Grupo Televisa SAB (TV) 2007 Q1 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's first quarter 2007 conference call. Before we begin, I would like to draw your attention to page seven 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're pleased to have you join us for this discussion of Grupo Televisa's first quarter 2007 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 and will review the outlook for the year. After that, Pepe will discus the operating results of our Television segment. Then we will be happy to take your questions.

In the first quarter, consolidated sales increased 5.9% to MXN8.2b and operating income increased 4.4% to MXN2.3b. These results set a new record for a first quarter. Our Television Broadcasting business faced a difficult comparison in the first quarter, due to last year's non-recurring political advertising. As a result, sales decreased 3.8% to MXN3.8b and operating segment income decreased 11.5% to MXN1.5b. These results are in line with our expectations for the quarter and our guidance for the full year.

In our Pay Television Networks business, sales rose 32.8% to MXN398m and operating segment income increased 65.8% to MXN237m. This growth was driven by increasing sales through Pay Television platforms in Mexico and Latin America and an increase in sales in TuTV in the United States.

Sales in our Programming Exports business increased 18.3% to MXN524m and operating segment income increased 75.6% to MXN236m. This growth came from a 9.1% increase in royalties from Univision, which amounted to $29.8m, and by an increase in [exports] to Latin America, Europe and Asia.

Sales in our Publishing business increased 6.6% to MXN593m. This was driven by an increase in advertising in Mexico and abroad and by an increase in circulation outside of Mexico. Operating segment income increased 15.9% to MXN53m.

Our Pay Television platforms continue to deliver strong results. Sky added 23,000 subscribers during the quarter, bringing its total subscriber base to 1,453,000. Compared with last year's first quarter, sales increased 10.9% to MXN1.9b. Operating segment income grew 18.5% to MXN965m and we achieved a 48.7% margin.

Cablevision added 18,000 television subscribers and 11,000 broadband subscribers during the quarter, bringing its total television and broadband subscriber base to 514,000 and 107,000 respectively. Compared with last year's first quarter, sales increased 28.4% to MXN553m. Operating segment income increased 24% to MXN202m and we achieved a 36.5% margin.

Our Gaming business is moving forward. We closed the first quarter with five bingo parlors and 919 class II machines in operation. With our opening of one additional parlor last week and in addition to two more parlors in the coming weeks, we will soon have eight Bingo parlors with 2,300 class II machines in operation. In accordance with our plan, we expect to close the year with 15 Bingo parlors.

Our lottery is also underway. Sales are still relatively small, given the recent launch of the business. However, we expect sales to gradually ramp up as we expand our distribution networks, continue our strong advertising campaign and launch new number games. We are very optimistic about the prospects of this new business.

The merger between Univision and a company formed by an investor-acquiring group closed on March 29. Consequently, all of Televisa's shares and [inaudible] warrants in Univision have been converted into cash in the aggregate amount of approximately $1.1b. As a result of this transaction, we recognized a non-cash, non-recurring charge of MXN651m during the quarter. This change was largely responsible for the 45% decrease in our majority interest net income to MXN733m.

Moving on to outlook for the year. Given the unfavorable comparison resulting from last year's non-recurring political and World Cup advertising, we continue to expect full-year Television Broadcasting sales to decrease marginally and we see operating segment income margin remaining above 50%.

As part of our stock repurchase program, over the last 12 months we have repurchased stock totaling MXN3.2b. Year to date, we have repurchased 14.3m CPOs for an aggregate amount of MXN891m. In addition, our Board of Directors resolved, at the meeting held yesterday, to submit to our shareholders' meeting a proposal to pay an extraordinary dividend of MXN1.10 per CPO, in addition to our ordinary dividend of MXN0.35 per CPO, for a total of MXN1.45 per CPO. The total amount of the dividend will be approximately MXN4.4b or $400m. This is equivalent to a dividend yield of 2.2% based on yesterday's closing price. If approved by our shareholders, this dividend will be paid on May 31.

