Grupo Televisa, S.A.B. Q2 FY2020 Earnings Call

Good morning, everyone, and welcome to the Grupo Televisa's Second Quarter 2020 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. Please note that during the call management will be referencing the presentation available in the company's Investor Relations website at www.televisair.com. I will now turn the call over to Mr. Alfonso Angoitia, Co-Chief Executive Officer of Grupo Televisa. Please go ahead, sir.

Thank you, Elton. Good morning everyone, and thanks for joining us today. With me today are Salvi Folch, CEO of Cable; Alex Penna, CEO of Sky; Patricio Wills, Head of Televisa Studios; and Carlos Ferreiro and Antonio Lara, Corporate Vice President of Finance and Administration respectively. I'll start with our consolidated financial results, followed with the financial results in our content segment. Then I'll turn it over to Patricio, Salvi and Alex. We will then use the time remaining to answer your questions. COVID continues to be a significant disruptor of the Mexican economy and to people's lives. The number of COVID cases in Mexico has continued to grow over the past few weeks. Unfortunately, we do not seem to have reached a peak yet. At the economic level, the impacts have been very dramatic. The survey conducted by Mexico Central Bank shows that the expectation is for the economy to contract by 8.8% in 2020. Throughout this period, protecting our people has been our priority. For that reason, we continue to take all necessary measures to protect our employees, such as those on the frontlines who are managing our networks and ensuring that people maintain connectivity during this critical time or those in our content operation who are making sure that people stay informed and entertained. Just as an example, I'd like to mention that we visit Sky and izzi around 18,000 phones every day throughout our country. In this environment, the results on our various businesses have been very different. We have a strong portfolio of complementary best-in-class assets, and this has proven to be an important differentiator. On the positive side, in Cable we posted record additions of broadband customers and have total revenue generating units, or RGUs, and double-digit top-line growth. Sky added both video and broadband customers, posting its fastest growth in over three years. In content, our programming was very strong. In Mexico, ratings were the highest of the last five years. In the United States, our content is allowing Univision to lead the industry in ratings growth. On the other hand, in line with the experience of other media and entertainment companies around the world, our ad sales business was substantially impacted by the shutdown of the economy. Also as expected, our other businesses segment was affected by the closure of our gaming sites, the retail outlets where we sell our magazines, the cinemas, and showcase and movies we distribute, along with the suspension of sporting events. Moving on to our consolidated second-quarter results. Revenues were down 7.8% reaching MXN 22.4 billion, and operating segment income was down 12.4% reaching MXN 8.6 billion. During the quarter, we put together a cost reduction plan across the company, and the most dramatic measures were implemented in our Content division. At the net income level, we reported an increase of 57.5% mainly due to the decline in financial expenses, mostly coming from the appreciation of the Mexican Peso. Moving on to our balance sheet, we maintained our privileged position of liquidity. We closed the quarter with a liquid position of close to MXN 55 billion and a net leverage ratio of 2.9x. I believe that there are very few companies in Mexico that have this type of liquidity. We have no significant maturities until 2024, and the weighted average life of our dollar debt is 20 years, while our Peso debt is 7 years. The rating agencies have been supportive of our business strategy and capital structure, and last month both S&P and Fitch confirmed our investment grade. In their review of Televisa, these two agencies highlighted our strong liquidity position, diversified business model, comfortable debt maturity schedule, and solid credit profile. Moving on to our content segment, let me briefly address the financial results. Revenues were down 16.3%. As expected due to the overall macroeconomic weakness, which was exacerbated by COVID, advertising revenue was affected the most, dropping 33%. The contraction in advertising spend was across the board. On the other hand, network subscription revenue was up 16.1%. This was in part the result of an increase in the price of our pay television networks across all our affiliate distributors. Also, the depreciation of the peso helped, given that a portion of revenues are dollar denominated. Finally, licensing and syndication revenue dropped marginally by 2.3%. We estimate that Univision's royalty will be down by close to 20% during the quarter to $80 million, partially compensated by the depreciation of the peso. As most other media platforms globally, Univision's advertising revenue will be negatively impacted by COVID during the second quarter. On the other hand, Univision's successful renegotiation last year of key distribution agreements has provided a resilient source of revenue, given the increase in subscriber fees. Now let me talk about our cost reduction program. We were very aggressive in doing this and implementing the reduction program in our Content division, which resulted in savings of approximately MXN 462 million during the quarter. For the full year, we anticipate that these measures will result in cost and expense savings of between MXN 2.1 billion and MXN 2.4 billion when compared to 2019. In some operating segments, income for our Content division reached MXN 2.1 billion and the margin was 30.9%. Now let me turn it over to Patricio, Head of Televisa Studios.

