Grupo Televisa SAB (TV) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Grupo Televisa Completo Second Quarter 2017 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, Cornicia. Good morning, everyone, and thanks for joining us today. With me are Salvi Folch, Chief Financial Officer of Grupo Televisa; Isaac Lee, Chief Content Officer; Adolfo Lagos, CEO of Cable; and Alex Penna, CEO of Sky.

Let me begin by stating the obvious. The second quarter was a bad one for us. Consolidated revenues declined by 1.5% and operating segment income by 2.7%. A number of factors impacted our results. Advertising revenues were down. Network Subscription and Licensing and Syndication revenues were lower as a result of the loss of certain clients, and Sky continued to have a difficult comparison as a result of the analog shutdown last year.

Let me address the financial results in content, then Isaac will discuss the progress made in our new content strategy. After content, we will follow with a discussion of our Cable and DTH segments. And at the end of the call, we'll be happy to take your questions.

During the quarter, prime time ratings of Channel 2 were 37% higher than those reached during the fourth quarter of last year. Even more remarkable is the fact that in the last few weeks, Channel 2 has been delivering more viewers than the entire universe of pay television networks, excluding Televisa's networks. I believe it is a great achievement that one single channel is having more audience than the aggregate audience of over 100 channels. As part of the new advertisement plan put together last year by the management team in charge at the time, advertising sold in the upfront was priced on a per-spot basis according to prior year's ratings. Under such structure, there is a substantial room for arbitrage opportunities. And as a result, we have not been able to benefit from the ratings increase. The flexibility that our clients currently have is allowing them to achieve their target number of eyeballs by investing less in advertising. As a result, advertising revenues were down by 9.8%, which was mainly responsible for the drop of 8.2% in total content revenue. We're actively working on changing the basic structure of our sales of advertising plans to base them on audiences delivered in a manner that is similar to the one used in the U.S. market.

Moving on to our Licensing and Syndication business. It posted a marginal growth of 0.7%. The royalties from Univision reached $82 million, slightly lower than last year.

Finally, Network Subscription revenue declined by 18% in the quarter, and it's mostly explained by the fact that the competitor is no longer carrying our pay television networks.

In terms of costs and expenses in the Content division, we remained very disciplined, which allowed for a decline of 4.3% when compared to last year, even considering the negative impact of exchange rate and higher inflation. As a result of these factors, operating segment income margin in our Content division reached 39.4% during the quarter. The strategy to rely less on advertising is paying off. Today, each of our Sky and Cable businesses are larger than advertising. And jointly, their contribution to operating segment income at the group level is already close to 65%. In our Cable segment and in spite of a difficult quarter, Adolfo will describe in detail how we're moving in the right direction. We were able to reactivate growth with high-quality customers by launching new packages and lowering churn. In the case of Sky, we reached a very strong operating segment income margin of 47%. Alex will address the particular issues we faced this quarter, especially the difficult comp that resulted from the analog switch-off last year. Alex will also address the opportunities ahead of us.

I will now turn it over to Isaac for a discussion of the progress we have made with respect to the recent operational changes in the Content division.

Thank you, Alfonso. Good morning to everyone. As Alfonso mentioned, ratings are up, and we are consolidating the leadership position for our flagship network, Channel 2. During the second quarter, prime time ratings for Channel 2 were higher by 37% when compared to the fourth quarter last year and 15% higher when compared to the second quarter last year. During the month of June, the increase in ratings was even more dramatic, reaching a 61% increase when compared to the fourth quarter last year. And Andres, if we take Q2 2017 versus 2016, Monday to Sunday, 6 a.m. to midnight, ratings are also up by 13%. The ratings increase is remarkable considering that we now have a new competitor in broadcast television that is frequently capturing the #2 slot during prime time. With the increase in our ratings, the gap in viewers between Channel 2 and any of our competitors has widened. And during prime time, we are delivering 4x more ratings than our closest competitor. For us, this is just the beginning. As with any other content company, there will be some volatility in ratings, but we are aiming higher and taking the steps necessary to extend this ratings success to our other free-to-air and pay-TV networks. We have a whole new management team in place, with 7 new executives in key positions. With this team, we continue with a massive restructuring of our Content division by implementing an audience-centric, data-driven programming strategy to modernize our offering. We have finished the complete reengineering of the core processes of Televisa's content production and programming. This includes a detailed breakout of all activities related to key processes such as greenlighting and production. For each activity, we have assigned responsibilities: determined time lines, set business rules and established clear KPIs. The implementation of the new process structure will allow us to plan ahead in a way that was not possible before. We now have a 24-month conceptual grid, and we will only start preproduction with at least 70% of scripts written, being able to analyze and track production costs in real time. This redesign of the way Televisa produces content amounts to a paramount disruption to the way the company makes television and a philosophical shift to a leaner, more efficient production scheme.

