Grupo Televisa SAB (TV) 2015 Q3 法說會逐字稿

Good morning, everyone and welcome to Grupo Televisa's Third 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 turn the call over to Mr. Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Thank you, Felisia. Good morning and thanks to everyone for joining us today. With me is Jose Antonio Baston, President of Television and Content and Salvi Folch, Chief Financial Officer of Grupo Televisa.

Let me take you through the highlights of our third quarter financial results. Pepe will follow by discussing the operating results of our Content segment. We'll be happy to take your questions right after that.

Consolidated sales increased 12.2% and operating segment income increased 15.3%. Net income reached MXN6.5 billion during the quarter, primarily as a result of the conversion of our debentures in Univision into warrants and the absence of a loss in the other expense line. The conversions into warrants resulted in a payment to us of $135 million by Univision and this payment was accounted for as other financial income, below operating segment income.

Starting with our Content Businesses, revenue increased by 1.6% to MXN8.6 billion during the quarter and the margin reached 46.6%. Pepe will go into further detail on the performance of each of our advertising sales, our network subscription and our licensing and syndication businesses.

Moving on to our Telecommunications operations, we feel very enthusiastic about the results of Sky and Cable, and also about the prospects of these businesses. Sky added over 166,000 new customers during the quarter, reaching a total of 7.1 million subscribers. For the first three quarters of the year, net additions in Sky now total 416 thousand households. In spite of the expanding subscriber base and relative stable churn, Sky has been able to sustain a solid base of growth. This is remarkable, particularly in light of the fact that last year -- last year growth in subscribers was helped by the transmission by Sky of all matches of the World Cup. At this pace Sky should end the year with over 7.2 million subscribers.

As a result, Sky's third quarter revenues reached MXN4.9 billion, equivalent to a growth of 9.3% and operating segment income reached MXN2.3 billion with a margin of 47.6%. Revenue in our Cable and Telco segment expanded by over 37.5% and operating segment income reached 40.8%. Excluding Bestel and the network operations of Cablecom, operating segment income margin for our cable companies reached close to 40.5%.

We started consolidating the results of Cablecom in September of 2014, and of Telecable in January of 2015. Excluding these two acquisitions for the full quarter, revenue expanded by close to 14% and operating segment income margin reached 38.2%. Excluding Telecable, revenue generating units expanded by 19% with data and voice RGUs expanding by 25.7% and 45% respectively. The fast pace of growth has resulted from the successful launch of Izzi, which is our disruptive broadband and telephony offering, which is now present in 13 major markets throughout the country. This software will continue to be deployed in other cities and towns across the country, supported by additional investments in infrastructure. We see a growth -- a great growth opportunity here, considering the low penetration of video over homes passed and a broadband in general in our country, which is as low as 45%.

In terms of our other businesses, revenue expanded by 3.7% to MXN2 billion. The growth resulted primarily from an increase in the revenue of our feature-film distribution and gaming businesses. Operating segment income margin reached 12.9% in this segment. As you can see, the diversification of our sources of revenue, which is a strategy that we started to implement some years ago, has paid off. This quarter alone, Sky and Cable contributed with over half of our revenue and close to 85% of organic growth. Within our Content business, non-cyclical Content revenue now accounts for close to one-third of total Content revenue.

Moving on to our CapEx, during the third quarter, we invested about $378 million, of which $235 million were in Cable and Teleco, $90 million in Sky and $53 million in our Content business. As you can expect, given that we recently bought two new cable companies, CapEx is likely to remain high in the medium term. We need to get these companies up to speed in order to provide the quality of service that is now expected from us. The large majority of the revenue generating units in these two cable companies are video RGUs. So we can now support a conversion of many single to double and triple play customers with that CapEx. The majority of our CapEx will continue to be destined to support the growth of those companies.