Thank you, Alfonso. During the quarter the production of our newscast, certain shows and some sports programming continued uninterrupted throughout the pandemic under strict sanitary conditions. We continued to deliver strong ratings across all time slots. In our flagship network, Las Estrellas, full week ratings growth was 18%, and during the weekend it was even stronger at 30%. This is more than twice the growth of free TV to air. The strong performance of our programming was evident across all key genres. Our dramas and comedies delivered very solid audiences. For example, the first episode of our new prime-time drama Rubi was the third most-watched premiere for drama since 2018, reaching 24% of all Mexican households. Even our late afternoon drama reruns beat our closest competitor, delivering 1.8 times more viewers than the prime-time programming. In addition, our nightly newscast continued to be the main source of information for the Mexican audience, delivering already two times more viewers than those of our closest competitor during the quarter. We have continued to adjust our production strategy by adopting new protocols and have resumed production of non-news programming and live shows under strict sanitary measures. In our financial facility, we started producing three dramas and nine daily shows in Mexico. Soccer returned on July 4 with a short tournament, and the regular soccer tournament will start on July 24. Consumption of our content in Mexico and through Univision in the US is evolving in dramatically different manners compared to the consumption of English-language content. While ratings for most English-language networks during the 2019-2020 broadcast season are down year-over-year, Univision has delivered double-digit growth in viewership. With the help of our content, Univision continues to be the undisputed leader in Spanish-language television in the US. Our new prime-time drama Te Doy La Vida is outpacing Telemundo's prime-time drama with approximately 40% more viewers over the last nine weeks. Similarly, our new romantic comedy Como Tu No Hay Dos is Univision's highest-rated 10 p.m. program over the last three years. During May, this program had a triple-digit advantage over Telemundo's narco drama in the same timeslot. Univision's market share lead over Telemundo has been expanding since last year, and the trend continued into the second quarter.

Thank you, Patricio. Now that we turn it over to Alex.

Thank you, Alfonso. The strong demand for Sky's video and broadband services continued into the second quarter. Our broadband offer continued growing, adding 72,000 RGUs in the quarter. We have now reached more than 500,000 broadband RGUs, the large majority of which are bundled with video. Our video services added close to 20,000 new video RGUs as a result of strong sales and retention efforts throughout the quarter. This is the fifth consecutive quarter of growth in the number of video customers. In addition, we saw an increase in the recharge rate of our prepaid video package. Revenue grew 3.1% to MXN 5.5 billion. This is the strongest growth in eight quarters and the fastest pace of growth in 13 quarters. Operating segment income reached MXN 2.3 billion, posting a margin of 42.1%. The majority of our customers subscribe to prepaid video packages, so they are highly sensitive to changes in household income. So far, demand has been strong and the recharge rate of their video service has gone up. Given their expectation for a slower macro environment in the second half of the year, we will remain very watchful of any changing trends.

Thank you, Alex. Let me now move on to Univision. This quarter, Univision took advantage of favorable market conditions to expand its amortization schedule at very attractive rates, significantly reducing its financing risk. Univision issued $1.5 billion in bonds due 2027 to refinance bonds maturing in 2023. In addition, Univision executed an amend and extend transaction to increase the maturity of $2 billion of their term loan to 2026 and the maturity of their revolving credit facility to 2025. The fact that Univision had access to the capital markets under such attractive terms shows the strength of its business model and the reach they have in Hispanic media. This is a vote of confidence in the company. We are also extremely happy with our relationship with Eric Zinterhofer and with Wade Davis and their vision for the future of Univision. It will be a great partnership, and you will see a very different Univision when the deal closes. As I mentioned before, we're very happy with the results of our restructuring and revamping of our Content division and the success that our new productions are having. Univision ranked as the number one network for six consecutive weeks in the key demographic of 18 to 34 during prime time. This is a historical performance since 1992. In closing, it is difficult to predict the shape of recovery in Mexico, since a lot depends on how the pandemic evolves. However, in terms of our ad sales operation, June was already better than May. We have the strongest ratings since 2016 in Mexico and a solid strategy to continue delivering strong audiences. In the meantime, management and I believe that Sky and Cable will remain resilient.

