Grupo Televisa SAB (TV) 2007 Q2 法說會逐字稿

Good morning everyone and welcome to Grupo Televisa's second 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 discussed in today's call and in the earnings release.

I will now turn the call over to Mr. Alfonso de Angoitia Noriega, Executive Vice President of Grupo Televisa. Please go ahead sir.

Thank you, good morning, we are pleased to have you with us for this discussion of Grupo Televisa second quarter 2007 results. With me today are Jose Antonio Baston Patino, Corporate Vice President of Television and Salvi Folch Viadero our Chief Financial Officer.

First I will take you through the highlights of our financial results for the quarter, and we will review the outlook for the year. After that Pepe will discuss operating results of our television segment, then we'll be happy to take your questions.

In the second quarter consolidated sales decreased 3.7% to MXN9.8 billion, an operating income decreased 11.9% to MXN3.4 billion. Our television broadcasting business faced a very difficult comparison in the second quarter due to last year's non-recurring political and World Cup advertising. In addition we experienced an unexpected slowdown in consumer spending in April and May that led to a decline in advertising sales during the quarter. As a result sales decreased 15.5% to MXN4.9 billion and operating segments income decreased 21% to MXN2.4 billion. The margin was 50.2%.

In our Pay Television Networks business sales rose 28% to MXN437 million, operating segment income increased 55.3% to MXN262 million and we achieved a record margin of 60.2%. This growth was driven primarily by an increase in sales to Pay Television platforms in Mexico, sales in TuTV in the United States and DirecTV Latin America.

Sales in our Programming Export business increase to 8.7% to MXN580 million, and operating segment income increased 28% to MXN282 million. This growth came from a 23% increase in royalties from Univision which amounted to $37.3 million, and an increase in exports to Europe and Asia. This growth was partially offset by a negative translation effect of MXN41.5 million, and that decrease in exports to Latin America.

Sales in our publishing business increased 2.7% to MXN790 million and operating segment income increase marginally to MXN154 million. This growth resulted from an increase in advertising and circulation abroad and from strong sales of sticker albums in Mexico. The growth in sales was partially offset by a negative translation affect of MXN42 million and by a decrease in magazine advertising in Mexico.

Moving to our Pay Television platforms, Sky added 36,000 subscribers during the second quarter bringing its whole subscriber base to 1,490 million. Compared with last year's second quarter sales increased 7.5% to MXN2 billion, operating segment income grew 13% to MXN992 million, and we achieved a record second quarter margin of 48.9%.

On July 15, Sky began operations in Central America, specifically in Costa Rica. Sky expects to launch operations in Nicaragua shortly and should begin operating in Panama and the Dominican Republic in the fourth quarter. We expect these operations to be highly efficient since we will run them out of Mexico at a reasonably cost -- reasonable cost taking full advantage of Sky's existing infrastructure.

On the other side, Cablevision added more than 12,000 television subscribers and close to 14,000 broadband subscribers during the second quarter, bringing its total television and broadband subscriber base to 527,000 and 121,000 respectively. In addition, we recently began offering IP telephony services in certain areas of Mexico City and we plan to end the year offering telephony in every area in which our network is bidirectional. Compared with last year's second quarter Cablevision sales increased 17% to MXN585 million, operating segments income increased 4.5% to MXN226 million and the margin of 38.7%.

COFECO the Mexican antitrust authority approved subject to the compliance of certain conditions, the purchase of our 50% interest in Television Internacional, the leading cable system operating in Monterrey, the second largest city in Mexico. Television Internacional offers cable services to 154,000 television subscribers, 59,000 broadband customers and 4,000 telephony customers. In addition, on July 15, COFECO authorized, subject to certain conditions, the conversion of our long term note into 49% of the equity of Cablemas, the second largest cable operator in Mexico. Cablemas offers services in 48 cities to 736,000 television subscribers, 198,000 broadband customers and 26,000 telephony customers.

Televisa now controls the only cable company in Mexico City and has significant interest in the largest cable company operating in Monterrey and in the second largest cable operator in Mexico which provides cable services in 48 cities. These acquisitions are part of the strategy we announced last year to consolidate the cable industry in Mexico. We believe this represents an outstanding growth opportunity that will generate significant value for our shareholders.

