Rogers Communications Inc Q4 FY2022 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications Inc. Fourth Quarter 2022 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please go ahead, Mr. Carpino.

Thank you, Ariel, and good morning, everyone, and thank you for joining us. Today, I'm here with our President and Chief Executive Officer, Tony Staffieri; and our Chief Financial Officer, Glenn Brandt. Our call today will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2021 annual report regarding the various factors, assumptions, and risks that could cause our actual results to differ. With that, let me turn the call over to Tony to begin.

Thank you, Paul and good morning, everyone. Thank you for joining us on this busy morning. When I stepped into the CEO role a year ago, our performance had been lagging our peers and we had lost our leadership footing. Last year we set a clear plan to reestablish our leadership position and to deliver sustained strong results. This included a renewed focus on the fundamentals and a significant improvement in execution. In short, we set a plan to turn around our performance. 12 short months later, I am pleased to share that we made significant progress, overcoming the backdrop of a lingering pandemic, a new executive team, and one of the largest proposed mergers in Canadian history. Despite these challenges, we did not get distracted, remaining focused on driving better execution across our entire business. As a team, we made tremendous strides, but we have much more opportunity ahead of us. I must express my satisfaction with the speed and magnitude of our turnaround. Across critical valuation metrics such as financial growth and customer share gains, we went from consistently ranking second or third against our competitors over the past few years to now ranking first on the vast majority of these important metrics throughout the year. Our turnaround wasn't solely about coming out of a pandemic; it was about instilling a performance-based culture focused on our customers, returning to growth, and outperforming the market. In 2022, the whole market grew slightly more than prior years, but we grew even more. In wireless, we went from losing market share just a few years ago to now leading the industry in net additions of mobile phone subscribers. The momentum seen in the first three quarters carried through into the fourth quarter and propels us into 2023. Importantly, we met our upgraded guidance for the year and set a strong foundation for growth in 2023. For the full year, we delivered strong total service revenue growth of 6% and adjusted EBITDA growth of 9%; the highest growth in over a decade. Additionally, the improvements made in 2022 were evident in our total shareholder return, which was up 9%. By comparison, our two national competitors had negative returns of minus 4% and minus 8%, while the TSX and Dow Jones also faced declines of 5% and 7% respectively. In wireless postpaid mobile phone net additions were 193,000 in the fourth quarter, up 37% from last year. The team executed exceptionally well in Q4 and delivered the best Black Friday in our company’s history. Overall, for the entire year, we added 634,000 mobile phone net adds, both postpaid and prepaid, marking our strongest result in 15 years and the best performance in our industry. In cable, we have seen aggressive promotional activities from our main competitor. Although revenue was flat, we delivered positive adjusted EBITDA despite our investments in key areas, including customer service. We see opportunities to improve our customer share performance and are confident that our product set, particularly internet and TV, have significant advantages across our entire footprint. Our recent heightened investments in cable should begin to yield market share growth this year. In media, we delivered strong results in the fourth quarter and full year. In 2022, we increased revenue by 15% and turned $127 million in losses into $69 million in profit. Our media performance clearly stands out within the industry, reflecting the quality of our assets and the team's execution. Importantly, these results did not come at the cost of investment. In 2022, our team invested a record $3.1 billion in capital, most of which is now in networks. In fact, this is double our investment in previous years. Looking ahead to 2023, we continue to see healthy growth catalysts supporting our businesses from factors such as healthy population growth, penetration headroom, and the benefits our transition to 5G will bring. Against this healthy growth backdrop, we expect to continue leveraging our execution momentum to drive leading customer growth, fueling robust organic growth in both total service revenue and adjusted EBITDA as you saw this morning in our full-year guidance release. You will also see that free cash flow will grow, alongside another year of record investment in our customers and networks. In 2023, we have allocated an additional $700 million from our CapEx envelope to ensure we maintain the best wireless and wireline networks. As I reflect on the year, I am proud of our entire team for their relentless focus, disciplined execution, and firm commitments to our customers and shareholders. While there is clearly more work to do, we have reestablished momentum. Before I turn it over to Glenn, let me provide a brief update on Shaw. As you heard last week, the Federal Court of Appeal reaffirmed the decision of the competition tribunal. Two federal courts have unanimously and decisively ruled in favor of these pro-competitive transactions, namely the sale of Freedom to Quebecor and the sale of Shaw to Rogers. To quote the tribunal decision, there will continue to be four strong wireless competitors in Alberta and British Columbia. The decision goes further in concluding that Quebecor will be a more disruptive wireless carrier and Rogers will inject a new and substantial source of competition. Given the matters before the federal government for final approval, we will not provide any further comment at this time. Let me now turn the call over to Glenn.

