Grupo Televisa SAB (TV) 2008 Q2 法說會逐字稿

Good morning everyone and welcome to Grupo Televisa's Second Quarter 2008 Conference Call. Before we begin, I would like to draw your attention to page eight 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 would now turn the call over to Mr. Alfonso De Angoitia, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Thank you, Elsa. Good morning. We're pleased that you have joined us for this discussion of Grupo Televisa's second quarter 2008 results. With me today are Jose Baston, Corporate Vice President of Television and Salvi Folch, our Chief Financial Officer.

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

Television delivered solid results during the second quarter. Consolidated sales and operating segment income reached all-time second quarter highs. Sales increased 17.4% to MXN11.5 billion. Operating segment income increased 17.6% to MXN5 billion and we achieved a margin of 42.9%.

In our television broadcasting business, sales increased 7.5% to MXN5.2 billion. This result was driven by our strong ratings and by the favorable comparison arising from the fact that the Easter holiday fell in the first instead of the second quarter. In addition, we continued to maintain strict cost discipline. As a result, our operating segment income increased 10% to MXN2.7 billion, enabling us to achieve a 51.2% margin.

Our paid television networks business also delivered positive results. Sales increased 17.8% to MXN514 million and operating segment income increased 25.3% to MXN329 million. This growth was driven by higher sales to paid television platforms in Mexico, Latin America and Spain, as well as by an increase in advertising sales.

Sales in our programming export business decreased 1.7% to MXN571 million and operating segment income fell 6.3% to MXN265 million. These results were driven primarily by a negative translation effect on foreign currency denominated sales in the amount of MXN25.4 million and by a decrease in exports to Europe. This was partially offset by a 5.2% increase in royalties from Univision, which amounted to $39.5 million in the quarter.

Sales in our publishing business grew 16.7% to MXN927 million and operating segment income increased 12.5% to MXN173 million. This growth resulted from an increase in sales from magazine advertising and circulation abroad, driven primarily by the consolidation of (inaudible) in Argentina.

This was partially offset by a decrease in circulation sales in Mexico and by a negative translation effect on foreign currency denominated sales that amounted to MXN13 million.

Sky delivered strong results during the second quarter, adding 51,000 subscribers and bringing its total subscriber base to 1.694 million. Sky continued to expand its operations outside of Mexico, closing the quarter with 71,000 subscribers in Central America and the Dominican Republic. In addition, Sky expects to launch operations in Panama during the second half of 2008.

Compared with last year's second quarter sales increased 11.8% to MXN2.2 billion. Operating segment income grew 13.9% to MXN1.1 billion and our margin was 49.8%, a record second quarter margin.

In our cable and telcom segment, sales increased 140.3% to MXN1.4 billion and operating segment income increased 98.6% to MXN450 million. These results were driven by 20% growth in sales in Cablevision, which is attributable to an increase in RGUs.

The consolidation of Bestel, which generated sales of MXN450 million, and the consolidation of Cablemas starting June 1st, which generated sales of MXN253 million. The total number of RGUs in Cablevision and Cablemas reached 1,861,000. This includes 1,373,000 [video], 387,000 broadband and 89,000 telephony subscribers.

Moving on to the outlook for the year, we continue to expect that our full year television broadcasting sales and operating income segments -- operating income will grow by approximately 4.5% in nominal terms.

Finally, during the second quarter, we repurchased 2 million CPOs for a total of MXN109 million. And in May, we paid a dividend of $0.75 of MXN1 per CPO for a total of MXN2.2 billion.

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

Thank you, Alfonso. Good morning everyone and thank you for joining us. We are pleased with the strong results that our television content continues to deliver. During the second quarter, Televisa aired 71 of the top 100 run programs in Mexico and 36 of the top 50. Excluding soccer matches, Televisa produced all of the top ten shows in Mexico during the quarter.