In hand with the new processes also comes a rightsizing of teams Broadly and across the company, we are taking all the steps that ensure that our structure aligns with our strategy. To that end, we are doing a review of all of our units, and we are creating standards of production in terms of resources use to reduce the current variability that exists.

In addition, we are using data like never before. For example, we're tapping into the extensive knowledge databases to follow constantly what viewers watch. We are implementing disciplined capital allocation to ensure our spending maximizes our on screen performance. We are repurposing our production budget and implementing best practices. We are no longer acquiring scripts that we cannot use, and we are eliminating exclusivities with talent that is not required for our current productions. We are running a leaner operation, have better selection of programming, improved 360-degree launches such as La Piloto and closer collaboration with Univision. To give you an example, the program "La Doble Vida de Estrla Carrillo" was a project in which Televisa and Univision collaborated hand-in-hand. The results were very strong in both markets. We shared all promotional materials, including the promo campaign, 4 original Mexican videos and a vast amount of digital assets, optimizing the efforts to launch the series in both countries.

In terms of sales from this project, there were 2 separate product integrations done for each company in each country, including MetroPCS for Univision in the US and Cerveza Victoria for Televisa in Mexico. And the production team was able to execute both, maximizing the revenue on the property in both countries.

In sum, we are running on all cylinders and expect that by 2018, the benefits of our reengineering process shall be fully achieved, providing us with more flexibility with respect to the manner in which we invest our budget.

Thank you.

Fantastic results, Isaac. Thank you. Now let me turn it over to Adolfo Lagos, CEO of Televisa's Cable operation.

Thank you, Alfonso. During the second quarter, revenue expanded by 3%. And in spite of higher inflation and the weakness of the peso, operating segment income margin reached 42.8%. Excluding our network operations business, the margin expanded by 80 basis points, reaching 43.3%.

As you may recall, over the last few quarters, we have implemented a number of initiatives that focused on improving the quality of sales in order to resume healthier, sustainable growth. Among them, we implemented stricter credit filters, improved the sales channel mix and strengthened the training of our sales force. Also, we focused on stabilizing our services by rationing the rate of changes and improving the quality of our networks. As a result, our operating metrics have continued to improve. Disconnects have fallen significantly from peak numbers, and early attrition is down.

In addition, we strengthened our collections function with positive results, and the percentage of customers that pay on time went up from low 80s last year to north of 90% today. On another front, we have been working very hard to improve our gross additions in order to bring them as close as possible to previous levels. Aside from having a better and well-trained sales force, we have been reestablishing our competitive edge with new product offerings. During the second quarter, we launched a 5-megabit plus video product and a 20-megabit plus telephony offers, both of which are getting good traction.

As a result of the above, during the quarter, gross adds were up by double digits on a sequential basis, and disconnects were down by 1/3. In terms of revenue-generating units, or RGUs, during the quarter, net additions were 160,000, reversing the trend of the prior 3 quarters. Data RGUs net adds were 119,000. Voice RGUs were 15,000, and video RGUs net adds were 26,000.

Given the progress we have made in recent months, this past July, we finally were able to raise the price of our flagship offer by 5%, which had remained unchanged since its launch back in 2014. With the normalization of our operating trends, we are in a better position to benefit from the extensive capital investments we have made in the past and the growing demand for data. In Mexico, demand for high-speed data is expanding but continues to remain low. We know this will change because we have seen it happen in other markets around the world. High-speed data is not the only opportunity for our Cable business. We have recently launched an advanced video offer, which we market as IzziTV. It is a high-end service with a fully new user interface that integrates VOD with more than 20,000 assets, including content from Televisa, FOX and HBO as well as TV Everywhere with more than 60 live free-to-air and pay-TV channels. We've made the necessary investments and are developing the expertise. At this moment, IzziTV continues to be a niche product, but we will be ready when demand for this type of video service picks up and becomes a mass-market product.

Finally, we're well ahead with the integration of our operations under one company and a single IT platform. The large majority of our customers are now under the same invoicing and collection system. 80% of video RGUs are digital now, and the majority of the network is now capable of offering up to 100 megabits per second across all regions. We still have plenty of work ahead, but we're happy with the progress we have made and the opportunity that we have at hand.

Thanks, Alfonso.

Thank you, Adolfo. Well, in Cable, we are reversing the negative trends, and I think we're moving in the right direction.