Thank you for your attention. Now I will turn the call over to Pepe.

Thank you, Alfonso. Good morning, everyone, and thank you for joining us. With the first quarter, we achieved an average sign-on to sign-off audience share of 70.8% and we have 78 of the top 100 programs in Mexico. In fact, 22 of the top 25 programs were produced by Televisa.

Our novelas continued to boost prime time in Channel Two. La Fea mas Bella, our 8pm novela, was the highest rated program in the quarter, with an average audience share of [50.4%]. And Destilando Amor, our 9.30pm novela, achieved an average audience share of 45.7% during the quarter. In addition, in Channel Two we recently launched a new show on Sunday evenings, called Los 5 Magnificos. This show targets families and presents great commercial opportunities. We are confident that it will maintain the preference of the audience and [inaudible] this very important time slot.

In Channel Five, we reduced the number of programs [inaudible] to children and instead launched several new programs to attract the highly important demo of 19 to 44, including the [new] series like Supernatural, Law and Order, House, Prison Break, just to mention a few. As a result, we achieved our goal of improving significantly the quality of our audience, increasing the proportion of the ABC target.

In March, we released exclusively on our Sky platform RBD The Family, a series based on the real life stories of the band members of the musical sensation RBD. The rating [inaudible] shows [inaudible] network and on an average basis they represent the fourth most watched programs in each time slot.

In addition, in May, we will release several new cutting edge [inaudible] service [inaudible] Televisa, including a thriller and suspense series entitled [Working Fears], a contemporary and clever mix of comedy and roma called [Sex and Other Secrets], a sitcom about our very important host Adal Ramones called [Y Aura Tiago] and a thriller and action series based on a comic book entitled El Pantera.

[Our productions] for the Pay Television business continue to deliver strong results. In the first quarter, sales increased 32.8% and we reached a 59.8% operating segment income margin. This was driven primarily by our increase in the number of subscribers that receive our channels through Pay Television systems in Mexico, Latin America and the United States.

Just a few weeks -- Just last week, we signed an agreement with the Chinese government whereby we will be cooperating in the distribution of our productions in their territory as well as in the development of core productions for that market. With that, so we would like to -- We are ready now to take your questions.

Judith, we are ready for our Q&A.

Thank you. [OPERATOR INSTRUCTIONS]. We will pause for just a moment to compile the [inaudible]. Your first question comes from Vera Rossi from Morgan Stanley.

Thank you. I have a question, first, on your cable business. With the recent changes made by Cofeco in Mexico, can you acquire other cable companies in the country -- can Televisa acquire? Thank you.

Hi, Vera. Yes. Well, we will not speculate on Cofeco's future decisions, but what Cofeco has said in the approval that they gave us in order for us to buy 50% of Cablevision in Monterrey was that they would apply the same criteria to analyze any other acquisitions, including the acquisition of 49% equity stake in Cablemas. So I think, if that is the case and they apply the same criteria, we would be allowed to buy other systems, but I would not speculate on Cofeco's future decisions.

Okay. Thank you. And the other question is, aside from these potential cable acquisitions, do you have any plans how you are going to use the proceeds from the sale of Univision?

Yes. Well, I guess we analyze investment opportunities all the time. However, we will continue to be disciplined in the investments that we make. The investments have to make sense, of course. And we're very careful, as you have seen [in all these years], in investing our resources.

Now, the Board of Directors, yesterday, agreed to submit to the shareholders' meeting a proposal to pay a cash dividend in the amount of around $400m. In addition, over the past 12 months, we have repurchased shares in the amount of about MSN3.2b. We have repurchased about 14.3m CPOs for an aggregate amount of MXN891m. So, we'll continue to repurchase shares as in the recent past.

However, our priority, as we have always said, is to grow the business organically or through acquisitions. So, if opportunities come up, especially in the U.S. Hispanic market, we would like to be in a position to take advantage of them. So that's why it's important to maintain a strong cash position.

