MONTRÉAL, QUÉBEC--(Marketwire - July 12, 2012) - Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Corporation") announced its financial results for the third quarter of fiscal 2012, ended May 31, 2012, in accordance with the International Financial Reporting Standards ("IFRS").
For the third quarter and first nine months of fiscal 2012:
- Revenue increased by 8.4% to reach $358 million, and by 12.1% to reach $1,049.7 million;
- Operating income before depreciation and amortization(1) increased by 11.6% to $158.4 million when compared to the third quarter of fiscal 2011, and by 8.9% to $443.2 million when compared to the first nine months of the prior fiscal year;
- Operating margin(1) increased to 44.3% from 43% in the quarter and decreased to 42.2% from 43.5% in the first nine months when compared to the same periods of the prior year;
- Profit for the period from continuing operations amounted to $55.4 million in the third quarter when compared to $54.4 million for the same period of the previous fiscal year. For the first nine months of fiscal 2012, profit for the period from continuing operations amounted to $129.3 million when compared to $134 million for the first nine months of fiscal 2011. Profit variation for the nine-month period is mostly attributable to the increase in depreciation and amortization expense due to the reduction of depreciation period for certain property, plant and equipment, partly offset by the increase in operating income before depreciation and amortization;
- Profit for the period reached $55.4 million in the third quarter compared to a loss of $179.2 million for the same period of the previous fiscal year. For the first nine months of fiscal 2012, profit for the period reached $184.8 million compared to a loss of $117 million for the first nine months of fiscal 2011. The increases in both periods are mostly attributable to the write-off of the Corporation's net investment in the Portuguese subsidiary recorded through a non-cash impairment loss in the amount of $225.9 million during the third quarter of fiscal 2011. The Portuguese subsidiary was subsequently disposed of on February 29, 2012;
- Free cash flow(1) reached $29.5 million for the quarter compared to $65.5 million in the comparable quarter of the prior year. Free cash flow decreased in the third quarter over the prior year due to the increase in acquisition of property, plant and equipment combined with the difference in the recognition of current income tax expense, partly offset by the improvement of operating income before depreciation and amortization. For the first nine months, free cash flow amounted to $73.8 million, compared to $85.7 million in the first nine months of fiscal 2011. For the first nine-months the decrease over the prior year is mostly attributable to the increase in acquisition of property, plant and equipment, partly offset by the improvement of operating income before depreciation and amortization;
- A quarterly dividend of $0.18 per share was paid to the holders of subordinate and multiple voting shares, an increase of $0.06 per share, or 50%, when compared to a dividend paid of $0.12 per share in the third quarter of fiscal 2011. Dividend payments in the first nine months totalled $0.54 per share in fiscal 2012, compared to $0.36 per share in fiscal 2011;
- In the cable sector, primary service units ("PSU")(2) grew by 6,246 in the quarter and 64,705 in the first nine months, for a total of 1,962,174 PSU at May 31, 2012.
| (1) | The indicated terms do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section of the Management's discussion and analysis. |
| (2) | Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers. |
"We are satisfied with the favourable results obtained for the third quarter of fiscal 2012. The cable subsidiary continues to grow and most of our performance indicators are on target with our objectives. These solid results demonstrate that with strong cost controls and a dynamic marketing strategy, Cogeco Cable continues to grow in this highly competitive industry," stated Louis Audet, President and Chief Executive Officer of COGECO Inc.
"Overall, we are pleased with the financial results of our radio division's activities. The recent BBM surveys confirm our strong leadership in the Montreal market as well as the good performance of our radio stations across the province. We are pursuing the integration of Métromédia as planned, which will serve to enhance our media offering to advertisers", added Mr. Audet.
FINANCIAL HIGHLIGHTS
| Quarters ended May 31, | Nine months ended May 31, | ||||||||||||||
| 2012 | 2011 | Change | 2012 | 2011 | Change | ||||||||||
| ($000, except percentages andper share data) | $ | $ | % | $ | $ | % | |||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||
| Operations | |||||||||||||||
| Revenue | 358,032 | 330,258 | 8.4 | 1,049,668 | 936,241 | 12.1 | |||||||||
| Operating income before depreciation and amortization(1) | 158,446 | 142,025 | 11.6 | 443,225 | 407,161 | 8.9 | |||||||||
| Operating margin(1) | 44.3 | % | 43.0 | % | - | 42.2 | % | 43.5 | % | - | |||||
| Operating income | 95,473 | 90,242 | 5.8 | 229,046 | 242,167 | (5.4 | ) | ||||||||
| Profit for the period from continuing operations | 55,373 | 54,371 | 1.8 | 129,346 | 133,994 | (3.5 | ) | ||||||||
| Profit (loss) for the period from discontinued operations | - | (233,573 | ) | - | 55,446 | (250,955 | ) | - | |||||||
| Profit (loss) for the period | 55,373 | (179,202 | ) | - | 184,792 | (116,961 | ) | - | |||||||
| Profit (loss) for the period attributable to owners of the Corporation | 19,303 | (56,303 | ) | - | 63,162 | (39,278 | ) | - | |||||||
| Cash Flow | |||||||||||||||
| Cash flow from operating activities from continuing operations | 109,546 | 141,106 | (22.4 | ) | 245,571 | 284,375 | (13.6 | ) | |||||||
| Cash flow from operations(1) | 117,606 | 129,327 | (9.1 | ) | 327,498 | 270,755 | 21.0 | ||||||||
| Acquisitions of property, plant and equipment and intangible assets | 88,141 | 63,807 | 38.1 | 253,731 | 185,049 | 37.1 | |||||||||
| Free cash flow(1) | 29,465 | 65,520 | (55.0 | ) | 73,767 | 85,706 | (13.9 | ) | |||||||
| Financial condition(2) | |||||||||||||||
| Property, plant and equipment | - | - | - | 1,285,200 | 1,272,251 | 1.0 | |||||||||
| Total assets | - | - | - | 2,994,431 | 2,871,648 | 4.3 | |||||||||
| Indebtedness(3) | - | - | - | 1,186,252 | 1,056,214 | 12.3 | |||||||||
| Shareholders' Equity | - | - | - | 1,169,646 | 1,043,680 | 12.1 | |||||||||
