Shaw Communications Inc. F3Q09 (Qtr End 05/31/09) Earnings Call Transcript

Jun.26.09 | About: Shaw Communications (SJR)

Shaw Communications Inc. (SRJ) Q3 2009 Earnings Call June 26, 2009 10:00 AM ET

Executives

Peter Bissonnette – President

JR Shaw – Executive Chair

Steve Wilson – CFO

Michael D`Avella - SVP Planning

Ken Stein - SVP Regulatory;

Jean Brazeau – SVP Regulatory;

Jim Cummins - VP Operations Shaw Direct

Jay Mehr - Group Cable VP Operations

Analysts

David Gober - Morgan Stanley

Robert Bek - CIBC World Markets

Jeffrey Fan - Scotia Capital Markets

Greg MacDonald - National Bank Financial

Vince Valentini - TD Newcrest

Peter MacDonald - GMP Securities

Dvai Ghose - Genuity Capital Markets

Operator

Welcome to the Shaw Communications fiscal 2009 third quarter conference call. Today`s call will be hosted by Mr. Peter Bissonnette, President of Shaw Communications. (Operator Instructions)

Before we begin management would like to remind listeners that comments made during today`s call will include forward-looking information and there are risks that actual results could differ materially. Please refer to the company`s publically filed documents for more details on assumptions and risks.

Mr. Bissonnette, I will now turn the call over to you.

Peter Bissonnette

Thanks to everyone for joining us this morning. In our company`s quest to be the best, when you have the opportunity to share the day with the best you do it. And as a result Jim and Brad won`t be joining us today as they had a once in a lifetime opportunity this morning to play golf and share experiences and insights with Tiger Woods.

Rather then scheduling the call later in the day, before a summer weekend, we decided to proceed with this earlier time instead. However in their absence we are pleased to have our Founder and Executive Chair on the call with us today, JR Shaw.

And along with JR we have a number of our senior management with us including Steve Wilson, our Chief Financial Officer; Michael D`Avella, Senior Vice President of Planning; Ken Stein, our Senior Vice President of Regulatory; Jean Brazeau, Senior Vice President of Regulatory; Jim Cummins, who is the Vice President of Operations for Shaw Direct; and Jay Mehr, Group Cable Vice President of Operations.

We will keep our comments short as you`ve already received our results for the third quarter. We continue to execute in the current economy with discipline and prudence. Western Canada`s economy is not immune to the pressures that the rest of North America is facing but as you can see from the quarter`s subscriber figures, we continue to grow across all of our business segments despite the economic conditions and increased competition.

However much of this competition is being price driven, highlighting the lack of differentiated features in our competitors` products. We had another quarter of solid subscriber additions. In fact our basic cable net additions in the quarter and year to date exceed results from a year ago.

Our digital business had another record quarter as we added over 110,000 customers. Since the beginning of the year our digital penetration has increased by 12 points and we now have over 52% of our customers taking our digital service.

Revenue and EBITDA growth remain strong and our consolidated margin improved almost 46% this quarter. This represents an increase of 50 basis points over the last three months. Our operational performance continues to place us among the best in North America.

At year to date we have generated over $405 million in free cash flow and we remain on track to achieve our free cash flow guidance of $500 million in fiscal 2009. We continue to monitor market conditions and we will be releasing details regarding fiscal 2010 guidance in conjunction with our fourth quarter results in October.

We do not believe the economic environment has turned the corner yet but based on our results this quarter and throughout fiscal 2009, we are confident that we will continue to be able to weather the storm and continue our track record of superior financial performance and customer growth.

Thanks for joining us today, and we would like now to open the phones to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Gober - Morgan Stanley

David Gober - Morgan Stanley

A couple if I could, I just wanted to see if you would comment on wireless and what the thinking is right now and particularly given that the state of the capital markets, you were able to raise some funds at pretty good rates recently and I`m just wondering if you have any interest in raising funds to more aggressively go that wireless in the near term given the spectrum that you acquired and also on the digital side, I was wondering if you could give any sense of where RPUs have been so far and what the penetration has been like on HD and [DVRs].

Peter Bissonnette

On the wireless, we continue to be in the [voice] of discovery if you will, we continue to keep our eye on the ball with respect to what’s happening [technologily]. We continue to look at what’s happening with respect to towers and topographical kinds of requirements that would be necessary if our company were to proceed.

