Alfonso de Angoitia - Co-Chief Executive Alexandre Silva - Chairman Salvi Viadero - Interim CEO.

Rodrigo Villanueva - Merrill Lynch David Joyce - Evercore Andre Baggio - JPMorgan Diego Aragao - Goldman Sachs Maria Azevedo - UBS Fred Mendes - Bradesco.

Good morning, everyone, and welcome to Grupo Televisa's Third 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 of Grupo Televisa. Please go ahead, sir..

Salvi Folch, CEO of Cable; Alex Penna, CEO of Sky; Patricio Wills, Head of Televisa Studios; and also Carlos Ferreiro and Antonio Lara. I will walk you through the highlights of our 2018 third quarter results. And following my opening remarks, we'll be happy to take your questions. Starting with our financial results for the quarter.

Consolidated revenues reached MXN 25 billion representing a year-over-year growth of 10.5%. While Sky's revenue were -- revenues were relatively flat. Content posted a solid growth of 21% and Cable grew double digits, reaching 10.8%.

In terms of operating segment income, on a consolidated basis, it reached MXN 10.3 billion, equivalent to a year-over-year growth of 10.4%. Year-to-date, growth in consolidated revenue and operating segment income reached a solid 10.3% and 10.5%, respectively. Let me address each of our core businesses in detail. Starting with Cable.

During the quarter, this division posted double-digit growth in revenue and operating segment income of 10.8% and 10.9%, respectively. The MSO business posted an even faster growth in revenue and operating segment income, up 12.6% and 13%, respectively, after adding 274,000 revenue-generating units or RGUs.

Year-over-year, growth in RGUs now stands at 11.2%. In broadband, net additions were 62,000. Notwithstanding that the pace of net additions was slower than in prior quarters, we continue to gain market share. In voice, we added 250,000 RGUs after our first [indiscernible] triple play services and to increase the number of services per customer.

Finally, video posted a marginal drop of 35,000 RGUs. As anticipated, as a result of the transmission of the World Cup in the second quarter, some disconnections were postponed to the third quarter. As of the third quarter, voice and broadband RGUs already represented more than 60% of total RGUs, up from 30% 5 years ago.

This trend is likely to remain as broadband continues to gain traction as the most important service for our customers. Moving on to the enterprise business. Within our Cable division, we posted a growth of 4.2%.

As we shared with you earlier in the year, we recently relaunched the enterprise business with a new management team, and our efforts are paying off. The turnaround is underway. The free cash flow profile of our Cable business continues to improve. Year-to-date, CapEx reached $460 million or 32% of revenue.

This is in line with last year and very favorably to 60% during the peak in 2015. The opportunity ahead of our Cable operations remains very strong. The most recent statistics by the telecom regulator indicates that Mexico's broadband penetrations remain -- remained slow at 55%.

Furthermore, still above 40% of these customers are DSL customers, who are gradually migrating to fiber and cable providers that deliver faster speeds. The market will continue to evolve, and we're preparing accordingly. Let me mention 2 recent initiatives that are getting traction. First, the usage of our Television Everywhere app continues to grow.

This app includes 68 live paid television channels and over 30,000 on-demand assets with content from Televisa and third parties, such as Fox and HBO. During September, we have close to 175,000 users. This is 3 times the number of users just 6 months ago.

Second, in addition, during the third quarter, we launched a sports network available only to our Cable subscribers. The new channel has software exclusive and has drawn plenty of interest. Moving on, Sky revenues remained relatively flat, reaching MXN5.4 billion.

The number of video customers dropped by 126,000, equivalent to approximately 1.6% of our customer base of close to 8 million households. As with Cable, the pressure on Sky's video service was also a result of what we call the hangover effect of the World Cup. Operating segment income margins for Sky remain remarkably strong, reaching 47.5%.

Sky continues to maintain a strict control on costs and expenses, which allows us to have one of the strongest margins in the industry globally. On the free cash flow generation front, Sky will deliver about $300 million this year. In addition, for a second consecutive year, CapEx has remained relatively low, reaching $141 million year-to-date.

