Grupo Televisa SAB (TV) 2016 Q1 法說會逐字稿

Good morning, everyone and welcome to Grupo Televisa's First Quarter 2016 Conference Call. Before we begin, I would like to draw your attention to the press release which explains the use of forward-looking statements and applies to everything we discuss in today's call and in the earnings release.

I will now turn the call over to Mr. Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead sir.

Thank you, Jasmine. Good morning everyone and thanks for joining us today. With me today is Jose Antonio, President of Television and Contents; and Salvi Folch, Chief Financial Officer of Grupo Televisa. During the first quarter, both our consolidated sales and operating segment income posted an organic growth of more than 9%. Revenue in Sky and Cable grew double digits and Content was able to post a high-single digit growth in revenue, partially [covered] by the depreciation of the peso and in spite of the new pricing structure in the advertising sales division.

Let us go briefly over each of our different businesses. First, I will ask Pepe to discuss the operating results of our Content segment. I will follow with discussion of Sky, Cable and our other segments, and we'll close with your questions.

Thank you, Alfonso. During the quarter, revenue in our Content segment expanded by 7.2% to MXN7.5 billion. In the first quarter, we'll launch a number of new shows with fresh formats. This included improvements to our traditional programming as well as a premier of new fiction series, both with higher production values and different story-telling. The initial results indicate that Televisa's offering is delivering two-and-a-half times more viewers than our nearest broadcast competitor in Mexico. Having said that, we are investing in our content offering with the understanding that the broadcast audiences continue to shift to other platforms. We have seen this with the growing appeal of our pay-TV networks.

Even with this audience fragmentation, our broadcast networks continue to be the most effective and cost-efficient alternative for our advertising customers, thanks to the unique scale that our networks deliver. For that reason, we will continue to focus on maximizing the value of our broadcast advertising inventory, while at the same time, we continue developing new sources of content revenue.

Now moving on to each of our revenue lines. Advertising posted a drop of 3.1%, ad revenues were impacted by the Easter holiday, when people typically spends less time watching television, which took place in the second quarter last year. Also as a result of the recent restructuring of this business, clients continued to be watchful with their investments in our advertising platforms. Having said that, the pace of decline have slowed down in a significant manner when compared to the prior three quarters.

Most importantly, we are carrying on with our repricing strategy. Our visibility continues to be limited, but we remain disciplined and committed to it. We have completed the initial stage successfully. Our customers have agreed to the new pricing structure, which for many of them, has also meant lower volumes.

Moving on to Network Subscription Revenue, this business continues to benefit from the expanding pay-TV penetration, the popularity of our networks and dollar linked revenues, posting a growth in sales of 31.2% during the quarter, excluding the impact of the peso depreciation, growth was solid at high single digits. Licensing and Syndication also posted strong results with sales increasing by 25% during the quarter. Royalties from Univision, the majority of this revenue line also posted a solid high-single digit growth of 7.7% reaching $71 million.

The growth of network subscription and licensing and syndication revenue more than compensated from the decline in ad revenues, even excluding the favorable impact of the peso depreciation. As a result and in spite of the step-up in our cost base and the drop in our ad revenues during the quarter, operating segment income expanded slightly by 1.8% to MXN2.7 billion.

Hi, again. Thank you Pepe. Now moving onto Sky during the quarter, net additions were 398,000 subscribers, reaching a total of 7.7 million. This is the highest number of net additions on record. Most of the growth continued to come from Sky's low cost prepaid offering. As a result, revenue grew by 15.7% reaching MXN5.3 billion. I shall mention that the growth was particularly strong this quarter due to the transition from analog to digital transmission of broadcast signals in Mexico. This transition, which was completed on December 31, helped drive adoption of pay television services by many customers that were left without a signal. Also as a result of the transition, the recharge rate in our prepaid offering increased and the number of set-top boxes per home expanded.

