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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Fiscal 2018 Third Quarter Results Conference Call. Your hosts for today will be Mr. Denis Rozon, Vice President and Chief Financial Officer of TVA Group Inc.; and Ms. France Lauzière, President and Chief Executive Officer.Mr. Rozon, please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. Thank you for taking part in our call today. [Foreign Language]Certain statements made on the call today may be considered forward-looking statements. And we will refer you to the risk factors outlined in yesterday's press release and reports filed by the company with regulatory authorities.I will now turn the call over to Mrs. Lauzière.
[Foreign Language]Good morning. During this period, our financial performance was impacted by lower operating revenues due to decreases in our 3 business segments. Advertising revenues were down in both our Broadcasting and Magazines segments. To offset the revenue decreases, we have made moves to cut operating expenses during recent quarters. Unfortunately, these efforts have not entirely made up for the decline in operating revenue.On the plus side, we are very pleased that the collective agreement with the employees at our Montréal station has been renewed. As you know, the media industry faces many challenges and is under enormous financial pressure. So our new 5-year collective agreement is excellent news. We can now look forward and focus on our company's future.Also during this period, TVA Group's market share was up 1 point compared with Q3 2017 to 38.1%. TVA Network's market share was relatively stable at 23.7%. We are very proud of the audience response to RÉVOLUTION, the largest dance competition ever seen on Québec television. The new format, developed entirely in Québec, is already a major hit. Its premier drew an audience of more than 1.6 million and is already attracting interest on international markets. Two weeks ago, RÉVOLUTION was presented as one of the hottest formats at MIPCOM, the big annual trade show for television content.Our specialty channels are performing well. Their market share was up 1.3 points year-over-year to 14.4%, thanks to LCN, Prise 2 and CASA, which grew their market shares in Q3. The LCN channel accounting for the largest part of the increase, growing its market share by 0.7 points because of, among other things, its outstanding coverage of the Québec election campaign. With a 5.5% audience share in Q3, LCN is not only the most popular specialty channel in Québec, but is -- also is the Channel V.Speaking of our election night coverage. Up to 2.1 million people watched the Québec election results on TVA and LCN, an all-time record. Regarding the acquisition of the Évasion and Zeste specialty channels from Serdy Media, we are still waiting for the CRTC decision, which is expected in the next quarter.Turning to TVA Sports. In Q3, it launched 2 original morning and noon hour shows, which -- in which viewers can interact with duo. The TVA Sports now present original shows from morning to night, in addition to its strong focus on live sports coverage. In Q3, TVA Sports banked on coverage of Montréal Impact soccer, for which audiences have increased 10% from last season.And of course, fans are happy, too, that NHL hockey and the Montréal Canadiens have been back on the air since the beginning of October. And we are proud that ratings for NHL games, not involving Montréal, are up 17% so far this year.Now for our Magazines. It is still a challenge for the advertising revenue. We've taken a number of initiatives in the past few quarters to offset the drop in revenues by cutting costs and increasing operating efficiency. And we are continuing our efforts on this front. Our brands still remain very popular. TVA Publications held its position as the top publisher of French-language magazines in Québec, with more than 3.7 million readers, while our English titles are read by nearly 5.7 million people. In all, 9 million Canadians read our magazines on all platforms.Turning to MELS now. The Film Production & Audiovisual Services segment's financial performance declined slightly in Q3. Still, MELS remains a growth driver, not only for TVA, but also for Québec's economy. In August, TVA Group bought the sound postproduction company, Audio Zone. The acquisition fits into our strategy of offering a full range of production services to meet the needs of the industry.In terms of stage rentals, all the studios are now full at full capacity. The feature film, Midway, is currently being shot at MELS. It's the latest film from Director and Producer, Roland Emmerich, whose credit also includes Independence Day.Thank you to all. Now Denis will review the financial results.
