Rogers Communications Inc. (NYSE:RCI) Q4 2022 Earnings Call Transcript

Rogers Communications Inc. (NYSE:RCI) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: 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.

Paul 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.

Tony Staffieri: Thank you, Paul and good morning, everyone. Thank you for joining us on this busy morning. When I stepped into the CEO role, one 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 I am pleased to share we made significant progress and we did it with a backdrop of a lingering pandemic and new executive team and one of the largest proposed mergers in Canadian history. Despite these challenges, we did not get distracted.

And we remain focused on driving better execution across our entire business. As a team, we made tremendous strides. But we have much more opportunity in front of us. I have to say I am pleased 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 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 industry leading share of mobile phone net additions. The momentum you saw in the first three quarters carry through into the fourth quarter and contains the power forward 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. And the improvements we delivered in 2022 were reflected in our total shareholder return, which was up 9%. By comparison, our two national competitors had negative returns of minus 4% and minus 8% and the TSX and Dow Jones were down as well: 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 we delivered the best Black Friday in our company’s history. For the full year, we added 634,000 mobile phone net adds postpaid plus prepaid our strongest result in 15 years, and the best performance in our industry. In cable, we continue to see very aggressive in market promotional activity from our main competitor. And although revenue was flat, we delivered positive adjusted EBITDA despite investments in key areas including customer service. Here we see opportunity improve our customer share performance, and we have confidence that our product set and in particular, internet and TV have a competitive advantage across our entire footprint and our recent heightened investments in cable will begin to yield market share growth this year.

In media, we delivered a strong fourth quarter and full year. In 2022 we grew revenue by 15% and turned $127 million of losses into $69 million of profit. Our media performance clearly stands out in the industry reflecting the quality of our assets and the team’s execution capability. Importantly these results did not come at the expense of investment. In 2022, our team invested a record $3.1 billion in capital, the vast majority of which is now in networks. In fact, a doubling of where we were several years ago in network investment. 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 technologies will bring.

And against this backdrop of healthy growth, we expect to continue leveraging our execution momentum to drive leading share of customer growth, which will fuel 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 continue to grow as well as we deliver another year of record investment in our customers and our networks. In fact, in 2023, we have allocated an incremental $700 million of our CapEx envelope towards ensuring we continue to have 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 firm commitments to our customers’ shareholders.

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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 now 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. And the decision goes further 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.

Glenn Brandt: 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 on market share and growth throughout 2022. The wireless market in Canada is healthy and competitive. And our better execution is allowing us to grow share once again. Our loading was very 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. And we achieved record Black Friday loading with strength continuing through to the end of the quarter. As we have seen all year, our results have been driven by better execution, growth in our unlimited plans, increases in immigration, and the continuation of customers embracing the diversified value plans Rogers provides across Canada. Through the very active Q4 promotional period, postpaid mobile phone churn was also higher, again reflecting a very competitive Canadian wireless industry with consumers very aware of the peak promotional periods and the available pricing and value alternatives. As a result of this increased activity churn for the fourth quarter came in at 1.24% compared to 1.06%, one year ago.

ARPU for the quarter was 58.69 up 1% benefiting from consumers continuing to travel. We exited Q4 with roaming revenues at 140% of pre-pandemic levels. And we’re just over 84% of pre-pandemic roaming traffic volume. Wireless adjusted EBITDA up a solid 8% reflecting excellent flow through from our service revenue growth, with adjusted EBITDA service margins coming in at over 63%. Moving to our cable business. Total revenue was stable and unchanged from one year ago. While adjusted EBITDA was up 1% reflecting tighter cost performance. Cable adjusted EBITDA margin was 51%, which is up 60 basis points from a year ago. As Tony has noted, the fourth quarter continued to be a very aggressive and promotionally intense period in the wireline market led by our national peer.

We were largely measured and balanced in our competitive response, matching competitive offers were appropriate while seeking to maintain underlying profitability wherever possible, versus driving loading. Gross ads remained strong while customer churn remains elevated reflecting that promotional activity. The market is competitive. On a product bases, we delivered 7,000 retail internet net customer additions in the fourth quarter, down from one year ago, again reflecting the highly promotional environment. Additionally, we continue to make significant investments in our cable network spending $235 million in cable network infrastructure alone in Q4. In our media business our results continued to reflect the quality of our sports and media assets with strong top line and bottom line results in Q4.

Revenue was up 17% driven by better content rates, a revenue distribution benefit from major league baseball and higher advertising revenue in the quarter. This drove strong profitability, with adjusted EBITDA of $57 million and $83 million turnaround from the $26 million loss in the same quarter last year, which as you’ll recall, was affected by COVID on live sports. At a consolidated level Q4 service revenue grew by 6% and adjusted EBITDA grew by 10%. Capital expenditures were $776 million and free cash flow excluding Shaw financing costs were $644 million. I should add, our deposit interest income is roughly 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 range 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 e adjusted EBITDA increased by almost 9%. Capital expenditures came in at approximately $3.1 billion and free cash flow for the year excluding Shaw financing was $2.0 billion; all meeting guidance. This performance is a clear demonstration that we are growing top line and bottom line and reinvesting these profits aggressively and increasingly back into our networks for Canadians. Importantly, these results also show we are in a strong position operationally and financially as we prepare to integrate with Shaw. Succinctly we are ready for when we received the final regulatory approval. 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 and a combined $4.4 billion available under our revolving bank credit facilities.

