Grupo Televisa SAB (TV) 2006 Q2 法說會逐字稿

Good morning everyone, and welcome to Grupo Televisa’s second quarter 2006 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. [OPERATOR INSTRUCTIONS]. I will now turn the call over to Mr. Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Thank you. Good morning. We’re pleased to have you with us for this discussion of Grupo Televisa’s second 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, and we’ll take a few moments -- I’m sorry, I’ll make a few comments on the events surrounding the Univision merger. Then we will be happy to take your questions.

Televisa delivered outstanding results in the second quarter, driven by strong operating performance in all business segments. On a consolidated basis, sales increased 20.9% to MXN9.7b. Operating income before depreciation and amortization increased 32.8% to MXN4.4b, and our margin reached 45.4%. These are all-time record results for any quarter in the Company’s history. In addition, net income rose 75% to MXN2.3b.

Now, I will take you through our segment results. Sales in our Television Broadcasting business increased 21.6% to MXN5.6b. These results were driven primarily by strong advertising sales associated with our broadcast of the 2006 Soccer World Cup tournament and by political advertising related to the presidential elections.

It is important to note that we aired only 30 of the 64 games of the World Cup, and that our results for the second quarter include only the World Cup games that took place in June. Therefore, our second quarter results do not include some of the quarter-final games, the semi-finals and the final which took place in July. In addition, we achieved significant operating leverage during the quarter. Operating income before depreciation and amortization increased 32.4% to MXN3b, and enabled us to achieve our record margin of 53.7% for the quarter.

In our Paid Television Networks business, sales rose 25.9% to MXN328m and operating income before depreciation and amortization increased 54.4% to MXN162m. This growth resulted primarily from higher sales to Paid Television platforms in Mexico and Direct TV Latin America, and an increase in sales of [inaudible] in the United States.

Sales of our programming exports business increased 1% to MXN513m, and operating income before depreciation and amortization increased 5.6% to MXN212m. This is also driven by an increasing royalty from Univision attributable to the Univision programming license agreement covering Puerto Rico which was executed in the first quarter. These royalties amounted to $1.9m.

Univision has not provided the royalty figure for the month of June. However, given that we do not receive royalties over the World Cup sales and most of the games took place in that month, we are estimating royalties to be flat in the quarter. This was partially offset by lower export sales to Asia and Africa.

Sales in our Publishing division increased 13.2% to MXN740m, and operating income before depreciation and amortization increased 5.5% to MXN148m. These results were driven by the consolidation of Editora Cinco during the first quarter of this year by increases in advertising sales in Mexico and abroad, and by an increase in circulation in magazines outside of Mexico.

Jumping to our Paid Television businesses, Sky Mexico exceeded our expectations once again. Sky added 74,000 subscribers during the quarter, bringing its total subscriber base to 1,389,000 subscribers. Compared to last year’s second quarter, sales increased 22.1% to MXN1.8b. Operating income before depreciation and amortization grew 39.1% to MXN843m and enabled us to achieve a 46.4% margin. This growth was driven primarily by Sky’s exclusive broadcast of the 34 out of the 64 games of the 2006 Soccer World Cup.

Cablevision added 19,000 subscribers during the quarter, bringing its total subscriber base to more than 458,000. In addition, the number of Cablevision broadband customers reached 75,000. Compared to last year’s second quarter, sales increased 41.1% to MXN481m. Operating income before depreciation and amortization increased 93.8% to MXN208m, and the margin reached 43.3%. This growth was once again driven primarily by the conversion of our system from an analogue to a digital format.

Sales in our Radio division rose 43.9% to MXN129m, and operating income before depreciation and amortization grew 100%. These results were driven by advertising sales associated with the transmission of the 2006 World Cup games, by political advertising related to the presidential elections, and by sales generated by our affiliation agreement with Panorama.

Sales in our other business segment increased 7.6% to MXN329m, and operating loss before depreciation and amortization increased 50% to MXN87m, driven by higher sales and costs associated with our sports and gaming businesses.