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

Thank you Alfonso. Good morning everyone and thank you for joining us. As you saw from our release, during the third quarter, we posted a drop of 8.9% in Ad revenue, which is mainly explained by the initial pushback from our clients due to the restructuring of our sales operation. This restructuring has the main goal of repricing our Ad inventory. The average pricing of our ads had been declining over time as we gave priority to our volume-driven strategy. That stage of our advertising business is over. We know that the pricing of our spots is low, just by looking beyond Mexico. For example, the average CPM or cost per thousand viewers in Mexico is one-third that of Chile and less than half that of Spain, Greece and Italy. CPMs in the United States are five times larger than in Mexico. Okay. Out of a sample of 29 countries of the OECD, Mexico has the 28th lowest CPM with only Turkey having a lower CPM. Similarly only 0.48% of Mexico's GDP goes to advertising, while in Brazil that has reached 1.14% and in Argentina it's close to 1%. As you can see, we have plenty catching up to do.

The restructuring has required dramatic changes in our sales function. Increasing the tariff is the toughest step of our new commercial strategy, and it is also the beginning of the bumpy road that I mentioned to you in the last quarter's conference call. We also eliminated end of month and end of quarter promotions, which caught many of our clients by surprise. We are showing the market that we are serious about reevaluating our inventory. The reaction has been and will continue to be varied. Some of our clients happily accepted the prices increase for 2016 upfront. Some others may accept the price increase, but reduce their overall investment. Others may reduce their [ad] spend, with the hope that we will lower prices later on. And some others may decide not to advertise with Televisa at least for now. In all cases, we are confident that customers will eventually see the value that large scale free to air advertising offers.

We note that even with the adjustment in pricing, our free to air networks are by far the most efficient and cost effective advertising vehicle, and that the reach that we offer with our network is unique in our country. As you can imagine, these changes are very significant and their effect will take some time. This is not a short-term move. It is a strategy for the long and we have to stick to it to be able to get the desired resource. As such, we may not see the full benefit of this restructuring in the short term.

A separate, but equally important task is improving the rating trends. Overall viewership in Mexico of free to air television has been declining over time, but mainly as a result of the increased pay-TV penetration. We are not immune to audience fragmentation. But it is important to recognize that this is not a 2015 event. pay-TV penetration has been growing consistently from 20% 10 years ago to north of 50% today. As you know, we're also beneficiaries of this trend. But we knew this will happen and we started taking the necessary steps early on by developing content for pay television. In Mexico, we now distribute 15 different pay-TV networks, 10 of them are among the top 30 highest-rated networks. Naturally, some of the revenue we derive from our content has migrated from cyclical advertising revenue to recurring affiliate fees, which now represents close to 10% of the total content revenue. Having said that, there is no question that we are facing weakness in the viewership of some of the content that we transmit on the free to air platforms and we have to address it.

In the case of our flagship Channel 2, we have a difficult comparison, since we broke some viewership records in 2014 during the prime time, which is the time slot when we primarily transmit our dramas. The recent weakness in ratings during certain time slots seems to have resulted from the transmission of a number of shows that fell short of our expectations. As always, we are analyzing in detail the root that causes this. Anyhow, the leadership of Channel 2 continues to be absolute in our market. This is important, because Channel 2 is programmed almost entirely by content produced in-house, where we have a unique expertise and we have the freedom to adapt this content as we see fit. Additionally, this Channel contributes with a very relevant portion of our broadcast advertising revenues and it is the launch platform for much of the content that we export.

Moving on to Network Subscription Revenue, the growth of 30% resulted from the success of our networks, which continued to benefit from increased pay-TV penetration and a stronger viewership. The revenue line also benefited from the depreciation of the peso. In total, as of the third quarter of this year, our networks were distributed in over 43 million homes, of which close to 31 million are outside of Mexico. Our Network Subscription business has a very attractive outlook, not only for increasing pay-TV penetration in the region, but also from the running success of our networks and the potential to distribute more networks in each of the pay-TV households, particularly outside of our country.

One-third source of content revenue, Licensing and Syndication revenue, expanded by close to 26%. As in the prior quarter, most of the growth resulted from a depreciation of the peso. Royalties from Univision increased by close to 3% in spite of the difficult comparison, due to the transmission of the World Cup in 2014. During the third quarter, the royalties we received from Univision reached $90 million.

