Grupo Televisa SAB (TV) 2012 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's second-quarter 2012 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 will 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, Elsa, and good morning. We are pleased that you have joined us for this discussion of Grupo Televisa's second quarter 2012 results. With me today are Jose Baston, President of Television and Content and Salvi Folch, our Chief Financial Officer.

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

Following the strong results of the quarter, of the first quarter, Televisa delivered solid revenue growth during the second quarter. Content revenue rose by 8.2% and revenue for all other businesses grew by double digits. Consolidated net sales increased 12.3% to MXN17b and operating segment income grew 13.3% reaching MXN7.1b. That resulted in a margin of 41.2%.

The growth in operating segment income was partially offset by a non-cash charge in fair value of our investment in Iusacell by approximately $70m. As you know, much of Iusacell's CapEx is dollar denominated. Given the recent volatility in exchange rates markets, we updated our forecast for the business based on new foreign exchange rate assumptions.

To a lesser extent, operating segment income was also offset by a negative foreign exchange impact and higher depreciation expense. Nevertheless our net income reached MXN1.4b. Excluding our non-cash adjustment in the value of Iusacell, net income reached close to MXN2.3b, an increase of 40% from last year.

For the first six months of the year, cumulative growth in consolidated net income is almost 19%. This is remarkable given that as a result of the Federal Electoral Law, we were prohibited from selling advertising to governmental entities during the political campaigns in Mexico. As a result, the advertising business lacked some of its usual recurring revenue during the second quarter.

In our Content business, second quarter sales increased 8.2% to MXN7.8b. The biggest contributor to revenue growth was the licensing and syndication which rose by 38% followed by network subscription revenue which grew by 31%. Advertising remained practically flat during the quarter for the reasons that I explained before.

Operating segment income for our Content business grew 7.3% to MXN3.8b and the margin reached 48.2%.

We are proud of the performance of our Content division. Pepe will walk you through the details of this business segment in a moment. For the full year we are increasing our guidance for Content revenue growth by a 100 basis points to between 7% and 8%.

Our Publishing business benefited from strong advertising revenues in Mexico and abroad as well as strong circulation revenue in Mexico. Second quarter sales increased by 17% to MXN929m and operating segment income reached MXN155m.

In our DTH business, Sky continued to grow rapidly for the 11th consecutive quarter. During the second quarter, Sky added a total of 267,000 new customers. As a result, Sky closed the quarter with a total of 4.6m subscribers. We have nearly doubled the subscriber base in two years.

Second quarter revenues grew by 13.6% to MXN3.5b. In spite of our gradual expansion of Sky in the segment of low-cost pay television offerings, its operating segment income margin remained strong reaching 47%. During the second quarter, Sky operating segment income increased 11.5% to MXN1.7b.

Moving on to our Cable and Telecom segment, second quarter sales increased 16.2% to MXN3.9b. The combined number of video, data and voice subscribers reached 2.2m, 1.2m and 700,000 respectively. Voice and data continued to be the main drivers of growth with data representing more than half of the increase in revenue generating minutes.

Bestel, our fiber optics network company contributed to the segment's growth in revenue and operating segment income. Revenue grew by 15% and the margin reached 37%. As a result, operating segment income for our Cable and Telecom segment increased 32.9% to MXN1.5b and the margin was 38%.

In our other business segments, second quarter sales increased 20% to MXN1.1b and the operating segment income reached MXN51m. Gaming, soccer and movie distribution were the main contributors to revenue growth, while gaming and [radio] were the main contributors to operating segment income.

Moving on to our CapEx, during in the second quarter of 2012 we invested approximately $168m in CapEx of which $90m were invested in Cable and Telco and $57m were invested in Sky. This is in line with our cash CapEx full year guidance of $850m.

It is important to recognize that much of the increasing CapEx over the past three years has been growth related. For example, of our Cable and Telco CapEx guidance for 2012 we anticipate that close to half of it is growth related while the balance is in investments to upgrade parts of the network. Similarly, the large majority of our CapEx in Sky is growth related. It results from the large number of receiver boxes and antennas that we have to install in order to support the recent growth of close to 1m subscribers per year.

We are in a heavy CapEx phase which will continue to be driven by growth and to a lesser extent by necessary but non-recurring investments in infrastructure.

