Grupo Televisa SAB (TV) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Grupo Televisa First Quarter Teleconference. At this time, all callers are in the listen-only mode and the floor will open for questions following today's presentation.

Before we begin, I would like to draw your attention to page six 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 the Executive Vice President of Grupo Televisa, Alfonso de Angoitia. Please go ahead sir.

Thank you. Good morning. We're pleased to have you with us for this discussion of Grupo Televisa's results for the first quarter of 2004. With me today are Jose Baston, Corporate Vice President of Television, and [Sally Faulk], our Chief Financial Officer.

Before we review our first quarter results, I would like to take a moment to report that all the resolutions required to implement the recapitalization plan announced on March 25 were approved by our shareholders during our last shareholders' meeting, held on April 16. As a result of this recap, all equity ownership in the Company will be concentrated at the Televisa level while maintaining a simplified control structure, and above all safeguarding the interests of minority shareholders.

With this transaction we come to the end of the long road we have traveled together, to solve the many issues that Televisa faced when Emilio Azcarraga Jean became Chairman, back in 1997. I would like to take this opportunity to express our deepest gratitude to all our shareholders for their support.

I will now proceed to take you through the highlights of our financial results for the quarter, and we will review the outlook for the rest of the year. Then Pepe will take you through the operating results of our television segment. After that we will be glad to take your questions.

The first quarter proved to be another record-breaking quarter for Televisa. Consolidated net sales increased 4.3% to 5.2b pesos, and EBITDA grew 10.4% to 1.5b pesos, reaching a consolidated EBITDA margin of 28.7%. Moreover, we reached record first quarter consolidated and television broadcasting net sales, EBITDA, and EBITDA margin.

This performance is even more significant when compared to last year's first quarter, when political advertising for 2003's mid-term elections boosted our results.

Our television broadcasting business continued to show strong momentum during the first quarter, with sales increasing 4.3% to 3.2b pesos. I want to highlight that excluding political advertising, sales of our television broadcasting business increased 10% during the first quarter, reflecting a solid increase in investment from our clients. In addition, we reduced costs and expenses of our television broadcasting business by more than 30m pesos during the first quarter.

As a result, television broadcasting EBITDA increased 15% to 1.2b pesos, reaching a record first quarter EBITDA margin of 39.7%.

Our programming for pay television business continued to expand during the first quarter. Sales increased 3.6% from last year's first quarter, to 158m pesos. And EBITDA grew 25% to 44m pesos, reflecting the growing popularity of our pay television channels.

Royalties from our programming license agreement with Univision increased 8.7% from last year's first quarter, to $22.9m. However, this growth was offset by slower programming exports in Europe and Asia, and 11.7m pesos negative translation effect on foreign currency denominated sales, which resulted from the appreciation of the Mexican peso.

As a result, our programming licensing business sales and EBITDA decreased marginally during the first quarter. Excluding the negative translation effect, our programming licensing sales in dollar terms were flat, and EBITDA increased 6% during the first quarter. Needless to say, we expect this business to continue to grow in the future quarters.

Sales from our publishing business increased 3.8% to 371m pesos from last year's first quarter, driven by an increase in advertising sales in Mexico and abroad.

Our publishing business produces seven of the ten most read magazines in Mexico. In addition, a recent study by one of the largest research companies in the US showed that Telenovelas - one of our most popular magazines in Mexico - has the largest number of average readers per issue than any other magazine in the US Hispanic market. Telenovelas has an average of 2.4m readers per issue, where People and Espagnole has only 1.8m. Telenovelas' content is based on Televisa's vast pool of entertainment talent, and is a perfect example of the strong synergies between our television and publishing businesses.

Like television, our radio business also faced a tough comparison, due to last year's political advertising. As a result, sales for the quarter decreased 9% to 53m pesos compared to last year's first quarter, and we reported a marginal negative EBITDA contribution.

Shifting now to our pay television businesses. Innova, our DTH business operating in Mexico, delivered outstanding results during the first quarter. The Company added 29,500 new subscribers during the quarter, reaching a total of 886,000 gross active subscribers.

Sales increased 19.1% from last year's first quarter, to 1.1b pesos, reflecting the growth in the Company's subscriber base and the positive effect of the elimination of the excise tax on telecommunication services. As a result, the Company's EBITDA increased by 42.6% to 387m pesos, reaching a record EBITDA margin of 35.4%.

