Grupo Televisa SAB (TV) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's fourth quarter and full year 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 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, Else. Good morning and thanks for participating in our call.

With me is Jose Baston, President of Television and Content, and Salvi Folch, our Chief Financial Officer.

I will take you through the highlights of our fourth quarter and 2012 financial results, then Pepe will discuss the operating results of our Content segment. After that, we'll be happy to take your questions.

We're very pleased with our results for the year. Our Content segment met our full-year guidance in revenues and margins. Sky added a record number of subscribers, and we surpassed the 2 million mark in voice and data customers in our cable operation.

As a result, full-year growth in consolidated net sales reached 10.7% to MXN69 billion, and in operating segment income reached 12%, equivalent to a compounded average growth rate of 16% since 2003.

Our net result was also strong. Net income increased 31.4% to MXN8.8 billion, primarily due to a MXN1.9 billion increase in operating income.

Let me go over each of our segments. Sales in our Content business increased 4.9% in the fourth quarter, and for the full year by 7.2%, reaching MXN32.9 billion. Operating segment income margin for our Content division was 46.9% for the full year, reached MXN15.4 billion.

As you may recall, Content revenue is made up of advertising revenue, network subscription revenue, and licensing and syndication revenue. Advertising revenue increased by 3.6% during the fourth quarter, and by 3.1% for the year. This was achieved despite a ban on selling advertising to governmental entities during the electoral period.

Fourth quarter network subscription revenue increased by 17.3%, for the full year by 23.1%. As of the end of the year, 33 million subscribers in Mexico and in various regions around the world receive an average of 6 Televisa channels.

Fourth quarter licensing and syndication revenue increased by 5.5% for the full year and 17.8%. This was achieved by an increase in royalties from Univision and an increase in sales to the rest of the world.

In our Publishing division, fourth quarter sales increased 2.6% and 8.2% for the full year. As you know, this industry is facing many challenges globally. In our case, our Publishing business in Argentina faced certain challenges specific to that market. In spite of it, operating segment income margin reached 13% for the year. Our Publishing business performance was consistent with that of global publishers of magazines many times larger than Editorial Televisa.

Moving on to our paid television business, during the fourth quarter Sky added a total of 270,000 subscribers, mainly in Mexico, and full-year sales increased 16% to MXN14.5 billion. As in the past three years, we continued to benefit from our launch of prepaid, high-quality, low-cost packages.

Since then, we have added over 3 million new subscribers, closing 2012 with 5.2 million. Operating segment income margins continue to be very strong, reaching 45% for the year.

On our Cable and Telecom segment, revenues grew by 9.8% during the quarter or 11%, excluding Bestel. For the full year, revenues grew by 14% to MXN15.6 billion.

During 2012, our three cable companies continued promoting attractive service offerings at very competitive prices. On a combined basis, the three operations added 470,000 revenue-generating units, or RGUs.

Bestel also continued to perform well, growing revenues by 11.5% year over year.

For the full year, operating segment income increased 22%, reaching MXN5.8 billion.

By the year end 2012, our Cable and Teleco division had 2.3 million video customers, 754,000 voice customers, and 1.3 million data subscribers. We expect our market share of voice and data customers in Mexico to continue to expand in the following years.

Finally, in our Other business segment revenues increased 10% to MXN4.2 billion in 2012. Our feature film distribution, radio, and gaming businesses performed relatively well during the year. As a result, full-year operating segment income reached MXN184 million.

During 2012, we invested $881 million in CapEx. This figures includes $455 million for Cable and Teleco, $292 million for Sky, and $134 million for the Content and Other business segments.

In addition, in the fourth quarter, we booked a satellite lease agreement as a capital expenditure of $326 million. However, our actual cash cost of this satellite will be approximately $36 million per year over the next 15 years.

We estimate that our CapEx in 2013 will reached $1 billion. Of this amount, $135 million will be used for our Content and Other business segment, $565 million for our Cable and Teleco segment, and $300 million for our Sky segment. As you may know, over the past four years we have increased our CapEx in Cable division. Most of this increase has been used to fund healthy growth in video, voice, and data customers, and another portion of it has allowed us to update and expand our infrastructure.

