Grupo Televisa SAB (TV) 2005 Q1 法說會逐字稿

Good morning everyone, and welcome to Grupo Televisa's First Quarter Teleconference. 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. It applies to everything discussed in this conference call, as well as to the earnings release.

Now, I will turn the call over to Mr. Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead sir.

Good morning. We're pleased to have you with us for this discussion of Grupo Televisa's results for the first quarter of 2005. With me today are Jose Baston, Corporate Vice President of Television, and Salvi Folch, our Chief Financial Officer.

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

Televisa continued to deliver strong results during the first quarter. On a pro forma basis, including Sky Mexico and reflecting the change in accounting treatment in our Publishing Distribution segment, consolidated sales increased 4.6%. And operating income before the depreciation and amortization increased 11% from last year's first quarter, reaching a record 34.3% margin.

Net income increased 20.6% from last year's first quarter, to MXN594.1m, driven primarily by a 35.8% increase in operating income.

Once again, our Television Broadcasting business exceeded our expectations, despite the difficult comparison, which resulted from having this year's Holy Week holiday in the first again.

Sales increased 1.7%, to MXN3.3b, and we continued to keep costs and expenses flat in real terms. As a result, our operating income before depreciation and amortization increased 4.6% to MXN1.3b, reaching a record first quarter margin of 40.8%.

Our Pay Television Networks business also delivered positive results. Sales increased 33%, to MXN235m. And operating income before depreciation and amortization expanded 103%, to MXN94m.

This reflects the growing penetration of our channels in Pay Television systems in Mexico and Latin America, as well as the consolidation of TuTV into our financial statement. TuTV contributed MXN18.9m to our sales and MXN2.8m to our operating income before depreciation and amortization during the quarter.

Sales of our Programming Exports business decreased 8.4% to MXN396m, due to our negative translation effect on foreign currency-denominated sales that amounted to MXN11.7m, as well as lower export sales outside of the United States.

Univision royalties grew $741,000 year over year, of which $625,000 came from the increase in Telefutura's minimum guaranteed royalty. Univision royalties were below our expectations, due to the fact that Univision decided to deduct the revenues from certain programs in the calculation of the royalties.

Our Publishing business continues its positive trend during the quarter. Sales increased 18.5% to MXN458m, and operating income before depreciation and amortization grew 9.5% to MXN34.7m.

This reflects an increase in both magazine circulation and advertising sales in Mexico and abroad.

Our Radio division continues to improve. Sales grew 12.7%, driven by growth in advertising sold during our newscasts and sports programs. This allowed our Radio business to make a marginal positive contribution to our first quarter operating income before depreciation and amortization.

Moving on to our Pay Television businesses. Sky Mexico continued to deliver outstanding results. The company added 105,000 subscribers during the quarter, reaching over 1.1m gross active subscribers.

Sales increased 14.2% compared to last year's first quarter, to MXN1.3b. And operating income before depreciation and amortization increased 26.2% to MXN509m, reaching a record margin of 39.1%.

In addition, Sky Mexico's net income increased 33% to MXN204m. During the first quarter, we switched 68,551 Direct TV subscribers to Sky, and we expect to complete the migration process before year-end.

[Cable Dicionale]. 15,822 subscribers during the first quarter, reaching 370,822 gross active subscribers, of which 147,040 subscribers have digital service. In addition, the Company added 10,015 broadband customers during the quarter, reaching 36,558 broadband users.

This growth translated into an 8.1% increase in sales, compared to last year's first quarter. However, operating income before depreciation and amortization decreased 6.8% to MXN82.6m, due to higher programming costs and costs associated with restructuring the Company Sales division.

Our Short Messaging Service, or SMS, business continues to grow. It generated MXN80.9m in sales in the first quarter, which allowed our Internet business in our other business segment to make a positive contribution to our first quarter operating income before depreciation and amortization.

Our balance sheet continues to be strong, with only MXN3.4b of net debt, including Sky Mexico.

In March, we took advantage of our financial strength by executing a refinancing transaction in the local and international capital markets. The refinancing consisted of issuing a new 20-year $400m bond, and two concurrent tender offers, one for our U.S. dollar-denominated bond, due 2011, and another for our UDI-denominated bond, due 2007.