As you can tell and as we expected, it was another challenging quarter for our advertising business. For us, this is a phase rather than business as usual. We share the conviction that this strategy will give us pricing power going forward, something we have not had in the past. We have a unique opportunity ahead and we believe that this is a risk worth taking. Thank you so much. We are now ready to take your questions.

(Operator Instructions) Michel Morin, Morgan Stanley.

Two questions if I may. The first is related to some comments that your competitor has made recently about specifically America Movil saying that they think that -- or they expect that they should be able to receive a pay-TV license in the near future. So I was just wondering if you can comment on how you think about that, and what the impact would be? And then secondly, Pepe you mentioned the importance of affiliate fees now in your revenue mix and the trend in recent years in the US has been for these fees to go up, and it's been a revenue driver, but that's kind of starting to change now in the US, there is a little bit more pushbacks. I am wondering if you can give us a little bit more color about how you think about your ability to extract greater value from those affiliate fees, what kind of contractual arrangements you have to ensure that you can get annual price increases going forward?

Hi, Michel. As to your first question, I guess since the privatization of Telmex back in 1991, I guess. Telmex has an expressed prohibition in their concession to offer video services and the recent telecommunications reform added certain regulatory conditions to be met by them in order for them to get a change in their Concession Title. So Telmex, as you know, has been declared preponderant in the sector of telecommunications and as a result of that -- and as a result of them having that expressed provision in their concession, they can only obtain a new concession or a change in their concession to provide additional services if they are in compliance, we believe, for at least 18 months with several things, including they have to be in compliance with all the obligations established by their current Concession Title. They also have to be in compliance with the effective unbundling of its network, which hasn't happened yet. And in addition to that, they have to be in compliance with all the asymmetric regulations that were determined by Ifetel. So, our understanding is that only if and after Ifetel certifies compliance, America Movil will have the option to file an application for a pay-TV license, not before that. So I guess, in any event, for all practical purposes, we have been competing against America Movil, and them offering video through dish, because as you know, we have always claimed that they offer video through dish, through an artificial package that they have formed to offer their telecommunication service and video service. So for all practical purposes, we have been competing against them through that package. But we do not perceive a change in their concession, because of the reasons that I have explained, happening anytime soon.

Well, based on the revenues from our affiliate sales, I can say that our sales have been growing driven by volume, since penetration of pay-TV has increased. That trend is expected to continue and since the penetration is just anywhere over 50% and we think that this can get close to 70%, we see still a great gap to keep growing in our subscription. Prices paid by subscribers in Mexico are low, and have not increased, which limits the potential of increasing our prices per channel, but the volume will increase. So we think that with the quality of our content and the consistency that we've proven in all of our pay-TV services and the uniqueness of the offer, with the low penetration, there is still good gap to grow in this area of affiliate sales.

Just to complement on that, but do you have annual price increases baked into your existing contracts or is that not the case?

No, that is not the case. Right now, the growth will come from volume, from lower penetration to higher penetration and they are dollar denominated rates.

Andrei Sabah, Credit Suisse.

I wanted to ask you about the Cable sector, a couple of things here. First, I have seen some price increases coming through those drivers since the month of October, I believe. I think some of the packages that you offer have increased by around 10%. But I was wondering if this is like the average price increase that you have made and what are you doing for Sky, if you could give us some color on what to expect for ARPU? So that would be the first question.

And secondly, just quickly, if you could just comment on the improvement in margins in Cable and in Bestel, if you could just provide a bit of color on what kind of efficiencies are driving this the most? Thank you very much.

Hi, Andrei. Yes, in the case of Cable, we are standardizing the packages, because we had many, many legacy packages. So when in the cities where we are launching Izzi, we're basically giving a standard to reduce the number of offerings and the number of legacy packages that we have. And that might have resulted in some increases of particular packages, especially upper-tier legacy packages, but it's not across the board. So it was not an increase across the board.

