Grupo Televisa SAB (TV) 2005 Q4 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's fourth-quarter and full-year 2005 conference call. Before we begin, I would like to draw your attention to page 9 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, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Good morning. We are pleased that you have joined us for this discussion of Grupo Televisa's fourth-quarter and full-year 2005 results. 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 year, and we will review the outlook for 2006. After that, Pepe will discuss the operating results of our television segment. Then we will be happy to take your questions.

Televisa delivered outstanding results in 2005. On a consolidated basis, including Sky Mexico and pro forma for the accounting changes in our publishing distribution segment, sales increased 8% to 32.4 billion pesos. Operating income before depreciation and amortization increased 16% to 13.2 billion pesos and our margin reached 40.7%, an all-time record for a full-year margin. Net income rose 37% to 6.1 billion pesos.

Now I will take you through our segment results. Sales of our television broadcasting business increased 5.1% to 18.5 billion pesos. The better than expected results were driven by higher investments by our traditional clients and by earlier than expected political advertising revenues. In addition, we continued to maintain strict cost control and discipline. Costs and expenses grew only 0.6% year-over-year. As a result, our operating income before depreciation and amortization increased 10.4% to 8.8 billion pesos, enabling us to achieve a record margin of 47.7%.

In our pay television network business, sales rose 34% to 1.1 billion pesos and operating income before depreciation and amortization increased 67% to 518 million pesos. This growth had three main drivers. The first is the consolidation of [Tutave], which contributed 81 million pesos to our sales and 33 million pesos to our operating income before depreciation and amortization during the year.

Second, we saw a better than expected increase in sales to Sky and cable platforms in Mexico.

The third driver was the addition of five of our channels to DIRECTV Latin America's basic package, which reaches more than 800,000 subscribers in the region.

Sales of our programming exports business decreased 5.3% to 1.8 billion pesos and operating income before depreciation and amortization increased 11.6% to 668 million pesos. These decreases resulted primarily from a 151 million peso negative translation affect on foreign currency denominated sales and from lower export sales to Europe. These were partially offset by a 4.6% increase in royalties from Univision, which amounted to $109.8 million, and by higher export sales to Asia and Africa.

Our publishing business continues to deliver strong results. In 2005, we saw an increase in sales of 15.8% to 2.5 billion pesos, driven by increases in both circulation and advertising in Mexico and abroad. This was partially offset by higher costs and expenses related to the launch of six new magazines for the Mexican market, as well as the integration of the magazines published by a Hispanic publishing group for the U.S. Hispanic market. As a result, operating income before depreciation and amortization increased 9.4% and the margin reached 19.2%.

Sky Mexico had an outstanding year. We added 248,000 subscribers during the year, bringing Sky's total base to more than 1.2 million subscribers. As a result, sales increased 21.5% to 5.9 billion pesos and operating income before depreciation and amortization grew 40% to 2.5 billion pesos, enabling us to achieve a record margin of 42%.

In total, we migrated 144,000 DIRECTV subscribers to Sky. In addition, DIRECTV recently acquired the equity interest in Sky Mexico formerly held by News Corporation and Liberty Media. Televisa and DIRECTV now own 52.7% and 47.3% respectively of Sky Mexico's equity. Once we exercise our right to acquire two-thirds of the equity interest that DIRECTV acquired from Liberty Media, we will own 58.7% of Sky Mexico's equity and DIRECTV will own the rest.

Looking ahead, we expect Sky's superior content and in particular Sky's exclusive broadcast of 34 out of the 64 games of the 2006 soccer World Cup to continue delivering subscriber growth. Cablevision also had an outstanding year. We added more than 67,000 subscribers during the year bringing Cablevision's total subscriber base to more than 422,000.

In addition, over the past twelve months, we more than doubled our broadband customer base from 26,000 to 61,000 subscribers. This growth, as well as the effect of the 6% price increase we implemented last March, led us to a 20.6% increase in sales to 1.4 billion pesos. The rise in sales together with our reduction in programming cost during the year led to an increase in operating income before depreciation and amortization of 32.9% to 489 million pesos and a margin of 34.8%.

The growth we have experienced in Cablevision's subscriber base has been driven primarily by the conversion of our system from an analog to a digital format. In the areas where we have switched to digital format we have seen our subscriber base grow at least 34% and in certain areas up to 98%, and we have experienced average ARPU growth of 39%.