So, basically, we're distributing $400m in the cash dividend. We're also planning to be very active in the market in the repurchase of our own stock. However, we would like to have a strong cash balance to take advantage of any opportunity that comes up and that makes sense. If those opportunities don't materialize, we would propose to the Board the return of additional capital to our shareholders, the repurchase of shares or the payment of an additional dividend.

Okay. Thank you. And my last question is on your Lottery business. Could you give us an update on this new launch, how the Lottery business is going in terms of revenues, compared to what were the first expectations of Televisa?

Yes. Well, the Lottery business took longer than we expected for the launching. We started the Lottery business with 3,500 terminals in different stores of Mexico, basically convenience stores. Currently, we have about 4,200 terminals in operation and, as we have said, we are planning to end the year with about 10,000 terminals up and running.

So it took longer than we expected to install those terminals in the convenience stores and other types of stores. It took, also, longer for us to train the personnel of those stores. Now, we're up and running. As I mentioned, we have 4,200 terminals in operation.

So, what I can say is that we see great prospects for this business. However, it took longer for us to launch that business and to have it up and running. But we're very happy with the current operation and also with the prospects.

I see. So, in the first quarter results, on the 70 -- around MXN70,000 in Gaming, this is very --

We have MXN74m.

I'm sorry?

It's MXN74m for the quarter.

Yes. Of the MXN74m, how much is lottery? I guess it's very small, still.

It's very small, yes.

So we should expect much higher revenues from Gaming in the next quarters, is that correct?

Yes. Well, the business is going to grow - that business, the Lottery business - as we install terminals, we have better trained people at the convenience stores and other type of locations. So, yes, of course, it will grow. It's a business that is going to be back loaded in 2007. So I think sales will take time to ramp up. But, of course, you'll see a growing line there.

Okay. Thank you very much.

The next question comes from Gordon Lee of UBS.

Hi. Good morning. Just a couple of questions. The first just on the guidance, specifically the margin guidance for the TV Broadcasting segment. I was wondering if you could give us a little more color in terms of how you expect to get from the quarter that was reported in the first quarter to that 50% for the year, especially since there seems to have been a little bit of cost creep in the first quarter.

And then the second question is, looking at your non TV broadcasting segments, across the various different segments, the margins were very strong. Is there anything unusual, anything that's sort of a one-off, that would have lifted the margins in the other segments? Or do you think profitability in those segments is sustainable? Thank you.

Yes. Well, as to your first question that has to do with Television Broadcasting and the margins, Pepe can answer that.

Well, like Alfonso explained in his script, the cost of sales in the first quarter represents an increase in the number of hours produced [and the high production] or the cost of certain hours. Although, this is totally going to be off set [towards] the year and we're going to exceed our 50% margin on our guidance base.

As to your second questions, Gordon, I will say that we had good results in the other segments, especially Sky, Cablevision, Galavision in Mexico and also our Export business was very strong, [both] the Univision royalty which is going to be, I think, very strong this year because, if you compare it to last year, last year they had the World Cup which is a special event and they don't pay us a royalty on that event. So we expect a much higher royalty what has to do with Univision this year. And our exports to other parts of the world was also strong and getting stronger. So, I think the margins in that segment are sustainable.

On our Pay Television segment business, as I mentioned, we have new packages of programming, including high-definition channels. We increased prices and we're having more and more subscribers watching our programs, watching our pay television channels, both in Mexico and in Latin America. So that's -- I think that those margins are also sustainable with the price increases and with more subscribers viewing those channels.

Okay. That's very clear. If I could just have one quick follow up on the share buybacks. Would it be reasonable to expect that you continue the current pace of about -- of more or less $300m, on an annualized basis, for the rest of the year? Is that a reasonable amount to expect?

We're always opportunistic about repurchases of stock. However, considering our cash position and the attractiveness of the price of our stock, we believe that that will continue, that pace.

Perfect. Thank you very much.

Thank you Gordon.

Your next question comes from Rodrigo Ortega of BBVA.