As of December 31, 2012, our consolidated net debt position was MXN25.2 billion. Going forward, we will continue to look for opportunities to deploy capital in our Content, Distribution, and Teleco businesses in a way that creates value for our shareholders.

Like every year, this last December we concluded the negotiation of the up-front for our broadcasting business. The result was a marginal increase of 0.7% from last year. It is worth mentioning that some governmental entities that regularly are part of the up-front were not able to participate this time due to the transition of the new administration.

In closing our Content division will continue to produce and distribute world-class programming for multiple platforms, and our sales team will continue working hard to convert the success of this content into solid advertising, subscription, and licensing revenues.

We're giving guidance for revenue growth in our Content business for 2013 of mid single digits, with an operating segment income margin of close to 47%, similar to what we achieved in 2012.

Our Cable and Teleco operations should also continue to perform well. Voice and data penetration among our video customers remains low, and continues trending up. Our customers find our triple play offerings to be very attractive, which also supports the growth in video subscribers.

With regards to Iusacell, we're not disclosing yet any additional information on the company or its strategy, but I can share with you that we have made good progress in growing our market share. We closed the year with 7.5 million subscribers, a year-over-year increase of 37%.

As I have mentioned before, this is a long-term investment. We have many challenges ahead, but we believe that we're on the right track.

Finally, I would like to inform you that yesterday the Board approved a proposal for a dividend of MXN0.35 per CPO on May, in line with our dividend policy. This proposal will be presented to our annual shareholders' meeting.

In sum, we have a fantastic platform and a unique opportunity to continue growing at a solid pace. We're certain that we have taken the right steps to benefit from what we anticipate will be a very healthy macroeconomic environment. We are bullish about Mexico. We believe it will pick up its pace of growth, and this will have a favorable impact across all of our businesses.

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

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

In 2012 we continued to demonstrate that we are a content company like no other. Our content continues to deliver very strong results in audience, consistent with the performance of our business for the past few years.

Pay TV penetration has increased at a fast pace in Mexico. About 43% of the households have a pay TV service. With that, the competition for audiences has also increased significantly.

The low-end pay TV offerings have at least 36 channels in addition to the over-the-air channels. Premium offerings can have as many as 250 channels, including the music channels. Even then, our content continues to deliver audience levels similar to those of five years ago when pay TV penetration was much lower.

Beyond our leadership in the telenovela genre, which is, by far, our main product and also the most important product in the Spanish-speaking world, we have consolidated our presence in the reality show segment. Our share of the audience was 3 times larger than our -- that of our competitor. Without a doubt, Sunday nights now belong to Televisa.

During 2012 we were equally successful with the (inaudible) of the special events. In August, we transmitted the Olympic Games and beat our competitor with our commentary programming, even though we transmitted the same content. Owning rights is important, but the production values around special events will always make the difference.

The success of our content was reflected in the growth of our multiple sources of revenue. On the advertising front, despite the effect of the electoral period during the second quarter of the year, we experienced solid revenue growth, driven by strength in most sectors.

Broadcasting continues to be the most efficient way to reach a broad audience on a national scale, but particularly for retail and non-durable consumer goods companies. For Televisa, these types of advertisers represent the majority of our broadcast advertising revenue.

On the other hand, with the increase in pay TV penetration, advertising in pay TV channels has become the vehicle of choice for clients that want to reach a specific demographic in selected markets. The specialization of our portfolio of 15 pay TV channels allows us to reach such no audiences like no other -- like no competitor. For that reason, advertising revenues on pay television grew 29% during 2012.

Beyond advertising, network subscription revenue grew by 23.1% over the year. We finished the year with 33 million households in Mexico and abroad, compared with 30 million in 2011.

Our pay TV networks remain among the most-watched networks on pay TV platforms in Mexico. We closed the year with 5 of the top 7 general entertainment networks, 3 of the top 4 movie networks, and the top 3 music and lifestyle networks.

The growth in pay TV penetration in Mexico is likely to continue to grow at a fast pace. That explosion, together with the growing popularity of our pay TV networks internationally, will remain an important driver of growth for (inaudible).

