Grupo Televisa SAB (TV) 2006 Q1 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's first quarter 2006 conference call. [OPERATOR INSTRUCTIONS]. Before we begin, I would like to draw your attention to page eight 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.

Thank you, Elsa. Good morning. We're pleased that you have joined us for this discussion of Grupo Televisa's first quarter 2006 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 quarter. After that, Pepe will discuss the operating results of our television segment. Then we will be happy to take your questions.

Televisa continued to deliver strong results during the first quarter. On a consolidated basis, sales increased 13.3% to MXN7.4b. Operating income before depreciation and amortization increased 24.1% to MXN2.8b and our margin reached 37.6%, an all-time record for the first quarter margin. Net income rose 110% to MXN1.2b.

Now I will take you through our segment results. Sales of our television broadcasting business increased 8.8% to MXN3.8b. These results were driven primarily by an increase in sales to our traditional clients arising from our -- the success of our programming; by political advertising related to the presidential elections and by the favorable comparison arising from the fact that Holy Week fell in the second quarter rather than the first.

In addition, we continued to experience significant operating leverage. Operating income before depreciation and amortization increased 16.6% to MXN1.6b, enabling us to achieve a record margin of 43.8% for the quarter.

In our pay television networks business, sales rose 18.2% to MXN287m and operating income before depreciation and amortization increased 40.9% to MXN137m. This growth resulted primarily from higher sales to Sky and cable platforms in Mexico and the addition of five of our channels to Direct TV Latin America's basic package during the second quarter of '05.

Sales of our programming exports business increased 3.9% to MXN425m and operating income before depreciation and amortization increased 17.5% to MXN129m.

These results had three drivers. The first was an 8.9% increase in royalties from Univision, which amounted to $25.7m. The second was a payment of royalties to the Company under the Univision program license agreement in Puerto Rico, which during the quarter amounted to $1.6m. And the third driver was an increase in export sales to Latin America and Europe.

Our publishing division recently acquired Editora Cinco, the sixth-largest magazine publisher in Latin America and the only one other than Editorial Televisa with pan-regional coverage. Through this acquisition, Editorial Televisa continues to strengthen its portfolio of products by becoming the licensee of 17 magazines in Mexico and other Spanish-speaking Latin American countries and [Munte de Santa] for Colombia. Editora Cinco is also the leading publisher in the arts and crafts segment and has strong brands in the woman's and general interest segments.

During the first quarter, sales of our publishing business increased 12.6% to MXN534m and operating income before depreciation and amortization increased 24% to MXN44.5m. These results were driven by the consolidation of Editora Cinco and by increases in both circulation and advertising in Mexico and abroad.

Sky Mexico had an outstanding quarter. We added 64,500 subscribers during the quarter, bringing Sky's total base to more than 1.3m subscribers. Compared with last year’s second -- first quarter, sales increased 27.3% to MXN1.7b and operating income before depreciation and amortization grew 48.3% to MXN782m, enabling us to achieve a record margin of 45.6%.

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 driving subscriber growth during the second quarter.

In addition, we exercised a right to acquire two-thirds of the equity interest that Direct TV had acquired from Liberty Media. Therefore, we now own 58.7% of Sky Mexico's equity and Direct TV owns the rest.

Cablevision also had an outstanding quarter. We added 17,000 subscribers, bringing Cablevision's total subscriber base to more than 439,000. In addition, we added 8,000 broadband customers during the quarter and as of the end of the quarter had a total of 69,000 broadband consumers. Compared with last year's first quarter, sales increased 31.4% to MXN413m. Operating income before depreciation and amortization increased 83% to MXN156m and the margin reached 37.8%. This growth has been driven primarily by the conversion of our system from an analog to a digital format.

We also continued to see growth in our radio division. Sales rose 28% to MXN82.4m. This sales growth was driven by an increase in political advertising related to the presidential elections during our news programs and from sales generated by our affiliation agreement with Radiorama.

Sales in our other businesses segment decreased 14.2% to MXN314m. This decrease was attributable to lower sales in our feature film and Internet businesses, which were partially offset by an increase in sales in our soccer business.