La Sexta, our free to air channel in Spain, broadcasted 36 games out of the 2006 Soccer World Cup, including the games of the Spanish national team, the semi-finals, the final, and many other matches. These events accelerated the [inaudible] process required to receive the channels’ analogue signal and helped us to obtain carriage rights in paid television systems throughout Spain.

Today, approximately 70% of households in Spain receive La Sexta’s free to air signal in either analogue or digital formats, or through a paid television system. From a financial perspective, La Sexta generated sales of €11m during the second quarter, and is currently exceeding its sales EBITDA and audience share budget.

Moving on to to outlook, we continue to expect our Television Broadcasting business to achieve high single-digit sales growth for the full year 2006. In addition, we are raising our full-year guidance with regards to operating income before depreciation and amortization margins. We now expect Television Broadcasting margin to exceed 50% and, on a consolidated basis, expect our margin to reach 42%.

Before I turn the call over to Pepe, I want to make a few comments on the Univision merger situation. As you know, Televisa has long been an important part of the U.S. Hispanic marketplace and is committed to pursuing the many growth opportunities associated with the market going forward.

After Univision announced its intention to put itself up for sale through an auction, Televisa explored the opportunity of participating in a bid with financial partners in which Televisa would increase its minority stake in Univision, fully consistent with FCC regulatory requirements.

Televisa and its partners made such a bid. After submitting our bid, we repeatedly offered to discuss with Univision all aspects of our proposal, including price. However, Univision and its advisors refused to enter into any discussions with us after the bid was submitted, and as you know, Univision went on to sign a merger agreement on June 26 with a Providence Equity led group. We believe that decision was unfortunate, not only as to Televisa, but as to the other shareholders of Univision as well.

Following these events, we have made clear that we have a number of alternatives that we are considering. We also have made clear our intention to move forward [inaudible] and to pursue all options to build our potential in the growing U.S. Hispanic marketplace.

On June 5, we announced that we were declining to participate in the June 26 merger agreement with Univision, which Univision signed with Providence Equity led group. We notified that group that Televisa would not be rolling over any portion of its Univision shares, as provided under the Group’s current merger agreement with Univision.

Further, we also noted publicly that if our holding in Univision were to fall below approximately 13.5m shares of Class D common stock, we would no longer be bound by the October 1996 Participation Agreement with Univision. If Televisa is no longer bound by the Participation Agreement, we will be able to engage in numerous new business opportunities to serve the growing U.S. Hispanic marketplace related to programming or otherwise without having to offer Univision the opportunity to participate in such ventures.

Furthermore, as you are aware, Televisa has brought litigation against Univision with respect to the program license agreement. We have previously given notice that we believe that we have a right to terminate that programming agreement as a result of material, uncured breaches by Univision.

But quite apart from that, we believe that after December 19 of this year, we will have a right under the PLA to distribute, on the internet, the television programming, including telenovellas that we provide to Univision. Televisa has a number of potential opportunities to develop long-term relationships designed to utilize Televisa’s expertise, content and capital in constructing a force which will be a leader in entertainment and information in the U.S. Hispanic market.

It is unfortunate the route that Univision took, and time will determine the ramifications. Now, I will turn the call over to Pepe.

Thank you, and good morning to everyone. We are very pleased with our second quarter performance. As Alfonso said, we attribute our strong results in large part to our focus of the World Cup Soccer tournament. Televisa’s superior programming has helped us to outperform our competitors in terms of audience preference, in not only the tournament itself but also our primetime shows, such as [inaudible], which feature analysis and commentary by some of the sport’s best-known players and personalities, as well as highlights of the matches.

It is quality programming such as this, as well as our strong and dedicated sales force, that has led our World Cup sales to exceed our expectations. Another major driver of our excellent second quarter results was our federal elections coverage. We provided our viewers with uninterrupted, high-quality coverage of the electoral process. And in return, our audience once again shows its preference for our newcast.

Despite the fact that most of the content of these two extraordinary events was exactly the same for Televisa and its competitors -- same soccer matches, same elections -- we managed to achieve an average sign-on to sign-off audience share of 70.1%, in the second quarter, and with 84 of the top 100 programs in Mexico.

