Grupo Televisa SAB (TV) 2008 Q4 法說會逐字稿

Good morning everyone, and welcome to the Grupo Televisa's fourth quarter and full year 2008 conference call.

Before we begin, I would like to draw your attention to page 9 of the press release, which explains the use of forward-looking statements and applies to everything we discuss in today's call and in the earnings release.

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

Thank you, April. Good morning. We are pleased to have you joined us for this discussion of Grupo Televisa's fourth quarter and full year 2008 results. With me today are Jose Baston, President of Television and Content, and Salvi Folch, our Chief Financial Officer.

First I will highlight our fourth quarter and full year consolidated financial results, and take you through our full year segment results. Then we will review the outlook for 2009, and Pepe will discuss the operating results of our television segment. After that, we will be happy to take your questions.

Please note that until 2007, our reported results included certain inflationary adjustments. Beginning in 2008, as required by Mexican financial reporting standards, we report our financial results in nominal peso terms. Therefore, the results for 2007 and 2008 are not directly comparable. Today's discussion compares 2008 nominal results to 2007 nominal results.

Televisa continued to deliver solid results during the fourth quarter. Consolidated sales increased 18.9% to MXN14.5 billion. Operating segment income increased 13.6% to MXN6.1 billion and our margin was 41.4%. This growth was driven by the strong performance in our Television Broadcasting, Pay Television, Programming Exports, Publishing, Sky, and Cable and Telecom businesses.

I want to highlight that during the fourth quarter we grew in most of our division including Television Broadcasting despite the negative growth of 1.6% of the Mexican economy during the same period.

For the full year, our results were also very good. Consolidated sales increased 18.6% to MXN48 billion. Operating segment income increased 14.3% to MXN19.9 billion, and we achieved the margin of 40.6%.

During 2008, our Television Broadcasting business sales grew 4.7% and we reached the margin of 48.9% meeting our full year guidance. These outstanding result was achieved in a very difficult and uncertain economic environment. The strong ratings that we had during 2008 coupled with our continued financial discipline were crucial to meet the guidance that we set for the whole year.

In terms of costs, we had to do an extra offer during 2008 since during that year we had the Beijing Olympics. Additional costs resulted from the deal we reached with Telemundo for Mexico, and the unanticipated peso depreciation put further pressure on our cost structure.

In our Pay Television Networks business, sales rose 22% to MXN2.2 billion. Operating segment income increased 22% as well to MXN1.1 billion, and we achieved a new record margin of 62.3%. This growth was driven by an increase in sales to pay television platforms in Mexico and abroad as well as by an increase in advertising sales.

Sales in our Programming Exports business increased 10% to MXN2.4 billion. Operating segment income increased 7% to 1.1 billion pesos and the margin was 44.2%. This growth resulted from, one, a 6.2% increase in royalties from Univision, which amounted to $146.5 million compared to $138 million that we received during 2007; two, an increase in programming sales to the rest of the world at 6% that resulted from $68.5 million received in 2008 compared with $64.6 million during 2007; and three, a positive translation effect because our exports are denominated in foreign currency.

It is important to mention that even though as part of the settlement with Univision, we received approximately $25 million in incremental royalties originally classified as payments under products, we have only booked $5.5 million as royalties from Univision, which is the amount that corresponds to 2008. The balance was booked as other expenses met as it corresponds to 2005, 2006, and 2007.

Moving on to our Publishing business, sales increased 13% to MXN3.7 billion. Operating segment income increased 3.8% to MXN649 million and we achieved a margin of 17.5%. This growth resulted from an increase in revenues from magazine circulation and advertising pages sold abroad, driven primarily by the consolidation of our Editorial Atlantida, which is the largest magazine publisher in Argentina, which we acquired in September of '07. The growth resulted also from a greater number of advertising pages sold in Mexico and a positive translation effect because a portion of this segment sales are denominated in foreign currency.

In the case of Sky, the business delivered again another year of strong results in both subscribers and profitability. Sky added 175,000 new subscribers bringing its total subscriber base to 1.76 million and sales grew 11.4% from MXN9.2 billion. Operating segment income grew 11.8% to MXN4.4 billion and the margin was 48.2%.

Sky continues to differentiate itself to its exclusive content and outstanding customer service. In addition, Sky continues to expand its operations in Central America and the Caribbean. It now has operations in Nicaragua, Dominican Republic, Panama, and Guatemala, and expects to launch operations in El Salvador and Honduras during the first half of 2009. By year-end 2008, our total subscriber base in Central America and the Caribbean has reached 109,000.