We also held $12.8 billion in restricted cash and cash equivalents that will be used to partially fund the cash consideration of the Shaw transaction when that closes. Our weighted average cost of all borrowings was 4.5% as at December 31, 2022. And our weighted average term to maturity was 11.8 years. Our debt leverage ratio at quarter end excluding the Shaw financing was 3.1 times compared to 3.4 times at December 31, 2021. As previously discussed until we close the Shaw transaction, we use 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 and cash equivalents associated with the transaction financing have been issued for the specific purpose of funding the acquisition which of course is not yet closed.

In terms of our outlook for the coming year, we continue to see strong momentum in our business and we have provided a robust outlook for 2023. Our 2023 outlook includes strong top line, bottom line and free cash flow growth, along with continued emphasis on investing in our networks, focused in particular on network reliability and customer service. 2022 has been a year of remarkable turnaround which will continue 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 in the range of 5% to 8%. These growth metrics continue to build on the industry leading organic growth we delivered in 2022. We are also continuing with our commitment to invest in our networks in 2023.

Our anticipated 2023 capital expenditures excluding Shaw integration costs will be in the $3.1 billion to $3.3 billion range. We anticipate free cash flow excluding Shaw integration will grow in 2023 ranging from $2.0 billion to $2.2 billion. As we head into 2023 we are monitoring the economic environment for signs of economic pressures. But we believe our execution is sound and we are managing effectively through the overall economic and business climate. Once we receive approval for the Shaw transaction, we will provide an update to our guidance, which will reflect the combination of these two strong and healthy organizations. But in the meantime, you can see that our underlying business is performing well and that we have not nor will become distracted.

In summary, we are very pleased with our results in Q4 and for 2022. These results reflect the Rogers team’s ability to make the necessary changes in the business and deliver better execution. And our teams did both of these very well without distraction. 2022 was not perfect and we know we have more work to do. But we have the right team in place and have established a much improved cadence for delivering more consistent and leading results. Thank you for your interest and attention this morning. And with that, Ariel, can you please commence with the Q&A.

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Q&A Session

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

Vince Valentini: 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?

Tony Staffieri: You will see continued those slowing growth in ARPU coming from roaming. You will see continued emphasis on our customers upgrading to unlimited plans and premium plans and so that will have a positive impact on our ARPU events. So yes, you’ll see that revenue growth will also be flowing through ARPU.

Vince Valentini: And just to clarify Glenn that the new guidance assuming you get the deal done, do we have to sort of wait until your next scheduled call in April with Q1 results? Or are you planning some sort of interim investor event to showcase what pro forma looks like?

Glenn Brandt: I think Vincent in fairness, let me not presume timing of when that will come and get ahead of our skis. 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 I don’t want to speak on behalf of others that the files on their desk.

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

Maher Yaghi: Thank you for taking my questions. Good morning, and congratulations on good results. Especially for the guidance, which is in within the current environment is impressive. But I did want to ask you a question related to the overall wireless market. We’re starting to see deceleration of wireless service, revenues and unsubscribe loading in the U.S. And some of that is coming from reduction in enterprise and the business segment. Now, Canada is a different beast, for sure. We’re seeing a lot of immigration. But can you talk a little bit about your expectation for wireless in €˜23? And are you seeing any deceleration of your business segments, which could, put some cap on how much further growth we can see in subscriber loading?

Tony Staffieri: Thanks for the question, Maher. As you stated, in your comments, Canada is slightly different than the U.S. macro environment owing to a couple of things that have helped us on the wireless side from a market perspective in €˜22 which we expect to continue into €˜23. And we’ve talked about them before. But notably, the level and pacing of immigration continues to be strong. When we look at foreign students and temporary workers, that pacing continues to be strong as well. And importantly, the penetration levels in Canada continue to have headroom. And so as we head into €˜23, we’re not foreseeing downward pressure on those. And with respect to the business, what we have seen is proportionately the business segment, and a particular small business has continued to grow in line with the consumer and those trends that I just talked about.

And so, as we looked at €˜23, we continue to see a fairly healthy backdrop. If you look at the overall wireless market, total number of subscribers for the market seems to have grown in €˜22 by just over 5%. And one of the healthiest growth rates we’ve seen in a long time. And so our expectation is that we’ll continue to see healthy growth in €˜23, may not be as high as €˜22, because there is a bit of the post pandemic catch up we believe that happened earlier in the year. But as we look for the rest of the year, we continue to see opportunity for that growth.