Grupo Televisa SAB (TV) 2015 Q4 法說會逐字稿

Good morning, everyone and welcome to Grupo Televisa's Fourth Quarter and Full Year 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, Elsa.

Good morning and thanks to everybody for participating in our call. With me today is Jose Baston, President of Television and Content and Salvi Folch, our Chief Financial Officer.

First, I will take you through the highlights of our fourth quarter and 2015 financial results. Then Pepe will discuss the operating results of our Content segment, including the initial results of the restructuring efforts of our ad sales business. We'll be happy to take your questions right after that.

For the full year, net sales increased 10% to MXN88 billion. This resulted mainly from strong revenue in our Cable and Telco segments followed by Sky, both of which grew double-digits during the year. Also for the full year, operating segment income increased 10.6%, reaching close to MXN36 billion and the margin was 39.6%.

Now, moving on to each of our businesses. Content revenue posted a decline of [3.3%] during the fourth quarter to MXN10.8 billion, and for the full year of 1.5%. Operating segment income margin for our Content division reached 42.3% in the fourth quarter and 42.4% for the full year. The drop in the full-year margin of approximately 220 basis points compared to last year's results resulted mainly from the process of repricing our ad inventory. Pepe will go into further detail on the performance of our Content business.

Moving on to Sky, during the fourth quarter, sales increased by 11.7%. This is the fastest growth for the last 10 quarters. It is 220 basis points faster than the average over that period of time and almost 60% higher than the same quarter last year. The acceleration in the growth of Sky's top line during the quarter is explained by the addition of more than 240,000 new subscribers and by an improvement in the average revenue per customer by 2.4%. There is very strong competition from all cable companies and from other content alternatives, but Sky continues to offer a very compelling package of pay television services. In addition, Sky benefited this quarter from the conversion from analog to digital transmission of broadcast channels as people look for ways of continuing watching content on their analog television sets. As a result for the full year, Sky posted a very solid growth of 10% to over MXN19 billion and reached 7.2 million customers. In terms of operating segment income, fourth quarter growth was 8.4% and notwithstanding the depreciation of the peso, fourth quarter margin reached 44.2%. For the full year, the margin was 46.6%.

Over the last five years, Sky has expanded customers at a compounded rate of [19%] per year. Cable companies have also grown at a solid pace. Over the same period of time, the number of pay television customers in the US has remained relatively flat. This is strong evidence that both markets are at different stages of development and operate under different circumstances. By the way, the remarkable growth posted by Sky over this period of time has been achieved in spite a strong competition for viewers from and rapid adoption of data services. It has also been remarkable to maintain high margins, considering this pace of growth.

Now, moving on to our Cable and Telco segment. Fourth quarter sales increased 21.6% to MXN7.6 billion. Excluding the acquisition of Telecable, which we started consolidating in January of 2015, fourth quarter sales increased 13%. For the full year, sales increased 36% to MXN28.5 billion and excluding Cablecom and Telecable, organic growth in sales was a solid 12.5%. Also operating segment income margin reached 40% for the fourth quarter and for the full year. This margin is noteworthy, given that, as with Sky, the depreciation of the peso puts pressure on the costs of some of our content among other things.

As you saw in our earnings release, organic growth in revenue generating units was remarkably strong during the fourth quarter, even faster than the growth posted in the first three quarters of the year. During the quarter, Video RGUs expanded organically by 6%, voice by 47% and data by 25%. In data alone, we estimate that as of December 2015, we already have close to 20% share of the customers in Mexico, almost double what we had just three years ago. The strong success of our cable business has been many years in the making. We could not-- be at a better point in time to continue making the necessary investments. Let me go over four basic reasons.

First, we already have a very solid pay television footprint across most of the country. Second, we believe we have the most competitive video, voice, and data offerings. Third, we have the strongest commitment to improving customer satisfaction. And last, fourth, we operate in one of the most attractive cable margins worldwide. Just a few figures, video penetration is low at 53% and continues to grow; data penetration is only 44% and continues to grow as well. And average data speeds are only 4 megs per second, but demand of faster speeds is expanding fast in Mexico.