Our Cable television and Telcom platform continue to deliver strong results. During 2008, Cablevision continued to successfully deploy triple play offering, reaching by year-end 2008 a total of 591,000 video subscribers, 200,000 broadband subscribers, and 54,000 telephony subscribers. As a result, during 2008, Cablevision sales grew 21% and RGUs increased 21.6% to 844,000. Operating segment income grew 32.3% to MXN1.1 billion and the margin was 40.2%.

Together with the consolidation of Cablemas and Bestel, our cable television and program sales grew 159% during the year to MXN6.6 billion, and operating segments income grew 130% to MXN2.1 billion.

Moving to our Gaming business, we closed the year with 21 bingo parlors and approximately 6,800 electronic bingo machines in operation. We have grown our revenue per parlor, improved the business model, and expect to reach EBITDA breakeven very soon.

Our online lottery business has not evolved as we originally expected, partially due to the adverse economic environment and the new tax. We have negotiated with Scientific Games, our technology partner, and ordered the termination of our contract, which shall be concluded during 2009. We are working on a plan to better exploit our licenses in the online lottery business.

Now, I'd like to discuss the outlook for 2009. We anticipate Television Broadcasting sales to remain flat. Under the current economic environment, we believe that maintaining the same level of Television Broadcasting sales as we achieved in 2008 will be remarkable. (inaudible) results, which show a 4% growth year-over-year, are a very good starting point.

We expect our Television Broadcasting operating segment margin to be between 46% and 47%. The reduction in margin is a consequence of the peso depreciation since we have certain dollar denominated costs such as movies, satellite costs, sports rights, and other programming.

The depreciation of the peso also has an important adverse impact on our Other Businesses, but in particular in Sky and in our Cable operations. For these reasons, our consolidated margin will also present a decline of about 250 basis points.

We have implemented a cost cutting plan across our organization and these efforts have already rendered results. As part of this plan, starting in the fourth quarter of 2008, we took a number of measures, which include the freeze in the number of -- in new hires, no salary increases for middle and top management during 2009.

In addition, we have eliminated a substantial amount of mobile phones and implemented a revised travel policy among other things. We plan to continue with our strict expense controls in 2009 and as a result expect to generate about MXN250 million in savings as part of this cost cutting plan.

I should also mention that during 2008, we repurchased 23.1 million CPOs for an aggregate nominal amount of MXN1.1 billion and paid a cash dividend of $0.75 of MXN1 per CPO equivalent to approximately MXN2.2 billion. In addition and on the same subject, our Board of the Directors resolved that the meeting held yesterday to submit to our shareholders meeting a proposal to pay an extraordinary dividend of MXN1.4 per CPO in addition to our ordinary dividend of $0.35 of MXN1 per CPO for a total of MXN1.75 per CPO.

The total amount of the dividend would be approximately MXN5.2 billion. This is equivalent to our dividend yield of approximately 5% based on yesterday's closing price. If approved by our shareholders, this dividend will be paid in May.

We approach -- we are approaching this challenging economic environment in an amiable position of strength. We continue to maintain a very solid balance sheet. Our cash position at the end of 2008 exceeds MXN42 billion of which more than 70% is denominated in foreign currencies. The average maturity of our debt is appropriate 13 years, and more than 40% of our total debt is denominated in pesos.

Finally, our Cable and Telecom business strategy continues to work very well. Our cable and Telecom assets are growing on a fast pace helping us to diversify. We remain very interested in opportunities in this industry.

In summary, we'll continue to work hard to deliver strong results across all our business segments while maintaining conservative risks and liabilities as part of our strategy. Thanks for your attention, and now I'll turn the call over to Pepe.

Thank you, Alfonso, and good morning everyone. We are very pleased with our results for 2008. During the year, we aired 74 of the top 100 rated programs and 34 of the top 50 programs in Mexico.

In Television Broadcasting, we enjoy extraordinary (inaudible) to sign on to sign off audience shares of 72.3%, both for the quarter as well as for the full year. These results were driven primarily by programming on our flagship Channel 2, which again generated excellent audience especially in primetime.

Average primetime audience share for Channel 2 alone was 34.1%, the highest for primetime since 1999. The 9:00 p.m. timeslot of Channel 2 has consistently delivered great audience results. In the fourth quarter, our 9:00 p.m. Novela (inaudible) achieved an average rating of 27% and an average audience share of 44.7% during the whole season.

Channel 2's reality series have been successful in terms of audience and profitability. These programs are among our most profitable hour for hour because in addition to allowing us for a strong pricing in the resulting spot inventory, we bring significant opportunities for profitability.

