Grupo Televisa SAB (TV) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Grupo Televisa's Second 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 would now like to turn the conference over to Mr. Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Thank you, Vishanta. Good morning, everybody, and thank you for joining us for this call. With me today is Jose Baston, President of Television and Content; and Salvi Folch, Chief Financial Officer of Grupo Televisa. 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, and we'd be happy to take your questions right after that. During the second quarter, consolidated sales increased 8.5% and operating segment income increased 6.6% and margin reached 39.8%. Starting with our Content business, revenues decreased 7.9% to MXN7.9 billion during the quarter and the margin reached 42.6%. The decline in Content revenue is explained by advertising revenue, which posted a drop of 16% year-over-year.

Licensing and syndication revenue, which includes the royalties from Univision, expanded by 9.7%. Univision royalties during the second quarter reached $75 million. The other components of this revenue line, licensing fees and exports to the rest of the world, remained relatively stable. This revenue line mostly benefited from the depreciation of the Mexican peso. Our network subscription revenue increased 27% thanks to the continued growth of Pay Television penetration in Mexico and Latin America, the success of our networks, and the depreciation of the peso. As you can imagine, we're not happy with the results of our advertising this quarter. As part of our long range plan, we started growing in Telco and finding other sources of revenue. Along the process, we have become a far more diversified company.

As a result, advertising is now less than one-third of consolidated revenue. However, it continues to be an important part of our business. It is true that during the second quarter we had a difficult comp, but for quite some time we were too focused on increasing sales via volume while ignoring the true value of our broadcast networks giving the unique reach. We also are facing audience fragmentation resulting from the increased penetration of pay-television and other platforms. Going forward, we will be more disciplined with our rates and give the proper value to our unique assets. Pepe will talk about the performance of our Content business and what we are going to do in the future.

Moving on to Sky, our DTH operation added over 120,000 new customers reaching close to 6.9 million subscribers. Most of the growth continued to come from Sky's low cost offering. Revenue and operating segment income grew by 9% and 9.2% respectively and operating segment income margin expanded slightly to 48.1%. During the quarter Sky successfully launched its owned-and-operated satellite, which will have 24 transponders and a lifespan of approximately 15 years. With the launch of this satellite, Sky will expand capacity and bring to the market it serves the most comprehensive high-definition channel offering consolidating its position as the leader in the industry. Our Telecom segment continues to post strong organic growth and also benefited from our recent acquisitions.

In this segment, second quarter sales increased 43.8% to MXN6.9 billion and operating segment income grew by 55.4%. Excluding the acquisitions of Cablecom and Telecable, second quarter sales from our three cable operations and Bestel increased by 10.6% and operating segment income increased by 12.8%. The opportunity for further growth in our cable business is compelling. We currently provide approximately 2.2 services per customer, up from 1.1 10 years ago. The US cable companies currently provide an average of 2.6 services per customer and that figure keeps growing. We seem to be following the same path. For us, data and video services are likely to continue being the main driver of growth as we go ahead with the gradual deployment across our various systems of the offering we have branded EZ.

With the terms that we offer, voice is now contributing with almost as many revenue generating units or RGUs as data and while other markets are dealing with cost cutting and shaving, we continue adding video subscribers. Organically both voice and data RGUs grew close to 35.2% and 23.5% respectively and video RGUs grew close to 4.2%. In total, including Cablecom and Telecable, during the quarter we added 48,000 video RGUs, 144,000 data RGUs, and 147,000 voice RGUs. We now reached close to 8.3 million RGUs; of which 3.9 million are video, 2.7 million are data, and 1.6 million are voice RGUs. As you can tell, the strategy we have in place continues to deliver very solid results.

In regard to our Other Businesses, revenue decreased by 2.6% and operating segment income reached MXN129 million. Our publishing business continues to face a difficult environment and our radio business experienced a drop in revenue given lower advertising sales. However, our gaming business performed well during the quarter and posted solid results. Moving on to our CapEx. During the second quarter of 2015, we invested about $372 million; of which $260 million were in Cable and Telco and $82 million in Sky. As in the past few years, most of our CapEx in our Sky and Cable segments continue to be driven by growth in subscribers and in the number of services sold per subscriber. Also as you saw from our press release last week, we have amended our relationship with Univision.