The market dynamics of the cable industry in our country are dramatically different than those in the United States. They are different in terms of the degree of fragmentation, the point in time in the build-out phase, the trajectory of prices, the adoption of pay television, of conversion to double and triple-play of tablets, of computers, of real broadband speeds. It is important to understand the differences in order to appreciate the opportunity that we have in front of us here in Mexico.

In our other business segment, fourth quarter sales decreased by 9.2% and for the full year by 1%, reaching MXN8.1 billion. For the full-year, operating segment income reached MXN753 million, compared with MXN651 million in 2014, a growth of 16%.

Now, let me make a comment about foreign exchange. As you know, during 2015, the peso depreciated close to 17%. About $900 million of revenue and about the same amount of costs and expenses are dollar denominated. So we have a transactional hedge. We also have a very close hedge in our balance sheet with a similar amount of assets and liabilities denominated in dollars.

We do have an exposure with our dollar denominated interest expense of close to $260 million per year. Starting 2018, this exposure will be partially covered with the expected increase in royalties from Univision after the step-up in the royalty rate. Our biggest exposure is with our capital expenditures, which are mostly denominated in dollars.

Moving on to CapEx. During 2015, we invested $1.6 billion, including approximately $1.1 billion in our Cable and Telco segment, approximately $360 million in our Sky segment and approximately $166 million in our Content segment and Other Businesses.

As you can tell, the main increase in CapEx during 2015 originated in our Cable and Telco segment. We are making the investments necessary to offer the best services possible for our customers and deliver a strong return to our shareholders. Those of you who had followed the US cable companies in early 2000 will recall that the leaders in the industry went through a similar phase. For a few years, the rebuilding of their networks represented a very relevant share of their total investments. Mexico is at that phase in the development of its cable infrastructure. CapEx in our Cable and Telco business is driven by the upgrading of our cable plant and also, and most importantly by the explosive growth in customers.

For 2016, we estimate that CapEx will be similar to that of 2015, both in terms of magnitude and of composition. You should expect CapEx to remain relatively high for the next two or three years, as we continue to support the growth in our subscriber base and expand the quality and number of services per household.

In closing, 2015 was another important year for Televisa. We initiated the restructuring of our advertising sales business, posted one more year of solid growth in Sky, expanded the availability of triple-pay offerings in our cable operation, and reached a number of operating and financial milestones in these two distribution businesses.

It has not been a year without challenges. As expected, the restructuring and repricing of our ad inventory was resisted by some of our clients and will continue to take time. In addition, the depreciation of the peso has put a burden on the macro environment. We will keep a close eye on the foreign exchange rate in order to adjust our plans accordingly. And we will actively work at reducing costs and expenses in order to protect our margins.

Mexico continues to be one of the most attractive emerging markets globally and consumer demand is showing signs of improvement. We have to continue to focus on making very good content, on making it available in all platforms and on providing the most attractive, video, voice and data services. We believe this is the most effective way to maximize the creation of value for our shareholders over the long run.

Finally, I want to thank our Board for their contributions during the year. We have greatly benefited from their deep expertise in media and cable specifically. We've maintain an ongoing dialogue that has proven to be very productive having debates around our strategic long-term vision and having made important changes.

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, the top line in our Content business dropped by 1.5% during 2015, in spite of the dramatic restructuring of our advertising sales business. The decline in ad revenue of close to 10% in 2015, which was the result of our repricing strategy, was substantially compensated with the growth in network subscription revenue of 26% and in licensing and syndication revenue of 18%. The majority of the growth in network subscription revenue resulted from the strong growth in its pay-TV customer base, and most of the growth in licensing and syndication revenue resulted from the depreciation of the peso.

Our exposure to cyclical ad revenue is declining every year, not only on a consolidated basis, but also within our Content division. For example, network subscription revenue and export revenues have expanded at a very fast pace. In 2015, these revenue lines were 51% larger than they were in 2011. Having said that, the restructuring of our ad sales business continues to be of the highest priority to us. We are committed to the changes we are implementing. We continue to believe that this is the right strategy to maximize the opportunity to create value for our shareholders over the long term. Let me remind you that this is a multi-year process. We saw some early indications that we might be on the right track.

