Grupo Televisa SAB (TV) 2013 Q4 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa fourth quarter and full-year 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, Elsa. Good morning, and thanks to everyone for joining us today. With me is Jose Baston, President of Television and Content, and Salvi Folch, Chief Financial Officer of our Group.

I will begin by taking you through the highlights of our fourth quarter and 2013 financial results. Then, Pepe will discuss the operating results of our content segment. After that, we'll be happy to take your questions.

For the full year, net sales increased 6.5%, to Ps.73.8 billion. This resulted mainly from strong revenue growth in SKY and our cable and telecom segments, both of which grew double-digit during the year.

As for the full year, operating segment income increased 5.1%, reaching close to Ps.30 billion, and the margin was 39.7%.

Now moving on to each of our businesses, content revenue increased 2.1% during the fourth quarter, to Ps.10.4 billion, and by 2.8% for the full year.

Within our content division, advertising revenue increased 7.8% for the fourth quarter and by 3.9% for the full year.

In the case of our network subscription business, revenue decreased by 22.1% during the quarter as a result of the must-offer obligations introduced in the broadcasting and telecommunications reform. As you may recall, among other measures, this reform requires us to provide broadcasting channels for free to pay-television providers in Mexico, subject to certain conditions being met. As a result, we had to give up to Ps.370 million in revenue, which corresponds to the period from mid-September through December 31.

For the full year, network subscription revenue grew by 2.3%, but if we were to exclude the must-offer impact, then revenue growth would have been 14% during 2013.

For 2014, we estimate that revenue foregone as a result of the must-offer obligation will be close to Ps.1.4 billion.

Our licensing and syndication business decreased by 12.3% during the quarter, or by 1.2% for the full year. Royalties from Univision, which we classify under this revenue line, remained strong, increasing 8.7% in the fourth quarter and 10.3% in 2013. In total, royalties paid by Univision in 2013 reached $273 million.

In terms of operating segment income, for our content division, it decreased 2.1% during the quarter, but grew by 1% for the full year, reaching a margin of 46%. The drop in the margin of about 90 basis points compared to last year resulted primarily from the must-offer obligation. Pepe will go into further detail on the performance of our content business during 2013.

Moving on to SKY, during the fourth quarter sales increased by 9.7%, after adding a total of over 136,000 subscribers, and for the full year by 11.3%, to Ps.16 billion. As of year-end, SKY surpassed the 6 million mark in terms of customers.

Since we launched our low-cost package just four years ago, total net additions have exceeded 4 million, far beyond our initial expectations. Today, we have a very large base of customers subscribing to SKY's most basic pay-television offering. We see this as a great opportunity for SKY. We expect that the disposable income will grow in the years to come, potentially resulting in more demand for SKY's premium offerings.

In terms of operating segment income, fourth quarter growth was 11.4%, and the fourth quarter margin reached 42.8%. For the full year, the margin was 45.6%, slightly higher than that of 2012.

In our cable and telecom segment, fourth quarter sales increased 13.9%, to Ps.4.6 billion, as a result of continued growth in revenue generating units, or RGUs, in our three cable platforms. Full-year sales increased by 10.1%, to Ps.17 billion.

In total, the three cable companies added more than 700,000 RGUs during the year. During 2013, voice and data RGUs continued to grow at a very solid pace, of 21.4% and 27.6%, respectively, while video RGUs expanded by a solid 8.1%.

Fourth quarter operating segment income increased 4.9%, to Ps.1.7 billion, and the margin for the quarter was 36%. Bestel's margin was close to 20%. So, it did not help the combined margin for cable and telecom segment. This resulted from Bestel's growing long-distance business, which has a smaller margin contribution.

Also, as I explained in our previous earnings calls, starting the third quarter of 2013, we have made important investments in personnel and in our sales infrastructure in order to drive growth at an even faster pace. These initiatives shall have a favorable impact in top line growth and margins over the medium term.

For the full year, operating segment income increased 5.5%, and the margin was 35.8%.

In our publishing business, the structural changes of the industry continue to have a negative impact on our circulation and advertising revenue, both in Mexico and internationally. Fourth quarter sales decreased 7.3%, and full-year sales decreased 6.8%, to Ps.3.2 billion. We continue to operate this business with discipline and a strong focus on bottom line. Operating segment income margin for the full year reached 10.2%.

In our other businesses segment, fourth quarter sales increased by 55.3%, and for the full year by 15.3%, reaching almost Ps.5 billion. As you saw from our results, a number of operations within this revenue line performed particularly well. For example, gaming continued to grow at a steady pace, and radio continued to bring in more ad revenue.

