Corus Entertainment Inc.

Good morning. My name is Lara and I will be your conference operator today. At this time, I would like to welcome everyone to the Chorus Entertainment Q4 and year-end 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 would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. 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. Welcome to Chorus Entertainment's fiscal 2023 fourth quarter and year-end 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 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 presentation section. 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 our call today, in addition to disclosing results in accordance with IFRS, CORUS 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 will 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 in Coors' fourth quarter 2023 report to shareholders and the 2022 annual report, which can be found on CDAR Plus or in the investor relations dash financial report section of our website. I'll now start on slide three with a look at our year-end results and then provide an update on the current environment and what we're seeing in the media marketplace. I've been using the term double whammy to describe the two-fold blow that we've been dealt in fiscal 2023. The first blow has been the meaningful decline in advertising revenues. The second has been the significant increase in required spending on Canadian programming. This one-two combination has resulted in a very challenging year for our company. Our focus remains on what we can control and influence. we are undeterred in the pursuit of our premium digital video growth initiatives. Our strategic plan and its priorities reimagines our business beyond broadcast television towards our evolution into a multi-platform aggregator of premium video with cross-platform monetization capabilities. This is what we call our video-first strategy. In service of this video-first ambition, we are concurrently demonstrating a disciplined approach to streamline our operations and rationalize our asset base. This enterprise-wide cost review, which we call Fit for the Future, has revealed meaningful opportunities to change the way we work and to better position Corus for the future. We are taking prudent actions now to ensure the resiliency of our company. We have proactively secured amendments to our credit agreement and further redirected our use of free cash flow to debt repayment, which will provide additional financial flexibility while we position Corus for the expected eventual recovery in advertising and program supply conditions. Against this backdrop, our results for the year are as follows. Our consolidated revenues were $1.5 billion for the year. Total consolidated segment profit was $334 million for the year with free cash flow of $107 million. We reduced bank debt by $172 million this year, resulting in pro forma leverage of 3.62 times. John will take you through the results for the fourth quarter and year in more detail in his remarks. Moving to slide four. The word distortion fittingly describes this very unusual post-pandemic environment we find ourselves in. The definition of distortion is the, quote, act of twisting or altering something out of its true natural or original state, close quote. Let me explain. Supply chain disruptions have affected and still affect companies producing goods and services. Labor shortages persist throughout the economy, impacting industries everywhere as wage inflation challenges business models. Economists still debate the likelihood that we will avoid a hard landing and move from today's slow-motion rolling recession. to a soft landing. Geopolitical tensions remain an unknowable risk to the markets and the economy. Now consumers themselves, once purchasers of durable goods, such as furniture, electronics, home renovations during the pandemic, are now favoring the service economy by dining out, traveling, and going to concerts. These same consumers are contending with high prices at the pump, increasing mortgage expenses, and food inflation. Last summer, we began to see the effect of these distortions impact our clients' businesses, with chief marketing officers cutting top-of-the-funnel marketing investments to protect their margins. That's the macroeconomic backdrop. Now, turning the dial to the entertainment media industry, where we've been dealing with a distortion field of our own, let's briefly review what's happened in our industry. In recent years, and certainly during the pandemic, all of the U.S. media and entertainment studios launched subscription video-on-demand products to offset declines in people viewing linear television. As interest rates increased, the challenging economics of the streaming industry became apparent, and we witnessed a pivot from a subscriber growth at all costs mentality to more of a disciplined pursuit of a path to profitability. On that path to profitability, these very same S5 services now embraced advertising-supported video, launching advertising layers to grow their revenues and ARPU. In parallel, we witnessed the launch of free advertising-supported streaming television, fast channels, that successfully leveraged quality library programming cost-effectively to grow online advertising revenues with no charge to audiences. So as the demand from the macroeconomic distortions weakened, The industry was creating a whole new supply of premium digital video impressions to monetize. Then, midway through the broadcast year, the entertainment industry was distorted once again when the Writers Guild of America walked out on May 2nd, followed by the actors on July 14th. The last time writers and actors were both on strike at the same time was in 1960. At that time, business models were changing, and the unions wanted to get better residuals from movies that were now being broadcast on the television networks, a new technology at the time. The active strike, now over 100 days in length, persists, although both sides have returned to the table this week. There remains uncertainty as to the duration of the strike, but across the industry, there is optimism about achieving a resolution by U.S. Thanksgiving. Writer's rooms are open. If that timeline is realized, we could then expect a full schedule by March, just in time for our second largest