In our recent upfront negotiation for 2016, deposits were basically flat against last year, which is remarkable given the magnitude of the changes in our advertising business. Most importantly, the very large majority of our customers have participated in the upfront. The short-term customer deposits and advances that you can see on our balance sheets grew 1.6%, and include all of our business lines. Most of those deposits resulted from our upfront advertising plan, but there are others derived from our Sky and Telecom division that make advance payments. The upfront, which is the advertising deposits that have to be used during 2016 declined by 1.5% compared to 2014. We are encouraged by such results.

The increase in prices varied by network and by time of the day. It was most significant during prime time in our flagship network, where we have the most differentiated offer. Also the increase in prices varied significantly from customer to customer, as we realigned our rate card. For the moment, this resulted in lower volume commitments for our customers as they assimilate the price increase. Without a doubt, this validates that our broadcast channels remain by far the most attractive and price competitive vehicle, even after the adjustments.

Moving on to our network subscription revenue. During 2015, our top 15 pay-TV networks reached a new record of viewers, with 10 of them rank among the top 30 pay-TV networks in Mexico. The pay-TV networks produced by Televisa continue to account for the largest share of viewership among pay-TV households, ahead of very strong competitors such Fox, Disney, Turner, HBO and Discovery among many others.

Our audience in these networks is young. On average for the 15 networks 43% of our viewers are millennials, and more than half younger than 44 years old. The age composition of our audience today is not very different to what it was five years ago, in spite of the significant increase in the importance of social media. Over the years, we've assembled a portfolio of channels for pay-TV that gets better every day, and that capture many of the viewers that migrate from free-to-air networks to pay television.

In our licensing and syndication business, the majority of the revenue continues to originate in the royalties we get from Univision. The royalties reached $311 million, double the amount received just five years ago. The figure is lower than the one in 2014 but that is explained by the transmission by Univision of the soccer World Cup that year. Other export and licensing revenue in 2015 reached $170 million.

Now, in terms of operating segment income margin for our Content division, the margin during 2015 decreased by 220 basis points. As you can expect, this is primarily explained by the restructuring of advertising inventory. 2016 will continue to be an incredibly important year for our content business. At this point, we cannot provide you with guidance for the top line growth. We believe it is prudent to wait until the end of 2016 to judge the success of our new sales strategy and probably until 2017. Upfront deposits will be sufficient to some clients, while others will have to make additional purchase in the scatter market, if they want to buy the same advertising mix they bought in 2015.

It is also difficult to provide guidance for Content margins for three main reasons. First, margins will be slightly dependent on our top line result. Second, we are looking for ways to strengthen our content. Competition for viewers is more intense every day. We constantly make changes to our formats and our stories, but we now have to do so at a faster pace. Finally, this week we relaunched our OTT platform under a new brand which we call Blim. We will position this platform as a premier destination for Spanish language content and by that we mean originally produced in Spanish. Blim will have the best selection of Televisa novelas, series and programs of the last 50 years, exclusive access to our large library of Mexican movies, exclusive access in OTT to many new programs that will be initially launched in Blim and some content from third parties.

We pay close attention to changes in viewing habits outside Mexico and want to be ready with a strong OTT offering. During 2016, we expect that the initiative to strengthen our content and relaunch our OTT offer will represent approximately $100 million of incremental content cost. As expected, the pay-off will not be immediate, but we consider our obligation to make the investment today. In the meantime, we will continue to maintain a very strict control in cost and expenses. We have been the leading producers of content in Spanish and we will continue to do so in the most profitable manner on every platform. We are committed to maintain that position.

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

(Operator Instructions)

Michel Morin, Morgan Stanley.

Pepe, I just wanted to clarify what you said about the volume impact of the restructuring of the advertising sales and actually I understood exactly what you meant, I heard you saying volumes are down, but I'm not sure if you quantify that.

