Grupo Televisa SAB (TV) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Grupo Televisa Second Quarter Earnings 2004 Teleconference. At this time, all callers are in a listen-only mode and the floor will be opened for questions following today's presentation. Before we begin, I would like to draw your attention to Page 8 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 Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead.

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

First, I would like 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 proceed to talk about the operating results of our television segment. After that we will be glad to take your questions.

Televisa delivered outstanding results during the second quarter, exceeding by far our initial expectations as well as the market consensus for the period. On a pro forma basis, consolidated net sales increased 9.4% to 7.4 billion pesos, significantly outpacing the Mexican economy and setting a new second quarter consolidated net sales record. Operating income before depreciation and amortization increased 15.2% to 2.7 billion pesos, reaching a 37% margin, the highest ever reported by the Company in any second quarter. In addition, all of our business segments grew during the quarter. This is particular impressive giving the difficult comparison faced by our television and radio businesses due to last year's political advertising. In fact, excluding political advertising television broadcasting net sales experienced double-digit growth for the second quarter in a row, increasing 18.5% to 3.9 billion pesos. This more than compensates for last year's political advertising and sets a new second quarter television broadcasting net sales record. These results reflect once again the excellent planning and execution of our sales team carried by Alejandro Quintero, who has done an outstanding job. In addition, we kept our commitment of maintaining cost and expenses flat, which allowed our television broadcasting operating income before depreciation and amortization to grow 5.6% to 1.8 billion pesos and to reach 46.4 % margin -- both a new second quarter record.

Our programming for pay television business also continued its positive trend. Net sales increased 10.4% to 194 million pesos and operating income before depreciation and amortization expanded a 121% due to the growing popularity of our pay television channels in Mexico and Latin America, and lower programming cost and operating expenses. In addition our program licensing business continued to expand at double-digit rates. Net sales increased 18%and operating income before depreciation and amortization grew 37%, driven by a 19.2% increase in royalties from our program license agreement with Univision, which amounted to $29.7 million as well as by a $25 million peso positive translation effects resulting from the depreciation of the Mexican peso during the period.

Sales from our publishing business increased 16.6% to 530 million pesos and operating income before depreciation and amortization grew 12% to 128 million pesos. This was driven by an increase in magazine circulation in Mexico and abroad and by an increase in advertising sales in every single country where we sell advertising. Despite the difficult quarterly comparison faced by our radio business, it produced a 4% increase in revenues and of 15% increase in operating income before depreciation and amortization during the second quarter. In addition we recently affiliated 41 new radio stations, expanding our network to 71 stations reaching 33 cities in Mexico and making our radio business an even more attractive alternative for national advertising.

Shifting now to our paid television business. As explained in our press release, effective April 1, 2004 we adopted the guidelines of FIN 46 in accordance with Mexican GAAP Bulletin A-8. As a result, during the second quarter, we began consolidating Innova, our DTH business in Mexico into Televisa's financial statement. With annual sales exceeding 4.2 billion pesos and an operating income before depreciation and amortization of more than 1.4 billion pesos per year, Innova represents approximately 15% of our consolidated sales and operating income before depreciation and amortization. Innova is our largest consolidated business after television broadcasting and it is also one of our fastest growing businesses. During the second quarter, Innova added 52,000 new subscribers reaching a total of 938,000 gross active subscribers. In addition, sales increase 19% to 1.1 billion pesos and operating income before depreciation and amortization increased 37% compared to last year's second quarter reaching 36.2% margin.

We are also pleased to report that Cablevision added 6,800 subscribers during second quarter reaching a total of 372,000 gross active subscribers. In addition sales increased 9.9%, and operating income before depreciation and amortization grew 45% compared to last year's second quarter. Net income reached 461 million pesos during the second quarter after booking one-time non-cash 992 million peso cumulative loss related to an accounting charge resulting from the consolidation of Innova into our financial statement. During the second quarter, we paid a dividend of 1.22 pesos per CPO for an aggregate amount of 3.85 billion pesos and purchased 15.5 million CPOs for approximately 372 million pesos. In total we returned over 4.2 billion pesos to our shareholders last quarter.

Our balance sheet remains strong with over 11.7 billion pesos in cash and a total debt of 19.6 billion pesos, including Sky Mexico's 4.4 billion peso debt, which is not guaranteed by Televisa. Fitch recently acknowledged strong financial profile upgrading Televisa's long terms foreign currency rating to BBB, one notch above Mexico Sovereign long term foreign currency ratings.