Thank you, Tony. And good morning, everyone. Thank you for joining us this morning. I know it’s a busy morning. Rogers' industry-leading fourth quarter and full-year results reflect the company’s commitment to better execution, combined with continued investment in our networks. In wireless, fourth-quarter service revenue was up a very healthy 7%. This reflected higher roaming revenue as global travel continued to recover, as well as a postpaid phone subscriber base which has consistently led in market share and growth throughout 2022. The wireless market in Canada remains healthy and competitive, and our improved execution is allowing us to grow share once again. Our loading was exceptionally strong, as we added 193,000 postpaid net additions, reflecting a 37% increase from one year ago. Loading was particularly robust during the Black Friday and Boxing Week promotional periods, achieving record Black Friday loading with strength continuing through to the end of the quarter. As we saw all year, our results have been driven by better execution, growth in our unlimited plans, increases in immigration, and customers embracing the diversified value plans Rogers provides across Canada. Despite the highly competitive promotional period, postpaid mobile phone churn increased, reflecting a very active Canadian wireless market with consumers aware of peak promotional periods and the pricing and value alternatives available. Consequently, churn for the fourth quarter was 1.24% compared to 1.06% a year ago. Average Revenue Per User (ARPU) for the quarter was $58.69, up 1%, benefiting from the continued return of consumers traveling. We exited Q4 with roaming revenues at 140% of pre-pandemic levels and just over 84% of pre-pandemic roaming traffic volume. Wireless adjusted EBITDA was up a solid 8%, reflecting excellent flow-through from our service revenue growth, with adjusted EBITDA service margins exceeding 63%. Moving to our cable business, total revenue remained stable and unchanged from a year ago, while adjusted EBITDA increased by 1%, reflecting tighter cost performance. The cable adjusted EBITDA margin was 51%, up 60 basis points from a year ago. As Tony noted, the fourth quarter remained very aggressive and promotionally intense in the wireline market led by our national peer. While we remained measured in our competitive response, matching offers appropriately while seeking to maintain underlying profitability, customer churn remains elevated due to promotional activity. On a product basis, we delivered 7,000 retail internet net customer additions in the fourth quarter, down from a year ago, again reflecting the competitive environment. Additionally, we continued to make significant investments in our cable network, spending $235 million on infrastructure alone in Q4. In our media business, our results continued to reflect the quality of our sports and media assets with strong top and bottom line results in Q4. Revenue was up 17%, driven by better content rates and higher advertising revenue in the quarter. This led to adjusted EBITDA of $57 million, representing an $83 million turnaround from the $26 million loss experienced in the same quarter last year, which was affected by COVID on live sports. At a consolidated level, Q4 service revenue grew by 6% and adjusted EBITDA increased by 10%. Capital expenditures were $776 million, and free cash flow, excluding Shaw financing costs, amounted to $644 million. Our deposit interest income is covering our 4.2% weighted average coupon on our $13 billion cash held on reserve for the Shaw bond financing. We achieved our 2022 guidance despite the $150 million