We also benefited from the price increase by 9% in our prepaid offering that came into effect on February 1. At a price of MXN185 per month, our prepaid offer remains incredibly attractive. So the change in price did not seem to have a negative impact. The favorable effect of these factors can also be seen in the revenue per customer, which after declining for many years, has expanded now for three consecutive quarters, posting a year-over-year growth of 3.7% in the first quarter of the year.

Sky continues to deliver a very strong margin. Operating segment income margin reached 45% to MXN2.4 billion. The compression in margins by 150 basis points is explained by the increase in the cost of content, some of which has to do with securing key sports rights for our premium pay-TV offers, and some of which resulted from the depreciation of the peso.

Now moving on to Cable, in our Cable segment during the quarter, net additions of RGUs or revenue generating units were 250,000, reaching 9.3 million RGUs and sales increased by 13.5% to MXN7.6 billion. Organic year-over-year growth in RGUs was strong across the three services, expanding by 7%, 21% and 36% for video, data and voice respectively. Video customers reached MXN4.2 million, data customers reached MXN3.1 million and voice customers reached MXN2 million. While the growth in total RGUs continues to be remarkable, it was lower than the prior quarter.

We believe the slowdown is temporary and is explained by two factors. First, during the quarter, we experienced certain challenges in the operation of two systems as a result of necessary upgrades to their infrastructure. We transitioned customers from an old technology to the one necessary to offer our izzi product and this resulted in an unexpected number of temporary disconnects. Excluding these two markets, the growth in RGUs in all other markets remained very strong and in line with the average of the last two quarters.

Second, Easter holiday fell in the last two weeks of the quarter. Collections are more complicated while people are on vacation, which temporarily increases the level of churn. Operating segment income increased 18.6% to MXN3.2 billion and the combined margin for our cable operations and our network operations reached 41.4%. In our Cable operations alone, margin expansion was even higher at 220 basis points. The increase in margin is explained by the strong operating leverage of this business as more customers adopt double and triple play services. In our other businesses line, our publishing film distribution and soccer operations experienced difficulties during the quarter, partially compensated by growth in revenue and profitability of our gaming business.

Moving on to our CapEx, during the first quarter, we invested $331 million of which $209 million were in cable, $88 million in Sky, and $33 million in our Content business. These figures are consistent with our plans for full-year CapEx to be similar in amount and in composition to last year's capital expenditures. Also, last month, we announced the acquisition of the remaining 50% of the equity of TVI, our cable operation in the Northeast of the country. Full ownership of TVI will allow us to better integrate the operations of this Company and to find more efficiencies with the rest of our cable operations.

Finally, I am glad to share with you that yesterday the General Shareholders' Meeting approved a dividend of MXN0.35 per CPO, which is consistent with our dividend policy. In closing, we're working hard to reaching the goals we set out to achieve and shared with you last quarter. We remained strong focus on the implementation of our re-pricing strategy and while results will continue to be bumpy in the short-term, we know it was the right decision.

The development of other sources of Content revenue has proven to be key to withstand challenges in the traditional ad sales business and to capture those audiences that migrate to other platforms. The royalties from Univision have become an incredible source of value to Televisa, and a very important stream of dollar denominated revenue. Sky keeps breaking records and the opportunity for further growth in customers and in revenue per customer remains very attractive. And in Cable, the customer base, we are building in all three services, is positioning Televisa in a very unique way to continue benefiting from the growth of this industry.

Thank you for your time and attention. And now, we are ready to take your questions.

(Operator Instructions) Gordon Lee, BTG.

Good morning. Thank you very much for the call. Two quick questions. First, on the Content business, I was wondering if any of these sort of additional $100 million in content production expenses that you anticipated in the fourth quarter conference call, how much of that we saw in the first quarter? And also on those $100 million, if you could give us a sense of how much of that is to beef up the content for your free-to-air platform? And how much of it is content that we could see exclusively on Blim? And the second question just on pay-TV, the increased sort of the subscriber adds that we saw in Sky in the first quarter, how much of the 400,000 would you estimate is attributable to the analog switch off and do you think that's a one-off that we've already seen play out or is there some additional momentum you could see from that standpoint for the rest of the year? Thanks.