So far, we have switched about 48% of our network from analog to digital format. We expect to have converted 100% of our network to digital before the end of the year. Therefore, we expect Cablevision subscriber growth to continue at a healthy pace throughout 2006.

We also continue to see growth in the radio division. Sales grew 12.8% driven by an increase in advertising time sold during our news and sports programs, as well as by sales generated by our affiliation agreement with Radiorama.

In addition, operating income before depreciation and amortization grew 59.1% to 52.2 million pesos, driven by growth in sales and a decrease in operating expenses. Sales in our other businesses segment increased 4.6% to 1.3 billion pesos due to strong sales in our soccer and Internet businesses. Sales in our Internet business were driven mainly by SMS. The growth in sales was partially offset by a decrease in sales in our feature film business.

In 2005, we generated over 7 billion pesos of free cash flow after maintenance CapEx. During the same period, we returned over 5.2 billion pesos to our shareholders through dividends and stock repurchases. Our balance sheet remains very strong with $1.4 billion in cash and a net debt of only $348 million with an average maturity of 13.8 years.

Moving on to outlook for the year, in our television broadcasting business, we expect high single digit sales growth and see our operating income before depreciation and amortization margin reaching 49%. On a consolidated basis, we expect our operating income before depreciation and amortization margin to exceed 40%. Our CapEx budget for 2006 amounts to about $280 million, including $90 million for Sky Mexico, $52 million for Cablevision, $45 million for gaming and $95 million for our television broadcasting segment and other business units. Now I will turn over the call to Pepe.

Thank you, Alfonso. Good morning, everyone and thank you for joining us. We're very pleased with our results for the fourth quarter and for 2005 as a whole. We attribute our solid performance during the year and in fact throughout the past several years to our ability to produce high-quality content distributed to diverse and ever-growing audiences who reshape it and extend its reach throughout our business segments, all while keeping cost and expenses under control.

In particular, it is our ability to consistently deliver exciting new content covering all the targets that our clients demand, and that has enabled us to grow our sales and deliver significant value to our shareholders. I will offer just a few examples of our popular programs. Our novellas continue to enjoy tremendous popularity in Mexico. La [Madra], our most popular novella in 2005, attracted an average audience share for the year of 41.2%. Moreover, Televisa produced all of the 10 highest rate novellas in Mexico.

In the United States, our novellas continue to drive Univision's strength and success. In fact, during the Nielsen television index this week of the measurement this year, Contra Viento y Marea won the 8 to 9 PM time period among the 18 to 34 demo. And that is all among U.S. audiences, Hispanic or non-Hispanic. During the same week, Univision's 9 to 10 PM prime time novella, [Guarada], which Televisa also produces, ranked third overall in its time period among adults 18 to 34.

Our novellas are also tremendously popular around the world. In Malaysia, we achieve an amazing 50% audience share. In the Philippines, Viva Los Ninos achieved another audience share of 41.8% and in Columbia, (indiscernible) achieved a similar audience share of 37.4%.

We also produced 9 of the top 10 entertainment shows in Mexico. Our game show, Bailando por un Sueno, which we launched in the third quarter, quickly became a phenomenon in Mexico, commanding an average audience share of 50.4%. In the United States, where the show airs on Univision, Bailando por un Sueno drew more than 5 million viewers, and according to Univision, beat both CBS and NBC on a highly competitive night of [Bergeron] programming. In fact, thanks to our programming, Univision could claim the number three spot in the United States among adults age 18 to 34.

Our sports programming, including the final and quarterfinal games of the Mexican soccer championship, drew huge audiences in 2005. In fact, our May broadcast of the final game of the Mexican soccer championship was the year's most watched program with an audience share of 50.6%. Another very successful program was our broadcast of the [under 70] World Cup soccer championship, which achieved an audience share of 44.2%. In total, we have 8 of the top 10 sports programs in our country.

Looking ahead to 2006, we expect to continue our sales world trend. Our upfront advertising sales grew 5% in nominal terms or 2% in real terms for the year, driven by a 10% to 12% price increase in nominal terms. It is important to note that while a few of our clients decided not to participate in the upfront season, we expect that they will purchase advertising throughout the year in the spot market.

In addition, during the first half of the year, the spot market will benefit from the political advertising sales. As a result in 2006, we expect our spot sales to represent a larger percentage of our overall advertising revenues than in the previous years.

Finally, as you know, during 2006, we will have two very important special events; the presidential elections and the FIFA World Cup, of which we will broadcast 30 games. The advertising related to both of these events will enable us to generate significant revenue growth and healthy margins for the year. Thank you, and now we will be ready to take your questions.