And so just as we did before we launched telephone, we did a lot of research and we looked to the economics of launching that service and when it was appropriate to launch it we did and I don’t think there’ll be anything different with respect to the way that we approach wireless. We continue to keep our eye on the ball and when it makes economic sense then we would proceed.

Steve Wilson

I think if you look at our digital RPUs, would suggest that the new digital adds will have a digital RPU marginally lower then our current sort of $20 to $25 range and numbers are still early, the numbers are consistent with that, only marginally lower, and we’re certainly going to build that over time. And certainly the growth that we’re getting in digital is coming from all spaces. HD continues to drive, HD DVRs continue to drive, or DCT 700’s has been part of the equation. So digital business is firing on all cylinders.

David Gober - Morgan Stanley

Any sense of where HD or DVR measures are either within the base or as a percentage of new adds.

Steve Wilson

The majority of new adds in the digital rental program are the DCT 700s because that’s our primary focus and that’s where we get the most bang for the buck. We do have a portion of them which are HD DVRs mostly and that’s sort of the direction that we’ll be driving forward as we go forward to keep that same focus on the DCT 700’s.

Operator

Your next question comes from the line of Robert Bek - CIBC World Markets

Robert Bek - CIBC World Markets

Just on the TELUS Bell satellite TV deal I think they announced that after your last quarter, could you give us a bit of commentary as far as how you view this within the competitive landscape in your territory for your cable and the bundled products that TELUS have against it and extending from that any comments that you might have on the Shaw Direct relative to this announcement from TELUS.

Peter Bissonnette

Well we really haven’t seen any impact from the Bell TELUS satellite business yet and that its certainly I think is a commentary on their confidence or lack of confidence in their IPTV offering and we’ve faced competition from Bell and very aggressive competition throughout our licensed area and Star Choice continues to compete with Bell outside our licensed area through the rest of Canada and we don’t see that it’s going to have a material impact.

Robert Bek - CIBC World Markets

And as far as the satellite goes, any new effort in Western Canada on selling that product in addition to Bell.

Peter Bissonnette

As you know we rebranded what was Star Choice now with Shaw Direct and the brand is, the Shaw brand is very, very strong. In fact in Eastern Canada we’ve been doing some direct marketing with respect to Shaw is back and we’ve seen some really good pickup on our Shaw Direct service.

And Shaw Direct being a digital video product solely, it’s really important that the services that we offer there are attractive to our customers and so we continue to add high definition services. We have recently dropped a few we’ll call non-performing services. We’ve notified the broadcasters of that and we’ll replace those with services that would have a higher attraction to our customers.

Robert Bek - CIBC World Markets

While we’re on the Shaw Direct, the source acquisition from BC, I guess into 2010, that is distribution pipe for Shaw Direct. Can you talk at all about the effect that will have on your distribution network if at all and your thoughts generally on that.

[Jim Cummins]

We’ve been planning for this for quite a while. Our strategy is we’ve actually been moving a lot more sales into our Direct in-house to give us a little bit more control. Certainly they have been a big provider of us, of our service, have been a good partner.

But bringing more inside provides more control and also more quality and we’re certainly, have prepared for that and we don’t see it damaging our hurting our services at all.

Peter Bissonnette

Many of the independents have also asked us to continue to sell our product in their independent retails.

Operator

Your next question comes from the line of Jeffrey Fan - Scotia Capital Markets

Jeffrey Fan - Scotia Capital Markets

Just wanted to follow-up on the digital rental program, first is how, do you have any sense of how long you want to keep this program going, is there kind of a goal in penetration you want to reach and then you start to scale back a little bit. And then secondly maybe a question for Steve on the accounting, just so that we’re on the same page, the cost of all these boxes going through the rental programs, are you booking them all through the success base CapEx. Just wanted to confirm that and maybe if you can just break out the box component related to what’s included in success base and then going forward as you get the rental revenue, you’re booking that through the operating revenue lines and just wondering if you can give us a sense as to how big that impact would be on a per sub basis given the mix of boxes.