Moving to our new project, La Sexta, the free-to-air channel in Spain in which we have a 40% stake, started transmissions on March 27. Its programming grid includes talk shows, comedy and foreign series. In addition, La Sexta has secured the exclusive rights to broadcast the 2006 Soccer World Cup. La Sexta will broadcast 36 games, including the games of Spain's national team, the semi-finals, the final and many other matches. The other 28 games will be sub-licensed to a leading Spanish pay television operator.

The World Cup will help La Sexta obtain carriage rights in pay television systems throughout Spain and will accelerate the ongoing [inaudible] process required to receive the channel's analog signal.

As to Univision, our Board of Directors held a meeting yesterday and authorized Emilio Azcarraga, our Chairman and President and Chief Executive Officer, and me at our discretion to enter into a group with others and to make a plan or proposal for a transaction with Univision which, if successful, would involve an increase in Televisa's minority shareholding in that company.

Moving to the outlook, our first quarter results put us on track to achieve our initial full-year guidance. In our television broadcasting business, we expect high single-digit sales growth and we 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%.

So, summarizing, we're very happy with our first quarter results. An all-time record operating income before depreciation and amortization for the first quarter in the television segment 43.8%, Sky 45.6% and consolidated 37.6%.

Also, all-time record growth in operating income before depreciation and amortization where pay television networks increased 40.9%, publishing 24%, Sky 48% and cable 83%.

We also have the lowest net debt that the Company has had, with more than MXN17b in cash.

Finally, our Board of Directors will submit to our shareholders' meeting a proposal to pay an ordinary dividend of MXN0.35 per CPO. The total amount of the dividend will be approximately MXN1.1b. If approved by our shareholders, this dividend will be paid on May 31 to shareholders of record as of May 30.

Now I will turn the call over to Pepe.

Thank you, Alfonso, and good morning to everyone and thank you for joining us. We're very proud, as Alfonso said, of our first quarter performance. The television broadcasting sales increased 8.8% and our operating income before depreciation and amortization margin reached an all-time high of 43.8%.

Of our first quarter television broadcasting sales, approximately 85% came from the upfront, compared with about 89% of last year, and 15% came from spot sales. We expect that during the quarters to come the proportion of the spot sales will increase due to political advertising in the second quarter and sales to clients that did not participate in the upfront system, or from clients that will require additional investments throughout the year.

Local sales grew 12.7% to MXN500m. Now they represent 13.1% of our total television broadcasting sales. During the first quarter we achieved an average sign-on to sign-off audience share of 17.6% and we aired 83 of the top 100 programs in Mexico and 24 of the top 25. In fact, Channel 214 used to drive high audience shares. It captured almost one more rating point than in last year's first quarter and the full year 2005.

Our novelas continue to boost our prime time ratings. Alborada, our 9pm novela that ended this quarter, was the highest-rated program in the quarter with an average audience share of 38.7%. Our 8pm novela, La Fea Mas Bella, is also achieving outstanding results with an average audience share of 49.5%.

Rebelde, our novela targeted mainly to young adults, continued to captivate this very attractive target. We have transformed Rebelde's success onto the screen into a rich multimedia experience for our viewers. Our music and light entertainment business are ideal vehicles for the expansion of the Rebelde experience. The music group RBD formed by the stars of the novela has produced four albums so far. Together, these albums have sold more than 4.7m copies, of which 2m have been sold in the United States.

We have promoted more than [18] concerts in Mexico and Central and South America, selling close to 1m tickets. And RBD have recently embarked on a 32-city tour of the United States. In fact, RBD kicked off its first U.S. concert tour in the Los Angeles Coliseum by playing for more than 53,000 people, setting a new attendance record for a Hispanic music act at this venue.

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 continue to be by far the most important content supplier for the company's TV networks.

In the Univision network, the Sunday February 26 finale of our program 'Bailando Por un Sueno' ran third among adults 18 to 34 from 8 to 11pm, beating NBC and CBS and achieving the highest audience delivery for this demo on a Sunday night. Univision set a record high with our 7pm novela 'Piel de Otono'. This show, which ended on Friday February 17, became Univision's highly rated 7pm novela of all time among adults 18 to 34 and adults 18 to 49 demographic.