| Equity attributable to owners of the Corporation | - | - | - | 385,740 | 342,525 | 12.6 | |||||||||
| Primary service units(4) growth | 6,246 | 18,304 | (65.9 | ) | 64,705 | 86,570 | (25.3 | ) | |||||||
| Per Share Data(5) | |||||||||||||||
| Earnings (loss) per share attributable to owners of the Corporation | |||||||||||||||
| From continuing and discontinued operations | |||||||||||||||
| Basic | 1.15 | (3.36 | ) | - | 3.78 | (2.35 | ) | - | |||||||
| Diluted | 1.15 | (3.36 | ) | - | 3.75 | (2.35 | ) | - | |||||||
| From continuing operations | |||||||||||||||
| Basic | 1.15 | 1.13 | 1.8 | 2.71 | 2.48 | 9.3 | |||||||||
| Diluted | 1.15 | 1.13 | 1.8 | 2.69 | 2.48 | 8.5 | |||||||||
| From discontinued operations | |||||||||||||||
| Basic | - | (4.49 | ) | - | 1.07 | (4.83 | ) | - | |||||||
| Diluted | - | (4.49 | ) | - | 1.06 | (4.83 | ) | - | |||||||
| (1) | The indicated terms do not have standardized definitions prescribed by International Financial Reporting Standards ("IFRS") and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section of the Management's Discussion and Analysis. |
| (2) | At May 31, 2012 and August 31, 2011. |
| (3) | Indebtedness is defined as the total of bank indebtedness, promissory note payable, principal on long-term debt, balance due on business acquisitions and obligations under derivative financial instruments. |
| (4) | Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers. |
| (5) | Per multiple and subordinate voting share. |
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("MD&A") may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to COGECO's future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding the Corporation's future operating results and economic performance and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Corporation, they may prove to be incorrect. The Corporation cautions the reader that the economic downturn experienced over the past few years makes forward-looking information and the underlying assumptions subject to greater uncertainty and that, consequently, they may not materialize, or the results may significantly differ from the Corporation's expectations. It is impossible for COGECO to predict with certainty the impact that the current economic uncertainties may have on future results. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the "Uncertainties and main risk factors" section of the Corporation's 2011 annual MD&A) that could cause actual results to differ materially from what COGECO currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Corporation's control. Therefore, future events and results may vary significantly from what management currently foresees. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Corporation is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter.
As described in note 1 to the condensed interim consolidated financial statements for the three and nine-month periods ended May 31, 2012, Canadian Generally Accepted Accounting Principles ("GAAP"), which were previously used in preparing the consolidated financial statements, were replaced on the adoption of International Financial Reporting Standards ("IFRS") on January 1, 2011. The Corporation's condensed interim consolidated financial statements for the three and nine-month periods ended May 31, 2012 have therefore been prepared in accordance with IFRS. Comparative figures for 2011 have also been restated.
All amounts are stated in Canadian dollars unless otherwise indicated. This report should be read in conjunction with the Corporation's consolidated financial statements and MD&A for the fiscal year ended August 31, 2011 included in the Corporation's 2011 Annual Report. It should also be read in conjunction with the Corporation's condensed interim consolidated financial statements and MD&A for the first quarter of fiscal 2012 as well as the information on the adjustments to the fiscal 2011 financial figures upon adoption of IFRS, explained in Note 19 of the condensed interim consolidated financial statements for the three and nine-month periods ended May 31, 2012.
Corporate strategies and objectives
COGECO Inc.'s ("COGECO" or the "Corporation") objectives are to maximize shareholder value by increasing profitability and ensuring continued growth. The strategies employed to reach these objectives, supported by tight controls over costs and business processes, are specific to each sector. For the cable sector, sustained corporate growth and the continuous improvement of networks and equipment are the main strategies used. In the other sector, the radio activities focus on continuous improvement of programming in order to increase listenership market share, consequently advertising revenue market share and, thereby, profitability. COGECO uses operating income before depreciation and amortization(1), operating margin(1), free cash flow(1) and primary service units ("PSU")(2) growth in order to measure its performance against these objectives.
| (1) | The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section. |
| (2) | Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers. |
During the first nine months of fiscal 2012, the Corporation's subsidiary, Cogeco Cable Inc. ("Cogeco Cable" or the "Cable subsidiary"), invested approximately $140.1 million in its network infrastructure and equipment to upgrade its capacity, improve its robustness and extend its territories in order to better serve and increase its service offerings for new and existing clientele.
PSU growth and penetration of service offerings in the cable sector
During the nine-month period ended May 31, 2012, the number of PSU in the Cable subsidiary increased by 64,705 or 3.4%, to reach 1,962,174, mainly as a result of targeted marketing initiatives and of the continuing interest for high definition ("HD") television service. As a result of the lower growth than expected in the first nine months of the fiscal year, Cogeco Cable revised its guidelines from 80,000 PSU, as issued on April 11, 2012, to 72,000 PSU for a growth of approximately 3.8% when compared to August 31, 2011. PSU growth is expected to stem primarily from HSI and Telephony services, the continued strong interest in Digital Television services, enhanced service offerings, and through promotional activities. For further details, please consult the fiscal 2012 revised projections in the "Fiscal 2012 financial guidelines" section.
