Grupo Televisa SAB (TV) 2006 Q4 法說會逐字稿

Good morning everyone, and welcome to Grupo Televisa's Fourth Quarter and Full Year 2006 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.

Thank you, Elsa. Good morning. We're pleased that you have joined us for this discussion of Grupo Televisa's Fourth Quarter and Full Year 2006 Results. With me today are Jose Baston, Corporate Vice President of Television and Salvi Folch, our Chief Financial Officer.

First, I'll take you through the highlights of our financial results for the year, and we'll review the outlook for 2007. 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 2006. On a consolidated basis, sales increased 12.2% to MXN37.9 billion. Operating income before depreciation and amortization increased 19.4% to MXN16.4 billion, and our margin reached 43.3%, an all-time record for a full-year margin. Net income rose 34.7% to MXN8.6 billion. Now, I'll take you through our segment results.

Sales in our Television Broadcasting business increased 8.5% during the year to MXN20.9 billion. This growth was driven primarily by political advertising related to the presidential election and by sales associated with the Soccer World Cup. In addition, excluding the cost associated with the World Cup, we kept our costs and expenses virtually flat year-over-year. As a result, our operating income before depreciation and amortization increased 15.1% to MXN10.5 billion and enabled us to achieve a record margin of 50.5%.

In our Pay Television Networks business, sales rose 14.9% during the year to MXN1.3 billion, and operating income before depreciation and amortization increased 26.6% to MXN682 million. This growth was driven by an increase in sales to pay television platforms in Mexico and Latin America, an increase in sales of TuTv in the United States and an increase in advertising sales.

Sales of our Programming Exports business increased 8.1% during the year to MXN2.1 billion, and operating income before depreciation and amortization increased 24.9% to MXN869 million. This growth resulted from an increase in exports to Latin America and Europe and from an increase in royalties from Univision.

In 2006, our programming represented 42% of Univision Network's non-repeated broadcast hours and 36% of Univision's combined gross advertising revenue. In exchange, we received $126.9 million in royalties, which includes $7 million for Puerto Rico.

Our Publishing business continues to deliver strong results. In 2006, we saw an increase in sales of 10.7% to MXN2.8 billion, driven by an increase in both circulation and advertising in Mexico and abroad and by the integration of Editora Cinco in the first quarter of 2006. Operating income before depreciation and amortization increased 11.3%, and the margin was 19.3%.

SKY Mexico had another outstanding year. And once again, high quality content was instrumental to its success. In 2006, SKY subscribers enjoyed exclusive access to some of the most exciting and popular sporting events in the world including 34 of the 64 games of the 2006 Soccer World Cup, all of the games of the Spanish Soccer League, 20% of the games of the Mexican Soccer League and many other major events. As a result, SKY added 179,500 subscribers during the year, bringing its total subscriber base to more than 1.43 million.

Sales increased 19.6% to MXN7.4 billion. Operating income before depreciation and amortization grew 35.8% to MXN3.5 billion, and we achieved a record margin of 47.7% for the year. These results allowed SKY to generate over $180 million in free cash flow in 2006.

Cablevision also had a great year. Sales increased 35.7% to MXN1.9 billion. Operating income before depreciation and amortization increased 60% to MXN816 million, and we achieved a margin of 41.2% for the year. These results were driven by the addition of 74,000 subscribers -- television subscribers, 35,000 broadband customers and by a 6% price increase during the first quarter of the year. Cablevision closed the year with 496,000 television subscribers and 96,000 broadband customers.

In addition, Cablevision completed the transition from analog to digital transmission. Cablevision subscribers growth was -- has been driven by the company's digital transition and by a combination of services including broadband, video on demand and high-definition television.

In our Radio business, sales rose 23.9% during the year, and operating income before depreciation and amortization increased 74.2%. These results were driven by political advertising relating to the presidential elections and by sales associated with the Soccer World Cup.

Our Gaming business is underway. We have opened five bingo parlors, one in the city of Puebla and four in the city of Mexico, and we expect to open ten additional bingo parlors in 2007. In addition, we started our lottery business on February 12th this year. We currently have four different games, and we expect to launch additional games including a game related to soccer and television bingo during the second half of the year. Needless to say, we are very excited about the potential of this business.