credits paid to customers in the third quarter. On a consolidated basis for the full year, total service revenue grew over 6%, and adjusted EBITDA increased by nearly 9%. Capital expenditures were approximately $3.1 billion and free cash flow for the year, excluding Shaw financing, reached $2.0 billion, all meeting guidance. This performance demonstrates our capability to grow top and bottom-line and aggressively reinvest those profits back into our networks for Canadians. These results also affirm our strong operational and financial position as we prepare to integrate with Shaw, making us ready for the final regulatory approval when received. Turning to the balance sheet, at December 31, we had $4.9 billion of available liquidity, including $460 million of cash on hand and cash equivalents, alongside a combined $4.4 billion accessible under our revolving bank credit facilities. We also hold $12.8 billion in restricted cash and cash equivalents, designated to partially fund the cash consideration of the Shaw transaction upon its closing. Our weighted average cost of borrowings stood at 4.5% as of December 31, 2022, with a weighted average term to maturity of 11.8 years. At the quarter-end, our debt leverage ratio, excluding the Shaw financing, was 3.1 times compared to 3.4 times as of December 31, 2021. As previously discussed, until we finalize the Shaw transaction, we utilize adjusted net debt, which excludes the Shaw financing and related cash held in reserve, to analyze our debt and calculate leverage. The Shaw-related senior notes, derivatives, and restricted cash associated with the transaction financing have been earmarked specifically for the acquisition, which is pending closure. Regarding our outlook for the coming year, we continue to witness strong momentum in our business and have provided a robust outlook for 2023. Our guidance includes strong top line, bottom line, and free cash flow growth, as well as an ongoing commitment to network investment, particularly in network reliability and customer service. 2022 represented a remarkable period of turnaround that will extend into 2023. We are executing well, and our outlook reflects this. We anticipate total service revenue growth in the range of 4% to 7% and adjusted EBITDA growth between 5% and 8%. These growth metrics build upon the organic growth we delivered in 2022. Moreover, we will continue investing in our networks in 2023, with anticipated capital expenditures, excluding Shaw integration costs, ranging from $3.1 billion to $3.3 billion. We expect free cash flow, excluding Shaw integration, to increase in 2023, projected between $2.0 billion and $2.2 billion. As we enter 2023, we are monitoring the economic climate for signs of pressure, but believe our execution remains strong, effectively managing through the overall economic landscape. Once we receive approval for the Shaw transaction, we will update our guidance to encompass the integration of these two strong organizations. In the meantime, our underlying business is performing well, and we will not become distracted. In summary, we are delighted with our Q4 results and overall performance in 2022. These outcomes reflect the Rogers team’s ability to implement the necessary business changes and achieve enhanced execution. Our teams performed exceptionally well without distraction. Although 2022 was not perfect and we acknowledge there is more work to be done, our team is in place, and a much-improved cadence for delivering consistent and leading results has been established. Thank you for your interest and attention this morning. Ariel, can you please commence with the Q&A?

