Corus Entertainment Inc.

Good morning. My name is Marjorie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Chorus Entertainment Q1 2023 Analyst and Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press the pound key, and thank you very much. As a reminder, this call is being recorded. I will now turn the call over to Mr. Doug Murphy, President and CEO of Chorus Entertainment. Mr. Murphy, you may begin your conference.

Thank you, Operator, and good morning, everyone, and Happy New Year. Welcome to Chorus Entertainment's fiscal 2023 first quarter earnings call. I'm Doug Murphy, and joining me this morning is John Gosling, Executive Vice President and Chief Financial Officer. Before I read the cautionary statement, I'd like to remind everyone that that we have slides to accompany today's call. You can find them on our website at www.coruscant.com under the investor relations dash events and presentations section. Now let's move to the standard cautionary statement found on slide two. We note that forward-looking statements may be made during this call. Actual results could differ materially from forecast projections or conclusions in these statements. We'd like to remind those on the call today in addition to disclosing results in accordance with IFRS course also provides supplementary non-IFRS or non-GAAP measures as a method of evaluating the company's performance and to provide a better understanding of how management views the company's performance. Today, we'll be referring to certain non-GAAP measures in our remarks. Additional information on these non-GAAP financial measures, the company's reported results and factors and assumptions related to forward-looking information can be found, of course, as first quarter 2023 report to shareholders and the 2022 annual report, which can be found on CDAR or in the investor relations dash financial reports section of our website. I will start on slide three with an update on the impact of the current macroeconomic environment on our business. I will then briefly review the progress we were making advancing our strategic plan and its priorities. I will also discuss our cost structure and go-forward actions that will address recent increases. To begin, I will reiterate my comments from last quarter. We are in an advertising recession. This is clearly visible in our revenue results for the quarter and evident across the entire media sector as reported by all of our peers recently. The decrease in advertising revenue is the logical result of companies trying to manage their profitability as they contend with inflation-induced cost increases and the impact of supply disruptions on their businesses. One of the first choices companies make is to reduce costs and cut discretionary spending, such as advertising. Again, to repeat, we do not know the depth nor the duration of this economic contraction. Based on our prior experience in the early stages of a recession, the broader media industry experiences abrupt declines in advertising revenues, followed by an equally quick recovery once the economy recovers. The declines in advertising revenue this quarter are ongoing evidence of the crosscurrents and riptides that we are experiencing in today's advertising marketplace. These remain mostly pandemic and supply chain related. Let me cite a few examples. With restaurants and out-of-home dining now fully open, consumers' love affair with food delivery to their home and the related expensive service charges and delivery fees has ended. Accordingly, the direct-to-consumer food delivery category advertising spending is down. You've all seen the stories about this year's cold and flu season, not to mention the empty medication aisles in grocery stores and pharmacies. That category's advertising spending is down, given depleted inventories. Supply chain issues persist in the automotive category, with many cars arriving, but they're presold. Presold inventory does not need to be advertised. Other categories with reductions in advertising spending include household goods, appliances, electronics, and toys, again, impacted by pandemic-related disruptions. Now, within categories, there is also much variability, as each advertiser adapts to the macroeconomic conditions in their own way based on their business strategies, adjusting their spending for their own unique challenges and opportunities. For example, there are new growth categories, such as gaming, a welcomed new arrival to the advertising marketplace. Within the packaged goods sector, while some clients ebb, other clients flow, investing to increase their brand's impressions and presence to take advantage of their competitors' void. Our talented sales team is there to serve the needs of our advertisers, whatever they may be. Chorus delivers strong, differentiated brands that can be bought across an expanding linear and digital multi-platform offering with improved targeting, automation, and a suite of customizable advertising options, providing a 360-degree solution that is highly attractive to advertisers and agencies alike. Visibility is still a bit limited, and advertising revenue softness in television will likely persist. However, right now, we expect to see sequential improvement in the rate of decline in television advertising revenue in the quarters ahead, as these cross-currents and riptides do appear to be stabilizing. With this backdrop in mind, let me now take a moment to talk about our strategic plan and its priorities. Our long-term