To your first question of the $100 million, it will be about one-fourth of that amount. And all the content that we're producing, we're going to be airing different platforms, it is not just one platform I suggest. As you know, one of the strategies that we have always got and has given us a possibility of amortize our content in the best way possible is that we air our content in different platforms, using different kind of window in strategy based on the needs of growth of any platform. So, that's basically the way that we're going to be using that content.

Hi Gordon, as to the Sky net additions, as you saw the results, they were great. We broke a record. And we believe that you should look at the net additions prior to the switch from the analog to digital broadcasting of the signals. So you can see a more normalized number of net adds.

Do you think that the impact from the analog switch up has already happened fully in the first quarter or do you expect that we might see a little bit more follow through in the second quarter?

We're seeing a more follow-up in the second. However, it's not to the same extent as in the first.

David Joyce, Evercore ISI.

First question is on the Blim service, how can we think about any potential regulations around the availability of Blim? I was just wondering if you could -- is there any compare and contrast your programming offerings across the various over-the-top services in Mexico. And are you required to make your content available to other over-the-top competitors? And then secondly, if you could please discuss the path of the upgrades and when you expect to be completed on upgrading the various cable systems and how widespread would be Izzi platform to you? Thank you.

There's no regulation in Mexico that has to do with the OTT services. There's plenty of competition in the OTT market. We believe that Blim is going to be successful because of our content, the content that will be produced and aired first window on Blim as Pepe explained and further another of our platforms, but there's no regulation has to do with content for OTT services, and we'll use that strength of our content for, I mean to enhance Blim.

As to Cable, as you know, I mean we have been making, in the last year, pretty heavy investments in the upgrade of the networks, the growth of the networks and of course for competitive reasons and at this juncture in Mexico's pay-TV industry, we're not disclosing the level at which we are planning to continue upgrading and changing the networks because we would be guiding our competitors. However, I mean, as we have said level of CapEx this year will be similar to that one of last year.

Understood. Thank you very much.

Michel Morin, Morgan Stanley.

Thanks. Good morning. So, just on that last point on CapEx, I was wondering, can you quantify for us how much of that is really kind of capitalized subscriber acquisition costs, specifically in cable and satellite. And then secondly, in your remarks, you talked about the acquisition of TVI as kind of opening up potential synergies. I was wondering how much more of that would be potentially achievable if you were to continue to consolidate all of your cable operations including Cablevision, where your stake is around 51%. Is there a plan or an intent as well to eventually do that for all of your cable interests? Thank you.

As we have mentioned in the past, it makes a lot of sense to consolidate into one company because operating as a single company has a lot of advantages in terms of exploiting those synergies and cost efficiencies. As you saw, we bought 50% of TVI in Monterrey in the Northeastern part of Mexico, I mean the 50% that was owned by another shareholder, so I believe that the multiple at which that 50% was bought was great. And we would like to continue exploring that possibility of putting together a single company that would operate as one, and that would be able to take advantage of all those cost efficiencies and synergies. As to your first question, I can tell you Michel that the large majority of the subscriber acquisition cost is capitalized.

And how significant is that as a percentage of the CapEx?

It's about 40%.

About 40%, okay. And sorry, one more follow-up as you mentioned that multiple pay was great for the 50% TVI, can you quantify what the multiple was, please?

Well, I think it was disclosed in the press release, which I don't have at hand because I don't really -- let me ask Salvi.

2016, it was about eight times.

Eight times, 2016, projected EBITDA?

If I remember correctly, 9.3 times, 2015.

Great, perfect, thank you so much.

And payment, as you saw Michel, was financed by the seller.

I am sorry, what was that last part, it was financed by the seller?

Yes, the payment of the total amount for the acquisition of that 50% was financed by the seller in pesos.

Okay.

It's going to be paid, over time.

I got it, okay. Thank you so much.

So it's peso denominated long term debt.

Over three years, I think, yes?

Correct.

Daniel Federle, Credit Suisse.