Certainly. We will now begin the question and answer session. Our first question comes from Vince Valentini of TD Securities. Please go ahead.

Yes, thanks very much. The guidance you’ve given looks impressive, by the way and good fourth quarter, I should add it. Can you clarify what you’re doing with your wireless ARPU assumptions since there are a lot of moving pieces with roaming and potentially new competition? Would you be assuming positive wireless ARPU growth within the service revenue and EBITDA guidance you provided?

You will see continued slow growth in ARPU coming from roaming. There will also be an emphasis on our customers upgrading to unlimited plans and premium plans, which will positively impact our ARPU events. Therefore, yes, you’ll see that revenue growth also be reflected in ARPU.

And just to clarify Glenn, does the new guidance assume you get the deal done? Are we expected to wait until your next scheduled call in April with the Q1 results, or are you planning some sort of interim investor event to showcase what pro forma looks like?

I think, Vincent, in fairness, let me not presume the timing of when that will come and get ahead of ourselves. We will be ready when we get clearance but let me not guess when that will come relative to our next earnings release or prior. I don’t want to be presumptuous and speak on behalf of others whose files are on their desk.

Our next question comes from Maher Yaghi of Scotiabank. Please go ahead.

Thank you for taking my questions. Good morning, and congratulations on the results, especially for the guidance, which within the current environment is impressive. I wanted to ask about the overall wireless market. We're starting to see a deceleration of wireless service revenues and subscriber loading in the U.S., partly coming from reductions in enterprise and the business segment. Although Canada is a different market, can you talk a little about your expectations for wireless in '23? Are you seeing any deceleration in your business segments that might cap how much further growth we may see in subscriber loading?

Thanks for the question, Maher. As you stated, Canada is somewhat different from the U.S. macro environment due to factors contributing to wireless growth in '22, and we expect these to continue into '23. Notably, the level and pacing of immigration remains strong; we continue to see foreign students and temporary workers arriving at healthy rates. Furthermore, penetration levels in Canada also indicate room for growth. Therefore, as we head into '23, we do not foresee downward pressure on these trends. Regarding the business segment, we have noticed that small business has continued to grow in line with consumer trends. In total, the wireless market grew by just over 5% in '22, reflecting one of the healthiest growth rates we've observed. We anticipate that growth will continue in '23, albeit possibly not as high as in '22, as some of that earlier growth may have been post-pandemic catch-up. Nevertheless, we see ample opportunity for growth moving forward.

Also, Maher, regarding the guidance you asked about, it reflects population growth. As for the business market, we have an opportunity to increase our share there. Looking at our service revenue guidance of 4% to 7%, it aligns with those overall trends in population growth.

Thank you for that information. Tony, since you joined, there have been changes leading to better operational performance and benefits on the bottom line. Can you discuss the next steps for further improvement in operations, what changes we should expect from Rogers beyond what’s happening with Shaw?

That's a good question, Maher. In 2022, we focused on rebalancing our business fundamentals, ensuring we have the best network while ramping up investments in both wireless and wireline networks, along with improving the customer experience. As we enter '23, we will continue to make tangible improvements to our network and customer service. Our focus remains on creating reliable connections and enhancing customer experience. As technology evolves, we see opportunities to simplify our offerings and further reinforce our commitment to a resilient network. These themes will continue to be significant drivers for maintaining market share, leading to positive financial outcomes.

Our next question comes from Drew McReynolds of RBC. Please go ahead.

Good morning. I want to extend on the previous question, specifically regarding the cable side. I think everyone is aware of the strategy there, especially in terms of recovery from outages. What are your expectations for the cable division for Rogers as we begin the year? Glenn, I’m also interested in hearing your thoughts on the balance sheet post-deal closure, considering evolving market conditions. What are your views looking ahead for the next two to three years?

Thanks for the question, Drew. Regarding the cable side of the business, think of it in two aspects. Firstly, the backdrop likely fuels growth; we saw solid growth in the wireless market. There is a lag as that growth translates to new home construction in our cable business, which we expect to support growth in demand. Additionally, we are increasing investments in homes passed. We anticipate improvements in subscriber market share, particularly in the second half of '23, with initial signs becoming visible in Q1 and more notably in Q2. We are reworking some of the fundamentals in our business, investing more in customer experience, resulting in a reduced cost structure for cable compared to any previous year. Simultaneously, we are redirecting from the Flanker Fido internet back to the Rogers main brand to enhance customer experience. You will notice Rogers Internet has considerably lower churn than Fido internet. While our main competitor has recently launched aggressive promotional pricing for higher tiers, we will compete when the time is right while focusing on our fundamentals.

Drew, regarding the Shaw transaction and our balance sheet, we have secured all the necessary funding to close. We have $13 billion in cash reserves from the bond proceeds issued last March, which are set to remain available through year-end ‘23. Alongside this, we have $6 billion in committed bank term loans with diverse terms. Thus, our total funding amounts to $19 billion without needing to return to capital markets as we close on Shaw. As for leverage, we will be around five times, a bit over five, depending on timing. We have sustained organic growth with Rogers during this period, and while we have incurred costs along the way, those added expenses will not offset the strong position we will be in upon closing. Considering the synergies, free cash flow in subsequent years will be available for debt repayment as well.

Our next question comes from Sebastiano Petti of JPMorgan. Please go ahead.