And then regarding the over-the-top Blim launch, so if I heard correctly, you're saying there is $100 million of incremental content costs that you will be absorbing. And I just wanted to know kind of what the timing of that would be, and also whether or not this means that you are no longer working at all with Netflix, and whether or not there would be an impact on revenues as well from losing the whatever revenues you're generating from that relationship?

I'm going to answer your second question first. Yes, the investment would be $100 million for this year, it is content that will be air most of it first on our OTT platform, Blim. And after that, in the sense we will go in this strategy, we'll be using that content in every place of the world that we export our content including of course Univision, and also in other platforms of Mexico. Now, yes, we're going to stop selling content to Netflix. And we think that our offer of export, with the amount of content in our library and with the great resource that we have with the production of language Spanish productions of Televisa, we can become a great player on the export arena, knowing that a good amount of content is being consumed that way.

Now, in the way of the volume, we cannot show you the exact volume or price change, but prices were up and volumes were down in the upfront. What that tells you is that clients took the increase in the prices, but without doubt they have been more conservative in the volume. But we think that with the result that we're going to be giving the clients and it will replicate the investment that they give in advertising last year, we feel that they are being very aggressive in consuming that investment in the first quarter of the year. We are working very hard to be able to have that differentiation of the volume in this current market. So that's exactly the strategy. We're going to work right now. We are working right now, we are repricing our inventory, but also with the good quality of our content and the leadership that we have in the market, we expect to work hardly in the consumption of that upfront to be able to have more capital market investments from those clients that even have the same volume as last year.

Great. And Pepe, what percentage of your clients from a year ago have already signed with you, roughly?

Most of them. I can tell you that, big, big percent of them, most of them, yes.

Richard Dineen, UBS.

Yes, maybe just to clarify on those numbers, on the upfront, I mean, I heard you mentioned that the short-term customer deposits and advances -- sorry, question for Pepe here, did they grew 1.6%, but then you mentioned that there was a decline of 1.5% year-on-year and I just couldn't hear what that negative 1.5% was referring to, was that the actual upfront revenue, was it sort of a volume measure? So if you could maybe just clarify those references.

And then secondly, just if I may ask, telecom advertising is usually quite a large customer vertical for broadcasters and just saying the increasing competition in the Mexican mobile market, do you think that telecom can become a significant contributor to Televisa's ad sales, particularly in 2016 or do you think that something that might only happen in 2017 and beyond? So any color on those questions would be fantastic guys.

The number that we have to concentrate on is the decline of 1.5% compared to 2014 in the upfront, that's the number to work around, because the other number that had an increase of 1.6% includes the deposit from Sky and our cable business.

Yes, to your second question, telecom will definitely become really important in terms of advertising sales. As you know, Grupo Carso, Telmex, America Movil have come back to Televisa to advertise as a result of additional competition from AT&T. AT&T has become a relevant client of ours as well as Telefonica and our own cable companies and Sky heavily advertise and pay for that advertising on our networks. So it is a line item that will grow as far as in my opinion.

And do you think that could be something that would be material this year, Alfonso? Or is that something further out, do you think?

It's a very important category and it will continue to grow.

Rodrigo Villanueva, Merrill Lynch.

Alfonso, I was wondering, if you could share with us the price increase negotiated in the upfront, that would be my first question. And the second is related to Sky, we saw very strong additions during the fourth quarter in part due to the analog shutdown. I was wondering if you could share with us, if you expect the first quarter to be a strong. What can we expect for the rest of 2016?

As I said, the increase in prices vary by network and vary by time of the day. It was with no doubt more significant on our flagship network channel, Channel 2, because there is a lot of demand of that network and that time slot by far, the biggest differentiator of our offer each on prime time. So it's where we have the most differentiated offer, but it varies customer by customer, we're realigning our rate card as I said, and it varies of time of the day and network.

Sky had a fantastic fourth quarter and we will have a fantastic first quarter, because of the reasons that you mentioned. As to the full year 2016, we expected to grow at a slower pace than in the past. Gross additions are likely to remain strong and as you saw, I mean, churn has stayed relatively stable, in line with the industry standard. But I mean the base is so huge, more than 7 million subscribers that of course maintaining that growth pace becomes more and more difficult. However, we believe that this company will remain growing at a slower pace, however, at a strong pace.