In the case of Sky, we have only increased the prices in the upper tier package. The (inaudible) package, which is the lower-tier offering, has been stable for some years now. In terms of efficiencies, in the case of Cable, we are operating more everyday as a single company. So there are many cost savings and efficiencies there. We're buying equipment as a single company -- as a single entity. Last year we laid off, as a result of synergies and efficiencies, about 700 people. We're in the middle of a new restructuring on the cable side of the business to reduce the workforce again by 600 people. So it's operating more and more as a single entity and the cost efficiencies that pertain to that. I mean the margins for Sky are extraordinary. I think it has to do with the lean operation that they have and the business model that they have been following. We have been extremely careful with costs and expenses and that is the result -- I mean, as a result you see the margin. I think that the margins of Sky are sustainable at a mid-40s level. And I think the margins for the cable operations should be in the low-40s for some time.

Rodrigo Villanueva, Merrill Lynch.

I was wondering if you could share with us by how much you're planning to raise advertising price in 2016? That would be my first question.

It's really a little bit hard to tell, because at the end, it will vary by customer. We will not realize the full potential of the new rate cut overnight. It will be a process that may take a couple of years, but we are repricing our inventory, and setting the price according to what we believe is the right value of our products. So, it's really, really hard to know what is going to be the real percentage of the growth of the pricing. But I guarantee you that we're going to be fighting to get what we have to get, knowing our unique offer and knowing that our unique reach and the unique consistency that we have been delivering to our clients for such a long time.

Also you mentioned that growth in royalties coming from Univision was quite strong. As you said they had difficult comparison base given the transmission of the 2014 World Cup. I was wondering if you could give us some color of what you're seeing in the US related to potential acceleration of the advertising market there. Is this what you're seeing and is there anything you can comment on 2016, given that it's going to be a year with presidential election?

Well this is a question more for Univision and unfortunately for the reasons that you could imagine, we cannot give forecast with respect to Univision or our investment in that company, unfortunately.

And my final question is related to CapEx. I know you mentioned that CapEx should continue to be high. But I was wondering if you could give us a sense on the amounts and so far you have invested around USD1.1 billion for the first nine months of the year. Is it something we should analyze and is this something similar to what you would be investing in 2016?

I mean, it's CapEx that goes basically to growth. We believe that time is of the essence for us to upgrade our cable plant, as we roll out Izzi throughout the country. The results of Izzi have been amazing, as you can see from the pickup in terms of RGUs in the last quarters. So we will continue to roll out Izzi throughout Mexico or throughout the parts of Mexico where we operate. So, basically, most of our CapEx is dollar denominated. So we're going to keep a close look at the exchange rate to review the pricing of our services. And as we said earlier in the year, we believe that in 2015 CapEx will be higher, as you were saying, than last year and this is mainly explained by the fact that we now have two more cable companies. We bought two cable operations last year. And our CapEx in our Telecommunications business will continue to be driven by growth. And we also see -- I mean, it will be higher to the extent that we continue to upgrade our networks and we continue to grow. So I have been saying this, it's like a good cholesterol and bad cholesterol. In our case, it's good cholesterol, because this CapEx is growth driven -- in both cases, in Sky and Cable. The more subscribers you have, the more subscribers you have to install the boxes, the more subscribers you have to install the homes with antenna et cetera. So if you continue growing at that pace -- at this pace, you need additional CapEx, in addition to operating our cable plant, which is going to drive huge growth for us in the coming years.

V. Rossi, Goldman Sachs.

I have two questions. First on your Cable business. What is the product that is leading the growth in your new subscribers, broadband or pay-TV? And my second question is about your Content is, how is Televisa rethinking the way it offers its content on digital platforms and how does the distribution fragmentation affect the Televisa's content? Thank you.

