Grupo Televisa SAB (TV) 2015 Q1 法說會逐字稿

Good morning everyone and welcome to Grupo Televisa's First Quarter 2015 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.

Thank you, Stella. Good morning, everybody and thanks for joining us. With me today is Jose Baston, President of Television and Content; and Salvi Folch, Chief Financial Officer of Grupo Televisa. First, I will take you through the highlights of our first quarter financial results. Then, Pepe will discuss the operating results of our Content segment. We will take your questions right after that.

During the first quarter, our consolidated sales increased 17.3% and operating segment income increased 25.6%. All our core businesses posted solid results. Our Telecommunications' businesses, Sky and Cable were the main drivers of growth. Content in spite of slow economic activity also grew. At the same time, profitability remained strong across our core business segments. We are encouraged by this result, especially considering the current economic environment.

Let me go briefly over each of our different businesses. Starting with our Content businesses, revenue expanded by 5.7% to MXN7 billion during the quarter and the margin reached 37.2%. All three revenue lines grew this quarter. Our Advertising business grew by 1.6% year-over-year. Licensing and Syndication, our second largest source of Content revenue, expanded by 12.4%. Our third source of Content revenue, Network Subscription, posted a growth of 19.4% from last year. Operating segment income for our Content business expanded by 8.7% as we benefited from operating leverage and maintaining a strict control on costs of Content. Pepe will go into further detail on performance of our Content business.

Moving on to our Telecommunications businesses, during the quarter, Sky added 129,000 subscribers, reaching a total of 6.8 million. Most of the growth continued to come from Sky's low-cost offering. Revenue grew by 10.1% and operating segment income margin expanded slightly to 46.5%. In our Cable and Telco segment, as previously announced, we concluded the acquisitions of Telecable in January of this year and also posted very strong organic growth in revenue and operating segment income. In this segment, first quarter sales increased 45.9% to MXN6.7 billion. This was driven both by strong organic growth and by the consolidation of Cablecom and Telecable. Excluding these two acquisitions, first quarter sales from our other three cable operations (inaudible) increased by 12.4%.

Organically, both voice and data revenue generating units, or RGUs, grew close to 28.5% and 23.3%, respectively, and video RGUs grew close to 5.1%. In total, including Cablecom and Telecable, during the quarter, we added 511,000 video RGUs, 314,000 data RGUs and 220,000 voice RGUs. In total, we now reached close 8 million RGUs, of which 3.9 million are video, 2.6 million are data and 1.4 million are voice RGUs.

First quarter operating segment income increased 63.3% to MXN2.7 billion and the margin reached 39.6%. Excluding Cablecom and Telecable, fourth quarter operating segment income increased by 18.4%. I shall also mention that two days ago, we were informed by the regulator that after an extensive investigation, our acquisition of Telecable meets all regulatory requirements.

In our Other Businesses line, our publishing and publishing distribution business continue to experience a difficult environment and our movie distribution business posted a small loss. All other operations within our Other Businesses segment posted solid topline growth. Our soccer business benefited from the sale of certain players, our radio business from higher advertising revenues and our gaming business from an increase in the number of electronic gaming machines. In the aggregate, revenue from our Other Businesses segment expanded by 7.3%.

Moving onto our capital expenditures, during the first quarter, 2015, we invested about $308 million, of which $220 million were in Cable and Telecom, $73 million Sky and $15 million in our Content business. For the full year, I'm considering the recent acquisition of two new cable companies, we expect CapEx to be approximately $1.4 billion.

Finally, as you may have seen in recent press releases, we have invited three extremely qualified individuals to our Board, Jon Feltheimer, CEO of Lionsgate, David Zaslav, President and CEO of Discovery Communications Michael Fries, President and CEO of Liberty Global. All of them have an incredible amount of experience in their fields, which are precisely the fields that matters the most to Televisa. They are the leaders in their industries and they are very well respected in the international business and investor community. They will be a great addition to our already strong Board. These individuals will be nominated for election to the Board of Directors at Televisa's shareholders meeting on April, 29. We are extremely excited about their participation in our Board and we're eager to draw on all their expertise.