Moving on to our gaming business. We currently have eight bingo partners with 2,500 class two machines in operations. In the coming months we plan to open six additional parlors in several cities including Acapulco and Cancun. With respect to our lottery business we have continued to expand our distribution network. We currently have 5,430 terminals in operation, 1,360 which are installed in [Oxo] Stores. We expect sales to gradually ramp up as we expand our distribution network, continue our strong advertising campaigns and launch new number game.

Moving to the outlook for the year. We expect our full year television broadcasting sales to decrease by approximately 2%, and we maintain our guidance for operating segment income margin for -- of over 50% for the year. We believe that this is an excellent result given last year's extraordinary performance and the slowdown in consumer spending during the second quarter of this year.

Finally, I want to mention that during the second quarter we repurchased 26.7 million CPOs in the aggregate nominal amount of MXN1.6 billion. Year-to-date we have repurchased 41 million CPOs for an aggregate amount of MXN2.5 billion. In addition on May 31, we paid a dividend totaling MXN4.4 billion, about $400 million, the largest dividend in our company's history.

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

Thank you, Alfonso, and good morning to everyone.

Going into our second quarter results, we achieved a number of sign-on to sign-off audience share of 70% and we had 71 of the top 100 programs in Mexico, 21 of the top 25 programs. Our novellas continued to boost prime time in Channel 2. The [Filando Moro] our 9.30 pm novella, continue to captivate audience achieving an average audience share of 44.5% during the quarter. So far, given its strong ratings, this novella is among the top five highest rate novellas of the last decade.

We continue to program and develop shows that appeal to young demographics on Channel 5. Starting this year, we program and develop shows trying to change the demographic of the whole network. For example, we released several (inaudible) original series produced inhouse targeting the 1944 demographics and these shows were very successful. These series are very appealing to advertisers and provide many commercial opportunities since they are designed to be exported on a 360 basis.

We will continue to produce and program quality and innovative shows in order to maintain our leadership in audience share and also attracting the most valuable targets for our customers.

Now we will be ready to take your questions.

Thank you. (OPERATOR INSTRUCTIONS). Please hold while we poll for questions. Our first question comes from Vera Rossi of Morgan Stanley.

Thank you. My question is about your EBITDA margins. You were able to -- in your guidance, you were maintaining your EBITDA margin guidance that you had before even though you are reducing the top line growth. So I just want to understand if the costs that you are cutting this year are sustainable to cut in the next years. So it means that you may have higher margins going forward given the extra effort in the cost-cutting we saw this quarter specifically and also for the year. Thank you.

Hi there. Yes. Of course, in order to maintain the 50% and the television business segment we're going to reduce some costs and expenses and it will be difficult to maintain those in the following years. However, we are planning to maintain that margin on of at least 50% in the following years. So I would say we're going to do an extra effort this year, but some of the things that we're going to deliver this year will not be sustainable. So I guess in the following years we'll be able to maintain the 50% margin, but it won't be a lot higher.

Okay. Thank you.

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

Good morning. Two questions, both on broadcasting. First of all is, can you give us some color on the downturn in ratings? It looks like it's mostly been driven by Channel 2. I'm just wondering what's going on there and what kind of impact you're seeing on revenue and, particularly, as you're moving forward as we're into the third quarter?

And second of all, just on the third quarter advertising environment, could you give us an idea if you're seeing an acceleration in the market or improvement in the market as we get past the difficult comparisons [you were] seeing advertisers come back to the market? Thanks.

First of all, in comparison on the ratings, yes, we are going through problems in the afternoon of Channel 2 although the comparison is a little bit difficult taking in account the amount of [hots] last year watching the World Cup as well as the political campaigns through our news. And also with that big success that we had with [La Firmus Vega], we have a very tough comparison although, as you saw in our audience share, we have done some complementary program to be able to keep the audience in television. But yes, we are working very hard on the afternoon of Channel 2 to change that tendency and you're going to see some changes in the second half of the year with some new products that we're going to be launching.