Peter Bissonnette

On the actual rental program and penetration objectives, as many of you are aware the, in 2011 the world changes with respect to digital migration and packaging and there is a threshold that the Commission has established in that, in their regulations of 80% penetration that allows us more flexibility in the way we program or the way we package our services and so clearly the 80% threshold is what we’re trying to achieve in the near-term and by 2011 we’ve said 80% is our goal.

And that that gives us a tremendous amount of flexibility in the way we provide digital services in a purely digital domain.

Steve Wilson

In terms of the cost of boxes, you’re right, the cost of boxes under the rental programs do go through the success base capital and the rental income goes through EBITDA. In terms of the split on success base capital between that and the internet modems and MTAs, I don’t have that directly here, but we can come back to you with that number.

And on a per sub basis I would say as the focus most of the digital rental programs on the DCT 700s we’re looking at a cost of around $70.00 and we’ve been successful and Jay could even talked about some of the self install options as a way of [truck roll].

Jay Mehr

The 700 growth has come quite elegantly. It’s a Canada Post delivery program, customer goes on a website and sets it up themselves, plugs the coaxial into the back of the TV, so the cost of the program is [inaudible] and the cost of the box is around $70.00.

Jeffrey Fan - Scotia Capital Markets

And in terms of the adds that are coming through, what percentage are coming through the rental program, I would imagine it’s a pretty big number.

Jay Mehr

The majority.

Operator

Your next question comes from the line of Greg MacDonald - National Bank Financial

Greg MacDonald - National Bank Financial

While we don’t get a chance to hear from JR often so I want to take advantage of that, last that you were on the call you talked a little bit about your outlook for the industry, that you thought it was still a great place to have major investments or a major part of your wealth, could you give us a sense on what you think the maturity profile of the industry is right now and whether you think as a result of number one, maturing products, and number two TELUS’ entry, at least on a go forward basis a lot more focused on TV distribution. Does that mean that consolidation is inevitable for this industry say in the medium term, like a two to three year period?

JR Shaw

I go back a little bit further then I want to admit this morning in this industry, its, the only complaint I’ve ever had about the cable and the communications industry that we’re participating is that it is an extreme CapEx business. But now that we have more flows of revenue coming through the same pipe into the household, i.e. telephone, i.e. internet and the success that we’re having there, makes it more manageable from a company point of view to have that cash flow to do that.

Sure the households are maturing, basic cable is mature, and yet we continue to move them towards digital. We continue to move them in other ways. Look at internet, when we started internet in 1995, we thought gee, if we got 50,000 customers, maybe 100,000 customers we broke the bank.

And today I think we’re around 1.6 million if I’m not mistaken. And telephone has had the success and I think a lot of our success is driven by our culture and the can-do attitude, the willing to be team players, the willing to maneuver on a dime to meet the subscriber, customer, whatever you want to call it, expectations of us and so I think those are the areas.

One thing you mentioned about consolidation, I think consolidation is always there. When I started in this cable industry there were hundreds of cable operators, just hundreds of them and today, there’s probably five majors, if you can get to that high number in the cable industry and every now and then somebody decides to sell like Campbell River or whoever else it might be and so there is all that kind of consolidation.

Whether there’s going to be consolidation in the big companies or not, that remains to be seen as to where they see their growth. We continue to not take our eye off the wireless ball because that is a future, that is a natural, we have the customers, we have the territory, we’re in the West, we’re strong in the West. And so we’re going to be prudent and as Peter has already mentioned this morning, we didn’t jump into telephone too quickly.

We could have jumped into it and done it with a twisted [pair]. We wanted to wait until the technology was there, to use their own infrastructure and use it to the best of our ability and it’s just turned out exactly like we wanted it to turn out. Now will wireless be the same way, we’re looking at our infrastructure to see how it will participate in the wireless industry in Western Canada and we’re looking at it all the time and we will move when the time is right as we always have.

I’m not sure I answered all your questions but you know sometimes when you get a little long winded you kind of forgot what the question was.

Greg MacDonald - National Bank Financial

You certainly managed shareholder capital very well over the years, that’s definitely the thing that’s highlighted on this company. If you don’t mind I might want to ask one quick follow on question, you opened by talking about capital efficiencies and that’s interesting to me because the one thing that could continue to drive equity value in the cable industry will be leveraging that capital efficiency. Do you think that that free cash flow margin potential in this business that we’ve even seen the beginning of what that can be yet, do you think that that can be a lot higher and therefore that could continue to be something that drives equity value.