strategic plan remains unchanged. We are focused on transforming how we sell media. We are putting more content in more places. We are investing in our own content business. Recent highlights demonstrate the progress we are making advancing our strategic priorities in the face of these advertising headwinds. Let me cite these. We have improved the value proposition of Stack TV by adding our English language suite of Disney channels. We have expanded our streaming portfolio to broaden the scale of our advertising offerings with the launch of Pluto TV. We launched Teletoon Plus, a new premium kids and family S5 streaming service available on Amazon Prime Video and Bell 5 TV. We've expanded our authenticated content offering on the Global TV app as well as on Stag TV, both now including more back seasons of big network franchises such as NCIS and FBI, full in-season stacking for Saturday Night Live, and a winning slate of Peacock originals that include The Resort, Vampire Academy, and a new season of the top audience driver, Bel Air, launching in March. These purposeful moves demonstrate how we are innovating in this challenging market to grow our total video audience delivery by adding new premium digital video impressions in addition to those large audiences delivered by our traditional TV channels platform. Further, we are growing our slate of content that we will sell into the international marketplace that diversifies our business from the Canadian economy. This successful implementation of our strategic plan is building a more resilient business for the long term. Moving to slide four and the key financial highlights for the quarter. Our consolidated revenue of $431 million was down 7% for the quarter, resulting from lower advertising revenues. Total consolidated segment profit was $132 million for the quarter, with free cash flow of $21 million. These revenue declines combined with the higher amortization of program rates resulted in leverage of 3.38 net debt to segment profit at the end of the quarter. More detail to follow on this. Over to slide five. Canadians have more ways than ever to consume video content. Whether through their traditional set-top box where two-thirds of Canadians enjoy their channel subscription or through streaming and other non-linear on-demand services, overall, multi-platform audiences in Canada are growing. Chorus is well-positioned to benefit from the large and expanding total video addressable market, leveraging our fan-favorite linear channels to pursue opportunities in premium digital video. Equity capital markets are no longer rewarding growth at all costs direct-to-consumer streaming ventures. As a result, the entire media and entertainment industry now is acutely focused on optimizing their programming investments and audiences across both traditional linear and on-demand streaming platforms, as most direct-to-consumer streaming platforms struggle to generate positive cash flow and earnings. In contrast to this, at Chorus, we have taken a different approach by building a capital-light, partner-led, direct-to-consumer strategy. We are leveraging our asset base and existing channels platform to pursue premium digital video without making bet-the-company type investments in either the production of the content or in the technology platform stack or both. To be crystal clear, when I say leveraging our asset base, I refer to optimizing our linear channels business while simultaneously pursuing streaming opportunities in this growing digital video marketplace. Our strong, innovative, and long-standing partnerships with all the US studio majors has been the key that has now unlocked these new digital on-demand premium video opportunities. Moving to slide six. On December 1st, Chorus and Paramount Global celebrated the launch of Pluto TV in Canada. With over 117 channels and more than 20,000 hours of free content, This represents the most robust content offering on launch of any international market. Our early results from Pluto TV are encouraging, with the app ranking among the top two free apps on Canada's Google Play Store, Amazon App Store, and Apple TV. Our chorus channels, including content from across our family of brands as well as our 24-7 global news feeds, are performing very well as expected given their strong local appeal. We want to recognize the extraordinary efforts from the Chorus team and our partners at Paramount Global in making this highly anticipated launch a reality. Over to slide seven. We are encouraged by the early results from our three Cheers for the Ears marketing campaigns celebrating the arrival of the suite of Disney channels on Stack TV. This marketing push harnesses the power of the Disney brand to drive awareness and subscriber acquisition to the platform. Although it is early days, we are seeing promising traction in our trial subscription numbers. We are confident that these powerful channel additions and other improved value proposition initiatives, such as the addition of more back seasons of popular content, will further the momentum of Stack TV in the quarters ahead. Moving to slide eight. As operators of streaming platforms look to optimize spending on production investments, they are seeking other sources of content supply. which is a perfect setup for our own content ambitions. Our growing slate of content in production and for sale will benefit from this demand in the international marketplace. While we saw modest declines in our distribution production and