Grupo Televisa SAB (TV) 2005 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's second quarter 2005 conference call. Before we begin, I would like to draw your attention to Page 7 of the press release which explains the use of forward looking statements, and applies to everything we discuss in today's call and in the earnings release. I will now turn the call over to Mr. Alfonso de Angoitia, the Executive Vice President of Grupo Televisa. Please go ahead sir.

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

First I will highlight our financial results for the quarter, and give you our outlook for the rest of the year. Pepe will then discuss the operating results of our Television segments. After that, we will be happy to take your questions.

Televisa continued to deliver outstanding results during the second quarter. On a consolidated basis, and pro forma for the accounting changes in our Publishing Distribution segment, sales increased 6.5% from last year's second quarter to MXN7.8b. Operating income before depreciation and amortization reached MXN3.2b, a 12.8% increase over last year's second quarter, and our margin reached an all-time record of 41.3%.

Net income rose 165% from last year's second quarter to MXN1.2b. This result was driven primarily by 2 factors, 1, the favorable comparison arising from the fact that we did not have the loss effect in accounting change resulting from the consolidation of Sky Mexico, and 2, the 16.4% increase in our consolidated operating income. As explained in our press release, these positive effects were partially offset by the MXN518m increase in our integral cost of financing.

Now I will take you through our segment results. Our Television Broadcasting business exceeded our expectations once again. Sales increased 7.5% to MXN4.4b, reflecting the favorable comparison arising from the absence of Holy Week in the second quarter and from political advertising.

In addition, we continued to experience considerable operating leverage. As a result, our operating income before depreciation and amortization increased 14.3% to MXN2.2b, enabling us to reach a record margin of 49.3%, and the highest ever reported by our Television Broadcasting business.

In our Paid Television Networks business, sales rose 25.1% and operating income, before depreciation and amortization, increased 28.6%. This encouraging growth had 3 drivers. First, we began consolidating TuTV in the first quarter of the year, and the consolidation of TuTV contributed MXN18.4m to our sales and MXN9.3m to our operating income before depreciation and amortization during the quarter.

Second, we saw an increase in the sales of Sky and cable platforms in Mexico. And the third driver is the overall increase in the penetration of our signals in paid television systems in Latin America.

Sales of our Programming Exports business decreased 9.7% to MXN492m, and operating income before depreciation and amortization decreased 22.3%. These reductions resulted primarily from a MXN49.6m negative translation effect on foreign currency denominated sales, lower export sales to Latin America, and a 3.7% decrease in royalties from Univision, which amounted to $28.6m. These decreases were partially offset by an increase in sales to Asia and Africa.

In our Publishing business, sales increased 14.4% to MXN633.7m as a result of increases in both circulation and advertising in Mexico and Latin America. This was partially offset by higher costs and expenses related to the launch of 6 new magazines for the Mexican market, as well as the integration of the magazines published by Hispanic Publishing Group for the U.S. Hispanic market.

As a result, operating income before depreciation and amortization increased marginally, reaching 21.5% margin. We believe these, and other initiatives we are implementing, will have a significant positive impact on the future growth of our Publishing business.

I will now talk about our Paid Television businesses, Sky Mexico and Cablevision. Sky Mexico continued to deliver outstanding results. We added 76,300 subscribers in the second quarter, bringing Sky's total subscriber base to 1,183,800 subscribers compared with 938,600 subscribers in the second quarter of 2004.

As a result, sales increased 17.7% to MXN1.4b and operating income before depreciation and amortization increased 32.4% to MXN587m, reaching a record margin of 40.7%. In addition, Sky Mexico's net income increased from 22 to MXN370m. During the second quarter, we switched 38,468 direct use subscribers to Sky, and we expect to complete the migration process by July 31.

Cablevision sales rose 15.5% to MXN330.7m, as a result of a 6% price increase implemented last March, as well as a strong subscriber growth. We added 18,835 subscribers in the second quarter, bringing Cablevision's total subscriber base to 389,657, of which 49% have digital service.

We believe that the increase in our subscriber base is due, in part, to the conversion of our system from an analogue to digital format, and we expect the conversion, which should be completed by the end of 2006, to continue to drive subscriber growth throughout the coming year.

Also contributing to Cablevision's sales growth is an increase in the number of broadband subscribers. We added 7,088 subscribers during the quarter, bringing the total number of our broadband subscribers to 43,646 at the end of the quarter, compared with 15,687 in the second quarter of 2004.

