Grupo Televisa SAB (TV) 2013 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's second quarter 2013 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, [Elvira]. Good morning, and thanks to everyone for joining us today. With me today is Jose Baston, President of Television and Content, and Salvi Folch, our Chief Financial Officer.

I will begin by taking you through the highlights of our second quarter financial results, then Pepe will discuss the operating results of our Content segment. We will be happy to take your questions right after that.

During the quarter, consolidated sales increased 6.4% and operating segment income increased 8.5%, with the margin reaching 42%.

Starting with our Content businesses, revenue increased by 5.1% to MXN8.2 billion during the quarter and the margin reached 49.3%.

Our Advertising business increased 6.2% year over year. We saw solid Advertising revenue growth across many categories.

Network subscription revenue expanded by 9.5%, and Licensing and Syndication revenue decreased 1.7%. These two sources of revenue were negatively impacted by the appreciation of the peso, given that they are dollar-denominated. In dollar terms, revenue from our deal with Univision grew by 9.9% during the quarter. Pepe will go into further detail.

Moving on to our Telecommunications business, during the quarter Sky added over 233,000 new customers, reaching 5.6 million customers in total. Both our traditional pay-television packages and our low-cost packages grew at a healthy pace during the quarter. This shows the resilience of Sky, even under an economic environment that has been slow for so many other companies.

As a result, Sky delivered record revenues of MXN4 billion and record operating segment income of MXN1.9 billion. During the quarter, operating segment income margin reached 47%.

Revenue in our Cable & Teleco segment grew 8.2% during the quarter and operating segment income margin reach 37.7%. Excluding Bestel, revenue grew by 10.8% and operating segment income expanded close to 10%. In total, our Cable & Teleco business reached 4.7 million revenue generating units, of which one-half were video customers, while the other half was voice and data customers.

Revenue in our Publishing business experienced a drop of 9.7%. As you know, the publishing industry is facing many challenges around the world. Our Publishing business is no exception. During the second quarter, circulation and advertising revenues were slow in many of our key markets. Also, it did not help that revenue was impacted by the appreciation of the peso, which accounted for about half of the drop.

We are very disappointed with these results. In any event, Editorial Televisa is a business that continues to contribute with positive free cash flow every quarter.

In regards to our other businesses, revenue increased by 1.2% and operating segment income reached MXN89 million. Our Gaming and Radio businesses performed well during the quarter.

Moving on to our CapEx, during the second quarter 2013 we invested about $210 million, of which $114 million were in Cable and Telecom, $77 million in Sky and $19 million in our Content business.

In addition, during the second quarter we invested close to $70 million in Iusacell. This investment remains in line with our expectation of approximately $400 million of additional investment, subject to certain conditions, on top of our original investment in the company.

In closing, for the balance of the year we expect our Cable and Teleco businesses to continue adding customers and expanding the number of services per household, and our Content business to maintain its growth at a solid pace.

In regards to our Content business, it is important to highlight that the constitutional broadcasting and telco reform will have an impact on our revenue as soon as the free must offer of our broadcast networks becomes effective. We believe that this may happen sometime in September. It is difficult for us to estimate the magnitude of this impact until we know the exact date when it will become effective and the new terms of our affiliation agreements with pay-television distributors.

Also, we do not know yet when and to what extent governmental entities will advertise with us, and the impact that it will have on our business.

For those reasons we do not find it prudent to provide you with guidance for our Content business until we have more clarity.

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

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

As you saw from our results our Content business had an increase from same quarter last year of 5.1%. Both Advertising and Network Subscription grew very well, while our Licensing and Syndication revenue line experienced a slight decrease in revenue, mainly because of adverse movements in exchange rate.

Our content continues to outperform our viewership expectations and we continue to invest in producing attractive content that is relevant and entertaining to our audience and our advertisers. On weekdays all of our telenovelas, broadcast during prime time on Channel 2, our flagship network, deliver very strong audiences and performed better than we had anticipated. Most of these novelas are being broadcast by Univision serving as a catalyst of growth and profitability for this network.