Similarly, our licensing and syndication revenue continued to deliver solid growth on the year. Like I've also said, royalties from Univision, which comprise the majority of this line of revenue, reached $247.6 million during the year, an increase of 10.1% from a year ago. The amount in royalties we receive today is twice as much what we received six years ago.

We continue to work closely with Univision to make our content even more appealing to the Hispanic audiences in the United States and, of course, to their advertising clients.

The finale of one of our novelas in August made Univision the number two network, beating ABC, CBS, and Fox, and all the cable networks except for NBC, which was transmitting the 2012 Summer Olympics.

Similarly, Univision's Latin Grammy Awards in November attracted more Hispanic viewers than the combined audiences of the latest editions of the American Music Awards, Billboard Music Awards, Country Music Awards, and MTV Video Music Awards.

As a result of its rating success, the Univision Network increased its ranking among the major US networks during 2012 by beating CBS to take the number four spot in broadcasting prime time among 18-- adults 18 to 34. Univision is working hard in converting its rating success into more revenue, which, for 2012, increased by 7.4% to $2.4 billion.

Our sales to the rest of the world also performed very well, growing 30% during 2012. The biggest contributor to growth in exports was Latin America, followed by Asia. The increasing revenue in those two markets more than compensated for a challenging environment in Europe.

During 2012, we produced content in four different languages and exported our content to over 80 countries. We also exported our scripts and our production expertise to other markets.

With Nickelodeon, for example, we produced in English 80 daily editions of a successful Mexican novela. The format traveled very well, and we were satisfied with the results. This is only one of the multiple initiatives we have around this content.

In closing, there has never been so much Spanish language content available, but there has never been such a good time to be in the content business. For that reason, we have more original programming, more viewing platforms, more windows for transmitting our content, and more revenue sources than ever. This strategy keeps rewarding us with a diversified and successful content business.

Thank you so much, and we are now happy to take your questions.

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

-- question. My question is about the guidance that you provided for the content segment, and, in particular, will -- could you provide any more color on the up-front season, what the increase in the up-front has been on a year-over-year basis so far?

And also, as we understand that the economy slowed a bit in the fourth quarter, are you sensing that that's having some impact on the advertisers as you start off this year? Thank you very much.

First, with the fourth quarter answer, normally the success of our content with the fourth quarter sets the grounds for the negotiations for the next year, not just the up-front, but the next year plan for the revenues. So, that was the reason why we invested more money in our content during that part and that was reflected in the margins, although, as you saw, the yearly margins kept in line with guidance.

Now, for the up-front, as Alfonso said, some entities from the government did not, because of the changing of the presidential every six years, they have -- they don't have yet the persons to make the decisions in different entities of the government that were part of the up-front last year. So, that is the reason why you see a small growth, year over year, in the up-front sales.

Okay, thank you.

Our next question comes from the line of Michel Morin with Morgan Stanley.

I was noticing that at Sky your revenue growth really has been accelerating throughout 2012, but we saw kind of the opposite at Cable. And I'm wondering if there's anything that you're noticing in terms of demand differences between the two segments?

And then secondly, Alfonso, you talked about the dividend. Was there any discussion at all about possibly paying a special dividend, given your financial strength right now? Thank you.

Hi, Michel, yes, to the last part of your question, we're not thinking about paying a special dividend. I think that we want to be conservative at this point and we want to have our powder dry for opportunities that might come up in our core businesses.

On the other hand, Sky had a fantastic year 2012. We believe that it will continue to have success this year, also. As to Cable, we don't see anything different going on there. I think that the growth in terms of RGUs was pretty healthy, especially in terms of Internet subscribers. So, we don't see any material differences as to what we expected.

Okay, thank you very much.

Thank you.

Our next question comes from the line of Rodrigo Villaneuva with Merrill Lynch.

Good morning. Alfonso, I was wondering if you could share with us the amount you expect from Univision royalties in 2013? That would be my first question. Thank you.

Yes, we expect around $260 million from Univision.