Finally, on June 14, Mexico's Federal Antitrust Commission approved the conversion by Televisa of the Iusacell debentures into common stock. The approval was subject to Televisa's acceptance of certain conditions. On June 19 we accepted those conditions and converted the debentures into 50% equity stake in Iusacell. As a result of the conversion, beginning in the coming quarter, we will account for our investments in Iusacell under the equity method.

The conversion enables Televisa to become actively involved in the management of Iusacell. Emilio Azcarraga, our Chairman and CEO will shortly become Co-Chairman of Iusacell. Iusacell started a turnaround of its operation the moment we made our investment, our initial investment in April 2011. While many changes remain, significant progress has been made to date. We hope to share with you operating and financial metrics on Iusacell very soon. In the meantime, we anticipate that a strong local economic environment will continue to favor our core operation.

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

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

As you can see from our results, the value of having multiple sources of Content revenue was more evident in this quarter than any previous quarter. While advertising remained practically flat, licensing and syndication revenue contributed with the majority of the growth, supported by strong network subscription revenue.

Our advertising business faced a challenging quarter as explained by Alfonso. That was not only the impact to our business. As per instructions of the Federal Electoral Commission, in the quarter we were required to transmit free of charge a total of 4.2m promotional spots for the different candidates across all of our networks. This was equivalent to 19% of our total over-the-air inventory and close to 25% of our primetime inventory.

In spite of the above, advertising revenue declined only 0.1% during the quarter. And as a result of our strong first quarter for the first half of the year, advertising revenue growth stands at 4.1%.

The ongoing success of our content was very important during the quarter. The ratings of our flagship Channel 2 were very strong. The share of this channel reached almost 43% during weekday primetime and this is a number that we haven't seen in over 34 quarters.

Once again, Televisa produced and transmitted a large majority of the most successful shows on Mexican television. During the second quarter, 24 of the top 30 programs were transmitted by Televisa.

On our Pay TV networks business, advertising revenue increased by 37% during the second quarter, continuing the trend from the last few quarters. Since 2003, the average rating of our networks has more than doubled, driven by increased Pay TV penetration as well as by the growing popularity of these new channels. For example, Televisa produces four of the top five general entertainment channels, the top three music lifestyle channels and three of the top four movie channels.

Similarly, our network subscription revenue grew by 31.3% during the quarter. The growth in penetration of Pay TV in Mexico is likely to continue at a fast pace. That expansion together with the ongoing success of our Pay TV networks will likely remain an important driver of growth for these reasons.

As of the end of the second quarter, our Pay TV networks business reached 32m subscribers around the world, carrying an average of 5.7 networks each.

Licensing and syndication with revenue growth of 37.8% was the fastest growing source of content revenue and the second most important source of revenue in absolute terms. Univision royalties which comprise the bulk of the revenue line reached $64.2m in the second quarter.

Univision continues to be the third most watched network during primetime among adults regardless of language. The collaboration between Televisa and Univision is stronger than ever and this is reflected in the results.

This line of revenue, licensing and syndication also benefited from the Netflix agreement which was not in place during the second quarter of 2011 and from an increase in sales to the rest of the world, principally in Latin America.

Diversification of the Content revenues will remain a priority for Televisa. Along these lines, during the second quarter, we launched Televisa USA, an initiative to co-produce and co-finance English language television shows for distribution on American networks.

After many years of exporting our content, we have seen that our stories have an universal appeal, regardless of language and culture. This (inaudible) is an opportunity for Televisa to bring its successful business model and great storytelling to the English language market in the United States. Our daily serials will allow USA networks to tap into the 5 day a week format which gives advertisers a unique vehicle to sell their goods or services while providing the network with a very cost-efficient way to produce high quality content. This business model has already been proven successful in the Spanish speaking world.

In sum, we never stop searching for alternatives to maximize the value of our content and solidify our leadership in the platforms where we have our presence.

Thank you very much and now we are ready to take your questions.

(Operator Instructions).

Hello?

Your first question comes from the line of Gregorio [with] Tomassi.

Yes, good morning and thank you for receiving the questions. First of all, congratulations. I think they are strong results. I have two questions.

First of all, Pay TV penetration, where do you see it standing in the next three years in Mexico? What's your view about it?