As a result, we will now hold 10% of their common stock and we'll also hold warrants exercisable for shares that if exercised after obtaining SEC approval would represent in the aggregate approximately 36% of Univision's total outstanding shares on a fully diluted basis. Also there will be various types of shares in the new shareholding structure post IPO. Based on that type of shares we will hold, we will have a 22% voting power in the company. As a result of accepting the conversion of the debentures into warrants, Univision will pay Televisa $135 million in July 2015 while improving Univision's credit profile. Finally, when Univision's initial public offering gets concluded, the term of the PLA will be extended to at least December 31, 2030; but can continue through perpetuity subject to us holding a minimum specified amount of shares in Univision.

In closing, in spite of a difficult quarter for our Content business, Grupo Televisa posted growth in sales and operating segment income. Our strategy of diversifying our sources of revenue and become a major player in the telco market has allowed us to build a stronger company. Thank you for your time and attention and now I will turn the call over to Pepe.

Thank you, Alfonso. Good morning, everyone, and thank you for joining us. As you saw from our release, revenue in our Content business posted a drop of 8% during the quarter as a result of a drop of 16.4% in our advertising revenue. Our network subscription revenue posted a strong growth of 27% and our licensing and syndication revenue grew close to 10%. Let me start by addressing the drop in advertising revenue, which resulted from a number of factors that made the comparison to the second quarter last year very challenging. First, as you recall during the second quarter last year, we transmitted the World Cup. While this quarter we had the Copa America and the Mexican team didn't make it to the second round. We were expecting better results from this tournament; but since the Mexican team didn't make it, we were not very lucky on that aspect.

Second, we had mid-term elections in Mexico last June 7. As a result and as mandated by law, we had limited government advertising revenue for a period of 60 days prior to the election date. In addition, in the second quarter alone we had to transmit free of charge a total of 1.3 million spots from the various political parties and the electoral authorities. This not only had the effect of crowding out our advertising customers, but also makes it less attractive for them to advertise their brands during this period of time. Many of our clients just don't want to be associated to political campaigns. Third, some of the content that we transmit on free-to-air television did not perform as expected. Our telenovelas continued to deliver solid ratings, which is remarkable given that the penetration of pay-TV has expanded from 20% to over 50% in the last 10 years.

But this fragmentation of audiences is impacting other genres of content, mostly the content we import. Some of these audiences seem to be migrating to pay-TV networks. We are capturing many of these viewers with our own pay-TV networks, which rank among the highest rated in their categories, but there is no doubt that audiences are fragmented and the industry is becoming more competitive every day. To strengthen the performance of our advertising sales operation, beginning this year we initiated the process of restructuring our sales organization. This process includes changes to our pricing schemes and some of our customers will resist them. We know that as our audiences fragment, we have to increase our prices. This is a long overdue, but important process that will ensure that we continue to be successful as the industry becomes more complex and our business more sophisticated.

Moving on to network subscription revenue, the growth of 27% resulted from the success of our networks and growing reach in Mexico and internationally. It also benefited from the depreciation of the peso. With 17 brands, television networks is the largest producer of content for pay-TV platforms in Mexico. Excluding kids' networks, we produce 10 of the Top 25 networks for pay-television. Of the total audience that television reaches in the typical pay-TV household, over one-third of such audience is reached with our pay-TV networks and the balance with our free-to-air channels. In total in the second quarter of this year, our networks were distributed in 42 million homes, of which close to 28 million are outside of Mexico. We are distributing more networks in more places every day and the ratings of our networks continue to improve.

With the ongoing increasing pay-Television penetration in Mexico and abroad, the prospects for these businesses are very favorable. Our third source of content revenue, licensing and syndication revenue, expanded 10%. Most of the growth resulted from the depreciation of the peso. Royalties from Univision were lower than last year, which is explained by the difficult comparison due to the transmission of the World Cup in 2014. During the second quarter, the royalties we receive from Univision reached $75 million. In closing, our ad sales business seem to have experienced the perfect storm during the second quarter. Some of the challenges we faced during the quarter we can control and some we cannot. We are disappointed with the results of our advertising sales business, but we also believe that we are taking the steps necessary to strengthen the business going forward even if it continues to impact our business in the short term.

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

(Operator Instructions) Richard Dineen, UBS.

Pepe, maybe just if we can talk a little bit about second half advertising prospects. If you say the advertisers were perhaps put off by the election, do you see scope for compensating overspend in the second half due to pent-up demand as advertisers spend to that full year budgets and that sort of thing? And then maybe just secondly on advertising, we've had the restrictions on the high calorie food and beverage advertising now for few quarters and I was just wondering how the market is adapting to that? The food companies, are they changing what they advertise or are other types of advertisers stepping in to offset? Is that still a headwind basically is mine my question? Thanks very much.