JR Shaw

Well even though I never liked the CapEx portion of it, CapEx drove our growth, the quality of our service, everything else above it. So its kind a good news bad news story and it has been really terrific for us from that point of view and we haven’t pulled back on CapEx any place that I know of. And I just think that we’ve kind of come to an area of topping that CapEx in my opinion and I hope that is correct.

And as more revenue keeps coming and so forth it will turn into revenue generating free cash flow or whatever else it is and that means more for the shareholder and my view on buying back shares and on dividends and so forth, I like to buy back shares but I haven’t seen how that touches a shareholder directly.

Where if you give them a little bit of dividend, we pay it monthly, and they see that coming into their bank account on a monthly basis. So I think this industry in the future will drive more free cash flow then it has in the past.

Operator

Your next question comes from the line of Vince Valentini - TD Newcrest

Vince Valentini - TD Newcrest

Maybe I can talk about free cash flow in the here and now rather than in the future, you had another phenomenal quarter and you seem to be trending to do quite a bit better than $500 million, not just slightly over $500 million. I know you still didn’t pay any cash taxes this quarter, maybe you can give us an update on how big that outlay could be in the fourth quarter, maybe that’s why you’re being cautious but I just think what you did in the fourth quarter last year added to what you’ve done year to date at $405 million, I get up to about $550 million of free cash flow for this year. So can you tell me why that’s an unrealistically high estimate.

Steve Wilson

You’re accusing me of being conservative. We [inaudible] in the fourth quarter. I would say the high end of that range right now is about $50 million. The other thing is we’ve got a number of pressing capital programs that we’re looking at both towards the end of this year and next year and we plan to continue with those and so to the extent that we see some opportunities that that cash tax number might be lower it would be our intention to proceed with some of those capital programs because they are necessary spending and to the extent that we can do it sooner, the sooner we do it the better.

And so that’s why I would still say that our target is to come in in the low 500’s taking all that into account.

Vince Valentini - TD Newcrest

And would those CapEx projects potentially be starting to do something in wireless or are you talking about just cable stuff.

Peter Bissonnette

We’re really focusing as we said on our core business and so some of the things that we’re trying to do is as you know we’ve launched Docsis 3.0 in some of our communities and we’ll continue to do that for the remainder of this fiscal year and there’s a cost to doing that.

We continue to really focus on segmenting our nodes so that the service levels that we give our customers continue to be able to scale with the growth that we’ve seen in the internet and in order to do that there are some fiber, strategic fiber builds that are going to take place and of course we’ll continue to do the success base growth on our digital which will be part of our core focus if you will as well.

Operator

Your next question comes from the line of Peter MacDonald - GMP Securities

Peter MacDonald - GMP Securities

When you talked about wireless is that a change in view on wireless and when you say it’s a must have, is it must have in the sense of network extension of what you have right now or do you think it’s necessary to have a wireless handset offering.

JR Shaw

I think wireless is becoming more important, not just for voice but for all modes of communication and particularly when the spectrum becomes available and just think if we followed the American theme where they take back the television spectrum and then put it out for data etc. and communications, that is a big area.

All that I was trying, that’s a big future area, and we’ve not taken our eye off that ball. But I think what I was trying to say is that we want to spring off our infrastructure that we have to be the most efficient and we can be in light of the future wireless operation that we want to have.

Peter MacDonald - GMP Securities

And if I can ask a regulatory question, can you comment on the Heritage Standing Committee’s decision to turn down the fee for carriage, is it now dead or are you negotiating something with the broadcasters as has been speculated and if it’s not fee for carriage, should we be assuming that there’s some other sort of cost that the cable industry is going to have to bare as a subsidy for the broadcasters.

[Ken Stein]

We’re very happy with the Committee report particularly we would point out the government members filed a dissent because they felt the Committee did not help with the issue directly enough and to quote some of those members, they said that we must indicate our most fervent and rigorous opposition to any potential fee for carriage system, either negotiated or imposed.

So our view on this is that there is no need to have negotiations on this issue. That the important issues will be dealt with in terms of the hearings in front of the CRTC and however the government decides to deal with the issue going forward.

