Grupo Televisa SAB (TV) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's second quarter 2011 conference call. Before we begin, I would like to draw your attention to 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 and good morning. We're pleased that you have joined us for this discussion of Grupo Televisa's second quarter 2011 results. With me today is Jose Baston, President of Television and Content, also Salvi Folch, our Chief Financial Officer. I will take you through the highlights of our financial results for the quarter, then Pepe will discuss the operating results of our Television and Content segment. After that, we'll be happy to take your questions.

During the second quarter, all our core businesses performed well and margins were strong. Consolidated net sales increased 4.7% to MXN15.1 billion and operating segment income increased 5.2%, reaching MXN6.3 billion, with a margin of 40.5%.

The growth in operating segment income was offset by increased depreciation expenses, which is, in great part, explained by the strong growth in pay television subscribers.

Consolidated net income was also impacted by the results of our minority equity position in La Sexta, which reflects the difficult economic environment in Spain. This negative variant was compensated by a favorable foreign exchange impact and by lower taxes.

In our Pay-- Television Broadcasting segment, in line with our expectations for the second quarter, sales decreased 5.9% to MXN5.5 billion. During the second quarter, we faced a difficult comparison to last year as a result of two factors -- the absence of Grupo Carso as a client and the 2010 World Cup.

Excluding Grupo Carso, broadcast revenues would have decreased by only 1%. The balance is more than explained by the contribution to revenue of the World Cup in 2010.

We are maintaining our full-year guidance, which is likely to be between 0% and 1%.

Operating segment income for second quarter decreased 8.7% to MXN2.6 billion and the margin was 47.8%.

Our Pay TV network segment continues to benefit from the strength of our channels and the growing success of Sky and our cable video offerings. The expanded subscriber base is also driving solid advertising revenue growth.

Even though we stopped consolidating the results of TuTV, our joint venture with Univision for pay television networks in the United States. Second quarter sales increased 6.4% to MXN827 million. Excluding the results of TuTV in 2010, segment revenues grew 15%.

Similarly, second quarter operating segment income was very strong, increasing 13.2% to MXN414 million and the margins reached 50%. The margin expansion for this business resulted from its strong operating leverage and the absence of certain expenses associated with the 2010 soccer World Cup.

In our programming export segment, second quarter sales increased 40.5% to MXN890 million. Univision royalties grew 63% from $37 million in the second quarter of 2010 to $60.2 million in the second quarter of 2011.

As Pepe will share with you, the growth in Univision royalties originated from a more favorable royalty structure and from the increased success of our content and, therefore, of Univision's results.

Second quarter operating segment income increased 58.7% to MXN466 million and the margin reached 52.4%.

In our publishing segment, despite the challenging-- the challenges facing the global publishing industry, our magazine business continues to have solid advertising and circulation revenue. Second quarter sales decreased marginally 2% to MXN796 million. Excluding the impact of the appreciation of the peso, revenues grew by 2%.

Costs and expenses are being managed carefully in order to deliver a solid margin. Second quarter operating segment income increased 14.3% and margins increased to 19.1%.

In our DTH business, Sky's new packages continued to drive explosive growth. Since the launch of Sky's low-cost offerings in the fourth quarter of 2009, Sky has added close to 1.8 million subscribers, practically doubling its subscriber base.

During the quarter, Sky added 274,000 subscribers, reaching 3.6 million. As a result, second quarter sales grew by 10.2% to MXN3.1 billion.

The growth in subscribers during the second quarter was 9% higher than the same quarter last year. This is remarkable, considering that Sky benefited from the exclusive transmission of soccer matches of the 2010 World Cup.

The second quarter was, in fact, the sixth consecutive quarter in which Sky added more than 230,000 subscribers. With its low-cost offering, Sky has delivered double-digit growth in its top line since 2007.

The growth in Sky has been achieved while at the same time margins have remained very strong. This quarter was no exception. Second quarter operating segment increased 16.4% to MXN1.5 billion and the margin reached 48%.

Moving on to our Cable and Telco segment, second quarter sales increased 14.9% to MXN3.3 billion. The continued success of our competitive triple-play bundles during the quarter allowed our cable subsidiaries to add 168,000 revenue-generating units or RGUs. With this, the combined number of cable video, voice and data subscribers has now reached 2.1 million, 577,000 and 898,000, respectively.

The penetration of data to previous subscribers remains low at 43%, from 39% 12 months ago. Also, the penetration of voice to video subscribers is 28% compared to 23% 12 months ago.