Finally, our broadband services are drawing plenty of interest. As you might recall, last March, Sky launched a fixed plug-in wireless solution in partnership with AT&T. We are happy to report that we closed the quarter with 51,000 broadband subscribers and the momentum has continued throughout the month of October.

With close to 8 million customers in Mexico. We have a unique opportunity to leverage Sky's scale, brand and infrastructure to expand the sources of revenue. We have other encouraging initiatives in the pipeline. For example, we will shortly launch the sale of bundles video and broadband services. Now moving on to Content.

Total revenue grew by 21% and operating segment income grew by 19.4%. Excluding our licensing of certain World Cup rights, Content revenue grew by 8.4% and operating segment income remained relatively flat. Within Content, advertising revenue rose by 2.2% during this quarter.

This is the third consecutive quarter of growth and is the result of our successful migration to the new Advertising Sales mechanism and our commitment to show results. Revenue growth in Network Subscription and in Licensing and Syndication reached 27% and 14.6%, respectively.

Much of the growth in Licensing and Syndication revenue continues to result from the increase in Univision royalties which reached $98 million in the quarter. This is primarily explained by the step-up in the royalty rate which came into effect on January 1.

During the third quarter, our Content business also benefited from the licensing of a broadcast and digital rights of the World Cup. This contributed with approximately $32 million in nonrecurring operating segment income. Moving on to ratings.

The content industry in Mexico is incredibly competitive, but we are confident in the strength of our programming. During the third quarter, our flagship free-to-air channel, Channel 2 continued to be the number 1 morning, afternoon and primetime channel in Mexico, capturing twice as many viewers as our closest competitor.

Our news operation produced the top 2 morning shows and the number 1 nightly newscast, and is the number 1 news network on a national basis. Having said that, there is no question that competition will continue to increase. The world has changed and we are changing with it.

We are the largest Spanish language content provider in the world, and we will keep it that way. For that reason, under the leadership of Patricio, we continue to transform and update our content offering, building on the changes in our content operation implemented last year.

For example, this division invests close to $1.3 billion in the production and acquisition of content. This is a very healthy budget, which we are allocating more effectively to increase production values. We are testing many new formats that appeal directly to the audiences that our advertising clients seek.

We're keeping our classic dramas alive but we are updating their formats and storylines. And we're also exploring production partnerships with global content distributors, such as the one already signed with Amazon. Finally, we have a renewed focus on monetizing the strength of our online presence.

This is an area where we have a significant untapped opportunity. Let me share with you some statistics. During the third quarter, we closed with 23.5 million subscribers in YouTube, a year-over-year growth of more than twice in the number of subscribers.

The number of views in YouTube, Facebook and Instagram reached more than 3.2 billion, a year-over-year increase of 61%. Also, in our digital platforms, we closed the quarter with 15 million users, 81% more than last year, and page views increased by 87% to 262 million. The demand for online advertising in Mexico is growing rapidly.

Advertising customers want to be associated to content from reputable charges and with high production values. We have a unique opportunity here. In closing, this is the third consecutive quarter with solid financial results, even excluding the positive effect of the World Cup.

Bernardo and I believe that our team continues to make real significant progress towards achieving the goal we set forth when we assumed our roles at the beginning of the year. In the last 12 months, we have surpassed the MXN 100 billion mark in consolidated revenue, growing at a compounded average rate of 6.4% since 2013.

We have achieved this with a very healthy consolidated operating segment income margin of 40%. We have also been able to diversify Televisa and turn it into one of the fastest-growing telecom participants in Mexico while maintaining an investment-grade rating. Our average debt maturity is 15 years, and our net debt-to-EBITDA ratio is less than 2x.