Now moving on to Sky, let me turn it over to Alex.

Thank you, Alfonso. Second quarter revenue growth was 1.1%, and operating segment income increased 4.9%. This is equivalent to a margin of 47.1%, which is 170 basis points higher than the same quarter last year in spite of the increase of the cost of certain sporting events and higher inflation. We closed the quarter with over 8 million subscribers, a growth of 210,000 subscribers compared to the second quarter of 2016, including an addition of 5,000 subscribers this last quarter. The recharge rate of our prepaid offer is now back to its historical average, but the comparison to last year continues to be challenging as a result of the analog shutdown and the unusually high recharge rate that resulted from such event.

In the meantime, we have implemented multiple strategies to compensate for the difficult comparison. Among others, we launched a loyalty plan for our prepaid subscribers, adding channels to their programming grid; introduced a 15-day recharge option for the prepaid plans; and launched various initiatives aimed at reducing churn. Sky continues to have great operating leverage to an environment of higher disposable income in Mexico. Since we launched VeTV in 2009, we had been following a volume strategy, keeping prices static at MXN 169 per month. In February of last year, for the first time, we raised the prices of VeTV by 9%, and then again in December by an additional 8%. On top of that, this past January, we increased prices of our traditional packages by an average of 6%. Even after these price increases, our prepaid TV offers remain very affordable and are among the lowest-priced packages of their nature in the whole region. Furthermore, the large majority of our customers are currently subscribers to the basic prepaid pay-TV package, and this presents an opportunity for Sky as many of them could eventually migrate to our higher-tier postpaid offers.

With regards to a potential triple-play offer, we keep working to test local loop unbundling. We ran the first tests with limited geographical coverage towards the end of last year, but coverage has been increasing gradually. We have found many obstacles being created by the preponderant company and have responded by filing over 100 complaints with the regulator. Compliance needs to improve significantly for this project to be successful. As we've said in the past, it is too early to tell if this will work, but we are doing everything in our hands to make this possible in the shortest period of time.

Thank you, Alex. As you can see, we have had a difficult first half of the year. We're not pleased with the results, but we continue to believe that the second half of the year will be better and that 2018 will be a stronger year. We're working hard to make this happen.

We're taking action in our advertising sales business to restructure the manner in which we sell advertising. This means that we need to change the way in which television advertising has been sold in Mexico for over several decades. This also means that we will continue to restructure our sales team. In addition, Isaac and his team will continue pushing for strengthening our content offering. The steps that this team is implementing today are transformational and are for the benefit not only of Televisa, but also of Univision.

Sky will continue to implement strategies to drive growth and increase revenue per customer and making efforts to launch a triple-play offer. We have a dedicated team working to explore this opportunity.

Also, trends in our Cable division shall continue to improve as it benefits from lower churn and as demand for high speed data grows. Our Cable assets are ready the main -- are already the main contributor to operating segment income and the main driver for growth of Grupo Televisa.

As to other aspects of our business, I shall also mention that capital expenditures were lower by 52% when compared to second quarter 2016. We are on track to reduce our CapEx in 2017 by close to $500 million.

In addition, this last May, we paid a dividend of MXN 0.35 per CPO in the aggregate amount of MXN 1.1 billion.

Finally, 2 weeks ago, S&P revised its liquidity assessment of Televisa from strong to exceptional and affirmed Televisa's ratingof BBB+ on a global scale and mxAAA on a national scale.

Thank you for your attention, and now we're ready to take your questions.

(Operator Instructions) Your first question comes from Richard Dineen with UBS.

Actually, a couple of questions, if I may. Just if you could explain a little bit more about this fix that you're considering in the upfront pricing. I'm maybe not familiar with the way that that's done in the U.S. Is that some kind of average for a spot price over a longer period? Is it some kind of price color for the spots but still based on the prior year's ratings? Just if you can maybe talk a little bit more about what that kind of international best practice is, I think it would be really interesting. And then just secondly, maybe for Alex, just a bit more detail on the local loop unbundling project because, I mean, you're talking about some of these compliance problems that are barriers to a more aggressive pursuit of local loop unbundling. I guess, we're all sort of thinking that this is a really promising opportunity for Sky. And we're just wondering sort of how these barriers you think will just kind of go way through the sort of legal challenge? How do you sort of anticipate that playing out? That will be super helpful as well.

Thank you, Richard for your questions. As to your first question, we're thinking basically of changing the structure of our sales plans to focus more on guaranteeing GRPs as in the U.S. So that means selling audiences rather than selling spots. The issue that happened in the plan that we're implementing this year that was put together last year was that, basically, we priced spots. We priced specifically time slots, and that was a result of the audiences that we had last year. So when audiences increased since we had priced those spots based on previous audiences, we were unable to capture those increases. So basically, we're focusing now on new plans, where we're going to basically sell audiences rather than selling spots at a fixed price. And Alex can take your second question.

