and 2004 fully, so this is part of the tax planning for Televisa. It's very difficult to say, at this point, the cash flow implications, because you -- we will not be able to use those losses this year fully because of the date on which we are going to close the transaction, which is, at this point, uncertain, because Televicentro (ph) has to do certain things there, and we would have to see, then, the advance payments that we have made during this year to the minister of finance in Mexico.

And, as I mentioned, the date of closing of the -- of the acquisition. So it will depend on all those factors, and it's very difficult to say the cash flow implication. What I would like to reiterate is that we will be able to reduce income taxes on a consolidated basis in the amount of 2.1 billion pesos, with a cost for Televisa of $81 million, and we will use those losses in 2003 and 2004.

Thank you, Alfonso. Concerning the question on political advertising, how much will be allocated in the second quarter versus the third quarter from the initial number of 35 million that you gave us the last conference call?

What we have said and confirm is that we will compensate World Cup revenues with the political advertising and additional sales related to the new shows that we have aired, including the comic (ph) strip (ph) at 10 p.m.

And, also, in terms of EBITDA, we will see an important increase, since the cost of production and transmission of the World Cup will be much higher than the cost of the new shows that we're producing. Also, the incremental cost of the war and the coverage of the elections, which also have a cost.

However, we would not like to be so specific about the number that has to do with political advertising, since it can hurt us, considering the competitive and political environment that we're living in Mexico, especially in the months to come.

So what I would like to reiterate is that we continue to believe that both political advertising and additional sales related to new shows will compensate World Cup revenue.

Thank you. The last question was on the spot sales as a percent of total sales for broadcasting in the first quarter.

The percent of spot sales was 13 percent.

Perfect. Thank you very much.

Thank you.

Our next question is coming from Francisco Rivero (ph) of Centender (ph). Please go ahead with your question.

Good morning, guys. Congratulations -- very good report. First, in programming licensing, I see a significant jump in the EBITDA this quarter. Could you explain why is that?

That is back (ph) because of the increase in sales, especially, and the reduction of costs -- I (ph) mean (ph) basically.

OK. And can we expect these type of increases in the -- in the next few quarters?

Yes. I think we will see a jump. It's not going to be as dramatic as we have seen in this quarter, but you will see that jump in the next quarter is basically because now we're enjoying the benefits of the new program license agreement with Univision, and the royalty that they're paying over the sale of Telefortura (ph)

OK. How about publishing distribution? That's on the contrary (ph). It goes down almost 70 percent.

No. Publishing ...

It's publishing distribution.

Publishing distribution -- EBITDA you mean?

Yes.

EBITDA went down, basically, because we took a six-million-peso reserve for -- in respect to Columbia.

OK. I have to assume that's a one-off, and we shouldn't have more of that in the -- in the next few quarters.

It's very difficult to say. I think we took six million, as I mentioned, this quarter, six-million-pesos reserve, which would have meant that, aside from that reserve, we would have an increase -- we would have almost doubled EBITDA.

However, because of the situation were dealing in Venezuela and Columbia and other countries, it's very difficult to say whether additional reserves will be required.

OK. Then regarding the share buyback, if I, I mean, make a lineal assumption, you should be buying back stock, more or less, in the amount of 44 million every four months. So far -- I mean year to date, you are saying you bought back 147 million pesos.

So that's -- I mean, that's a very small amount. Do you -- and considering that Televisa was trading at very low levels, I mean, I really don't understand quite clear. I mean, why is that you are not exercising more the program?

Yes. I don't think we can make a lineal assumption there, because, basically, we -- as we have mentioned in the past, we will be opportunistic about the buybacks, which means that -- I mean, not necessarily in the specific quarter you'll see the same amounts.

We have done some derivative transactions, which have benefited Televisa; however, I mean, what we have bought back is that amount, and we plan to -- and we plan to fully implement this program in the following years.

OK. But can we expect that in -- I mean, for the remainder of this year, are you going to be more aggressive, and can you say that?

As I mentioned, I think we're going to be opportunistic about it, and what I can tell you is that we'll fully implement this plan as we have proposed it.

OK. Thank you.

Our next question is coming from Chris Regusa (ph) of Bear Stearns. Please go ahead with your question.

Good morning, gentlemen. I wonder if you could give us some more information in regards to this related-party transaction. Specifically, who are you buying the -- this company from -- this entity from? And, also, what was the methodology to come up with the $83-million valuation versus the, roughly, $200 million of net income that you guys are going to shelter? If you can just walk us through that please.

Hi, Chris (ph). Yes. First of all, the owners of that company are the shareholders of Televicentro -- the four (ph) shareholders of Televicentro (ph). Second, we determined that value by means of a negotiation with Televicentro (ph), and, basically, we took into account the use of that -- of those tax losses during 2003 and 2004 and the reduction of income tax that that'll bring to Televisa and the other tax and the whole tax benefit that we'll receive.

So, I mean, on (ph) a (ph) consolidated basis, basically, we're going to use up (ph) 2.1 million pesos, and we have paid $81 million. So that was the basic -- both negotiation and valuation.

