Grupo Televisa SAB (TV) 2016 Q2 法說會逐字稿

Good morning, everyone, and welcome Grupo Televisa's second 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, Jeanette. Good morning, everyone, and thanks for joining us today. With me is Jose Baston, President of Television and Content; and Salvi Folch, Chief Financial Officer of Grupo Televisa.

During the second quarter, growth in consolidated revenues reached 12.1%; and operating segment income 13.7% Most importantly, our three core businesses, which are content, Sky and cable, posted double-digit growth.

Pepe will discuss the operating results of our content segment. I will follow with a discussion on Sky, cable and our other segments; and then we will take your questions.

Thank you, Alfonso. During the quarter, revenues in our content segment expanded by 11% to a second quarter record of MXN8.8 billion.

Advertising revenues posted a growth of 2.1%. This is the first quarter that we post growth since we initiated the restructuring of our ad sales business. While the growth is marginal, we believe it is an indication of an improving trend. Anyhow, we believe it is important to wait to see the full impact of our restructuring initiative, and it will take more time.

In the meantime, we will continue to be disciplined and committed to the new prices.

Moving on to network subscription revenues, sales posted a growth of close to 35% during the quarter. Our pay-TV networks continue to benefit from strong and new programing, more pay television households, and a dollar-linked revenues. Even excluding the impact of the peso depreciation, growth was very strong at mid-teens.

Licensing and syndication also posted strong results, with sales increasing by 25% during the quarter. Royalties from Univision, which account for two-thirds of this revenue line, reached $83 million, posting a double-digit growth of 11%.

We are happy that the three business lines of our content segment grew during the quarter. Such growth allowed total content revenues to expand at their fastest pace in 16 quarters. While operating segment income margin reached 41.9%.

As you recall, during 2016, we are investing an incremental $100 million for the production of new content with fresh stories, faster pace, original formats for the launch of our blim, our OTT network platform. Such investment is being used to produce exclusive and original content that will be aired on all of our platforms. We will determine on a case-by-case basis the best windowing strategy for the content, with the objective of maximizing monetization. This strategy is consistent with our vision of continuing to be the most successful producer of Spanish-language content in the world.

Thank you, and I put the call to Alfonso.

Well, now moving on to Sky, revenue grew by 18%, which is the fastest pace of growth for Sky in four years. During the quarter, net additions were 121,000 subscribers. This is a similar pace to that of the first half of last year, before the beginning of the transition from analog to digital broadcast signals in Mexico.

As a result, for the first six months of the year, the growth in subscribers was over 500,000. This is twice as high as the number of subscribers added over the same period of last year.

During the quarter, operating segment income expanded by 11.3%, and the margin reached 45.4%. The compression in the margin is explained by the cost of some key sports' rights, which are denominated in US dollars. In spite of it, the margin remains remarkably strong.

We are pleased with the performance of Sky. It keeps adding customers at a solid pace. Over the years, Sky has built an incredibly strong customer base of close to 8 million households, making over 200,000 payments every single day through more than 181,000 points of collection in the country.

Moving on to cable, during the quarter we added close to 260,000 RGUs, or revenue-generating units, reaching 9.5 million RGUs. And sales increased by about 13%. The growth in RGUs was solid, and higher than that of last quarter.

As we mentioned in the first quarter, we had a spike in the number of disconnects in two systems, which were undergoing revamping of their infrastructure. This impacted the results of the first quarter and, to some degree, the results of the second quarter. We've already seen a trend of improvement in those two systems, with the month of June posting better results than in May, and much better than the ones we got in April.

We continue to upgrade the infrastructure in many cities. We expect to experience temporary increases in the number of disconnects in some of them. It is an inevitable part of integrating the new systems and transitioning customers to a digital platform.

During the quarter, operating segment income increased 19%, and the combined margin for our cable operations and our network operations reached north of 42%. This is the highest margin on record and it's over 500 basis points higher than the margin achieved just two years ago.

The improvement in the margin was possible thanks to an aggressive cost reduction plan implemented in the second quarter and to the strong operating leverage of this business.

The opportunity with this business remains incredibly attractive. Pay-TV penetration in Mexico continues to be low, at around 58%. Similarly, the penetration at voice and data services is low compared to other markets.

In our case, among the homes that we pass with our cable systems, only 27% have our data services and only 17% have our voice services. For this reason, voice and data RGUs are growing at a very fast pace and are likely to continue doing so.

In our other business segment, our soccer, gaming and radio operations experienced solid growth during the quarter. This was partially compensated by the decline in revenue and profitability of our publishing business, especially in South and Central America.

Moving on to our CapEx. During the second quarter, we invested $358 million, of which $231 million were in cable; $101 million in Sky; and $26 million in our content business. These figures are consistent with our plans for full-year CapEx to be similar in amount and composition to last year's capital expenditures.

In closing, we continue to execute our plan to revamp our advertising sales business, grow our other sources of content revenue; expand the number of customers that we reach with video, voice and data services; and invest our capital in a manner that maximizes the return on investment.

Thank you very much for your time and attention. Now, we'll take your questions.

(Operator Instructions). Richard Dineen, UBS.

Two questions if possible. Alfonso, regarding the investigation that you mention in the press release, which concluded that these allegations were false, just wondering if investors can draw a line under this now.

Is there anything further that you anticipate might happen? Are the authorities in Mexico or US asking to see this evidence, refuting the allegations? Or do you think this issue just kind of fades away in your view?