Moving on to outlook, we're our guidance for the year. We now expect revenues for our television broadcasting business to increase in the range of 3% to 4%. In addition despite the cost associated with the production and transmission of the Olympic game, we remain committed to keeping cost and expenses of our Television broadcasting business flat. Therefore we now expect to exceed last year’s television broadcasting operating income before depreciation and amortization. Now I would like to turn over the call to Pepe.

Thank you, Alfonso, and good morning to everyone. Our television broadcasting business continued to deliver outstanding resource. In total during the first half of the year, sales for traditional non-political customers increased 40% to 45% or approximately $912 pesos, establishing new first and second quarter sales records and surpassing last year's political advertising. We also kept our commitment of maintaining cost and expenses flat, which allow us to reach [inaudible] margins during the first and second quarter. This performance is directed related to our ability to generate high and profitable rating points, which is, as I have mentioned in the past, our main objective. In other words, we only produce programs that target within demographics that our clients demand.

Let me share with you some examples, [inaudible] we achieved another excellent year of 71%. We aired 85 of top 100 programs in Mexico. We also had the top 22 programs in the country. Our novelas continue to be a reliable source of ratings and profitability. Our 9 pm novela Mariana de la Noche was among the highest rated programs in the quarter with an average audience share of 41.3%. Our 8 p.m. novela Amarte es mi Pecado reached an average audience share of 38.1%, and our children novela Amy, La Niña de la Mochila Azul reached an average audience share of 38.5% during the quarter.

Our reality shows have once again proven to be tremendously popular and profitable. Our third edition of Big Brother VIP captured an average audience share of 45.2% during the Sunday nomination and [addition] shows reaching an operating income before depreciation and amortization margin of 75%. The Mexican Soccer championship game in June captured an average audience share of 72.5 with an audience peak of 79.7%, reaching an operating income before reaching depreciation and amortization margin of 72%.

In addition, we continue to take advantage of the synergies that exist [inaudible] media assets. During the second quarter we published a secret album for kids based on the characters of our story of our popular novella for kids Amy, La Niña de la Mochila Azul. Our results were amazing. We sold more than 1 million albums on approximately 60 million stickers. This kind of magazine television combination will force our novela and programs among our television viewers and at the same time have additional sources of revenues for our publishing business.

Shifting now to our programming licensing in businesses, our programming continues to be extremely popular among the U.S. Hispanic community. Last June, Televisa launched two television programs novelas Mujer de Madera, and Amarte es mi Pecado, which immediately became the second and third highest rated programs among Hispanic, only behind another Televisa produced novela Mariana de la Noche. In addition, we continue to provide a valuable source of viewers for [Elavision] and [Telefotura] networks. In exchange during the second quarter we received $29 million in royalty in royalties from our programming license agreement with Univision. Now we will be glad to take your questions.

Thank you. The floor is now open for questions. If you do have a question please press "*" "1" 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 "#" key. We do ask that while you pose your question that you utilize your handset to provide optimum sound quality. Once again that is "*""1" on your telephone keypad for any questions at this time. One moment while I hold for questions. Our first question is coming from Whitney Johnson of Merrill Lynch. Please go ahead.

Yes. thank you, three questions. The first is with provide to local sales, can you give us an idea of what percentage of television broadcasting revenue they were this quarter versus 1Q of this year as well as versus 2Q'03? Second question is with the [inaudible] division of your television broadcasting revenue, are you going to upgrade your free cash flow generation targets for this year? And third is given that your free cash is strong will you entertain another special dividend?

The local sales break down for the -- do you want a first quarter against second quarter '04?

Yes please.

It was basically 12% in the first quarter and 14% in the second quarter.

Okay great.

And then your second question Whitney, I think in the last 12 months we have generated about 6.5 billion pesos of free cash flow, which is also an extraordinary result. What we have said is that is the free cost low generation during this year will be from 4.5 to 5, but I think it’s a little conservative; however we would like to leave it at that 5 billion pesos. And as to the dividend, as we have said we have established a dividend policy which amounts to paying a $100 million a year more or less and we’ve said that if we don’t find any attractive opportunities in terms of growth for the Company, we will definitely present to the Board a proposal for the payment of higher dividend.