(OPERATOR INSTRUCTIONS). Andrew Campbell, Credit Suisse.

I was wondering if you could give a little bit of color on the dynamic that you saw in the upfront season, in particular with only the 2% increase, but yet you're keeping your guidance for high single digit sales growth. So is the upfront season that has just closed later this year, or do you believe it is going to be picked up in the spot market, or what exactly have you been seeing there?

As we mentioned, the upfront sales grew 2% in real terms, and I think that taking advantage of what we believe will be a very good year for the television segment. We increased prices in the range of 10% to 12%. This comes from last year in which we increased prices about 7.5%. And as you can imagine, the negotiations were pretty tough with a lot of the clients. A few clients decided not to participate in the upfront plan; however, we expect those clients to buy advertising in the spot market throughout the year. So excluding those clients, the upfront deposits would have grown 7% in real terms. And also sales related to the election, plus whatever those clients buy in the scatter market, we believe that it is going to be -- therefore, we're going to see a strong spot sales market.

Vera Rossi, Morgan Stanley.

I have just a follow-up on the upfront season. Do you expect this year's upfront season to be -- or spot sales to be around -- what percentage of your total sales? Usually it is around 20%. Do you expect that to go to at least 30% this year? And then on Sky Mexico, what is the number of subscribers do you foresee for year-end '06, and if you are seeing price increase in terms of like the monthly fee the subscribers pay ahead of the World Cup? Thank you.

I think it's difficult to predict exactly what percentage the spot market will represent of our total sales on the television broadcasting side of the business. But I can say considering the clients that decided not to participate in the upfront sales, and considering that most of the political sales will be also in the scatter market, it will be stronger than in previous years. As to Sky Mexico, our target for the year is 1.375 million subscribers. I didn't get your last question about Sky.

The last question is about price increase on the monthly fee of your subscribers ahead of the World Cup.

We're going to increase prices -- we have increased, I am sorry, prices in about 3.5%.

I saw this decrease in the beginning of January, but do you expect a further increase or that is it for the year?

That is what we expect for the year.

Okay. And 1.3 million subscribers for year end?

1.375.

7 5. Okay. And just going back to the upfront season questions, I know it is difficult to predict a percentage of the spot market, but do you think a 30% number on the spot market is a conservative number or is a realistic number for --?

I think it is going to be around there.

Michael Kopelman, Merrill Lynch.

A couple of questions for you. First of all, Univision essentially put itself up for sale and I was wondering if you could give us some thoughts on how you guys are approaching the transaction and maybe what an optimal outcome would be for you, first of all. Second of all, I was wondering if you could give us an update on the dividends. You referenced the strength of your balance sheet and the fact that you have $1.4 billion, and I was wondering if there are plans for a special dividend this year as well. And finally, I was hoping you could give us an update on Spain and any details you can give us on your business plan there. Thanks.

Mike, as to Univision, at this point, we are not participating in the process at Univision and UVS begun some weeks ago. We have had no discussions or negotiations with them. And I guess we are in the early stages of analyzing the difference in areas to determine whether it makes sense or not for us.

Then the dividend, as we have always said, we always review business prospects and growth opportunities, mostly related to our core business, which makes sense from the financial and strategic points of view. And we will continue to look for growth opportunities. If those opportunities don't materialize, we will return capital to our shareholders via the payment of extraordinary dividends and stock buybacks as we have done in the previous years. So we have a dividend policy of paying $0.35 per CPO, which amounts to about $100 million, and we will be proposing the payment -- of course of that dividend of the dividend policy, and considering the growth opportunities, if they materialize or not, any extraordinary dividend in the April meeting of the Board.

And finally as to Spain, we're going to launch the channel in April. We are very excited about the prospect of what is going on in that market. We are very happy with our partners there. They are the top producers of content. They are the second largest producers of content in Europe. So we are very happy with our partners. We are very happy with the prospect of the business, and as I have mentioned, we will launch the channel in April.

Just a follow-up on Spain. Can you give us an idea of what kind of marketshare you think is realistic? I think [Quattro] has gotten 5% to date and if you look out one, two, three years what you might be able to get, and then do you have a sense of what the losses will be in 2006?

As to marketshare, we are very -- we're being very conservative in the business plan and we are saying there that we're going to reach a 7% marketshare in three years. And as to the losses, I don't have the number with me, but I can give it to you afterwards.