Okay, thank you. And regarding margins at Sky, Alfonso, do you continue to expect them to remain at around 45% in the medium term?

Yes, well, as you saw, margins in Sky during the fourth quarter were impacted by basically a number of investments we made in premium content, such as the Spanish League and also English soccer tournament. And so, it had to do, in the fourth quarter in general, with an increase in the cost of sports.

As you have seen throughout all these years, we will continue to be disciplined in terms of costs, but costs of special events such as the ones that I mentioned continue to increase. However, we believe that we can sustain margins of around mid-40s.

For 2014, just an example, we have secured the rights to the English Premier League, which will be transmitted on Sky on an exclusive basis in Mexico, and we also will transmit many matches of the World Cup, also on an exclusive basis. So, Sky will continue to have top content, especially in what has to do with soccer, which is Mexico's national sport, and soccer around the world, but we will continue to be very disciplined and even considering those increases in costs of sports, will maintain margins around mid-40s.

Understood. Thank you very much, Alfonso. And final question is regarding CapEx. When shall we expect CapEx for Televisa to peak? And, if possible, could you please repeat the breakdown of CapEx that you provided before? Thank you very much.

Yes. During 2012, mostly CapEx went to Cable. Cable CapEx was for Cable, $122 million. That was -- I'm sorry, $122 million went to Cablevision, Mexico; $219 to Cablemas, which, as you know, operates in 51 cities around the country; and $88 million for TVI, which is in Monterrey and the northeastern part of Mexico. In addition to that, $27 million went to Bestel, which has to do with our fiber optics network growth.

So, at this point, we will see additional CapEx going to those companies because we are looking at growth, still. Penetration of video services and, of course, of Internet and telephony services are still very low. So there's a huge opportunity there, and we continue to invest.

Let me give you the breakdown of CapEx for 2013. As I mentioned, it will reach around $1 billion. Of this amount, $135 million will be used for Content and Other businesses. $565 million for Cable and Teleco, and $300 million for Sky.

Understood. Thank you very much, Alfonso.

Thank you, Rodrigo.

Our next question comes from the line of Soomit Datta with New Street Research.

Three questions, please. First of all, on the Cable business, can I just ask about the Q4 margin? It looked to be quite strong, and I think looking into the detail, it looked to be particularly strong in TVI. I make the operating margin above 50%. I just wondered if there was anything one-off-ish of nature within that nature, if I've got my sums right, and just wondered why that-- the profitability was so strong there?

Secondly, please, on Iusacell and, I guess, the contribution to the P&L, there's been a big increase in the negative contribution from the associates in Q4, which I guess is to be expected, but it is fair to assume that the delta versus Q3 is all to do with Iusacell, or is there anything else happening in any of the smaller businesses?

And then, thirdly, please, just minor question on depreciation. The charge seems to have picked up a little bit in Q4. Is there anything to read into that? Is that a reasonable run rate to assume going into 2013? Thank you.

Hello, Soomit. Yes, as to depreciation, it has grown and it has to do with our investments in Cable and Sky. And, of course, the depreciation and amortization of those equipments.

As to Iusacell, the loss increased in the fourth quarter, especially in what had to do with the Christmas promotion, and we did have a very healthy and strong fourth quarter in terms of margins in several sectors, but it had to do with the quarter itself with the Christmas season and the quarter.

Okay, but there was nothing sort of unusual in the Cable margin? That was just the -- that was the organic underlying profitability?

Yes, as to Cable, Soomit, it had to do mostly with the pickup of additional Internet subscribers. And, as you know, the margin of Internet and Internet services, broadband services, is pretty healthy. So, you have made the investment in the Cable, and we have the -- of course, the homes passed, so if you pick up Internet subscribers, then it goes directly to -- mostly to the bottom line.

Okay, thank you.

Thank you.

Our next question comes from the line of Sean Glickenhaus with HSBC.

Good morning. Just two questions.

First, on Iusacell, can you just please reconfirm the investment over the next three years is, indeed, the $400 million or is there a great probability that that needs to increase?