In the first quarter of the year, we began expanding our sales force and adding call center and installation personnel in an effort to improve our customer service. In addition, we saw an increasing program in the network maintenance costs. As a result of our operating income before depreciation and amortization dropped by 4.7% during the quarter. It is important to note that some of these costs are related to the digitalization process, and therefore, are non-recurring.

We continued to see solid growth in our Radio division. Second quarter sales rose 22.9% and were driven by the success of our news programs, political advertising and by our growth in the listeners base. As a result, operating income before depreciation and amortization grew 63.7% and contributed marginally to our overall operating income before depreciation and amortization.

In our other businesses, net sales decreased 19.1%, due primarily to a decrease in feature film sales, which were down MXN127m compared with last year's second year. And the drop in feature film sales was partially offset by an increase in internet sales, driven primarily by SMS services as well as by growth in our soccer business.

Our balance sheet continues to be strong, with a net debt of only MXN7b, including Sky Mexico. As a result of the continuous improvement of our credit profile, in May 2005 Moody's upgraded Televisa's foreign currency debt and senior unsecured issuer ratings. The outlook on all the ratings is now stable.

Moving to the outlook for the year, we're raising our guidance. We now expect our full year Television Broadcasting sales to increase 5%. In addition, we will continue to keep costs and expenses under control. We therefore expect our Television Broadcasting operating income before depreciation and amortization margin to exceed 47%.

Finally, as part of our stock repurchase program, in the second quarter we repurchased 12.7m CPOs for an aggregate amount of approximately $37m. Year to date, we have repurchased over $55m and in total, we have returned approximately $450m to our shareholders through dividends and stock repurchases. Now, I will turn the call over to Pepe.

Thank you, Alfonso, and good morning to everyone, and thank you for joining us. We are very proud of our second quarter performance. Sales exceeded our expectations once again, and we are especially proud of the fact that our margins reached an all-time high of 49.3%.

We achieved these results because costs and expenses rose only marginally in the quarter, enabling us to generate significant operating leverage. In fact, over the past 4 years, we have kept costs and expenses virtually flat on an inflation adjusted basis. As a result, our margins have grown at a much higher rate than our revenues.

We also achieved strong results in terms of our audience share and ratings. We attained an average sign-on to sign up audience share during the quarter of 69.3% and an average weekday prime time audience share of 70.1%. In addition, we are 85 of the top 100 programs in Mexico and 16 of the top 20 programs.

Our broadcast of the Mexican Soccer Final game, which took place in our stadium, generated sales of MXN49m and was the highest rated program of the quarter, reaching an average audience share of 50.5%. Aside from the Soccer Finals, our novelas continued to be the highest rated programs within the quarter. La Madrastra, our 9.00 pm Novela, was the highest rated novela and third highest rated program in the quarter, with an average audience share of 40.2%.

Our 8.00 pm novela, [indiscernible] was the second highest rated novela and the fourth highest rated program in the quarter, with an average audience share of 42.7%. [Indiscernible], our 7.00 pm novela for teenagers, continues to captivate young audiences, achieving an audience share of 38.4% for the quarter.

In the United States, our programming continues to enable Univision to maintain its position as the undisputed leader in the U.S. Hispanic market. With the Univision network, our morning show, [indiscernible], our drama show [indiscernible] and our novela [indiscernible] Madastra and [indiscernible] generate a significant portion of the network's ratings and revenues.

In fact, our prime time novelas allow Univision to become the number 1 broadcast network in the United States in 12 nights of the first quarter, in prime time among 18-34. This news, that more often than not, in the first quarter, Univision had more 18-34 year old viewers than either ABC, CBS, NBC or Fox is thanks mainly to our content. [Indiscernible], our children's novela, [indiscernible], our new show [indiscernible] and our comedy shows are helping [indiscernible] to become the number 2 Spanish language broadcast network behind Univision.

Finally, our Paid Television network business continues to expand, driven by the wide penetration of our channels in paid TV systems through the world. Within the second quarter, 5 of our paid TV channels were added to Direct TV Latin America, reaching approximately 800,000 subscribers in the region. And 3 of our channels were included in Direct TV Puerto Rico, reaching approximately 170,000 subscribers.

In the United States, our paid TV channels now reach over 1.2m subscribers through [indiscernible], Fox and Direct TV. In addition, we have concluded agreements with Time Warner and [Charter]. Finally, 4 of our channels were recently added to the Hispanic package of an Australian BPH platform.

Thank you, and we will be glad to take your questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Vera Rossi with Morgan Stanley. Please go ahead.