Hi, Michael. For your second question, we're -- we won't experience in the second half of the year the difficult comparison than we have in the first half. We're seeing better results as we speak. As you know, our consumer spending went down in Mexico, especially in the second quarter; I don't think -- know if you saw Walmart's figures, but they're down. So I think in July we have seen better results.

Just to keep in mind, we had some gains of the World Cup in July last year so the comparison won't be as difficult as the whole second quarter because of political advertising and the World Cup in general. But for the month of July we still had some gains, especially the semifinals and the final. However, the economic perspective in Mexico is better in the -- will be better in the second half I think.

Okay. So you are seeing a pickup? Just a follow-up on the television side. How quickly do you see an impact on revenue when you have -- when the ratings are a little bit softer?

Well, we don't see a big impact because -- on those ratings because, as you know, we are selling on a [host] per rating point and we don't keep the warranty. What we do is we do make goods around the our program in charge and, as you know, we have enough inventory to do that. So to be honest, the upkeep on the ratings in the afternoon did not hurt the revenues of the company.

Okay. And it's not having an impact, I guess, in the third quarter either then?

No.

Alright. Thank you, guys, very much.

Thank you. Our next question is coming from Anthony DiClemente of Lehman Brothers.

Hi. Thanks for taking the question. Two quick questions. The first one is on Cablevision and it seemed like you experienced some margin compression in the quarter. And if you can just give us some context around why your expenses grew faster than at least we had expected in the 2Q that would be great. And then, is that something that we would continue to see in the second half and then into '08? So that's on cable TV.

And then the second question is just your balance sheet is so strong with your net cash position and I think if you could help investors with prioritizing some of the uses or some of the potential of using that balance sheet. I know you're buying back some stock, I know you're paying some of it out as a dividend, but are there other things, and I understand your strategy with consolidating cable, but other than that, are there any other things that you can do to return capital to shareholders and, perhaps, optimize the capital structure a little bit better because it does seem as though you're extremely overcapitalized at this point? Thank you.

Hi, Anthony. Yes. As to your first question that has to do with cable, costs and expenses were up during the quarter. Costs had to do especially with the new digital package that Cablevision is buying in terms of programming, digital programming, high definition channels etc. So the cost of programming went up.

And as to expenses, has to do with call center, with certain expenses incurred in respect to telephony. As I mentioned, we have launched telephony, we have made as a soft launch in an area of Mexico City and throughout this year will launch it in all the areas where Cablevision offers its services. So I guess that is impacting its margin. We have incurred in costs and expenses and we don't have the revenue yet so I believe that the margins of cable should go up in the following quarters.

As to your second question, we always analyze opportunities to grow the business; that's what we would like to do to grow the business organically or through acquisitions. What we have always said is that we -- if we don't find acquisitions that have to do with our core business, with content, with telecommunications, what we would do is to find ways of returning capital to our shareholders via dividends or buybacks. So if we don't find those opportunities, you will see more dividends or extra money being paid as dividends and more repurchases of stock. I mean, in the last 12 months we have repurchased stock and paid dividends for $900 million.

And then, in terms of the acquisitions, can you just give a little bit more texture on what you're seeing in the M&A environment both on the cable distribution and then also in content? I know you had looked at some TV production and content companies earlier in the year, are there any like those available at this time and then that's it? Thanks.

Yes. To cable, we'd love, as we have mentioned, to continue consolidating the cable industry in Mexico. I think consolidation of the cable industry and the constitution of a national cable system will derive in great value for our shareholders. We're buying these cable systems at prices which are less than $1,000 per subscriber, which I think are very good acquisitions for Grupo Televisa.

We're in the process of implementing this consolidation that you saw; we have now bought 49% of the second largest cable system and 50% of the one operating in Monterrey which is the second largest city in the country. So there are more than 200 systems in Mexico and we'll continue to consolidate those systems. There we find excellent opportunities to create value. So we'll continue to look for opportunities in that segment.

And as to content producers or companies that are engaged in the creation of content, we always explore opportunities and if opportunities come up and make sense we'll consider them and make an investment.

Thank you, thank you very much.

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

Thank you. A couple of questions. First on, I guess, uses of capital. Could you give us any update if you are in discussions with Univision or the current status of negotiations with Univision?