Our first question will come from Rodrigo Villanueva from Televisa. You may begin.

Thank you. Hi, good morning, Alfonso and team. This is Rodrigo Villanueva from Bank of America. My first question is related to advertising. I was wondering if there was any change in advertising deposits of MXN 15 billion that you disclosed during the last conference call. In case there is no change, is it fair to say that this MXN 15 billion in advertising deposits could be perceived as a floor for full-year advertising revenue in 2020? And the second question is related to Cable. I was wondering if you could please provide more color regarding such strong revenue growth of almost 30% at the enterprise operations within Cable. And if you expect these new revenue levels to be sustainable. Thank you.

Thank you, Rodrigo. As to your first question that has to do with the upfront deposit. Of course, we have seen collection of more deposits as time goes by and clients pay in respect to the agreements that they have executed. Of course, as a result of the pandemic, some clients have lost most of their revenue and therefore are not using their upfront commitments or have rescheduled the payments. For example, the tourism industry or movies that have been shut down or severely affected. Those clients have talked to us about rescheduling the payments, which is logical considering what has happened to those clients. We have been in constant contact with them, talking to them and seeing how we can be helpful and how we can restructure some of the payments in such instances. As to Cable, we're very happy with the results, 5 million broadband subscribers and the pickup in terms of net adds. We're very, very pleased with what happened in that company. And I'll ask Salvi to go into further detail and give you more color.

Yes. Hi, Rodrigo. Regarding the question of the growth in enterprise during the quarter, the growth is mainly explained by certain projects where we are building broadband infrastructure for some state government. We see a great opportunity for continued growth in the enterprise segment. Our market share in that business is limited, and we see a potential for getting additional projects. The pandemic has brought additional needs for connectivity across the board. We will continue to tackle that opportunity and remain focused on customer service for our residential, small business, medium business, and enterprise segments. We have a good roadmap ahead of us in the enterprise segment as well.

Thank you. Our next question comes from the line of John Belton from Evercore. You may begin.

Hi, everyone. Thanks for answering the questions. I just wanted to ask about the cost reduction program in the content segment. I think you said you are targeting MXN 2.1 billion to MXN 2.4 billion of savings for the year compared to last year. Any additional comments on where these savings are coming from? And should we think about this as a permanent savings, which will remain in the cost base beyond 2020? Could this lead to margin expansion in the content segment looking out beyond 2020? Thank you.

Hi, John. Thank you for your question. Yes, the cost and expense reduction was comprehensive and across the board. We reviewed each and every single line item as you can imagine. This will result in savings between MXN 2.1 billion and MXN 2.4 billion this year. We believe that around 30% to 35% of the savings will be kept in 2021. The balance will depend on how the economy evolves. We will only produce certain shows, mostly live shows or reality shows if there's demand for them. If there's demand, we will produce more and see the cost next year. However, it will be associated with sales. The cost reduction plan was significant, and we intend to remain as lean as we can in 2021.

Thank you. Our next question comes from the line of Gordon Lee from BTG. You may begin.

Hi, good morning. Thanks very much for the call. A couple of questions. First, just to follow up on the cost reduction initiatives. I see we're concentrating on the Content division. I was wondering whether you've done similar exercises in the Cable and Sky as well. The second question is on CapEx. After the first quarter numbers, you said CapEx would be around $750 million to $800 million for the year. Is that still more or less the target range? Finally, when would you expect the Univision deal to close? What exactly are we waiting for?