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

Thank you, Alfonso. Good morning, everyone and thank you for joining us. Our content business performed well during the quarter, especially considering a relatively soft economy. As Alfonso mentioned, our Content segment expanded 5.7% with all three content businesses contributing to the growth.

Our flagship channel network, Channel 2, delivered solid results in the quarter. Channel 2 has continued to be the most efficient outlet for our advertising customers and is the only real massive reach network in the country. Similarly, our multi-platform offer, (inaudible) which we broadcast on Channel 5 is attracting younger audiences, mostly with new formats produced in-house. These audiences are very dynamic and demanding, are also very attractive from a commercial point of view and generate a significant amount of traffic to our digital properties.

In the fast-changing world of video entertainment, owning the rights of the content is becoming more and more relevant. We own the rights to most of the content that makes us successful, which gives us a competitive advantage and allow us to exploit our content in multiple platforms and in different windows. As a result, we are able to monetize the content by providing our advertising customers with the demographic targets they seek while satisfying the desire that our audiences have of watching what they want, where they want and when they want.

Advertising revenue experienced growth in spite of a weak and uncertain economic environment. Broadcast TV advertising, which expanded by 1.4% during the quarter, continues to be the most efficient vehicle for advertisers. pay TV advertising, which now represents more than 6% of total advertising revenue, continues to grow at a fast pace. During this quarter, it expanded by 10%.

Do remember that when analyzing the advertising sales business of Televisa, you have to consider that the seasonality for our ad revenues is very irregular. It depends on the quarters in which some holidays fall, which may change from year to year and it also depends on the quarters in which key sporting events take place such as the World Cup last year or advertising events, given the election times.

During the quarter, we restructured our commercial area in order to provide a real multi-platform service and a one-stop shop for our clients. This strategy would allow us to expand the potential of advertising revenues in all of our platforms, free-to-air, pay TV and digital media.

Moving on to our other two sources of content, Network Subscription revenue increased 19.4%. This revenue line benefited from an increase in subscribers, both in Mexico and the rest of the world, mainly Latin America. At the end of the quarter, we had 40.7 million subscribers with an average of six channels per subscriber.

The success of our content has also reflected on the viewership of our pay TV networks which remain among the most watched networks in the country. To a lesser extent, our Network Subscription revenue line also benefited during the quarter from a positive translation effect on revenues denominated in US dollars.

Our third source of content revenue, Licensing and Syndication, expanded 12.4%. This line item accounts for the royalties we receive from Univision and the licensing and export of our content around the world. During the quarter, royalties from Univision reached $66 million. This year, our export business face the challenge of economic weakness in some of the markets that we reach. This line item also benefited from a positive translation effect on revenues denominated in US dollars.

Univision performed well during the quarter, with Univision network finishing several weeks as the Number 3 or Number 4 network regardless of language. Among adults 18 to 34, (inaudible) at least one of the other major broadcasters, thanks in part of two of our (inaudible). In the February 2015 suits, Univision network outdelivered at least one of the English language [closest] networks on most nights among young adults 18 to 34.

Finally, UniMas, the other Univision free-to-air network finished the February suits as the Number 2 Spanish language network [over Telemundo] during weekend daytime and weekend primetime among many key demographics. Also, UniMas, on average, delivered more viewers than the combined audience of Estrella, Azteca and MundoFox across key dayparts and key demographic groups.

Thank you so much. And we are ready to take your questions.

(Operator Instructions). Richard Dineen, UBS.

Alfonso, wondering if you can give us an update on the potential Univision IPO and what would be your strategy there? Do you see a deal this year and would you seek to increase or reduce Televisa's stake into that transaction? And secondly or perhaps related, the three new Board nominations, Feltheimer, Zaslav, and Fries, all have strong ties to John Malone, particularly Fries and Zaslav. Should we read anything into John Malone connection? Seems perhaps more than a coincidence. So, any color on that would be fantastic.

Yes. Well, as to Univision going public, as you know, Univision is owned Televisa and a group of private equity firms and by the nature of the firms' business model, they most likely want to sell their ownership in Univision and one possibility would be to take the company public. I believe that a transaction could happen in the short term. However, of course, there are no assurances that a transaction will happen.