The most important benefit, however, came from the fact that our soccer team, America, performed well in the two tournaments and also from the fact that we distributed two very successful movies, the Hunger Games Catching Fire and Instructions Not Included.

For the full year, operating segment income reached Ps.493 million, compared with Ps.184 million in 2012.

In terms of our CapEx, during 2013 we invested over $1 billion, including approximately $600 million for our cable and telecom segment, approximately $400 million for our SKY segment, and approximately $160 million for our content segment and other businesses.

We estimate that capital expenditure in 2013 (sic) will be similar to those of 2013, both in terms of magnitude and composition.

Let me take this opportunity to explain three important non-cash impacts in our net results during the quarter, which in the aggregate resulted in a drop of Ps.1 billion, or close to 12% for the year.

First, the tax reform and the end of the tax consolidation regime increased our tax liability as a consolidated level and our deferred taxes at our subsidiary level. As part of the reform, we had to recognize a significant benefit from tax loss carryforwards in SKY and our cable and telecom segments in 2013.

This resulted in a net income attributable to our partner for 2013 which was much higher than the one we reported in the prior year. This non-cash adjustment accounted for about Ps.1 billion, and would alone explain the drop in the net revenue during the year.

Second, we took an impairment charge in our investment in Iusacell of close to $355 million. The change in the regulation has taken longer than we had expected. The Company has improved in many fronts, but the regulatory changes are needed and overdue. Those changes should level the playing field in the telecommunications industry and allow for a more effective competition in this industry.

And third, we believe that the prospects for Univision continue to improve. We had accounted for that by adding the value of our participation in the company upwards by approximately $385 million. This was also validated by a recent investment in Univision of $125 million by a third party at an equity value of approximately $8 billion.

In closing, in light of the challenges that we faced in 2013, both competitive and regulatory, we are pleased with our results for the year. Our two core businesses, content and distribution, are incredibly strong, and the opportunities ahead of us are very attractive.

In spite of the negative impact of the must-offer in our content business, we are giving guidance for the content revenue growth in 2013 (sic) of mid-single digits, with an operating segment income margin of close to 44%.

On the distribution side, our businesses should continue to benefit from low pay-television penetration, further adoption of double- and triple-play services, and our very competitive service offerings.

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.

As Alfonso mentioned, content revenue increased 2.8% for the full year. With our content division, the growth in advertising revenue of 3.9% for the full year was driven by a solid increase of around mid-single digits in the amount invested in advertising by many customers in key categories.

Broadcast advertising, which represented a large majority of our ad revenue, continues to be the platform of choice for our customers, given its scale, cost, and efficiency.

During 2013, viewership of our telenovelas was among the highest of the last 10 years in spite of the ongoing increase in pay-television penetration. The telenovela genre is as popular and successful as it has ever been.

In terms of our network subscription business, Alfonso has already explained the impact of the must-offer. I would like to add that we closed the year with [17] pay-TV brands and close to 50 [feeds]. As of year end, we reach about 36 million homes, two-thirds of which are outside of Mexico.

Our networks continue to be in high demand during the year. Today, we currently produce and distribute four of the top five networks in the general entertainment category, three of the top five in the movie category, and the top three music lifestyle networks.

Regarding our licensing and syndication businesses, revenue decreased by 12.3% during the quarter as a result of a very difficult comparison to the fourth quarter of last year, when we had unusually strong exports to Latin America and non-recurring co-production revenue. This also explains the drop of 1.2% for the full year.

We continue to advance our co-production efforts in the US Anglo market. During 2013, we produced Devious Maids with ABC, a show based on one of our successful formats. The show was very well received. A second season has already been ordered, and it is in production as we speak. We will be broadcast in 2014 in the Lifetime network.

Also during 2013, we co-produced a second show with ABC and Lions Gate called Chasing Life. This show is also based in one of our formats and will be broadcast during 2014 in the ABC Family network.

During 2013, Univision reached several milestones, like winning the July sweeps and launching two new networks, Fusion and El Rey. It is true that ratings for the Univision network were weak during certain day parts during the fourth quarter. This resulted from a couple of shows that did not deliver as expected. Univision management has addressed this, and the trends are already favorable.

For 2014, we expect Univision to continue delivering solid top line results, potentially resulting in royalties to Televisa of close to $350 million.