Gordon Lee, UBS.

Just a couple of questions. Just a follow-up on the dividend first. Just to understand, you obviously didn't specify an amount on the extraordinary dividends if you were to propose that, but are you considering the proposal of that as early as the April shareholders' meeting, or would that be something that you would consider later in the year? And then just a second question, just given the relevance or the greater relevance of spot market sales this year, could you just give us a sense based on 2005 of what the difference was between spot rates and upfront rates? Thank you.

As to the dividends, if no growth opportunities materialize, we will be proposing to the April Board meeting and shareholders' meeting the payment of an extraordinary dividend similar to the one that we paid last year. So we will consider opportunities and as I said, if they don't materialize, we will propose the payment on extraordinary dividends in that amount in April.

As for the spot sales in comparison with the upfront sales, it's about 10% growth on a yearly basis.

Dan [Klietowski], [Schroeders].

I have three questions. The first question, can you give us what the utilization rates in the broadcasting line were in 2005 is the first question?

For some time, we have not disclosed that information since other people have taken advantage of it and we believe that it is not in the best interest of our shareholders that we disclose that information.

Okay. Sorry. Second question, you have obviously got an option to buy more of Inova from 52.7 to 58.7. Can you explain the timing and the pricing dynamics of that?

Yes, we can buy these shares in the next 45 days, and -- the pricing is fixed at $58 million.

That is obviously something you're going to do then.

I'm sorry?

That's obviously something that you are going to do.

Yes, yes. That was previously negotiated and signed.

Okay, great. And then last question, you are putting $49 million into gaming in the quarter. When will you start the operations there and can you give us an idea of just what that entails and how the operations are going to look?

We are going to start operations in the second quarter, and we will make an announcement in that quarter as to the whole business plan.

Fantastic. Thank you very much.

Lee Westerfield, Harris Nesbitt.

My question -- if you can help me understand a little bit better. I believe there is some proposed legislation, Ley de Radio y Television, and I wonder if you could just help me understand what that legislation may concern at the moment if it passes and what impact it may have for you?

The law that regulates the radio and television is a very old law in Mexico. So considering all the changes in technology, etc., a new law has been proposed and is being discussed. The main thing that that law contains is the creation of new type of [SEC] for Mexico, which would be an independent commission that would regulate telecommunications in general, including radio and television. The main difference is that today the current commission that regulates telecommunication does not regulate radio and television. So radio and television would be incorporated to that commission. And this is being discussed. I think it is a positive thing for television. Let's see what happens.

That's helpful. Thank you very much.

Jose Ramirez, Deutsche Bank.

Just to follow up on the upfront, do you think more clients will be closing in the first Q '06, and also, now that cable is in much better shape, do you think it makes sense for you to look into possibly buying some smaller operators outside of Mexico City?

No, we're not planning to close any more clients at the beginning of the year, also no (indiscernible).

As to the cable systems, it is something that we're going to consider. As we have always said, there is a lot of space and opportunity consolidating the industry in Mexico, and it is something that we will analyze this year.

[Mark Estigarribia], Citigroup.

Just a couple of -- just to focus more on the Cablevision asset. The digitalization efforts will be 100% by what quarter this year? Also, can you give us a net add number for full-year '06 on the high access speed? And just to follow-up on the high access speed clients, what packages are you offering or when are you going to start offering packages including Internet telephony to those subscribers?

As to your last question, we're going to start offering telephony in the third quarter, and we will have the whole network digitized by the fourth quarter. As to the packages that we are offering, I will ask Salvi to answer the question.

Yes, well, we are offering packages that go from 64 K of speed up to two megabits, and it can be for clients that decide only to go for the broadband services or clients that decide to go for both services.

Thank you. Also do you have a royalty payment for '06 estimate, and can you give us what the election spending amount was for 2005 please?

We are not going to disclose the political monies, political advertising until after the election, and I didn't hear your first question.

What the royalty payment for 2006 is going to be from Univision. Is it around 115, $120 million?

Yes, around there.

Just one last question on the gambling -- on the gaming. How many outlets can you tell us will be open prior to the World Cup? Can you give us that number?

Yes, we're going to have two opened before the World Cup.

[Martin Lauda], (indiscernible).

Do you plan to sell the games of the World Cup that Sky will broadcast on an exclusive basis, on a pay-per-view basis?

No.

No. Okay. And also could you repeat the breakdown of your CapEx for 2006 please?

