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Rogers Communications Inc. (NYSE:RCI)

Morgan Stanley Technology, Media & Telecom Conference

February 25, 2013 4:55 pm ET

Executives

Anthony Staffieri - Chief Financial Officer and Executive Vice President

Bruce M. Mann - Vice President of Investor Relations

Analysts

Simon Flannery - Morgan Stanley, Research Division

Simon Flannery - Morgan Stanley, Research Division

All right. Okay, all right. Good afternoon, everybody. My name is Simon Flannery, telecoms services analyst from Morgan Stanley. It's my great pleasure to have Rogers Communications here today, Tony Staffieri, Chief Financial Officer; and Bruce Mann, Head of Investor Relations.

Tony, if I could ask you to make some opening remarks. You just reported a strong set of numbers last week. You raised your dividend, had a buyback announcement. But perhaps, just go through a little bit of your -- you've been with Rogers, I think, about a year now. Just talk a little bit about your background and some of your sort of thoughts on the company as we look into 2013 and beyond.

Anthony Staffieri

Sure. Hi, everyone. Let me start off, Simon, thank you for hosting the event and having us here. Glad to be able to spend a few minutes with everyone, telling them a little bit about Rogers. As you said, I've been here coming on a year now. And so it's really been a good environment and a good assessment, sort of independent assessment of the assets and the team. And it's been good to get right into it.

I understand some of the folks in the room may not be that familiar with Rogers Communications. And so maybe I'll just spend a couple of minutes telling you about who we are and touch on some of the highlights from the fourth quarter results that we released a couple of weeks back, and then we can get into some specific questions.

Rogers Communications, we operate almost exclusively in Canada in the wireless space. We are the country's largest wireless provider and we have about 35% market share. The other 2 incumbents each have about 28% share. Good metrics in our wireless business, if you were to look at -- getting a bit of feedback. Hopefully, that isn't bothering anyone.

Good metrics overall in terms of profitability, churn improvements, data growth and smartphone penetration. We ended the quarter with 69% smartphone penetration, probably one of the highest in North America. So good performance there.

On the cable side, we also lead the country on that front as well. And we have about 5.5 million total subscriber units. We operate predominantly in Ontario, which is the country's biggest population and most densely populated, and gives us a good platform to operate our coax fiber network. And we've got a little bit in Atlantic as well.

We also have a media business that has a healthy balance of assets within that. We own some key television properties, that includes Sportsnet, one of the country's largest sports broadcasters; and City Television as well, which is now national, covers 80% of the population; as well some key iconic sports franchises, the Toronto Blue Jays. We have a 40% interest in Maple Leafs Sports & Entertainment, which owns the Toronto Maple Leafs, NHL franchise, as well as the Toronto Raptors and other assets.

We have 55 radio stations across the country, including the 2 most listened to stations in the country. Over 50 magazine and trade publications. And so a healthy mix of assets.

In terms of size, roughly $12.5 billion of revenue. Just under $5 billion of profit, operating profit. Cash flows, on a pretax basis, generally runs at just under $2 billion. We've had a healthy track record of returning cash to shareholders in the form of dividends and share buybacks. In the most recent quarter, we increased our dividend by 10% to $1.74 a share. And that comes on the heels of good track record of buybacks over the last 4 to 5 years. We bought back about 26% of our outstanding shares. So good progress on returning cash to shareholders.

From a balance sheet perspective, good liquidity and good flexibility. Our debt-to-equity ratios fourth quarter, we ended at just under 2.3x. So good flexibility. We try to keep that within a policy range of 2x to 2.5x. We ended the year with liquidity of just over $3 billion between the cash on hand and facilities that we had. So good liquidity position.

So I'd say, overall, a superior asset mix. If you were to look at our assets, every segment is growing. And so that perspective, good -- we've got a proven and experienced management team. And you saw that particularly in 2012, as we executed on some key initiatives, being top line growth and cost management.

And so when you look at both -- those 2 aspects, you look at the macro environment in Canada, which as an economy continues to do well against the backdrop of the rest of the word, is good.

And so when you put all of those together, strategically, financially, economically, we continue to sit in a good environment, to continue to deliver strong shareholder returns over the long term.