In addition to solid operating results, interest expense and foreign exchange loss decreased during the quarter, allowing Innova to generate 147m pesos in net income.

We are also pleased to report that after nine consecutive quarters of subscriber losses, Cablevision added 1,500 new subscribers during the first quarter, reaching a total of 365,900 gross active subscribers. In addition, sales increased 7.6% from last year's first quarter, to 269m pesos, reflecting the positive effect of the elimination of the excise tax.

EBITDA increased 14.9% to 84.9m pesos, due to revenue expansion and lower programming costs. As planned, we are currently implementing the first stage of Cablevision's digital station plan, and we expect to have preliminary results by mid-year.

Net income increased 81% from last year's first quarter, to 472m pesos, driven primarily by an 194m pesos increase in operating income and an 172m pesos increase in equity in results from affiliates.

Our balance sheet remains exceptionally strong, with more than 15b pesos in cash at the end of the first quarter. As a result, for the first time in the Company's history, we reported a negative net debt of 47m pesos.

As part of our recently established dividend policy, in 2004 we will pay a regular dividend of pesos 35c per CPO, plus an extraordinary dividend of approximately 87c per CPO, which will be simultaneously paid with the regular dividend for the total payment of approximately 1 peso and 22c per CPO. This will be an aggregate amount of 3.85b pesos. This dividend will be paid on May 21 2004, to shareholders on record as of May 20.

Looking ahead, I want to emphasize that the second quarter will not be directly comparable with the last year's second quarter, since we received 500m pesos in political advertising during the second quarter of 2003. However, for the full year we believe that our 2004 upfront sales, the current advertising momentum, and the special events scheduled in the calendar for this year, will allow us to make up the political advertising shortfall and achieve a marginal revenue increase in our television broadcasting business.

In addition, we expect to keep costs and expenses flat throughout the year, which will allow us to maintain our television broadcasting and consolidated EBITDA margin at 2003 levels.

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

Thank you Alfonso, and good morning everyone.

I am pleased to report that in the first quarter we continued to sustain the highest ratings and audience shares across the board. From sign on to sign off, we achieve an average audience share of 71.1%. And we're 85 of the top 100 programs in Mexico, and 19 out of the top 20.

Our novelas continue to provide strong ratings and revenues. For example, our 9:00pm novela - Mariana de la Noche - was again the highest-rated program in the quarter, with an average audience share of 37.8%. Also, our children's novela - Amy, La nina de la Mochila Azul - reached an average audience share of 37.8% during the quarter.

Our reality shows have again proven to be tremendously popular and profitable. Our third edition of Big Brother VIP, which has started to air on March 14, captured an average audience share of 38.7% during our Sunday nomination and eviction shows. And it's generating an EBITDA margin of 75%.

Our weekly comic programs in the 10:00pm slot are among the top ten programs in the country. [Les Collitas VIP], for example, achieved an average share of 41.6%, followed by [Edifactura West], with an average share of 38.1%.

Channel 4, our local Mexico City channel, continued to drive our local sales growth. In the first quarter, local sales increased 8.4%, and accounted to 12.6% of our television broadcasting sales.

I want to emphasize that excluding the effect of political advertising, sales to our traditional television customers increased 10% during the first quarter. This growth illustrates the strong momentum we are experiencing in our television broadcasting business. In addition, during the first quarter we reduced costs and expenses by more than 30m pesos compared to last year's first quarter, reaching a record EBITDA margin of 39.7%.

We have been able to continue finding ways of reducing costs and expenses while maintaining strong ratings. I would like to share with you some examples of the strategies we have implemented to increase our profitability.

Our programming strategy is defined around our customer needs. In other words, we only produce programs that target the demographics that our clients demand.

We are airing more re-runs that are achieving high ratings with minimal cost attached.

We are optimizing the profitability of our programming inventory among our different channels and timeslots. For example, we recently moved a program called La Oreja, which used to be sold out in Channel 9, to Channel 2. But the term continues to be sold out but with a much higher rate.

We implemented a special incentive program through which we share a percentage of the savings generated with the production teams of the novelas and comedy shows, as long as they reach the rating objectives. As a result, since January 2003 85% of our novela productions have received this incentive.

Our results this quarter reflect our strategy of maintaining the optimal balance between revenues, ratings and costs.

