Grupo Televisa SAB (TV) 2007 Q3 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's third-quarter 2007 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.

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 are pleased to have you join us for this discussion of Grupo Televisa's third-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 we will review the outlook for the year. After that, Pepe will discuss the operating results of our Television segment. Then we will be happy to take your questions.

In the third quarter, consolidated sales increased 8.9% to MXN10.4 billion. Operating income increased 4.2% to MXN3.8 billion. This was driven by revenue growth in most of our businesses.

Sales in our television broadcasting business increased 3.4% to MXN5.3 billion. Operating segment income increased 5.9% to MXN2.7 billion, and we achieved a record third-quarter margin of 51.9%. This growth was driven by an increase in advertising sales, which was partially offset by an unfavorable comparison resulting from advertising sales associated with the transmission of two quarter finals, the semifinals and the final of the FIFA World Cup in the third quarter of last year.

In our pay television networks business, sales rose 33% to MXN470 million. Operating segment income increased 61% to MXN301 million. We achieved a record margin of 64.1%. This growth was driven primarily by an increase in sales to pay television platforms in Mexico and by sales in TuTV in the U.S. and DirecTV in Latin America.

Sales in our programming exports business decreased 2% to MXN585 million, and operating segment income decreased 1.9% to MXN283 million. This decrease resulted from a negative translation effect of MXN12.5 million, which was partially offset by a 3.5% increase in royalties from Univision and by an increase in exports to Asia and Africa.

Moving to our publishing business, during the third quarter, we acquired Editorial Atlantida, the leading magazine publisher company in Argentina. Editorial Atlantida publishes 11 magazines and had an annual circulation of 12.8 million copies in 2006. With the Atlantida acquisition, our publishing business will enhance its activities in Argentina and strengthen its position as the world's leading Spanish-language publishing company.

Sales in our publishing business increased 15.3% to MXN812 million and operating segment income increased 6.4% to MXN155 million. This growth resulted from an increase in revenues from magazine advertising and circulation in Mexico and outside of Mexico and from the consolidation of Editorial Atlantida on September 1.

Shifting to our pay television platforms, in Sky, sales increased 5.5% to MXN2 billion, driven by an increase in Sky subscriber base. Sky added 52,000 subscribers during the third quarter, bringing its total subscriber base to 1.542 million. This growth was partially offset by a difficult comparison resulting from advertising and pay-per-view sales associated with the transmission of several games of the FIFA World Cup during last year's third quarter.

Sky's operating segment income grew 1.3% to MXN988 million, driven by higher sales which were partially offset by an increase in cost associated with an increase in subscriber acquisition cost due to the high number of subscriber additions during the quarter, higher promotion expenses, and the start-up cost of Sky operations in Central America. Sky began operations in Costa Rica and the Dominican Republic in the third quarter. We plan to launch Sky in Nicaragua shortly and to launch in Panama and Guatemala in the first quarter of '08.

Cablevision added more than 10,000 television subscribers and 11,000 broadband subscribers during the third quarter, bringing its television and broadband subscriber base to 538,000 and 132,000, respectively. In addition, Cablevision recently began offering IP telephony services in certain areas of Mexico City. Sales increased 17% to MXN605 million, driven by an increase in Cablevision subscriber base and by a 3% price increase that became effective March 1. Operating segment income grew 1.6% to MXN219 million, due to an increase in programming and advertising expenses and the startup costs associated with a telephony service.

As part of our strategy to offer high-quality telecommunication services through our cable platform, during the third quarter, we announced that Cablestar, a 70%-owned subsidiary of Empresas Cablevision, signed an agreement to acquire the majority of the assets of Bestel for a total cash amount of $325 million. Bestel is a telecommunications company that provides domestic and international broadband, local and long distance telephony service to carriers, wholesalers and corporate customers. Bestel owns a fiber-optic network with approximately 8000 kilometers that covers the most important cities and economic regions of Mexico and provides access to the United States. Bestel will provide the backbone that will allow our cable companies to offer reliable, high-quality telephony and broadband services to residential and business customers in Mexico.