Our capital expenditures to sales ratio continues coming down from 28% in 2016 to 17% over the last 12 months. And our free cash flow profile keeps improving. For example, our operating segment income, net of CapEx, has doubled from MXN11 billion in 2016 to MXN22 billion in the last 12 months.

We also have close to 19 million revenue-generating units, which contribute with 2/3 of consolidated operating segment income. We have expanded our broadband market share from 13% in 2013 to 23% today. The opportunity to grow in broadband, as I mentioned before, is immense, and we have deployed the capital to take advantage of it.

And finally, after 88 years in this business, we continue to be the most important producer of Spanish language content in the world, and we're modernizing and improving our content offer faster than ever. With that, I'd like to thank you for your attention and take your questions..

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

I have 3 questions, if I may. My first question is related to advertising revenues. I was wondering if there was any positive impact as a result of the 8 world cup matches transmitted on free-to-air television.

And also with advertising revenues up by 5% in the first 9 months of 2018, could you give us a sense on how you're seeing the advertising market in the fourth quarter, potentially during '19?.

Hi Rodrigo, of course, the transmission of the games nor there had an impact on our revenues. It's very difficult to say or to know exactly what that impact was because, of course, advertisers move their advertising budgets and their advertising spend from one place to another. But it did definitely had, have an impact.

As to, so I mean, but there, as you saw the World Cup had, was a great success with Televisa, not only on over-the-air, but also for Sky during the second quarter specifically and throughout our sales of the rights in Latin America.

As to the fourth quarter, it's, I mean, we're undergoing the fourth quarter, so it's very difficult to say how it will end up but we feel pretty confident. It feels to be a pretty healthy environment among our private sector clients. The fourth quarter will be special in the sense that there will be a transition in the government.

And typically, governmental advertising will slow down with this transition. Traditionally what happens, Rodrigo, is that the administration that is leaving reduces its campaigns towards the end. And of course, the incoming administration takes some time to determine what they want to advertise, what campaigns they want to launch.

So specifically, in the month of December, we'll definitely see a slowdown in terms of governmental spending..

Understood, Alfonso, very clear. My second question is related to Content EBITDA. We estimate that without the positive impact from the monetization of the World Cup in the third quarter, Content EBITDA would have been flat year-on-year.

So I was wondering if you could give us additional color on why this is the case, particularly concerning that Content revenues increased by 8% year-on-year. Thank you..

Yes, as you might recall, Rodrigo, the increase in content investment during 2018 was estimated by us at the beginning of the year to be around $100 million. About that, half of that increase was explained by the nonrecurring costs of the World Cup and also the coverage of the elections. For that reason, most of that money has already been spent.

That is the World Cup and the coverage of the elections. So we will see, I believe, a slightly higher than originally anticipated cost of production of content of around $10 million. That's going to be less than 1% of total cost in content for the year.

So that's what I can say, I mean, we'll end up with about 1% more than originally envisioned, and that's around $10 million..

Understood, thank you. Alfonso, and finally could you please give us an update regarding your strategic review? Is it timing to come up with a decision still before year-end any color on this, that would be helpful to us. Thank you..

Yes. Well, the strategic review is ongoing. What I can assure you is that Bernardo and I are completely focused on that. We continue to explore various combinations. But as we have mentioned in the past, we will only enter into a transaction that makes sense and that is good for our shareholders. And of course, as you know, many things are on the table.

We won't do a deal just to do a deal or just to announce a deal that doesn't make any sense. All these possible transactions are really complicated on many fronts on the financial structure inside, on the tax side, on -- from the regulatory perspective.

And as I mentioned, since we have a lot of things on the table, it's like Rubik's Cube, and it has to get to the right point. So what I can tell you is that we're doing this, Bernardo and I hands-on. And this takes a big part of our time. But I mean, we won't do anything to announce just a deal or to do a deal because we want to do a deal.

It has to be within our strategic plan, and it has to end up being great for our shareholders..

Perfect, thank you. .

And your next question comes from the line of David Joyce from Evercore..

Thank you.Just wanted to talk about some of your newer products.