The re-offer spread of the new bond was 198 basis points over the U.S. 30-year treasury or 6 basis points inside the UMS 2034 curve, resulting in a coupon of 6.58. The success rate on the U.S. and local tenders was of 74% and 76% respectively. With this transaction, we expect to reduce interest expense by approximately $8m in 2005 and $12m in 2006, as well as extended duration of our debt from 8.2 to 9.5 years.

Looking ahead, we expect a strong second quarter with Television Broadcasting sales increasing approximately 7%, compared to last year. For the full year, we expect our Television Broadcasting sales to increase approximately 4.5%. In addition, we continue to keep costs and expenses under control throughout the year, which should allow our Television Broadcasting operating income before depreciation and amortization margin to reach 47%.

Finally, as part of our stock repurchase program, year to date we have repurchased 9m CPOs for an aggregate amount of MXN290m.

In addition, our Board of Directors will submit to our shareholders' meeting a proposal to pay an extraordinary dividend of MXN1 per CPO, in addition to our ordinary dividend of MXN0.35 per CPO, for a total of MXN1.35 per CPO. The total amount of the dividend will be approximately MXN5.25b.

This represents a 10% increase over last year's dividend, and it's equivalent to a dividend yield of 4.2%, based on yesterday's closing price. If approved by our shareholders, this dividend will be paid on May 31 to our shareholders on record as of May 30.

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

Thank you Alfonso. Good morning to everyone.

As Alfonso explained, our Television Broadcasting sales exceeded our expectations for the quarter. This reflects the success of our programming brief, coupled with expected promotions that were introduced by our sales team for the Holy Week season, which proved to be very attractive to our clients.

During the first quarter, we achieved an average sign-on to sign-off audience share of 71.2%, and we air 85 of the Top 100 programs in Mexico and 19 of the Top 20.

Our novelas continue to boost our prime time ratings. "La Madrastra", our 9pm novela, was the highest rated novela and third highest rated program in the quarter, with an average audience share of 39.7%. Our 8pm novela, "Apuesta por un amor", was the second highest rated novela and fifth highest rated program in the quarter, with an average audience share of 37.4%. "Rebelde", the 7pm novela for teenagers, was also among the ten highest rated programs of the quarter.

Looking ahead, in our Television Broadcasting business we expect a strong second quarter, due to three factors.

First, the favorable comparison arising from not having the Holy Week in the quarter, as it was in the case in 2004.

Second, the political advertising we expect to receive from the elections of the State of Mexico, which will take place in the first week of July.

And finally, we expect to continue delivering high ratings with our content. For example, next Sunday we will start airing a new edition of "Big Brother VIP", the program that in the past has had great results in terms of audience and profitability.

I am also pleased to report that we have already secured the broadcasting rights for the Soccer World Cup, to be played in Germany next year. We will broadcast 30 out of the 64 matches on the event. Televisa paid $15m for these rights.

It is also worth mentioning that Sky Mexico will be the only platform that will air the entire 64 games, offering 34 games on an exclusive basis. We believe this exclusive content will be again, a very driver for attracting new subscribers and will continue positioning Sky as the leading Pay TV platform in the country.

In the United States, our highly popular programming continues to allow Univision to maintain its position as the undisputed leader in the U.S. Hispanic television market. We are by far the most important content supplier for the Company's three networks.

In the Univision network, our novelas, such as "La Madrastra", "Apuesta por un amor" and "Inocente de Ti", generate most of the network strength in ratings and revenues. And our game show "Cine Mexicano [de feron]" is helping Bella Fortuna become the number 2 Spanish language broadcast network behind Univision.

In addition, our comedy show "El Charro", our newscast and our magazine shows such as ["Oi"] and ["La Casa"], are some examples of the programming we supply that make Galavision the number 1 Spanish language cable network in the United States.

Finally, I would like to highlight the great success of the results of our Pay TV Network business during the quarter. Sales grew 33% and our margin expanded from 26% to over 40%. And these sales come at almost no additional cost.

This business segment will continue to grow over time, as Pay TV penetration grows in the markets where we currently distribute our signals. For example, in the U.S. TuTV has now over 1m subscribers and there is still significant growth potential.

Now we will be glad to take your questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Vera Rossi.

Hi, good morning. My first question is on Univision, this adjustment in revenues we saw during the quarter. I would like to know if this is going to happen going forward, or was just a one-quarter event.

And the second question is on the gambling legislation in Mexico, if we have any progress in the last month or so on the legislation. Thank you.