And second, on advertising, I understand we'll expect higher advertising growth, or, I'm sorry, higher advertising for next year, but is the way to think about it a weak Q1, given the front-loading we saw in 2012, and then compensated for in Q2 and Q3? Thanks.

Hi. Yes, as to Iusacell, Televisa's share of the investment we estimate to be $400 million. So, the total, of course, is $800 million. As you may recall, last quarter we, in our call, informed the market that this additional amount of capital is what Iusacell needs over the next three years, and this is to -- for that company to become self-sufficient from the cashflow point of view.

We have not made any capital injections yet, but we anticipate that some of this capital will be contributed in 2013, and, as we have said in the past, these capital increases into Iusacell will be subject to, basically, two factors, which are ongoing good performance of the asset and the prospect for an improving regulatory environment.

So, we're going to check those two closely, and we will invest that money, this is $400 million, in the next three years, subject to those two things, the performance of the company, and also improving the regulatory environment and the leveling of the playing field on the telecommunications sector in Mexico.

Our next question comes from the line of Andres Medina-Mora with GBM.

Good morning. I was wondering, regardless these government entities that did not enter the up-front sales, are you expecting them to pay a higher amount of cost share, or do you expect them to try to negotiate some sort of up-front at the beginning of the year?

And also, regarding the new telecommunications reform that is expected to be presented soon, do you expect any important modifications apart from the opening in the TV channels? And do you think this could foster consolidation in the sector, in the cable sector? Thank you.

Well, basically your first question, like I said, we're still in negotiations with these governmental entities, but they will be part of the top-off, not of the up-front.

Well, I guess, the regulatory initiatives that are part of the pact that was signed by three parties, main parties, in Mexico and by the government contains a series of very important things for the country.

So, on the television side, the pact will contemplate the auctioning of two broadcast networks. On that side, we have many years of experience producing content and also many years competing successfully in that field. So, additional broadcast networks will result in healthy competition for us.

Competition has always been good for Televisa. I guess three examples come to mind.

I can say that when the government privatized what now is Television Azteca, our share -- this is Televisa's share of broadcast -- was more than 90%. But Televisa was a less efficient company. When Television Azteca was privatized, we learned to strengthen our position by introducing higher-quality content, even, and managing costs and expenses better. So, as a result of additional competition, we became a more profitable operation. So, that is one of the examples.

Another example is Dish. When Dish entered the DTH market in Mexico, Sky, our company's, competition increased substantially, but in the process Sky improved its pay television offerings and successfully expanded into low-cost paid television market. So, we believe that Dish is highly subsidized by Telmex, so, effectively, we're competing not against Dish, but against Telmex in the DTH market, and, in spite of that, today Sky is twice as big and it has become the envy of Dish and its margins have remained very strong.

And on our Cable operations, we face a lot of competition in the offering of triple-pay services. We compete against the incumbent that has close to 75% market in voice and data, and, in spite of that, and of Telmex's aggressive push on its triple play with Dish, our Cable operations have continued to grow double digits with voice and data customers growing the most.

So, we're used to competition and we believe that competing with our content and competing with all our assets and energy on the broadcasting side will be good for us.

On the other hand, the pact contemplates a number of measures that have to do with opening up competition on the telecommunications sector. So, we basically support a reform that will bring competition on broadcasting, but also, that levels, effectively, the playing field on telecommunications. This is good news for all of our investments in teleco.

The pact, though, also contemplates a number of reforms that are very important for the country, in particular the fiscal reform and the energy reform. We believe that this will accelerate the growth of Mexico, and this is excellent news for Televisa.

We will benefit across all of our businesses from a more dynamic economy. So, we're really bullish on Mexico and also on the growth prospects of all of our businesses.

Thank you. Do you think this could foster a higher amount of M&A in terms of the cable sector?

Yes. As we have always said, we continue to be interested in the consolidation of the cable industry and, if opportunities come up, we'd love to take advantage of them. So, we're going to be ready to take advantage of those -- of consolidation opportunities.

Great, thank you.

(Operator Instructions). Our next question comes from the line of Ken Berlin, Legal and General Investment Management.