Moving on to our gaming business, we expect to close the year with 13 bingo parlors and approximately 4,000 electronic machines in operation. Regarding our lottery business, we have faced a challenging execution marked by several unexpected logistical problems. We're working closely with Scientific Games to improve the results of that business. We currently have more than 4,700 terminals installed, and we expect to have 6,000 in operation by year-end. In addition, a new tax was recently imposed on the gaming industry which will have a negative impact on the growth and margins of our business. We are developing an adjusted business plan that factors in the effect of the new tax.

Moving on to the outlook for the year, we expect our full-year television broadcasting sales to decrease by approximately 3%, and our operating segment income margin to be close to 50% for the year.

Finally, I want to mention that, during the third quarter, we repurchased 13 million CPOs in the aggregate nominal amount of MXN728 million. Year-to-date, we have repurchased 54 million CPOs for an aggregate amount of MXN3.2 billion. In addition, on May 31, we paid a dividend totaling MXN4.4 billion.

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.

In the third quarter, we achieved an average sign-on to sign-off audience share of 71.3%. We are 78 of the top 100 programs in Mexico, 33 of the top 35.

Our novellas continued to drive the primetime ratings in Channel 2. The [Celand Amor] our 9:30 PM novella achieved an average audience share of 49.7% during the quarter and an amazing 61.1% audience share during its final episode. In fact, the Celand Amor was the novella with the highest rating since the year 2000. This program contributed with 74.2% EBITDA margin.

The Novella Passion, which was launched in mid-September after the Celand Amor, is also generating promising results in audience and in sales. Our reality show, Looking for La Banda Timbiriche on Channel 2 on Sundays was a huge commercial success, attracting a significant number of advertisers that target the demographics of 19 to 44. We plan to build upon this success by launching a novella, a musical album and a tour with the members of this band, a model like we have done with the Group Rebelde.

The repositioning of Channel 5 continues to generate great results. Compared to last year, our new programming aimed to young, higher-end audiences has brought 17% more commercial audience to this Channel. Our in-house produced series plus high-quality imported series have been welcomed by the audiences and by these advertisers.

Internationally, we continue to expand our content through the sales of our format. For the first time, we launched a coproduction of our novellas in French, which is a novella that is based on one of our scripts and was launched in September in the French territories with very promising results. We said the novellas we have closed deals to sell our owned reality formats to more than 15 countries and the results are also very well received.

Now, we will be ready to take your questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Miguel Garcia, Deutsche Bank.

I have a couple of questions regarding the gaming business. First of all, what are you doing to improve the training of the salespeople? It's something you are actively yourself, or you are leaving it to the stores?

Second, I wanted to know if the agreement with [Oxo] is already completed.

Third, I wanted to know if there is a possibility that the government will authorize Televisa for scratch-off type of games.

Another question is how many subscribers you have in Central America with Sky. Lastly, I was wondering why you need interconnection with Telmex, as has been seen in the press, when you have now Bestel and you could do the interconnection through Bestel. Thank you.

Miguel, yes, your first question has to do with the lottery business. It's clearly behind schedule. The launch was delayed several months and we experienced some unexpected problems in the execution of our business plan. I think the main problems that we have identified and we are analyzing are delays in installation of the lottery terminals, also a higher-than-expected turnover of personnel in the convenience stores. Turnover in those convenience stores in terms of personnel is about 40%, so it's very difficult to train people because of that turnover. As to your specific question that has to do with this, we have teams of people that are dedicated entirely to train those people that are working in the convenience stores.

Another thing that we have seen is that we did not have an incentive plan for the employees selling the lottery tickets. Also, we have experienced a lot of logistical problems in the stores, such as [Oxo]. So we have identified these problems, and now, together with Scientific Games, we're working on implementing the solution, as I was saying. In terms of training people, we have whole teams of people composed of Televisa and Scientific Games, experts training them. So I think you'll see an improvement very soon.

As to Oxo, we have signed an agreement with Oxo and it's in place and we're moving along with them.

Also, you asked about the scratch games. We believe that we're going to get the approvals to launch the scratch games business very soon. So, those were the questions associated or related to the lottery business.