Channel [2] continues to draw high audience shares. Their re-enforcement of our primetime lineup showed an increase of three share points from the first to the second quarter in this time slot. We continued to develop programming of the highest quality, such as novella [inaudible] which consistently captures an audience share of more than 45%, leading to EBITDA margins of 75%.

In addition, this novella has enabled Univision to become the highest ranked network among 18-34 in the United States in several weeks, outperforming the top networks, including ABC, CBS and NBC. In fact, our novella has continued to be the main primetime offering of Univision.

In the most relevant market, Televisa’s programming in the Univision network captures 50% of the total network Hispanic audience with only 30% of the programming hours. Undoubtedly, our programming consisted of the bulk of all product offering in the U.S. Hispanic market.

We’re going to launch several new shows in the second half of 2006, including [Amor Mio] which will air on Channel 2. Amor Mio is a new format, part sitcom, part dramatic series, which we believe will capture new audiences highly demanded by our advertisers, namely families and young adults.

This quarter we will launch [inaudible] on Channel 2 on Sunday evenings. This program has already started to beat the best show ever produced by our competitors, La Cabina. We are confident that we will maintain the preference of the audience and the advertisers in this important time-slot, keeping very tight margins.

We continue to program and develop shows that appeal to a young demographic on Channel 5. For example, we are re-launching and repositioning of high-quality popular series such as CSI and Prison Break. In addition, we are producing in fact, a reality show that, together with Sky, will attract young audiences in the third quarter, and will keep the growth of our DTH systems.

In the second quarter we launched Esmas TV, our TV service offered through the internet, with more than 1,500 sponsored short videos. In just five weeks, these videos covered traffic more than 8m downloads. In addition, we provided the alternative finale of the novella [inaudible] which appealed to more than 1.7m internet users. This is only the beginning of a new business that leverages our high-quality content.

Internationally, we developed our first co-production with our Spanish partner, La Sexta. HMS [inaudible] is the title of this primetime novella, aimed at the young audience. In addition, La Sexta will broadcast the World Basketball Championships to be played in Japan, which are very popular in Spain, and we will start in September with the transmission of our news programs. We expect this, and other high-quality programs to boost La Sexta’s ratings into the coming months.

Looking ahead, we expect a good third quarter in our Television Broadcasting businesses. We have extremely attractive programs that will appeal to advertisers in this traditionally low period of advertising expenditure. The second semester will see the launch of innovative formats, as well as new platforms. For example, Esmas TV will have live TV and video-on-demand as part of its online service offerings. Thank you and we will be glad to take your questions.

Hello?

Mr. Angoitia, your line is live. You may speak.

Yes, hello.

Your line is live, sir.

Yes, we’re waiting for the questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Jean-Charles Lemardeley of JP Morgan.

Yes, and good morning, Alfonso. Could you give us more concretely and in more details as to what you could do in the U.S., what, not being bound by the participation agreement could allow you to do in the programming field, what kind of opportunities could be offered for you going forward?

And then the second question would be, on your margins, you’ve raised your guidance to above 50%. You’ve had a very strong performance, very strong including leverages for the past few years. We’re now seeing some broadcasters in central Europe guiding for margins above 60% for next year, for instance. What would -- why shouldn’t we expect those strong margin gains to continue in strategic revenues?

Yes, well if I answer your last question, we have continued to expand our margins, increase them, so hopefully one day we will get to the 60% but not this year. I think we’re going to stick to our increased guidance.

As to your first question, it has to with the U.S. Hispanic market, we’re looking at many potential opportunities. I think Televisa is in a great position to take advantage of those opportunities, and it’s very important that we are not tied by the participation agreement, because that would -- then Televisa will be free to explore many, many alternatives and opportunities. However, at this point I would not like to speculate on any of those opportunities and not to speculate on any specific conversation or negotiation.

Okay, but the broad areas that you will be looking at, the segments of the market you will be focusing on, what would they be likely?

Within our core business, of course.

Okay, thanks a lot.

Thank you.