Yes. As we stated before with regards to the unbundling of the local loop, we are still at the stage of family and friends in terms of execution. There are 2 ways of going about it. One is reselling, the other is through the local loop of Telmex offering our service with our own brand. We have been carrying out this process in both fronts. And to date, as I stated earlier, we have filed over 100 complaints with the authorities about issues that have arised in the process with Telmex. But we are currently in the process of advancing the unbundling of the local loop with the idea of launching our services in Mexico City and Toluca by the end of September. And we are going to continue going through the process with family and friends until then, trying to resolve the issues that we have faced to date with the execution of this process.

Yes. I think there, Richard, Sky is uniquely positioned. So if this works, if it's implemented correctly from the regulatory standpoint, I think Sky having 8 million subscribers and Sky operating nationally with a national sales team and having, I think, one of the best brands in the industry and having fantastic service all over the country, would be the one to benefit from this.

But with regards to your specific question, if it will go away, that's something that we are working on. It's difficult to predict whether or not the authorities, particularly the IFETEL, will ensure that the preponderance will comply with the regulations issued by the authorities.

Right. So if I interpret that correctly, it's more an issue or - that has any hesitation or risk is more an issue with Telmex compliance. It's not the fundamental attractiveness of the regulatory regime, the ULL regime prices or anything like that?

You are precisely right.

Your next question is from Rodrigo Villanueva with Merrill Lynch.

My first question is regarding advertising. Alfonso, when you mentioned that the second half of the year will be better, I was wondering if you could help us quantify what you mean with that. Secondly, could you please share your thoughts regarding the possibility for the Supreme Court to rule in favor of AMX, allowing the company to charge for interconnection? If this were the case, which would be the potential impact on cable margins?

Yes, it's very difficult to talk about the second half of the year in terms of advertising sales. I think the second half will be better, but we have limited visibility. However, inventory usually tightens up in the second half, but the results in that second half will depend very much on the scatter market buys. We are working hard on making this happen to have a better half of the year. We have launched a new structure for the sales of advertising of our inventory, where we're guaranteeing audiences, and that is is happening as we speak, and that is specifically targeting scatter market sales. So this will give us flexibility of placing our spots and optimizing our inventory. So this is kind of a test as to what we want to do for next year. As to the issue with the resolution of the Supreme Court -- or the judgment by the Supreme Court as to Article 131 of the telecommunications law, I would not like to speculate on that.

Your next question is from David Joyce with Evercore ISI.

A couple questions. First, on the strong cable net RGU additions. Did those come rather late in the quarter? Or is there something about the pricing of the bundles or on the HD that could help us understand how that's been phasing into the financials? And then, secondly, how should we think about the customer deposits and advances on the balance sheet still at about 2/3 of what the year end number was at in terms of thinking about how customers would be allocating their upfront deposits for the rest of the year?

Yes, I'll ask Adolfo to respond to the first question and what has to do with RGU adds, and then Salvi will take the one referring to customer deposits.

Okay. Yes, thank you. What I can tell you is the following. After the new filters that we implemented starting of the year and the shock that it meant for our channel, especially our sales forces, that was absorbed rather quickly. And we have seen a trend starting February month-by-month of growing additions. So it's a very steady trend. It's not in the late month. It has been very consistent, very stable. And that's what is making us quite optimistic as to the levels of sales that we are reaching if you take into account also that combined with diminishing disconnect that's a visual effect and net adds grow the way they are growing. That's why we're showing such strong net adds this quarter.

Regarding customer deposits, what you can see on the balance sheet is an increase of 4.6% compared to last year. However, that includes deposits of all our business. Just considering advertising customer advances, we are up 7.4%. The reason why we have a larger deposit than last year is due to the lower consumption, especially on the second quarter. According to the plan, to the rules of the upfront plan, all deposits need to be used throughout the calendar year. But there is no specific commitment of how they will be used between the third and the fourth quarter. As Alfonso stated, we expect a better second half. And depending on the specific use of this result and on the scatter market, we expect to have better results than on the first half.

Your next question is from Marcelo Santos with JPMorgan.