Thank you for taking my question. I guess, to go back to one of the former questions around the possibility of a special dividend, as I think about your organic growth, strong free cashflow, and conservatively positioned balance sheet, and the backdrop of an exceptionally low funding rate environment, I guess can you provide any context or commentary around how you're thinking about the Univision stake, and, potentially, for a further buy-in of that stake, near term, and maybe, what, beyond the things that I've outlined, would be required for you to move in that direction? Thank you.

Yes, we're extremely happy with our investment in Univision. The whole Univision deal that we made some years ago has proven to be really successful for Televisa, both on the new royalty deal. As you saw, last year we received from Univision almost $250 million, and so on the royalty side, it has been a huge success for Televisa.

On the investment side, we're very happy with both the equity portion that we have and the convertible debenture. So, as to investing more money in Univision, we'll continue to see if opportunities come up. We don't foresee them in the near future, but we'd love to participate more in that great company, and an asset that-- where we have all types of synergies.

As to a special dividend, as I have mentioned before, we want to have our powder dry, and we want to be ready to capture opportunities basically in our core businesses, opportunities that might come up in the near future. So, we're investing a lot of money in our Cable business, Content business, and also Sky. Those businesses will continue to grow.

As I mentioned, we are bullish on Mexico. We believe that Mexico will accelerate its growth and we see a huge potential, especially on Sky, which will continue to grow with very high margins, and on Cable, because if you look, there's a huge opportunity there because penetration continues to be extremely low, even on the core business which that company, Cable, has, which is video, but, as you see, penetrations of Internet, this is broadband, and telephony, they're really low. So, the opportunity is huge on that front.

So, we continue to look at organic growth in those businesses and we'll continue to invest, and we also see that opportunities might come up in terms of acquisitions, so we want to be prepared for that. And those acquisitions have to do with our core business.

So, I think that we don't foresee paying a special dividend at this point. If those opportunities don't materialize, we'll analyze this again.

Great, thank you.

Our final question comes from the line of Michel Morin, Morgan Stanley.

Maybe I missed it in your prepared remarks, but in the Content business we didn't see any EBITDA growth in the fourth quarter and I was wondering if there was anything unusual on the cost side that might have -- that might explain that? Thank you.

As I said a little bit ago, normally the success of our content during the fourth quarter typically sets the ground for the negotiations of our deals for the year after. So, that was the reason why we made important investments in Content and this was definitely reflected in the margins.

Okay. Okay, that's clear.

And then separately, Alfonso, I was wondering, your gaming business, we don't really talk about it too often. Is there any hope that under a new administration the context for competition in that sector might improve for you?

Well, hopefully, it will. As you know, this has become an unfair competition because we compete against illegal bingo parlors and illegal lottery businesses that don't follow the rules, don't pay taxes.

So, as a result of not paying taxes, they can pay higher prices. So, it's an unfair competition, so, hopefully, the environment will change in that front.

What I can tell you is that our business is performing much better now. The business -- the bingo parlor business is larger than radio, larger than our football business on Other businesses, larger than the movie distribution business. So, I think we're performing much better, even in this environment.

And this business will continue to grow this year, we believe. As you have seen, EBITDA of the business has also continued to grow at a fast pace.

So, if things change and the law is enforced, we'll have a stronger business. However, even, I repeat, in this environment, we're performing much better.

Great. And finally, if I may, the question of possibly injecting additional capital at Iusacell, when should a decision be made on that front? Or what kind of timing are we looking at?

Yes, well, some capital maybe contributed in the first semester of 2013, but those will be smaller amounts of money. We're going to see what happens in terms of the implementation of the pact for Mexico and the regulatory changes to see if it makes sense and if the level -- the playing field will be leveled or not on the telecommunications front, to see if it makes sense to invest more money into that company.

And you have an indication from your partner that they are also prepared to invest their pro rata?

Yes. They will invest their pro rata.

Great. Thank you very much.

Thank you.

And that was our final question. Presenters, I turn the call back over to you for closing remarks.

Well, thank you very much for participating in the call. Give us a call if you have any additional questions. 'Bye.

Ladies and gentlemen, that concludes today's call. You may now disconnect.