Yes, the growth in our Cable segment is basically driven by the disruptive product that we launched. This product, which is called Izzi, which we launched in November of last year, is basically our broadband and telephony product. It's an unlimited double-play offering for MXN400 per month and this allows residential customers to call any number, fixed or mobile, in Mexico, the United States, Canada and most places in the world. This package also includes our data offering of 10 Megs of speed and allows customers to choose one of three video offerings. But basically we wanted to change the mentality of the cable companies and we wanted to offer a package that is based on broadband and telephony and from that package a subscriber can choose a video offering, but it can remain with the broadband and telephony offering. So basically it's a highly disruptive offering, MXN400 per month, unlimited calls and 10 megs of broadband speed. So this has been extremely successful. We launched it in Mexico City in November of last year and we have rolled it to about 13 cities in Mexico. We will continue to do that as we upgrade the networks. So, basically the growth, which is double-digit growth, comes from broadband and telephony. However, our video, which is the traditional and the legacy service that we're offering is also growing. It's growing single digit, but it has continued to grow.

What we have seen in the digital needs of our client is that mostly what they -- the high demand that they see in Televisa is based mostly in our sports and telenovelas offers. The clients like display banners and we are working with them to develop more and more strategies. They are very interested also in video. What we have seen is that they have seen an important [topside] opportunity developing video with Televisa, which is something that we are developing with them, it's like content creation together with the clients. This is still very slow. The bigger demand with no doubt is in search. In social media, in fact, we don't see any kind of opportunities. Of course, what in social media we do, because we see a high demand in our properties and in the celebrity accounts that we develop in our product. So, the offer of digital is like getting better and better every day. We still see it slow. We just hired a new team of people concentrated only in developing more and more of our digital offer. We see that the one-stop shop that Televisa is offering, selling Broadcast, Pay, as well as Digital is becoming very attractive. We see a lot of transmedia activities that have to do with what we air on the air, Broadcast or Pay having a lot of traffic in activities that we do in transmedia with the shows and digital activities.

So I can say that we're in the process of developing a better and better and better offer to our clients. But I guarantee there is not a better company, a more well positioned company than Televisa that owns the content and owns the actual properties of the talent to be able to develop more and more activities, actually with the client, so we can grow the revenues of digital and this fragmentation will play in our side also.

Gordon Lee, BTG.

Two quick questions, the first for Pepe, on the sort of price increase strategy and the conversations with the clients. Is that a process that will continue to 2016 or are you seeing 2015 as a year where you really sort of take them up to more normalized levels and then the normal discussion resumes? That's the first question.

And then the second question is a bit more clerical, but on the other expenses line that was almost three times what the usual run rate is. In the press release you mentioned that there are some severance and some write-downs related to that. But I was wondering if you could give us a sense of how much of that is recurring and how much of it is non-recurring? Thank you.

Well, no doubt the pricing strategy will take time. As I told you, our gap, just talking about the CPMs compared with the other countries, it's really, really far from where we have to be. We are definitely making significant changes to our rate card structure. It is difficult to tell you at this point, for our mission is to extract the full value of our advertising inventory, even if it takes a few years to catch up. But we definitely think that with our unique offer in all the platforms plus the absolute leadership that we have in the broadcast television, the reach that Televisa offers is unique. And knowing how lower our CPM is and knowing perfectly that we are a unique offer to any client and that we have always had great consistency, great quality and the reach that they need, we think that we are in the best position to give the right value to our advertising offer.

Hi, Gordon, to your second question, yes, we had some severance expenses in connection with the dismissal of personnel and that has to do with basically with our publishing division. As you know that industry as a whole is experiencing a huge challenge. And we have been reducing and streamlining that operation. And it also has to do, as I mentioned before, with Cable, where we're operating more and more as a single unit. And we have been extremely careful with costs and expenses, including personnel expenses and there have been some layoffs last year and also this year. And that will continue in the case of Cable.

If I could just have one more -- one quick follow-up with Pepe, just -- and I realize obviously you have a very different product offering in terms of quality, but do you have any sense at this point how your competitor has reacted? Are they trying to do the same, or are they sort of trying to take advantage of the push you're making, and see where they can take some additional clients?

No, honestly I don't know what they are doing, traction-wise, of course.

Alejandro Gallostra, BBVA.