My first question is just to clarify what you mentioned in your remarks. You mentioned that the disconnections in the broadband market, they were temporarily. Are you expecting to revert those disconnections in the second quarter? And my second question is related to do the advertising business, if you could comment, if you are already seeing some advertisers, which you're playing hardball in negotiations, and we're soft in this 2015, and in the upfront of 2016, now, they are coming to this scatter market? Thank you very much.

Hi Daniel, we believe that those disconnects are going to be temporary. As I explained, we had basically two cities that where we had the issues, where we were transitioning from one network transmission to the other. And we had other issues because we were also transitioning between two platforms, but we believe that those will be temporary.

Now, we believe that our customer reduction in volume gives in the volume that they have -- also gives them the ability to absorb the price increase over a longer period of time. Therefore, volume could go back up eventually either during the 2016, scatter market, or even in 2017. But there is also good chance that our customers will try to increase their investment in other platforms. Therefore, I wouldn't assume yet that we will see an increase in volumes this year. Let's just wait a little bit to see how 2016 goes and we will continue to be, I think it will continue to be choppy this year.

Okay. Thank you very much.

Gregorio Tomassi, Itau BBA.

Yes. Good morning, and thanks for the call and taking the question. This is also a question on advertising probably for Pepe. If we were to assume a -- what it could be a regular seasonality in advertising expenditures in Mexico, what can we derive from first quarter results. I think they're pointing out to at least mid-single digit growth for full year, would that be the case, again if we were to assume regular seasonality?

Actually, we believe that the restructuring of our advertising sales division is going in the right direction, but we need to -- we need more data points to see the degree of success that we will have with it. However our broadcasting inventory continues to be, by far, the most cost effective advertising vehicle in Mexico. It is likely that our advertising customers will be testing all their platforms during this year, it is also likely that our customers will keep volumes down for some time while they assimilate the price increase that we put in place.

We do not know how long this process is going to take, we're going to keep being very solid. Although, as I mentioned just now, one of the most important elements of our content strategy is that we extract the value of our content through multiple platforms. For example, our efforts to diversify into production and distribution of pay television networks, which we started already over 10 years ago, have already paid-off. The same can be said about our export revenue, both are becoming more and more important sources of content revenue every day. Although we're working hard to improve the trajectory of our broadcasting business, we will also continue to push for the development of other sources of content revenue. We own most of our content that we transmit, so we have the ability to showcase it in any platform that we think will give most value to television. Our deposits are down compared to last year, but we have to wait. Like I said, we have a choppy row to come and we are going to keep solid with our strategy of keeping the biggest value to our inventory of our networks.

Just a follow-on on the same subject. Would you say that in first quarter, you already saw a lot of many advertisers trying intensively to other platforms or you may expect an intensification of looking for different alternatives in the next quarters compared to what you saw in first quarter?

Well, we have seen clients buy other media, yes, but we have also seen that they are consuming our networks because of the reach that they get. Remember that the most important asset that you have in a network like ours in broadcast an now in pay, because -we have with no doubt the best option for any client in pay-TV also, we have by far biggest reach in broadcast and we have all the targets that client look for. I think we have to wait a little bit. It's very early to tell. Clients are already buying other media.

They didn't start this year, they started last year and even before, but I think they are finding that the result of the engaging the media is not well measured, and also is not giving them the results that they're expecting yet. I think that what we are offering to them is unique. And I don't have a doubt that we are, with no doubt, the best offer to them. So, we are going to keep solid, we're going to keep fighting for, like I said, keeping the value of our inventory very, very high. And I think that we have to wait a little bit to be able to have more signs.

Sumit Datta, New Street Research.