Operating income before depreciation and amortization and operating margin
First nine months operating income before depreciation and amortization increased by 8.9% when compared to the same period of fiscal 2011 to reach $ 443.2 million and operating margin decreased to 42.2% from 43.5%. The operating margin reduction is mostly attributable to the growth in the radio activities and the acquisition of Métromédia CMR Plus Inc. ("Métromédia") for which the operating margin are generally lower than the cable sector. As a result of the improvement of operating income before depreciation and amortization during the first nine-month period, management revised upwards its April 2012 projections for fiscal 2012. Operating income before depreciation and amortization is now expected to reach $600 million from $595 million. For further details, please consult the fiscal 2012 revised projections in the "Fiscal 2012 financial guidelines" section.
Free cash flow
For the nine-month period ended May 31, 2012, COGECO reports free cash flow of $73.8 million, compared to $85.7 million for the first nine months of the previous fiscal year, representing a decrease of $11.9 million. This variance is mostly attributable to the increase in acquisition of property, plant and equipment, partly offset by the improvement of operating income before depreciation and amortization. Giving effect to the revised guidelines of operating income before depreciation and amortization, management also revised its free cash flow projections from $95 million to $100 million. For further details, please consult the fiscal 2012 revised projections in the "Fiscal 2012 financial guidelines" section.
Disposal of subsidiary and discontinued operations
On February 29, 2012, a subsidiary of the Corporation, Cogeco Cable, completed the sale of its Portuguese subsidiary, Cabovisão - Televisão por Cabo, S.A. ("Cabovisão") for a cash consideration of €45 million or approximately $59.3 million. Operating results from European operations have therefore been classified as discontinued operations. For further details on the European's operating results, please refer to the "Disposal of a subsidiary and discontinued operations" section.
Other
BBM Canada's spring 2012 survey in the Montréal region, conducted with the Portable People Meter ("PPM"), shows that 98.5 FM is the leading radio station in the Montreal francophone market with listeners and men two years old and over ("2+"), while Rythme FM has maintained its leadership position in the female 2+ segment. In the other Quebec regions, our radio stations registered good ratings.
On December 6, 2011, COGECO Inc. concluded an agreement to acquire Métromédia CMR Plus Inc. ("Métromédia"), subject to customary closing adjustments and conditions. Métromédia is a Québec company that operates an advertising representation house in the public transit sector. Métromédia represents over 100 public transit markets notably in Montréal, in other Québec regions as well as in major cities and numerous markets in the rest of Canada. The transaction was completed on December 26, 2011.
On February 1, 2011, a subsidiary of the Corporation, Cogeco Diffusion Acquisitions Inc. ("Cogeco Diffusion"), completed the acquisition of 11 radio stations in the province of Québec ("Quebec Radio Stations Acquisition"), which was originally announced on April 30, 2010 and then subject to the Canadian Radio-television and Telecommunications Commission ("CRTC") approval. When the CRTC approved the Québec Radio Stations Acquisition, there was an order to divest three radio stations to comply with the common ownership policy in the Québec City and Sherbrooke markets.
On November 30, 2011, Cogeco Diffusion concluded an agreement for the sale of two of its four Québec City FM radio stations, CJEC-FM and CFEL-FM for a cash consideration of $4.6 million, subject to CRTC approval and customary closing adjustments and conditions. On December 6, 2011, Cogeco Diffusion closed its Sherbrooke radio station, CJTS-FM. On January 19, 2012, the CRTC approved the sale of CJEC-FM and CFEL-FM which have been completed on January 30, 2012 and marked the end of the process established with the CRTC for the divestiture of these three radio stations.
OPERATING RESULTS FROM CONTINUING OPERATIONS
| Quarters ended May 31, | Nine months ended May 31, | |||||||||
| 2012 | 2011 | Change | 2012 | 2011 | Change | |||||
| ($000, except percentages) | $ | $ | % | $ | $ | % | ||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||
| Revenue | 358,032 | 330,258 | 8.4 | 1,049,668 | 936,241 | 12.1 | ||||
| Operating expenses | 199,586 | 188,233 | 6.0 | 606,443 | 529,080 | 14.6 | ||||
| Operating income before depreciation and amortization | 158,446 | 142,025 | 11.6 | 443,225 | 407,161 | 8.9 | ||||
| Operating margin | 44.3 | % | 43.0 | % | - | 42.2 | % | 43.5 | % | - |
Revenue
Fiscal 2012 third-quarter revenue rose by $27.8 million, or 8.4%, to reach $358 million, when compared to the prior year. The increase is primarily due to the cable sector and the recent acquisition of Métromédia. For the first nine months, revenue amounted to $1,049.7 million, an increase of $113.4 million, or 12.1% when compared to the first nine months of fiscal 2011. The increase is primarily due to the cable sector, the results of the Québec Radio Stations Acquisition and the recent acquisition of Métromédia.
Cable revenue increased by $21.6 million, or 7.2%, for the third quarter and by $74.1 million, or 8.4%, for the first nine months of fiscal 2012 when compared to the same periods of fiscal 2011. For further details on Cogeco Cable's operating results, please refer to the "Cable sector" section.
Revenue from the radio and advertising representation house activities improved by $6.2 million in the third quarter mainly as a result of the recent acquisition of Métromédia and by $39.4 million in the first nine months, mainly as a result of the Québec Radio Stations Acquisition and the recent acquisition of Métromédia.
Operating expenses
For the third quarter and first nine months of fiscal 2012, operating expenses amounted to $199.6 million and $606.4 million, increases of $11.4 million, or 6%, and of $77.4 million, or 14.6%, when compared to the prior year. For the third quarter, the increase is primarily due to the cable sector and the recent acquisition of Métromédia. For the first nine months, the increase is mainly attributable to the cable sector as well as the Québec Radio Stations Acquisition and the recent acquisition of Métromédia.