In 2006, Grupo Televisa generated over MXN10 billion of free cash flow after maintenance CapEx. During the same period, we returned over MXN3.6 billion to our shareholders through an ordinary dividend of MXN0.35 per CPO, equivalent to approximately MXN1.1 billion and through share repurchases totaling MXN2.5 billion. As in the previous years, we will propose to our shareholders to cancel the shares, which we have repurchased in the upcoming shareholders' meeting.

In November 2006, the company invested $258 million in long-term notes convertible into 99.9% of the equity of a company that holds 49% of the equity of Cablemas. The long-term notes have a five-year maturity with a coupon rate of 8% in the first year and 10% in the following years.

Cablemas is the largest cable operating in -- operator in Mexico, operates in 48 cities. Its cable network share is about 700,000 cable television subscribers, about 160,000 high-speed Internet subscribers and about 25,000 IP telephony lines with approximately 2 million homes passed. The conversion of the long-term notes into equity is subject to the approval of the regulatory authorities in Mexico.

Moving to the outlook for the year, in 2007, our Television Broadcasting business will face a difficult comparison, particularly in the first half of the year, due to the last year's non-recurring political and World Cup advertising. As a result, we expect Television Broadcasting sales to decrease more than 5% in the first half of the year. For the full year, we expect Television Broadcasting sales to decrease marginally and OIBDA margin to remain above 50%. Our CapEx budget for 2007 amounts to about $300 million including $100 million for SKY Mexico, $65 million for Cablevision and $60 million for Gaming.

Thank you for your attention, and now I'll turn the call over to Pepe.

Thank you, Alfonso, and good morning to everyone. We are very pleased with our results. In 2006, we aired 83 of the top 100 programs in Mexico and 24 of the top 25. In our Television Broadcasting business, our average sign-on to sign-off audience share for the full year was 71%, driven primarily by our programming on Channel 2. To illustrate, I'd like to offer a few of the year's highlights.

Channel 2 is the country's leading television broadcast network. Televisa almost produces 100% of the programs aired over the channel including our world-famous telenovelas. In 2006, our telenovelas were by far the leading programs in the country. For example, La fea mas bella was a phenomenal success, achieving an average audience share of 47.5%. This together with our other programs including our newscast, game shows and variety shows led Channel 2 to capture an average sign-on to sign-off audience share of 31.8%.

We launched several new shows during the year with great success. For example, in the second quarter, we launched Amor Mio, a new sitcom on Channel 2 with an average of 37% audience share, attracting advertisers with its family-friendly content and with good product integration opportunities. In addition, in July, we launched Bailando Por La Boda De Mis Sueños, also with great audience and commercial success during the very important Sunday night slot.

We are capitalizing on the popularity of this show by licensing its original format by Bailando Por un Sueno to TV stations around the world. In Panama, the format produced locally with Televisa's support was the highest rated program in the country, capturing 47 rating points in its initial episode. And in Argentina and Romania, the same format produced locally achieved an average audience share of 56.7% and 36.4% respectively. And now, they are both airing their second season with the same success. This is just the beginning of our format-selling international business.

Other drivers of our excellent full-year results were our broadcast of the World Cup Soccer tournament and our presidential election coverage. We broadcasted 30 of the 64 games of the World Cup and provided viewers with uninterrupted, high-quality coverage of the electoral process. Once again, audiences preferred our coverage of both events.

The key to our ability to generate consistently strong results is our commitment to expanding our high quality content to all of our business segments to meet the diverse needs of our audience and clients. This is what we call our 360 Model. Rebelde, our Telenovela for teenagers is an excellent example of how we capitalize on all of the outlets to reach our audiences. The success of the original program has grown into a phenomenon that includes a sequel entitled Familia RBD that will start its transmission on SKY Mexico as a first window next month, our music albums that have sold more than 4.7 million copies, 129 concerts in Mexico, Central and South America and the United States and a new magazine for the teenagers called RBD, among other things. We are now creating shows this time from its origin with the 360 model in mind.