A couple on the Cable business please. First of all, there was an expenses item, I think in the other line which related to the disposition of assets as regards and infrastructure, great, I didn't quite understand exactly what that was and why perhaps it wasn't booked in the cable line, maybe, you could clarify that. And I am assuming, it sounds like it's a one-off item, but if you maybe help put a number to that? Secondly, on the Cable, we've seen for the last couple of quarters, you're sort of main peer in the market, putting up revenue growth rates of around 20%. You're seeing your revenue growth accelerate nicely this quarter, is it unrealistic to think you could be achieving those kind of top line growth rates, and over the next sort of two to three years, et cetera, something along that time period. And then finally, please, can you give any sort of quick, sort of snapshot of where you are on the network. I know it's difficult because you have a number of different assets, but again on the cable side, what percentage of your homes passed can achieve what sort of speed, so 80% can get 10 Megs or anything to kind of understand where we are on the network development side would be really helpful? Thank you.

Hi, Sumit. As to your first question that line item has to be -- has to do with disposition of old pieces of the network, all the network and equipment that is substituted when we go in and make the changes. So, it's disposition of the old network, in essence. Then as to the rate of growth, if you'd see the penetration of the three services in Mexico, but especially of video, which has reached 55% and still has room to grow. And also if you look at penetration of broadband, which is in the 50s, there's still a huge space to grow. So, we believe that this rate of growth is sustainable.

There will be many challenges, we have a fierce competitor. However, we believe that with our products, with our disruptive products, such as Izzi, we'll be able to maintain that rate of growth, if you look at both the competition and the pricing, that competition is put into their products. And also the underpenetrated services in Mexico. So, the network, I mean this is a network today that has over a 100,000 kilometers. So, this is the second largest in our country, 25,000 of those are fiber, and I mean additionally Bestel has 30,000 together with Metrored and GTAC. So, with the lines of the fiber that we operate together with Megacable and Telefonica. So, what I can say as to the network is that more than 95% has be directional capacity and capabilities, more than 50% operates with one gigahertz, approximately 37% at 870 megahertz, and Cablevision, Cablemas and TVI operate using DOCSIS 3.0 exclusively and close to 80% of their customers have DOCSIS 3.0 equipment.

That's really helpful, thank you. And just on the first question, the expenses, the disposition related charge, can you quantify that? Is it sort of meaningful?

Yes, well, I don't have the figures here. If you want, can you call Carlos and he can get it to you?

Richard Dineen, UBS.

Hi, this is Maria Azevedo. thanks for taking the question. I would like to know what are you seeing in terms of pickup in telecom advertising with AT&T post improved numbers, can this be a new growth element in the business you believe?

Yes, I mean in all the sectors and specifically, on the telecommunications front, the more competition in those industries, in those sectors, the more they need, the participants have to advertise. So, competition is very good for advertising. And in that sector, telecommunications in specific, we have seen more competition and that results in more advertising, and if there is more competition in other industries as in the telecommunications industry, we'll see a pickup in terms of advertising.

Thank you, another follow-up question, do you have any expectations for the unbundling of the local loop and how can this be an opportunity for Televisa? Thank you.

Maria, we are analyzing that very carefully and we are actively participating. We are evaluating reference offers that were launched last year and towards the end of last year. We are looking into the terms and conditions in detail. The initial findings show that the conditions in place were designed to inhibit any third-party from accessing the networks of the preponderant operator in a cost-effective manner. We're pursuing the necessary changes with the regulators in order for this to turn into a viable opportunity for Televisa. So, we're actively looking into this and we are actively participating in the regulation with IFETEL. So, this becomes a reality, so the unbundling of the local loop becomes a reality in conditions that would allow us to compete. We believe that it's a great opportunity especially for Sky. Sky has more than 7 million subscribers in our country, has a national brand, has a national presence, and therefore it would make a lot of sense for Sky to offer broadband services to its subscribers. So, we believe that specifically for that company, if the regulations are right and if we can really take advantage of them and make this a reality, it'll be a great opportunity.

Perfect. Thank you very much.

Andre Baggio, JPMorgan.

Good morning. I have two questions, first one relates to the cable, you had a very nice increase in margin in the quarter year-over-year, so I want to understand what's behind this margin increase and how sustainable it is?