Channel Two, which attracts mainly families and women, aired six of the top ten programs in the second quarter, including [Boho] in the Family, (inaudible) and (inaudible). (inaudible) continued to draw excellent ratings and audience shares during the quarter. For example, our (inaudible) of our 19-novella Boho in the Family drew an average audience share of 50.7% during the quarter.

Together, our novellas and our other popular programs maintain another [shine on to shine off] audience share of 72.1% for the quarter, as well for the entire half of the year. And we think primetime average audience share was 75%.

We are pleased to note that we also posted the highest overall ratings of the past four years during the second quarter. We attribute our novella's strong performance to two factors. One is our planning process, during which we conduct an intensive evaluation of each part of our production system.

The other factor is our strict quality control process, which seeks to ensure that each program reaches the audience for each time slot and achieves its sales goals.

Channel Five continues to attract desirable demographics. In particular, the higher income demographic. In fact, our programming strength for Channel Five has led to a steady increase in our share of these demographics over the past three years as well as an increase in advertising revenues.

General [sold] results from the quarter were aided by two television series [Corporoantera], which began its second season during the quarter, and [Simulaloris], a new adventure comedy series aimed at commercially attractive audiences, which began airing during this quarter.

These series were produced under a business model that enabled us to recover 20% of the costs through transmissions in other platforms to be recovered before or right after the broadcast television. We will continue to explore new programs and formats and attractive demographics our customers want, always having the margins very well planned.

Our international strategies moving forward would promote exports to more than 60 countries and co-production arrangements in several key markets. In China, we have produced 25 full episodes of our popular program [La Fermas Vaya] and we'll begin broadcasting on September 8th.

In Brazil, we are in the process of finalizing an agreement with [Record], the second -- the country's second most important television network, to produce programs for its seven PM slot -- to the seven PM slot.

Under our agreement, we will receive a royalty on advertising sales related to programs produced under this agreement, which will allow us to participate directly to Brazil's advertising market, the largest in Latin America.

Our (inaudible) business again delivered solid results. Television networks increased its EBITDA network to 64%, driven by advertising sales and signal sales in Mexico and Latin America. We recently announced that BBC Worldwide and [television network] have joined forces to distribute two BBC branded entertainment channels, BBC Entertainment and a [priest called] children's channel called [CD-vis].

And they will be delivered in Mexico later this year. Under the terms of the agreement, television networks will distribute these new channels in Mexico and other Latin American countries and in exchange we will receive our royalty on subscription fees generated by these channels.

We will continue to produce exciting new content and formats and remain extremely committed to integrating and cross-promoting all of our business segments to extract maximum value from our content, from concept to realization and beyond.

Thank you very much for your patience and now we will be ready to take your questions.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question is coming from Vera Rossi of Morgan Stanley. Please go ahead.

Thank you. I have a couple of questions. First on your cable business, what is the expected subscriber growth you have, now you have two companies consolidated? So Cablemas and also Cablevision? So what is the subscriber growth you expected for the next years? And also where do you see your EBITDA margins going?

And the second question is on your gaming business. Do you expect to launch a scratch lottery in the second half of this year? As of August? And then if so, what do you think will be the impact on the readiness of the gaming business? Thank you.

Hi, Vera. Yes, the last question that has to do with the lotteries, the scratch lotteries, we will announce them in the second semester of the year. And we're not providing guidance as to the effect of that -- of those lotteries in the overall gaming -- the gaming business.

As to your first question, we expect to grow double -- to continue growing double-digit in all our television -- cable television platforms or cable platforms in general. And we're expecting to maintain the margins, the EBITDA margins, as they have been this semester.

Okay. So just to follow-up, in the case of the cable business, the margins are in the mid-30s now. Do you expect then to stay in the mid-30s? So you don't expect an improvement from the current levels. Is that correct?

That is as it's going to be in the high 30s.

In the high 30s. Okay. And why do you think the margins of the cable companies of Televisa, are in general, lower than the margins of [Megacable]? What do you think it creates this gap in margins, between the two groups?

