HBO Latin America Group 20102010 BudgetBudget Coral Gables, Florida Tuesday, November 10th, 2009 HBO LAG Finance Committee Meeting Agenda • Economic Outlook Jose Gonzalez • YTD Financials Nelson Mendoza • Budget Overview Nelson Mendoza • Revenues • Affiliate Revenues Giovanna Fronduto • Other Revenues Giovanna Fronduto • Service Fees Nelson Mendoza • Programming • Amortization Nelson Mendoza • Acquisitions & Original Production Nelson Mendoza • Sales & Marketing Nelson Mendoza • Staff Dennis O’Sullivan • Other Expenses (Net Ops, G&A, Other) Nelson Mendoza • CAPEX Nelson Mendoza • Financing Jose Gonzalez 2 Economic Outlook Latin America Economic Outlook • Overview of Region ¾ Estimated regional GDP 2010: 2.9 to 3.6% growth 2009: contraction of 1.7 to 2.5% ¾ Signs of recovery Improving industrial production & domestic demand Rebound of commodity prices Improving capital flows 4 Latin America Economic Outlook • Political Overview ¾ Upcoming Elections Uruguay – October 25, 2009 • Resulted in November 29 run-off election Honduras – November 29, 2009 Bolivia – December 6, 2009 Chile – December 11, 2009 Colombia – May 2010 Brazil – October 2010 ¾ Argentina: change in government majority 5 Latin America Economic Outlook GDP % YOY 2007 2008 2009 2010 Actual Actual Forecast Forecast Argentina 8.7% 7.0% -1.3% 1.5% Brazil 5.4% 5.1% -0.5% 4.0% Mexico 3.3% 1.3% -7.1% 3.0% Venezuela 8.4% 4.8% -2.7% -0.8% Sources: IMF, Latin Trade, Latin American Monitor, Bank of America • Regional growth (3.2%) expected modest compared to 2004 – 2008 (avg. 5.46%) 6 Latin America Economic Outlook Inflation % YOY 2007 2008 2009 2010 Actual Actual Forecast Forecast Argentina 10.9% 16.3% 23.0% 21.5% Brazil 3.6% 5.7% 5.3% 4.3% Mexico 4.0% 5.1% 5.6% 3.6% Venezuela 18.7% 30.4% 32.6% 35.0% Sources: IMF, Latin America Monitor and Bank of America • Argentina figures reflect unofficial non-government estimates (questions persist regarding legitimacy of government figures) • Likely Venezuela declared hyperinflationary for US GAAP 7 Latin America Economic Outlook Premium over US Treasury bond yield (%) Oct-08 Jul-09 Oct-09 Argentina 18.78% 9.76% 7.21% Brazil 6.88% 3.50% 2.40% Mexico 6.04% 2.12% 1.93% Venezuela 18.04% 11.83% 8.83% Source: JP Morgan Chase EMBI+ Index 8 Latin America Economic Outlook • Chile unemployment at five-year high • Colombia unemployment three-year high • Mexico unemployment at record levels 9 Latin America Economic Outlook • Venezuela ¾ Q2 2009 GDP: 2.4% decrease y-o-y ¾ Inflation: 28.9% y-o-y in September 3 year inflation rate of 102.1% (fifth consecutive month > 100%) Highest expected inflation in the world over next five years (IMF) ¾ IFRS discussion if parallel market rate is a more meaningful FX rate for financial reporting 10 Latin America Economic Outlook • Venezuela ¾ CADIVI increased allocations of USD for Q3 2009 to $7.7B Still below demand • $10B imports in Q2 2009 • 14% lower than worst quarter in 2007 or 2008 Lack of USD contributed to 8.5% decline in manufacturing output in Q2 2009 ¾ Recent USD bond issues attempt to narrow spread of parallel rate to 3.4 – 3.6 (resulted in rate of approximately 5.25) $5B sovereign debt BsF/US$ 8.00 Parallel Market Official Rate $3.26B PdVSA 7.00 6.00 ¾ Recently approved 5.00 legislation will allow central 4.00 3.00 bank to trade PdVSA bonds - 2.00 1.00 another attempt to influence - parallel rate 1/1/05 5/1/05 9/1/05 1/1/06 5/1/06 9/1/06 1/1/07 5/1/07 9/1/07 1/1/08 5/1/08 9/1/08 1/1/09 5/1/09 9/1/09 11 Latin America Economic Outlook • Venezuela ¾ Proposed Audiovisual Law – Definition of “National Producers” Cable programmers with more than 30% of content produced in Venezuela considered a “national producer” Must carry certain programming, including Presidential addresses (“cadenas”) ¾ Proposed Reforms to Labor Law Work Day • 6 hours of work (42 hours max per work week) • Overtime hours limited to 2 per day and 80 per year • Management member may not work more than 10 hours per day • Increase in bonus pay (to 60%) for employees working Sundays or holidays Prohibition of dismissal without cause Change in calculation of severance benefits 12 Latin America Economic Outlook • Venezuela ¾ Expropriation of Margarita Island Hilton Hotel ¾Complaint against cable operators Filed with CONATEL in Oct 2009 by a consumer group associated with local channels against Intercable, DirecTV, Supercable, Cable Corp, Net-Uno, Cabletel, Cablevisión and Omnivisión Requests • Price regulation of cable TV service • A la carte packages for basic channels • Only CONATEL approved channels may be distributed • License agreements must be registered with CONATEL and subject to Venezuelan laws and jurisdiction • At least 50% of programming lineup to include national channels ¾ Ranked 177 of 183 economies in World Bank’s 2010 Doing Business report 13 Latin America Economic Outlook • Argentina ¾ Recent economic