other revenues in Q1, Nelvana and Quora Studios did grow. We expect strong growth in our content business in the coming quarters when compared to the same quarters last year. Over to slide nine. It is clear that as advertising revenues decline, we are also experiencing an increase in programming costs, not an ideal combination. At Chorus, we have been steadfast in our strong conviction that our U.S. studio partners needed us as much as we needed them. This has been proven out as we have successfully renewed, extended, and broadened the rights acquired through our content supply agreements well into the next regulatory regime. These investments ensure the long-term viability of our traditional channels business and now provide us with an opportunity to grow our streaming portfolio in addition to our large television audience delivery with new premium digital video impressions. These are smart programming decisions that require increased programming investments. The other increases in programming costs are required as part of our regulatory obligations. These result from the dated regressive spending requirement calculated as 30% of prior year's regulated revenue, along with the many other restrictions that limit our ability to compete. Unfortunately, our broadcast regulator decided the summer before last that chorus would be required to make up the approximately $50 million in Canadian production expenditures that we could not spend given the COVID-19 related production shutdowns in 2020. This unexpected decision... made us spend more on Canadian programming in this challenging economic environment. Now, while we are excited about our successful programming investments with our U.S. studios that ensure the long-term resiliency of our business, the dated off-strategy regulatory spending requirements is currently affecting our financial performance. The only good comment I would make is that these will pass, and we expect reduced Canadian programming expenditures on a run rate basis of $20 million in the years ahead. Every company in every industry these days must address the changing labor market, as well as the additional costs from the post-pandemic return to normalized business operations. Companies must adjust to new workforce dynamics, whether or not that's disruptions from early retirement or an unwavering demand for remote work flexibility requested on behalf of workers, especially younger ones. Of course, we are making necessary investments to accommodate the needs of our people. In addition, given the investments we have made in acquiring content for our channels and on-demand streaming platforms, a companion marketing investment is required to promote these new offerings to our audiences. So that's important context. The CP cash-up cost will pass. The incremental U.S. program investments will generate margin-accretive new digital revenues. We will always invest in our people, and we must market our products. Importantly, and in light of our revenue weakness, we are conducting an enterprise-wide cost review that is looking at all expenses and operations. We will streamline our operating model and asset base over the coming quarters and identifying meaningful cost savings on a run rate basis. With that, I will now turn it over to John to discuss our Q1 results. John?

Thanks, Doug. Good snowy morning, everyone. I will start on slide 10. Challenging macroeconomic environment that emerged last summer, certainly persisted into the fall, impacting television advertising demand in our first quarter and contributing to lower consolidated revenue of $431 million, and that's a 7% decrease from the prior year. As a reminder, in Q1 of the prior year, the pre-Omicron recovery was well underway with strong consolidated revenue growth of 10%, and that was bolstered by TV advertising revenue growth of 16%. Consolidated segment profit was $132 million for the quarter. reflecting the lower TV advertising revenue coupled with increased programming costs and marketing investments in Stack TV, as Doug has just mentioned. Consolidated segment profit margins were 31% for the quarter. Consolidated net income attributable to shareholders for the quarter was $0.16 per share. We delivered free cash flow of $21 million in the quarter, and as a reminder, last year our free cash flow in Q1 benefited from a non-recurring $43.5 million distribution from a venture investment. Net debt to segment profit was 3.38 times at November 30, 2022, compared to 3.02 times at August 31 of last year, reflecting the impact of the lower segment profit and slightly higher debt balances. Now let's turn to our TV results for the first quarter, as detailed on slide 11. Overall, TV segment revenues were $402 million for the quarter, and that's down 8%. This was mainly driven by lower TV advertising revenue, which declined 11%. in Q1, and that compared to the strong growth of 16% in the prior year, as I mentioned. Subscriber revenue was consistent with last year with streaming subscriber growth from expanded distribution of streaming services acting to offset declines within the traditional distribution system. As a reminder, in Q2 of fiscal 2022, we did benefit from approximately $6 million of retroactive adjustments from the renewal of distribution agreements, and that's going to set up a difficult comparable for us in the coming Q2. Distribution, production and other revenue was 3% lower for the quarter and that was driven by the timing of content licensing sales and lower publishing