Understood. Thank you very much. And just one final question. We saw that you increased prices at Sky since February. I was wondering if you're planning to do the same with the cable companies, particularly in the video segment.

Yes. We are looking into that especially as a result of the exchange rate effect and what that does to our CapEx and also to our operations both on the cable and Sky front. What we're going to do in order to protect our margin on both companies Sky and the cable companies, cut costs and expenses. We're finalizing a plan for this year. And of course, that will include all types of costs and expenses, especially the ones that are denominated in foreign currencies. And you'll see the results. So I mean, basically what we're going to do is to protect our margins on both companies.

Gregorio Tomassi, Itau BBA.

This is actually Arturo. I wanted to get your opinion about how you see the cable industry evolving and also the Sky business evolving in a couple of years, especially considering the increased data demand from telecom carriers and how you see fixed broadband and fixed networks within that market. And if so, are there any plans for you to return to the mobile business or any thoughts around that would be great.

Yes, fixed broadband, Arturo, I think it will continue to be a great business both in terms of margin and in terms of growth. We believe, because of the reasons that I mentioned before that it's a great opportunity for us. As I mentioned, we already have a very solid pay television footprint, we cover about 40% of the Mexican households. So we have a lot of space to grow in that view. We believe that we have a very strong and competitive triple-pay offering, competition is of course very strong, especially from Telmex as a preponderance operator who offers triple-play services bundling with dish as well.

We have also a strong commitment to improve our customer satisfaction. And just as I mentioned before, let me give you a few figures, why we believe it will continue to grow at a fast pace. Video penetration is still very low at 53%, as you have seen in the previous years this continues to expand. Data penetration is only 44%, so there is a lot of space to grow on the broadband side and average speeds are only 4 megs per second. So demand for faster speeds is growing and we are well positioned because of the investments that we have made to deliver higher speeds. So we believe that, that business will continue to grow and we'll continue to deliver the margins that we have seen.

On the side of mobile, we're not planning to enter into the mobile business, we're focusing on the businesses that we have today which have double-digit growth.

Vera Rossi, Goldman Sachs.

I have a question on the OTT product, how do you compare the OTT product of Televisa with the ones that are in the market, such as Clarovideo? And could you talk about how many titles you expect to have the mix between Spanish and foreign language and also the pricing strategy?

The comparison is very simple. We have the library of Grupo Televisa that has 50 years, more than 50 years of producing content. We have a great amount of the history of our country, which is basically all the telenovelas in our country plus the library of most of the sports that have been going on in our country, especially soccer. We have all the content that Televisa has produced for many years and it will be on an exclusive basis on Blim.

Now also, we are developing new content using the great infrastructure that Televisa has, developing shorter content, and reduced amount of episodes. We have a great, great number of subscribers in our country that will help us to try this new business, as well as great platforms of promotion. So, I think that we can become a very, very important player in the OTT arena, with the content that we're using plus the great synergies that we can do with pay-TV operation -- the pay-TV subscribers outside Mexico plus the cross promotion that we can get from our great market share that we have in our country.

The pricing is MXN109, which is for two devices, which we're -- if you compare with our main competitors, about 15% less in the price that they are offering. Honestly, I don't know what Clarovideo is offering. But I think that we can become a very solid player very soon, because of the great amount of -- and quality of offer that we are putting in the market.

And just a follow-up question, do you expect to charge your pay-TV customers the same price? Or depending on the pricing plan your pay-TV or your cable customers, you're going to have like a give the service included in their plan, so leverage our platform.

Yes. Actually we're doing different strategic alliances with the pay-TV operation that we have. We will be giving discounts to the subscribers that are already in our pay-TV offer and also we are developing different kind of strategy of bundling. So I think that we're just beginning with some simple synergies, but we think that when the time goes by, we will be able to develop more taking advantage of our great position in the pay-TV market.

Okay. And the last question on that, so the mix is Spanish/foreign language based on what you've described will be mostly the Televisa's content, you won't have foreign or content that is not Televisa produces, is that correct?