On the first question, I wanted to touch a little bit on the arbitrage that clients were doing. The rating numbers you gave, it looks like that the prime time ratings increased much more than the nonprime time. I think we saw a 13% increase in our ratings, if I got it right. So if the prime time improved so much, why were declines migrating to the nonprime? I mean, I just wanted to understand a little bit about what happened. And the second question is regarding the new sales structure. So the way you're -- we're seeing that is actually -- has already changed. So it has been fully implemented for the second half. The only difference for next year is that it's going to apply to the upfront as well. Is that the case?

Yes. Well, what has happened is that clients basically can get to their GRPs goals by buying slots on day parts, which, because of the ratings results that those day parts are delivering are cheaper than advertising on prime time. So that's, I mean, the arbitrage opportunity that they're taking advantage of, basically advertising on day parts rather than on prime time, which is more expensive and getting to their GRP target. So what we're thinking about for the scatter market for the rest of the year and for the 2018 plan is basically guaranteeing and selling GRPs rather than time slots at a fixed price. , we priced those time slots -- or those advertising times based on ratings of last year. So basically, that's the arbitrage opportunity that the clients are taking advantage of.

Okay. And then the new structure, the difference between what's being applied now is that now is for the scatter and next year will be for the -- also for the upfront. Is that the case?

That is correct, yes.

Your next question is from Fred Mendes with Bradesco Bank.

I have 2 questions, actually. I mean, number one is how important were the new plans for us to see the improvement in terms of the net adds in the Cable business, particularly video and the broadband? And if you can show any movement from the competition to stop this trend from Televisa. That will be the first question. And then the second one is we see the CapEx running well below the guidance of $1 billion for the year. Should we see a pickup in the second half or we can expect maybe a lower-than-expected CapEx for 2018?

Yes. Can you repeat your first question because we couldn't hear it clearly?

Oh, no, for sure. For sure. No, just wondering here how important were the new plans. When we talk about the Cable business, right, we talk about the Cable plans, the 20 megabytes and the 5 megabytes for the improvement in terms of net adds, especially when you look at video and the broadband? And if you already saw any kind of movement from the competition of maybe decreasing prices or something like that. That would be the first question.

Okay. Yes, the 2 products that we launched during the first quarter, double-play products, one with Internet telephony, the other one with Internet video, have been taking a lot of traction. So yes, they have been relevant in our growth, and we will continue to pursue those, especially the video, broadband double-plays, which we didn't have prior to this, and that has taken good traction because this has provided to our customers more flexibility. The customers that do not want telephony at any rate, now they have an option where they can have a bundle price and they get broadband, which is what they want. And we are those 2 double-plays with video, they are with the skinny bundles. So that has been very attractive. This is a very good price point. As far as competition, we made the adjustments of our products, obviously taking into account what's happening in the market. We have not seen any further specific reaction on the competition, and these products are taking good traction. On broadband also, the main change that we did to our core product was instead of moving prices, basically we increased speeds. And that has been very, very well received and is taking a lot of traction. We're moving into a territory where we have capabilities, and we have a network that is able to deliver those speeds, not just offer them but deliver them, and that is making a difference in the market.

As to your second question that has to do with CapEx, we have invested less in the first 2 quarters of the year. However, we're not changing our guidance of about $1 billion for 2017, where, the breakdown is basically $150 million for Content and other businesses, $300 million for Sky and $550 million for Cable. This means that CapEx in our Cable division during this year is expected to be around $400 million lower than it was in 2016.

Your next question is from Daniel Federle with Credit Suisse.

The first one, could you please clarify the main reasons for this expectation of a much stronger second half versus the first half in terms of ad sales? If it should be -- if this improvement should be mostly the result of this new pricing scheme or it's an expectation of a much stronger demand in the scatter market? Because I understand that with increase in ratings, probably the demand for -- in the scatter market will be even lower because the advertisers will be able to reach the audience they need only with the upfront. So this is my first question. And the second question is related to costs. We could see some declines in OpEx in the Content division and in the Sky division. So if you could please provide more color on the ongoing initiatives to reduce costs in each one of those divisions, that would be great.

Yes, I think we believe that the second half of the year is going to be better for several reasons. First, there's less uncertainty in respect to the relationship between Mexico and the United States. Second, our ratings, we believe, will continue to be very strong, especially our flagship Channel 2. And third, inventory usually tightens up by the second half of the year. So considering the deposits that we have on hand from our clients, we believe that the second year will be better than we have experienced in the first half of the year.

Daniel, in terms of content cost, we believe we have a healthy budget of $1.2 billion that will suffice to produce growth in ratings, and we are committed to have a margin of around 40%.

At this time, there are no questions. Do you have any closing remarks?

Yes. Thank you very much for participating in the call. We're working very hard in improving these results, and please give us a call if you have any additional questions.

This concludes today's conference. You may now disconnect.