If you could provide some more color of kind of what kind of customers are taking up the voice -- the product on this increased push up, bundling that you've been working for the past year? Are there particular regions where that's happening or particular reasons why people are taking up voice now? And how that was able to grow so much even despite the post World Cup hangover? And then on Blue Telecomm, what -- again, what kind of customer is taking that up to date previously not have access? Or was it DSL? Or is it additive to maybe some other connectivity?.

Yes. Thank you, David, for your question. I'll ask Salvi to take the first one and Alex will answer the second one..

Yeah. Well, I think that the bundling of our 3 services is a very attractive for our -- it's very attractive for our customers. The price point that we have, that is our flagship product, this MXN520 for the 3 services is very attractive when you compare buying the products separately.

As you know, when IFTwas launched some years ago, we were focused on double-play with -- on limited telephony and broadband being a disruptive product. Now we are focusing on the triple play services. If you compare our load factor with that of our competitors, we still have room to grow.

So the growth that you see in telephony during the quarters -- during the quarter comes from both sides. One, we are selling more triple play. And the second one is we are being able to capture some of our customers that had 1 or 2 services with us, given the very attractive price that we have on the bundling.

It was throughout the country, so it was not for a specific market. And I think that we will continue to see for the coming quarters strong additions in telephony..

Hi. This is Alex. As Alfonso mentioned in his remarks, Sky fixed wireless technology is getting a lot of traction. We are offering 5 and 10 megahertz of speed for about $12 and $20, respectively. And the demand has been strong. It is very attractive offer among our existing prepaid customer base, who is very price-sensitive.

Also, above 10 million homes in the country are not passed by Cable, and fixed wireless broadband will be a compelling alternative to those homes that can only get the broadband service via the incumbent's proper infrastructure. So we believe, and with the bundles that Alfonso also mentioned, we are in the process of launching it.

We believe we can add hundreds of thousands of broadband clients over the next year..

Great. Thank you very much. .

And your next question comes from the line of Andre Baggio from JPMorgan..

Hi, good morning everyone. So the first question I have is regarding the Content cost. There was a mention that this year should the cost may be $10 million more, but what's the outlook for the next year when we may not have this one-offs of political or global general World Cup? And so this will be the first question..

Hi, Andre, yes, we're finalizing the budget for next year. So it's too early to say. We're increasing our production values. As I mentioned, we're doing a lot of stuff in terms of producing better content, more contemporary content, as we have always mentioned, faster-paced content, et cetera.

So we will have, we will announce this once we have it ready..

Thank you. And second question is that how do you think we could see demand for pay-TV? So aside of the broadband, but mostly on Cable and Sky? Let's say this year, we had the World Cup, so that helped. But so in the coming years, there will not be World Cup.

So are you reaching somewhere near the full penetration in Mexico or difficult to assume more opportunities?.

Yes. We think, Andre, that the penetration of pay television will continue growing for some time. As you saw in the second quarter and as we were mentioning in your question, we have strong additions in video as a result of the World Cup. However, and we're, we also have a lower churn.

People don't disconnect knowing that the World Cup is coming and they want to have access to that World Cup. However, during the third quarter, we have the World Cup hangover effect, which meant that we have higher churn. So on the Cable front, we increased prices in July and therefore, we have some extraordinary cancellations.

And also we had the back-to-school in, which is not good for a third quarter. We also, we always have that effect. Having said that, for easy, the year-over-year growth stands at about 4%. We chose that we continue to add video subscribers. As to Sky, we believe, as Alex was saying, that we still have an opportunity for growth of the video services.

Management is working on implementing a number of initiatives to reverse the recent slowdown. As I have mentioned and Alex also touched on it, Sky is the largest pay-TV platform in the country. And it's important to see the trajectory of this company. Since 2011, it has added close to 4 million customers.