The potential of the conversion of our video subscribers to double and triple play is encouraging when comparing these ratios to cable companies in the United States. Data to video subscribers is, on average, in excess of 80% and video-- and voice to video subscribers is more than 55%.

The growth in revenues in our Cable and Telco segments is also explained by the growth in Bestel, which is our fiber optics network, which in the quarter contributed with MXN670 million in incremental revenues.

Second quarter operating segment increased 15.1% to MXN1.1 billion and the margin was 33.1%.

In terms of our other businesses, second quarter sales increased 2.2% to MXN1 billion and the operating segment income reached MXN11 million. The results of this business segment mainly reflect the impact of the revenues and costs associated with the consolidation of two soccer teams starting the third quarter of 2010.

On April 1st, 2011, we announced an agreement reached with our partners in Cablemas, one of our three cable subsidiaries to obtain the remaining 41.7% equity interest that we did not own. The acquisition has been approved by the relevant authorities. The total value of the transaction amounted to MXN4.6 billion. In connection with this transaction, we issued 24.8 million CPOs and the rest was paid in cash.

This acquisition is in line with our interest to continue participating in the consolidation of the cable industry. It gives us greater exposure to an asset that will benefit from the low penetration of pay television in Mexico and the appetite for triple and eventually quadruple play offerings.

This also-- there are also synergies to be exploited, together with the rest of our cable and telco assets. Full ownership of this operation should allow us to maximize the value of economies of scale among our cable assets.

Moving on to our CapEx, during the last couple of years, we have increased the pace at which we invest in our pay TV platforms. This is a response to the growing appetite for the premium video offerings, higher data speeds and better telephony services. The investments are bringing our networks up to world-class standards and are creating sufficient excess capacity to support further growth. We expect to continue harvesting the benefits of the recent capital expenditures for a few years.

In line with our full-year guidance of $850 million, during second quarter of 2010, we invested approximately $203 million in property, plant and equipment as CapEx.

We are very enthusiastic about the prospects for Televisa. With our recent investments, we have already set a very solid foundation for the growth of our business in all our core segments, from content to distribution to telco.

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

Thank you, Alfonso. Good morning, everyone, and thank you for joining us.

Our broadcasting business continues to produce successful content with very solid rating results. Our flagship network, Channel 2, remains the leading network in Mexico. During the second quarter, 9 of the 10 top-rated shows were transmitted by Televisa on this network.

We remain committed to our goal of producing content that reaches our target audience and achieves our commercial objectives. The highest-rated show during the quarter was the final episode of (inaudible), which was broadcast on Sunday night and delivered a share of 40% in its two-hour episode.

Along this process, we have continued to seek other sources of revenue growth. For example, product placement is an important tool for Televisa. As owners of the large majority of the content that we transmit, we are positioned to exploit it as no other broadcaster can.

So far, we are obtaining very good results. For example, in our novella, Una Familia con Suerte, product integration currently represents over 50% of revenues. As of this date, this is the show with highest contribution of product placement to the total revenues.

Product integration and branded entertainment are opportunities that we exploit in Mexico but that can now also be exploited in the US, in collaboration with our partner, Univision.

We continue to transfer our expertise in the promotion of novelas to the development of new forms and we are doing so with great success. During the second quarter, we launched Pequenos Gigantes (inaudible), which is a family-oriented format that has garnered excellent audience shares and delivered solid commercial results. With this programs, we keep positioning Televisa as a clear leader in Sunday nights.

As before we continue to enter into such (inaudible) alliances to access new markets and develop new formats, in order to maximize the revenue and the offer to our audience. For example, in the second semester of the year we, with (inaudible), the founder of (inaudible), we are producing the Mexican version of The Voice, a family show already proven successful in the US.

Also, our Brazilian version of [Novela Revilda], which we dubbed into Spanish-- will be dubbed into Spanish and will be broadcast on Channel 5 in Mexico to be able to reach young audience and this is definitely a proven business model.

These initiatives, among others, allows us to exploit the value of our expertise and expand our content offering globally with new formats, reaching all key demographics.

Our core broadcasting business remains strong. We have begun to compensate for the loss of Grupo Carso as a client through stronger sales to other clients.

As Alfonso mentioned a few moments ago, the drop in revenues reported in the second quarter is explained by the difficult comparisons to last year as a result of the lack of Carso as a customer and also as a result of the 2010 World Cup-- the 2010 World Cup, a challenge we will face again during the third quarter of this year. In spite of this difficult comparison, we will maintain our strict control on costs and expenses in order to meet our full-year guidance of an operating segment margin of 46%.