Thank you. Good morning everyone. I had 2 questions. The first is on your new business segment, [bingo] and sports book. Could you give us an idea what kind of services you will offer with your new permissions? You don't need to give us numbers because I understand you're still awaiting your business plan, but if you can give us an idea how you will generate revenues for the company it will be very helpful.

And the second question is on Univision, the royalties to Univision. I saw a decline in royalties in the quarter and I just want to know how much this decline has to do with the disagreement between Univision and Televisa. Thank you.

Hi there. Yes, to your first question, as you know, we got 65 licenses to operate books and bingos and we're working on the concrete business plan and on all the things that we'll be able to operate, so we are not ready yet to talk about our business plan. We'll be, I think, in the course of the third quarter or starting early in the fourth quarter.

As to Univision, we were also surprised when we received the royalty. However, we only received from them, from Univision, the royalty figure but not the breakdown, and have not had the opportunity to get the details so we don't have more information now.

Okay, but do you think part of the decline that you have this quarter has to do that they are not paying 100% that they owe to Televisa?

Well, as I was saying, since we don't have the breakdown, I don't know yet. We just received the royalty figure, and of course, we'll talk to them to see what happened, and why we received a lesser amount than the same quarter last year.

Okay, and just a follow-up question on bingos and sports book, do you expect to talk to investors about your business plans during the third quarter or early in the fourth quarter, or do you expect the revenues from this business to start to be on your income statement at this date [inaudible]?

Yes, we expect to release our plans that have to do with this business either in this quarter or early in the fourth quarter.

And when do you think we will start to see the impact on Televisa's income statement?

It's here but I think materially, you will begin to see it in the next year.

Okay, thank you.

Thank you. Our next question is coming from Gordon Lee with UBS. Please go ahead.

Hi, good morning. Just a couple of questions, first on the TV side. Could you give us your expectation of what you're expecting in terms of TV broadcasting revenue growth in the third quarter, just given the difficult comp last year, obviously given the Olympics.

And also, in your outlook for TV broadcasting for the year, when you made that increased guidance, at that point were you considering the recent announcement from [Decree] in the way in which they will select their candidate for the 2006 elections or would that be additional to that guidance that you put forward? Thank you.

Well, hi Gordon. Everything is included in the guidance and we would not like to give quarterly guidance but as you saw, we increased our guidance for the full year to 5% and we would like to stick to that.

Okay, thank you. And if I could just have a follow-up on Sky, could you just repeat what the final number of migrating subscribers you expect from Direct TV, and then based on that, what your resulting equity stake will be in Sky Mexico?

Yes, as I mentioned, we'll close a migration period, the last day of July. During the quarter, we migrated - hold on a second - we migrated 38,468 subscribers and we believe that the total number of subscribers that migrated or will migrate in the process will be around 140,000.

Okay, and so then your resulting equity stake would be roughly what?

It will be roughly 60% for Televisa, or 59% - between 59% and 60%.

Perfect, that's excellent. Thank you very much.

Thank you.

Thank you. Our next question is coming from Andrew Campbell with CSFB. Please go ahead.

Yes, hi, good morning. I was wondering if you could give us an estimate of how much the contribution from political advertising was in the second quarter, and if you think that political advertising will have a meaningful impact in the second half of the year in the run-up towards elections, or if you think that we should really just expect it to have an impact next year?

Hi Andy. Yes, I think it will have an impact in the second half of the year. However, we have decided, for competitive reasons, not to disclose, during this political season and until the presidential election, not much related to political advertising. I think it's against our interests, the shareholders' interests to disclose this information, and we will disclose it after the presidential election.

Okay, understood. Thank you. Could you also just confirm, are you still working with the same $210m CapEx number for this year?

That is correct.

Okay, thanks Alfonso.

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

Hello, good morning. Could you just try to repeat that again? You're not -- there weren't political -- there was political spending in the second quarter, but you're not giving the amount, is that correct?

My other question is on Sky Mexico and the cable TV. It looks as if about half your additions are actually new additions coming into the market. Do you think that we will see -- is that rate of about 38,000, or 32,000 or so new additions, new, new additions, not migrating additions? Do you think that will continue or accelerate going into 2006?

And then I have a very quick question on the terms of the Univision contract and carrying Televisa content on the internet. How is that - what's the timing of having a resolution on that?

Hi Patrick. Yes, as to political advertising, what we said in the last question is that we have decided, for competitive reasons, and because we believe it's in the best interests of Televisa and of its shareholders, not to disclose during this political season the amounts related to political advertising.

[Inaudible] was there any political advertising? You don't have to tell a number, but was there some political advertising in the second quarter?

