Grupo Televisa SAB (TV) 2018 Q4 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's Fourth Quarter 2018 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, Co-Chief Executive Officer of Grupo Televisa. Please go ahead, sir.

Thank you, Elsa. Good morning, everyone, and thanks for joining us today. With me today are Salvi Folch, CEO of Cable; Patricio Wills, Head of Televisa Studios; Alex Penna, CEO of Sky; and Carlos Ferreiro Antonio Rivas, Corporate Vice President of Finance and Administration.

2018 was an important year for Televisa with the company achieving many milestones. To date, Televisa is a far stronger company than a year ago. Bernardo and I have kept the team busy. In our Content segment, we completely overhauled our operation and named new heads in Televisa studios, Televisa International, Televisa networks and in our sports division. We fully revamped our content offering with more updated formats and storylines and higher production values, which have proven to be successful in Mexico and the U.S. For example, during the fourth quarter, 6.5 million people watched our flagship channel every night. Also, more than 40% of the people watching television during prime time watched Televisa on one of our broadcast broad-day television channels. Our flagship broadcast network alone got more viewers than all competing day television networks combined. This volume and reach are unparalleled and this is where clients such as Amazon, Netflix, Mercado Libre and others have chosen to advertise with us.

Besides the revamping of our content, we also partnered with leading global content player such as Amazon, Endamo, MediaPRO and Sony. Amazon, for example, based its launch of Amazon Prime in Mexico on 2 series we produced for them. Also, our new advertising mechanism has now been fully assimilated and is achieving its objectives. And finally, on the digital front, we continue to expand our presence. For example, in Mexico, we have become #1 in terms of video views in YouTube and Facebook with close to 12 billion video views in 2018, a growth of 87% from the previous year.

In our own digital platform starting 2018, we grew 54% in terms of users reaching a 22% share of all users in Mexico, which means that we still have a lot of room to grow. In addition, according to Comsport, during 2018, we became the #1 digital platform among all media companies in terms of number of users.

In our Cable segment, we achieved double-digit growth in revenue, operating segment income and revenue-generating units or RGUs. All of our operating metrics continue to improve. For example, thanks to our strong focus on customer service, churn fell to historically low levels. We turned around our enterprise business delivering revenue growth during the year. And we purchased at an attractive valuation, the residential fiber to the home business of Axtel in the city where we operate. This strategic acquisition added more than 550,000 high-quality RGUs on a fiber optic network of close to 5,000 kilometers.

Regarding Sky. Despite a loss in video subscribers after the World Cup, it has been able to maintain its market share for the past 2 years. While the market share of its largest DTH competitor has decreased by close to 500 basis points. In addition, Sky was able to maintain its superior operating segment income margin of around mid-40s, even considering the nonrecurring costs of the World Cup. Finally, Sky successfully launched its broadband service and closed the year with 92,000 customers.

As I mentioned before, 2018 was a good year for Televisa. In all, on a consolidated basis, it posted revenue growth of 8.2% and surpassed MXN 100 billion revenue milestone. Consolidated operating segment income grew by 8.5%, reaching a margin of 38%. Also, I've noticed that following a significant decrease in capital intensity, our operating cash flow has doubled to MXN 22 billion when compared to 2016.

Now let me address the financial results in our Content division and then Patricio will discuss the progress made in our new content strategy. We will follow that with a discussion of our Cable and Sky segments before taking your questions.

Content revenue and operating segment income posted double-digit growth of 15.4% and 15.8% respectively during the year. In advertising, and as a result of the turnaround of our ad sales business, full-year revenue growth reached 2.1% following a decline of almost 11% in 2017. In the fourth quarter, Advertising Sales fell by 3.7% but this was entirely due to a significant drop in government advertising as a result of the change from one administration to another. As we mentioned in our previous earnings call, this was anticipated. Sales to the private sector remained healthy growing mid-single digits during the quarter.

Our other 2 sources of content revenue, Netflix subscription and Licensing and Syndication, posted double-digit growth in the year. In terms of Univision royalties, in the fourth quarter, they reached $88 million and in the full year, they reached $384 million equivalent to a growth of 22%.