Hi Jessica.

Hi.

We cannot comment on any -- we have discussions, operating discussions all the time with Univision, of course, because we have the program license agreement, but we cannot comment on any discussions that have to do with an investment in Univision.

Okay, then two more questions. Different subjects then, on cable with the beginning of the rollout of voice can you just talk about what your expectations are in terms of pulling along the other services, both video and data, and what kind of payback period you expect?

Yes as to video, we believe that in all these areas that we're making investment there's a huge opportunity because of the penetration in those areas. Just in the city of Mexico Cablevision was able to increase its Internet subscriber -- as to data its Internet subscriber based 60% year-over-year. So we believe -- and still there's the huge opportunity because penetration is really low.

Cablevision now is in Mexico City it's 100% digital. Cablevision in Monterrey is 60% digital and this year will become 100% digital and has grown tremendously also in terms of broadband services and has started offering telephony, as we mentioned. So I think there's a huge opportunity there. And also Cablemas is a very well operated company. It has almost 800,000 subscribers, data subscribers, penetration is still low, so we believe -- and they have -- they are offering telephony services in some cities in which they operate. So I think that the opportunity is tremendous. We're buying, as I mentioned before, these systems at less than $1,000 per sub; they're very good systems. So I think that it's a huge opportunity.

Sorry Alfonso.

Yes, to create a national cable system and be being able to form a real competitor in the telecommunications arena in Mexico.

Maybe I should have said it differently. What we've seen in the triple play in the US is that voice really pulls along both basic subs and data and I was wondering if you expect that the same kind of -- if you expect the same kind reaction from consumers in Mexico?

Yes that's what we're experiencing in this area, especially in Monterrey.

Okay. And on Sky Mexico the second quarter revenue was a little late, at least relative to our expectations. What -- could you just talk about drivers of ARPU in the coming quarters?

I think you're right, I think Sky has decided for the time being not to increase prices. So as you saw the increase in the number of subscribers is almost the same as the increase in sales, because of that reason. So Sky will be considering in the fourth quarter of the year an increase in some of the packages that they're offering.

Okay, thank you.

Thanks.

Thank you our next question is coming from Gordon Lee of UBS.

Hi good morning. Just a couple of questions. First, I was wondering if you could give us an updated expectation in terms of CapEx given the investments in cable and also given the expansion of Sky into Central America and the Caribbean? And also Sky specifically, if there would be any additional expenses that we should think about in the second half associated with that expansion?

And the second question was just on the proposed tax reform in Mexico. Obviously there's an impact possibly for your gaming business, and the lotto business, and my question was whether you have put any of the expected investments and rollouts for second half on hold until they have greater clarity on what the final outcome might be? Thank you.

Hi Gordon, yes as to CapEx, as you know the budget is $300 million where we have a $100 million for Sky Mexico, $65 million for Cablevision, $60 million for gaming and $75 million for television broadcasting and other businesses. We won't increase that amount [to our] budget of $300 million for this year. So I don't think that cable or the other companies will require more money.

As to the new tax, I think it's too early to say what the impact will be. Of course, for example there's a 2% tax on cash deposits which will hurt somewhat our cable subsidiaries, Sky, the magazine business. Because in those businesses we receive a lot of cash payments and now they're imposing a 2% tax on any cash deposits. So if you receive cash payments and you deposit the money you will be -- you will have to pay a 2% tax on those cash deposits. So -- and it's unclear whether you can offset that payment versus other taxes. So that would -- if that 2% on cash deposits is maintained it will affect somewhat this company.

The other tax, the minimum tax code [set to] is being discussed. I think that there will be still some changes as to that tax. The special tax on gaming is also very important; it has an important effect as it has been proposed. And we're talking to the Minister of Finance of Mexico because we believe that that tax is extremely high and it's a developing industry and if you impose a tax of that magnitude to a business or an industry that is still developing in Mexico it will affect it severely. So we're talking to them. It's too early to say what will happen in the end.