In addition to exporting our programs to TV stations around the world, we are now licensing our most successful program formats and are providing production consulting services related to these formats with tremendous success. In Colombia, for example, we license the format for 'Bailando Por un Sueno', which captured a 54% audience share during its first 15 episodes. In Argentina the same format produced locally achieved a 50% audience share in every episode aired so far. And in Romania the show became the highest rated show in its time slot.

Looking ahead in our television broadcasting business, we expect a strong second quarter with significant revenue growth and healthy margins due to political advertising related to the presidential elections. In addition, we will broadcast 30 of the 64 games of the FIFA World Cup. We are also preparing for the second half of the year by developing new formats -- new programs and formats that will be released in the third quarter, including a new reality show that will start to air on July 9, the day of the final of the World Cup.

Finally, we are developing new ways to leverage our television broadcasting assets to enhance the value of our new ventures, including our investment in Spain, our new gaming business and our new in-store advertising project.

Thank you very much and now we are ready to take your questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Jessica Reif Cohen with Merrill Lynch. Please go ahead.

Thank you. I have a couple of questions about Univision, so I'll ask them one at a time. Just to clarify, did you imply that you're not planning on increasing your stake beyond 25% of the whole company? 25% is the legal limit but would you take a higher stake in the network, which you can [inaudible]?

Hi, Jessica. Yes, I guess it's premature to comment on the terms of what any proposal that may or may not develop might be. So we're analyzing many different structures in some areas which at different prices, of course, have different outcomes. But I guess it would be premature at this point to say how a structure or how a bid that may or may not happen will be.

Well, just one more question, then, about that part of that. If you went on -- there's a lot of speculation that you'll have -- well, you would have to have multiple partners, and you said that. So if you come in on private equity like terms, which means -- which is to say highly levered, it seems to us that you would only need to commit an incremental $700 to $800m at most. Is that in line with your expectations?

Well, it depends a lot on the structure and of course it depends also on the price. So it all depends, I guess, on the structure of a bid if it happens. So at this point, I guess it's premature to talk about amounts.

Okay, alright. And then one last question. There's been [inaudible] recently purchased a stake in Univision and [inaudible] in the paper again there's an increase in that stake. Can you clarify for us if you participated in the Board decision to approve the bid for Univision and can you make any comment at all on this investment and how it might affect your bid?

Yes. What we have been told by him and by that group is that they made this investment as a personal investment and also for the [Telmex] pension fund, as was described in our 13-D form yesterday. So it is a personal investment and an investment rate by Telmex pension fund, and they are not part of our process or not part of what we're structuring. And so when we discussed this yesterday at the Board meeting, he reduced himself and left the Board meeting. So what I can say is that he did not participate yesterday and he will not participate because of that conflict of interest in any further discussions or decisions that have to do with Televisa.

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

Morning, just a couple of questions. First of all, was there any election spending in the first quarter numbers and if so, how much? And could you update us on the guidance for the election now and the World Cup as you get nearer to it?

Secondly, you opened your first gambling outlet over the last week, I believe. Could you give us an update on the gambling business and what the next steps are there, when we should see some activity in that?

And then the last thing is could you talk through the option arrangement with Univision? I understand that you have this -- there's this 25% cap on foreign owners. The Slim stake seems to preclude the possibility of exercising -- Televisa exercising the options in Univision, because if you did, if you add up the Slim stake, the Televisa stake and the Venevision stake, it looks as if you’d be over the 25%. How does that work?

Hi, Patrick. Well, as to your first question, I guess as we have said in the past, we're not disclosing any -- the figures that have to do with political advertising for the time being and we'll disclose them after the election happens, of course for competitive reasons and also for political reasons.