Hi, Gordon. Yes, regarding cost reduction, we will see MXN 800 million in reductions of costs and expenses in the Cable Company and Sky. As to your last question regarding the Univision closing, it's basically subject to regulatory approvals in the United States, so that is DOJ and FCC approval. Regarding CapEx, we believe that we will meet the guidance. The CapEx guidance for 2020 is in the range of $750 million to $800 million. If growth in RGUs at Sky and Cable exceeds our expectations, then we'll see higher CapEx. If we meet our expectations of $750 million to $800 million, it will be driven by more subscribers and RGUs, which would be great news.

Thank you. Our next question comes from the line of Fred Mendes from Bradesco. You may begin.

Hello. Good morning, everyone. Thank you for the call. I have two questions here related to the Cable segment. The first one: very strong net adds at 258, one of the highest over the last quarters. I’m trying to better understand if you’re able to gain more clients from the competition, or if you believe that given the home office trends, you see more people demanding this type of service. Is the pie getting bigger, or are you gaining clients from your competitors? The second question is about the mid- to long-term strategy. I understand that the capacity you have in your network is above the current demand in terms of data usage, but looking three to five years down the road, do you think it makes sense to deploy FTTH in the main cities in the most competitive regions, or do you think that Cable should remain the high quality option for at least the next three to five years without changes?

Thank you, Fred, for your questions. I'll ask Salvi to answer them.

Thanks, Fred, both questions are very relevant. Regarding the first one, I believe the pandemic brought additional needs for connectivity. As Alfonso pointed out, broadband penetration in Mexico is still low, below 60%. There were additional needs for everything — for education, for working from home, and for entertainment. I believe that in this quarter, the industry overall grew, and I do think that we will see a faster pace of growth this quarter than what we saw last year. Our investment in Cable is that penetration will continue to grow, and we will gain market share both from the growth of penetration and by taking customers from some of our competitors. What will happen in Mexico is similar to what has happened in other countries where Cable networks and FTTH take away market share especially from DSL offers. Regarding your second question, the capacity of our network allows us to remain confident in the medium term; DOCSIS 3.0 allows us to provide faster speeds, and most of our network, especially in major cities, is DOCSIS 3.1 Ready. Investments needed to achieve gigabit speeds are primarily related to terminal devices and depend on market demand. In newly built areas, prices for FTTH have decreased, and we are constructing in some of those areas with FTTH, but we don't plan to replace our entire network with FTTH as we have a strong and reliable network. The spike in data demand, particularly in April and May, indicated that our network is prepared for increased data needs.

Thank you. Our next question comes from the line of Marcelo Santos from JPMorgan. You may begin.

Hi, good morning. Thanks for taking my question. My first question is about advertising. I wanted to know if you could provide more details on how it behaved during the quarter. You mentioned that June was better than May. How much better, and do you see clients demanding more at the beginning of the third quarter, or is that something that should happen moving forward? The second question is about Sky. You discussed launching packages with faster broadband speeds. I wanted to understand how the structural separation works and how your relationship with AMX is regarding using their network. Have you been able to advance on that front so far?

Yes, Marcelo, thank you for your question. During the second quarter, the contraction in advertising was across the board. Certain sectors, in particular, reduced expenditures significantly, such as telecom, which dropped close to 50%, and retail and food and beverages saw close to a 30% drop. The health, personal hygiene, and cosmetics sectors also saw a mid-teen decline. These industries alone accounted for about 80% of our advertising sales, resulting in a severe impact. However, June was already better than May, which I can only elaborate on generally. The future of that business will depend on the pandemic's evolution as well as the economic recovery speed. As for the Sky question, I will ask Alex to answer it.

Thank you, Alfonso. Hi, Marcelo. To clarify, we have over 502,000 broadband subscribers, with the majority being fixed wireless broadband. Specifically, 99% of our broadband subscriber base is currently divided into approximately 77% on the Altan network and 22% on the AT&T network. The fixed broadband we provide using the America Movil network constitutes nearly nothing, approximately 1% of the subscriber base. In terms of evolving our product offering using the Telmex network, we have yet to make significant progress. We continue facing challenges in developing that segment of the internet business.