Yes, we had the elections of the State of Mexico.

Okay.

And also in the State of Navarit which is small, but we had some, and we will continue, as I mentioned, in the second half of the year, to receive political advertising and until the presidential elections next year.

Okay.

So I think that -- we will disclose it, but after the presidential election.

Fine.

As to Univision and the terms of internet, our internet content going through those services, as you know, in the 2001 renegotiation, we decided, for a period of 5 years, not to discuss the issue. As you know, there is a disagreement between us and them as to who has the right for our content, to put it in the internet, so it's something that was postponed for 5 years.

Right, which means it comes up again in 2006?

That is correct.

Is your position still that internet delivery of Televisa content is excluded from the agreement?

Yes, it's the same position that we have always had.

I imagine Univision is not going to accept that, so it would go to court. Is there a possibility it would be resolved in '06 or is that not something you're prepared to discuss?

Yes, I don't know what is going to happen. It's going to take further discussions with them. For the time being, we have an arrangement, an agreement, where we share some of the content, especially news and soccer content, so let's see what happens in the future.

Okay.

And I missed your second question.

The second question was on the satellite business. It looks as if -- you mentioned there's 76,000 additions on the satellite business, of which 38,000 is migrations. So that means there's a good chunk of actually new subscribers coming into the market, and on top of that we had good additions on the cable TV business. Is that something you're predicting that will continue for the rest of this year and going into next year?

Yes, I think so, especially in the case of Sky that now have closed more and more exclusive content agreements. They have the NFL on an exclusive basis for the Mexican territory. They have baseball on an exclusive basis. They have a golf tournament. They will have 34 out of the 64 matches that will be played in the World Cup, the Soccer World Cup, so I think that with more and more exclusive content that Sky will have, it will drive additional subscribers. We are very happy to see that more subscribers were organic growth and not migration from Direct TV for the quarter.

Right.

And that will continue, I think. In the case of Cablevision, we're very happy to see the results in the areas that we have digitalized, both because we are getting new subscribers, more subscribers, and also because ARPU in those areas is greater because those subscribers want to receive additional services.

As I mentioned, we had tremendous growth in the broadband area of service, so I think Cablevision will receive more and more subscribers and request for additional services in that digitalized area.

Right. Okay, good. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Jean-Charles Lemardeley with JP Morgan. Please go ahead.

Yes, good morning. Just a first question would be, can you give us an update on your general relationship with Univision and the status of the lawsuits you brought against the company, if any, at this point?

Hi Jean-Charles. Yes, to the lawsuit, we have amended the complaint to add to new claims. The first 1 is in respect to Univision's breach of the program license agreement and a separate agreement that we have that has to do with the rights to air soccer games, which is, as I mentioned, separate from the program license agreement that goes until the year 2017.

And we believe that they have broadcasted various Televisa programs that Univision has altered in ways not permitted by those agreements, and of course, without that, Televisa's consent. And also, the other new claim relates to Univision's failure to make part of their unsold or unused advertising time available to Televisa.

As you know, under the program license agreement, Televisa is entitled to receive part of the unsold advertising time, and also, they have unilaterally refused to broadcast certain Televisa advertising. So those are the new claims, and we have amended the complaint.

Univision has not yet responded to the original complaint. We're waiting to see, and another development was that Univision has wired the amount withheld from the February license payment in respect to [indiscernible]. Of course, they have reserved their rights to recoup that amount in the pending litigation that we have, and we have decided not to include that amount, the $1.5m amount in the sales figure, either for this quarter, or of course for last quarter.

Okay. Those claims that you are making against Univision, do any of the breaches constitute material breaches of your agreement according to your claims at this point?

Oh, I think that will be determined in the litigation.

Is that what you're seeking to establish?

I think it will be determined in the process.

Okay. The next question is on your - can you provide us an update on your SMS business? We saw a strong revenue surge in the first quarter, how that is growing, and generally speaking, your thoughts as to distributing your content more widely, maybe through mobile operators, also through IPS, through television or DSL potentially with a tack-on [indiscernible] in Mexico. What are your thoughts at this point as to the potential for that going forward?

Well, it has tremendous potential especially if you see what has happened in Europe, and we are the leaders in that market because everything is based on the content that Televisa produces, so I think that most people in Mexico and now in the U.S. want to download scenes of the Televisa telenovelas. They want to download the pictures of the Televisa stars. They want to download the Televisa news casts, etc, so I think our content is the driver for the growth of SMS, and that's what people want to watch.