Then as to the subscribers that we have in Central America, as of this date, we have 12,200 subscribers. We launched, as you know, this quarter.

Then finally, as to the interconnection agreement with Telmex, we haven't yet signed an agreement. We expect hopefully to be able to sign one soon but of course, you have to sign that agreement because of the number of subscribers both of fixed lines and of mobile lines that Telmex and America Mobile have. You cannot rely of course on only the Bestel network, because of the number of interconnections with other companies.

Okay, excellent. Thank you.

Anthony DiClemente, Lehman Brothers.

Thanks for taking the question. I just wonder if there is any way you can quantify the World Cup comp in the 3Q. I think it was, on the broadcasting and the Sky Mexico segments, a little bit more of a headwind in this quarter than we had thought. Maybe the number of games or something to that effect?

Then the second question -- again, if I compare your company to most media companies, particularly those in the U.S., you are overcapitalized by quite a bit. I mean, that is underlevered. So I guess I would just have another question about what is your planned use of cash flow? I understand that you are using a bunch for the dividend and a bunch for the buyback, but would you ever have plans to layer on a little bit more debt on your balance sheet? If so, could that the coming in the form of a return of capital to shareholders incrementally? Because I think, right now, you are underlevered and I think investors are just trying really to understand what you continue to have such a strong and bolstered balance sheet for. Thank you.

Yes. Well, as to your first question, for competitive reasons, we don't disclose or we would not like to disclose the amount of money that we had as advertising revenue associated with the World Cup.

As to the second one, last May, we paid a cash dividend of MXN1.45 per CPO, which is equivalent to MXN4.4 billion. As I mentioned before, year-to-date, we have repurchased 54 million CPOs for an aggregate amount of about MXN3.2 billion. So in total year-to-date, we have returned over MXN8 billion to our shareholders via the payment of dividends and repurchases of stock. We will continue to repurchase shares in the market, as in the recent past.

Now, as we have always said, our priority is to grow the business organically or through acquisitions. If opportunities come up, we want to be in a position to take advantage of them. That is for this reason that it's important to maintain a strong cash balance.

If opportunities don't materialize, if we don't find anything that is attractive, we will propose to our board to return additional capital to our shareholders via a larger payment of a dividend and/or additional repurchases of stock that can be in amounts greater than the ones that we have seen.

I got you. Thanks. A quick follow-up on the cable side -- can you report or quantify any telephony adds on the Cablevision Mexico triple-play, if there were any in the quarter? Because, if not, it does imply really strong ARPU growth for your basic video and broadband product. That's all I have. Thanks.

Yes. We have about -- I mean, we just launched the telephony service and we have about 2,500 clients at this point. So, I mean, of course, we have a lot of costs associated the launching of the telephony service, but we are picking up subscribers as we speak and we have about 2,500.

Great, thanks.

Gordon Lee, UBS.

Good morning. Just a couple of questions -- the first couple actually on Sky. I was wondering if there's any way you could tell us what the margin for Sky would have been without the ramp-up expenses in Central America. I guess, in other words, what the Sky Mexico margin would have been.

The second question on Sky is just to get a sense. Obviously you've got discounts initially as you roll out. But once the businesses in Central America and the Caribbean more or less stabilize, how do you think ARPUs in those markets will compare to Sky Mexico?

We believe -- as to your last question -- that the ARPUs in Central America are going to be a little lower. One of the problems that we have in that region is, because of the satellite capacity, we will be unable to offer a lot of the local channels. So in competing in those markets, that's a disadvantage. However, we will have of course many other channels that the cable operators in the region do not have, and special products and special content on an exclusive basis. However, not having the local channels for each country, because of satellite capacity restrictions, is going to limit our ability to offer those local channels. So, I think, Gordon, that ARPUs are going to be lower than Mexico.

As to your first question that has to do with the margin without the investments in Central America, I don't have the number. I will have to figure that out, considering the costs of the launching of Central America, so if you want, we can follow-up on that.

Perfect, that would be great. If I could just have one follow-up, and it might be too early to ask this question, but on the TV Broadcasting segment, what's your sense so far, in terms of your preliminary conversations with customers, as to how the upfront is looking? What, at this stage, would be reasonable to expect in terms of the revenue outlook for next year? Thanks.