Let me now address our advertising business in 2019. During the year, we will have 2 effects that will make the comparison to 2018 difficult. The first effect has to do with the fact that we transmitted the World Cup last year. The second effect has to do with lower investment in advertising by the government and governmental agencies. The new administration is implementing a number of public policy measures to release funds for other initiatives. One of these measures is the reduction of its overall investment in advertising, which they have publicly indicated would come down by about 50%. This measure will apply to all media including radio, print, digital and television. To compensate for the expected decline in government advertising, we will maintain our strict control in cost and expenses in our content division. As a result, we anticipate a reduction in this line item by at least $50 million in 2019 when compared to last year.

Now in terms of our 2019 upfronts, we have good news to report. We were able to reach a similar amount to last year, MXN 16.4 billion. This is a very positive development considering the current uncertainty at the macro level and also considering that last year we carried the World Cup.

I will now turn it over to Patricio for a discussion of the progress we made during the year in our content offering.

Thanks, Alfonso. 2018 was the most exciting year in my life at Televisa Studios because I had the wonderful opportunity to collaborate in the great invention of Televisa [camp,] among our many achievements. We consolidated most solid creative (inaudible) develop and producing a new generation of content across all platforms and all formats including series, miniseries, realities, dramas. We closed a couple of thousand deals with some of the biggest industry players including Amazon, Sony, Endamo, MGM and MediaPRO. We have [combinations] the results of [a way to send] money to the front of the [screen] resulting in largest production budgets and aggregate production value. This has allowed us to be more competitive. We consolidate this trend of the Televisa News, which now features the most watched television newscast in Mexico and delivers more than twice the audience of our closest competitor.

We also -- we were also audience leaders throughout the election season last year, hosting especially strong ratings during the debate and analysis [product.] In sports, we worked with Chart of Mexican policies during 2018 Soccer World Cup, both in terms of the matches and in terms of the programming to [run with] this effect. And finally, our achievements in drama have continued to lead in their market segments. During 2018, 27 of the 30 very most watched TV programs in Mexico were produced and broadcast by television. In fact, Televisa Estudios behind our Rosa (inaudible) series has had the highest audience of all television. We have been introducing content for 64 years and you can see we're very well positioned to continue our trajectory as the leading producer on Spanish language content. Adolfo?

Thank you, Patricio. Everything you're doing is really exciting and we're seeing great results. Now let me turn it over to Alex Penna, CEO of Sky.

Thank you, Alfonso. In Sky, we closed the year with 7.6 million video RGUs and 92,000 broadband RGUs.

During the fourth quarter, we experienced the decline of 199,000 video RGUs partially compensated by a gain of 41,000 broadband RGUs. The loss of video RGUs in the second half of the year is mostly due to disconnections by some customers following the end of our transmission of the World Cup in mid-July. For that same reason, we expect to see additional disconnections in the first quarter of this year, mostly from prepaid customers with a rebound in video subscriber growth towards the second half of 2019.

In terms of revenue, gross during the fourth quarter was marginally down at minus 1.9%. And for the full year, at minus 0.9%. In addition, full year operating segment income margin was 44.4%. The 110 basis point decline in margins versus the previous year is explained by the adoption of IFRS 15. We are excited about the opportunity to continue growing our broadband business. We still do not have a level playing field in Mexico's telecommunications industry given that the preponderant operator has had to comply with the rules established by the regulator in respect to the access to their infrastructure. But we will continue pursuing our complete access to this network as dictated by law and in parallel, growing this business through the [AT&T and now does] networks.

Thank you, Alex. Now moving on to Cable. Let me turn it over to Salvi.

Thank you, Alfonso. In Cable, we continued to deliver solid results. During the fourth quarter, and without considering Axtels acquisitions, we added 316,000 RGUs in our MSO segment. This is the second fastest pace of organic growth in net additions on record for a single quarter. For the full year, we added 1.2 million RGUs, equivalent to an organic growth of 12%. Most of the growth came from broadband and voice services where we continue to gain market share. We closed the year with [14.6 million] (corrected by company after the call) homes passed and 11.8 million RGUs. Of those, the number of broadband RGUs is already larger than that of video.