Good morning, Alfonso and Pepe. In relation to what you mentioned on China's -- the agreement you reached with the Chinese government, could you give us your guidance in relation to the companies that would be involved in the agreement and the amount of resources that could be invested in this business and the timeframe of it? And if you can, as well, the size of revenues you're expecting and the margins that we should include in our estimates?

Well, the companies that we will be dealing with are [inaudible]. The deal was done -- the agreement was signed with the actual government of China. And we might be [inaudible] doing some of the -- They have a channel that is called CCTV International that will be transmitted to the Mexican -- well, the Chinese people that live in our country. And in exchange, we are looking for opportunities, with [Shanghai] TV, with CCTV and with other companies around that big country, to develop our ideas, like to produce formats that we know how to do very well like the telenovelas and be able to grow our business in their country.

There is not much detail that we can talk about, because we haven't even started to analyze anything that has a relation with cost or any plan in concrete. But we're going to be there in a few weeks with more details of what is going to be, or we want to be the next step in this relationship. Although, we feel that it's a very important step to be able to start to have an important and bigger presence in their country.

Okay. Is there any particular concerns regarding the market conditions in terms of regulation and competition that would be worth considering?

Well, to be honest, I don't have much details on the regulations of that country. But one thing I can say is that we have seen in the past that the novelas of Televisa that have been transmitted there have had good results. And, analyzing the content that works in that country, we see that we can have important formats that can work there. And, of course, we see an opportunity that is worth to spend good time on it.

Right. Thank you very much.

The next question comes from Michael Kopelman of Merrill Lynch.

Thanks. Good morning. I have a couple of questions for you. First of all, just talking about capital allocation in -- Alfonso, you were talking about the fact that you'll continue to do share repurchases, you guys announced the dividend. But even in that -- even with those returns, if you don't make any acquisitions, a year from now, you're going to have more cash than you have today.

I guess I'm wondering about timing. How long are you willing to hold onto this amount of cash, as you look at opportunities out there? At what point would you decide that the opportunities -- it's time to move on and look at something else or return capital to shareholders? Then I have a follow up.

Yes. As I mentioned, we always analyze investment opportunities. This is an ongoing thing that we do all the time. As I mentioned, as we have demonstrated in the past, we are disciplined about our investments. So, our priority is to grow the business both organically, as we have done it, and also through acquisitions. I think that the U.S. Hispanic market will present opportunities going forward. So, we would like to maintain a strong cash balance for that purpose.

I think it's very difficult to mention a precise timeframe to wait and see if the opportunity comes up, because it depends on a lot of factors. However, what we're doing, basically, is to distribute $400m as a cash dividend. We'll continue, as I mentioned, to buy back stock opportunistically. As you have seen in the last 12 months, we have bought back approximately $300m, as I discussed with Gordon.

So, in the event that those opportunities don't materialize, especially in the U.S. Hispanic market, and that I will give -- it's difficult to say, but I would give a timeframe of a year to 18 months. Then we will think about making further and bigger repurchases of stock and/or the payment of an extraordinary dividend.

That's very helpful.

It's very difficult to say, Mike, because it depends on the factors and on the market and that has to do with the U.S. Hispanics, but I would say that the timeframe would be around there. However, if we see that things are moving on the right direction, it would be a little more time or, if not, less time. So it depends a lot on how things are moving in that market.

Okay. That's extremely helpful. The other question is can you give us an update on the regulatory discussions around regional broadcasting in Mexico? I think the latest discussions have been that they would do regional licenses maybe late this year or next year. What your expectations are for that process?

Yes. I guess there was an announcement in a public meeting held this Tuesday of Cofetel. As you know, Cofetel is the equivalent in Mexico of the FCC, which is an independent commission. That commission has a power of granting a concession for television.

What they have announced, basically, is that they're in the process of analyzing the technical feasibility of auctioning television concessions. What they have also mentioned is that the law does not contemplate national concessions. So, the auction, if any, of these concessions would be local.