We have very high expectations. In the first half of the year, revenues of SMS in Mexico were MXN150m and EBITDA of MXN30m, so I think that we're working very closely with intent and we have very high expectations. I think this is a market that will develop, and we of course, as I mentioned, are the leaders in Mexico. We have launched in the U.S. these types of services, and we will do the same in other countries in Latin America. As I mentioned, the driver is content, and we're the best in producing that content.

Thank you very much.

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

Thank you, good morning gentlemen, a couple of questions. First of all, on the FX losses during the quarter, I was wondering if you could tell us how much of this was due to the August '05 forwards and if the peso remains strong by August, if this would become a cash effect on your financials for the third quarter?

And the second question is in terms of the royalties paid to Endemol, if these royalties are paid in dollars and are paid quarterly, and if this had an impact on your costs during the quarter, benefiting the margins? Thank you.

Hi, Rene. Yes, I'll break down the foreign exchange loss. I think, of course, most of it is non-cash and it's an accounting thing. Out of the MXN370m during the quarter, MXN22.5m resulted from having a net asset position of $54m, so since we had this net asset position of $54m and an appreciation of the peso of 3.74%, that is comparing 11.15% exchange rate to 10.742% in June. That generated MXN22.5m of loss of the MXN370m, so this is just because of the net asset position of the dollars that we had.

The second is that in the forward, we entered into forward contracts to hedge the payment of the $200m of senior notes that mature in August, and as a result also of appreciation of the peso, it generated a loss of about MXN150m of the MXN370m, of course, because of the difference between the spot-rate and the forward exchange rate.

And then, as we have discussed, we also swapped the coupons for the next 5 years of our U.S. dollar denominated debt. This is of $1.1b. We have swapped the coupons for the next 5 years and the end result, as I see it, was that out of an average rate of 7.8% in dollars that we have in connection with the $1.1b debt, we swapped it into pesos and that gave us a result of now having an exchange rate of 8.7% - I'm sorry, an interest rate of 8.7% in pesos for the next 5 years.

I think that this was a very, very good deal for Televisa, having $1.1b coupons at a fixed rate of 8.7% in pesos. However, since you compare the exchange rate on the date at which those coupon swaps were made with the exchange rate of the close of the quarter, that generated also an accounting loss of about MXN200m. So of course, these are accounting losses that will be reversed if the peso depreciates in those time periods.

Rene, about Endemol, can you repeat your question about Endemol? I want to understand exactly what was the question?

Yes, my question in Endemol is if you're paying royalties in dollars, and if this benefited -- if you saw some benefit because of the appreciation of the peso in the quarter?

Well, we definitely pay in dollars but it's based on a per project basis so it depends on the cost of the production, the license fee that we pay, so it did not help us as much.

Okay, thank you very much. 1 last question, Alfonso, can you tell us in terms of going back to Univision if you had conversations with them that would - obviously they have paid this $1.5m so do you feel the relationship with them at all is improving or you think that the relationship is still strained?

Well, I guess what I can tell you is that we have not had conversations in the recent days, or weeks.

Okay, thank you very much.

Thank you. Our next question is coming from Gordon Hodge with Thomas Weisel. Please go ahead.

Yes, good morning, thank you for taking my question. I had just 2 quick ones, 1, the margins on TuTV sounded very strong. I'm just wondering if you could help us understand the revenues and expenses there, and if that should continue? And then also - or the source of revenues, I should say. And then I'm curious if you're still comfortable with the Univision PLA fees guidance? I think you'd issued last quarter of about $115m this year? Thanks.

Yes. Well, as to your last question first, I guess we gave guidance of $115m and looking at what has happened in the first half of the year, we now believe that the royalty will be closer to last year's $105m.

As to TuTV, of course the revenue stream comes from subscribers. The more subscribers that we have through the paid television systems in the U.S. the more revenues.

Expenses?

The expenses are related basically to the management of the service, and to advertising and in selling expenses because of course, the cost of production of the channels we have in Mexico already, and that's in the paid television segment [inaudible].

So the high margins can continue as you grow?

Yes, yes, and we'll expand as more subscribers add to the service.

Thank you.

Thank you.

Thank you. Our next question is coming from Martin Lara with Santander. Please go ahead.

Good morning. This is Martin Lara from Santander Mexico. Could you please give us your target in terms of subscriber growth for [Innova] and Cablevision in '05 and '06?

Yes, as you know, we don't give those targets.

Okay, thank you.

Thank you. There are no further questions at this time. I'll turn the floor back over to you.

Well, thank you very much. We're very happy with our results. We expect, as I mentioned, very good results in the second half of the year, so we'll 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.