Operating expenses in the cable sector increased by increased by $7 million, or 4.4%, for the third quarter and by $39.3 million, or 8.3%, for the first nine-months of fiscal 2012 when compared to the same period of fiscal 2011. For further details on Cogeco Cable's operating results, please refer to the "Cable sector" section.
Operating expenses from the radio and advertising representation house activities grew by $4.2 million in the third quarter mainly as a result of the recent acquisition of Métromédia and by $37.3 million in the first nine months mainly as a result of the Québec Radio Stations Acquisition and the recent acquisition of Métromédia.
Operating income before depreciation and amortization and operating margin
Mainly as a result of growth in the cable sector and the Québec Radio Stations Acquisition, operating income before amortization grew by $16.4 million, or 11.6%, in the third quarter to reach $158.4 million, and by $36.1million, or 8.9%, at $443.2 million for the first nine months of fiscal 2012, when compared to the same periods of the previous year. COGECO's third quarter operating margin increased to 44.3%, from 43% in the third quarter of the previous year. For the first nine months, COGECO's operating margin decreased to 42.2% from 43.5% in the first nine months of fiscal 2011. The operating margin reduction for the first nine-months of fiscal 2012 is mostly attributable to the growth in the radio activities and the acquisition of Métromédia for which the operating margin are generally lower than the cable sector. For further details on Cogeco Cable's operating results, please refer to the "Cable sector" section.
PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS
For the three and nine-month periods ended May 31, 2012, profit for the period from continuing operations amounted to $55.4 million, or $1.15 per share, and $129.3 million, or $2.71 per share, respectively. For the comparable periods of fiscal 2011, profit for the period from continuing operations amounted to $54.4 million, or $1.13 per share in the quarter, and $134 million, or $2.48 per share in the first nine months. Profit progression for the quarter is attributable to the improvement of operating income before depreciation and amortization, partly offset by the increase in fixed charges. For the first nine-month period, the variance is mostly attributable to the increase of depreciation and amortization expense due to the reduction of depreciation period for certain property, plant and equipment in the cable sector, partly offset by the increase in operating income before depreciation and amortization and the decrease in financial expense.
PROFIT FOR THE PERIOD
For the three and nine-month periods ended May 31, 2012, profit for the period amounted to $55.4 million and $184.8 million, respectively. For the comparable periods of fiscal 2011, loss for the period amounted to $179.2 million and $117 million, respectively. Profit progression for the period is mostly attributable to the write-off, in the cable sector, of the Corporation's net investment in the Portuguese subsidiary recorded through a non-cash impairment loss in the amount of $225.9 million during the third quarter of fiscal 2011 and the improvement of operating income before depreciation and amortization improvement, partly offset by the increase of depreciation and amortization expense.
For the three and nine-month periods ended May 31, 2012, profit for the period attributable to owners of the Corporation amounted to $19.3 million, or $1.15 per share, and $63.2 million, or $3.78 per share, respectively. For the comparable periods of fiscal 2011, loss for the period attributable to owners of the Corporation amounted to $56.3 million, or $3.36 per share in the quarter, and $39.3 million, or $2.35 per share in the first nine months. Profit progression for the period is mostly attributable to the previously described impairment loss recorded in the cable sector during the third quarter of fiscal 2011 and the improvement of operating income before depreciation and amortization improvement, partly offset by the increase of depreciation and amortization expense.
The non-controlling interest represents a participation of approximately 67.9% in Cogeco Cable's results. During the third quarter and the first nine months of fiscal 2012, the profit for the period attributable to non-controlling interest amounted to $36.1 million and $121.6 million due to the cable sector's positive results, compared to a loss of $122.9 million and $77.7 million in the same periods of fiscal 2011 mainly due to the impairment loss recorded in the cable sector during the third quarter of fiscal 2011.
FINANCING ACTIVITIES
In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and finance leases and guarantees. COGECO's obligations, discussed in the 2011 Annual Report, have not materially changed since August 31, 2011, except as mentioned below.
As a result of the sale of Cogeco Cable's Portuguese subsidiary, the letters of credits which were issued to guarantee the payment by Cabovisão of stamp taxes and withholding taxes have been released.
On February 14, 2012, Cogeco Cable completed pursuant to a public debt offering, the issue of $200 million Senior Secured Debentures Series 3. These Debentures mature on February 14, 2022 and bear interest at 4.925% per annum payable semi-annually. These debentures are indirectly secured by a first priority fixed and floating charge and a security interest on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation.
On November 30, 2011, the Corporation renewed its credit agreement for a $100 million credit facility in the form of a four-year renewed Term Revolving Facility. The renewed Term Revolving Facility will mature on February 1, 2016, but may be extended by additional one-year periods on an annual basis, subject to lenders' approval. The renewed Term Revolving Facility is indirectly secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation and certain of its subsidiaries, excluding the capital stock and assets of the Corporation's subsidiary, Cogeco Cable Inc., and guaranteed by its subsidiaries, excluding Cogeco Cable.
On November 22, 2011, Cogeco Cable renewed its credit agreement for a $750 million credit facility, with an option to increase to a total amount of up to $1 billion, subject to lenders' participation, in the form of a five year Term Revolving Facility. The renewed Term Revolving Facility was arranged by a group of financial institutions. The renewed Term Revolving Facility will mature on November 22, 2016, but may be extended by additional one-year periods on an annual basis, subject to lenders' approval. The renewed Term Revolving Facility is indirectly secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking of every nature and kind of Cogeco Cable and certain of its subsidiaries, and provides for certain permitted encumbrances, including purchased money obligations, existing funded obligations and charges granted by any subsidiary prior to the date when it becomes a subsidiary, subject to a maximum amount.
On November 7, 2011, the Corporation completed, pursuant to a private placement, the issue of 6.50 % Unsecured Notes for a total of $35 million maturing November 7, 2021. Interest on these Notes is payable semi-annually in arrears on November 7 and May 7 of each year commencing May 7, 2012. Net proceeds of approximately $34.6 million was used to reduce COGECO Inc.'s bank indebtedness.