Thank you, France. I would like to outline the main following financial highlights for third quarter results. Our consolidated operating revenues record a 9% decrease with a 6% decrease in the Broadcasting & Production segment, a 27% decrease in the Magazines segment, and a 5% decrease in the Film Production & Audiovisual Services segment, or MELS segment. Decrease in the Broadcasting & Production segment is mainly due to 10% decrease in the TVA Network's advertising revenue, 3% decrease in the TVA Sports channel's revenue and another 3% decrease in the subscription revenue for -- of the other specialty channels, all that partially offset by a 3% increase in the advertising revenue of the other specialty channels.Decrease in the Magazines is primarily due to a 42% decrease in advertising revenue, partly because of fewer issues of some monthly titles and 13% decrease in newsstands revenue and the sale of the Hockey News magazine in Q1 2018.Decrease in the MELS segment is essentially due to a 12% decrease in some soundstage and production equipment rental revenue; 54% decrease in visual effects revenue and 9% decrease in dubbing and subtitling revenues, partly offset by a 61% increase in postproduction revenue, essentially due to a higher volume in the third quarter of 2018 compared to Q3 '17; and the addition of the activities of Audio Zone for the month of September 2018; and also the addition of mobile unit rental activities following the acquisition of Mobilimage in the first quarter of 2018.The consolidated EBITDA reached $27 million for the third quarter, which represent a negative variance of $6 million compared to last year quarter.Broadcasting & Production segment recorded a negative variance of $3 million caused mainly by a 30% decrease in EBITDA from TVA Network and 11% decrease in EBITDA from specialty services.Magazines segment record a negative variance of $1.5 million, mainly due to the decrease in operating revenue, which was partially offset by savings generated by the staff and expense rationalization plans implemented in recent quarter. And the MELS segment record also negative variance of $1.3 million, due primarily to the lower volume of activities in soundstage and equipment rental and in visual effects and, as I explained earlier, offset by higher volume of activities in postproduction and the contribution of mobile unit rental activities.Operational restructuring costs and others of minus or positive $0.8 million in the third quarter representing the combination of several elements, such as $2.9 million as a gain on disposal of the building in Québec City; a $0.3 million reduction in the allowance for onerous leave; $2 million permit charge on an investment in an associated corporation in the Magazines segment; and $0.6 million operational restructuring costs in connection with the elimination of position.Finally, the corporation declared a net income attributable to the shareholder of $14 million or $0.32 per share compared with a net loss last year of $15 million or $0.35 per share. Last year quarter was including a $42 million charge for impairment of goodwill and intangible assets related to its magazine cash CGU, cash generating unit.This concludes the official portion of our conference call. We will now be pleased to answer your questions. Operator?
[Operator Instructions] So our first question will come from Vince Valentini of TD Securities.
Let's start with advertising market and the TVA Network specifically. So ad revenue is down 10%. It's a little bit worse than the second quarter. It was down 9%. Is there anything going on here in terms of the big sports events this year and the World Cup maybe having a bit of an incremental impact in the third quarter? And then also, do you have any sense of confidence on -- and visibility on bookings and the outlook for the fall period in Q4?
Yes. In Broadcasting, the market is still very aggressive, and it shows also -- for example, let's say, for the month of September, the market and television shows had a 5% decrease globally. And as on a year-to-date basis, it shows a 2% decrease globally. We performed -- TVA performed -- is underperforming the market this year. But what we have to keep in mind, it is that last year quarter, we have been overperforming the market. We showed an increase of 13% in its advertising revenue at TVA Network. So we're a little bit, I'd say, penalized for the overperformance we did last year and last year quarter. If we ended the year with that almost 5% increase in advertising revenue in the market, that was going downward. So just to compare to last year results of -- definitely shows negative variance. And I think it's more like, could we see another market correction? But I think if we look at more on the several years, we're still in the growth pattern on the advertising revenue. So we're like a little bit penalized for the good performance we had last year.
And Denis, can you remind us, in Q4 of last year, did you also do a lot better than the markets? So you still have a pretty tough comparison?
I could not tell you exactly about the market. But I remember for -- that last Q4, last quarter, we were starting to have a decrease in advertising revenue. So we were not as a higher percentage as 13% we did in Q3 2017. I think we were something like minus 1% or minus 2% as far as I remember, I have to go back to my report for Q4. So that's the time line we started to see more of trend like the market.
Okay. That's good color. Related to that, obviously, you're continuing to reduce costs. How much of the more recent reductions you just talked about a few months ago, what percentage of that do you think is reflected in your third quarter cost run rate versus amounts still to come in the fourth quarter?
You mean for magazine or globally?
Globally.
Globally, we're still on. We still have some other cost savings going on. We've put in plan -- it's all the way the same thing. When you start cutting plan in costs, you do get the full results a few months later. So even in the magazine, we have -- we're just completing the move of all the -- our employees within our Montréal facility, which can save us a lot of rental costs -- leasing costs on their office premises, which we're going to get, in fact, full effect starting this month. And we do have other initiatives we've put in place that will still going to have effects. So I could not quantify that. But what I could tell you, we're still on the path of the cost saving here.
Okay. Two more. One, I think you've just completed some renegotiations for the TVA Sports subscription fee. Any update on how that went? And is that starting to flow through your numbers in the next quarter?
We're still in negotiations. So we don't have things to conclude yet. But we're going on, on that matter.
Has that been somewhat delayed, where you originally supposed to have these in place by September 1?
Actually, when you are negotiating with the videos, to be honest with you, you always get several months of negotiation before getting results. And in case of TVA Sports, it's quite more complicated, what I could say, though. I don't think you -- we should expect adjustment on the fees or making new agreement by the end of this quarter.
Okay. And last, regarding acquisitions. So you have a couple of acquisitions pending that you noted. There's some discussion that, of course, has 2 French language specialty channels that they couldn't sell the ballot. They may want to sell them to somebody else. I'm just wondering, when you guys stand back and look at using your capital, if you want to call it that, whether its step capacity or your issuing of shares to make acquisitions, these things are going for 7, 8x or so EBITDA multiples, sometimes even higher, and you guys are trading at less than 3. It seems like it'd be impossible for you to create economic value and make more acquisitions. But yet over the past few years, you've continued to make acquisitions. Given where your share price is now, do you and your board have to pause and reflect and say, "Look, if we do have any excess capital, we just have to use it to buy back shares maybe or reduce debt. But making acquisition is just so dilutive on an enterprise value and EBITDA basis that we can't even remotely consider it."