Hi, good morning. Thanks for taking my question. I’d like to discuss cable network investments and competition. Tony, you mentioned in your prepared remarks the fourth quarter was aggressive regarding promotional intensity from national peers. However, you also mentioned that you expect market share trends to improve in Q1 and Q2. Can you provide further insight on the drivers leading to improved subscriber market share? Also, as a longer-term question, larger U.S. peers like Charter and Comcast have discussed their DOCSIS 4 upgrade paths, targeting ubiquity by 2025. What does this mean for Rogers in terms of maintaining competitiveness?

Thanks for the questions, Sebastiano. As we head into '23, regarding market share improvements, I want to clarify that expectations should remain realistic, with progress occurring gradually throughout the first half of the year. We remain focused on ensuring our customers receive reliable internet speeds rather than merely competing on price. While obtaining customers at lower ARPU may occur, we emphasize positive customer experience, avoiding dissatisfaction that leads to churn. These fundamentals will drive the right growth. Regarding DOCSIS 4, we have no competitive disadvantage; in fact, we view it as an advantage. We've been deploying fiber extensively throughout our footprint for over a decade. Our hybrid fiber coax is capable of achieving speeds far exceeding current customer demand, with the capability for one to 2.5 Gbps speeds across 99% of our footprint quickly expanding. The transition to DOCSIS 4 will enhance those speeds, aligning with similar timelines to our U.S. peers.

Our next question comes from David Barden of Bank of America Merrill Lynch. Please go ahead.

Hey, guys, thanks for taking the questions. First, congratulations on your success with the merger. Given its prolonged development, do the synergies of this merger still hold, and how do you view future CapEx requirements in integrating Shaw?

I'll start, and Glenn will provide additional insights. Throughout the course of our evaluation of the Shaw transaction, we have continually assessed our investment thesis. Our confidence in cost synergies has only increased, aided by a clearer understanding of our cost structures and roadmaps. Furthermore, we now look positively upon projected revenue synergies as Canadian population growth exceeds our previous expectations for Shaw's primary markets. These factors support the notion that our investment thesis continues to enhance as time progresses.

To build on that, the capital expenditure forecast has remained unchanged since our initial projection of the transaction. Much of Shaw's previous capital spend has been directed towards wireless infrastructure, while our main focus will shift to wireline improvements in the West, which aligns with our fundamental business strategy.

The next question is from Tim Casey with BMO Capital Markets. Please go ahead.

Thanks. A couple of clarifications, Glenn. With your CapEx comment, are you implying that you will invest a billion dollars a year in Western Canada or simply matching Shaw's prior investment of $700 million in wireline?

I’m not ready to get into specific investment numbers just yet, Tim. Our guidance for ‘23 stands, but we will invest in wireline networks to enhance customer service. Investment will occur over time—not merely over a few months—across the entire footprint.

Regarding wireless loading, we had a strong quarter; however, our churn was affected, likely due to increased activity in the Flanker brands, likely anticipating competition from Freedom. The dynamics within these brands during that period contributed to this, but we are actively moving back to focus on premium plans, as evidenced by the growth rate in Rogers outpacing Fido. So overall, despite the competitive pressures, our approach of focusing on the right balance between share gains and ARPU growth is vital. In terms of media signaling from the CRTC regarding pricing, we look forward to engaging constructively with the new chair. I believe our industry continues to demonstrate value to consumers, and I’d like to note that our sector has seen price reductions amidst rising inflation rates in various sectors over the past few years.

On the media aspect, there is a one-time contribution tied to MLB that we recorded in the fourth quarter, stemming from the sale of a minority interest in one of its properties. However, I cannot disclose the specific amount due to policy mandates.

Our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

You’ve mentioned revenue synergies, and we see a decline in triple-play bundles in the U.S. compared to double plays. Can you share your observations about bundling in Ontario? How many of your cable customers have your wireless product? How will this change as we expand into Western Canada?

We have observed this trend closely in the U.S., and Canada has more experience having operated both cable and wireless for a significant time. Bundling has often been a pricing incentive for consumers. The channel distribution in Canada differs as we focus also on customer experience and not merely bundling. Price is a factor, but we are also considering customer satisfaction over the long term.