Terrific. Thank you.

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

Yes, good morning. Your guidance suggests for the second half growth of 3-5% basically in television broadcasting revenues. I understand you prefer to be conservative, which is commendable, but could you give us any reasons why we specifically -- we should expect a slowdown from the pace of say 10% that we saw in the first quarter of the year to that range of 3-5%, is there anything, specifically that would lead you to expect this?

I think Jean-Chares it’s based on the deposits that we have on our balance sheet, which means that -- in order to grow 4% in the year we will have to grow upon 4.5% something around there in the second semester of the year. And you see the deposits in the balance sheets and excluding that line item under deposits that have to with Cablevision and with Sky, with publishing and others -- that is more or less the amount we have. So that assumption is based on the deposits that we have on had.

Okay. Can you remind us just what the economics of the Olympics should be in terms of revenues and of costs in the third quarter?

Yeah. We expect to sell about $22 million and if some of the Mexican athletes are successful, we believe that we can sell a little more, not substantially more but a little. And the total cost of transmission production and the rights is going to be around $12 million.

Okay, thank you very much.

Okay.

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

Hi, good morning. Two questions. First question is can you give us the breakdown of what the spot sales versus upfront sales were in this quarter?

Sure. It was -- upfront 84.3%, spot 18.7%.

And then the second question is, in the first half of the year how much the upfront have been spent versus the first half of last year?

Yeah, hold on a second.

Okay on a percentage basis.

Yeah.

In the first quarter of 2003, it was 4.8% of spot sales and the second quarter of 2003 it was 18.6% on the spot sales. Again the first quarter 2004 -- 12.3% and second quarter 2004 15.7%.

Okay, thank you very much.

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

Hi good morning. Two questions. First of all on the upfront again, and you mentioned that this 5% -- your upfront deposits of 5% higher for TV now than they were a year ago. What kind of a momentum do you have in the revenues, is it likely we are going to see a pickup in spot revenues or just -- I would like to get a qualitative idea for why customers decided to allow their upfront deposits to deplete so much in the second quarter, usually that’s something that only happens in the fourth quarter? And are you expecting a very sharp slowdown in the rate of spending in the fourth quarter or do you think its going to be taken up in the spot? Second question is as you've raised your guidance on the revenue, your old guidance on the EBITDA margin was just over 40%, I believe, on the EBITDA margin on the TV business and 30-32% on the consolidated numbers, I might be recollecting that wrong. Are you raising up -- I imagine your rising your EBITDA margin guidance and if you are to what?

I think as to the last question we talked about maintaining the margin, which last year was 42.5 and now considering the new guidance for television broadcasting, which would be a growth of 3-4% of the top line that would get you about that 44% margin.

And consolidated margin?

And consolidated, we are not predicting -- I mean you have to do the numbers, but that's higher than last year of course.

Okay, fair enough.

Then as to your first question the sales during the third and fourth quarters are better than the first quarter of the year. I think what had helped us a lot especially in the second quarter was the economy in general and also that we had -- we were fortunate enough to have three of the four teams that played the semi-finals of the Soccer league tournament, and we had the two final matches -- just on those two final matches we sold 53 million pesos and during the semi-finals we sold 120 million pesos, so that helped us. And also we shared the two Big Brother: VIPs which were back to back when one -- the same day one ended the other one started and those are products in which you can segment the market, advertisers are looking for those types of products and therefore we treat them as special programs where the discounts that are given to clients not necessarily are applicable to those programs.

So --

That is what happened during the second quarter and, I think, -- we're basing this growth of 3-4% in the year with a growth of little higher than 4% during the second semester, and basically, as I mentioned, before we are talking about the deposits that we have on hand.

Alright. So the seasonality we normally see with nearly everything sold in the third and fourth quarter, you are going to see a little -- you are going to see a small shift in the seasonality --

I think that the second quarter has been so strong that you might see a shift. However, as you mentioned we like to be conservative and not over promise. That's why we're saying, basically that we believe that television broadcasting will grow 3-4% in the year.

Okay. That's the floor.

That's what we are thinking right now and that’s based on the deposit.

Okay excellent. Thank you

Thank you, our next question comes from Vera Rossi of Morgan Stanley. Please go ahead.