DIVIDEND DECLARATION
At its July 11, 2012 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.18 per share for multiple voting and subordinate voting shares, payable on August 8, 2012, to shareholders of record on July 25, 2012. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of the Corporation based upon the Corporation's financial condition, results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no assurance that dividends will be declared, and if declared, their amount and frequency may vary.
CABLE SECTOR
CUSTOMER STATISTICS
| Net additions (losses) | % of Penetration(1) | |||||||||
| Quarters ended May 31, | Nine months ended May 31, | |||||||||
| May 31, 2012 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||
| PSU | 1,962,174 | 6,246 | 18,304 | 64,705 | 86,570 | |||||
| Television service customers (2) | 868,873 | (4,453 | ) | (1,401 | ) | (9,112 | ) | 4,849 | 52.9 | 54.5 |
| HSI service customers | 628,852 | 2,835 | 6,989 | 27,638 | 34,411 | 38.3 | 36.8 | |||
| Telephony service customers | 464,449 | 7,864 | 12,716 | 46,179 | 47,310 | 28.3 | 25.1 | |||
| (1) | As a percentage of Homes Passed. |
| (2) | The number of Television service customers includes 765,585 Digital Television service customers. |
Fiscal 2012 third-quarter and first nine months, PSU net additions were lower than in the comparable period of the prior year mainly as a result of category maturity, competitive offers and tightening of our credit controls and processes. For the third quarter and the first nine months net customer losses for Television service customers stood at 4,453 and 9,112, respectively, compared to 1,401 and net additions of 4,849 for the same periods of the prior year. Television service customer net losses in the third quarter are usual and due to the end of the school year for college and university students. Television service customer net losses in the first nine months of fiscal 2012 are mainly due to the competitive promotional offers for the video service combined with the tightening of our credit controls and processes. For the three and nine-month periods ended May 31, 2012, Telephony service customers grew by 7,864 and 46,179 compared to 12,716 and 47,310 for the same periods last year, and the number of net additions to the HSI service stood at 2,835 and 27,638 customers compared to 6,989 and 34,411 customers for the same periods of the prior year. HSI and Telephony net additions continue to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. For the three and nine-month periods ended May 31, 2012, additions to the Digital Television service which are included in the Television service customers, stood at 12,943 and 87,259 compared to 34,080 and 89,444 for the comparable periods of the prior year. Digital Television service net additions are due to targeted marketing initiatives to improve penetration, the launch of new HD channels, the continuing interest for HD television service and the deployment of Digital Terminal Adapters technology to migrate customers from analog to digital services.
OPERATING RESULTS FROM CONTINUING OPERATIONS
| Quarters ended May 31, | Nine months ended May 31, | |||||||||
| 2012 | 2011 | Change | 2012 | 2011 | Change | |||||
| ($000, except percentages) | $ | $ | % | $ | $ | % | ||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||
| Revenue | 319,771 | 298,211 | 7.2 | 952,930 | 878,872 | 8.4 | ||||
| Operating expenses | 167,110 | 160,064 | 4.4 | 515,218 | 475,918 | 8.3 | ||||
| Management fees - COGECO Inc. | - | - | - | 9,485 | 9,172 | 3.4 | ||||
| Operating income before depreciation and amortization | 152,661 | 138,147 | 10.5 | 428,227 | 393,782 | 8.7 | ||||
| Operating margin | 47.7 | % | 46.3 | % | 44.9 | % | 44.8 | % | ||
Revenue
Fiscal 2012 third-quarter revenue rose by $21.6 million, or 7.2%, to reach $319.8 million, when compared to the prior year. For the first nine months, revenue amounted to $952.9 million, an increase of $74.1 million, or 8.4% when compared to the first nine months of fiscal 2011. The increase in revenue was driven by PSU growth, rate increases implemented in April and October 2011 combined with the acquisitions of MTO Telecom Inc. ("MTO") and Quiettouch Inc. ("QTI") during the fourth quarter of fiscal 2011.
Operating expenses
For the third quarter of fiscal 2012, operating expenses, excluding management fees payable to COGECO Inc., increased by $7 million, to reach $167.1 million, an increase of 4.4% compared to prior year. For the first nine months of the fiscal year, operating expenses, excluding management fees payable to COGECO Inc., amounted to $515.2 million, an increase of $39.3 million, or 8.3%, when compared to the same period of fiscal 2011. The increase in operating expenses is mainly attributable to servicing additional PSU, the launch of new HD channels, additional programming costs, deployment and support costs related to the migration of Television service customers from analog to digital and the acquisitions of MTO and QTI.
Operating income before depreciation and amortization and operating margin
Fiscal 2012 third-quarter operating income before depreciation and amortization increased by $14.5 million, or 10.5% to reach $152.7 million, and by $34.4 million, or 8.7%, in the first nine months to reach $428.2 million. Cogeco Cable's third-quarter operating margin increased to 47.7% from 46.3% in the comparable period of the prior year. For the first nine months, the operating margin increased to 44.9% from 44.8% in the first nine months of fiscal 2011.
DISPOSAL OF SUBSIDIARY AND DISCONTINUED OPERATIONS
On February 29, 2012, the Corporation completed the sale of its Portuguese subsidiary for a cash consideration of €45 million ($59.3 million). The selling price has been reduced by selling fees of approximately €8.5 million ($11.2 million) and contingent claims assumed up to a maximum amount of €5 million ($6.6 million). The carrying value of the net liabilities disposed of on February 29, 2012 was $6.7 million resulting in a gain on disposal of $48.2 million recorded in the interim consolidated statements of profit or loss.