Our Ignite offering is attractive as viewing habits shift towards streaming while still providing easy access to traditional content. This positional strength in our offerings facilitates the growth of our customer base.

On 5G, can you elaborate on your rollout and coverage targets? What kind of customer uptick have you seen moving to higher-tier plans following its deployment? Also, how do you anticipate network costs will be affected by operating both 4G and 5G networks?

Regarding the 5G rollout, we've been quick to deploy mid-band spectrums. Currently, we have approximately 83% coverage, aiming for about 90% by year-end. We are aggressively progressing. In terms of network costs, higher-band spectrum will accommodate more data, while 5G users tend to consume more data. We will require mid and higher bands to manage data effectively in the years to come.

As we mobilize into the market with 5G services, the pertinent capital investment will be largely fixed costs for deploying infrastructure and spectrum, which you will observe below the EBITDA line but will enhance our capability and service delivery.

Thanks for my questions. On cable, can you provide an update on the overlap between your cable network and fiber to the premises? Additionally, in wireless, are you observing a significant shift towards lower-end market subscribers, and what does this mean for your go-to-market strategy?

Regarding the wireless segment, the growth in customers new to Canada, particularly students, has led to slight indexation towards our Flanker brands. However, our main brand remains strong, with significant and healthy growth in Rogers’ subscribers. While there’s a minor shift, we are effectively managing a balanced portfolio.

Without frustrating you, Jerome, with specifics, we do focus on being opportunistic in areas such as Atlantic Canada, where running fiber is more feasible and cost-effective. Our hybrid fiber-coaxial network will continue to compete effectively even as we implement DOCSIS 4, maintaining competitiveness with our peers who have fiber to the premises.

Thanks for taking my question. I have two inquiries. Firstly, regarding wireless churn—while we’ve seen an uptick in churn due to foot traffic returns, what are your expectations for medium to long-term churn developments given the contributing factors such as family plans? And Glenn, on the free cash flow side, cash taxes appear notably lower in 2022. What expectations do you have for ‘23 regarding cash taxes?

With respect to wireless churn, the ongoing competition has led to heightened churn rates. While lower churn is preferable, the overall cost of acquisition rates have remained high across the industry, indicating that churn is only one aspect of our overall strategy. Our margins are holding strong year-on-year despite these fluctuations.

Regarding free cash flow and cash taxes, you will see some minor differences year-on-year, stemming mostly from the timing of quarterly cash tax payments made in 2022. However, those variances aren’t significant from one year to the next.

Can you provide insight into synergy achievements versus merger integration costs post-deal? Additionally, how do you see the business market opportunity evolving with the Shaw closure?

Morning, Batya. The business market is growing as population trends influence both consumer and business segments, reflecting growth in small business penetration. We are pleased with the results and are keen on our growth prospects in this area.

In terms of achieving synergies, a rough estimate indicates that for every billion dollars in synergies, you can expect one-time costs to be approximately one-time revenue. This provides a good baseline for modeling expectations.

Thanks for squeezing this in. Regarding guidance, can you provide insights on revenue dynamics for Q4 versus expectations for next year? Furthermore, although fees are comparable to fiber offerings, can you address the strength of your cable competitors in light of their market share gains?

Your insights on customer share losses do not elude us; we acknowledge our customer share trends. Our approach is measured with a disciplined focus on sustaining long-term customer relationships rather than being subject to short-term promotional pricing pressures. Our network capabilities deliver significantly higher speeds than market demand, serving as our competitive advantage.

In terms of roaming statistics, we are reaching about 85% of pre-COVID traffic volumes, with revenues now at 140% of pre-pandemic levels. Though volumes may be lower, we still expect some quantifiable growth as travel momentum continues to build.

Ultimately, roaming growth has stabilized in the seasonality of travel, and we anticipate stronger performance approaching major travel events. I'll pause there. Thanks, everyone, for joining today. We welcome any follow-up inquiries. Thank you.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.