This has to do with cost reduction and cost efficiency plan that we put together towards the end of last year, so we were able to compensate most of the depreciation of the peso and go further. This margins that you're seeing this quarter are sustainable. So, we're going to be very strict in terms of reducing costs and expenses and getting to a point where we take advantage of all the synergies and efficiencies.

Okay. Thank you. The second question, I just want to clarify some numbers. You had said before that you had roughly $100 million in related to cost to Blim and then a fourth of that was already in this quarter, so I just wanted to understand the impact on the content EBITDA this quarter was more or less to $25 million, because of Blim?

The $100 million is investment over the whole year. And Blim launched at the end of February. So I mean you can do your numbers based on the time that blim has been on, but actually the investment of the $100 million is a twelve month investment.

And now that we're correcting numbers, I mentioned before the call that apparently that the dividend was 35%, no, it's MXN0.35 per CPO, not 35%.

And by the way the $100 million are not for Blim. Just to put that clear. $100 million is new content.

So I mean, as Pepe explained that content will be window, some of it will go originally and the first window to Blim, however, it would go to other platforms of Grupo Televisa and following that or in the reverse order, so it's a windowing strategy that Pepe is putting together with that content. So, it's a $100 million going to Content and it will be windowed on Blim or and another platforms as we think it's a smarter way of putting it out.

Rodrigo Villanueva, Merrill Lynch.

First, I was wondering, if you could share with us, the breakdown between upfront and spot advertising revenues during the quarter? And then, I was wondering if you could share with us, after three months of launching Blim, which has been the subscriber intake that you have had there, and what could you expect over the next 12 months? Thank you.

Going to your second question of Blim, customer assistance has been good, it hasn't been three months yet by the way, we just closed the second month. But the customer acceptance has been good, brand awareness has been really high, higher than we expected. The number of subs so far are in line with our expectations. Our plans are on track. In any event, as we said in the past, it will take a lot of time for this investment to pay off. I mean not a lot of time, it will take time for this investment to pay off. We will not be giving any subscribers targets until it contributes to our topline in a relevant manner. Most of the sales were up front, although we do not provide the specific breakdown to these numbers.

Carlos de Legarreta, GBM Research.

Just very quickly on the acquisition of TVI. Two questions there. One is that the cash outflow was made during this quarter or will it happen during the next quarter? And the second one would be, I understand, you follow, let me say, a different regulatory path to complete this as compared to the past two previous acquisitions. I was wondering if you could explain the reason for this? Thank you.

As to the acquisition of 50% of TVI, it's MXN2 billion this year, and then it will be three installments in the following years. And that debt is with the seller, it is peso denominated. Can you repeat the second question Carlos, because I couldn't hear it.

Sure. Just, I mean for the past two previous acquisitions of Telecable and Cablecom, you guys used basically the, you know, this article that allows you to acquire companies, then you say, we're just notifying the regulator, whereas with this other acquisition, there were the increasing stake in TVI, I understand you went first to them, so as to get a certain, let me say, conditions, and we understand that what you disclosed in the press release, but I don't think we're clear on what those conditions were and why did it make sense to take a different route in this acquisition?

Yes, Carlos. We went to the regulator for its approval to acquire that 50%. In this case, it was different because we were acquiring basically 50% of a company that we already consolidated and controlled and operated. So, of course, it was a different type of acquisition rather than a 100% of the company, this is 50% of a company we already consolidated.

And what the conditions that we're imposed, I understand that they're not very significant, but if you can comment on those, it will be great?

Yes. I mean there were conditions specifically that have to do with the acquisition and with the sale by that seller because the seller is a broadcaster in the region of Monterrey, but I mean they're not conditions that impose a burden on us nor that would make difficult or impede the operation of Company.

All right. That's very clear. Thank you.

Thank you. This concludes the question-and-answer session for today. I would now turn the call over to Mr. De Angoitia for any closing remarks.

Well. Thank you for participating and give us a call with any additional questions. Bye.

Thank you, ladies and gentlemen, this concludes the Grupo Televisa's first quarter 2016 conference call. You may now disconnect.