We are also looking to improve our audience mix in our broadcasting network. To serve this purpose, soon we will be launching a new and revamped Channel 5. The ongoing success of our content and of broadcast television as the advertising platform of choice helps our advertising revenues, which increased 6.2% from the same quarter last year. During the quarter, we saw a solid increase in investment from most private sector clients.

Moving on to our other two sources of content revenue, as Alfonso mentioned, network subscription revenue grew by 9.5%. Network subscription revenue, which includes the affiliate fees we collect from pay-TV providers in Mexico and around the world, keeps growing thanks to the growth in pay-TV penetration in Mexico, and to the success and attractiveness of our networks.

Televisa produces a total of 18 networks for pay-television. Year over year, the number of RGUs in this business grew [14%]. Among key categories, general entertainment, music and movies, we produce three of the top five channels in each group. As with broadcast TV, the success of Televisa's pay-TV networks rests on the content produced by Televisa in house; Televisa believes that the value of this content will drive the future growth of this revenue line.

Our third source of Content revenue, Licensing and Syndication revenue, decreased 1.7%. Around 55% of the revenues from this line come from the royalties we receive from Univision. The rest includes the exports of our content to more than 50 countries around the world and the revenues that come from the programming agreement with Netflix.

During the second quarter, sales around the world were strong. However, since all of the revenues in this line are denominated in dollars, this revenue line suffered from the negative impact of the appreciation of the Mexican peso against the US dollar.

In the US, during the month of June, we premiered on Lifetime Networks, a co-promotion between Televisa and ABC Studies called Devious Maids. The series is based on the Televisa format, Ellas son la Alegria del Hogar.

And during the summer, we will be premiering our second US co-promotion. The show is called Chasing Life and is based on the format Terminales. The show will be broadcast on ABC Family.

Moving on, Univision continues to post very solid audiences. And, as an example, I'll tell you this; Univision's live coverage of the final match of the Mexican soccer league, a few weeks ago, ranked as number one prime time program among key demos. During the season, Univision increased total viewers ages two and up, while ABC, Fox and NBC declined. Also, for several weeks this quarter, Univision ranked number three on -- or higher, in terms of viewers on four of the seven nights of the week among adults 18 to 34.

Televisa is constantly looking at ways to deliver its content and monetize it effectively; as a result, Televisa has a multimedia strategy that allows it to leverage its world-class TV content in other platforms, including pay television and Internet.

We transmit our live broadcast content over the Internet when we find that it makes sense to us. For example, the final match of the Mexican soccer league attracted more than 250,000 online viewers. But we do this selectively, because we do not yet see a market that is fully developed. It will get there eventually and we will be ready, both in the content side, as well as in the technology.

As long as we own the rights to the content that makes us successful, we will benefit from the growing diversity in the number of platforms that delivers this content. We are confident that our content will continue to boost the growth of our business and present us with new opportunities.

We have been producing content for more than 50 years. Our success is not dependent on one show or one network. We have the expertise and the team required to continue producing successful, relevant and entertaining content and no matter where or how our audiences decide to watch our content, we will find a way to bring together our audience and our customers.

Thank you very much. Now we're ready to take your questions.

(Operator Instructions). Morgan Stanley.

Michel Morin, Morgan Stanley. Alfonso, I just wanted to see if you could clarify your comment about the guidance on Content revenues. I think you said that it's hard to anticipate or to give much detail about the impact of the must offer rule, but you also said something about the government entities and their ad spending. Can you elaborate a little bit more on what you've seen in the second quarter and what you're seeing now? Thank you.

Michel, as I mentioned a few moments ago, first, we need to know to what extent the governmental entities will advertise with us and the impact that it will have on our business, because basically, they're not advertising.

And also, as to the free must offer, we have to know, first, when that is going to become effective. And, second, as you know, we currently sell in a single package our four over-the-air channels, together with our 10 pay-TV channels. Only the over-the-air channels will be free of charge and only in the specific markets in which they are broadcasted.

So we will then need to renegotiate all the affiliation agreements with the pay-television distributors to determine the price for the pay-television channels, so this will also depend on the negotiation of the prices of those channels.