And it has been able to grow its market share from around 33% then in 2011 to about 38% today, and that 38% has remained stable. So Sky has been able to maintain its market share. Also, I mean, of course Sky's offer is based on premium content, such as the rights for the British Premier League, which Sky just renewed.

So Sky will continue to be the platform of choice for many households. As I mentioned before, they have exclusive soccer rights, which are extremely popular in Mexico, such as La Liga from Spain. And as I mentioned before, we just renewed the contract for the British Premier League.

In addition, I mean the Sky is leveraging off its existing customer base to sell broadband services. This is, aside from its success on video, we believe that Sky has the scale and a very well-recognized brand and has the infrastructure on a national basis necessary to launch new services.

So what we see on the Blue Telecomm, which is the brand that we have used for the broadband products is, are encouraging. Just I mean, as I mentioned in my opening remarks, there in the third quarter, we added 40,000 new broadband customers. And Alex will begin to bundle the services, the pay-TV services and the broadband services this quarter.

So we believe that Sky has a great opportunity in terms of growing both the video service and also broadband..

And your next question comes from the line of Diego Aragao from Goldman Sachs..

So the first question is actually a follow-up from David's question regarding the incremental opportunity for Cable. As during the quarter, both video and broadband net adds accelerated significantly when compared to the past few quarters. And total RGUs growth was driven mostly by voice users.

So can you share your thoughts and eventually provide with the economics of this voice users that you are adding?.

Yes. Diego, I'll ask Salvi to take this question..

Yes. Well, first, I would say that bundling is a great opportunity for us because as I, when I answered David's question, it allows us to give a bundle discount that is very attractive for our customers. Second, the cost for us when, the subscriber acquisition cost is not very different when we include the 3 services than when we sell 1 or 2 services.

It's mainly the cost of the box. However, the Cable modem or the EMTA, it costs as the same if it has broadband and voice or only one of the services. Notwithstanding that the use of fixed telephony in the world, and it happens the same in Mexico, has declined over time. There are still about 20 million fixed telephone users in the Mexican market.

And our market share there, it's only about 13%. So there is room for growth. If you see our loading factor, we're getting close to 2%, which is lower than some of our competitors that are closer to 2.2% as a loading factor. So over time, that helps.

It also helps because the churn can be lower once that we are able to provide additional services to our customers. So over time, what we are trying to do is to fulfill the telecommunications needs of Mexican households and bundling is part of that strategy..

Okay. Thank you very for these. And my second question, if I may, is regarding Sky. Just want to also to understand the economics of the partnership with AT&T.

I'm not sure if I missed in your comments during the opening remarks, but just want to better understand what is the revenue and the margin opportunity for this bundle that soon we will start to offer in Mexico. Thank you..

Yes, thank you Diego, Alex will answer your question. .

Thank you, Alfonso. Yes, we have an agreement with AT&T to provide this fixed wireless service through their network, but we also recently signed an agreement without them, which, as you know, has pretty much version network established in Mexico covering the main cities like Mexico City, Guadalajara, Monterrey, Puebla and a few others.

And we are going to be using both networks for providing our fixed wireless service. The economic a bit different between the [indiscernible] agreement and the AT&T agreement. But naturally, the margin profile is different to that of pay-TV.

But the way we see it is that those services are additive to operating segment income, and it's going to be a very good retention tool..

That’s very helpful, thank you very much..

And your next question comes from the line of Maria Azevedo from UBS..

Hi, everyone, thank you for the question.

I think I'd like to know a little bit better if you do expect to strengthen your partnerships with OTT players, which is Netflix, Amazon Prime? And if you think that this will come with higher content production costs? And also, after AT&T had made some comments, they also want to produce their own content, if your proximity with AT&T might help you be their first provider.

And then as a follow-up question, it will be on your Cable CapEx. If you think that with pay-TV penetration reaching saturation levels, if you need to do any upgrade in the network to focus on ultra broadband? Or if you think that CapEx levels should maintain steady going forward? Thank you..