And the second question relates to how do you see the risks about the third network to be auctioned soon in Mexico combined with, also combined with the analog switch-off that is foreseen for the end of 2015?

Hi, Gregorio. I think that pay television will end this year around 43%. However, we believe that there are some between 6m and 8m additional households that can afford to pay for content or for pay television. So I think that there is a lot of space there to grow. And on the other side, our cable operations have a lot of space to grow on data and telephony where penetrations are really low. So we believe that there's still a lot of space. We have accomplished a lot because as I said penetration will end the year around 43%, 44%. But there's still a lot of space to grow.

As to your second question about our third network that will compete in Mexico, as I have always said, we welcome competition. It will make us stronger, a better company. We have been producing content successfully for over 60 years and I believe that we have the scale and also the talent and expertise to continue producing content that has strong appeal around the world, not only in Mexico.

We really believe that competition is good for any business. That has proven to be the case for Televisa and I guess two, three examples come to mind.

The first example would be on television precisely. When the government privatized Television Azteca ten years ago, our share of broadcasting television was more than 90% I would say. But it was a less efficient company. So our broadcasting business improved its production of high quality content and managed costs and expenses much better and it has been incredibly profitable since. So I guess it's more -- Televisa is more profitable on the broadcasting side now with competition from Television Azteca and with more or less a 70% audience share than when it had a 90% audience share. So we have become a more efficient company and we have faced competition and we'll face competition on television as well.

Another example with satellite television where with the entry of Dish, Sky's competition increased a lot. But in the process Sky improved its pay television offering and as you have seen we expanded into low cost pay television market. We believe that Dish is highly subsidized by Telmex. Effectively to compete against Dish is to compete against Telmex which as you know is the dominant telecommunications company in our country. In spite of that, today Sky is twice as big as it was before Dish and its margins remain as strong as ever. So in the DTH business we have been able to compete against Telmex effectively and efficiently, maintaining margins and doubling the size of the company.

And the last example that comes to my mind is Cable. In Cable we face incredible competition everyday in the offering of triple play services. Our cable companies compete with an incumbent that has close to 75% market share in both voice and data. And in spite of that and Telmex's aggressive push of triple play with Dish, our cable operations have continued to grow double digit with voice and data customers growing the most.

So we're used to competing. We welcome it and I believe that competition of a third network will make Televisa a stronger company.

Alfonso, if I may follow on and thanks for the thorough answer. But if we consider that the TV broadcasting business is a more mature business than the Pay TV business and probably my assumption is that competition will bring some pressures on margins and prices and some fragmentation of audiences. Would you agree with that? Would it be not necessarily completely similar to what happened with the Pay TV as it is a more mature market?

The best example in that case would be Dish where when in order to compete against -- this is Sky. In order to compete against Dish we launched the low cost pay television offerings and there the concern of the market was that as a result of that ARPU would of course drop and our margins would suffer. However we have been able to maintain a very strict control of cost and expenses in our DTH operation. And of course we have doubled the company year over year and the company has been able to maintain its margin.

So I think that we have taken precautions in order to compete against a new entrant into the network business. We believe that in the short term margins can suffer a little. But we don't think that because of the things that we have put in place we will have a material impact on our margins or on our operations.

Thank you very much.

Your next question comes from the line of Michel Morin.

Hello.

Your next question comes from the line of Andrew Campbell.

Yes, good morning. I was looking to just clarify some points about the adjustments you made for the Iusacell investment. Can you just clarify that there has been no other change other than FX in terms of the operating assumptions and the way that you're viewing the underlying potential of the business?

And the other question is how the asset will be accounted for going forward. On what regularity will you be reviewing the value of the asset and what is the potential risk of some kind of an additional adjustment of that valuation?

Hi, Andy. I'll ask Salvi Folch to answer your question.

Hi, Andy, how are you? As you know, we have to value our investment at fair value. So every quarter we have to look at the fair value of our investment and compare it to the current value that we have on our books. When operating our valuation model with the market exchange rates, there was a reduction this quarter valuation of about $7m basically explained because CapEx is dollar denominated while revenues are basically peso denominated.

Going forward, starting July 1, since we'll have 50% of equity it will be valued under the equity method and we will have 50% of the net income of Iusacell on our results.

We will continue to have to look at the value of our investments compared to its current value. The impact this quarter was not due to the operations but was due to this market factor.