Shifting to the US Hispanic market, as Alfonso said, in 2006 our programming represented 42% of Univision Network's non-repeat broadcast hours. Our telenovelas continue to serve as Univision's primary prime time offering. In fact, on nearly one out of every two nights during the fourth quarter Univision attracted more total adult viewers 18-34 than ABC, CBS, NBC or FOX. During the high competitive 8 to 9 p.m. slot, La Fea Mas Bella made Univision the number three network in the country among all adults 18 to 34. Over the course of the fourth quarter, Univision increased its prime time viewership by 6% among adults 18 to 34 and 5% among adults 18 to 49.

We're also taking our television programming to the Internet with exciting results. In 2006, we launched several services including Esmas TV, our Internet television service through which customers can watch a live stream of our four broadcast channels enhanced by a 15-day time shifting archive, Video on Demand service, through which customers can download television programs, movies, music videos and other content and a new short-clip video streaming service with our portal which launched with more than 1,500 short videos. Today we are streaming 1.7 million short videos a month and we have sustainable growth pattern for this service. Our Pay Television Network business continues to grow. Over the past five years sales have more doubled and EBITDA has grown more than 500%. Today, our Pay TV channels reach more than 60 million Pay TV subscribers worldwide. We expect to continue seeing strong growth in this segment of Pay TV penetration growth in the markets we serve.

Looking ahead, in 2007 we face a very difficult comparison. However our 2007 up-front deposits increased 8.2% in real terms to MXN15.9 billion. The growth in the up-front combined with a stable economy should allow us to offset most of the last year's nonrecurring advertising. Our ongoing commitment to integrate and cross promote our business segments with our high quality content as a common thread will drive our results. We will continue to reach the demographic that our clients demand and to deliver the kinds of programming products and services that excite and engage audiences around the world.

Thank you and we are ready for your questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Andrew Campbell with Credit Suisse. Please go ahead.

Yes, hi. I just wanted to ask a little bit more about the Cablemas investment. And last quarter you said that you would potentially spend 250 million to $500 million on cable investments. Do you feel that guidance is still reasonable for the next three years? Or given this investment do you think it could potentially be higher?

Hi, Andy. Yes, I think it depends on whether opportunities such as this one come up. But I think for the time being we're fine with that figure.

Okay. And in terms of the convertible debt, is it convertible basically at any time over the five years? Is it only convertible at the end of five years? Or have you already requested to convert it? Or how exactly would the convertible potentially work?

It's convertible at any time during the five years, however as I mentioned, the conversion is subject to the approval, especially from the Commission, the Competencia en México, the Federal Competition Commission.

Okay. No, I understand, but in other words you've requested already the conversion, or you're interested in converting it?

No, we have not requested the conversion. I think it all depends on how the market in Mexico develops and how in this new converged market things move in Mexico. And I think that the Mexican authorities will take a new look at the market once they see what happens as a result of convergence.

Okay great. Thank you very much.

Thanks.

Our next question is coming from Vera Rossi with Morgan Stanley. Please go ahead.

Thank you, I have two questions. First on the launching of your Lottery business, can you tell us how was the launch compared to what you were expecting in terms of revenues? And second, in your television broadcasting guidance for 2007 that is marginally below 2006, are you including the revenues from advertising that you are going to have from your Lottery business as well in this guidance? Thank you.

Hi Vera. Yes, as to your first question, we're very happy with what has happened in the Lottery business we launched about ten days ago. And we have advertised this lot. I think it's going to be a great business for us. The results in the first days have been very good. We'll end the year with 10,000 terminals and I think we're going to see that business growing a lot this year. We, of course, are advertising a lot on television. However those cross promotions are not included in the revenues of television broadcasting.

So your guidance does not include the potential revenues from the Lottery business?

Well, no, because it's a cross promotion from one of our own companies and what we do is basically, on a consolidated basis, that's offset.

Yes, on a consolidated basis, I understand, but when you report by business the breakdown in your press release, this is already excluded?