advertising revenue quarter, Q3. In our first quarter, however, these strikes have caused all deliveries of scripted simulcast content to stop. This significantly reduced our audience delivery during prime time, impacting advertising demand and revenues during what is our largest quarter, typically. Over to slide five. The Fit for the Future initiatives demonstrate the hard work we are doing to streamline our operating model and rationalize our asset base. We have tenaciously implemented cost cuts and ongoing workforce structural reviews throughout the company to deliver reductions quarter by quarter as we find ways to work differently and improve productivity across all aspects of our business to lower our cost base. Let me give you a few examples. In the fourth quarter, we successfully completed the sale of Toon Boom with net proceeds of $141 million used to pay down bank debt and rationalize our asset base. We have reorganized our sales team to deepen expertise in cross-platform selling. As we transform into an aggregator of premium video, our goal is to provide a seamless buying experience for our advertisers. We have streamlined our approach to content, introducing the expanded role of executive vice president networks and content and eliminating the role of executive vice president content and strategy. This consolidated role is accountable for the oversight of all programming investments for both Canadian and foreign programming as we streamline our programming operating model and maximize our audience delivery across all platforms. We have made tough decisions to discontinue certain Canadian productions to reduce costs. Let me provide two examples. After 18 amazing seasons as our flagship entertainment news program, the difficult decision was made to wind down Canadian Screen Award-winning entertainment news program ET Canada. Equally difficult was shuttering the global news production The New Reality, a news program launched during the COVID-19 pandemic. The New Reality answered the public's most pressing questions of the day during an uncertain time while looking forward to the future. Chorus invested more in news at that time than other broadcasters were, but not anymore. When we last spoke in June, we mentioned that our cost reduction efforts were translating into an almost 8% reduction in our workforce. Based on our current work, that number is now approaching 15%, and we continue to look at all other opportunities to reduce costs. Moving to slide six. Our rapidly expanding scale in digital video is creating exciting new opportunities for advertisers. With our investments in cross-platform monetization, we now deliver dynamic ad insertion across all streaming platforms, offering more targeted and effective solutions to clients. With last year's launch of Pluto TV, alongside the Global TV app, Stack TV, and our Global News Fast channels, we're delivering more than seven times the digital video ad impressions than just two short years ago. This gives us confidence that the new platform revenue remains a significant opportunity for us as adoption by audiences and advertisers grows and is evidence of our video-first strategy in motion. In Q4, 13% or $33 million of total TV advertising and subscriber revenue was attributable to new platform revenues, while representing 11% or $146 million for the year. Chorus remains steadfast in our efforts to offer more targeted ways for advertisers to better reach their desired audience. We are extending our industry segments across all platforms, linear and digital alike, to improve our cross-monetization capabilities. In Q4, 55% or $75 million of advertising revenue was optimized, and 54% or $411 million for the year, which is an important step towards breaking out of the legacy TV trading model. And with that, I'll turn it over to John.

Great. Thanks, Doug. Good morning, everyone. I'm starting on slide seven. Given the prolonged advertising market distortions and unexpected labor disruptions in our industry, as Doug has mentioned, this morning we announced certain prudent actions to support our approach to capital allocation. This includes the suspension of our dividend and an amendment to our bank credit facility. We announced the suspension of our dividend to enable free cash flow to be redirected from dividends to debt repayment. We also announced a further amendment to our credit facility, which we proactively secured given the uncertain duration of the current macroeconomic conditions and the ongoing actor strike, which is impeding our program supply and impacting audience levels and advertising demand, as mentioned earlier and also as pointed out in our outlook. In February 2023, we had renegotiated the covenants under our bank credit facility to address the persistent headwinds in the economic environment and provide us with additional financial flexibility. But at that time of the February amendment, the writers and actors' strikes were not in view. Today's amendments increased the maximum total debt-to-cash flow ratio permitted up to and including the end of the fiscal year, August 31, 2024, reintroduced mandatory quarterly repayments of the term facility totaling 5% per annum, change certain conditions related to the use of net proceeds on asset disposals, and introduce additional restrictions on distributions to shareholders. Our intense focus on deleveraging is appropriate and necessary given the low revenue visibility and the uncertain outlook at this time. We continue to expect improvement in macroeconomic conditions and a resolution of the actor strike, both of which should have positive impacts on our TV advertising revenue in the coming quarters. Over the past five years, we have reduced our debt by $912 million and diversified our sources of financing, improving our debt profile to maintain financial flexibility. At the end of the fourth quarter, we were in compliance with all covenants and had $56 million of cash and cash equivalents and $286 million available to be drawn under our revolving credit facility. Our pro forma leverage at August 31, 2023... 