However, they're analyzing if, technically, they can do that. And what, also, they have said is that they have technical difficulties in granting concessions in the City of Mexico, Monterrey, Guadalajara and in the cities that are close to the border with the United States.

So we'll have to wait and see what they're planning to do. Basically, they said that this technical study that they're making will take from now until 2008. So, let's wait and see how that technical feasibility study comes out, and we'll have to wait until 2008.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. Your next question comes from Andrew Campbell of Credit Suisse.

Yes, hi. Good morning. I know that your Broadcasting revenues, of course, were down year-on-year because of political advertising, but I was wondering if you could give any color on what the trends are in recurring advertising and, overall, just the appetite that you're seeing in terms of the ad market.

Well, as Alfonso said, we see our results totally in line with our guidance. We have developed new shows and new products to be able to reach our guidance again. And we see a normal trend in the market, excluding, of course, like you said, the revenues that were from the political [inaudible]. On the other hand, we see totally in line with our guidance and with the market [inaudible] are going on in the Television Broadcasting market.

Do you think, in the absence of the political advertising, that Broadcasting revenues would have grown more than GDP, for example?

We have already announced the guidance. And, of course, they will be [a little bit over] the GDP.

Okay. Could you just explain a little bit about what it was that generated the loss from the UVN transaction, because my impression was that that had been written down to market value, and if that loss is going to provide any benefit from a tax point of view?

Yes. Well, first, it's non-tax, it's non-deductible. It's 100% an accounting charge. It's non-cash and non-recurring. And it has resulted from the loss in the monetary position. Basically, it's the inflation from the date in which we classified the shares of Univision as an asset available for sale and the date in which we received the money. So, on July of 2006, we reclassified the stock of Univision as an asset available for sale. And so we have to calculate inflation from that date. Since the price was fixed, we have to calculate inflation from that date until March of this year, when we received, basically, the price. Okay, 100% accounting, it's non-deductible, it's non-cash and non-recurring.

Okay, understood. And just one last question, if I could? It's reported in the local press over the past couple of weeks that you guys would maybe be interested in Satmex. I was wondering if you could explain why that would potentially be an asset that would be interesting to Televisa or why there would be perhaps some synergies from that. Yes, well, what I would say is that we analyze, as I have mentioned before, investment opportunities all the time. In some cases, we just analyze them and then learn about the business and pass. In others, the fewer, in that case, we have made the investments themselves.

So I would not want to speculate on Satmex at this point, whether we would like to do that transaction or not, because it's -- I mean, we're just analyzing it, so we're in the process of due diligence. So I would say that we are learning about that business. We're learning about the synergies that it would have with other business segments. However, we have not made any decisions as to whether we're going to go forward or not.

So, when you read about all of these things, please keep in mind that we analyze, as I have mentioned before, opportunities all the time and it doesn't mean that we are going to make all those investments that we're analyzing. And in some cases, we go in, we learn about the business and we decide to make the investments, and in others we decide not to. So please keep that in mind. Okay. Thanks, Alfonso.

Your next question comes from Patrick Grenham of Citigroup.

Good morning. Just talking about the acquisitions, you're also reported to be looking at Endemol in Europe. And I suppose it brings up the question, do you have a conceptual framework for the acquisitions you will look at and are interesting, apart from ones that are just, say, accretive? But there must be some sort of -- Is there a strategy you could explain to us as to what you look for in acquisitions?

I suppose I have a second question on, again, the use of cash and the situation with Univision, if you could go through where you are. Are you thinking of re-entering the Univision consortium there, or where are you on that?

Yes, as to your last question, what I would say is that there will be many opportunities in the U.S. going forward. It's not Univision only. As you have seen, we have sold, of course, the stake in Univision as part of the merger. But I think we shouldn't focus only on Univision, because there are other opportunities that are surfacing, but I would not like to speculate about those.