Also, during the fourth quarter, we launched Veo, our content aggregator, which we have positioned as a value-added service for our pay-TV customers in each of our four TV platforms. One of the main competitive advantages of Veo will be the ability to showcase exclusive content produced by Televisa before making it available in any other platform, even our own free TV or pay-TV platforms.

The appetite of this type of services is still low, but we will be ready to take the lead once the demand is there.

Finally, we distributed, as Alfonso said, two very successful movies in 2013, the Hunger Games Catching Fire and Instructions Not Included. This had a very favorable impact in the results of our other businesses segment, and as we have said before, this is the beginning of the value chain where this content will be transmitted.

In closing, as you know, it was not an easy year in many fronts, but 2013 was the 12th consecutive year of posting growth in our content business. In fact, the average growth rate over this period of time has been close to 7% per year.

In the last few years, we have faced many macroeconomic, competitive, and regulatory challenges, but we continue to build our business in the basis of our competitive advantages -- on one side, the quantity, the quality, the consistency, and the efficiency of the content that we produce, and on the other, the monetization of this content in as many platforms as possible, including free-to-the-air, pay-TV, digital, and many markets internationally including of course Univision.

Thank you very much for your attention. And now, we are ready to take your questions.

(Operator Instructions) Michel Morin, Morgan Stanley.

I just wanted to focus on a couple of things. First, on the advertising revenue which was up 8%, that was from what we can see one of the strongest fourth quarters that you've reported in a very long time. And given all of the macro data that we've been seeing, it's quite surprising that you would have had such a strong performance.

So, I'm wondering if you can point to anything in particular that would have driven that? And specifically, I'm wondering are you perhaps being a little bit more aggressive in going for higher prices as an offset to the impact of the must-offer? And is that something that is embedded in how you're thinking about the outlook for 2014?

And then, secondly, on Iusacell and the write-down there, I was wondering if you can explain a little bit better the rationale for why you're taking the write-down? Is it more an accounting adjustment that could have been done even before you made the investment? Or, has something really changed in the last three to six months that has led you to this?

Well, fourth quarter is typically strong as you know. This quarter specifically is particularly we benefited from the strength of our content. The results of our content were very good, and also we benefited from the interest of many of our customers to drive revenue growth in their businesses in such an important quarter for them, also, in the fourth quarter. That's basically where we saw the growth.

As to the write-down that has to do with Iusacell, as you may recall, since 2011, almost three years ago, we announced our investment, and we have always been saying from that date on that there was an urgent need for a regulatory change in the industry.

With the current rules, there's no way of competing effectively, particularly because of the on-net, or [club] effect, that Telcel offers to its clients and because of interconnection rates as well, and many other factors.

So, we believed that the regulatory changes were going to come sooner than they have. Unfortunately, that hasn't happened.

And the company is performing better. It has grown, and it has outpaced the other participants in the market. However, because of this effect that we're looking at the projections, we see that there's no --. If we don't see a dramatic change in the regulations that levels the playing field and that allows us to compete effectively, then of course the value of that asset is impaired.

Thanks, Alfonso. And if I can quickly follow up, can you provide any metrics on Iusacell, when you say the company is performing better? Can you share, at least, subscriber numbers or even whether or not there's been an acceleration or a deceleration in the trends during the past year?

As I mentioned, the company is performing better. Iusacell closed the year with 8 million subscribers and with an 8% market share, about an 8% market share. That is a growth of approximately 9% during the year.

So, performance has improved. We have reduced costs and expenses. And we have done many things there. However, if the regulatory framework doesn't change, it will be very difficult for this company to get to the scale it needs for it to become profitable on a net basis.

Great. Thank you very much.

Richard Dineen.

Just wanted to ask a question on Univision. You mentioned the $125 million investment. I think that implies a fairly high multiple, I think, sort of 16 or 17 times EBITDA. I was just wondering if you can give us a bit of your perspective on that transaction? Do you think that new equity investment signals broad interest in a larger offering, and if that is the kind of price marker that we should be using to value your Univision stake?

And then, just secondly, if you could just repeat the figure that I think you gave that was the revaluation of Univision? Did I hear $380 million, or around that number? Any color on that would be fantastic.

As to the investment in Univision, an unrelated third party -- this is a financial investor -- approached Univision with an interest in investing in the company. We had received several proposals from others, but this was particularly interesting for us because we believed it to be a good opportunity to use the proceeds to pay down some debt.

The transaction involved 1.5% of the equity capital of the company, and this resulted in an implied equity value of $8 billion, which is about 15 times.