So we have both the absence of political advertising, or advertising by governmental entities. And on top of that, we don't know when this free must offer is going to become effective, and what the new terms of the affiliation agreements for our 10 pay-television channels will be. So it's very difficult then to know the exact impact on our numbers, and that's why we cannot -- or we don't feel prudent to provide guidance at this point.

And just --

However --

I'm sorry.

But what I can say is that advertising sales have been -- aside from the governmental entities, have been extremely strong, and that has covered some ground. However, we don't feel comfortable until we have more clarity as to advertising by governmental entities.

And that's across the board, all areas of the Federal government, or also State government?

Both.

Wow, okay. So I guess the implication would be if -- given that you've seen strong trends elsewhere, the implication would be that, if they do come back in the second half, it actually suggests that you would be on track to have a pretty good year.

Yes. However, they did not advertise in the first half; they will not advertise in the second, and that gap will not be filled.

Okay. So it's not a matter of them spending their entire budgets in the second half, necessarily?

I don't think so.

Okay. And if I can also just clarify separately on the Iusacell losses that you reported, the press release last night stated that the majority of the losses there were related to FX losses. Can you confirm that that's accurate, because, if I read that correctly, it would imply that, on an underlying basis, things improved; if you were to exclude FX losses, you would have had less losses this quarter than in the previous quarter.

That is the case, Michele; the Company's operating better. Iusacell is on track to meeting the target that we set for it. It's growing at a good pace, and making solid improvements in terms of expanding its market share. However, you should not draw any conclusion from one quarter alone.

We believe that Iusacell has several quarters to grow before it reaches profitability and free cash flow break-even. But as I mentioned, it is operating much better and I confirm that a substantial portion of the loss was attributed to the negative foreign exchange effect on Iusacell's net dollar liability position.

Perfect. Thank you very much.

Thank you.

Andre Baggio, JPMorgan.

So I have two questions; one is a follow-on to what Michele has asked with regards to the advertisement. We have seen, over the last few quarters, the advertisements growing below GDP, and even below inflation, when we account for the fact that there was a positive seasonal effect of the Easter in this quarter, which was offsetting the negative impact last quarter. So what's needed for advertisement to start growing in line, at least, with inflation, and preferably in line with GDP in Mexico?

Well, as we explained, I think what you have seen is that absence of advertising by governmental entities, but, aside from that, we had solid growth. So that is basically the effect that you're seeing, the one that we have been explaining.

Do you mind disclosing what's this growth, except the government? Or could we imagine that next year that we don't have this impact from the lower government, because the government is already not there we should see much better growth in advertisements?

Yes, Andre, well, we do not disclose the percentages of governmental advertising versus regular clients. However, what I can say again is that, as to regular clients, we had solid growth. And what you have seen in terms of the pace has been the absence of advertising by governmental entities; that has been the result. But, once again, as to regular clients, we have seen solid growth, and we're very excited about the prospect of that.

Okay. And then my final question is with regards to CapEx. You have been quoting CapEx in dollars, but the peso has depreciated. Do you think that we should see a lower CapEx budget, or we should see relatively stable dollar CapEx budget, despite the FX changes?

No, Andre, there I think, most of the things that we buy, for example equipment or set-top boxes, etc., are dollar-denominated. So we continue to estimate our CapEx, this year, we reach around $1 billion. And of that amount, about $135 million will be used for our Content and Other Business segments; around $565 million will be used for Cable and Telco; and $300 million for Sky. But a lot of those things that we're buying in terms of equipment are dollar-denominated.

Okay. Thanks a lot.

Andrew Campbell, Credit Suisse.

Just going back to Iusacell a little bit, because you reiterated the guidance of $400 million of additional capital needs; could you just confirm, once again, that that was, as I recall, over a 3-year period?

Hi, Andy. Yes, that is $400 million in about three years.

Okay. Because in the first half of the year, you're running on [pace] for something like $90 million, so I guess the implication would be that maybe this $400 million is going to be more front loaded. Is that the way that we should think about it?