And just to follow up on that are you -- obviously the conversations are pending and who knows what the final form of the approval, if any approval takes place, actually comes out to be. But I guess would you be putting on hold any of the investments, or any of the spending associated with the lotto or the gaming business until you had some clarity on that, or will you continue ahead as planned?

No we are continuing to -- we're going ahead as planned. And in the following months we'll -- they will pass or won't pass the taxing we'll see what happens. But for the time being we'll continue to -- with the plan as we have mentioned.

Perfect thank you.

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

Good morning. Just a couple of questions one on -- could you comment a little bit on how you see the second half of TV broadcasting and how the linkage is on consumer demand in Mexico? Are you seeing a pickup in consumer demand or do you think that that's going to -- how do you see that that pickup is going to bring your revenues back?

And the second question is, to what extent do you think the other businesses, namely the cable and the Sky business can offset the pull down of your guidance for the broadcasters (technical difficulty) overall -- the overall revenues in your business growing respectively this year. How do you see the overall improvement and how do you see the contribution to that?

And lastly, can you talk about the Pay TV, that business is growing very well. Is that going to accelerate further or is this really the Univision and royalties you're getting?

Well to your first question, we see a recovery in the consumer spending. As you probably heard in the month of June, the store sales grew 3.9%, so we see definitely a recovery in the consumers as I said. And also it is important to mention that we're going to be facing a fair comparison in the second half of the year with the exception of the weeks of July that have the World Cup still with the final and semifinal, but we see definitely a more fair comparison and we see a recovery on the consumer spending.

Hi Patrick, as to your second and third question. The second, of course cable and Sky will help us to offset the decline in television broadcasting. On a consolidated basis of course in the year will grow, and that growth in sales will be driven primarily by cable, Sky and also gaming.

As to -- your second question has to do with Pay TV. That company will continue to grow as subscribers grow. As you saw in the quarter we experienced grow in the Latin American region, in the cable companies and also DirecTV, Latin America. TuTV which is the joint venture we have with Univision to exploit our pay television channels in the United States has also been successful; it's still small, but has been successful. And as they engaged with more operators with more cable companies and satellite companies in the States we'll see growth there also. And in Mexico pay television continues to grow. We continue to see a very healthy grow in terms of subscribers, so as the cable industry and Sky grow in Mexico we'll continue to see growth in our pay television business. So I think that business will continue to see -- I mean to experience great results in the following quarters.

One of the things I imagine with the launch of voice on the cable business, you'll see a further acceleration of growth in the cable business, but that could come at a little bit of expense of the satellite business in Mexico. Is that what you're thinking through or is that something -- ?

Yes I think you're right, but that will happen in the mid-term, not in the early stages of IP telephony through cable.

Okay great, thank you.

Thank you. Our next question is coming from Miguel Garcia of Deutsche Bank.

Thank you. My first question is regarding to your new series on Channel 5. I wanted to know if you have already some numbers on the -- or result of the ratings, if they are in line with what you expected or better?

The second question is about the gaming business. You have already started to sell scratch off type of games, or other games that don't require terminals?

And lastly, I wanted to ask you about your expansion in cable. If COFECO tried to limit your future expansion, would you be able to sell the Sky TV operation to concentrate on networks that are able to offer triple play?

As to your first question, the results of our -- the launch of our series have been very, very good; we have seen better results than expected. On the quality of ratings that we were looking for which is (inaudible) [19 to 44] demo which is the one that advertisers are more attracted to, the results were great. The margins are there, the margins are in line with what we were expecting, actually a little bit higher and we definitely see a new line of products that we'll launch with very good beginning. So we definitely are looking forward to keep doing this kind of series.

As I mentioned in my first remarks, this is a whole new business model which has to do with an exploitation of the product on a 360 basis, so this is the beginning of the transmission of the series. From there we're going to go to the DVD sales of the first season, and then we're going to go to different [windows]. So we're exploring a new way of producing and transmitting products, and this is the beginning of that.