Overall, we're very pleased with the performance of Channel 2, which together with the programming of Channels 4, 5, and 9, and the local stations has allowed us to deliver all the target market that our clients seek. For example, our series produced in-house and transmitted in Channel 5 have generated favorable ratings and profitability. And we are exploiting these programs throughout all -- throughout other business segments. These series are producing immediately pay back and enabling us to build a robust inventory of new programs that we can exploit at closed order platforms.

In fact, we are branching our strategy to cultivate our expertise in all genres. Towards the end -- towards that end, it is important to know that content is a key differentiator in our industry and it is the quality of our content that enable us to maintain our position as the industry leader and adds value to our offerings across all of the business segments and all of the different distribution platforms.

At the same time, we are exploring additional innovative programming options. For example, we are developing more sponsored programming, which is highly profitable. In 2008, we produced programs sponsored by Nestle, Coca-Cola, and (inaudible) among others. While maintaining the ability to sell additional advertising during those broadcasts, we have continued to implement the same strategy in 2009 with good results.

Our pay TV networks enjoyed an outstanding year. We introduced two new channels in partnership with the BBC, one for children and one featuring general entertainment programs. We will continue to expand our offer in our pay TV networks to reach every demographic that is of interest of our advertising client as well as our pay TV affiliates.

We are exploring the potential of other markets around the world. We accomplish this -- to accomplish this, we are seeking our mutually beneficial growth collaborations to produce content in high-growth markets.

For example, in 2008, we collaborated with Nesound and Hunan Satellite to broadcast the Chinese production of our hit show "La Fea mas Bella." During its first of five seasons, this program reached on average 11 million viewers every nights, 7 nights a week and was the number one rated show on that timeslot.

The second season currently on the air is delivering the same outstanding results. We will continue to seek out alliances in other high potential countries such as Brazil, France, and Spain. This kind of alliance offer us to -- the possibility to create additional revenue streams. We are taking our time to find the right partners and the right business models, ones that will enable us to broaden the reach of our content and format with low risk.

Finally, we continue to work to build our digital platforms as these have been significant potential to expand to -- to expand the reach of our content. We remain committed to extracting the maximum value for our content by integrating and cross-promoting it throughout all of our business segments.

Thank you for your attention, and we are happy to take your questions.

(Operator Instructions). We will pause for just a moment to compile the Q and A roster.

Your first question comes from [Pablo Ribeiro] with Credit Suisse.

Hi, good morning. My question is regarding FX. What's your exposure operationally in terms of aggregated --?

I'm sorry, Pablo, we can't hear you.

My question is regarding FX exposure. What's your exposure operationally in terms of aggregated revenues and aggregated expenses? And my second question is regarding CapEx. Could you remind us what's your budget for the year and if the currency depreciation would impact your investment decision for the year?

Yes, Pablo. As to FX risk, which I think was the first question, our foreign exchange exposure is limited. First, from the balance sheet perspective, if we include the hedge position, as of December 31, 2008, our foreign currency assets -- asset position amounted to about MXN2.2 billion and, our foreign currency -- I'm sorry, dollars, $2.2 billion -- and our foreign currency liability in total amounted to $2 billion. So we have a positive net foreign exchange position of $200 million.

So in total, from an operating perspective in '09, we expect to generate dollars denominated sales of around $600 million and we expect to have dollar denominated costs and expenses including interest expense of about $750 million. So as a result, we have a manual FX exposure of about $150 million.

Now, as to CapEx, let me tell you our CapEx budget for 2009 is approximately $500 million. It's about the same level that we had in 2008. This includes $145 million for our Sky segment, $220 million for Cable and Telecom segment, $35 million for Gaming and $100 million for Television Broadcasting.

Thank you.

Your next question comes from the line of Gordon Lee with UBS.

Hi, good morning. Two questions, if I may. The first is, I was wondering if you could give us any more color on the recent settlement that you reached with Univision, in particular what you think the relevance is of the soccer rights agreements, both quantitative, if possible, and qualitative as well. And then the second question related to the previous question on the FX exposure. In your forecasts, what pesos-dollar exchange rate are you assuming? Thank you.

Hi, Gordon. As to your first question, we have two separate trials going on, one that had to do with soccer and another one that had to do with the program license agreement. So let's split it in parts. The soccer litigation had to do with the teams owned by the Televisa. Televisa owns the rights of three teams that play in the first division in Mexico. We have signed in 2001, a soccer letter aside from the program license agreement that allow Univision to broadcast the games of those three teams.