My question is related to advertising and specifically if it's possible to quantify the contribution to advertising revenues of your largest customer, but at least the contribution of your top 10 clients and if you have seen any significant pushback from these top 10 clients, please?

We definitely have seen pushback. I think this is totally obvious. The rate increase that we're putting on the table that all the clients already know, has created a pushback. We think that this is the beginning of the negotiation. We also think that clients are analyzing their media buy and the clients are knowing that the offer that we have it's an offer that it's hard not to buy when you are -- when you're a client that wants to reach really the big masses of Mexico. Although we are not -- we do not provide breakdown of our customers, but I can tell you that 31 of our top 40 customers are made up by companies to sell non-durable consumer goods, such as food, beverages, cosmetics, toiletries, and also by the top retailers of our country. So these companies drive sales through effective advertising. These companies drive sales through reach, and like I said, we have, with no doubt, the most important and unique offer of media in Mexico. So this is going to be, like I said, a bumpy road, but we are going to stick to our pricing and we think that this is the right way to go.

To complement on what Pepe is saying, I mean we're fully committed to this plan. If you look at the unique product that we are offering and that our CPMs are the lowest in the region and the lowest if you compare us to any other economy of the size of Mexico, then it is time to raise prices. We haven't been disciplined in the past, but we are fully committed to this plan and we will receive pushback from clients, from large and medium and small sized clients. I mean, they're not used to seeing these price increases, and we will do it, even though we receive this pushback. So we believe that just to conclude that we have the right product and we have to do this, it's essential for Televisa on the Content side of the business.

One of my main concerns is related to one of your top 10 clients, which is Genomma Lab, which revenues are expected to decline [5%] in 2015. I was wondering if you are seeing any significant impact from this client, which is one of your top 10 clients, correct?

We don't know very clear about the Genomma Lab's number. What I can say is that a company that really needs the reach and really needs the television advertising for their business model is Genomma Lab. We think that those kinds of clients are really the ones that without the reach of Televisa, it will be hard for them to keep having the results that have been giving them a lot of growth in the last ten years. So I can tell you that, that client particularly is a client that needs the reach, that uniqueness of Televisa offer, it's really, really relevant for them.

Now, we have a very well diversified customer base, so this is not just about the top 10 clients. I think this is going to be longer lease negotiations and like I said, I think clients are going to start to -- as soon as they know, which by the way, they already know -- by the way we have already closed some key clients for the 2016 plan with the new rates. Similar to what the clients are doing now is that they are really analyzing their media buys and knowing exactly where they can sacrifice and what they can't sacrifice. And what we think that they cannot sacrifice is the offer of Televisa, because it's totally unique, and we are going to stick to it. And like Alfonso said, we know that we have the product to push the rates where they have to be. We just have to be very, very strong, stick to the plan and just keep going.

One final quick question. Will it be possible to give us an update about the status of the Univision IPO please?

Well it's a question more for Univision than for us. We have a registration statement on file with the Securities and Exchange Commission, but that's a question that unfortunately we cannot answer.

Sunil Rajgopal, HSBC.

I was wondering if you could update us about your plans for the mobile business, where are we right now on that process and when we could see more light into it?

I think we want to be laser focused on the growth of our broadband offerings. We are experiencing, as I mentioned, double-digit growth, especially in areas where we have launched this disruptive package Izzi. We believe that there is a huge opportunity there and we will continue experiencing double-digit growth in the next years. So I would not like to distract my management team on the cable side with other things. So eventually mobile will be important. We will look at a capital-light type of model, maybe through an MVNO. We would definitely be launching a disruptive package eventually. We know that -- I mean will close the year with a total number of -- more than 11 million subscribers, if you add Sky and the Cable companies. So you have a huge base. But we want to -- for the time being and because of the growth of broadband and because of the effort that that represents for our operations, especially on the cable side, we believe that it's not the right time to offer a quad play. We want, as I mentioned, to be 100% focused on the growth of broadband, and so it's a plan that we'll develop, but it's not going to happen any time soon.

And there are no further questions at this time.

Well, thank you very much. Please give us a call if you have any additional questions. Bye.

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