And as to your question as to whether Televisa could be a buyer or a seller, it is a very difficult question to answer now. We have the right to sell our interest in Univision together with the private equity sponsors. So, that decision will depend on the terms and conditions of a deal if and when it comes up. So, at this point, we could not say whether we are sellers or not of shares of Univision.

And, as to your question that has to do with our Board members, our three Board members, I think that they're three very capable individuals, well respected and well regarded by the industries in which they operate. So, I think it has nothing to do with John Malone, but it has to do with them, with basically the high regard we have for them and their capacities as individuals.

Andrew Campbell, Credit Suisse.

I was hoping that you could shed some light on the pay-TV growth that you saw in the quarter. Do you believe that you're approaching some kind of market saturation because the growth continues to be very strong? And staying with that point on pay-TV, could you perhaps give an update on the significant market power investigation? I believe that the Company had a period to reply to the regulator. So, any update there would be very helpful.

Well, Sky as you saw continues to grow. Now, of course, this growth is at a slower pace than last year. Gross additions are likely to remain strong and churn has stayed relatively flat, in line with industry standard. But, as I was saying, the net additions will be at a lower pace growth in the number of subscribers, following the trend over the last two years. This year will be especially difficult in terms of comp than last year, because last year, we had the World Cup which is very important for Sky. So, we'll have that difficult comp.

And as to the second part of your question, IFETEL is in the process of determining if we have substantial market power in the segment of audiovisual services transmitted through telecommunication networks in Mexico. That's the precise definition of the relevant market and we have presented IFETEL with all the information that is necessary to demonstrate that we do not have substantial market power in that market in particular. That information is currently under review by the governing board of IFETEL and we expect this investigation to be completed in the next month.

Vera Rossi, Goldman Sachs.

Given the good performance of the advertising revenues versus the weak upfront season we saw, what would you expect for the rest of the year?

When you look at advertising spend will continue to be driven by the macroeconomic environment. That also applies to our television advertising business, of course. And also, we see clear trend of solid macroeconomic resource. We will remain cautious on our expectations for our ad sales business and [we are] to do the same.

But cautious mean, do you expect to recover at least to flat advertising year-over-year or to have a positive growth versus your upfront business that was down [than] 10%?

The thing is that we don't have a clear visibility yet. We should have seen more activity as you see the results of the quarter, but we cannot tell you more because of the visibility that we're seeing so far during the months of this year.

And I have one question on the pay-TV margins. Do you expect the current level of margins around 40% to be sustainable, going forward?

Yes, we do, Vera.

And what were the costs that this improvement on year-over-year basis, what were the major changes in your cost structure that created this significant margin expansion?

Yes, there are many efficiencies in this industry and we are realizing those efficiencies and basically, they have to do with procurement, I would say also admin sales, call centers, et cetera. So what is happening in that business is that the scale is helping us maximize those efficiencies.

Michel Morin, Morgan Stanley.

I just wanted to focus on cable first. And I was wondering regarding the EZ launch, I think you'd said earlier that you were planning to expand that to the rest of the country. I was wondering if you can give us an update as to where you are with that expansion plan. And specifically also, I know I don't necessarily want to get too granular here, but there has been a competitive response by the incumbent and I was wondering if you can discuss kind of how the business evolved as Telmex responded by cutting price? Have you continued to see good momentum towards the end of the quarter versus perhaps the beginning of the quarter prior to their response?

Yes, we have seen great momentum. We're not publishing the EZ results because we don't want to signal our competitors, giving more information than is necessary. We launched originally in Mexico City in November of last year and the response was extremely good. Most recently, this year, we have launched EZ in the cities of Ensenada. We launched also in Merida and in Tijuana and the initial results have been very encouraging.

And then, just to clarify, these three cities you mentioned, these are definitely not the Cablevision footprint. So can you remind which units these fall under? This is Cablecom?

This is Cablemas.

Cablemas, all three of them. Okay.

All three of them. Yes.