Well I think, basically, it's a result of the launching of the telephony business.

So if you launched the telephony business, you believe your margins are going to get to Megacable? Or is that a right statement?

Well, I don't know. I don't know their margins, but I mean ours, as a result of the launching of telephony, they're going to be in the high 30s and once we amortize the original investments, as in respect to telephony, they're going to be in the low 40s.

Okay. Yes, the margins of Megacable are in the mid to high 40s today.

Yes. Of course, we have the effect of very high interconnection rates in the telephony business and that effects especially the interconnection rates and will have to do with mobile phones. So that effects the whole business.

But in the original stages of launching telephony, that's why we have margins in the high 30s. However, we expect them to eventually to get to low 40s. As they have been in the past.

Okay. And a follow-up question, in your lottery business, the lottery has been presenting lower than expected results compared to what was originally expected. Part of that was execution and I want to understand if the scratch lottery, the delay that was supposed -- the scratch lottery was supposed to happen last year, not this year.

So that also will create a significant impact on your revenues? Or the main reason for the lower than expected numbers of lottery has been just because of execution?

I think it has both -- been both. Delays and more difficulties than we envisioned in execution. And also delays in the final approval process of the scratch lotteries, which took longer than we also expected.

I see. So with this approval, you think we are going to see more meaningful results going forward with a lot -- coming from the lottery business. Is that a correct assumption? Should we -- ?

That is our expectation. Yes.

Okay. Okay. Thank you very much.

Thank you, Vera.

Thank you. Your next question is coming from [Michael Copleman] of Merrill Lynch. Please go ahead.

Good morning. Thanks for taking the question. Two topics actually. First of all, on broadcasting, results were actually -- were obviously pretty good in the quarter. Just wondering what the pacings are like in the third quarter and wondering how much of an impact you'd expect from the Olympics and whether -- how much of that you actually think is incremental?

And then on cable, now that you have the majority stake in Cablemas, can you discuss the prospects for combining your various cable businesses into one operating unit? And if you did that, how much cost savings do you think there would be? So what kind of margin bump there might be in that scenario? Thank you.

Yes, hi, Mike. As to your -- the last question, in respect to cable and combination of our investments, as you know we own and control 51% of Cablevision in Mexico City.

We also own 50% of Cablevision in the city of Monterrey, which is the second largest city in Mexico. And the -- 54% of [Mayer Alpha] Cablemas. So that means that we have these investments, but they're three separate companies.

At this stage, we have different partners in Cablemas and also DDI, which is cable in Monterrey and we're expecting that to continue. That is having these joint ventures with [Alvarez-Guerrerro] family and with [Francisco Monsalas] in Monterrey and as to Cablevision in Mexico, it's a public company where we control it.

We own 51%. So eventually it would -- it could make sense to combine all the companies because of what he mentioned, synergies and tremendous cost savings. However, we're not envisioning that in the short term.

So we shouldn't expect anything in the next two or three quarters on that front?

No, I -- that will not happen in the next two or three quarters.

Okay. Thank you.

As to your first question, that has to do with the pacing. We asked -- we haven't felt a slowdown in the Mexican economy or in our television broadcasting business yet. So things in the month of July have been strong. And hopefully that will continue going forward. As you see, our up front deposits are currently 3.7% lower than last year's, so that's why we're maintaining our guidance.

So to exceed our guidance, we would have to see very strong spot sales in the second half of the year. And considering the economic environment in the U.S., we don't see -- we don't know if that will happen. So that we're being conservative and sticking to our guidance of 4.5% growth in nominal terms for television broadcasting.

Okay. And just one last question. The -- on the Olympics, do you expect a material impact on revenue from the Olympics? Is it mostly incremental, what you sell there, or do you think it's non-incremental and mostly cannibalizing?