Moving on to our pay TV business, the growth in advertising sales continues to be very strong. Ad revenues now represent 25% of this segment's revenues, compared to only 18% two years ago.

As I have shared with you in the past, we are the leading product of Spanish language channels for pay TV platforms. As such, we are also the largest owner of advertising inventory for pay TV channels and the company best positioned to capture an important share of the advertising budget for these platforms.

But our channel offering is also getting stronger. Televisa Networks produces more than 15,000 hours of original programming each year. This is allowing us to assemble a rich library of content that can be utilized in other platforms by taking advantage of the various windows, including broadcasting and digital.

We continue to explore the opportunity for new pay TV channel launches. For example, we are close to adding another channel to our content portfolio of 18 channels. Our new pay TV network will be focused on the highly attractive demographic of the 9 to 12 years old, often as "tweens."

In terms of our export business, as Alfonso mentioned, royalties from Univision grew 63% during the quarter. The growth in royalties has resulted from the higher royalty rate on an expanded royalty base, but also from the growing success of Univision.

Thus far in 2011, Univision continues to be the number three broadcast network, averaging 7% more adult viewers than CBS and 11% more than NBC. Season-to-date, Univision network ratings-- the Univision network ratings are up 8% while the four major English language broadcast networks are reporting audience declines that range from 5% to 12%.

Televisa's programming continues to be the key revenue driver in Univision. The transmission of the novela Teresa has been a key component of its rating success.

Pequenos Gigantes, the second-most-watched show on Sunday night, has positioned Univision as a key participant in one of the most commercially attractive time slots.

Formats like this one are allowing us to explore the opportunity for separate product placement initiatives for Mexico and the U.S. Hispanic market. The initial results look very promising. We are very enthusiastic about the prospects for our partner, Univision, and the full value of the new programming agreements is yet to be shown.

Earlier this year, Univision announced that it plans to launch three new pay TV networks in the coming months -- a dedicated novela network, a sports network and cable news network. These are highly attractive genres that will surely fill the gap in Spanish language pay TV programming in the United States.

Finally, in light of the continued development of digital platforms for distribution of our content, we completed the structure of a new media business unit. We will focus on finding the most effective and financially attractive manner to make our content available online and on mobile platforms.

We expect digital platforms to become an efficient outlet to showcase show content which has already been transmitted through our broadcast and pay TV networks and we will do so in a manner that supports our core business.

As you know, we have over 50,000 hours of content ready for online distribution and this number grows every day. Let me stress that by producing the large majority of the content that we transmit, we are very positioned to take advantage of new platforms for distribution, regardless of the shape or form that they may take.

Every new platform is an incremental opportunity for us, because we maintain the freedom to determine the optimal window and strategy on our own terms. And as content offerings fragment online, the attractiveness and importance of premium content will grow for sure.

Thank you so much for your attention and now we are ready to take your questions.

(Operator Instructions). Your first question comes from the line of Tomas Lajous with UBS.

Good morning, gentlemen. Thank you very much for the call.

I have two questions. The first question is for Alfonso. Alfonso, we've heard some concerns from the COFECO on the Iusacell transaction and could you update us in terms of what you expect as for the approvals and whether you have any concerns on the transaction not being approved? And also, is the $600 million that you have not yet paid to Iusacell, is that contingent on any approval or not and what would happen if the COFECO were to veto the transaction?

And the second question is for Pepe and, Pepe, given the continued success of Univision ratings in the US, are you starting to product anything specifically for the US market, similar to, for example, the bilingual shows that Telemundo is putting through or are you just expecting to continue pushing through the Mexico production into the US?

Thank you, Tomas. Well, the approval from the antitrust commission in Mexico of the Iusacell transaction is ongoing. Of course, they have requested from both us and Iusacell a lot of information. However, this approval involves us, Televisa, which is a company that has no presence in the wireless industry and Iusacell, that is a company with a 4% market share of wireless. So, we don't expect the antitrust commission to challenge the transaction.

As you know, as part of this transaction, during the second quarter we contributed $1 billion to Iusacell and the balance, which is $600 million, will be paid before year end. But that amount of money, the total of $1.6 billion, is to buy the convertible debentures of Iusacell. So basically, we're buying debentures, which will be converted upon receipt of the regulatory approval, but if not, we would maintain the convertible debentures into 50% of the equity of Iusacell.