This agreement expired, I think, in December of '04 originally and then it was extended several times, and finally it ended on September of '08. Univision believes that the soccer matches played by the teams owned by Televisa by this meeting were part of the contents included under the PLA. So in essence Univision was saying that all those games played by our three teams were part of the PLA and they did not have to pay us any extra amount aside from the royalty.

And it claimed that the soccer was outside of the program license agreement and we were free to license those rights to anyone that we wish. So we initiated a litigation against Univision last year separate from the one that had to do with the PLA. And in December of last year, the judge presiding over the soccer claims ruled in our favor. So we won the litigation. And this has allowed us to auction the broadcast rights of those three teams.

In the case of -- for '09, Univision bought the rights for '09. So going forward, as to your question, we have -- we will receive incremental revenues on soccer rights as a result of that judgment. So in essence, we sold them for -- in '09 for Univision, and going forward will auction them and we'll sold -- and we will sell them to whomever pays us the higher amount.

Right. If I could actually just have a follow-up to that question. And then there was the other question on the FX, but just going -- so the other teams, the teams that you did not own, if I recall, you had sold those rights for a period of time to Telemundo I think for the fourth quarter. Will you not be selling those rights together as a group or will you still be splitting them separately? And then the second question is just, again, what is the FX rate assumption that you have in your forecasts?

Yes. Okay, so as to the other six teams -- as to the teams we owned the rights, we sold those for the year 2009 to Telemundo. So basically, we split the package and we sold our three teams to Univision aside from the program license agreement and we sold the other six teams as to which we have the rights to Telemundo for the full year 2009.

So that was the way in which we split the package and we sold the rights. It was very convenient and very attractive for Televisa to have split the package that way because we got more money. As to our budget or as to the margin impact that we described in our forecast and guidance, we have considered FX at MXN14.50 per dollar.

Perfect, that's great. Thank you very much.

Thank you.

Your next question comes from Jessica Reif Cohen with Merrill Lynch.

Thank you. Alfonso, I was wondering if you could just talk about -- given part of the stuff with Univision has now been resolved, can you discuss sitting here today what your long-term plans are for the US, what opportunities you see, and also what your expectations are given the decline in broadcasting here in the US, what your expectations are for the Univision royalty? And then secondly, can you give us an update on Spain?

Yes. Hi, Jessica. As to Univision one -- and I forgot to answer this part of the question that Gordon asked. I think that the settlement and what had to do with the PLA lawsuit looks good for Televisa. In essence, we will keep all the money that Univision has paid under protest, which is about $21.5 million. They paid us an additional amount of $3.5 million to release the other claims. We had a new formula for the termination of the royalty, which eliminates many ambiguities that we had in the program license agreement. So going forward, we'll have less discussions hopefully with them as to the calculation of that royalty.

And so I think it was a good deal for Televisa. Now, on April the 21st, we are starting the new litigation in respect to Internet rights which was not settled as part of the PLA litigation. So starting on April 21st, we'll start the lawsuit in respect to Internet rights for the US territory.

So, in general, we believe that the settlement and what had to do with the PLA litigation was good for Televisa, good for Univision. We have a more transparent relationship now. And we'll start the Internet litigation on April the 21st.

As to the royalty that -- we had forecasted or budgeted about $150 million of royalty for '09. Looking at what's happening in the US and the environment, I don't think that we're going to get there. I think that we're expecting a decline of about 5%.

And as to Spain, Spain has been always in a recession also. It's having a very difficult time. From an operating point of view, La Sexta keeps performing extremely well, exceeding the rating goals that we set out in the business plan. However, as -- under the current economic environment that I was describing, it's going to be more difficult for La Sexta to reach EBITDA in '09 as originally contemplated, or breakeven.

Based on a revised business plan, we are now expecting to reach EBITDA breakeven in 2011. And we're going to make additional capital contributions of about EUR50 million during the years 2009 and 2010.

I'm sorry, did you say EUR50 million?

Yes, EUR50 million.

Okay. Thank you.

Next question comes from Gustavo Oliveira with Citigroup.

Hello and good morning everyone. Question is on the negotiations on the upfront deposit. Did you have to lower prices substantially? And do you think that that will actually affect your spot market going to 2009?

No, we don't think so. We don't think it will affect. And we were very -- we were surprised. And I think that the results of upfront were great. It's a result of a plan that Pepe put together with Alejandro Quintero. And I think it was very successful. We took advantage of an opportunity in the early stages in September and October of last year. And the results were fantastic. However, I don't think that it will have an effect on top-offs for the rest of the year.

And besides that we have developed different strategies to work against the high risk that we have during the year. Although we are keeping guidance, we have the ratings where we want them to be able to make the likely shift to the sales team, to get to that -- to the top-off guidance that we are -- we have been putting forward.