Shifting now to our programming and licensing business. Our programming continues to be tremendously popular among the US Hispanic community. During the first quarter, our novela 'Mariana de la Noche' achieved an average of 19.7 rating points for Univision's 8:00pm timeslot. And our other novelas and programs continue to provide a valuable source of viewers for the Univision, Galavision and Telefutura networks.

In exchange, during the first quarter we received $22.9m in royalties from Univision.

Now we will be glad to take your questions.

Thank you. The floor is now open for questions. [Operator Instructions].

Our first question is coming from Rene Pimental of Deutsche. Please go ahead.

Yes. Good morning, gentlemen. Congratulations on your results.

I have a question regarding Cablevision. The Secretary of Communications seems to have issued a requirement eliminating all the exclusivity in terms of territorial coverage for cable companies. What effect could we expect to see, especially if there is a new competitor in Mexico City? And will you take advantage of this to go into new territories in the rest of Mexico?

Yes. There is no ruling of that sort. What has happened is that in certain areas the Secretary of Communications has granted other concessions. So there are two concessions in some areas. However, as far as we know no new concessions have been granted in connection with areas where Cablevision operates.

So I think Mexico City is a very difficult area to cable. So I think-- I don't know what, if those concessions were granted to someone in Mexico City, how profitable it would be for someone new to enter this market.

Would you be looking at seeking concessions in other markets for Cablevision?

Yes. We have been seeking and obtaining new concessions in the area surrounding Mexico City.

Okay. Thank you very much.

Thank you. Our next question is coming from Dan Prikowski of Schroeders. Please go ahead.

Good morning. Congratulations again. Two questions.

First question is - how do the utilization rates compare in this quarter versus the first quarter in 2003?

And the second question is - what do you think your effective tax rate is going to be in 2004?

Well, I'm going to tell you that basically your first question, the utilization rate that we have had as an average is about 60%. Utilization rate across the board.

And how does that compare against last year?

We have had that very similar, a very similar-- The first quarter of, and also basically all the year, we have a very similar percentage quarter against quarter.

And sorry, then, which was your second question?

Your expected effective tax rate for 2004 for the full year.

That will be around from 26-28%. Because of the [Telespecialidales] deal last year we were able to reduce that to 16%, which was a success for the Company. However, I think this year it will be from 26-28%.

Okay. Excellent. Thank you very much.

Thank you.

Thank you. Our next question is coming from Jean-Charles Lemardeley of JP Morgan. Please go ahead.

Yes. Good morning. Just first a question in-- You had more insulation this quarter than last quarter, the first quarter last year. How much did you get from inflation adjustment of deposits versus last year?

Well, in the first quarter of 2003, we had 79.2% of upfront dollars against 20% of spot market, of the spot market. And first quarter of 2004 we had 87.7% of upfront money against 12.3% of spot sales.

Okay. So you did see a drop in spot sales as a percentage of your--?

Yes. The comparison is like that because of the political sales, which are totally spot sales. From the spot market.

Okay. But as far as the inflation adjustment of deposits, that particular revenue stream - did you see an increase year-over-year?

Yes, Jean-Charles. We had a slight increase last year. In the first quarter we had 30m and this year 33m. So it was a slight increase.

Okay. So it's immaterial. So overall your recurring cash revenue growth was close to 10%. How sustainable do you think that is for the rest of the year? Because obviously this is significantly higher than what you had in pre-sales, and it's a pretty robust number.

I think, as we have said, the comparison during the second quarter is going to be tough because of the 500m pesos we received in political advertising in the second quarter of last year. However, we feel that the economy is better. And also, as a result of the upfront sales and the deposit that we have, we think that we can reach the outlook that we have given to the market. Which is flattish sales of television throughout the year and maintaining the margins since costs and expenses will be flat.

Okay. Just on the costs side in television, how much did you benefit from the stronger peso versus last year?

One moment. The conference will resume momentarily. Please remain on the line.

Thank you for your patience. Just one moment, the conference will resume momentarily. Please remain on the line.

Hello?

Please resume with your conference.

Okay. Thank you. Jean-Charles?

Yes.

There was some problem with the telephone.

Okay, yes. Just on the, from the stronger-- What was the effect of the stronger peso? Obviously it did hurt you in some revenue lines, but on the cost front - particularly in television broadcasting - how much help did you get from the stronger peso versus last year?