Yes, let me give it to you. It's $280 million; 90 million for Sky Mexico, $52 million for Cablevision, $45 million for gaming and $95 million for our television broadcasting business.

David Joyce, Miller Tabak & Co.

Thank you. Could you remind us the volume of your political ad spending in the last presidential year?

In 2000, which was last presidential election and also the renewal of Congress, we sold about $75 million of political advertising.

And is there going to be further expenditure in the airline, or is this recent payment going to be it?

As far as we foresee and considering the business plan, this is our total investment.

(OPERATOR INSTRUCTIONS). Philip Remek, Guzman & Co.

I wanted to ask about the dynamics of increasing the OIBDA margin, particularly in pay TV and Sky, and about the very strong trends in those, and if we can see ongoing trend in this direction. If there are -- at this point, potential for ongoing growth in Sky beyond the recent subgrowth. Is that clear?

No, Can you rephrase it?

Okay. I want to ask about the EBITDA margin improvements in several segments, most particularly pay TV, Sky. In cable, we can see it could be largely from digital conversion, I would think. So can we expect these big improvements in OIBDA margin to continue in '06 and '07?

I think it will depend on the growth of subscribers. We have fixed costs and some that are valuable depending on the number of subscribers, such as programming but as we experience subscriber growth, which we believe we will experience in this year both in Sky, if they have 34 out of the 64 games of the World Cup on an exclusive basis, and also cable, as a result of digitization of the network, I think that we will continue experiencing growth in profitability of those businesses.

Just kind of the same question for Q4 also. The current number of CPOs, and on your assumed peso to dollar exchange rate. And perhaps on the general idea about what kind of tax rate you may expect going forward.

I will ask Salvi to answer the number of CPOs.

Well, as you know, the share structure of Televisa has CPOs and have shares that are not in the form of [BPO]. If your question has to do with how many outstanding CPOs would be there or equivalent CPOs, that is an AVR of just about 158 million AVR. That's also (indiscernible) initial. Outstanding, it's about 145 million AVR.

Great. Then the assumed peso to dollar exchange rate for Q4?

The exchange rate that we use for year end, it was 10.62.

And then on -- the tax rate has been bouncing around and if you can give us some idea of where you think a normalized tax rate is?

I think this year it is going to be much higher. We have tax loss carryforwards from previous years, and I think we have fully utilized those. So I think that this year you will see a jump and we are going to be closer to the mid to high 20s.

[Claudio Rocallo], [Batterymarch].

A question for Alfonso. Following up on Gordon Lee's question, do you feel that the Board will have enough information by April to decide on extraordinary dividends? In other words, will there be enough information so early as to any major growth opportunities as to decide what an external dividend might or might not be?

Well hopefully there will be more information than the one we have today. So that is what we expect. I mean we will -- definitely I think Claudio will have more information in April.

But enough to make a final decision by the Board on in April?

Well, hopefully so. If we don't have enough information, I guess we will have to postpone that decision. But hopefully we will have sufficient information to make a decision.

Matthew Walker, Lehman Brothers.

I have just got some questions just going back to the previous question about Spain. Three questions actually. The first question is, is there an arrangement put in place with your partners to eventually buy them out and take 100% of the venture? The second question is the bidding for the World Cup rights in Spain, which yourself and [Quattro] are still left involved in has apparently got to over EUR100 million. Would you be prepared to pay that kind of money for that event? The third question is, could you comment on the technical reach, which is believed to be guaranteed to be about 70. Do you think you'll actually start with 70 or are there some technical issues, which might mean you build up to 70 and over what period of time? Thanks.

Let me answer your last question first. Although we have a guarantee of 70% coverage, what technically -- I mean the information we have received technically is that we will reach 84%, and it will take some time because of what we have called our (indiscernible) process where you have to install basically in most of the buildings in the cities of Spain and the houses. We'll reach 84% by then, or '06 or early in '07. As to buying 100% of the venture, there is absolutely no agreement of that sort, and it's a 60/40 joint venture, and that's the way we are planning to keep it. And as to the World Cup, we would love to buy the rights for La Sexta, but it is a negotiation that is ongoing and it is being handled by our partners. So I think you should ask them that are involved on a daily basis in that negotiation.

I would now like to turn the floor back over to Mr. Angoitia.

Thank you very much for participating in our conference call, and we will see you next quarter.

Thank you. This does conclude today's Grupo Televisa's fourth-quarter and full-year 2005 conference call. You may now disconnect and have a wonderful day.