Tomas, then to the Univision part, we are meeting very often with the Univision team, looking for opportunities that we think make sense, business wise, to develop. Now we are in the process of, as I mentioned in my script, to develop new pay TV networks and we think that's a very promising area of growth and we are developing different strategies that we we're going to be working together, but I don't have any plans right now to be producing any bilingual content. We are going to stick with the content that we have seen has been successful and we are working in developing ideas to new areas of revenues.

Thank you very much, gentlemen.

Thank you.

Your next question comes from the line of James Rivett of Citi.

Morning, guys. Sorry about that. My question is just about your broadcast guidance. Clearly, we're looking for a steep improvement as we go into the second half of the year in terms of the revenue growth. Can you just give us some color as to whether that's actually starting to come through yet, what you're seeing that should make us happy that you can get to that kind of level? Thanks very much.

Well, we know that the second quarter is going to be tough, although we think that the second quarter, which is half of the year we have to grow between 3.5% to 5%. For the third quarter, we'll also have a difficult comparison, as we said in the-- we said a little bit ago, given that we had, also, a revenue contribution from the World Cup.

Much of the jump in this will be shown in the fourth quarter and we think, although it's going to be challenging, we have the content to develop different ideas of revenues, some of them come from product integration and we are launching new shows that have a lot of opportunities of that.

Besides that, we see our Channel 2, the most important network, with very solid ratings and we think that with the amount of content that we have there, as well as with the amount of revenues that we have in Channel 2, we will be able to reach that guidance. And also, of course, we are weighting a lot into our control of cost and expenses.

Okay, thank you very much.

Your next question comes from the line of Paul Steep with Scotia Capital.

Great, thanks. Maybe just the first one, what's the outlook for CapEx for the reminder of the year. Is it sort of intact as we talked about in Q1, or if it is intact, what's the driver for the big spend in the back half?

Yes, well, the-- we can tell you, Paul, the breakdown of our CapEx, but basically our CapEx for this year has to do with the growth of our subscribers in both Sky and our cable subsidiaries. So that is associated, almost entirely, to that growth in terms of subscribers.

Okay. And then, just on Univision, you talked a little bit, Pepe, about launching a new pay TV network. What's sort of the timing should we be looking at? You talked previously in other calls about doing some work on web properties over time, as well as bringing soccer in. Can you remind us a little bit on the timing of the big milestones that are upcoming?

Well, yes, the novela, the telenovela channel will be launched in the next two months. Actually, the date we have is in the month of August.

And we are in the process of getting together all the rights and all the different programs that we want to launch in our sports network. We know that that's going to be a very, very competitive channel with all the market viewers and, of course, Spanish market of sports. As you know, that is a very, very important commercial, attractive for our clients, as well as subscribers, and we think that we have very exclusive content that we already own that can have-- that can make this channel very, very successful.

The news channel we don't have a date yet. But sports and news, I think, is going to be in the first semester of next year.

Okay. And just, sorry, one clarification here. On the telenovela channel you're launching, is that something that's already got carriage by various cable systems that Univision is rebranding or is it a brand new launch?

It is a brand new launch and they are working already with the different MSOs, as well as with satellite distributors, to be able to have a very high distribution.

Okay, thank you.

Your next question comes from the line of Mauricio Fernandes of Merrill Lynch Brazil.

Good morning. Thank you for the call and the question.

Just back to broadcasting, the-- one of the reasons why revenues were down in the first half, everyone knows, is the fact that the Carso Group is not advertising. Any-- I just want to get an update there, if there's any new negotiations, if you're negotiating at all or not? That's the first question.

The second question is, on Univision, it looks like the bulk of the revenue increase on the business line from Univision has come from the fact that royalties have gone up, which would suggest that the revenue increase from Univision has been small.

Can you-- why is that and can you comment about what are your revenue expectations, coming from Univision? Thank you.

Yes, as to the Univision question, it's both that the royalty is higher based on the new deal that we have and better performance of Univision and-- in sales. And, of course, you have to-- they also had the World Cup in the second quarter of last year, so that-- if you compare the results of this quarter to the same of last year, that, of course, is a difficult comp.

So-- but it's-- I mean, the company's performing better and the royalties, based on the new formula, of course, are growing as you saw, by 60%. We believe that this year the royalties are going to reach about $220 million.

As for the Carso question, at this moment we are not in negotiations with Grupo Carso. We will welcome them back as clients any time, as before. We have remained open to negotiate with them on market terms whenever they are ready.

Okay. And is there any timing to-- for that negotiation to come back, any catalyst that needs to happen for the negotiations to come back?

Well, we are ready as long as they are ready, also.

Okay, thank you.