Yes hi Miguel, as to your second question, we haven't launched lotteries that have to do with scratch cards yet. And as to your third question, the antitrust commission basically approved the acquisition, the 50% of the stock of the cable company in Monterrey and the conversion of the ventures, and so 49% of the equity of Cablemas subject to certain conditions. The most important conditions were that Televisa must offer its over the air channels and the non-discriminatory conditions to our pay television operators in the country. And second that Televisa own cable platforms, the cable systems and Sky must carry all local over the air channels within their coverage area. Sky must carry any over the air networks that cover more than 30% of the Mexican territory, and if Sky decides to carry a local channel they have to carry all the local channels operating in the city, just as a local coverage of those channels.

So I think that, basically the antitrust commission said that conceptually that Televisa could go ahead and buy cable systems subject to these conditions. They have said that these acquisitions of Monterrey and Cablemas are subject to those conditions, that basically it's most carry and most offer, and they have said that they'll apply those conditions to any further acquisition of any other cable company by Televisa. So those conditions are no -- not only for these two acquisitions, but for any other acquisition in the cable industry that we make.

And as to the question that has to do with the sale of Sky, we're not planning on selling Sky. I mean as you know Sky has -- Sky is a great business; Sky is generating $600,000 of free cash flow every day. It now represents 20% of consolidated sales and 22% of Televisa's consolidated EBITDA. It continues to grow through its exclusive programming, and the service that it provides to the customers I think it will continue to be a very successful platform.

Okay, regarding the scratch off games, what is preventing you from offering them? Are you planning to do it?

Yes we haven't obtained the licenses yet.

Okay thank you.

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

Yes good morning, just continuing with Sky, could you give us a sense for how big the market opportunity could be in the Central American countries in terms of either the total market size for Pay TV or how big it could be as a percentage of Sky's total subs? And are there any other DTH competitors in those markets?

Yes it would be a -- hi Andy, it would be a single platform in all those countries and we believe that collectively we'll be able to add 100,000 subscribers in the following years.

Okay, and you said it wouldn't have a material impact in terms of the CapEx from what I understood and it would be a very efficient operation. But do you think there could be at least in the initial quarters any margin pressure on Sky because of the startup costs in those countries?

No costs of launching is not really relevant for the size of Sky, so we don't believe it will affect our margins.

Okay, great. And just a last question on Sky. It's been in some of the papers in Mexico that there could be a new competitor, a startup DTH business perhaps next year. Do you work with the assumption that you'll have more competition in DTH? And, if so, how are you preparing the business for that?

Yes there has been news of a new concession has been granted. I guess here you have to keep in mind our own experience with Sky, Televisa and its partners have invested almost $500 million in equity and about -- this company has about $375 million in debt. And it took Sky four years to reach EBITDA breakeven and about six years to reach free cash flow breakeven. So now Sky has almost 1.5 million subscribers; it's a very well established brand in Mexico. So we welcome competition, but we believe that we're ready to affront that competition.

Okay, thank you very much.

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

Thank you. A couple of questions for clarification on the cable telephony product. You say that they're 100% digital or 60% heading towards 1000% digital. Does that also mean bidirectional, meaning that you can offer IP telephony [mutually] on all of these systems?

Also on the cable systems where you've had a recent stake increase, are those fund subs also on IP telephony basis or are those circuit switched?

And finally, I was wondering if there's an update on any ability you might have to stream your video online in the US as it relates to the court review and the PLA? Thank you.

Hi, David. Yes as to telephony being offered by these cable companies, all of them it's IP -- through Internet protocol. Most of those systems are -- in most of the areas they have bidirectionality especially in Mexico City and in Monterrey, however, it's not 100% of the network. It's in areas that we believe that it's -- that we can achieve the margins that we're expecting and we have made those investments. But not 100% -- not in 100% of our networks.

However, in the following years we'll take, especially in Mexico City and Monterrey, 100% of the network and 100% of the areas covered will be both digital and bidirectional.

And as to the litigation with Univision that has to do with Internet, that -- the trial itself has been postponed and it will start in January of '08. And part of that trial will be the issue as to whether we have the right to transmit our content on the Internet even though it reaches the US market.

Okay, thank you.

Thank you.

Cheers.

I would now like to turn the call back to management for any closing remarks.

Well thank you very much and we'll talk to you next quarter.

Thank you. This does conclude today's Grupo Televisa's conference call. You may disconnect your lines at this time and have a wonderful day.