And then on your deposits, if I may -- changing gears a little bit, your deposits are up year-on-year and we know that they were down in the fourth quarter year-on-year. So there was some concern there. We also know that one of your large customers has had some financial difficulties. So, can we assume by looking at these numbers that there's been no impact from any disturbance at one of your largest customers? And then, kind of tied into that, there were some headlines around some of the slim companies starting to advertise again on your network. If you can please confirm that and tell us whether or not it's been more than just a one-time thing and there's a renewed relationship there.

Yes, I don't think you can read that from the deposits. Of course, the deposits don't include all the sales. We have not seen any weakness in advertising of particular client, especially -- I don't know -- you can't read anything from the deposit in respect to a particular advertising. And then, yes, Grupo Carso is a customer of Televisa again. It is difficult to tell you at this point if they will be, at large, our advertising customer as they were in the past. However, also with the entrance of AT&T in the Mexican market, they are also advertising now with us. So, we expect total ad spend in the segment of the telecommunications industry to grow over time. So, we're having both Grupo Carso and AT&T as advertisers with us, which makes us very happy.

Gordon Lee, BTG.

Just two very quick questions. I was wondering if you can maybe give us just a little bit more color on the technical assistance contract that was terminated prematurely by Univision, which obviously translated into a gain in the quarter. But I was wondering if it had any implications on revenues going forward that are material. I assume not, but -- and maybe what the nature of that or what the reason for the cancellation was? But second also, on advertising, you have provided for some time what share of your advertising revenues is on pay-TV platforms, but I was wondering if you could give us what percentage of your advertising revenues are on your digital offerings?

As you may have seen from Univision's releases, Univision decided to restructure a number of deals of agreements. For example, they restructured their programming license agreement with Venevision. Basically, they paid an upfront fee for the years to come of the Venevision agreement. And most recently, they renegotiated their technical assistance agreement with us, and also with the sponsors. They have signed management agreements with the sponsors. So, they restructured those as well. This does not affect the terms of our programming license agreement with Univision. So, it has to do with the restructuring that Univision decided to do of all these sorts of agreements. And both the payment for the early termination of the agreements that they had finalized with Televisa in particular and formerly the fee paid by Univision to us, we accounted that as other income below operating segment income.

As for the (technical difficulty) breakdown but I can tell you that's still very, very low, percentage-wise.

Rodrigo Villanueva, Merrill Lynch.

And I was wondering with respect to Univision, we saw flattish revenues, according to the preliminary numbers that the Company released; and I was wondering if it would be reasonable to assume for the full year that they remain flat considering that Q2 and Q3 were pretty strong for this Company, given the World Cup transmission last year. That would be my first question.

I'm sorry, but I cannot answer that question at this point. I'm sure you can understand. So, you can call Univision directly.

Regarding, another question that I have, I was wondering if your new cable companies have to stop consuming content from PC-TV, as was the case with the other companies that you have. So we expect that to be the case as well.

Yes, Rodrigo, there, the decisions regarding the channel lineup are made by the operators based on the particular markets where each of the cable companies operate. So, I think it depends on the performance of the particular channel and the terms and conditions of the (technical difficulty) with those particular channels. So, we'll not comment on specifics as to the channel lineups and the particular channels in each region of the country.

And my final question would be related to Bestel. Which would be your target margin for this business and when would you expect to achieve it?

Well, we've made a lot of progress in terms of operating Bestel more efficiently. Bestel has grown in all the businesses that it operates in. We believe that a margin in the high 20s to low 30s would be sustainable for this company.

John Tinker, Maxim Group.

Could you just talk a little more about the FX loss and where that came from? And do you anticipate any more going forward?

It's related to sales and operating segment income and given basically that we have a net liability in our US dollar position during the first quarter of 2015 and there was a depreciation of the Mexican peso then, you could see the loss of MXN866 million. This compares to a foreign exchange loss of MXN108 million during the first quarter of 2014 and that resulted from a depreciation of the peso of 1.3% in that period. So basically, it has to do with all our cost and expenses in the operating segment income line related to dollar-denominated and the future depends on the foreign exchange. So, it's very difficult to predict.

Sunil Rajgopal, HSBC.

Most of my questions have already been asked. Thank you very much.

Well, thank you very much for participating in our call. If you have any additional questions, we're here to answer them. So give us a call. Bye.

Thank you. And this does conclude today's call. You may now disconnect.