In terms of revenue, our Cable business posted double-digit growth of 10.8% in the fourth quarter, and 9.6% for the full year. Operating segment income was also strong, delivering 9% growth both in the fourth quarter and in the full year. In our enterprise business, during the fourth quarter, we posted revenue growth of 11.3%. This is the fastest pace of growth in 8 quarters reflecting a successful turnaround of this operation.

The outlook for our Cable operation continues to be very favorable. On the Amazon side, penetration of broadband in Mexico remains slow at around 53%. Our prices for video, voice and broadband continues to be among the lowest in the region and all of our operating and performance metrics keep improving. As Alfonso mentioned, churn is the lowest on record.

Thank you, Salvi. Now let me talk about Univision. Just like Televisa, it is a very different and improved company today than it was a year ago. With an entirely new management team, Univision continues to make solid progress in their efforts to restructure programming, sales and marketing and they remain very focused on improving free cash flow. This new team is being led by Vince Sadusky, a very seasoned, hands-on media executive who joined as CEO last fall. As you may have seen, Univision reported that core advertising revenue in local TV, radio and digital grew year-over-year during the fourth quarter. As a matter of fact, Univision was the only major broadcast network in the United States to post ratings growth during the fourth quarter. Since its launch last fall, our series, Amada Muerte, has been reaching a larger audience than that of Fox and CW Networks during its time slot. In addition, Univision continues to generate a material amount of cash, which is being directed towards the reduction of debt. During the first half of 2019, we believe that Univision will continue to have a difficult year-over-year comparison due to the loss of its carriage deal with Dish. This carriage dispute definitely hurts Univision in the short term. However, as Dish Latino customers migrate to other platforms, which is definitely happening, this will result in a stronger relationship between Univision and other distribution platforms.

Our relationship with Univision is stronger than ever and we continue to develop content in close coordination with their team and finding opportunities to collaborate even more closely on a variety of projects. Most importantly, Univision continues to be the most relevant media platform serving the Hispanic audience in the United States. There is no doubt that Hispanics will continue to drive population and GDP growth in the U.S. for the years to come. Over the long term, Univision will continue to be the company best positioned to serve one of the most important demographics in the U.S. market.

Next, let me address our restructuring analysis. Let me begin by noting that Mexico recently underwent a major overhaul of the regulation framework in the broadcast and telecommunications industry that led us to conduct an in-depth review of our capabilities and the potential separation of one or more core businesses. As you have heard today, we have already implemented many significant changes in the company with regards to management, production of content, Advertising Sales and our Cable operations. Specifically, the management and direction of our Content division has been completely overhauled to address the changing pace of our viewers in Mexico and the United States as well as competition from domestic and global media companies. Our advertising sales organization and the structure of our advertising rates have been radically changed to conform more closely to traditional offerings.

Lastly, we have aggressively invested in our Cable operations, which has resulted in the solid pace of growth particularly in the case of broadband customers. While work remains to be done, the result have been a leaner and more competitive organization. As part of this process, we also considered the launch of a separate public entity for one or more of our core operations. We closely analyze the financial and strategic implications including costs involved, loss of synergies, tax impact, focusing on how such a move would impact total shareholder value. We also studied the corporate structures of other global participants and how the structures of our peers impacted their businesses. What we have found is that vertical integration and consolidation are 2 of the most important dynamics that companies are pursuing as competition intensifies. Comcast, NBC Universal, Sky, AT&T Time Warner and Disney Fox are clear examples of this. In the end, after careful deliberation with our financial advisors, we concluded that a partial or complete separation of our core content Cable or Sky assets would not create shareholder value and could have a negative impact on our competitive position.

Moving on. Capital expenditures were $970 million during 2018. For 2019, we expect that capital expenditures will be around $1 billion with a similar breakdown among our 3 core operations to last year. As in the last 2 years, more than half of CapEx in Cable and most of the CapEx in Sky will continue to be driven by the pace of growth of these businesses. In the case of Sky, for example, the increase in CapEx is primarily the result of our growth in broadband customers. We expect that our radio -- our ratio, I'm sorry, of capital expenditures to revenue will continue to decrease over time.