Hi, Vera. As to Univision, as I explained, they decided to deduct the revenues from certain programs in the calculation of the royalty. We disagree with that interpretation and we'll be following up with that company. So it's only in respect to a small -- a very, very small percentage of a special category of programming. So we're going to follow up with them.

As to gambling, there's no gambling law in Mexico. Apparently, it will not be passed by Congress in this session. So let's see what happens in September, but as far as -- as of today, we don't have any gambling project.

Okay. And just a follow up on Univision. What is your expectation for revenues coming from Univision in 2005 in terms of royalties?

We expect to receive about $115m.

$115m? Okay.

Coming from $105m last year.

Okay. Thank you.

Thank you. Our next question comes from Gordon Lee of UBS.

Hi, good morning gentlemen. Just two quick questions. First, on Sky Mexico. Could you just repeat the number of customers from Direct TV that migrated to Sky during the quarter? And also, if you could just confirm that the ARPUs for those customers are in line with those that you have for Sky Mexico on a standalone basis? That's one question.

And the other, if you could just provide an update on the status of the legislation regarding the new media law that the press have been highlighting over the past several weeks. Thank you.

Well, as to your first question, the number of subscribers that have migrated is 68,551. We will continue the migration process throughout the year. And the ARPU is similar to the one that we have in the subscriber base that Innova has.

As to the legislation and the new law, well, they haven't -- there's no project at this point. There's no -- not even a draft. The sessions of Congress for this period are going to end this week. So I don't think anything will pass in this session.

Perfect. Thank you very much.

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

Good morning. Could you go through what will be driving the guidance for 7% growth in the second quarter on a year-over-year basis? And how does that tie in to your guidance of 4.5% for the full year, because I would imagine the political spending will start to pick up in the second half of the year, which should give you a good base for the TV Broadcasting revenues in the second half?

The second question is on the Univision and the royalty revenues. You mentioned $105m -- sorry, $115m of guidance. Does that assume that you do get back the money from the programs which are now being excluded? The $155m assumes that those programs are not in the future excluded or how much of the first quarter -- how much would the first quarter have been, had those programs not been excluded?

The royalty in the first quarter grew 3.2% and if those programs had been included, it would have been 10%. The guidance is $115m. So as you can see, the excluded programs were very small amounts. In this quarter, it represented maybe, percentage-wise it was an important percentage. However, in the year it's only a very small portion of the royalties.

Okay. Alright.

Based on the guidance of the second quarter, as I said, one of the reasons why we sit with very good [indiscernible] because of -- last year we had the Holy Week in the second quarter and we are not going to have it in the second quarter. And like I said, we're going to be having elections for the Governor of the State of Mexico. The elections will take place the first week of July, so we are expecting revenues from that side also.

And like I said, we're starting with a new program this Sunday, which is "Big Brother VIP". And that program has always bring us good revenues and like I said, very good profit.

We are keeping the 4.5% guidance of the year growth on sales. And one of the reasons why we see that is because the third quarter last year, we see a difficult third quarter this year because of last year having the Olympics and the Cup Americas during the third quarter. So that's why we see the third quarter a little tougher, although we keep the guidance on a yearly basis.

So what we should see then is 7% second quarter, then back to flat third quarter and then up to 4.5% fourth, would that be the play out?

What I can tell you, Patrick, is that we're sticking to the 4.5% by year-end.

Okay. Alright. Thank you.

Thank you. Our next question is coming from Andrew Campbell, with Credit Suisse First Boston.

Yes, good morning. You mentioned the payment that you're making in terms of the World Cup rights. Have you already incurred the cash outflow for that, both at the Televisa level and at the Sky Mexico level?

Hi Andy. Yes, Televisa has paid the amount that corresponds to the rights, and Innova will pay this quarter.

Okay. And just to understand, the way that you'll be expensing that, I'm assuming that didn't hit the income statement yet?

No.

Okay. So you'll expense that next year, I guess, at the time of the World Cup?

That is correct. However, in the case of Innova, they will include costs starting this year.

Okay. Terrific. And if I could just ask one follow up, there's been -- there have been several articles in the press, saying that you're looking at an acquisition in Columbia of a publishing company. Can you confirm that that's either in process or is taking place?