Thank you. My question is on your special event. You mentioned in your press release that Euro Cup and also the soccer match in the Mexico helped the second quarter results. In the third quarter we had American Cup, so I want to check if this is also going to help the third quarter results? And my second question is also if you have a new reality shows for the third and fourth quarter like any Big Brother or other reality shows in your schedule to help the revenues to grow as you head in the second quarter? Thank you.

Hi Vera. I think the CopAmerica will definitely help. It's, as you know -- soccer is very popular in Mexico. As I mentioned, during the semi-finals of the soccer league we sold a 120 million pesos and just the final two matches, we sold 53 million pesos. So the CopAmerica will help.

And to the reality question we are not planning to have any other daily reality shows on the air for the second semester. We want to take a break -- a little bit. We have been using this format for a very long time and with a lot of different shows in a very short-term basis, so we want to take a break and come back in the first semester of 2005. Although, we are going to have the Fear Factor and we're going to -- we developed two reality shows Televisa, our own format and they are doing very well. But you won't see the kind of revenue that you see on a program like Big Brother, because as you know Big Brother is a 24-hour program for the pay TV industry which is on the Sky program --on the Sky exclusive program. And also we have about, let's say, 10 hours a week of show during our [inaudible]. So we want to take a break to be able to have these kind of shows for a long term, and we won’t have any of those big programs in the second semesters.

Okay I have one more question about the economy in Mexico in general. What are the industries that are spending more? I had a conversation with Michel and he told me consumers in general, but I want to check if its beverage, telecom, banks -- what are the segments in the economy that are spending more this year versus last year?

I think we have seen five sectors in the second quarter -- it was construction, financial services, consumer products, pharmaceutical and food and general.

Okay. Thank you.

Thank you. Our next question is coming from Rene Pimentel of Deutsche IXE. Please go ahead.

Yes. Good morning gentlemen and congratulations on your results. I had a couple of questions. We saw a significant expansion in the margins of Sky and Cablevision, obviously partially explained by the elimination of the excise tax. How sustainable do you think these margins are going forward? And the second question is in regards to the repurchase program, you have above $400 million for the repurchase program, if I am not incorrect and you acquired around $32 million this quarter. Do we expect to see an acceleration of this repurchase program going into the second half of the year?

Yeah to the margins on pay television I think that the [inaudible] margins will be sustainable. Cablevision, as you know, had very difficult years after the Mexican Congress passing the special tax. I think that we are seeing light at the end of the tunnel, and for the second quarter in a row we have seen a pick up in terms of number of subscribers, more than 6,000 during the second quarter. So we believe that the Company is doing much better, and I think they will be able to maintain reasonable margins; however, I mean the margins of this quarter were extraordinary, so but as to Cablevision we are looking at a better picture. I don’t know if you are going to see the level of margins that we had in the second quarter. But they will have good margins.

And then as to the repurchase, we were limited during the whole third quarter as to repurchases, because we were planning the restructuring of [inaudible] and the recapitalization. And as a result of that, the lawyers told that we could not buyback stock. And after that during the second quarter, we bought back 371 million pesos, especially in the last 2 months, so we'll continue to buy opportunistically, and we are committed, we feel, that it’s a great price. At this price it's a great investment and a great use of our cash to invest in our shares. So we will continue to buy opportunistically.

Okay. Thank you very much.

Thank you out next question is coming from Rodrigo Ortega of GBM. Please go ahead.

Good morning, gentlemen and congratulations on a good set of results. I have just two quick questions. And could you give us your update on our maintenance CapEx for the year now that you have consolidated Innova? And the second is, could you give us any comment in relation to the possibility that people start using the [dualband] capacity to transmit voice and data?

To answer your first question, Innova's CapEx will be around $60 million this year, so and that we're committed to the number we gave you in terms of CapEx, which in total amounts to 110 million including Cablevision. So Innova's will be 60 million. And then I couldn't hear Rodrigo, your second question?

It was in relation to the possibility that [inaudible] start using the dual-band capacity for voice and data services?

The rules are not ready yet. The concession that we have does not allow us to offer Voiceover IP or other type of voice services. However, we are working on it. I think [inaudible] has other things to solve before offering those services. We have been able to grow in terms of penetration of broadband. We have in most [inaudible] in this quarter than before, but I think it’s not going to be this year and I don’t think it’s going to be in the first semester and next year either.

Okay and from my -- I believe that Cablevision’s priority is now to turn to digital to increase its subscriber base. Could you give us some insight on what’s going over there?