We're valuing our investment in Univision in the total amount of $2 billion, although at that valuation that was paid by that financial investor, we could value it at $3 billion. But we are being conservative, and that's why we adjusted the valuation upwards by $385 million.

$385 million. Okay.

I just wonder if I could just squeeze in a quick question, just on the slowdown in the SKY net adds this quarter, as well? It looks like you're well below your run rate of about 250,000, which has been the rate for the past several quarters, and you did over 130,000. I'm just wondering what you attribute that to? I think you mentioned this quite low pay-TV penetration. I'm just wondering if you're seeing any saturation in that lower-end satellite segment? That would be really helpful.

Well, as to SKY, we have grown about 1 million subscribers every year for the past four years. And we're penetrating other segments of the market. So, we will continue to see a slowdown if you compare it to that 1 million subscribers a year. It doesn't mean that the company will stop, of course, but you won't see going forward 1 million subscribers every year on a net basis.

Okay. Thanks.

Andrew Campbell.

I have two questions. Actually, the first question is related to the tax rate and the impact of the tax reform on a going-forward basis. So, basically, I realize that you made some adjustments, bringing on balance sheet these net loss carryforwards and also some tax liabilities.

But as we look ahead to the full year basis, do you have any estimate if there will be a change in the effective tax rate, or perhaps in the absolute amount that your taxes may be affected?

And then, my second question is on the upfront season and whether or not you'll be providing any color at all on how the upfront season has gone?

As to the taxes and the new tax rules, I'll ask Salvi to answer the question.

Well, as you know, the tax consolidation regime was terminated at the end of 2013. You can see on our balance sheet that we had to book a liability of the taxes that we will have to pay over time. The rules came out, and those amounts will have to be paid from now until 2023, and that's why we booked the liability at a consolidated level.

But at the same time, we booked the deferred taxes as an asset on our [various] subsidiaries. If you [see, the overall] effective tax rate that we paid in 2013 was north -- was very close to 27%, and it was lower than the 30% given the very large investments that we have been making and the effect of the deferred taxes that I just referred to.

We have been paying for many years an effective tax rate similar to the highest one, and we expect to be around there.

I think the --. We booked the deferred taxes as an asset, because we believe that our subsidiaries that have had losses in the past will be able in the future to benefit from that tax credit. So, that is on taxes.

Based on the upfront, Andy, the comparison of upfront commitments for 2014 grew about [40%] from upfront 2013.

40%, four-zero.

Four-zero. 4%.

Okay. 4%.

4%, not four-zero. 4%.

40% would be great, but no, it was 4%.

4%.

Yes, that would be big news. Okay. Excellent.

John Tinker.

I was wondering if you could just talk a little about how you see the World Cup and how that's going to play through in the next few months?

Well, it is very difficult to measure the actual impact, because a lot of advertising during the World Cup comes from reallocation of our customers' budgets from our traditional programming to this event, although we think that it is an event that we have to have and we are going to as always put a lot of [quality in it.] We are expecting good results based on the transmission of the event, but we don't see anything material in the growth of revenues.

As to SKY, SKY will benefit from the transmission of the World Cup. SKY will transmit 30 matches, the 30 matches that will go on free-to-air television. But also, on top of that it will have 24 matches on an exclusive basis, out of the total 64 matches.

So, we have launched a package, a promotion, for the viewers of VETV, which is the lower-tier package. They will have access to those 24 exclusive matches only if they have six consecutive recharges in the prepaid service. And this is by June 2014, which is when the World Cup starts.

So, we believe that this will help SKY not only to maintain our subscribers and to reduce churn, but also to grow our subscriber base.

Thanks. And if I can just have a follow-up, advertising sounds like it's going quite well. Is there any --? Could you just discuss a little which categories are doing well, and if there are any new categories which are beginning to emerge?

Well, actually, the general market is growing in some way. We think that it has to do with the good consistency that we have had in our audience.

We are starting to see government expenditure coming on, although it is not a very big percentage of our revenue. But we see that that is going to help our objectives of 2014.

But we think that this has to do with a better look of the economy in 2014 and also of the great results and consistency that we have had, not just in our broadcast television segment but also in our pay-TV channels.

Thanks.

Gregorio Tomassi.

I have two questions. The first one is, back to Iusacell, if you can give us a little bit more detail of what are your specific expectations from the regulations that could benefit the competitive position of Iusacell? What are those items that you think would be the most important for Iusacell for a return to profitability?

And my second question would be, excluding the three one-offs that were part of the net income results for this quarter, if we were to exclude them, what would have been the effect? And I understand the impact; I cannot calculate it directly because it depends also on the savings on taxes that is related to the increase in the minority stake of your net income.