And our next question comes from the line of Diego Aragao from Goldman Sachs. You may begin.

Yes. Hi, good morning, everybody. I hope all is well with you and your families. I was wondering if you could provide some updates on the launch of the izzi Movil business. What are the main goals for this segment? It would also be helpful to understand the financial terms related to your engagement with Edico Barrida. Thank you.

Yes, Diego. I'll ask Salvi to answer the question.

Thanks, Diego. We launched our MVNO in June, just a month ago. The strategy is similar to what cable companies have done in the U.S. market. Our product is an unlimited postpaid service available only to our broadband customer base; it's not a substitute for the fixed broadband connection. Our customers have fixed broadband usage exceeding 250 gigs per month, significantly higher than what a typical mobile user in Mexico utilizes, approximately 4 gigabytes per month on the postpaid service. Providing unlimited data as well as phone and SMS services makes it an attractive offer, and we priced it competitively at MXN 250 with everything unlimited. We use Altan's network, which allows us to operate in a capital-efficient manner, and where Altan's network lacks coverage, we provide roaming via Telcel. We reached about 14,000 subscribers at the end of the quarter, which I think is a good start for the first month, considering the targets we aim to achieve. A key challenge we face involves device compatibility; Altan operates on a 700-megahertz frequency band, and not all devices support that band. However, we believe that problem will gradually resolve. Those are the initial results of our launch.

That’s super helpful. Thank you for that. Just a follow-up question on the data connectivity. The broadband additions at both Cable and Sky in Mexico this quarter are impressive. I was wondering if you could describe the profile of these new customers. I know that broadband penetration is low relative to more developed markets, so could you elaborate?

As you pointed out, I can refer to my earlier response. The penetration is growing; it's not just new customers. Many potential customers likely didn’t feel the need for broadband at home because they were often out, using mobile options substitutively. However, during isolation, the necessity for connectivity became clear. The exceptional performance of our bundling offers, which provide pricing discounts, significantly contributed to our growth. Our customer base with triple-play offers increased from 25% to over 47% between 2018 and now. This suggests well that our product is robust and competitively priced. Growth occurred nationwide, although some markets like Riviera Maya, Cancun, and Puerto Vallarta were particularly challenging. Nevertheless, there is a general demand for additional services. I believe that the increased demand for connectivity due to work-from-home needs will persist. Our bundling strategy is effective.

Thank you. Our next question comes from the line of Soomit Datta from New Street Research. You may begin.

Hi, a couple of questions from me, please. Going back to izzi Movil, could you first provide any targets for subscriber acquisition that you're aiming for? You indicated you're progressing toward that; I would like to understand better what that looks like. Additionally, is the aggressive pricing at MXN 250 monthly indicative of a genuine effort to win market share, or is it also a means of churn management? Finally, could you discuss the expected pace of expansion? Given Altan's need for network buildout and device compatibility considerations, when can we reasonably anticipate this project to gain meaningful traction?

Yes, Soomit, thank you for your question. I'll ask Salvi to elaborate, but having a quad-play offer has proven to be an effective churn-reduction mechanism as we have seen other cable companies, especially in Eastern Europe, achieve success in this space. That being said, it's also a revenue source, and Salvi will further explain it.

Indeed, we prefer not to disclose specific subscriber acquisition targets. However, this service aims to maintain our existing broadband subscriber base while reducing churn. It makes use of our own infrastructure as part of the strategy. Additionally, while we seek to expand our share of the postpaid market —which is limited in certain areas— we recognize that the roaming fees charged by Telcel add complexity to the expansion process outside of Altan's footprint. As for the expansion rate of the Altan network, they are committed to steadily increasing coverage over time, which will dictate our ability to enhance our offerings. In conclusion, our strategy focuses on delivering additional services to our customer base with attractive pricing, directly reflecting what American cable companies have achieved, without necessarily targeting the average market share.

You’re absolutely right, Soomit, and that's why we’re focusing on our broadband subscribers to offer this service. Thank you very much for your question.

Thank you. I am not showing any further questions at this point.

Thank you for joining us. If you have any follow-up questions, please contact our Investor Relations team. Have a great day and stay safe.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.