Yes, Gordon, I think it is too early to say -- because the conversations have been still preliminary, and I would not like to speculate as to the outcome.

Perfect. Thank you very much.

Patrick Grenham, Citi.

Could you just talk a little bit about -- sort of a follow-up on the upfront, but also about the seasonality of the business. Your guidance has come down a little bit. It seems as if the seasonality of the amount of revenues you're getting in the fourth quarter in the TV broadcasting business is shifting a little bit. Is that what you are seeing, or you're seeing it's still very much business as usual? The last guidance we had was for overall TV broadcast revenues to be down 2%, and now we're talking down 3%. How does that look for going into 2008? So that was my first question.

My second question was, again on the usage of capital, you mentioned that, if there are no opportunities, that you would pay the capital out. When do you think you can make that decision? Is that something you'd make early next year, or are you going to hold onto the capital for probably another two years?

As for your first question, let me explain it this way. Normally, in the fourth quarters, (inaudible) sales represent a very large percent of our television sales because our customers usually run out of upfront deposits. Therefore, additional advertising comes through this important market. Due to the slow down in the [consumption] we experienced in the second quarter, the customers have more upfront deposits available than usually, and therefore, the top-off is not going to be invested at the amount that we were expecting. As a result of that, in the fourth quarter, we will not expect the sales to grow at the 7.9% pace that will be required to achieve the full-year guidance of sales decreasing 2%. As Alfonso said, we're going to be decreasing 3%.

Based on the upfront deposits and the spot sales expectations we have, we expect to see strong growth in the fourth quarter but not enough to meet our previous guidance.

Okay. But we're still talking about underlying growth of around 6.5%, aren't we?

It's going to be a little bit less than that.

Okay. 2008, is this a sign for 2008 for growth, too, or no?

No.

You still think next year you could grow the business around 6%?

Well, it's a little bit early to say. As Alfonso said, we are in conversations with the most important part of our revenues, as you know, through the upfront, so I would think that it's definitely very, very easy to say you have to do a lot also with the economy and --

But are you saying the economy is still weak, or do you think it is recovering?

Well, I think we are seeing that it is still sluggish. I don't know if you have seen the Wal-Mart sales in Mexico. Apparently, they are beginning to pick up but we haven't seen anything, any dramatic change. So, it's sluggish.

Right. So guidance could be coming down for next year or be pretty weak for next year?

Well, hopefully not, but it's too early to say.

Okay.

As to your other question, it has to do with use of capital. Every April before -- during the April Board meeting or for the April Board meeting and before the shareholders meeting, we analyze our cash position and the capital structure of the Company, and we make a proposal to the Board. So I think we will see, in April, if we have identified some interesting opportunities or not, and there, we will decide at the Board meeting and at the shareholders meeting whether to return additional capital to our shareholders.

Okay, excellent. Thank you.

Michael Kopelman, Merrill Lynch.

Thanks. Good morning. I have two questions for you. First of all, can you discuss if you know what's going on with Univision and why the revenue growth or your royalty growth at least was so low this quarter? I'm not sure if I got that earlier, first of all. Second of all, could you discuss your expectations for the new media law that is being discussed?

Mike, as to your first question, you saw the result in respect to the royalty. They did not grow as we had expected, where they were kind of disappointing for us. One of the factors was (inaudible) America which is a special program under the program license agreement. Therefore, Univision does not pay us a royalty based on that program. But of course, I mean, the results and the royalty growth was a little disappointing.

As to your second question that has to do with the law, of course you know, as we have discussed in other Conference calls, the Supreme Court in Mexico issued a resolution that deemed that several articles of the Radio and Television Law were unconstitutional. As a result, a Senate commission has been created to review the current law and to draft amendments if necessary. We don't know when this proposed amendment will be presented to Congress, if it is presented.

So basically, what I can tell you is that the Senate has said publicly that they are working on this amendment. However, there's no specific timing as far as I know in respect to such an amendment.