Just to be clear, so starting July 1 will it be carried on a cost basis and then reviewed periodically by an impairment test? Or will you be adjusting it every quarter for fair value and therefore we should expect some volatility resulting from that?

Well, we will have to look at fair value of the investment itself, right. So that will depend if the value that we have in our books is backed by our model. So only if there is a change on fair value we will have an impact. But aside from that every quarter what you will see is that we will book net income, 50% of the net income of Iusacell on our equity method under EBITDA.

Okay, understood. Thank you.

Your next question comes from the line of Michel Morin.

Your next question comes from the line of Enrique Gomez.

(technical difficulty) One is if you could provide us some guidance on advertising revenues for the second half of this year. You explained what happened with the elections. Next quarter we have the Olympics and then I think the market analysts expect that (inaudible). If you could provide us guidance on ad revenues, that would be great.

And my second question relates to the Cable and Telecom margin, we show a 38% margin which is one of the highest we've seen in recent quarters. Do you think that's -- could you give us more color on that and do you think that's sustainable for the second half of this year? Thank you very much.

Yes, hi Enrique. As to broadcasting and what we can say is that we're increasing our guidance for Content revenue growth by 100 basis points to between 7% and 8%. So of course as a result of what we experienced in the first half of the year and what we see in the second half of the year, we are increasing our guidance by 100 basis points.

As to Cable and Telco, Bestel had great results. Bestel had the highest margin it has had in its history so that of course helped us to increase the margin of that segment.

And do you think that's sustainable going forward?

Well, we believe that the sales margin, a sustainable margin would be close to 30%. That's what we believe to be achievable. Its margin was 37% in this quarter. So I believe that that a stabilized margin would be 30%. And it's a much better margin than what it used to be and it will stabilize there.

That's clear. Thank you very much.

Your next question comes from the line of Rodrigo (inaudible).

(technical difficulty).

Yes, we're here.

Hi Alfonso, good morning. I was -- we have seen the news related to the potential IPO of Univision. I was wondering if you could give us an update on that respect, if it is something that you're pursuing. Or any comments on this respect would be very much appreciated.

Hi, Rodrigo. We're not working on an IPO of Univision for the time being.

Okay, thank you very much.

Your next question comes from the line of Andres Medina.

Hi good morning. Congratulations on the results. I was wondering if you expect any further investments in Iusacell which could modify your CapEx guidance or rather maintain your guidance but modify the distribution of it. Thanks.

Well, as to further investments in Iusacell I guess it's yet to be determined. We'll invest additional CapEx to the extent that that company is achieving its growth target. In general, we have seen a better performance of the assets. We have made progress in many fronts.

We have closed a new deal with Telefonica which is a very important deal for both companies. We are going to share with Telefonica networks, access to domestic roaming at reduced rates and we're also going to share the deployment of new technologies. So that will reduce CapEx on both sides, on the Telefonica side and Iusacell side.

So in general we're planning to invest additional capital only to the extent that Iusacell is achieving its growth targets and it's improving its performance, as we have seen this company improving in these months.

Thanks and just a quick follow-up, could we expect any kind of synergies or cross-selling services between Cable and Sky and Iusacell?

Yes, now that we have converted the debentures into equity and we own 50% of Iusacell, we're actively working with our cable companies and also with Sky and Iusacell. And later on in the year we'll share with you the plans that we have in combination of all those companies.

Perfect, thank you.

Your next question comes from the line of Michel Morin.

Okay, can you hear me now?

Yes, we can.

Great, third time is the charm I think. I just wanted to follow up on your comment on the guidance, Alfonso. I think I heard you say that it's now between 7% and 8% but I don't know if you changed your margin outlook which I believe is [47%].

Hi Michel. Yes, that's correct. We're increasing the guidance by 100 basis points, that's 7% to 8%. And we want to be conservative as to margin so we're maintaining that guidance.

Okay. And on the revenue front, obviously you will be facing more difficult year-on-year comparisons in the second half. Given that you're already above the high end of your revised guidance range in the first half of the year I'm just wondering what would explain this slowdown that is implied by your revised guidance for the second half. Is it simply the tougher comps or is there something else related to the shifting of some of the political and government ad spending.

I guess it all has to do with the FX.

With FX.