Thank you, our next question is coming from Michael Kopelman of Merrill Lynch.

Hi, good morning guys, a couple of questions for you. First of all on advertising, I’m not sure if you can do it, but if you could break out the World Cup numbers? I know you said that the [AC] are estimates. That would be helpful.

And then just looking at it, it looks like the underlying growth is pretty negligible for the quarter. What’s your expectation moving forward? Is that a result of the people, the advertisers who are not party upfront, and really, my question is, have they come back into the market?

Hi Mike, as to the World Cup, I think we’re at this time negotiating the rights for the next World Cup. We’re not going to break that down, nor political advertising. I don’t think at this point it’s in the best interests of Televisa or its shareholders to give the numbers.

As to the results of this quarter, I think that they were great. I think when you analyze these results of Television Broadcasting, we have to keep in mind several things. I think as to World Cup sales, we had only 30 of the 64 games of the World Cup, since we sold 34 games on an exclusive basis to Sky.

These results for the second quarter only include the games that took place in June, so some games, including the quarter-finals, the semi-finals and the final, took place in July, and we will see that revenue from the broadcast of those games in the third quarter. And also, only part of the revenues associated with the World Cup are incremental. They are mostly the same advertisers, but not all that money is incremental.

Now, to political advertising, I would like to say that we received part of the revenues that had to do with the political campaigns in the first quarter, and the rest in the second quarter, so not -- you have to distribute it between the two quarters.

Also, not all the political advertising is incremental, because we also had revenues from political advertising in the second quarter of last year, especially in respect of the election that took place in the state of Mexico. So I think we have to consider all those factors in analyzing the results.

Okay, Alfonso, a follow-up question and it somewhat relates to Univision, but looking at your balance sheet right now, you guys have 1b, 6b, 7b, 8 in cash, something in that range, and it seems like no matter what would happen with the Univision outcome that you probably wouldn’t need to use that capital or even necessarily a significant portion of it. When can we expect some sort of news, either dividend or a share buyback, and what’s your thought process, or what’s the thought process you’re going through when you consider what to do with your balance sheet, currently?

Yes. I think, Mike, as we have always said, we would like to grow the company with that money and if we don’t find attractive opportunities, which are high growth opportunities, which are related to our core businesses and that are not dilutive to Televisa, we would consider the payment of dividends and/or buybacks.

I think we have to first analyze all opportunities that we’re seeing in the U.S. Hispanic market, to see what happens in the case of Univision, and then we would bring to the board the possibility of doing something like returning capital to the shareholders.

And Alfonso, just one final follow-up on that, can you imagine a scenario where you will need an incremental $1b of capital over and above the Univision stake to invest in the U.S.?

It depends on the opportunity, so I think there are many, many attractive opportunities that we are exploring. So it will depend on how these things play out.

All right, thank you.

Thank you. Our question comes from Jessica Reif Cohen of Merrill Lynch.

Thank you. Alfonso, I have to go back to Univision, a couple of questions. You said you wouldn’t join the Providence led group under the current terms. Could you discuss what terms you would be willing to join that group? It has been reported in the press that you were in discussions with that group, so I was just wondering what you can say about that? And then finally, what do you think the timing of the litigation regarding the PLA is? What happens to the timing, given the sale of Univision?

Hi Jessica, yes, I think there has been a lot of speculation about our meeting with the Providence Group. As you know, we attended [inaudible] company media conference, and numerous parties that had to do with this transaction also went to that conference.

However, at present there is no change in Televisa’s plan, and we have announced that we will not participate by rolling over any of our Univision shares, and we have also, under the current merger agreement, and we have also told the Providence Equity led group that we would be willing to enter into negotiations to sell them the shares that we have in Univision, because as we have mentioned, that’s important under the level that I mentioned before.

We would no longer be bound by the participation agreement and we would be able to take advantage of opportunities in the States, and I guess if that is the case, the sooner the better, to be free of that participation agreement, so we have told them that we would do that. We’re willing to entertain the possibility of selling this part to them now.

So that has not changed. We’re not interested in participating in rolling over our stake in the terms of that merger agreement, so nothing has changed since we made the public statement.