All right. One follow-up question, actually -- I was just wondering. Could you give us an update on how the Spanish broadcasting business is going?

La Sexta is doing well. I think the results have been pretty good. According to -- as you know, according to the business plan, we expect to invest EUR220 million in that company. We have invested EUR153 million, so EUR28 million are pending and that will be invested throughout next year.

During the first nine months of '07, La Sexta had an average audience share of 3.6%. In September, they reached 5.5% audience share. This increase was a result from the broadcast of sporting events during the month of September. We experienced their audience share to return to a level of 3.5% to 4% in the coming months, which is -- that is according to the business plan.

From a financial perspective, this company is in line with the sales and EBITDA budget and business line. So we're very happy with our investment there.

Can you just remind us when you expect to get to EBITDA-breakeven there?

That will happen in 2010.

All right, thank you very much.

(OPERATOR INSTRUCTIONS). Jessica Reif Cohen, Merrill Lynch.

Alfonzo, I have two topics. One is Univision; the other is cable. One, Univision, the number was really disappointing. Does that have any impact on your ultimate prospects for the deal with the current owners? If you do strike a deal in the next six months or so, could you discuss what you would hope to accomplish?

Turning to cable, how closely are your cable companies working together now? Do you still see significant opportunities for acquisitions?

Jessica, you always have the tough questions.

Yes. (LAUGHTER).

As to cable, which is the easiest one, what I can say is that we still see the consolidation of the cable industry in Mexico as a great opportunity. As you have seen, we have bought or we have invested money in these companies and we have paid approximately $800 to $900 per sub. They are great companies, both of them, Cablemas and TVI in Monterey are offering the triple-play services. They have updated their networks, so we feel that it's a great opportunity for us buying those cable systems who are participating in those cable systems at those prices.

We have basically established a committee where we share ideas and we share operational plans in order for those companies to take advantage of the synergies. Now, since the three companies -- Cablevision in Mexico City, TVI in Monterey, and Cablemas are going to invest in Bestel in this fiber optics network, that is going to form a link between the three companies. As you know, our plan eventually would be to really consolidate them and operate them as a single company, which makes a lot of sense, and to have maybe a public vehicle in what has to do with cable.

So I think we're moving in the right direction. We are taking advantage of synergies. Management of the three companies is in touch all the time, so I think this opportunity is coming together and we continue to see it as a great opportunity. There's still possibilities in terms of acquisitions of medium-sized cable companies in Mexico. We're looking into those and we continue to believe in the consolidation, as I mentioned before.

Great. And Univision?

Univision -- well, there's nothing new to report in respect to Univision or the possibility of us in making an investment in Univision. It depends on -- any investment in Univision would depend on the terms and conditions of that investment. We believe that Univision is a great company; we believe that Univision is great partially, or importantly because of the Televisa content. We think that Univision has an 80% market share because of the success of our content, especially on prime time. So I think that they have realized that Televisa is very important for them. For us, it would be the most important investment in terms of entering the U.S. Hispanic market or participating in that market here.

So I believe that -- I mean, let's see what happens. And as I was saying, there's nothing new to report. But what I can say is that they know that Televisa is very important for them and we know that, for us, it's a very interesting opportunity to participate in the largest market outside of Mexico.

But do you have any sense, just to maybe be a little more short-term oriented, why such a fall-off so quickly after private equity took over?

I think that the market is difficult, in the U.S., especially the local markets. And I think that's why they chose Joe Uva as the CEO of the Company. I think he's going to make a lot of changes there, especially in what has to do with the sales forces and especially in that area in the local sales forces. So, I think they are moving in the right direction.

Great, thank you.

Andrew Campbell, Credit Suisse.

Yes, good morning. I was wondering if there was any affiliate company income that came from Cablemas or from TVI during the quarter.

No, there's none.

Okay. Is that because the Cablemas (inaudible) is still not being converted to equity, or it's just there was a 0 (multiple speakers)?

Yes, through the equity method.

Okay. So the stake has been converted into equity but it just didn't have a material contribution in the quarter. Is that right?