As to the changes that are necessary for Iusacell to grow and become profitable, because of the political situation in Mexico and because the bill will be introduced to Congress in the following weeks, maybe even next week, I would not like to comment on what we see as the changing of the rules to level the playing field.

Once the bill is introduced, we'll be happy to talk to you about how we see it and how we see each and every one of those particular changes that are needed.

And, I'll ask Salvi to answer your second question.

Regarding what would have been the effect on the net income if certain items had not been included, I think I can follow up with you to see which effects you want to see how would it look without those.

What I can tell you is that there is no tax effect, neither on the Univision valuation nor on the Iusacell impairment, given that those investments are not available for sale. Those are long-term investment of the Group. So, you would not have to make any adjustment to taxes if you wanted to see how the net income would look without those effects.

Okay. Thanks. Yes, we'll follow on with you later.

And if I may, a third question on CapEx guidance. What guidance can you give us in there, please?

CapEx will be, as I mentioned before, very similar to last year's. So, it will be $1 billion. It will be about $600 million for our cable and telecom segment, approximately $400 million for SKY, and $160 million for content and other businesses.

Thank you very much.

Alejandro Gallostra.

Could you please give us any idea of how much you're charging for your pay-TV channels? And, perhaps you [could repeat] what's the impact of the must-offer rule, because I missed that at the beginning of the call?

We're not disclosing the particular negotiations that went on with the pay-television providers. We don't think for competitive reasons it's good to disclose those rates or amounts.

And what was the impact of the must-offer rule that you mentioned at the beginning of the call?

During 2013, the impact was Ps.370 million in revenue foregone, which corresponds to mid-September to December 31. And for 2014, we estimate revenue foregone of approximately Ps.1.4 billion.

Okay. And then, you also had expected SKY to post better margins as a result of the must-offer rule, and you do not disclose this impact. But perhaps you could help me out with the impact of the World Cup costs that you registered in the fourth quarter on SKY, please?

Well, I don't have that number with me. Please, give us a call and we'll give it to you.

What you need to consider is that during the last quarter of 2013 we had the impact of the World Cup. We distributed among four quarters. So, we will not disclose the specific figure, but it's 25% of the cost. And we also had the English Premier League that we did not have last year. So, part of the increase in the cost that you see well on the expenses has to do with those two events.

Okay. Thank you.

Vera Rossi.

In terms of your cable and telecom business, can you elaborate where are you investing? Are you increasing homes passed, or improving the quality of network? And how many --? What is the number of homes passed in the three companies you current own?

We are investing in both, in growing the network and also upgrading the network. So, basically, we have been doing both. We have been digitizing part of the network, especially in the area of Monterrey and surrounding places. So, it has been both.

Hold on a second, so I can provide you with homes passed. Well, I don't have that information as to homes passed of each of our particular cable companies at hand. So, please give Carlos a call, and we can give it to you.

Okay. And I have another question, on your mobile business. Did you see an increase in the contract customer base in the last two quarters, taking an advantage of the disconnections that Nextel is facing in Mexico?

We have experienced growth in that particular segment, those particular subscribers, and we experienced that growth throughout the year.

Okay. Thank you.

Maria Azevedo.

Can you please just comment a little bit on the [scatter market] plans for this year? Do you think that 2014 will be [atypical] in terms of the content [ads pre-visibility]?

And as a follow-up question, I'd like to ask you to please comment on your views on the scenario of a consolidation in the telecom business in the light of the reform? Does the speculation of a joint venture between you and another carrier make sense?

Well, as of the scatter, we see the same mix that we have seen from years before, of between the upfront and the scatter. We are developing of course content that will help us to reach our goals as soon as possible based on different kind of [product integration] opportunities in new shows, new demographics that the clients are looking for.

And we feel very comfortable with the guidance that we have given to you guys based on the goals that we want to reach in the mix of the upfront that we already have, of course, and the scatter market that we will face during the year. But we feel very comfortable about it.

As to consolidation of operators in Mexico in the telecommunications industry, we think that may be good for the market down the road. For the time being, we're focusing on improving operations of Iusacell and, of course, very importantly, waiting for clarity regarding the secondary laws and how those laws will level the playing field in the telecommunications industry and will change the industry as a whole.

Ladies and gentlemen, we've reached the allotted time for questions. I would now like to turn the call back over to the presenter.

Well, thank you very much for participating in the call. If you have any additional questions, call us.

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