Yes, because the Company is performing better, so its operations are improving. So we believe that those $400 million, you're right, will be more in the first year. However, it's going to be -- and the plan is $400 million in those three years -- around those three years.

Sure, I understand. And if you could give any additional color in terms of where this capital is going at Iusacell? Is this directed, without having to provide any specific, obviously, percentages, but is this, in general, going more towards network enhancement, additional capacity, or is it going more towards the operating side of the business in terms of allowing for additional subsidies and more commercial effort?

Andy, it's both; improving the network substantially, and coverage, and also equipment.

Okay, great. Thank you.

Thanks.

Richard Dineen, HSBC.

If you could maybe talk a little bit about the timing and the implications from the regulatory reforms; we understand that they're selecting the candidates for IFA Tel right now. And it seems you're expecting quite a quick introduction of the must offer rules, as early as September; I guess, that's right at the start of the new regulator taking office. I'm just wondering what you see for other aspects of the reform, new broadcast licenses, implementation of unbundled local loop, asymmetric rules in mobile, just maybe an update on that would be helpful. Thanks.

Hi, Richard. The broadcasting and telco reform, the constitutional reform, became effective on June 12. Of course, this is a constitutional reform, so it establishes a framework for the operation of the broadcasting and telecommunications industry, going forward. However, now Congress has to pass the secondary laws to implement that constitutional reform, so IFA Tel will be created. We believe that that will happen in September; this is the new telco regulator.

So once IFA Tel is formed, this new entity will have, under the constitutional mandate, 180 days to take three very important steps. The first one is to publish the rules for the auctioning of two national broadcast networks, because keep in mind that the reform, of course, wants to enhance competition on the broadcasting side of the business; of course, also on the telco. But by publishing its rules for the auctioning of two national broadcast networks they want to enhance competition on that sector.

The second thing that they have to do within the first 180 days is to impose asymmetric regulations to what the constitution calls preponderant operators. And the third is that they should order the unbundling of the local loop of the preponderant operator in the telecommunications sector.

So all these three things, which are really relevant, have to take place as part of the constitutional mandate within 180 days upon the formation of IFA Tel. In the meantime, in those 180 days, Congress will pass a secondary law to implement the constitutional reform. So that's more or less what will happen in the following months.

Thanks, that's very helpful; maybe just as a quick follow-up? Just wondering if you see any issue with designations of preponderance against segments of your business; I'm thinking particularly you've talked previously about the opportunity, or the desirability to further consolidate Mexican cable. And just thinking about how your current markets shares, whether that would be an issue, or maybe that would be a factor?

Well, we continue to be very -- we're very interested in the consolidation of cable. We continue to believe that this country needs a second network, and in order to achieve that, and in order to have a competitive national network, we have to consolidate cable even further.

So we would not like to speculate as to the measures that the new regulator will implement. However, what the constitution calls preponderance is based on sectors. So on the telecommunications sector, Televisa, even considering all the assets that we have put together, is very small on the telecommunications sector as a whole. So that's what I can tell you, basically.

Okay. Thanks very much; appreciate the comments, guys. Thanks.

Thank you, Richard.

Gregorio Tomassi, Itau.

Just a brief question that remains, it's on Bestel. You posted a 37% margin, how much of that is sustainable? What should be --what's underlying that high margin and what can we expect, going forward?

And second, in the case of -- going a little bit back on Iusacell, the main assumption was that the $400 million investment was going to be deployed in -- to the extent that conditions were improving. You've given an upbeat signal here of performance of Iusacell improving, but I just want to ask if you were to articulate what the new change in law -- the change in law represents for Iusacell, where do you see the largest opportunities -- the two largest opportunities for Iusacell continuing to improve its performance? Thanks.

Hi, Gregorio. Well, first as to Bestel, we believe that the margins of around -- in the 30s are sustainable.

As to Iusacell, well, you're right. It's a company that's operating better; its performance has improved, although, again, we cannot see a single quarter and think that now it has changed completely. So there are a lot of challenges still in that industry as a whole and in particular to Iusacell so we're working very hard in achieving our goals.