The details of the assets and liabilities disposed of are as follows:
| ($000) | $ | |
| (unaudited) | ||
| Cash and cash equivalents | 13,041 | |
| Trade and other receivables | 7,693 | |
| Income taxes receivable | 277 | |
| Prepaid expenses and other | 2,777 | |
| Property, plant and equipment | 38,931 | |
| Trade and other payables | (42,514 | ) |
| Provisions | (6,665 | ) |
| Deferred and prepaid revenue | (411 | ) |
| Foreign currency translation adjustment | (19,817 | ) |
| (6,688 | ) |
As a result of the sale and in accordance with IFRS 5 - Non-Current Assets Held for Sale and Discontinued Operations, the Corporation reclassified the current and prior year results and cash flows of the European operations, up to the date of the disposal, as discontinued operations.
Profit (loss) for the period from discontinued operations
| Quarters ended May 31, | Nine months ended May 31, | |||||
| 2012 | 2011 | 2012 | 2011 | |||
| ($000) | $ | $ | $ | $ | ||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||
| Revenue | - | 43,647 | 80,546 | 128,971 | ||
| Operating expenses | - | 37,637 | 70,247 | 114,544 | ||
| Depreciation and amortization | - | 13,640 | 2,814 | 40,068 | ||
| Operating income (loss) | - | (7,630 | ) | 7,485 | (25,641 | ) |
| Financial income | - | 7 | 155 | 85 | ||
| Impairment of goodwill | - | 29,344 | - | 29,344 | ||
| Impairment of property, plant and equipment | - | 196,529 | - | 196,529 | ||
| Gain on disposal | - | - | 48,215 | - | ||
| Profit (loss) before income taxes | - | (233,496 | ) | 55,855 | (251,429 | ) |
| Income taxes | - | 77 | 409 | (474 | ) | |
| Profit (loss) for the period | - | (233,573 | ) | 55,446 | (250,955 | ) |
Cash flows from discontinued operations
| Quarters ended May 31, | Nine months ended May 31, | ||||||
| 2012 | 2011 | 2012 | 2011 | ||||
| ($000) | $ | $ | $ | $ | |||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||
| Net cash flows from operating activities | - | 6,292 | 13,637 | 15,849 | |||
| Net cash flows from investing activities | - | (7,934 | ) | 36,826 | (26,073 | ) | |
| Effect of exchange rate changes on cash and cash equivalents denominated in a foreign currency | - | 573 | (866 | ) | 438 | ||
| Net increase (decrease) in cash and cash equivalents | - | (1,069 | ) | 49,597 | (9,786 | ) | |
FISCAL 2012 FINANCIAL GUIDELINES
As a result of revised projections in the cable sector described below, the Corporation revised its consolidated projections. Revenue is now expected to reach $1,410 million, a reduction of $5 million when compared to the April 2012 revised projections. Operating income before depreciation and amortization should increase from $595 million to $600 million and free cash flow should reach $100 million, an increase of $5 million from April 2012 projections. Profit for the year attributable to the owners of the Corporation should reach $77 million compared to $80 million, mainly as a result of the increase of the corporate income tax rate in the cable sector as discussed in the "Income taxes from continuing operations" section.
| Revised projections |
Revised projections |
||
| July 11, 2012 | April 11, 2012 | ||
| Fiscal 2012 | Fiscal 2012 | ||
| (in millions of dollars) | $ | $ | |
| Financial guidelines | |||
| Revenue | 1,410 | 1,415 | |
| Operating income before depreciation and amortization | 600 | 595 | |
| Financial expense | 69 | 69 | |
| Current income taxes expense | 90 | 90 | |
| Profit for the year attributable to owners of the Corporation | 77 | 80 | |
| Acquisitions of property, plant and equipment and intangible assets | 345 | 345 | |
| Free cash flow | 100 | 95 | |
Cable sector
For the first nine months of fiscal 2012, Cogeco Cable improved its financial performance with regards to operating income before depreciation and amortization, while PSU growth and revenue increased at a lower pace than expected, when compared to the revised projections issued on April 11, 2012. As a result, management revised downwards its revenue projections from $1,285 million to $1,280 million and PSU growth from 80,000 to 72,000 net additions, as a consequence of a more competitive environment and tightening of credit controls, thus containing collection and bad debt expenses. Nonetheless, operating income before depreciation and amortization should increase from $580 million to $585 million to reflect the cost reduction initiatives implemented by the Corporation over the year and, consequently operating margin should increase from 45.2% to 45.7%.
Giving effect to the revised guidelines of operating income before depreciation and amortization, management also revised its free cash flow projections from $85 million to $90 million. Profit for the year is expected to amount to $225 million, $10 million lower when compared to the revised projections of April 2012, resulting from the increase of the corporate income tax rate as discussed in the "Income taxes from continuing operations" section. Finally, management has not revised its other financial projections for the 2012 fiscal year.
| Revised projections |
Revised projections |
||||
| July 11, 2012 | April 11, 2012 | ||||
| Fiscal 2012 | Fiscal 2012 | ||||
| (in millions of dollars, except net customer additions and operating margin) | $ | $ | |||
| Financial guidelines | |||||
| Revenue | 1,280 | 1,285 | |||
| Operating income before depreciation and amortization | 585 | 580 | |||
| Operating margin | 45.7 | % | 45.2 | % | |
| Depreciation and amortization | 270 | 270 | |||
| Financial expense | 65 | 65 | |||
| Current income taxes expense | 90 | 90 | |||
| Profit for the year | 225 | 235 | |||
| Acquisitions of property, plant and equipment and intangible assets | 340 | 340 | |||
| Free cash flow | 90 | 85 | |||
| Net customer additions guidelines | |||||
| PSU | 72,000 | 80,000 | |||
FISCAL 2013 PRELIMINARY FINANCIAL GUIDELINES
For fiscal 2013, COGECO expects revenue of approximately $1,490 million and operating income before depreciation and amortization should amount to approximately $630 million, as a result of Cogeco Cable's 2013 preliminary guidelines, the full year impact of the Métromédia Acquisition and the improved results of the radio activities. Free cash flow should generate approximately $115 million and profit for the year attributable to the owners of the Corporation of $65 million should be earned.