And then regarding that litigation, regarding the PLA, does anything change with the sale of Univision?

No, nothing changes. The litigation will commence in the first quarter of ’07. We feel very confident that we are going to be successful in that litigation.

Okay, thank you.

Thank you. Our next question is coming from Andrew Campbell of Credit Suisse.

Yes, good morning. I was just hoping for an update on the gaming initiative, and if you could talk a bit about where you are in terms of the launch of the [Play city] locations, and also if you have an estimated timing for the number draw launch?

Hi Andy, yes, we have opened with four bingo partners, one in Pueblo and three in Mexico City, and surrounding areas. We expect to open six more of those bingos before May ’07. The results so far are encouraging. I think we’re on the right track.

As to the number draw business, we have some delays in execution. We expect to launch that business in September. So you will hear from us and what has to do with that business in the next quarter.

Okay. Do you think, in aggregate, that gaming is going to have a material contribution to revenues in the second half of the year, or?

No, I don’t think in the second half of the year it will have. I think it will have a material contribution next year.

Okay, thank you Alfonso.

Thank you. Our next question is coming from Vera Rossi of Morgan Stanley.

Thank you. I have two questions. The first is on your margins for the Television Broadcasting business. If we exclude the political advertising in the second quarter where your EBITDA margins would have been? And the second question is a follow-up on the gaming. When do you expect to give a breakdown of your gaming business on your results? Today you are reporting together with other businesses, but what level of revenues do you expect to be to give us the breakdown? Thank you.

I think as to your second question we’ll give the breakdown of gaming and we’ll consider that as a separate business when the numbers become material. We have to see how ’07 plays out, and then we’ll make a decision.

As to political advertising and World Cup revenues and margins, as we have said, we don’t think it’s in the best interests of Televisa and its shareholders to break that down, so we will not be breaking down the margins without that either.

Okay, thank you.

Thank you. Our next question is coming from David Joyce of Miller Tabak & Company.

Thanks, just a question on the upfront process for where it is versus last year. Do you see any advertisers looking for any changes in that?

I’m sorry, David, I didn’t get the question.

Of upfront advertising contracts with your advertisers, so I was wondering if there were any new changes in that process this year versus last year, or any indications you’re getting from advertisers?

Yes, and Pepe can give you the numbers of upfront versus scatter, but I don’t see any material changes. Therefore, the political advertising is coming in as scatter.

No, the scatter definitely changed in this quarter because of obvious reasons. The percentage of upfront was 73.5 and 26.5 of scatter market, against 15.2 last year for scatter, and it’s so basically because of the political and the World Cup, but we are going to keep our guidance on a yearly basis.

Okay, thank you.

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

Oh, just a couple of questions, one on that upfront question as a follow-on. It looks as if -- I know these numbers are always tough to bring forward, but it looks as if you have 11.2b of paces of upfront that still could be amortized for the rest of the year, which suggests that.

What was the percentage of scatter and upfront, or depletions of upfront deposits in the second quarter? And how do you see the second half going? Can we see that the drop back in ad spend in the scatter and in the upfront in the second half of the year, will we still have good growth compared to last year, or would you have separated guidance for the second half of the year compared to the second half of last year, I suppose is the question?

The second question is on the gambling business. You have two outlets open on the bingo, but we’re not seeing a lot of advertising or real promotional push on that business as yet. When do you think you’re going to do? Are you going to do a very aggressive push on those businesses or how do you see the marketing of those businesses, that and lottery as well? I would imagine if you’re going to do a September launch on the numbers business, you should be advertising it today?

Yes, hi Patrick. We haven’t advertised a lot because we’re starting to open these bingos, as I mentioned. We have opened four bingo partners, one in Pueblo and three in Mexico City. The three in Mexico City opened mid-June, so that’s why we haven’t advertised because they are few, still, and in Pueblo we are advertising on a local basis. The campaigns are ready, and as we open more, we’ll use all the force of Televisa in advertising this business.

As to your first question, I’ll ask Salvi to give you the answer.