No, we even have -- it will be probably a mix about 70% Spanish, 30% English, but we are also getting content in Spanish that is not produced from Televisa. So we want to have a very, very solid Spanish offer, but also we're going to have important content that we buy from English-language producers and a great amount, that represents about 30% of the offer will be targeted to kids.

Okay. And how many titles you expect to have approximately?

We are starting with over 13,000, we're going to be closing the year with close to 20,000.

Soomit Datta, New Street Research.

A couple of questions, please. One, you finished the year with close to $3 billion of cash on the balance sheet. Could you help me understand a little bit what that's for and perhaps tying in what are your latest perspectives on further consolidation in the cable market. And then the second question is going back to a discussion earlier on cable CapEx, which $1.1 billion remains very high, I sort of understand conceptually what's happening, although still the numbers are a little kind of mind-boggling. Could you perhaps give a little granularity on what that spend is going on in terms of CP, access network, construction, other costs, any sort of granularity on the CapEx for the year gone would be very helpful.

Yes, we maintain a strong cash position and basically, most of the CapEx is going to our cable assets, cable investment. So, I mean that's basically in terms of CapEx what we're doing. And in terms of our CapEx investments, it's improving our networks, growing the homes passed. So I mean, as I mentioned before, we are at a different stage than the US. I like to use the example like Comcast in the year 2000 when broadband was starting. However, the main difference is also that in Mexico, we're competing against a preponderant operator on the telecommunications front. So, we have to keep up the pace of investment. So we can compete by delivering a better service and by delivering, especially higher speeds.

So, we have to keep up the investment in order to expand our networks, to improve our networks to be able to deliver these services and to deliver higher speeds. That's the priority. So, we are at a very heavy CapEx cycle at this point in time. We will be seeing a reduction in the following years. However, this would be the most heavy year of them all I believe.

Okay. And maybe just a quick follow-up. Homes passed, I don't think we have that number in the release, I don't know do you have the current homes passed rate and do you have any near-term targets for that?

Yes. I don't have the number with me. Carlos, if you want, can give it to you afterwards.

Andre Baggio, JPMorgan.

So I'm interested in knowing how it would been at the sitting with this price hikes, and what was the reaction in the fourth quarter of the clients, which we're not so pleased with these price hikes? Did you end up selling less advertisement than you had, so that you have unsold inventory and you would expect this clients that they would come back in 2016 as they realize that the strategy of Televisa to increase prices were good?

Yes, some of the clients are participating in this capital market, but only on some degree. So to explain it better, I think that what clients are doing, they are really trying to absorb really this new change of Televisa's strategy in advertising sales. We don't have a doubt that this is the right way to go. We are very clear that our offer is unique. And we also think that the reach that Televisa has, which is by far the biggest clients are going to be aligned by the marketing strategies knowing that our offer is something that they have to have. So I think that the processes are starting. We have said that 2016 is the year, it's going to be a bumpy road, but it is a year where we're going to learn a lot of the way clients are going to be using their -- the strategy, I mean the resources to buy advertising. So like I said before, we're going to learn a lot. We think that we have the product and we think that the right way to go is to revalue our inventory because with no doubt Televisa has to increase the revenues in advertising.

And just the final question, were you happy with the sales of even down 1.5%, that's way better than the result we've seen in 2015, that was down advertisement down almost 10%. So is Televisa thinking that the strategy is going on the right track and this minus 1.5%, a good indication of a better growth in 2016 and onwards after this decline in 2015?

Andre, we are very, very happy with the results of the upfront. We think clients are valuing very, very fast what we offered. All I can tell you that we are happy with the upfront and we think that the 2016 has already started importantly, positive. So I think, again, I think it's going to be a great year to learn other things about what's happening with the value of our inventory and we think that's the right way to value is to keep our position very, very strong because we know we have a unique offer.

Thank you. I'd now like to hand the conference back over to Mr. de Angoitia for any closing remarks.

Thank you very much for participating. Give us a call if you have any additional questions. Thank you.

Thank you. And this does conclude today's Grupo Televisa's fourth quarter and full year 2015 conference call. You may now disconnect.