| Preliminary projections Fiscal 2013 |
Revised Projections Fiscal 2012 |
||
| (in millions of dollars) | $ | $ | |
| Financial guidelines | |||
| Revenue | 1,490 | 1,410 | |
| Operating income before depreciation and amortization | 630 | 600 | |
| Financial expense | 69 | 69 | |
| Current income taxes expense | 96 | 90 | |
| Profit for the year attributable to owners of the Corporation | 65 | 77 | |
| Acquisitions of property, plant and equipment and intangible assets | 350 | 345 | |
| Free cash flow | 115 | 100 | |
Cable sector
For fiscal 2013, Cogeco Cable expects to achieve revenue of $1,350 million, representing growth of $70 million, or 5.5% when compared to the revised fiscal 2012 projections issued on July 11, 2012. The preliminary guidelines take into consideration the current uncertain global economic environment. In Canada, household debt remains a concern as credit market debt as a % of personal disposal income continues to rise and average resale price to household income continue to increase, which should coincide with a contraction in consumer spending. In addition, the high value of the Canadian dollar may generate further restructuring in the manufacturing sector and additional headwinds from government spending restraints might result in slower 2013 growth. In previous recessionary periods, demand for cable telecommunications services has generally proven to be resilient; however there is no assurance that demand would remain resilient in a prolonged difficult economic environment. These preliminary guidelines also take into consideration the competitive environment that prevails in Canada, the deployment of new technologies such as Fibre to the Home ("FTTH"), Fibre to the Node ("FTTN") and Internet Protocol Television ("IPTV") by the incumbent telecommunications providers.
Revenue should increase as a result of PSU growth stemming from targeted marketing initiatives to improve penetration rates of the Digital Television, HSI and Telephony services. Furthermore, the Digital Television service should continue to benefit from the customers' ongoing strong interest in the Corporation's growing HD service offerings. Revenue will also benefit from the impact of rate increases implemented in June 2012 in Quebec and July 2012 in Ontario, ranging an average between $2 to $3 per HSI and Telephony service customers. Cogeco Cable's strategies include consistently effective marketing to residential and business customers, competitive product offerings and superior customer service, which combined, lead to the expansion and loyalty of the Basic Cable Service clientele. As the penetration of residential HSI, Telephony and Digital Television services increase, the new demand for these products should slow, reflecting signs of maturity. However, growth in the commercial and business sector is expected to continue at a consistent pace.
As a result of increased costs to service additional PSU, inflation and manpower increases, as well as the continuation of the marketing initiatives and retention strategies, operating expenses are expected to expand by approximately $41 million, or 5.9% in the 2013 fiscal year when compared to the revised projections for fiscal 2012.
For fiscal 2013, the Corporation expects operating income before depreciation and amortization of $614 million, an increase of $29 million, or 5% when compared to the revised fiscal 2012 projections issued on July 11, 2012. The operating margin is expected to reach approximately 45.5% in fiscal 2013, compared to revised projections of 45.7% for the 2012 fiscal year, reflecting operating expenses growth slightly higher than the revenue growth.
Cogeco Cable expects the depreciation and amortization of property, plant and equipment and intangible assets to increase by $20 million for fiscal 2013, mainly from acquisition of capital expenditures and the increase in intangible assets related to PSU growth and other initiatives and by the full year impact of those of fiscal 2012. In addition, the depreciation and amortization expense for fiscal 2012 included the impact from the reduction of the depreciation period for certain home terminal devices. Cash flows from operations should finance capital expenditures and the increase in intangible assets amounting to $350 million, an increase of $10 million when compared to the revised fiscal 2012 projections. Capital expenditures projected for the 2013 fiscal year are mainly due to customer premise equipment required to support PSU growth, scalable infrastructure for product enhancements and the deployment of new technologies, line extensions to expand existing territories, support capital to improve business information systems and support facility requirements and expansion for the data services business.
Fiscal 2013 free cash flow is expected to amount to $105 million, an increase of $15 million, or 16.7% when compared to the projected free cash flow of $90 million for fiscal 2012, resulting from the growth in operating income before depreciation and amortization. Generated free cash flow will result in reduced Indebtedness net of cash and cash equivalent, thus improving the Corporation's net leverage ratios. Financial expense should amount to $64 million, essentially the same when compared to the 2012 revised projections, as a result of a slight increase in the Corporation's cost of debt reflecting current market conditions, partly offset by the reduction in Indebtedness level. As a result, profit for the year of approximately $190 million should be achieved compared to $225 million for the revised fiscal 2012 projections. The 2012 projections of profit for the year include $55.4 million profit from discontinued operations resulting from the disposal of the Portuguese subsidiary. Excluding this item, the fiscal 2013 projected profit for the year represents an increase of $20.4 million, or 12%, when compared to the revised fiscal 2012 projected profit for the year.
The fiscal 2013 preliminary financial guidelines are as follows:
| Preliminary projections Fiscal 2013 |
Revised projections Fiscal 2012 |
||||
| (in millions of dollars, except net customer additions and operating margin) | $ | $ | |||
| Financial guidelines | |||||
| Revenue | 1,350 | 1,280 | |||
| Operating income before depreciation and amortization | 614 | 585 | |||
| Operating margin | 45.5 | % | 45.7 | % | |
| Depreciation and amortization | 290 | 270 | |||
| Financial expense | 64 | 65 | |||
| Current income taxes expense | 95 | 90 | |||
| Profit for the year | 190 | 225 | |||
| Acquisitions of property, plant and equipment and intangible assets | 350 | 340 | |||
| Free cash flow | 105 | 90 | |||
| Net customer addition guidelines | |||||
| PSU | 50,000 | 72,000 | |||
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures from continuing operations used by COGECO throughout this MD&A. It also provides reconciliations between these non-IFRS measures and the most comparable IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. These measures include "cash flow from operations", "free cash flow", "operating income before depreciation and amortization" and "operating margin".