I’m sorry, on the numbers business, on the lottery business, when should we see promotional activity on that?

We’ll start the whole campaign in September.

Okay, so then the first draws should be late September/early October, so it’s really a third and even fourth quarter event?

The first draw is going to be in late September and we’ll start the advertising campaign in the first days of September.

Okay.

Hi, Patrick. Regarding how do we see the rest of the year in terms of sales and the upfront, as you can see, probably, on our balance sheet, the deposits from clients are better than what we had at the beginning of the year, compared to last year, which means that some of those clients that did not participate in the upfront originally came in with deposits that were in this first half of the year.

If you see our guidance for the entire year, that we have provided for Television Broadcasting, you can have an idea of what we are expecting for the second half, and I would just remind you that during the fourth quarter, usually scatter market is higher than the original upfront deposits because clients start to run out of money. So I think that with that, you can have a good idea of how the second half will play out.

Thank you.

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

Good morning, hello?

Hi Phil.

A couple of things. Kind of a technical question, if I read numbers correctly in the balance sheet, it appears you had a repurchase in Q2 of shares worth about MXN1.8b, or about $160m, which would be about 1.5% of the market cap, and perhaps an update on it would be good for the current share count for the GDF, as well as current data on the repurchase authorization?

Yes, Phil, Salvi is going to answer your question.

We did not repurchase shares during the second quarter.

Okay, but under liabilities here, the share repurchase number changed dramatically in Q2.

Well, we had a general shareholders meeting where the cancellation of those shares that we had previously bought got cancelled.

Yes, that’s a technicality, Phil. What happens in Mexico is that you repurchase the shares on the stock exchange, and then, on a yearly basis, you have to have a shareholders meeting in order to cancel the shares that you have repurchased, so that’s why in the single quarter you see that reduction, and those are all the shares that were bought back in the previous year. But it’s a legal technicality that basically you reduce capital, and you cancel all those shares on a yearly basis.

All right. Then, do you still have repurchase authorization now?

Yes, we do.

Okay, and in what amount?

I think we have $600m authorized by the shareholders meeting and the board.

Okay, and that would still be outstanding as of now?

Yes, that is the total number authorized by the board.

Meaning?

It’s the maximum amount authorized by the board.

Okay, I guess the question that would be, how much of that have you already used, or is that not touched yet?

I think in that shareholders meeting we approved $500m so basically, we did not repurchase stock this quarter or the second quarter then that means it’s untouched.

Okay, and then a little follow-up, way back up on television, in your first paragraph it mentions local sales were up 18%, and I was wondering if you could give a little color on local sales, like division of local versus national for the company? And perhaps whether local sales, would that include, say, the campaigns for Chamber of Deputies in the Senate, or were there other factors involved in the local sales growth?

Yes, local sales in the second quarter represented 14% of total Television Broadcasting sales, and that jump that you saw had to do with political advertising on a local basis.

Great, thank you.

Thank you. Our final question comes from Mario Epelbaum of [Author] Capital.

Hello, gentlemen, I have two simple questions. Sorry to go back to the Univision. Have you ruled out the possibility of trying to put together a counter bid? We all know that has to be probably higher than the $38 range. Is this something that you could tell us that it’s not part of your plans, or is it too early to say that?

I think we haven’t ruled that out. It’s one of the alternatives that Televisa has, and we haven’t made a final decision, but I would not speculate on the price.

Okay, and the second question is, I know that the official position is that under the current terms of the merger agreement, you do not wish to roll over your shares. Are there some terms under which you would be willing to roll over your shares, and are you in discussions with the other party about that possibility?

Yes, well I guess that what I can tell you is that we haven’t changed our plans. We haven’t changed the decision that we made, and which is public, which is that in the terms of that merger agreement, we would not participate with that group, and as I mentioned before, we have also told officially in a letter to that group that we would be willing to start a negotiation to sell the block of stock that we own in Univision now to them. That has not changed.

Okay. Thank you.

So thank you very much for participating in our conference call. I think the results were great, and we’ll talk to you next quarter. Thank you.

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