Finally, I'm also pleased to share with you that my co-CEO, Bernardo Gomez, was selected by President Andrés Manuel López Obrador to become part of his advisory business council, which is composed of 8 business leaders. This council will be instrumental in advising the president directly in respect to the economy and business in general.

In closing, we are pleased with our results for the year. Throughout 2018, we will focus on executing across all our businesses and we continue the turnaround efforts in our Content and Cable operations as we make very good progress in Sky with the launch of new services. Televisa today is a fully integrated media and telecommunications company. On one side, we continue to be the largest and most successful producer of content in Spanish in the world. On the other, we operate in 2 distribution platforms, the largest DTH company in Mexico with close to 8 million [daily] subscribers and the largest Cable company with 11.8 million RGUs and the second largest fiber network in the country.

Going forward, during 2019, Bernando and I will continue to focus on enhancing our production of content with more innovative formats and stories, strengthening our relationships with Univision, growing our Cable business further, converting Sky into a telecommunications operation and maintaining a total and absolute financial discipline. In sum, we remain confident in the long-term potential for our 3 core businesses and will remain fully committed to the execution of our business plan.

Thank you for your attention. We're now ready for your questions.

(Operator Instructions) And your first question comes from the line of Rodrigo Villanueva from Merrill Lynch.

My first question is related to your strategic review. As part of it and taking a look at the conclusions, you make reference to organic and inorganic growth opportunities at Cable. So I was wondering if this means that you're still considering any potential M&A either with Megacable or if there are any other potential acquisition targets either in Mexico or outside of Mexico? That would be my first question.

Thank you for your question, Rodrigo. What I can tell you is that organic growth is there and Cable will continue to grow at it has in the past. Cable represents for us a tremendous opportunity because of low penetrations of -- especially of broadband in Mexico. So it's a company where we have a lot of excitement and we believe that it will continue to grow us as in the past. In terms of M&A transactions, I would say that we'll be opportunistic about them. You saw that we bought the subscribers and the network of Axtel and I believe that transaction was accretive for our shareholders and was a very good transaction. As far as Megacable is concerned, we have always openly shared with the market in the past that we believe that there's a great opportunity in the combination of our Cable businesses with Megacable. It would create a national cable operation where synergies would be substantial. I could also say that this is a business of scale -- I mean, Cable. And if we were to put together our cable assets and Megacable, we would create a company with almost 40% of the total broadband market share in Mexico and it would create a real competitor in the telecommunication sector. That being said, we have not been able to do a deal that allows us to create value for our shareholders even considering the synergies involved.

Understood. Also, in light of your comments regarding consolidation and vertical integration globally, do you think that an entire sale of Televisa would be a possibility?

Would an entire sale of Televisa would always be a possibility if it's good for our shareholders and if we generate value.

Your next question comes from the line of David Joyce from Evercore.

I appreciate that you provided some commentary on how much viewership you've had on your broadcast networks but could you talk about the rating trends and how those could impact the upfronts that you just completed? Could you frame it -- what the kind of growth in that revenue we could expect this year based on those ratings trends? And then additionally on the content side, you talked about a plan to reduce some costs to offset some of the royalty pressures from Univision but -- and from -- sorry, from the government lack on ad spending but would you -- could you talk about what your programming spending increases might look like?

Yes, David, I'll ask Patricio to touch on the ratings. The ratings and their trends have been amazing this year. We started very strong and we believe that looking at the programs and the shows that we have for the rest of the year, we feel confident that this will continue to be the case but Patricio can get into further detail.