Well the priority of Cablevision is to digitalize the full platform which, it’s a 2-year program we started thus year. We have been successful in digitalizing some areas in Mexico City where we have seen pick in terms of subscribers and also in terms of sales because of the additional services, the value-added services that we can offer once the network had been digitalized. As a result of the digitalization, we can combat piracy more effectively, and therefore I think it’s a right thing that we are doing. It will take time. I said it’s a 2-year program and well the results are -- we are starting to see the results.

Okay. Thanks and congratulations again.

Thank you.

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

Yes, hi. My question has to do with Sky and specifically the status of any combination with the Innova and DirectTV. I guess we had always thought this would be a 2004 event, does that seem like a possibility? And then secondly given that you are consolidating Innova and yet are not assuming its debt, given the high cost of Innova debt, is it contemplated in some way that perhaps there would be some sort of assumption or refinancing at a lower rate using Televisa credit guarantees?

Yeah, I think for your first question, we have always said that it makes a lot of sense to have a single DTH platform in Mexico. And I cannot comment on specific negotiations with DirectTV; however, I can say that it makes -- we continue to think that it makes a lot of sense to have this single platform and to unify it. However, the only thing that we would like to buy from DirectTV in Mexico are the subscribers and not the whole company nor do a merger, because it doesn't make a lot of sense for us to do that because of the costs involved, especially the transponder agreements that DirectTV has signed for Mexico and the cost of eliminating the double satellite. Also the cost of programming and the cost of laying off the employees in that company. So basically I think that hopefully that will be during the 2004 but I cannot comment on the specific negotiations.

And then to the second, I think that, you know, that there is still a remaining portion of Innova previous bonds, which is very expensive and I think that during this quarter you will see a change there and basically Televisa will be willing to give its guarantee to reduce the cost of that of the refinancing of that portion of the bond that is still outstanding.

Thank you very much.

Thank you once again I would like to remind the audience for any question you may press "*" "1" on your telephone keypad at this time. Our next question is coming from Andrew Campbell of CFSE, please go ahead.

Hi. I understand that there were some digital TV regulations that were published during the quarter, I was wondering if you could just describe briefly what your requirements would be under that and if you think it would be a material impact in terms of CapEx?

Yes I think that the regulations were issued; however, it’s a long term thing. We would have to be during the first stage transmitting on digital starting in -- the total period is 18 years for the whole coverage of the Mexican Republic, and the first phase is only 7 cities by 2006 and that’s low power stations, so I don't think it will involve a huge CapEx or anything of that sort. As a matter of fact, it’s a very small investment. So its an 18-year process. Its very good for Televisa, because we are going to have a lot of spectrum where we can launch other services and other businesses. So I think it’s a great thing for us and it's an 18-year process as I mentioned. So I don't believe that the short term impact will be material.

Okay, thank you very much.

Thank you. One moment while I poll for any follow-up questions. Our next question is coming from Eduardo Estrada of Accival. Please go ahead

Good morning gentlemen, I have two questions for you. One is about programming licensing, while you have a very good margin for the second quarter, can you talk us a little bit if you think you can sustain that in the future? My other question is publishing distribution and other businesses which will --you haven't improved, they are still having negative margin. Do you think that we will see in the future some profitability in these sectors? Thank you.

Programming licensing I think that depends a lot on what Univision delivers as the royalty from the program license agreement. As we said the royalty from Univision grew 19% in this quarter, and for the first time they paid us during a single quarter $30 million, which is great for us. So I think that we will able to maintain those margins assuming that Univision continues to grow double digit. That’s lot of business as I think -- it depends a lot on the different segments and the different businesses that we have there. For example the distribution of movies depends a lot on the [inaudible] that you have for every quarter. This quarter we were very fortunate than the second quarter we had the Scooby Doo, we had Troy and also we had Harry Potter, which were great for the distribution for the sales, so then the result of the movie distribution depends a lot on the actual releases that we get. And then we have seen an increase in cost of soccer teams which we're trying to control. And internet -- they have launched the SMS services, which I believe are helping them a lot that is going to help them in their program in order to get to break even next year.

Okay thanks a lot.

Thank you at this time I would turn the floor back over to you for any closing remarks.

Well thank you very much. We are very encouraged. With these results, very happy with them, and we are sure that we will be able to maintain them. So we will see you next quarter.

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