Yes, well, to keep it in perspective, Mike, in the '04 Olympic games, we generated sales of approximately MXN300 million. And the cost of those -- of producing those games and rights, expenses, et cetera was around MXN210 million. So our EBITDA contribution during the '04 Olympic games was about MXN90 million. So we expect similar results for the broadcasting of this year's Olympic games.

Okay. Thank you very much.

Thanks.

Thank you. Your next question is coming from Andrew Campbell of Credit Suisse. Please go ahead.

Yes. Good morning. My question is about the Univision situation. You've had a couple of delays with the trial in the U.S. and I was wondering if you could just give us an update on what's happening there?

Yes, hi, Andy. Yes, on June, at the request of Univision and Televisa, the court ordered a postponement of the trial, which is currently set to start on October 14th. Settlement talks have continued, but we cannot anticipate if any agreement will be reached or the timing or the terms. What I can say is that the trial will -- is set to start on October the 14th.

Okay. Thank you. And if I could ask a follow-up question, a second question. How is increasing -- how does increasing inflation effect the broadcasting business? Can you remind me how the up-front deposits are adjusted?

They're not adjusted anymore, Andy, as a result of the changes. I mean now we are not considering inflation in our accounting. So, basically, what you see is the nominal terms -- the nominal amount of the deposits.

Okay. Understood. But the actually sales that are made on an up-front basis are the sales -- are the contracts the advertisers actually adjusted for inflation?

No.

No? Okay.

No. We receive the money up front, as you know. We invest that money and basically the prices are fixed. They are not adjusted by inflation.

Okay. Understood. Thank you.

Thank you, Andy.

Thank you. Your next question is coming from Miguel Garcia of Deutsche Bank. Please go ahead.

Hi. Thank you. My question is regarding the royalties from Univision. They increased 5.3% in dollars from last year. This is in the midst of a very weak environment. I wanted to know if there is any increase in rate involved in this increase or it's just that the market was a little stronger than we were expecting?

The other question is related to other expenses, for [MXN545 million]. I wanted to know how much of that is from litigation expenses you mentioned and how much is related to the impairment of assets in the U.S.?

Yes. As to your first question, Miguel, in '07, in the second quarter, Univision has the [Copa America] and Copa [The World of Soccer] tournaments, which are considered special under the program license agreement that we have with Univision, and therefore the comparison is -- I mean, the amounts are not comparable. So it doesn't mean that that percent increase in the royalty was a percent increase in their sales in general.

So you're saying that they were artificially low last year, right? Because you didn't get revenues from those events?

Exactly.

Okay.

And the royalty last year did not include sales in what had to do with Copa America and Copa [De Auto] and therefore, the results -- the figures are not comparable.

Okay.

And then as to the expense that has to do with litigation, it's about MXN55 million.

And the impairment?

The impairment, we recognized a non-cash impairment adjustment of MXN427 million. And this relates to the carrying value of goodwill of our U.S. television station in San Diego. We know -- we own this station.

And the impairment in the value of that station in San Diego resulted from a change in our affiliation agreements and the deterioration of the economic environment in the U.S. So this is a one-time non-monetary charge that we took this quarter. Basically excluding that one-time non-monetary charge, net income would have increased 12.6%.

Okay. Are there other assets in the U.S. that could also generate other impairments in the future?

No, we have made a full review of all the assets that Televisa holds and we do not believe that there will be another impairment.

Okay. Thank you.

Thank you. Your next question is coming from Fernando Ramos of GBM. Please go ahead.

Good morning. Thanks for the question. I was wondering if you could give us some guidance regarding growth for Bestel for 2009? And secondly, could you give us some CapEx guidance for Cablemas also for 2008 and 2009? Thanks.

Yes, we expect sales of about MXN2 billion, in the case of Bestel, and EBITDA of about MXN350 million in '08. As to Cablemas, we're not providing guidance.

All right. And can you give us the growth you expect for Bestel for 2009? I mean, it should stand in the low teens or where do you expect it?