Question-and-Answer Session

Simon Flannery - Morgan Stanley, Research Division

Great. Well, one of the things I always find coming back to the conference every year is just contrasting how things have changed in the 12-month period, what we were worried about a year ago. And I think in Rogers, the contrast may be about as stark as any of the -- some of the major telcos or communications companies. I think a year ago, there was concerns about margins, there was concerns about elevated churn, about negative ARPU trends. But we've really seen progress on a lot of those metrics. What do you think were the most important things towards turning the trajectory, turning the momentum in the business? And how does that translate into 2013, where you basically guided to more of the same?

Anthony Staffieri

Yes. I would say it's 2 things: As we thought about 2012 and the things we wanted to pick up the pace on, one was top line growth. That continues to be a priority for us. We think data, monetizing data, is going to be a key aspect of that, both on the wireless side, as well as on the cable side of things. On the wireless side, LTE, we continue the expansion of that. At the end of the year, we ended with 60% of the population covered in LTE, and we continue to roll that out at an aggressive pace. And we combined that with a very healthy penetration of smartphone. And so we actually get the experience onto our network. And as I said, we lead in smartphone penetration. So pleased with where that's going. And then I'd layer on top of that, new price plans that we introduced in the fall that are largely data centric. And so that really gets the customer focused on choosing something that continues to drive data growth. And so on the wireless side, that was a key focus in 2012. And on the cable side, making sure we have the best internet experience was the other piece of it. So we ended the year with 90% of our population or our footprint, I should say, being able to get 150 megs of data speeds. And so to the extent that we continue to lead on Internet, we think that's going to be important ingredient for the top line growth. And then just as important was cost management. And to some extent, even more so in 2012. Cost will continue to be part of our DNA going forward. We look at the primary components of it: labor, our supplier base and our G&A are sort of the 3 primary components of it. And so we're not going to take our foot off the gas pedal when it comes to cost management. And so I would say those 2 items, in terms of execution, particularly proud of in 2012. And I think, given our exit rate in the fourth quarter of 2012, positions us well going into 2013.

Simon Flannery - Morgan Stanley, Research Division

And I think there's -- we just had Verizon downstairs, and a lot of the focus is on the U.S. market with Softbank coming in. Obviously, Canada has had its own experience with competition at the -- more at the lower end. But maybe you update us on what you see as the competitive environment right now and the ability for Canadian penetration to -- at 80% or so to convert on U.S. penetration at 100%-plus.

Anthony Staffieri

Yes, a couple of things. Certainly, as we look at penetration and we look at the rates over the last several years and where it's been going, as you said, we're sitting at just under 80%. And we see that growing at a rate of 400 to 500 basis points per year. Very consistent with what we saw in the U.S., just on a time lag of 3 to 4 years. And so with everyone else sitting at over 100% in terms of countries, we see good uptick potential on that side of it. So the overall subscriber base continues to grow. And we're all seeing -- also seeing multi-device adoption rates continue to increase. And tablets, certainly helped by the type of plans, data sharing and family plans, that we have out there. And so I think that sets up a good environment for that. Competition continues to be intense in our landscape, predominantly among the 3 incumbents. Some of the new entrants continue to play predominately in the prepaid space, a different set of customers. If you were to look at their metrics, ARPU sitting at much lower than the 3 incumbents. So we'll see how that part of the marketplace plays itself out. But as I said, they're largely in the prepaid space. And so we'll see how that plays out.

Simon Flannery - Morgan Stanley, Research Division

So the government's got some spectrum in 700 megahertz and then 2.5 down the road to auction. What's the latest in terms of the time line on that? And how are you thinking about making sure you've got enough money for that? You're looking to Shaw to maybe buy some more spectrum as well versus your current spectrum position, which is already pretty strong?

Anthony Staffieri

Yes. Spectrum is, as you all know, key to us continuing to lead in performance in the markets that we choose to serve. And so the Shaw transaction was a big part of shoring up our spectrum, particularly in the West. So it was very viable spectrum from our perspective to get the performance where we wanted it to be in those markets. On the 700 spectrum, that's going to be important as well. And we intend to participate in it, not withstanding some of the strength that we're seeing in AWS. The spectrum auction has been delayed. The expectation, it was going to happen some time around midyear, and it's been pushed out towards the end of the year and now some speculation maybe even into just after year end. We were expecting some rules on the auction process to come out a few months ago. And those have been delayed as well. So we are anxiously awaiting to see what those rules look like so we can be sure on how we're going to participate and make sure that we get sufficient amount of spectrum at that auction.