Well, to answer your second question firstly, it definitely has cleared off. Some of advertising because of the new regulations have had to be away from most of the important time slots of the day. So yes, we have had some changes and we are adapting to that by defining the new way that we program some of our networks as well as trying to develop content produced with the actual clients that can be aired in time slots of the day that regulatory wise are legal. Now as to your first question, as we have mentioned before, we're not giving any guidance for our Content business, we do not have enough visibility. In spite of the favorable comparison, the changes we're implementing in our sales organization may continue to be resisted by some of our advertising customers and it might take a few quarters to pay off.

But one thing that we are convinced is that we are taking the necessary steps even if it means some pain in the short term. We have to increase our prices, we have to take advantage for our reach, and as Alfonso says, we're not going to sell volume any more. We have to give more value to what we offer. We know that we are by far the most important offerer of media in Mexico. We have the mix of broadcast, pay, and digital. And what we're doing is that we're giving more value to our advertising prices and we know it is going to be a bumpy road, but we know that we are taking the right decisions going forward.

Okay. Thank you very much for the color. Appreciate it.

Andrew Campbell, Credit Suisse.

My question was actually a continuation of what you guys were just discussing, which is because I understand that there's certain events that's very clear; Copa America, campaign; these things are very objective and quite clear to understand. But the changes in terms of the sales organization and the approach to clients is something that I was hoping that you could elaborate a little bit more on. I mean is this a gradual process, is this something that's basically was there certain dates where there was a change in approach and if the concern is that you're maybe losing some advertisers. I mean wouldn't the concern be that by raising prices, perhaps this could aggravate a bit the problem. I just wanted to understand a bit better the dynamic in terms of this aspect more specifically. Thank you.

Well, we are as we speak going through our pricing. We know that the changes in the industry has taken us to a point that we have to change the strategy that we are offering to our clients. We have comparable sales for example in cost per thousands in countries like Brazil and Argentina and we are less than one-half of the cost per thousand that we offer to advertisers. We know that, like I said, clients are not going to like this, but we also know that we are the best option to buy media. I can tell you that when you analyze the fragmentation of the audiences and you start to see that broadcast television has become with no doubt the most important reach and the only one actually because of the big, big fragmentation of pay-TV as well as digital.

So to be able to get more than 900,000 to 1 million persons in one shot, the only way to go is broadcast television and we have with no doubt the leadership on that. So we know that in future the only way to go is to higher the value of our offer, that the pricing is going to be, like I said, something that we're working on right now. We have been working on this for a few months already and what we want is to be very, very strong to be able to face the 2016 upfront with a lot of strength to be able to negotiate with our clients.

So, the changes for now are being dealt with basically through the spot markets and then it will be addressed again in the upfront for next year?

Yes, definitely. They are going through the scatter market, but more importantly, going forward to the upfront of 2016.

Okay, great. Thank you.

Diego Aragao, Morgan Stanley.

So actually on the Cable and Telecom business, I just want to understand if we should expect some growth acceleration in the second half due to the expansion of EZ footprint? Thank you.

Yes, as we roll out EZ throughout several cities in Mexico this year, you will see accelerated growth. We have experienced accelerated growth in the cities where we have launched. It has been a huge success and we expect that to be the case in the cities where we're launching. Towards the end of July we're launching it in the City of Monterrey, which is the second largest city in Mexico, and we believe that that is going to be a huge success.

Okay. Thank you.

Rodrigo Villanueva, Merrill Lynch.

Actually my question is related to the changes regarding the Telco reform. I was wondering if you could share with us if you are planning to take advantage of the AMX infrastructure in Mexico now that they have to share it given their preponderance status. If that is the case; where do you see it, what you're planning to do with it, and when would you expect to start offering this service? Thank you.

We are analyzing this and I think we have two opportunities basically. We have an opportunity of launching a mobile service through an MVNO, which is launching a service which is capital-light using their infrastructure. We have to look carefully at the pricing to see if we can launch a real service with that type of pricing and we have to see the timing of all this. And the second is that I believe Sky with almost 7 million subscribers has an opportunity to launch other services using also the network of the preponderant operator.

Understood, Alfonso. And one final question. Is it possible to quantify the impact of the World Cup and the mid-term elections on the advertising business?