It's not really material in television broadcasting. I think it hurt us, especially in the export of programming, as I mentioned. Where it hurt us on sales, but those costs are in pesos basically, so it's more an effect on sales - a negative effect on sales - than costs.

Okay. So in other words you didn't get any help in broadcasting?

No. Not really.

Okay. Thanks a lot.

And congratulations on your wedding.

Thank you very much. Thank you. Goodbye.

Thank you. Our next question is coming from Chris Recouso of Bear Stearns. Please go ahead.

Good morning guys. Two questions. I wonder if you could speak to the - from what I calculate - pretty huge decline in your receivables on the balance sheet, and if perhaps that's because a lot of your advertisers are prepaying in cash.

And also, if you can go through a breakdown of your non-recurring and other expenses, please.

Yes. As to your first question, I think it's what you mentioned. And also that we're collecting more effectively. We have been very efficient in collecting receivables.

And the second question, you were referring to other expenses?

Yes. If you can just go briefly through your non-recurring and other expenses, a breakdown please.

Yes. Well other expenses - we had a decrease on this other and it's basically because we're not amortizing goodwill any more, as a result of [Bulletin D7]. As you remember, we took the impairment last year and we're not reflecting the amortization of goodwill this year.

And as to the rest of the items, about 25m are related to donations, especially to Televisa Foundation. We have disposition of assets, especially related to Cablevision and television broadcasting, for about 40m. Cablevision has to do with the new equipment and the old equipment, and the cable that we're changing. We have also a reserve for non-operating doubtful trade accounts, for 15m. And we have legal services, which are related to non-operating lawsuits, such as the DirectTV lawsuit, Kinema Films for [Novica]. It's some legal services not related to operations, which are 20m.

Okay. But just to circle back in terms of the accounts receivables, is there any reason specifically why there's so many advertisers that I assume are not just paying upfront in cash, as opposed to legally binding notes?

Chris, it was part of the plan and how we sold the plan.

Okay. Thank you.

Thank you. Our next question is coming from Patrick Grenham of Citigroup. Please go ahead.

Yes. I have a question on the upfront balance again. It seems to have dropped a lot in the first quarter. I know that you mentioned that a very high percentage of your revenues this quarter was from upfront, but you usually have a residual amount coming in in the first quarter. Are we likely to see this rate of decline, or could you - I suppose the question is really, could you give us an idea of how the spot revenues, you think they'll move in the next three quarters of the year? Are we expecting them to be low again in the second quarter and then move up quite a bit in the third? And overall, do you have guidance for overall spot revenues for this year compared to last?

Hi Patrick. I think here in the balance sheet you can see that on December 31 we had 13.7b pesos of customer deposits and advances. And at the close of this quarter we have approximately 12b. And that's basically because of the consumption by clients. As they place advertising we reduce the deposit. But that's basically the reason for the decline. It's the sales.

And as to spot sales versus upfront, we have seen a very similar thing on what we have in the previous years, which is about an 80/20 - 80 upfront, 20 spot sales.

And the seasonality on the spot?

Well the seasonality on the spot is most importantly in the second quarter and third quarter. And almost irrelevant on the fourth quarter, where almost everything is upfront.

So your guidance on spot this year would be pretty much grow in line with the rest of the market overall? Or do you think it'll--?

Yes. That is correct. And we continue to believe that it's going to be approximately 20% of total television broadcasting sales.

Okay, great. Thank you.

Thank you. Our next question is coming from David Joyce of Guzman and Company. Please go ahead.

Thank you. Excuse me. Could you please discuss the amount of hours you produced this quarter, and breakdown by the type - be it news, sports, novelas, what have you? Also, the proportion of that that went to Univision?

Yes. Hold on a second. We're getting that information.

Well, we produced in the first quarter 13,000 hours. A little bit over 13,000 hours. Well, for some of our programs - and I cannot give you the exact details on that - our programs that we don't have the rights, the international rights. And I'm talking about programs that we have to pay a license fee for the Mexican rights, which is basically the reality shows as well as programs that we call [Cinecam Dejarum]. But basically the total-- I can tell you that out of those 13,000, I would say that close to 90%, a little over 90%, of those are available for Univision and they are into the three networks - Galavision, Univision and Telefutura. But I don't have the exact number of hours that they have aired. I can get it to you, if you want.