How we do it is that in the cross promotion between our own companies we sell at a discount from one company to the other, so what you see is going to be marginal.

Okay, thank you very much.

I don't know if I was clear. I mean when we do it, we sell at a heavy discount between one company to the other, so what happens is that you're going to see something marginal on television broadcasting, not the size of the total advertising that we're making for the lottery business.

Okay, and you are seeing something marginal because the price that you charge is low?

Exactly, yes.

Okay, thank you.

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

Thanks. Good morning, guys, I have two questions. First of all, just on Univision, they said that they plan to close March 26 and I'm wondering if you can give us an update on your thinking there, particularly in the context of the extension of the contracts to the current management. I'm wondering if you think that has any implications for your future relationship there. And maybe you can give us an update on litigation as well? And the second question, you touched on what you guys returned in 2006 and I'm wondering what the plans for return of capital are in 2007? You have a significant amount of cash on your balance sheet now, even assuming that you used the Univision proceeds to reinvest in the company, I'm just wondering what you'll do with the free cash that you generate throughout the year? Thanks.

Hi, Mike. To your first question, there is basically no news as to the Univision situation. The lawsuit is going slowly I guess, it's proceeding in the Federal courts in Los Angeles, it's now set for trial in October of this year. We're prosecuting our claims and we're confident, as we have always said, in our legal position. However, I don't believe it would be appropriate for us to make any further comment about the litigation, just to say that we strongly believe in our position. But basically there is no development there, there is no news.

As to your second question about the usage of cash, as we have always said, our priority is to grow the business organically or through acquisition. And if opportunities come up such as the one that you saw in the case of Cablemas, we will take advantage of them. If not we would propose to the Board the return of capital to our shareholders via repurchase of shares and/or the payment of dividends.

All right, thank you very much.

Thanks.

[OPERATOR INSTRUCTIONS] Our next question is coming from Patrick Grenham with Citigroup. Please proceed.

Good morning. Could you give us a little update on you mentioned flat broadcasting fee revenues this year, 2007, with 5% down in the first half of the year. What's the underlying growth of the broadcast TV business? Because we still don't have a really clear of what the World Cup and the election spending was in 2006. I also have a question on the Gambling business. You mentioned that there is going to be very little effect from gambling advertising and I understand that the advertising has got pretty aggressive for the Lottery business, but I also understand that a lot of the machines aren't selling actual tickets yet. When is that going to happen? And I understand that there's training issues for the lottery machines, when are we going to see the Lottery business up and fully launched? And if we're talking about a low cross pricing between the Gambling business and the TV Broadcast business, what would your guidance for the EBITDA on the Lottery business be?

Hi, Patrick. As to your first question, we're not disclosing because I don't think it's in the best interest of Televisa nor its shareholders, the amount of money that we received in respect to the World Cup nor the elections in Mexico.

As to your second question, we have started the Lottery business. We started February 12, with approximately 3,500 terminals in different stores in Mexico. We started basically with four types of games and we're very excited about the prospects of this business. On the television front of the business, I don't think I was clear enough. We're using unsold inventory to promote this business and that unsold inventory is sold to the gaming business at a discount because it's unsold inventory. So as I said, we started with 3,500 terminals and we will end the year with 10,000 terminals. However, the results with those 3,500 terminals was very good. So that business has started.

If you were to annualize the ticket sales on the first week out, what sort of ticket sale numbers could we expect?

We're not providing guidance for the Gaming business at this point. I think we'll be able to provide some guidance further on in the year. But it's important to note that we have only five bingo parlors opened at this time. As I mentioned, we're going to open ten in the course of the year, and we just launched the Lottery business. So it's going to take some time for this to ramp up and the results then will be back loaded. So that's why we're not providing guidance at this point.

Okay, great. Thank you.

[Don Charles], your line is live, please proceed with your question.