Simon Flannery - Morgan Stanley, Research Division

One of the big debates in the U.S. and I think in Canada, too, is the trajectory of phone subsidies, they've obviously had with the rise of smartphones, and it's obviously been a huge increase in the subsidy levels. How are you seeing your ability to manage those subsidies, to manage the upgrade cycles? I think Canada got the BlackBerry -- the new BlackBerry Z10 before most of the rest of the world. Windows is around. There's other stuff coming out at Mobile World Congress. How should we think about that for Canada -- the Canadian industry in general and Rogers specifically?

Anthony Staffieri

Yes. I would say that the whole subsidy model for us is really factored around the whole lifetime value economics. And as we see data pulling ARPU growth, overall, that bodes well for a continuation of the subsidization. For us, it's really been about making sure that we give the customer choice. And so when we combine that with the introduction of the Flex Plan, which we did in 2012, what we're seeing is more and more customers opting into new handsets. But more and more, it's on the customer's nickel as opposed to the -- our nickel on the Flex Plan programs. But we don't think it's necessarily going to go away. I mean, the wanting of the latest device is always going to be there. And so that's why we've always said, "If we can make sure we have the best-in-class cost structure everywhere else, then that will allow us to continue to invest in customer experience." And in the wireless side, handsets is a big part of it. While at the same time, delivering solid margins. And so if you saw our margin performance in the fourth quarter, very good margin performance, not withstanding a record number of acquisition and hardware upgrades. And so that's the delicate balance we'll continue to go through, and it will always be a balance. But again, it's all about cost efficiency on noncustomer experience things to be able to afford that.

Simon Flannery - Morgan Stanley, Research Division

Okay. If we turn to the cable side of things, you talked about the impressive speed, 90% getting 150 megs or better. Obviously, Bell has -- is making a big push with their 5 offer, starting most in Quebec, but now more so in Ontario as well. How is the level of competitive intensity right now? And how is Rogers defending themselves or trying to ensure that you can continue to grow that business despite the increased competition?

Anthony Staffieri

I would say there's a couple of dynamics there that we're seeing. On one side of the space, there's competition for what I would call the whole home, but we're also seeing a growing segment that is internet focused. And whether that's a single-line internet or internet combined with wireless is the other aspect of it. So that's why I've talked about us leading with internet on both wireless and cable is going to be a key part of that. Certainly, IPTV has been competitive for us. In the short term, we continue to deal with what I would consider to be aggressive pricing in terms of acquisition and retention offers by our IPTV competitor. To some extent, it isn't -- it's new, but we've always been competing with their satellite product. And so that competition has always been there. But I would describe it as certainly having picked up and continuing to pick up. And it's largely been through pricing offers as opposed to product. Our investments in our NextBox 2.0 is, again, us making our product on par with the competitor. And so it offers whole-home PVR, a much improved user interface guide. The other thing we have is one of the largest libraries. So significant -- over 8,000 titles in various formats. And we introduced in the fourth quarter, Anyplace TV. And so using NextBox 2.0, you could watch television on tablets anywhere in the home. And so continuing to improve the product, continuing to meet the competition on a tactical basis, price points, that will be a key part of it as well.

Simon Flannery - Morgan Stanley, Research Division

Okay. And one of the challenges a lot of cable companies would face is content cost inflation. Now you're obviously hedged by some of your media assets. But what are you experiencing in the Canadian market? And how much are you hedged with that?

Anthony Staffieri

Yes. Let's say a couple of things. If we were to look at some of the content price increases, that's largely -- probably the biggest ones have come on the sporting side. And so given the investments we've made in media on sporting and sport content in particular, as you said, that's really given us an ability to hedge. And so to the extent that the market is willing to pay more for that, then we benefit through our media subscription revenues on that, as well as, quite frankly, the ad revenues that come with it. So on that side of it, it's a good plus. But the other thing we've been trying to be disciplined on is to the extent that content price increases are there because consumers want it, then we want to make sure we're disciplined in passing on that cost to the customer. And so we strive to make sure that in our TV, video business, that our gross margins are on a consistent basis. So if you were to look at how that's played out over the last several quarters and several years, it's been fairly consistent. And so that's what we strive to do is to make sure that those programming costs ultimately are passed on to the consumer, which is ultimately driving up the cost through their demand.

Simon Flannery - Morgan Stanley, Research Division

Okay. Another opportunity in the cable side is on the business telephony side. Now you talked about there's less focus on maybe consumer voice. But the internet product is very appealing to a lot of corporates. How is Rogers penetrating that opportunity within -- particularly within your cable footprint?