3.62 times net debt to segment profit reflects a significant repayment of bank debt of $172 million for the year, and that includes the net proceeds of $141 million from the sale of Toon Boom in the fourth quarter that were used to pay down the debt. As Doug noted, our fit for the future initiatives will continue to result in aggressive cost reduction measures, which are increasingly reflected in our financial results while maintaining focus on our long-term strategic objectives. All right, now over to slide eight, a review of the consolidated results. Advertising revenue in our fourth quarter was impacted by the ongoing challenges in the economic landscape compounded by the writers and actors strike. This was largely offset by positive results from our content business contributing to a relatively consistent Q4 consolidated revenue of $339 million. For the year, we delivered $1,511 million in consolidated revenue and a decrease of 5% from the prior year. Consolidated segment profit for the fourth quarter was $46 million and $334 million for the year, and that reflects the lower advertising and subscriber revenue together with the increased programming costs that we saw. This included higher Canadian programming expenditures, or what we call CPE, of $5 million for the quarter and $11 million for the year. and that was partially offset by G&A cost saves that were identified as a result of our enterprise cost review. Installation segment profit margins were 14% for the quarter and 22% for the year. Net income attributable to shareholders for the quarter was $0.25 per share, and that includes the gain on sale of Toon Boom of $142 million, partially offset by non-cash impairment charges of $100 million. in the television segment, and that's as a result of the continued contraction in advertising demand and the lower share price since May 31st, 2023. The net loss per share for the year was $2.15, which includes the gain on the sale tune boom and non-cash impairment charges, totaling $690 million in the television segment. We delivered free cash flow of $32 million in the quarter and $107 million for the year, and that reflects the impact of lower segment profit in both periods. All right, let's turn to our TV results for the fourth quarter and the year, and that's on slide nine. Overall, TV segment revenues of $314 million in the fourth quarter were consistent with the prior year, and for the year, revenues of $1.4 billion were down 6%. TV advertising was 10% lower in the fourth quarter, and it was down 11% for the year. The persistent challenges in the macroeconomic conditions contributed to significant contraction advertising demand for both the quarter and the year. Subscriber revenue was down 1% in the quarter and declined 3% for the full year. Distribution, production, and other revenue grew a significant 46% for the quarter and 21% for the year, and that was driven by increased content deliveries from all of our content businesses, Nelvana, Aircraft Pictures, and Core Studios. Direct cost of sales was up 10% for the quarter and 7% for the year, and that's as a result of the increased amortization of programming costs and that was driven mainly by a ramp-up in the Canadian spend as well as investments in U.S. studio output deals in the year and the increase in amortization of film investments, and that's driven by the higher production deliveries at Nelvana and Aircraft Pictures that we saw. Our effective CPE rate for the year was more than 35%, and that was driven by higher regulated revenue in the prior year and further exacerbated by the required CPE catch-up spending from COVID-related production shutdowns in 2020. This level of spending for the year was required under the terms of our broadcast licenses and came at a time where we experienced significant pressure due to many factors. Total general and administrative costs in TV declined 6% in the quarter and 3% for the year. Employee costs were down 6% and 4% for the quarter and the year respectively, and other G&A expenses declined 5% and 1% respectively. Overall, TV segment profit was down in the fourth quarter of the year, primarily as a result of the situation with advertising, reduced subscriber revenue, and higher amortization of program rights and film investments, partially offset by the aggressive cost controls. TV segment profit margins were 16% in the quarter and 24% for the year, and that compares to 19% and 31% in the respective prior period. Looking ahead to the first quarter of fiscal 2024, We expect continuing macroeconomic uncertainty. Coupled with the impact of the extended writers and actors strikes, we expect television advertising revenue to decline in the range of 15 to 20% compared to the prior year. Amortization of program rights is expected to decline by a similar range due to lower programming deliveries. We continue to aggressively pursue a number of cost management initiatives in response to these factors. While we expect improvement in the economic environment in the medium term, our visibility remains extremely limited at this time. All right, let's turn to our radio results now on slide 10. Fourth quarter results reflect revenue softness, particularly in entertainment, professional services, restaurants, and telecommunications categories, and that was partially offset by growth in categories such as retail and automotive. The full year results reflect the impact of the broader environment, and on national advertising across all categories. Radio segment revenue decreased $0.8 million for the quarter and $3.1 million for the year as a result of lower advertising sales, partially offset by higher podcasting revenue. Radio segment profit increased $1.2 million and $0.2 million in the quarter and year, respectively, as a result of cost control measures. G4 segment profit margins for radio were 12%, and that was up from 7% last year, while full-year segment profit margin was 13%, consistent with the prior year. It is a new fiscal year, and we are hopeful for improved visibility in the coming months. In the meantime, we are taking prudent actions as we navigate unfavorable market conditions. We are reducing costs, putting appropriate measures in place to maintain our financial flexibility, repaying debt, and strengthening our balance sheet. This is all part of how we maintain a disciplined focus on the long-term health and stability of our company. We have tremendous operating leverage, which we stand to benefit from when these cyclical pressures eventually dissipate. And with that, back to Doug.