Maria, as to your second question, we believe that the CapEx intensity phase has been passed. We only have 1 remaining city where we're expanding to fiber. But basically that will be it within the parameters that you have seen this year. As to your first question, we're talking to everybody. Televisa is a studio, as we mentioned.

We are the largest and most successful producer of content in the Spanish-speaking world. So as we announced, we closed a deal with Amazon for 3 series. Two of those are already in the prime system, in their Amazon Prime service, and they have been extremely successful, especially the second one which was 100% produced by Televisa.

It's called ExtrañoEnemigo, and it's basically on the student revolts and what happened in Mexico in 1968. The values of production on that series are just amazing. You should watch it, I really recommend it. So -- and it has been a huge success in Mexico. And I think it will be a huge success throughout Latin America and in the U.S.

This was produced exclusively for Amazon for it -- for the launching of its prime service in Mexico. On top of that, Amazon is also buying advertising on over-the-air television. The -- in order to launch their prime service they bought a pretty substantial campaign for -- on our over-the-air channels.

So in essence, we will continue to produce being a studio for Netflix, Amazon, AT&T and whomever -- I mean, and others, who need this content for their Spanish-speaking services. So it's an area that we're beginning only to exploit. We're well prepared to do that. So it's another opportunity for us on the studio side..

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

Good morning everyone. Thanks for the call. I have 2 questions as well, basically on Cable.

I mean, the first question is what is the main challenge, I mean, to improve the net adds even more? I mean, is it competition or it's basically execution? And also, on this line, if you're seeing your main competitor upgrading its network to fiber? That would be my first question.

And then my second question, mainly I'm just trying to understand the profile of the clients who are capturing on broadband. I mean are you getting new clients that basically did not have this service before? Or basically, you're getting some clients from competition as well? Thank you..

Yes. Hi, Fred, as to your second question, as we mentioned, the opportunity for growth is substantial since penetration of broadband is still at 55% and most of those customers are DSL customers. So the service that we can provide through EC or through our Cable companies, is much better than what people are getting.

So it's -- I mean, you have both, you have new customers that did not have the service before, and we're taking market share away from the dominant player. Your first question, I'll ask Salvi to answer..

Yes. Well, I think, first, you have to look at our footprint. We have about 14 million homes packed out of a universe north of 33 million. So we are only in about 40% of the Mexican households. That's our coverage area, and we have 23% market share. That means that in many markets, we have north of 50%.

So we have made a great advance, a great progress in terms of gaining market share in the different market because we have a very attractive offer, especially comparing it with the incumbent trough. The main challenge has, a growth has to do with how Mexico's broadband penetration will increase over time.

Mexico continues to be the country with the lowest penetration of broadband within the OECD country. Notwithstanding that it's at 55% and that it has grown every year, I think we still have a long way to go. For many Mexican households, what they need to have the broadband, they need a device, they need to pay for the subscription.

So for many of them, it's something that at the beginning, they start using it more with Internet cafés or with free WiFi access in certain places. But we're confident that over time, many more households would require our broadband services, and that's why we made our Cable investments there.

The speeds that we are offering are very attractive for what it's offered in the Mexican market. There's no doubt that over time, probably households would need faster speed, but our DOCSIS 3.0, even with 3.0, it's enough for most of the needs. The cost of fiber deployment has declined over time.

And in the new areas where it makes sense, as Alfonso was pointing out, we are deploying some fiber. But we do think that our infrastructure is very competitive, and that's why every single quarter you can see that we continue gaining market share..

Thank you. Very clear. Thank you. Thanks for the answers, that's all. So thank you. Very clear. .

And this concludes today's question-and-answer session. I will turn the call over to Mr. Alfonso de Angoitia for the closing remarks..

Thank you. So in closing, I would like to say that Bernardo and I feel good about the prospects that we're seeing here in all our businesses. We continue to work extremely hard to accomplish our goals and to accomplish better results.

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

And this concludes today's conference. Thank you for your participation. You may now disconnect..