The July 6th announcement by the CRTC will come up with a context for the over the air hearings which will be held in September. The CRTC had denied fee for carriage twice in the last three years. The broadcasters have gone BMPs. They failed the BMPs so I imagine now they’ll try again with CRTC and we would think they would fail once again. We don’t think it’s in the interest of cable and satellite subscribers to pay a fee for services that are available free to people over the air.

Operator

Your next question comes from the line of Dvai Ghose - Genuity Capital Markets

Dvai Ghose - Genuity Capital Markets

I’d just like to readdress the wireless question with Mr. Shaw if I may, I can understand why you waited with voice, it was a relatively new technology in the early 2000’s and you wanted to make sure it worked and so on, if that’s really true with wireless which I know has iterations and upgrades but it’s a 30 year old product in Canada. I’m not sure if there are any major technological changes which are going on and by waiting aren’t you carrying some risks here, every day penetration rises, every other new entrant in your territory will launch ahead of you, and substitution may roll up before you’re actually ready to fight it with a wireless product. Isn’t there some risk in delaying?

JR Shaw

I guess there’s risk in delaying or whatever you do. We do have a portion in our CapEx this coming year that will address some of the updating ourselves both from a backroom point of view and from a system point of view as to where we should be going and so forth. So we’re not broadcasting it big time. It is significant dollars. If we will spend that to analyze what’s going forward. We understand that the newer systems are coming into place and possibly we, they might become more secure with the customer.

We do have a strong base here in Western Canada. We do have significant customers here in all forms of this and we think that when the time comes we’ll put forward such an offering that we’ll be able to gather up as many customers as we’d like to have at that time to do, to make this a viable business along with what we’ve already got.

Dvai Ghose - Genuity Capital Markets

On the Star Choice side in the quarter we saw a very significant 364 bps increase year over year in margin, I assume part of that is because of reduced part two fees, you had extraordinary fees last year but it can’t just be that. How did you get such a great margin improvement?

Peter Bissonnette

We’re not allowed to call it Star Choice.

Dvai Ghose - Genuity Capital Markets

Shaw Direct.

Steve Wilson

A portion of it is the, remember we booked $4 million in satellites for the part two fees that related to previous quarters. So a good portion of this, $184 million of revenue, that about 2% is representative of that [inaudible]. So if you adjust for that, the margin last year would have been 35.5, and we’ve got a 36.5 so I don’t think that’s sort of within the [inaudible] if you will.

Dvai Ghose - Genuity Capital Markets

On the cable side you had 13% growth in total RGUs compared to the end of last year 10% growth in revenue, is that just a timing issue because you added a lot of people towards the end of the quarter, of course you released two months’ figures so you did show some good sequential growth in May or is that because of lower RPU from incremental customers and what does that mean for margins.

Steve Wilson

Well I’m not sure how you equivalize all of the RGUs there, so what was it 13% in RGU and 10% in revenue, it could be partly timing and it could be just the equivalization of as you say some lower RPU customers coming on as well. And particularly the digital rental and the digital rental through the entire quarter being 110,000 coming on very quickly in the course of one quarter won’t have an immediate revenue impact.

Dvai Ghose - Genuity Capital Markets

I understand that you’re not particularly fussed about the TELUS satellite threat. Satellite is said to do better in less urban markets outside downtown cores, what percentage of your cable base do you think are outside that sort of downtown core market where satellite has been very unsuccessful.

Peter Bissonnette

In terms of the mix between downtown core type customers and rural, we’re probably 65/35.

Dvai Ghose - Genuity Capital Markets

So 65 downtown core.

Peter Bissonnette

No 65 out in the rural areas. We’re talking about satellite.

Dvai Ghose - Genuity Capital Markets

No, I’m talking about of your cable customers, what percentage are in rural areas which are more susceptible to satellite competition versus urban.

Peter Bissonnette

It’s probably 90/10.

Dvai Ghose - Genuity Capital Markets

So 90 being—

Peter Bissonnette

Downtown.

Dvai Ghose - Genuity Capital Markets

With the Source, obviously Bell has alluded to the fact that it’s a big distribution for Shaw Direct, can you give us an idea of what sort of percentage of gross loading comes from the Source.

[Jay Mehr]

In the past we’ve seen between 1,200 and 1,300 new activations per month.

Peter Bissonnette

We will wish you all a great weekend and thank you for your questions and thank you for coming onto the call.

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