Anthony Staffieri

Yes. There's 2 sides on the business: One is, if we think about small business, in that -- the channels on that are largely in line with our consumer business. And so we're seeing good share pickup in terms of internet and telephony. But there's also, as you moves upscale, Rogers Business Solutions. So we continue in that business to focus on next-generation IP on net-type revenues. And so if you were to look at our results for the fourth quarter -- first quarter where our IP revenues were on par with legacy. So we're well positioned for 2013 for IP revenues to grow in the fourth quarter. Those revenues grow -- grew at 26% year-on-year. So good healthy clip rate. That business, we're sitting at -- when you look at our fiber, we are on net or near net 22,000 businesses. And to date, we have what I would describe as a very light penetration rate. So we see good opportunity to monetize the investments we've been making and we'll continue to make in fiber on that side of it, as we move up in the mid to large space in Business Solutions.

Simon Flannery - Morgan Stanley, Research Division

Are you -- is that an area where you're putting more resources this year?

Anthony Staffieri

I would describe it as a continuation of the resources that we have been putting on. So as legacy, we continue to monetize legacy. So to the extent the customer wants to stay with their legacy solution, we're doing all the right things to, a, monetize it from a customer's perspective, but also take out cost quickly. As that revenue comes down, get them onto IP, which has -- it just drives more data revenue with it as well in terms of solutions, et cetera. And that allows us to take out costs. So again, if you were to look at RBS's performance in the fourth quarter, strong margin improvement year-on-year. And so that will continue to be a focus. Some of the investments we will make in that space will continue to be around more fiber and driving solutions onto that fiber, investments into a sales force, as we continue to try to monetize that. And then the third is I would describe as investments in adjacent services relating to the core offering, whether it's solutions design. We don't want to move too much into, what I would call, managed or professional services. But at the fringe in terms of helping us sell our primary connectivity product, then we'll make those investments.

Simon Flannery - Morgan Stanley, Research Division

Okay. Last week, as part of the earnings announcement, Nadir Mohamed announced that he would be stepping down at the end of the year, and you're going to conduct an external CEO search. Can you give us some perspective on what we should think about in terms of timing? And if there's any other sort of guidelines about -- are you looking for somebody international or somebody from a telecommunications background or a media background?

Anthony Staffieri

Yes. I would say it's still early days. Nadir's announcement came out 2 weeks ago. And certainly a disappointment from my perspective. He's been a fantastic CEO, 30 years in the industry, 13 years with Rogers. And at the time he retires, it will have been 5 years as CEO. So understandable in terms of his thinking on that. But the 12-month period allows us an orderly transition period. So the board is in the process of commencing that search process. Nadir will be a part of that as well. So it's really going to be about getting the right talent for the next phase of the company, which will largely be a continuation of the path we've been on, and doing that transition in an orderly process. So more to come on that, still early days.

Simon Flannery - Morgan Stanley, Research Division

Great. Well, we've got time for some questions from the audience here. There's the mic.

Unknown Analyst

Could you just talk a little bit about the Maple Leaf sports deal? I mean, it was an unusual deal in that you did it with your largest competitor. Can you just talk a little bit about government issues and kind of initial learnings that you've had since the deal has finished?

Anthony Staffieri

Yes. So just to provide context around it, we purchased 37.5% of Maple Leaf Sports & Entertainment together with one of our primary competitors, BCE, who bought 37.5%. So together, we own 75%. And we've both got 75% as a block. The other 25% is held by Larry Tanenbaum and Kilmer Investments. He has been a shareholder and will continue to be a shareholder. And I would describe him as a governor and leading in the management of some of the franchises. The big uptick for us was, obviously, the content side of things and quite frankly getting a culture there that is -- to the extent that we can have franchises that are winning, and you saw that in spades in the Blue Jays. Of the -- all the questions I've been asked in the first 12 months, I've gotten more questions about the Jays, the trades we made. And so I think if you look at the spin-off effect, both in terms of content but as well as the brand, to the extent we can move that culture to something like that, then that's a positive. And I would say notwithstanding we're competitors between us and BCE, our objectives on that front are aligned. And us bidding in it together helped us ensure that we both had access to the content.