Yes, because of the new composition of the Content segment, of course FX has a tremendous impact. And of course if the peso appreciates, that would change the scenario. So that's why we're being conservative in maintaining our margin guidance for the year.

Okay. And then within advertising can you tell us how much is coming from the Pay TV networks?

Yes, hold on a second.

Thank you.

Advertising for Pay TV is still very small. We see a good upside going forward, but we are 5n about [8%] of our advertising revenues. But like I said we see a good upside opportunity in that area from advertising in pay TV networks.

Great, thank you. And if I may, just one last thing is you used to provide a breakdown between what was the upfront and the spot sales. I don't know if you can give us a sense of how that's been trending in the second quarter and year to date as well.

Upfront and spot sales, 83.2% of upfront and the rest is spot sales. And just to give you the last question, the sales are MXN280m in the second quarter.

MXN280m. And sorry, the 83.2% that's in the second quarter or for the year to date?

It's in the second quarter.

Okay, thank you very much.

This is very similar every quarter. We are around 82% on an average basis.

Right. Okay, thank you very much.

Thank you, Michel.

Your next question comes from the line of Mark Jason.

Yes, hi good morning. A couple of questions. The first one is I'd like to get a little bit more follow up on your agreement with Telefonica and how you intend to utilize the agreement together to build out CapEx. Who will be responsible for what?

And then secondly, I just want to understand your -- what you intend to do in terms of CapEx for Iusacell in terms of -- it sounds to me like you intend to inject more money into Iusacell. But I want to hear explicitly. I've heard before that it may have been self-funding and today maybe we're hearing something a little bit different. So I just want to explicitly understand that point.

As to your last question, as I mentioned before we will invest additional capital in Iusacell to the extent that Iusacell is growing, is achieving its growth targets. We believe that it's performing much better. We have done a lot of things there and we'll continue to be making changes. We have stabilized the network. We have refocused its marketing efforts and launched new plans. We have streamlined the operations, reduced cost and expenses. Specifically expenses are way down. So we believe that its performance is much better and will continue to get better.

As to the first question that has to do with Telefonica, it depends. Basically we're sharing the networks between Telefonica and Iusacell. We're having access to domestic roaming at reduced rates. Telefonica has a greater infrastructure in Mexico so we're getting access to all those towers and to all those places where Iusacell did not have or could not offer a service. We are roaming at reduced rates.

As to infrastructure it all depends on where they are located, where they have infrastructure, where they have towers and where Iusacell has towers. And we're going to share infrastructure and towers depending on where each company is more strength and where each company is better located.

Okay, just a quick follow up, you said on Iusacell to achieve -- it should be achieving your growth targets for you to invest more capital. Can you share with us what are some of those growth targets?

We'll start to share more information about Iusacell in the next quarter when we're going to account for this through the equity method.

Okay, thank you very much.

Thank you, Mark.

Your next question comes from the line of Andres [Coello].

Hi good morning. So I wonder if there's any regulatory issues with doing a sort of alliance with Telefonica with regards to the operations in mobile in Mexico. If the government can insist that because there's not so many players in Mexico, that sharing the towers and maybe doing other agreements could be an issue to the competition in Mexico.

Hi Andres. Basically what we have closed with them are commercial agreements, which we'll have better access to roaming at reduced prices, to be able to offer services to the Iusacell subscribers throughout Mexico and sharing infrastructure in order to avoid duplication of investment. So that will -- for both companies it will save us CapEx and cost.

Because in Mexico we have a company that is dominant and has a 70% plus market share, we do not believe that in that market we'll have a problem with this commercial agreement or other commercial agreements with Telefonica and with other companies in the sector that we're working on.

And because your partner has already stated that it wants to divest some assets because it's looking to reduce its debt in Spain, do you think that it would be a possibility that Televisa in the end of the day decides to buy the Telefonica assets in Mexico and the government would allow that.

We believe that consolidation of operators in Mexico's telecom industry would be good for the market especially in mobile. But we have not explored this possibility. For the time being we're focusing on improving the operations of Iusacell which is a challenge. As you know, it's really tough to compete against the incumbent with 70% plus market share. However we're not focusing on the consolidation of operations. We're more focused on doing these type of commercial agreements like the one that we closed with Telefonica. And there is still much that Iusacell can do organically.

There are no further questions.

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

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