Yes, well, Cablemas, as you know, we have not converted the convertible debentures we bought that were issued by that company, so now, I mean, it's an investment in those convertible debentures until the ruling by the antitrust commission in Mexico takes effect, in which case we would convert those debentures into 49% of the Company.

Okay, I understand.

And it has been registered as an investment in the Cablemas convertible debentures.

Okay, understood. Do you have any sense for the timing on that conversion now -- any better idea on that?

It will happen this quarter.

Okay. Just changing the topic for one last question, would you mind just touching on the electoral reform that was passed during the quarter and the impact that you think that will have going forward?

Yes. Of course, I guess the main aspects of that reform were, first, that it redistributes the free air time that the government already has, that the government already is entitled to. Now, that electoral reform basically defines the election period, the pre-electric period, the pre-campaigns and the campaigns. They have defined this period of pre-campaigns and campaigns as 150 days, so 150 days for the presidential election and 100 days for the intermediary election.

The Federal Electoral Institute, or IFE, and the political parties will be entitled to 48 minutes of free advertising per channel, per day, which is exactly what the government has today under the current rules. This is equivalent to an average of 2.6 minutes per hour with a cap of 3 minutes per hour. So during nonelection periods, IFE and the political parties will be entitled to 12% of the 48 minutes.

Second, according to the reform, the IFE and the political parties would not be allowed to buy advertising time on television and radio. What is the impact? I mean, if I were to summarize what is the impact of the electoral reform, it is that, over a six-year period, political advertising represented in the past about 2% of our television broadcasting sales. So, in general, it's 2% of our television broadcasting sales in a six-year period. I don't think it is material.

Okay. In terms of the 48 minutes per channel, per day, you said that was the same as what they had previously, so (multiple speakers)?

Yes, that is the same as they -- as the government has today. So now it would be redistributed, and during the election periods, the political parties will have access to those 48 minutes.

Okay, understood. But in nonelection periods, the impact on your ad inventory you think is negligible?

Yes.

Davis Bell, Morgan Stanley.

Can you talk a little bit about the effect of the fiscal reform on the taxes that you're going to end up paying?

I think, since we paid dividends and we also are making stock repurchases in the amounts that I have mentioned and we will continue to do that in the future, I think there's no great impact in what has to do with the new (inaudible) tax.

Okay, and any other thoughts on the tax on gaming?

Well, on gaming, of course it will have an impact. It's a 20% tax on the net win, which is 20% of tax considering sales minus prices that you pay. Of course, it will have an impact on the whole industry and in our businesses, both the bingo parlor business and the lottery business. So as I mentioned before, we're still analyzing the impact and we will keep you posted.

David Joyce, Miller Tabak & Co.

Thanks, if you could just provide some color on the new Sky markets, what level of penetration for multi-channel homes there is now, and do you expect to be driving penetration of new homes that haven't been in pay TV, or are you taking it from other satellite or cable operators? Thanks.

Are you referring to Central America or also Mexico?

Mostly in the new markets, yes, Central America.

Yes, well, as I mentioned, during the third quarter, we started operations in Costa Rica and the Dominican Republic. We expect to launch operations in Nicaragua very shortly and in Panama and Guatemala during the first quarter of next year.

We currently have a little more than 12,000 subscribers. We believe that we can capture, in a couple of years, about 100,000 subscribers in the region. It's both taking away subscribers from other platforms, which as I mentioned will not have the content on an exclusive basis such as sporting content, and also new subscribers -- I mean the subscribers that don't have pay television service.

Do you expect a need to launch another satellite to offer those local channels, which you mentioned is a disadvantage right now.

Not for that purpose, exclusively, but for Sky's own purposes, we are in final negotiations to launch a new satellite with Intelsat. The satellite will provide Sky with a backup as well as additional capacity for new standard and high-definition channels. We need it for Mexico and this new satellite, and of course we will use it also for Central America. If the launch of the satellite goes according to plan, according to the conversations we are having with Intelsat, we could begin operating that satellite within a two-year timeframe.

Great, thank you.

Thank you. At this time, I would like to turn the floor back over to you for any further or final remarks.

Thank you, Elsa. Well, thank you, everyone, and see you next year for the year results.

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