Bruce M. Mann

Maybe I can add to that, the -- what's relevant perhaps about BCE other than that we compete in the telephony and broadband space is that you don't really have ESPN per se in Canada. You've got 2 sports broadcast networks, Rogers Sportsnet and TSN, which is owned by BCE, which is TSN, The Sports Network. So I mean, the commonality between the 2 of us, one of vertical integration and just hedging or ensuring control over the single biggest cost of goods at running those businesses, which is sports content. So we may be competitors in certain things. But in this, I think we're pretty well aligned in what we're trying -- I think we're probably natural partners in many respect for this.

Unknown Analyst

As data grows on your wireless network, are you seeing -- and people go over their plans, are you seeing a willingness to upgrade their plan? Or are you seeing more of a willingness to look for alternatives, such as Wi-Fi and shift usage onto the Wi-Fi network? Which are you seeing more of?

Anthony Staffieri

So let me start off by saying, generally, all of the above. And so as we move into a world of more smartphone penetration, but also moving from 3G to LTE. Simply on 3G to LTE, you see an immediate growth in data usage. Same users, but if you were to look at the data set, it's just within a defined period of time, they can just access more. And so for whatever reason, whatever they're doing with it, it's just driving more usage, more efficiency and they're using it in the business context. And so what we are seeing and as part of the new plans that we introduced is to give them buckets that are comfortable. And as they move up in usage, they continue to move up those buckets to give them that comfort in usage. Tough to monitor how much of it goes on to the Wi-Fi. But if you were to look at broad data usage on a year-on-year basis, it continues to increase at 30% to 50%. So...

Unknown Analyst

So in my own usage, one of the things that I've looked at is I upgraded to LTE, I used a ton. I blew through my data plans. I found every Wi-Fi network I use on a regular basis. And a lot of my usage has shifted off to the Wi-Fi networks, and I actually used, I think, less on a regular basis on the wireless network than I did probably on 3G because of that change in behavior. So you're talking in aggregate on your platform, what if you isolate to on a per smartphone user basis? So someone is on 3G and they move to LTE, are they actually -- and post that initial bump, are they actually increasing their overall usage at that 30% to 50% range? Or is it lower than that?

Anthony Staffieri

Yes. So I would say a couple of things. If you were to look at the specific example you described, we're talking about the heavy user. And so what we've seen is 2 things happened. And this is the balance we're always trying to struggle and make sure we get right. So as we introduced new plans with what we think is the right amount of data buckets, then what you see is folks that are on legacy plans come into those. And so you have the ARPU decline and loss of revenue from those. But at the same time, you see the rest of the market coming up in it. And so they're coming into data plans that are probably more than they need. But for most users, what they're looking for is comfort in usage. And so what we found is there's a preponderance to buy more than what you need. So there's no surprise at the end of the month in terms of billing. And so it's all about that comfort in usage that we're focused on in the price plans. So what we're hoping is while we have some of that coming down in some of the behavior you described, we have a lot more that are coming up. And initial indication on the new price plans is that's exactly what's happening. And so that's the type of format that we want to play out in the roaming space as well. And so we've announced that our roaming will move to packages that are $7.99 per day when traveling to the U.S. for up to 50 megs, which is more than the average user will need on a per day basis. But again, our thinking is that while some of the high usage ones we'll see come down, we will more than offset that with the growth in adoption rates and eliminating what we would call SIM card substitution that goes on today. Similar type of phenomena.

Unknown Analyst

Just one last follow-up. So after people go, I forget, you guys are like 50%, 60% smartphone penetrated versus feature phones. After you see a lot of that upgrade go through, again, we get to a steady state there, I realize there will always be the next standard to upgrade to. But are you seeing per user data growth growing? I'm trying to get a sense for what per user data growth is after they've upgraded. After people have found the Wi-Fi networks as -- is it this astronomical rate that people look for? Is it something that's more kind of like a 5%, 10% annual growth?

Anthony Staffieri

Yes, so I would say 2 things: One is just to clarify, in terms of smartphone penetration, we're sitting at 69% of the base. And what we find is even with same users, if you take that user set, there continues to be growth in usage quarter-on-quarter and year-on-year. So we still see that data growth even within the same user set. And then of course, as you drag along the rest of the adopters, then that's where you sort of see the overall, in the 40%, 50% year-on-year increase. So it is both.

Simon Flannery - Morgan Stanley, Research Division

Okay. Unfortunately, we're out of time, Tony, Bruce. We really appreciate your time today. Thank you.

Anthony Staffieri

Okay. Thank you very much.

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