(Operator Instructions). Your next question comes from the line of Andrew Campbell with Credit Suisse.

Yes, good morning. My question is related to the telecom segment and I was wondering if you had any comments on any of the recent regulatory changes in Mexico and their impact on the Televisa properties and if you were expecting any additional regulatory changes on the telecom side?

Yes, regulations are being changed and modified by COFECO-- I'm sorry, by Cofetel, which is the independent or autonomous commission that is regulating the telecommunications industry in Mexico. Of course, this involves creating more competition on the telecommunications side of the business so I think that that's for the benefit of all the companies involved.

The reduction-- I mean, the most important ruling from Cofetel was the reduction of the termination rate. That, I think, is a very important step and it's going on the right direction. So I believe that once all the litigation involved is resolved on a permanent basis, the benefit of this ruling is likely to be passed along to the end consumer.

So it's going to benefit our cable companies since people will find prices more attractive to make calls from a fixed line to a wireless line and, of course, this will increase the-- this will result in higher volumes of phone calls for our cable assets.

So I think the regulators are moving on the right direction. We have not seen this type of change for a long time in Mexico and we're very happy and enthusiastic about it.

Okay, thank you.

Your next question comes from the line of Enrique Gomez with HSBC.

Good morning, everyone. Thank you for the call.

I have two questions. First, on the cable and satellite businesses, margins were quite high this quarter. If you could provide us some guidance on what to expect for the remaining of the year? Specifically, we can expect these levels of margins to remain?

And my second question relates to the ratings and audience share on which the prime time on the tables you show at the back of the report. It seems like they came lower than the previous quarter, so if you could provide us some color on that? Thank you very much.

Hi, Enrique. Yes, so your first question, the margins of cable and Sky will be more or less the same in the following quarters.

Okay.

Based on the ratings, you can see we changed our offering by putting in Channel 4, the news channel, (inaudible), looking for those targets that we did not have in the past. You see that decrease mostly in that comparison, because of what I just mentioned.

And-- but I can tell you that Channel 2, it's very solid. The ratings are still in the places where they have to be and, of course, going to be working to higher the ratings of our new channel and also in our offerings of other-- the other networks.

Okay, thank you very much.

Your next question is a followup from the line of Mauricio Fernandes with Merrill Lynch Brazil.

Thank you. Given the new networks that will be launched at Univision, can you share with us any expectations on the costs related to launching these new channels?

There won't-- basically, we're taking the content and the channels that Televisa already produces and in some instances there has to be some changes in those networks to be launched in the United States, but basically the costs associated with launching those channels will be taken by Univision and they're not material.

I understand. Thanks. And one more, if I may just follow up. On the performance of Bestel, the niche performance there has been quite solid, it looks like, the last few quarters. What's behind it and what are-- can we expect it to be sustainable?

Yes, the performance of Bestel and the changes that we have seen in that company are primarily linked to governmental contracts that we had to establish the network for transmission of data of ISSTE, which is a Mexican social security institution. That is a big jump that you see in those numbers.

Okay, thank you, and, if I may, one more. On also margins on the pay TV network, programming exports and Sky, they expanded. So not only year on year, but quarter over quarter also, to the first quarter. Is there any-- is this more related with the World Cup, as well, when you compare year on year? What is the reason for the expansion, again, both quarter on quarter and year on year, avoiding the World Cup effect?

Yes, of course, there is a World Cup effect on those platforms, so that is-- I would-- that is associated with the World Cup, basically.

Okay, thank you very much.

Okay, thank you.

Your next question is also a followup from the line of Enrique Gomez with HSBC.

Yes, thank you for the followup. Just briefly, if you could comment on, we've seen here a different type of advertising that is specifically products within the program, not as an ad, but as part of the program, for example, (inaudible) in one of the novelas. I was just wondering if you could provide us some detail on how that is going and if you are going to continue to do that? Thank you.

Well, that's going very good, as I said. We are developing a lot more offerings of product integration opportunities, as well as branded entertainment shows. We see a lot of future on that because of the different way of producing our content.

To be clear, we are developing from the beginning of the actual script opportunities of product integration for our clients. So you're going to see that growing because we see a lot of-- we have great expectations of that and because of that, we are developing a lot more opportunities.

Okay, great. Thank you.

And there are no further questions at this time. I would now like to turn the call back to Alfonso for any closing remarks.

Well, thank you very much for participating and please give us a call if you have any additional questions. Have a great summer. 'Bye.

Thank you all for participating in today's conference call. You may now disconnect.