data Q2 2009 GDP: decrease of 0.8% September 2009 y-o-y Inflation: • INDEC official CPI: 6.2% • Provincial CPI: 9.1 – 13.6% • Analyst estimates: 13.25% ¾ Government recently announced intentions to improve INDEC’s collection and calculation methodology ¾ Conciliatory stance with debtors, IMF Stated willingness to reopen debt swap of $20B in defaulted bonds and repay $6.7B owed to Paris Club creditors May allow IMF review of economy and policies 14 Latin America Economic Outlook • Argentina ¾ New Law on Audiovisual Communication Services Signed into law October 10, 2009 (implementing regulations pending) Registration requirement • Must register in public registry • Must appoint a local agent and establish legal domicile Content regulation • Limit of 6 minutes per hour for commercials; no commercials on premium channels • Infomercials – hours to be established by authority • Programming during 06:00-22:00 must be suitable for all persons (premium channels excepted) • Programmers airing > 50% fiction programming must use 0.5% of revenue annually to purchase local product 5% tax on Ad Sales 15 Latin America Economic Outlook • Brazil ¾ Recent economic data Q2 2009 GDP: • Decrease of 1.2% y-o-y • 1.9% increase from Q1 September 2009 inflation: 4.3% y-o-y September 2009 unemployment: 7.8% • Lowest level since October 2008 • 738K net jobs created in Q2 2009 ¾ 2% financial transaction tax on foreign investments in Brazilian stocks and fixed-income securities ¾Effective October 2009 ¾ Attempt to rein in strengthening real 16 Latin America Economic Outlook • Mexico ¾Recent economic data GDP • Q3 2009: 2.7% increase from Q2 (6.4% decrease y-o-y) • Q2 2009 GDP contraction of 10.3% 4.89% inflation in September 2009 y-o-y • Slowest increase in 17 months • 8th decrease in 9 months this year 735K jobs lost year to date ¾ August remittances down 13% y-o-y ¾ Auto production down 40% ¾ 2010 Budget includes Income tax increase to 30% (from 28%) 3% luxury tax on cable operators 1% VAT increase (to 16%) 1% increase on bank deposit tax (to 3%) 17 Latin America Economic Outlook FX Assumptions 2010 2009 2010 Spot Rate Budget Reestimate Forecast* Actual** Argentina 4.50 4.00 4.21 3.82 Brazil 1.90 2.40 1.77 1.77 Mexico 13.92 15.50 12.51 13.22 Venezuela 3.18 2.50 3.21 2.15 * Sources: Bank of America Securities and Latin America Monitor ** Spot rates as of November 2, 2009. Source: Bank of America Securities 18 Latin America Economic Outlook FX Volatility Actual Volatility (%) 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 USD/ARS USD/BRL USD/MXN 19 Latin America Economic Outlook Key Economic Factors that May Impact HBO LAG Business • Regulatory ¾ Exchange controls in Venezuela ¾Telecommunication laws in Argentina and Venezuela ¾ Luxury tax on cable TV in Mexico • Inflation ¾ Impact on costs in Venezuela ¾ Hyperinflation in Venezuela • FX Rates ¾ Rate volatility ¾ Impact on revenues (Argentina, Brazil, Mexico) ¾ US GAAP adopting parallel rate for financial reporting • Commodity prices • Mexico drug war 20 September 2009 YTD Results & 2009 Budget Overview September 2009 YTD Operational Highlights Operational Highlights – Capadocia receives 3 International Emmy nominations for Best Drama Series, Best Leading Actress, Best Leading Actor. – HBO LAG Original Production receive awards: • Alice: Monte Carlo Television Festival • Capadocia: Geneva TV & GLAAD – Completed exhibition of Epitafios II & Sexo Urbano. – HD launched with Sky Brazil & DTV Panamericano. – Production of Capadocia II begins. – Marketing activities for premiere of FDC II (exhibition Oct 2009). – Warner output deal agreed in principle. – Mulher de Fases approved by Ancine (Q4 highlight) Financial Highlights – Major currency impacts: • Net currency gains on collection in Brazil & Argentina ($1.2M) • Currency devaluation impact on revenues in Mexico ($2.0M). • Gain on bond transactions ($1.5M). 22 2009 September YTD Variance Analysis Revenues higher than Reestimate •Revenues higher than Reestimate due to increased subscribers and exchange rates. •Ad Sales better than Reestimate due to exchange rates. Ad sales recorded at minimum guarantee. •Original Production revenues above Reestimate due to timing of sale Epitafios II ($520K), DVD sales of Capadocia ($10K) and boxing ($5K). •Service Fee revenues above Reestimate ($861K) due to higher basic channel distribution fees ($140K) and additional services requested by channels ($640K). Additional services include downlink ($98K), decoders ($78K) and regional office support ($464K). 23 2009 September YTD Variance Analysis Expenses higher than Reestimate • Programming higher than Reestimate due higher EBU’s ($7.7M), offset by timing of MEGA title ($1.9M) and non movie exhibitions ($175K). Savings on second season of La Liga en Accion ($114K). • Cost of Licensing is higher due to timing of sales of Epitafios II and Capadocia DVD’s.