Just a quick follow up. Can you give me how much you guys recognized, in terms of inflation adjustments as revenue this quarter?

Yes. Hold on a second.

Thank you.

Thirty million pesos.

Thank you very much.

Once again, if you do have a question or a comment, please press the number one, followed by four, on your telephone keypad at this time.

Once again, you may press one, followed by four, on your telephone keypad at this time to register for questions. One moment while I poll for questions.

Our next question is coming from Frank Daly (ph) of Lincoln (ph) Capital. Pleas go ahead with your question.

Could you go through the Univision royalties once more? I'm sorry. I got 26 -- they were up 26 percent? Is that -- is that correct?

That's right, and it doesn't mean that they were for the quarter. Let me go through the number. The increase was 2,430,000, which, if you break it down, is (ph) $730,000 for the three-percent, incremental royalty that we received on Univision sales for 2002.

Then we received $1,250,000 for Telefortura (ph), and we received both -- we received a total Univision royalty for the first quarter of $450,000.

OK. Thank you,

Our next question is coming from Whitney Johnson (ph) of Merrill Lynch. Please go ahead with your question.

Yes. Three questions. The first is can you just give us an idea of how much political ad spend was in the first quarter, so that we can have a better sense as to what underlying ad spend gross was?

Yes, Whitney (ph), as we have mentioned, we have decided not to be specific about that number, since it can hurt us, considering the competitive and political environment that we live in in Mexico.

OK. On the cost control, your costs -- you had good cost control during the first quarter. Your target for your consociated EBITDA margin this year's around 30 percent. Can you give us an idea of what you think you can actually do with costs on a consolidated basis this year and next? Is there room for further cost cuts?

I think on the television side of the business, as we have said, we will be able to maintain costs flat, when compared to last year's. As I mentioned, in the second quarter, you will see an increase in EBITDA as a result of the sales and less costs, since the coverage of the elections and the new shows that we're producing and also the cost of the war will be lower than the cost of the World Cup.

So, in the second quarter, you will see a positive jump, in terms of EBITDA for television. And on a consolidated basis, I think that there's still room to move in terms of reductions. So I think you will see, on a consolidated basis, reductions at year-end.

So you're expectation then is that cost on a consolidated basis will be flat year on year or actually lower year on year?

Slightly lower but not immaterial.

OK. And, also, your cap ex for the quarter was very low. Are you still comfortable with 110 million, or do you think there's a possibility of lowering that number for the year?

No. I think it was because of the cyclical nature of investments that we 're making, but I feel comfortable still with 110.

OK. And on the NOLs (ph), what is the discount rate that you're using to get to your ...

Well, basically, if you -- and we're buying 2.1 billion pesos of net losses or -- I mean the 6.4 billion at 33 percent, and I think that was the methodology used. I mean, basically, since we're going to use them in 2003 and 2004 fully, that's why we think that $81 million is a very good price.

OK. And if you can just give us an update on the share buybacks, what price level would you consider an attractive level for buying back the shares?

Well, as we have mentioned, we'll be opportunistic about the buybacks. We continue to -- and we would like to confirm that we will fully implement this three-year plan. However, as you know, we don't disclose the price levels at which we both buy back shares or do derivative (ph) transactions.

OK. And just one final question. On the Televicentro (ph) puts (ph), what's the effective price at which those puts can be exercised?

That put (ph) can be -- it's a -- it's a formula based on the purchase prices at which the shareholders of Televicentro (ph) bought their shares, plus a compounded -- a compounded amount -- a compounded IRR (ph).

However, this is a 2005 issue. We're going to be proactive about it, and we will find a solution before that. But we don't feel nervous, or we don't have any problem with that issue right now, and we will find a solution that is beneficial, both for the shareholders of Televicentro (ph) and for the shareholders of Televisa.

So I feel comfortable about that. I am not nervous or under pressure because of that issue.

OK. Thank you, Alfonso.

Our next question is coming from Scott McDonald (ph) of Aladdin (ph) Capital. Please go ahead with your question.

Good morning, gentlemen. I thought it was a very good conference call. I've got two, brief questions. I was just wondering if there's any changes, in terms of your situation with your credit facilities. And the second question -- and the lady before me might have asked this, but I didn't hear it, but it was a question as to any changes in the status of your debt.

As to our credit facility, there has been no change. This year we're going to refinance 800 million, basically, and in the -- we have maturities for $118 (ph) million, and we have decided to refinance 800 million pesos in pesos and to pay back $44 million.

Can you talk about anything else in terms of your debt at all or ...

We feel very comfortable with the debt schedule that we have, so, I mean, basically, more than 40 percent matures in 11 years or more, so I think we feel extremely comfortable with that.

OK. Thank you very much.

Also with our ratios. No (ph)? I mean, our ratios are extremely solid, so net debt is very small, so we feel very comfortable.

OK. Thank you very much.

Gentlemen, there appears to be no further questions at this time. I'll turn the floor back over to you for any further remarks.

Well, thank you very much for participating and see you next quarter. If you have any other questions, give us a call.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.