Yes, thank you very much. We're so happy about our ratings and we are getting -- I have to say, well liked here in Mexico [channel 2 is] by far #1. And we're increasing our ratings in Channel 5. And we were talking about before this phone call about the (inaudible) that we have last night and this year. And also, our company's having very good ratings in television and worldwide. We have 2 programs right now invested in Colombia, South America. And talking about the launches that we have, the idea is to move our (inaudible) behind the camera to in front of the camera. We have to say that our competitors right now has just been more of the production companies that is working in the industry, our competitors. So we took the decision that move all the money that we have behind the camera to in front of the camera. We have been increasing drastically, our production budgets for this year to be more competitive, to pay more for the actors, directors so our content is relevant. That's the reason why today we have coproductions with the most important brands worldwide like Sony, MediaPRO, MGM, Amazon and many others because we are increasing our production budget. That's the key.

Yes, so Patricio is doing a great job in basically being more efficient in the use of the capital allocated to that division, David. And in the case of 2019, what I can tell you is that we expect cost and expenses in Content to come down by at least $50 million. And this, of course, has to do with this year not having the transmission of the World Cup nor the elections.

And your next question comes from the line of Marcelo Santos from JPMorgan.

My first question is regarding Blue Telecomm and the package offers you're doing with Sky. This has been having an impact on the margins. So could you please provide us how should these margins continue to be impacted in the next couple of periods and when do you think that we reach kind of a breakeven? That's the first question. And the second question, when you say the costs will decline $50 million in 2019 on the Content division, so we should consider both the costs of the normal cost as well as the cost related to the World Cup licensing. So is it the combined or just the cost without the World Cup licensing? That is the question.

Thank you, Marcelo. I'll ask Alex to take your question about the Blue Telecomm and then I'll answer the one that has to do with costs.

Yes. Thanks, Alfonso. I think, Marcelo, it's important to highlight the following, which I think the market has not -- is not clear on that. The fourth quarter reduction in EBITDA, okay? And the full year reduction in EBITDA compared to the previous year has to do mainly not with the Blue Telecomm but mainly with the IFRS 15 effect, which in a nutshell, has to do with the requirement that all the acquisition costs of subscribers have to be amortized over the life or expected life of the subscribers. So without these impacts in the fourth quarter, the reduction would be minus 2.4% in EBITDA compared to the previous year and minus 1% compared to the previous year in the full year. So that's important to understand because the reduction in the margin or the impact in the margin is not fully as a result of our launching of Blue Telecomm. Having said that, we expect -- it is a fact that the Blue Telecomm product has a lower margin than our video product. But we don't expect a major drop in the overall margin of Sky.

And Marcelo, as to your second question, on the total cost and expenses of the Content division, you should take off $50 million. We are basically reshuffling the budgets of that division as Patricio was explaining. We're changing the manner in which we had been producing content for a very, very long time. Of course, in our budget, we are absorbing all increases of salaries, utilities and inflation. Things that we cannot control. So that's basically how we see it for 2019.

And your next question comes from the line of Fred Mendes from Bradesco.

I have 2 questions here as well. I mean, the first one is just related to the other expenses. It looks like there was a nonrecurring impact of about MXN 650 million in the quarter but when I look at your 4Q '17, I see a similar number as well. So I was just wondering if you can give us more clarity on this impact, this nonrecurring impact. That would be my first question. And then my second question, if you can talk a little bit about the competitive landscape in the Cable segment. And especially looking for 2019, you main comparator, 75% of its network is basically corporate so you definitely have a clear advantage here. So my point is, as clients start to require for some more speed, do you think you can even accelerate this growth that you showed in 2018 when you look at 2019?

Yes, thank you, Fred. I'll ask Carlos Ferreiro to answer your question that has to do with other expenses. And I'll ask Salvi to touch on the competitive landscape of Cable.

Thanks for the question, Fred. There's an increase of about MXN 650 million in the quarter in other expenses. As we mentioned, about 2/3 of this is noncash and it comes from the impairment of certain trademarks in our publishing division. And also, from the disposition of obsolete infrastructure in our Cable segment. This happens as a result of the ongoing upgrades that we're doing in our network, pretty much every year. The balance, which means 1/3, it's related to a onetime payment of certain taxes made by Sky in Central American and also costs related to the Axtel acquisition. As I mentioned, all of that -- I mean, there are 2/3 are noncash, the other 1/3 is nonrecurring. So we should expect this number to go down in 2019.