Oh I'm sorry, I didn't hear you. Yes a couple questions, first could you give us an update on your status of talks with Cofeco regarding consolidation of the cable industry? I understand that they're concerned with making your content available for Pay TV platforms in Mexico, so are you optimistic a compromise can be reached there? Partially tied to that, can you give us an update on your thinking on the SKY strategy for triple-play, eventually what you're thinking? And then if you could discuss a little bit the format sales business? What's the size of your sales? I mean I'm aware you've sold some formats to Eastern Europe already, what's the current size of that business and what do you think it could grow into? What's the potential there? It sounds interesting.

Hi, Don Charles. Yes, about the cable industry and our conversations with Cofeco, what I can tell you is that they're very positive talks. As I mentioned before, it all depends on how the industry is going to move. It's an industry that is going to be transformed as a result of convergence and triple-play. So I think these discussions, these conversations are in the early stages and what we have said is that we're not going to use our content and our content production to displace other competitors. So I think we have had a very positive attitude, they are also having a very positive attitude. They would like to have more competition in the telecommunications sector. So I think all these things are very positive for Televisa. The telecommunications market is a $22 billion market in our country, so I think it's a big opportunity for us. And the question about the competition, it's ongoing and it will depend on how the industry moves as a result of convergence.

Based on your format question, what we see there is a new line of business and, of course, a new line of revenues. As you probably know that has become very popular in different parts of the world because you are producing something locally to the local market with a format that we helped them to produce, and we can become partners with the local stations in different kinds of revenue lines. A good example is the amount of scripts that we have of telenovelas and our plan is to start to sell the telenovela as a format. We have done in the past what we want to do it more strongly too in these two years, because we are seeing that it could be a new line of revenue and of course a new line of business for the company.

And Don Charles, as to the question that you made about SKY and the triple-play strategy, we're working on that. It's not a short-term thing or it's not a short-term solution, and SKY, as you saw, continues to experience high growth, high subscriber growth, basically as a result of the content that SKY has on an exclusive basis, and also as a result of the great service that they provide to their subscribers. So it's not something that is going to be solved in the very near future, however, we're looking at different solutions to a triple-play strategy.

Okay, thank you very much.

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

Hi, good morning. Just a couple questions, one just to follow-up on the SKY issue and the cable consolidation, I just wanted to see what your latest comfort level is with your ability to keep your existing Pay TV assets, specifically SKY, and at the same time to consolidate the cable business? I know that's a difficult question to answer, but based on those approximations that you've had with the regulators, do you still feel that's possible? And the second question is just if you could provide us an update on La Sexta, how the business is developing versus your original expectations and also whether your investment plan has changed at all? Or have you continued to expect the same CapEx that you were speaking about a few months ago? Thank you.

Hi, Gordon. Yes, as to SKY and cable I think, as I mentioned, that it all depends on how convergence and triple-play and that market develops in Mexico. I think that, as we have always said, that we'd love to consolidate the cable industry. We believe that a lot of value will be created in the consolidation of that industry in our country and the formation of a national telecommunications company that could compete. So, of course, we would be delighted to see consolidation and to participate in that consolidation of the cable industry. In terms of maintaining SKY, I think the question there is, as I mentioned, how convergence moves this industry and how it develops. The conversations that we have had with regulators are very positive and, of course, there will be a lot of competition in that market going forward, so let's see what happens. But we would definitely love to participate in the consolidation of the cable industry.

As to your second question that has to do with La Sexta, we're very pleased with La Sexta's performance. From an audience perspective, La Sexta's signal reaches about 77% of the households in Spain, and in December, as I recall, La Sexta achieved a 3.2% audience share. And from a financial perspective La Sexta continues to exceed its sales and EBITDA budget. So we're very happy with its performance.

And the CapEx expectations remain in place?

They remain in place.

Perfect. Thanks very much.

Thank you. Our next question is coming from Jose Ramirez with Deutsche Bank. Please go ahead.

Yes good morning. A quick question on your up-front, have you closed the up-front? Or are you still having negotiations with advertisers?

It has already finished.

Okay, so this is the number we will get for the year?

Yes, sir.

Thank you.

Thank you. I will now turn the floor back over to you for any further or closing remarks.

Well thank you very much for participating in this call and we'll hear from you in the next call. Thank you.

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