Okay. And could you please clarify the pricing, by how much was the decline versus last year in terms of pricing, or is that actually happening?

The prices in real terms are flat.

The next question comes from Miguel Garcia with Deutsche Bank.

Thank you. My question is regarding the broadcasting margins. You mentioned before that you were expecting a big decrease. I think you said 46%, 47%. I wanted to clarify that. But I wanted to know why -- how is this big decrease generated because in the fourth quarter you already saw a huge increase in the value of the dollar, a big depreciation and do we then see that decrease in margin? Why would the decrease, the -- or maintaining similar level of the dollar currency would create such a big decline in margin?

And the other question is regarding Sky, they showed very good growth in revenues, but not so much in subscribers. And I was wondering if there was some rate increase in the fourth quarter.

And there is one more question, just very quick. You showed -- there is very -- small detail in the Cablemas business, you show a very small growth in phone lines, only 3,000 net adds. I wanted to know if there was some reason for this, especially when you compare it to Cablevision which reported over 20,000 net adds.

Yes. Hi, Miguel. Yes, to the FX question, of course the main effect that we had on television broadcasting and other business segments in the fourth quarter of last year was only in that quarter where we started with an exchange rate of about 10.97, and we closed the year at 13.84. So, however, it was only in that part of the quarter. And now we'll have the effect throughout the year of '09, the whole year.

And why the decline in margins, well, as I explained, because of the costs that we have denominated in dollars. If you consider an exchange rate of $15 per -- MXN15 per dollar, of course you have that decline in the margin.

Can you repeat your question about Sky?

Yes, just I wanted to know if you had an increase in rate at Sky in the fourth quarter.

We had increase in -- some increases in rates in the higher tiers of programming, but not in the basic package.

Okay. And the weakness in the growth in phone line.

Yes, we -- at the Cablemas level, we did experience a lower than expected pick-up of telephony subscribers in the fourth quarter, you are right. Cablevision did a much better job in the telephony side.

And what would you -- based on that, what would you expect in '09 to happen in terms of phone lines growth for Cablemas?

Well, it's going to be a very difficult environment as we know. However, considering the price packages that both Cablevision and Cablemas are putting together for '09 I think we're going to be very successful because if you compare those price packages of triple play and telephony, especially with other offers that are on the market in Mexico, I believe that especially in this environment we're going to be successful.

Okay. And lastly just a follow-up, you said that the fourth quarter -- I was focusing on the fourth quarter margins at broadcasting. You reported 51.9%, and that was with a depreciation of the peso. And you are saying now that for the full '09 you're going to get down to 46%, 47%. When you don't -- if you take the end of the year exchange rate and compare it to the one you are saying, 14.5, it's not such a big incremental depreciation.

(Multiple speakers)

Sorry.

However -- yes, in '09 we're basically forecasting zero growth in terms of sales. So if you consider the exchange rate going from 13.84 to 15, then you do have a bad effect on the margins.

Okay. And then margin is only for broadcasting, right? For that sort of --?

Yes, that is -- that is margin for broadcasting, yes.

Okay. Thank you.

The next question comes from Anthony DiClemente with Barclays.

Hi, thank you. Following up on the comments on the April 21st litigation on Internet rights, can you just give us some more on the nature of the allegation there? What's the dispute centered around? And what maybe are just some of the possible outcomes there? Thanks.

Yes, of course Anthony. The only issue in respect to that litigation is whether Televisa has Internet rights in the US to its content, to the programs. There is no claim by Univision that Univision has those rights to exploit Internet rights as to our programs in the United States. So in essence that is what we're taking to the court.

Right. And then depending on how the court rules, do you think there could be strategic opportunities to partner up with the US entertainment companies on digital distribution outside of your PLA with UVN?

Yes, it's too early to say. But -- of course we expect to win the lawsuit, and if we do so we will look for opportunities in the US.

Okay. And then on DTV Latin America I was hoping can you give us an update on your thinking surrounding that strategic relationship, meaning would you have an interest in taking full control of Sky Mexico? And then I guess on the other hand, would you be open if the economics were attractive to selling that asset?

Yes, well, we have full control of Sky in Mexico, and of course as being central of -- the Central America operation part of Sky Mexico we also have full control of that also.

As to the -- selling that asset, we're not considering that at all.

Okay. All right, thank you very much.

Thank you.

At this time, we've [reached] out of time for questions and answers. Presenters, are there any closing remarks?

Well, thank you very much for your attention, and if you have any further questions please give us a call.

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