Cash flow from operations and free cash flow
Cash flow from operations is used by COGECO's management and investors to evaluate cash flows generated by operating activities, excluding the impact of changes in non-cash operating activities, amortization of deferred transaction costs and discounts on long-term debt, income taxes paid or received, current income tax expense or recovery, financial expense paid and financial expense. This allows the Corporation to isolate the cash flows from operating activities from the impact of cash management decisions. Cash flow from operations is subsequently used in calculating the non-IFRS measure, "free cash flow". Free cash flow is used, by COGECO's management and investors, to measure its ability to repay debt, distribute capital to its shareholders and finance its growth.
The most comparable IFRS financial measure is cash flow from operating activities. Cash flow from operations is calculated as follows:
| Quarters ended May 31, | Nine months ended May 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| ($000) | $ | $ | $ | $ | ||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||
| Cash flow from operating activities | 109,546 | 141,106 | 245,571 | 284,375 | ||||
| Changes in non-cash operating activities | 20,507 | (17,406 | ) | 85,288 | 56,048 | |||
| Amortization of deferred transaction costs and discounts on long-term debt | 1,681 | 1,141 | 3,357 | 2,902 | ||||
| Income taxes paid (received) | 10,634 | (120 | ) | 67,711 | (1,695 | ) | ||
| Current income tax recovery (expense) | (25,016 | ) | 1,647 | (72,306 | ) | (73,197 | ) | |
| Financial expense paid | 18,076 | 19,578 | 49,587 | 60,305 | ||||
| Financial expense | (17,822 | ) | (16,619 | ) | (51,710 | ) | (57,983 | ) |
| Cash flow from operations | 117,606 | 129,327 | 327,498 | 270,755 | ||||
Free cash flow is calculated as follows:
| Quarters ended May 31, | Nine months ended May 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| ($000) | $ | $ | $ | $ | ||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||
| Cash flow from operations | 117,606 | 129,327 | 327,498 | 270,755 | ||||
| Acquisition of property, plant and equipment | (84,161 | ) | (61,026 | ) | (243,161 | ) | (176,514 | ) |
| Acquisition of intangible assets | (3,980 | ) | (2,781 | ) | (10,570 | ) | (8,535 | ) |
| Free cash flow | 29,465 | 65,520 | 73,767 | 85,706 | ||||
Operating income before depreciation and amortization and operating margin
Operating income before depreciation and amortization is used by COGECO's management and investors to assess the Corporation's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before depreciation and amortization is a proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial community to value the business and its financial strength. Operating margin is a measure of the proportion of the Corporation's revenue which is available, before income taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income before depreciation and amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income before depreciation and amortization and operating margin are calculated as follows:
| Quarters ended May 31, | Nine months ended May 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| ($000, except percentages) | $ | $ | $ | $ | ||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||
| Operating income | 95,473 | 90,242 | 229,046 | 242,167 | ||||
| Integration, restructuring and acquisition costs | - | - | 108 | 13,222 | ||||
| Depreciation and amortization | 62,973 | 51,783 | 214,071 | 151,772 | ||||
| Operating income before depreciation and amortization | 158,446 | 142,025 | 443,225 | 407,161 | ||||
| Revenue | 358,032 | 330,258 | 1,049,668 | 936,241 | ||||
| Operating margin | 44.3 | % | 43.0 | % | 42.2 | % | 43.5 | % |
ABOUT COGECO
COGECO is a diversified communications corporation. Through its Cogeco Cable subsidiary, COGECO provides its residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services using its two-way broadband cable networks. Cogeco Cable also provides, to its commercial customers, through its subsidiary Cogeco Data Services, data networking, e-business applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, data storage, co-location services, managed IT services, cloud services and other advanced communication solutions. Through its subsidiary, Cogeco Diffusion, COGECO owns and operates 13 radio stations across most of Québec with complementary radio formats serving a wide range of audiences as well as Cogeco News, its news agency. Cogeco Diffusion also operates Métromédia, an advertising representation house specialized in the public transit sector that holds exclusive advertising rights in the Province of Québec where it also represents its business partners active across other Canadian markets. COGECO's subordinate voting shares are listed on the Toronto Stock Exchange (TSX:CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (TSX:CCA).
ADDITIONAL INFORMATION
For additional information relating to the Corporation, including its Annual Information Form, and for a detailed analysis of COGECO's results for the third quarter of 2012, please refer to the Management Discussion and Analysis and condensed consolidated financial statements of COGECO, available on the SEDAR website at www.sedar.com.
| Analyst Conference Call: | Thursday, July 12, 2012 at 11:00 a.m. (Eastern Daylight Time) |
| Media representatives may attend as listeners only. | |
| Please use the following dial-in number to have access to the conference call by dialling five minutes before the start of the conference: | |
| Canada/USA Access Number: 1-800-820-0231 | |
| International Access Number: 1-416-640-5926 | |
| Confirmation Code: 1348176 | |
| By Internet at www.cogeco.ca/investors | |
| A rebroadcast of the conference call will be available until October 11, by dialling: | |
| Canada and US access number: 1 888-203-1112 | |
| International access number: + 1 647-436-0148 | |
| Confirmation code: 1348176 |
Contact Information:
COGECO Inc.
Pierre Gagne
Senior Vice President and Chief Financial Officer
514-764-4700
Information:
Media
Rene Guimond
Vice-President, Public Affairs and Communications
514-764-4700