And then just secondly, if I could just maybe ask on the cable margins. Just wondering about the cost-reduction initiatives, if you can dig into that a bit more. Maybe explain some of these initiatives. Is there more to do there that might show in future quarters? Or is this something that was largely one-off changes mainly in 2Q? Anything on the above would be fantastic. Thanks.

Yes, good morning, Richard. As to the investigation of the anonymous letter, what I can say is that the lawyers in the United States, this is Wachtell Lipton, have been in touch every week with the authorities and they have kept them appraised. -and e Wachtell Lipton was the one that brought the anonymous letter to their attention immediately as it was received, and they have been working with them throughout this process.

There is no investigation of anything of that sort in Mexico. We have not been notified of any investigation in the US either. So we'll continue through our lawyers to work with the authorities in the United States.

As to the second question, our cable margins are strong especially this quarter, as I mentioned because of the cost-reduction plan that we had in cable. It involves all sorts of initiatives throughout all our operations and companies. Very unfortunately, we laid off about 1,000 people and we have streamlined the operation.

The cost-reduction plan covers everything, all aspects of the business. So we'll continue to find opportunities there and we believe that we can maintain a margin of around 42%.

Okay. Thank you very much for the color; very helpful.

Thank you, Richard.

Gordon Lee, BTG.

Two quick questions, the first on the costs I guess for both Sky and cable; to a certain degree, the free to air as well. To the degree that the content is imported, I understand that the FX weakness is passed gradually over time, or is not translated immediately.

I was wondering if you could confirm that; and if you could provide a rough guess of how much of the currency weakness do you think we still have to capture as that FX effect is gradually transferred over to you?

And then the second question is just a follow-up on the severance and the restructuring expenses. Should we expect similar amounts in the third and fourth quarters to be recognized? Thank you.

Hi, Gordon. Yes, as to Sky and cable and what has to do with our cost and the effect of FX, what I can tell you is that in most of the agreements that we signed in the past years we have hedged the currency effect. That is we share with the programmers with people selling us content, the effect of the depreciation of the peso.

In other instances that has been, "pesofied", which means that it's denominated now in pesos. We pay them every month. As you know those payments are related to the number of subscribers, so basically you see the effect almost immediately. But you don't see a 100% translation of the depreciation to those costs, because either they have been hedged or they're denominated in pesos.

As to severance payments, I think in what has to do with cable, what we did in the second quarter was most of it, so you won't find any costs of that magnitude going forward.

Great, thank you very much.

Gregorio Tomassi, Itau BBA.

This is about advertising revenues, basically it is different from last year. Looking at first and second quarter we're already starting to see some return to a normal seasonality, just looking to first and second quarter.

Would you agree that this is the case? And You're seeing this, I mean the normal relationship between first and second quarter? And what's your assessment of how much this can be extrapolated to a full-year estimate, also based on normal seasonality?

Well, we continue to have limited visibility even though the first two quarters are looking very, very good for us in the way that we're seeing the consumption of our inventory. We still have limited visibility.

As you know this is the first year with the new pricing structure in both the upfront negotiation and the scatter market buys. The clients are still opposing to the price increase and they are testing other platforms; they limited their volume and their commitments to free to air television advertising.

Having said that, we are maintaining a constructive relationship with all of our customers. The communication is very, very often and we are looking for a lot of ways to help them to optimize their investment in our advertising platform. But we still see some limited visibility for the rest of the year.

Thank you Pepe, if I may follow-up on this. Is there an indication you can provide us in terms of the mix between the scatter market and the use of pre-purchased inventory in second quarter and going forward?

The mix is very similar, to that of last year, which is about 80/20.

Okay, thanks.

Rodrigo Villanueva, BofA Merrill Lynch.

I was wondering if you could share with us how much of the ad growth in the second quarter is related to the reversal of the Easter effect in the first quarter? That would be my first question, thank you.

The results of our advertising business continue to be driven primarily for the restructuring of our sales strategy that we're following. This quarter is difficult to measure those kinds of effects, it's like a total different story. We are concentrated in growing the advertising rates, as well as to keep our strict control in the value of our inventory, so it's very hard to compare with the Easter season of last quarter, I mean of the second quarter of last year.

Understood, thank you. And I was wondering if you could share with us the magnitude of the severance payment that you paid in the second quarter?

Yes, it's about -- I could say the magnitude is around half of what you see in the line of other expenses.

Understood, Alfonso, thank you very much.

Thank you, Rodrigo.

Daniel Federle, Credit Suisse.

I was wondering if you could share with us some update on the negotiations with AMX regarding the local loop unbundling? That's my first question.

Well, we're working with them, considering the legal framework. As you know there has been an offering, so the local loop unbundling is becoming effective. Last December Telmex published their terms and conditions for the access to the local loop.

We have made comments to the regulators and we are working with them to show how this can become a viable business model.

We believe that a number of changes to those terms are necessary. We're working with the existing terms and we're commenting on changes to those terms to make this a more competitive environment. We're working together with the authorities and also with the preponderant operator.

Okay, any idea about timing to start to offer --?

It's very difficult to say because it depends also, as I mentioned, on our comments and the changes that we're expecting to happen.

Okay, thank you very much.

There are no further questions, I'll turn the call over to the presenters for closing remarks.

Well, thank you very much for participating in the call and give us a call if you have any additional questions. Bye.

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