In respect to Cablemas, you meant?

No, to Bestel.

No, '09, I could not project that. I mean I could not give you guidance as to '09.

And could you give us -- could you give me the year-over-year in -- seen during two -- the 2Q '08 for Bestel?

Well, no. What I can tell you is that, what I said, that we expect sales of around MXN2 billion and an EBITDA of MXN350 million.

Okay. Thank you.

Thank you. Your next question is coming from David Joyce of Miller, Tabak, and Company. Please go ahead.

Thank you. If I could just have some more color on the strong ratings, what drove your net average viewership increase up to 75% in the quarter? And then secondly, I was wondering what the differences in the roll-out, the stage of the lifecycle of the roll-out of cable telephony in your different cable investments.

Pepe can give ---

Your ratings question, what is the question (inaudible), the 75%?

The first question was what was the driver behind your stronger TV ratings?

Well, the reason -- like I put in my -- I said in my script, we have been, since about two years ago, doing a whole new system of pre-production, which gives the details news of the demographics that we're going to, in each of the productions that we do, and of course we start in the script.

So we have been working on this, I guess, two years ago and the results have been great because I think that the quality that we have always had in television mixed with a lot more planning turns into this great success.

And of course we have -- we always have said we have the best production team in the whole world and that's why the results are there and I think that this tendency is going to stay that way, at least for the rest of the year.

All right. And again, the second question was just what -- how would you explain the difference in the telephony product between Cablevision and Cablemas in terms of how far out you are -- you have that product available?

Yes, well Cablemas covers 44 cities in Mexico, throughout the Mexican republic. So Cablemas has launched telephony in certain areas of our country. And as to Mexico City, which is Cablevision, we expect to cover all areas of Mexico City towards the end of '09.

As we speak, we have launched telephony in about half of Mexico City, which as you know is the largest city in the world. So it's a pretty big area.

Great. And finally, I was wondering what your criteria was for rolling out the other countries of Sky operations and particularly -- for example, why you'd like Panama as the next area to move into?

I think the launching of Sky throughout -- we have all the Central American territories. And it has depended on the licenses that have been granted in each and every one of those countries. So we have requested all the licenses.

In some instances, DIRECTV had affiliation agreements or had joint ventures, so they had to finish those arrangements that they had in the past, so they could transfer the assets and the subscribers to Sky or the licenses. And in some other instances, we required new licenses. So it depends on the regulatory process and on DIRECTV or Sky terminating the agreements that they had in the past.

Great. Thank you.

Thanks.

Thank you. Your final question is coming from Christopher Buck of Barclays. Please go ahead.

Good morning. I'm wondering if you could briefly comment on the impact you expect from member portability legislation that just went through on your telecom business?

I think it's going to be great for the cable companies that are participating and have launched telephony. We expect to experience a lot of growth as a result of portability.

Okay. And you don't have too much of a concrete number on that yet?

No, it has just started, so I could not give you a number or guidance.

Okay. And also on the telecom cable industry, I'm just wondering, now that Cablemas has been consolidated, what your future plans are and whether or not there's any expectations for future purchases or what the outlook is in general?

As we have mentioned in the past, we think that consolidation of the cable industry. It's a very good idea for Mexico. We need a strong competitor in what has to do with the telecommunications industry. And we'd love to participate more actively as we have done in this month in the consolidation of that industry, so any opportunity that comes up, we would love to explore it and to execute it.

Okay. And so nothing actively in the pipeline?

Not now. Not as we speak. But eventually if opportunities come up, we would love to take a look at them and participate more actively in the consolidation.

Great. Thanks.

Thank you. There appears to be no further questions. At this time, I would like to turn the floor back over to Mr. Alfonso De Angoitia for any closing remarks.

Well, thank you very much and please give us a call if you have any additional questions. Goodbye.

Thank you. This concludes today's Grupo Televisa Second Quarter 2008 Conference Call. You may now disconnect.