It's very difficult to say because we have to look at the year in total to see how advertisers moved throughout the slots and throughout the quarters. So, you have to look at the year in full to be able to determine exactly what happened and how they shifted advertising from one quarter to another.

Okay, very clear. Thank you very much.

Vera Rossi, Goldman Sachs.

Could you talk about the CapEx in your cable business for the next two years, especially if it will continue at the levels we have seen in the first two quarters of 2015? Thank you.

CapEx in our cable companies will continue at similar rates than what you have seen this year. We're investing resources in our networks and of course it also involves growth CapEx because it has to do with the growth in terms of RGUs. As I have mentioned, we're growing both in total subscribers and also in the services that we provide to subscribers. So, we're picking more and more of those customers and I believe that that CapEx that involves growth is good CapEx as good cholesterol. So as we continue growing those companies double digit, you will see an increased CapEx at the levels you have experienced this year in the next two years.

Okay. Thank you.

Andre Baggio, JPMorgan.

I have a question related to Sky and cable. Do you expect any reaction, any change in the business model of Televisa based on the investigation of the significance of market power that's there if it [doing business with] Televisa?

Well, that investigation is pending and it will be decided sometime this year. But nothing has been determined yet so there have been no changes in what has to do with Sky and cable.

Okay. And the second question is that you pointed out that there has been more fragmentation of the audience because of Pay-TV, but has anything dramatically changed in that regard with regards to last few quarters versus the second quarter because we saw a dramatic deceleration of the revenue? So is it all attributed to the political events and the World Cup or do you think that there's something particular that could be attributed versus last quarters to the Pay-TV business?

I think it's a combination of all those things and as Pepe was saying, this quarter was the perfect storm because we experienced not having the World Cup and not having this soccer tournaments et cetera, having the political advertising which displaces our regular advertising et cetera, and also a trend towards audience fragmentation that has to do with the increased penetration of the pay-television and also other platforms. So, it's a combination of all those factors.

Okay, perfect. Thanks a lot.

Gordon Lee, BTG.

First related to the sort of new sales plan or approach to the selling of time that you're mentioning, just one quick question. Is there anything in the new law that you believe restricts your ability either to raise prices or to sell across platforms as a result of the new regulation that was passed last year? And then the second question related to that, has this prompted a rethink of the way in which you plan to offer your content on digital platforms or maybe sort of an acceleration in the rollout of those platforms? Thank you.

Well, to your first question, there is no regulation that prohibit us to be able to offer either multi-platform or to raise our prices, we'll just have to in some way make them public to the different regulations. On the other hand, yes, we are in the process of analyzing how are we going to be windowing our content. As we all know, the fragmentation comes also from non-linear consumption of content. So given the fact that we have basically the leadership in all the different genres of content in the Spanish speaking world, we think that we're going to have to be able to change the way we air our products and use some of them to be launched more in non-linear offers. So, we are in the process of also reanalyzing the way we're going to be airing in the different windows of distribution of our content.

If I could just have a follow-up to the first question just to make sure. So when you change your rates or if you sign across platforms, you need to notify the regulator of that, right? But you don't need to request authorization or permission for that, is that correct?

That is correct. It's mostly a disclosure issue of the rate card, but not for client; but it's the rate card that we have to make public. So, it's a disclosure obligation.

Perfect. Thank you very much.

Valder Nogueira, Santander.

How do you believe that the pricing of telecom service have evolved in the recent six months or at least in the last 12 months from what you had planned? How the air time or the voice pricing has been changing from your perspective especially now that EZ is at full steam and gaining even more clients?

Well, EZ is a disruptive offer so for MXN400 basically you're getting 10 megs and you're getting unlimited calls, both national long distance and international long distance except for a few countries. So, that is a disruptive offer and we're planning to launch EZ throughout the country and the cities where we operate. So this has been very successful, but that price is fixed at MXN400 so it has been kind of flattish. In the other services, in the DTH and also in other services that our cable companies offer, basically the pricing is kind of flattish.

So, you haven't seen too much pressure on the downside for telecom services either because of you or because of the behavior of your competitors?

No, not really, we haven't. I think the MXN400 offering that EZ is making I think is the best in the country if you consider the value that it's giving and our competitors have not been able to match our pricing.

Okay. Fair enough. Thank you.

There are no further questions at this time. Now, I'll turn the call back over to the presenters for closing remark.

Hello. Well, thank you very much. If you have any additional calls, we're here, give us a call. Bye.

Thank you. Ladies and gentlemen, this concludes today's call. You may now disconnect.