That is correct. It's [Torafinco]. It's a group of magazines that are sold in the U.S. for the Hispanic market in Mexico and throughout Latin America. It's a very successful company and we're finalizing the negotiations.

Okay. Thanks Alfonso.

Thank you. Our next question is coming from [Dan Prikowski] of Schroders.

Good morning. Could you possibly explain the accounting change that took place in the first quarter? I assume that that is a non-cash item?

Yes, Dan, that's correct. It's a non-cash item.

Okay, great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from Rose Hammond of Oppenheimer Funds.

It's [Rajit Hammond] at Oppenheimer Funds. Could you perhaps characterize the relationship with Univision at the moment, and what the implications are for your future workings with them? Or are you going to continue to see areas of irritation on -- whether it's revenue recognition, revenue payments or other things?

Well, the relationship is an institutional relationship. We believe that Univision is a great company. And of course, we're the most important suppliers of their programming, especially if you consider prime time, where the revenue is very, very important for them. And of course, in a relationship of this sort you always have discussions and that's why I'm saying that as of this quarter, as of the first quarter they've decided to make the deductions as to certain programs. And we will be following up with them and discussing this issue.

Could you perhaps just explain what the deductions were for and what that really means, so we can perhaps understand it a little bit better?

Yes. It has to do with a definition of a certain category of programs, where they believe that they shouldn't pay the royalty because it's this special program category. However, we, as I mentioned, disagree with that and I will be following up with them.

But broadly, the relationship remains fraught or does it -- is it improving? How would you characterize the circumstance?

I would characterize it -- it's an institutional relationship. It's a professional relationship, and of course we're large shareholders of Univision and large programming suppliers.

Thanks.

Thank you. Our next question is coming from Philip Remek of Guzman and Company.

Good morning gentlemen. Good morning. Hello.

Hi, good morning.

Alright. I wanted to ask, first of all, about the sale trend in the programming exports area. I did have a disconnect on the call, I don't know if you addressed programming exports and whether the positive trend in sales would turn around in the other quarters of this year.

Yes, I think we had a decline in the first quarter in sales in Indonesia, and in some countries of Latin America, especially Columbia. But we believe that the trend will improve in the next quarters.

And there was also a reduction in the OIBDA margin, but that would also reverse to a positive trend as sales increase as well?

Yes, and also we had $11m that had to do with the translation effect of the foreign [indiscernible] due to the appreciation of the peso.

Right. And I know there was a question earlier about the Sky Mexico segment, and I just needed to ask again because I see there was a 25% increase in the sub base, and yet a sales increase of 14%. And could you discuss why there's that difference? If it's not from a reduction in ARPU, then why would there be that difference?

Can you repeat your question? I'm sorry, I didn't get it.

Yes. Regarding Sky Mexico. You reported a 25% increase in the subscriber base and a sales increase of 14%. And there was an earlier question, I guess about that, the smaller increase in sales compared to the increase in subs. That's not a reduction in the average revenue, the ARPU, but what would cause that difference between the big increase in sub base and the smaller increase in sales?

I think it has to do -- we didn't increase prices on one front, and another is that the best month for Innova in this quarter was March. So it depends on -- you see, if the subscribers came in, a lot of them, in March, then you would not reflect that in terms of sales to other quarters, but you would include with new subscribers.

Sure. And going forward, I imagine?

Yes.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Oliver [Booland] of Allianz Capital.

Hi. I had two questions about the Sky Mexico subsidiary. One was on the football rates contract, you mentioned earlier on another question that part of that would start to be expensed in 2005. I was just wondering if you could -- is that a quarter of the expense in '05 and three-quarters in '06, or if you could give a little color around the timing of those expenses and payment?

And then the second question was on the capital side. I know before the Direct TV migration began, there was some talk of another security card swap-out, and I was just wondering if you'd had any further thoughts about timing of that or even the need to do that in the near term?

Yes. As to your first question, Innova is going to expense MXN7m per month, starting with this quarter.

And then, as to the change of cards, the smart cards, we will make that change in the third or fourth quarter. We haven't decided.

Do you know the -- is there an estimate on the cost of doing that, on the cards?

To tell you the truth, I don't have that number with me, but I recall Sky, they would have that.

Okay. Thank you.

Thanks.

Thank you. At this time, I would like to turn the floor back over to Alfonso for any closing remarks.

Well, thank you very much and we'll talk to you next quarter.

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