As to your second question, gaming, as we have mentioned, will be an important business for Televisa. The gaming industry generates about 0.7% of the world's GDP and in Mexico we believe that this industry is under-penetrated. Therefore it presents a great opportunity for us. As we know, in 2005 we obtained a permit to operate sports books and number games, including the opening of 65 locations in Mexico. In 2006 we expect to open 10 bingo and sport book halls and we expect to open the remaining 55 bingo parlors over the next eight years. And these facilities will offer sport books and bingo gaming.

Multimedia Games, a leading developer and supplier of gaming systems and products, will provide technical assistance for our traditional bingo games and will supply electronic bingo machines for our bingo halls. And we expect to invest an average of $4.5m per facility in our first 10 facilities.

We also formed a strategic alliance with Scientific Games, which is a leading supplier of gaming systems and services with customers in the U.S. and more than 60 countries. Scientific Games will provide their electronic terminals for the number games and will be compensated based on a percentage of the revenues which derive from that business.

As to -- well, that's what I can say about the gaming [inaudible].

Can you talk for a second about the $4.5m per facility seems to be higher than the competition. What's the pricing idea, when you go in with these bingo halls? Are you trying to price at a premium to your competition and make it more glamorous, or are you trying to price in line with the competition? How do you see that?

And when you think we'll see the Scientific Games part of the gambling business actually launched, because I imagine sports books would have the maximum impact if you launched it before the World Cup. But we haven't seen any activity there yet.

Yes, I think the Scientific Games piece will be launched in the third quarter.

Okay.

And as to the other question, well, we want to have very nice places and attract people, I think. And then therefore we're investing about $4.5m. I don't know what other people are investing but this is what we will do. The first one -- we opened the first one in Puebla and it's a very nice place. I would invite you to come whenever you have time. So it's a very -- it's a different type of atmosphere. So I guess it makes sense to make these investments and to attract people to go to those bingo parlors.

As to the last question that has to do with the 25% cap, I guess, as I mentioned, it's premature to comment on the terms of what any proposal that may or may not develop might be. But if we were to proceed with the formulation of a proposal for Univision, we'll be in full compliance with the U.S. law which limits our participation in the voting equity to 25%. The investments by the Slim family entities and by the Telmex pension fund are their personal investments. They have nothing to do with what we will or will not do. So I guess it's a personal investment that they made.

Completely separate, okay. Okay, great. And last question. La Sexta in Spain, how -- when do you think you'll have a substantial proportion of households in Spain have topped up the cards?

I'm sorry? I didn't get your question, Patrick.

Coverage is the biggest issue for La Sexta in Spain because you have to put the cards in the buildings, in the TVs. When do you think you -- how is that going and how fast a rate do you think you can get those cards into the TVs?

That's going great, I think as a result of getting the exclusive rights for the World Cup. It will speed up as the World Cup gets nearer because just imagine -- the most-watched sport in Spain, of course, is soccer. And by having all the games of the Spanish national team, this will drive people to want the cards being put in. So I think we will see a better result than we had expected or had planned for in terms of speeding that up.

Okay, great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Michael Kopelman with Merrill Lynch. Please go ahead.

Thanks, good morning. Two questions for you. The first one on gaming. I was wondering if you could give us an update on the case before the Supreme Court, questioning the validity of the gaming regulation.

And the second one on the television division. You discussed previously when the upfront deposits came out that there are a couple of large advertisers who had pulled out. Can you see them -- have you seen them buying in the spot market in Q2?

Okay. Hi, Mike. As to your first question, the case that was brought to the Supreme Court has not been resolved and there's no timing for its resolution. So I guess it will take still some time and I cannot give you a schedule or a precise timing for that to be resolved.

Maybe just a follow-up on that, Alfonso. If the Court were to decide that the regulation was unconstitutional, what impact would you expect that to have on your permits?

Well, from the strict legal perspective, when the Supreme Court took the case they did not suspend the effects of the regulation. And therefore the permits would still stand even though -- or even in the case that the regulations are declared unconstitutional. So -- which we do not believe will happen, but of course it's a case that was brought before the Supreme Court, so. But even if that -- those regulations were deemed unconstitutional, the permits would stand.

Okay. And then, on the advertisers in terms of broadcasting, have you seen them come back in and buy in the spot market yet?