I'd appreciate that. And I guess, since you're expecting flat expenses throughout the year, you would probably have a flat level of production going forward?

Yes. We're going to have a very similar level of production throughout the year.

Okay. Thank you very much.

Thank you. Our next question is coming from Eric Olum of ING. Please go ahead.

Yes, hi. Good morning everybody. My question has to do with Innova. Could you just give us an update on the status with DirectTV? And also maybe some color on the subscriber growth - how much of that could you really subscribe (no pun intended) to migration from DirectTV subscribers?

Yes, hi. We cannot comment on the ongoing negotiations with News Corporation and DirectTV. However, what I can tell you is that we reiterate that it would be a very good thing to have a unified platform in Mexico. So we're working on it.

As to the migration of subscribers, it's very difficult to tell but we believe that DirectTV continues to be losing subscribers every quarter. Even though they have launched promotions, but I don't think that they have been very successful. So I think part of the growth is from that, from capturing DirectTV subscribers, but most importantly it's the addition of new subscribers.

Okay. Could you ballpark a ratio, or--?

It's very difficult to say. We don't have that kind of information. We just get the subscribers, but we have not identified whether they're coming from DirectTV, or from other, from a cable system or from other sources.

Okay. All right. Thank you.

Thank you. [Operator Instructions].

Our next question is coming from Whitney Johnson of Merrill Lynch. Please go ahead.

Thank you. Alfonso, on your local sales as a percentage of the total for the quarter versus 1Q '03 - can you give us an idea of how those percentages changed, as well as the number of new advertisers that you had this quarter versus a year ago?

Hi Whitney. First, I'm very glad this year that your question is not related to the television throughput.

I think that the local sales were very good and we were very successful in selling locally in the first quarter. Just to give you an example, Channel 4 grew 16%, even considering the political advertising that Channel 4 had in the first quarter of '03 that was related to the elections in the state of Mexico.

However, if you look at the total local sales there was a small reduction if you compare the first quarter of '03 to '04, because of this political advertising. But it is irrelevant, and it represents about 12% of total television broadcasting sales in the quarter.

Alfonso, how much was political advertising in 1Q of last year? And was it all booked as local?

The total amount was 150m pesos, and I don't have the breakdown as to local and national here. But I can get it to you.

Okay, great. Also, your cash taxes. You indicated that your effective tax rate's going to be considerably higher this year than last year. Are you looking at acquiring additional NOLs?

We're looking at several strategies. However, I think that considering the very low rate that we had last year it's going to be very difficult to match it. But even the 26-28% is, I think, very good.

Okay. And then two more questions. On CAPEX, your number was very low for the quarter versus your full-year guidance. Are you looking at revising down your guidance for the year, or is this just seasonal?

No. I think it's seasonal. We are kicking to $110m.

Okay. And the final question is on Innova. I know that you have been looking at the potential of consolidating that into your financial statements. Can you give us an update on the timing of that? And is there any below the line charges that we can expect, and how much they would be?

Yes. I think, as we have mentioned, I cannot comment on the specifics because the negotiations are ongoing. I think that something will happen this quarter, but we cannot go into the specifics. As I have said, I think we continue re-emphasizing that it would be great to have a single platform in Mexico. It would be a great business, serving more than 5b pesos a year, and with more than 1m subscribers. So we're working towards that and we would be interested in doing a deal that has to do with subscribers more than a merger or buying a company.

Now, setting aside the issue of DirectTV, what about actually consolidating Innova, so that we see it on your P&L, etc., as opposed to as an equity?

Yes. Aside from the DirectTV deal, we would be proposing to the Board of Directors in its next meeting - so this would be this quarter - the financial consolidation of Innova.

Okay. And will there be any charges related to that, below the line?

Yes. There will be a charge, an accounting charge non-cash, because we would have to recognize 60% of the losses that Innova has had.

Can you give us an idea as to order of magnitude on that?

It's about 1.4b pesos.

Okay. All non-cash?

Non-cash, yes.

It's likely to show up in the third quarter, it sounds like?

Yes. Or even in the second quarter. It's recognizing the losses that Innova has had.

All right. Thank you.

Thank you. I would like to now turn the floor over to the speakers for any further remarks.

Well, thank you very much. I think that the results were extraordinary, and hopefully we'll have very good results next quarter. Thank you. Goodbye.

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