But the reform presents to Iusacell a lot of opportunity -- with a lot of opportunities. We believe that, of course, one company in Mexico will be considered as preponderant in that sector. And as part of that the new institute will determine asymmetric rules. Those asymmetric rules can include asymmetric interconnection rate. Those alone will not solve the challenges that a small mobile operator faces.

The industry, in our opinion, needs a number of regulatory measures that foster competition, so asymmetric mobile termination rates is only one of them. But other measures will have to be implemented, such as elimination of handset exclusivity, the unlocking of SIM cards, etc. So there are many things that the new institute has, or can regulate or can do in order to level the playing field on the mobile side of the business.

The constitutional reform has set a good framework for the leveling of this playing field, so a good place to start is in the enforcement of existing regulation and in guaranteeing that the dominant operator is complying with its obligations under its concession title.

But, aside from that, we believe that if we see the examples of the leveling of the playing field happening in other parts of the world, that, if implemented correctly, can really change the market dramatically. And Iusacell, because of all the investments that we have made in the network and now that it's operating much better, has a chance of growing faster and becoming a player in the market.

Thank you, thanks; a follow-on question on Iusacell. Whenever we see, for example Televisa has invested this quarter $72 million, we should assume automatically that the total investment in cash that has gone into Iusacell is double of that; meaning the 50% partner has also put the money in?

That is correct, yes.

Thank you, thank you.

Thank you, Gregorio.

Soomit Datta, New Street Research LLP.

A couple of questions please; one on Iusacell. You've talked a little bit this quarter about how the business is improving and you're talking about the direction in quite a favorable light. I just wondered is that something to do with the overall Mexican mobile market conditions? Are you seeing a slight easing in competitive environment or is that more that the business is, in its own right, progressing in the direction you were hoping, you're taking market share, the business is scaling up and that's supporting profitability? I just wondered is it sort of business model specific or is it a broader commentary on the Mexican mobile market. And that's the first question.

And then the second question, I'm not sure whether you can give any numbers for this but I just wondered how much debt is there -- or gross debt or dollar debt is there at Iusacell at the moment, please?

Hello, Soomit. At Iusacell it's the better performance of the Company. It's not industry-related, but basically the Company is operating better.

And then as to your second part of the question, we don't disclose the amount of debt that Iusacell has. We will be providing more information about Iusacell at the beginning of next year.

And just as a follow-up maybe on part one, is it a case of, in terms of Iusacell's performance, is it a case that the network is now in a position where you're able to compete more effectively against competitors? Or have you reached a certain scale which then you're able to leverage off? Is there anything in particular which is really kind of working in your favor or is just everything is, generally speaking, moving in the right direction?

Yes, it's more Company-directed what we have done is -- and we have disclosed in the past, is an agreement with Telefonica, and that perhaps allowed us to have national roaming. We have a better network; it's operating much better. Our data service is superior to the one that is being offered by our competitors, because we have a good network and it's not saturated. So we're on the path of accomplishing the scale that we need.

As we mentioned, this doesn't mean that a good quarter implies that we're out of the woods, and that we're saying that Iusacell is now a successful company, but there are many challenges still ahead. But, as I mentioned before, we believe that the constitutional reform and the secondary loss and the decisions by the new institute will establish a framework for the leveling of the playing field in this market.

So we believe that we have a good asset and as part of -- we are operating that asset better. And if the rules change, if the rules of the game change and competition is fostered and the playing field is leveled, we have a very good chance of transforming this into a really valuable asset.

Okay, thank you.

Rodrigo Villanueva, BofA Merrill Lynch.

I was wondering if -- with royalties for Univision growing at around 8% during the first half of 2013, if we could expect this trend to continue in the second half and probably exceed your $260 million guidance for the year. Thank you.

Hi, Rodrigo. We believe that Univision will continue to give us very good results, but we believe that it's going to be around what? The number that we mentioned; we don't expect a lot more.

Understood. Thank you very much.

And there are no additional questions at this time.

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

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