We have -- the two large clients that didn't come in in the upfront sales have not come -- are not buying advertising still.

Okay. Thank you very much.

Thank you. Our next question is coming from David Joyce with Miller Tabak & Company. Please go ahead.

Thank you. I just was wondering if there was any update on your plans to -- any plans to expand your cable TV footprint?

Yes, well, we're working and have worked in this quarter to expand it. I guess, as we have always made the comment, we would love to participate in the consolidation of this industry in Mexico. This industry is growing very fastly and you saw the results - we have about 70,000 high-speed Internet users or subscribers and it's growing rapidly. So I guess we'd love to participate and we're working very hard to try to accomplish that. We'd love to buy something and we're working on that.

I apologize if I missed it, do you have any guidance on CapEx for that division?

Yes. Hold on a second, let me give you -- I can update the whole CapEx for the year. CapEx for this quarter amounted to 48m and for the whole '06 it came to total $300m including $90m for Sky, $52m for cable, which was your question, $45m for gaming, $20m for our in-store advertising project with Wal-Mart and $95m for our television broadcasting segment.

Thank you very much.

Thank you. Our next question is coming from [Antia Patel] with DLS Capital. Please go ahead.

Hi. Can you please give some guidance for your national lottery and when that will be [inaudible]? What are the plans and how many outlets are you planning to put up over the next year or so? Thank you.

Yes. Well, as I mentioned before, we believe that this is going to be a great opportunity for Televisa and we signed the strategic alliance with Scientific Games which operates in the U.S. and more than 60 countries. And we expect to install 4,000 terminals this year. That's what I would -- could tell you about that business.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from [Andrew Pewer] with JL Advisors. Please go ahead.

Yes, hi. Just a quick follow-up on the multimedia games relationship. How many games do you think you'll have in each facility and what kind of revenue share [inaudible] you'll be expecting? Thank you.

Well, as to the number of games, there's different combinations and permutations of games, including the electronic bingo machines or class two machines. So it's difficult to say the number of games because we change them all the time. And as to -- we just opened the Puebla facility, the Puebla bingo hall, so I would be able to answer your second question, I think, in the next quarter once we have learned more about the business and how consumers are acting in those facilities and how are they reacting to the class two machines.

And how about from a revenue-sharing standpoint?

I don't have -- it's a table that we have depending on revenues. So I can share it with you if you want. I don't have that information with me but we can speak afterwards if you want.

I appreciate your help. 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 on Sky. Obviously a very good start to the year. I guess my question is, after the World Cup, are you expecting [inaudible] to churn in terms of subscribers? Or I guess another way of asking that is what do you think your year-end subscriber level will be there?

And then the second question is, now that you've exercised the option to increase your equity stake to 59%, have you given any thought about taking up the opportunity to develop Sky in Central America and the Caribbean? Thank you.

As to your first question, I think Sky will continue to experience growth in the next quarters, as we mentioned, as a result of the World Cup. And after the World Cup, we have developed a plan in terms of having content for the subscribers -- for the churn to basically stay flat. We are concerned because of the -- what we have called the World Cup hangover. So we have developed a plan and we're working on that, to have a lot of content for the subscribers for them to stay in this great service that Sky provides.

As to your second question, that had to do - I'm sorry Gordon - with --?

Just now that you've exercised the option and increased your equity stake, now you're -- at the time when that agreement was originally structured with Direct TV and with Liberty there, you had also been given the -- I guess the right of first refusal to develop Sky in Central America and the Caribbean. And I guess my question is whether you've given any more thought to that?

Yes, we have and Sky's management is working on a plan to develop the business in Central America. I think we -- they have structured it in the sense of grouping different countries. It would make a lot of sense, for example, to operate a service from Mexico that goes to Guatemala and they're working on that. I think you won't see anything in '06 and it will start in '07.

Perfect, thank you very much.

Thank you. At this time we have no further questions. I would like to turn the floor over to the speakers for any further or final remarks.

Well, thank you very much. We're very excited about this result and we hope to talk to you the next quarter.

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