revenues, but partially offset by the addition of aircraft pictures last February and modest increases from Novana and Core Studios. We do expect significant growth from our content business in the coming quarters, supported by a robust international sales pipeline. We remain encouraged by our progress in creating incremental new platform revenue, increased adoption of optimized advertising, and prospects for a slate of original content to position us for longer-term growth opportunities. Direct cost of sales was up 8% for the quarter, and that's driven mainly by the 7% increase in amortization of program rights, which resulted from the investments in U.S. studio output deals and an increase in original programming deliveries. On a full-year basis, we anticipate the programming costs will grow modestly, with approximately one-third of this driven by the CRTC's catch-up decision. TV G&A expenses were up 5% from the prior year quarter, and in the current quarter, G&A mainly reflects an increase in marketing investments to promote our fall programming and stack TV, higher development costs in our content business, and other costs related to growth areas. Overall TV segment profit was down significantly in the first quarter, primarily as a result of the contraction in advertising demand, higher amortization of program rights and film investments, and G&A expense increases. TV segment profit margins were 33% in the current year quarter compared to 41% in the prior year comparable period. As detailed on slide 12, despite the contraction in advertising demand, we are encouraged by the growth in our new platform and optimized advertising revenues. New platform revenue was $40 million or 10% of total TV advertising and subscriber revenues in the first quarter and that was up 13% or $4 million from the prior year quarter. The continued growth reflects the discipline execution of our strategic plan as we deploy our expanded content rights in new places and connect with audiences in new ways to drive additional sources of revenue. As a reminder, this metric demonstrates some seasonality from quarter to quarter due to the higher linear advertising revenue mix in Q1 and Q3 compared to the lower demand quarters of Q2 and Q4. Optimized advertising revenue was also up significantly in Q1, representing a new milestone of 55% or $138 million of total television advertising revenue in the quarter. This is an increase of 31% or $33 million in the prior year quarter, as more advertisers explore the benefits of our targeted and automated advertising solutions. Now let's turn to our radio results on slide 13. Radio is certainly benefiting from resiliency in key advertising categories, including entertainment, travel, restaurant, and retail, offset by continued softness in automotive. Radio segment revenue increased 2% for the quarter as a result of stronger local revenues, but partially offset by the impact of broader macroeconomic conditions on national sales. Radio segment profit increased 5% in the quarter, benefiting from the revenue growth, and radio segment profit margin was 20% in Q1. That's consistent with last year. Over to slide 14. Since introducing our new capital allocation policy in September of 2018, we have demonstrated our commitment to reducing bank debt, and we also termed out our bank debt with the issuance of two long-term high-yield notes. In just over four years, we've repaid over $500 million of bank debt, which, combined with the funding of our dividend and share repurchases, has contributed to a total shareholder yield of $958 million. At the end of Q1, our net debt to segment profit increased to 3.38 times compared to 3.02 times at the end of the prior year, driven by the impact of lower advertising demand on our segment profit and lower free cash flow for the quarter. We exited the first quarter with $81 million of cash and cash equivalents and $214 million available to be drawn under our revolving credit facility. Our financial priorities remain unchanged. Importantly, we remain committed to increasing our financial flexibility over the longer term. In this low visibility environment, however, we believe it is prudent to conserve cash out of an abundance of caution. As Doug noted, we have and continue to take serious cost reduction measures, but given continuing uncertainty in the advertising environment and the macro conditions, the company has decided to take additional prudent measures. We will not renew our share buyback program when it expires next week. And consistent with this approach, the board has decided to defer its decision on the declaration of the dividend at this time. The outside date for this decision is March 15th, by which point the company expects to have more clarity on advertising market conditions and Q2 results. To be clear, we are not reducing, eliminating, or temporarily suspending the dividend this time. We will take this opportunity to consider the alignment of dividend declaration and payment dates. We completely understand the importance of our dividend to our shareholders and remain committed to our long-term dividend philosophy. Our foremost priority is to navigate this difficult environment as we have successfully done many times before, while carefully managing our expenses and our cash. We are confident in our long-term plan to position Coors for the future by investing in the business, delivering, and providing attractive returns for our shareholders. And with that, I'll turn it back to Doug.