As to your first question, I would say that we analyzed a lot of things, because it's part of our job, of course. And what we have always said is that acquisitions have to be accretive. They have to be related to our core business, the businesses that we know, that have synergies with our own businesses. And around those lines, if the ones that we analyze --

The obvious question, Alfonso, comes then as, what are you doing in China? And you already have, I believe, a JV in Mexico with Endemol, so I imagine that's a business that you already know.

What are we doing in China? Well, we [show] product to all the world. And in China we saw an opportunity too to analyze the possibility of producing, with our formats, to that very big market. We've done it in formats in Russia, we've done it in formats in Brazil, with good results. And we see an opportunity of growth by analyzing the possibility of keeping -- of growing the sales to that market, just dubbing our actual programs into their language. And also, we see opportunities to probably co-produce or sell our formats to be produced in the Chinese country.

We're not analyzing the acquisition of anything in China.

Okay, so this is just purely a commercial with minimal capital outlay?

That is correct.

Okay. But the acquisitions you're looking for in Europe and the possibility of acquisitions in the U.S. are still very much in the cards.

You're right, we have a deal with Endemol in Mexico, but that doesn't mean that -- first of all that we own the format. We have to pay Endemol, of course, for the format. And, as I mentioned, there are many circumstances in which joining the process to buy a company, for us, means that we enter the process because we want to learn about the business and analyze it and then make a decision. So when it's announced, not by us, but by some other interested party, that we have joined the process to buy the X&Y company, it doesn't mean that we are going to buy it. It means only we are analyzing and we're learning about that business, and then we will make those decisions.

Okay. And just one follow-up on the cost base. Somebody earlier mentioned the slight cost creep we saw in the Broadcasting business in the first quarter. Could you say why, again, the costs were increased?

And the second sort of subsidiary question to that is how did you account for the advertising that the Lottery business did in the first quarter? Were they included in revenues in the TV Broadcasting business or were they all consolidated out?

As to your last question, the Television Broadcasting segment does not include any sales of advertising on television that have to do with gaming, with the games business.

And how much did you spend on gaming? I know it's not in the results, but was there a budget for the gaming, to advertise?

Yes, of course there is a budget. We're not disclosing that for competitive reasons. However, nothing is included in the revenue, on the revenue side of Television Broadcasting.

And the scratch cards, when do you think you will have approval to launch them?

I'm sorry?

The scratch cards.

We're working on that. I cannot give you a precise date, but we are actively pursuing that permit.

Okay.

As to your first question, the increase in our costs was basically because of the increase of the number of hours that we produce in the quarter in comparison with the first quarter last year, as well as a higher production cost in certain programs that we produce. That's basically the reason. Although we said we're going to keep in our guidance of achieving the 50% margin in our TV Broadcasting segment on a yearly basis.

Okay. Thank you.

Thank you, Patrick.

Your next question comes from Jose Ramirez of Deutsche Bank.

Hi, good morning. I probably missed this, but you talked about the class II gaming machines. I just wanted to get some sense of how many class II machines you have now in place and what you expect for year end.

Yes, hi, Jose. We closed the first quarter, as I mentioned before, with five bingo parlors and 919 machines in operation. With the opening of one additional parlor last week and two more that are coming -- that are opening in the coming weeks, we will soon have eight bingo parlors with 2,300 class II machines.

Okay. And another quick question. Does it make sense for you to buy - talking about the [uses of cash] -- Would it make sense for you to buy minority stakes in, say, companies like Cablevision or [inaudible] Sky, or is that something that you are not considering at this point?

Well, yes, we analyze, as I mentioned, opportunities all the time and those opportunities that you mentioned could be very attractive. And of course we have partners, or in the case of Cablevision it's a public company. But we would love to repurchase stock of Cablevision and the liquidity of that stock is very small. But we buy anything that comes up, basically.

Okay, thank you.

Judith?

At this time, I will hand the floor back over to management.

Well, thank you very much for your attention. And if you have any additional comments or questions, please give us a call. Thanks.

This concludes today's Televisa conference call. You may now disconnect.