Well, going to the second question about competition in Cable. There's no doubt that broadband represents a great opportunity in the Mexican market. If you look at broadband penetration within the OECD country, Mexico is among the lowest. So over time, it's an industry where we believe that it makes a lot of sense and that's why we have been deploying relevant amounts of capital. And we should continue to gain market share. We are happy with the fact that during 2018, we were able, again, to grow our market share both in broadband and in telephony. Competition is intensifying because we now have the fixed wireless that is being sold by AT&T, by Sky, by other -- our companies that are using [Altan]. But we believe that we have a great products in the areas where we have coverage. We have about 24% market share, which is very encouraging considering that -- it's very encouraging considering that we are only offering less than half of the country. Our network is superior. The amounts of data that are being required by our users is increasing. There are more users, more devices and the use of video is increasing the download requirements that our users have. So I do think that broadband will continue to grow. It's difficult to say at the exact pace but it has been growing double-digit. And we believe that it will continue with strong momentum going forward. Prices are low and our bundling strategy is working because we offer 3 very high-quality services at a very good price compared to other places in the world. So I think that we will keep working and gaining market share in the different services that we provide.

And your next question comes from the line of Soomit Datta from New Street Research.

Just one please on CapEx in the Cable business. And I think, for the year, just on the CapEx was around 35% of sales. Earlier on the call, you said, I think, over half of that is growth related. And I guess, just stepping back, it's a high-level of capital intensity. I would appreciate the business is growing double digits. It's still a relatively high-level of CapEx intensity, though. Are you still happy with the mix of growth and profitability on those incremental subs? And I guess, ultimately, when you look across global benchmarks, when do you think capital intensity can get down to more kind of U.S. style levels, if ever?

Thank you, Soomit. I'll ask Salvi to answer your question.

Well, sometimes it's difficult to compare among peers on different countries given the different ARPUs in the industry. Notwithstanding that, what we see on capital intensity is that it's an industry with great opportunity and it remains a priority to deploy CapEx in an industry that will be more relevant over time and where we are gaining market share, especially in broadband. That is the future. Our CapEx is being deployed and expanding and improving our network, more terminal equipment due to higher sales, better systems to improve our service. We believe that it makes sense. We have to remain very disciplined and we are investing and limiting our investments to the cash flows that we do generate in the business. Also, remember that time is of the essence because there is a symmetric regulation that is not being well enforced, but there is a symmetric regulation and we believe that we should continue to take advantage of this opportunity so it would be easier to reduce capital. But I don't think -- capital expenditures, if we were going to reduce the opportunities that we have. We continue to build new home pass, we continue to offer better services, better equipment, terminal equipment to our customers. So I think that for that creating shareholder value, it makes sense to continue having -- to deploying the capital wisely. But it will decline over time, certainly.

And your last question comes from the line of Gordon Lee from BTG.

I have a question on Univision, and specifically on the context of the outlook, which remains a little bit challenged for 2019. If you look at the 2018 balance sheet, because of the declining EBITDA, leverage went back to around almost 7.5x. I was wondering if a capitalization of Univision is something that the shareholder group is considering? And if that were the case, would you contemplate maybe modifying the terms of the royalty agreement, just swap maybe a lower royalty in exchange for more equity in that asset if that were to help the balance sheet and cash flows?

Yes, thank you, Gordon. I will touch first on the program license agreements. The program license agreement is basically set in stone and it remains in place basically perpetually as long as Televisa has not sold down 2/3 of its initial investment in Univision, but it stays in place always, and it's not terminated before 2025. So what I can say is, we're not looking at the capitalization of Univision. We believe that the results of Univision next year will be, of course, much better and we have -- we would have absorbed the Dish effect. So we're not looking into the capitalization of the company. It's a strong company. It's generating a lot of free cash flow and that free cash flow is being used to repay down debt. So we believe that, currently, it's a sustainable situation and basically that's how we're looking at it.

There are no further questions at this time. I will turn the call over to the panelists for the final remarks.

Well, I would like to thank everyone for joining us today. As always, feel free to contact us at any time for additional questions. Goodbye.

And this concludes today's conference. You may now disconnect.