I mean, I could not comment about the shares buy or buying back the capital. This is a question for my Quebecor and my Board of Directors. But we're not -- we're looking at all possibilities to invest or to increase the result and grow this. It means that we could look at some acquisition. We're not putting anything on -- aside.
So even when you're trading at less than 3x EBITDA, you would not -- you'd still consider acquisitions that could be at least double that multiple?
We still have the debt facilities. We have a lot of cash available or debt available to us. We're going to renew our -- in French, we call it [Foreign Language]. I don't remember in English. Our debt facilities has to be renewed in the following months. And we're still going to keep that level, that possibility to use the debt to continue an acquisition if it makes sense to our business now.
And we have another question from David McFadgen of Cormark Securities.
Yes, a couple of questions. So just on the revenue decline at TVA Sports, is that just a function of maybe some seasonality with some subscribers coming off, but then they'll pick up again once hockey has started now? Can you give some color there? And then secondly, why would the subscriber revenues be declining on the other specialty channels? Is this just a function of cord shaving, cord cutting? Any help would be appreciated.
Definitely. We do have the effect of the cord cutting and cord shaving trend that all BDUs are living actually. And when it does affect the distributor, basically it does affect also your subscription bases. So effectively, the cord cutting and the cord shavings reality is facing a subscription revenue stream. That's one of the reasons for TVA Sports' reduction in the revenue. But also we have to develop new ways of commercialize and to get access to the -- to our customer and the subscriber base. And as we told you also last quarter, we are working on to get an OTT services for TVA Sports being available for the subscriber in the following months. So we're expecting to launch that in 2019. And that will help to compensate the cord shaving or the cord-never -- more the cord-never than the cord shaving, but only the cord-never and the cord cutter for our services.
So that's primarily the reason why the other specialty revenue is down and TVA Sports is down. It's just the trend of cord cutting and cord shaving? Or is there anything else happening here?
Mostly it.
Mostly it.
Yes. Okay. And then just a question on the negotiations for the services for TVA Sports. Is there one BDU who's going to set the price that everybody else will follow? And if so, can you tell us who that is and when that might be negotiated?
No. As you believe, it is not working like one BDU is setting the price. There's all the process of demonstrating the value of your services and the real value of it. And it's always negotiation with individual BDUs based on the fact how they are delivering this thing or how they are commercializing it, how they do perceive the value of your service also. So no, it's not one, but pick the price, then all the other has to follow definitely now.
Okay. I thought everybody would be kind of in the same range. But anyways, when do you think you'd have this totally done so we'd have a better idea on the ultimate profitability of TVA Sports? Is it 6 months out? Is it a year out? Any idea there?
We are looking for fiscal 2020 or '21 to turn EBITDA positive. For sure, it will depend on our success in getting the real value of our channel with the negotiation going on right now with all the BDUs. But we expect to succeed, and our plan is 2021.
Okay. And have you exhausted all the regulatory means to try and achieve that?
We -- that's a good question you asked, David. Actually, we have the big -- we're looking -- we do define ourselves -- it's not only for TVA Sports. I think it's all the market, about all the existing system has been the result of an unfair historical regulation process. And I think that, today, a lot of specialty channels are getting rates, which does not reflect the real value of the services. And on the opposite, some of the services, including ours -- most of them is including ours, are underevaluated compared to their real value and the appreciation of the customer and all the investment made on them. So we're looking more at complete rebalancing of the value of the services without adding cost to the customers. So it's a big, big, big -- what I can say, it's a big question of getting the real value for your services and make sure that other services that have been very overvalued over the years for several reasons, which are regulatory or whatever, they were in a monopoly position. And now they're no more in the monopoly position. So there's a lot of things. We have to make sure that we're using very objective criteria to make the value of that. And that's not going to be solved within weeks. That's going to be -- that's going to take time.
[Operator Instructions] And at the moment, we have one more question from Adam Shine of National Bank Financial.
Denis, can you give us an update on what's happening with this new facility in MELS? Is this being pushed off entirely or simply postponed into 2019?
Definitely, it's not pushed off forever. The opposite, we are still -- our plan to go ahead with that. There's a few condition that we have to make sure before making that kind of investment. We have to make sure that all the tax incentive in place will stay in place for the province for several years. And we call that in French, [Foreign Language]. So we're looking to have a confirmation from governmental bodies that the actual tax credit incentive won't disappear the day after you decide to invest that amount of money to get the new facilities and to attract all the major -- international major productions. So definitely, we're still there. When we get those condition -- final condition, and we'll make sure that we could go ahead with that investment.
And if I can add. We believe very much in this project because it's important for the Montréal area and Québec as a whole also. So we expect to pursue the new government to commit to maintaining and, hopefully, enhancing the tax credit.
Yes. Look, I think it's perfectly understandable, and I think you hit that, obviously, in the context of what you say in the press release. But if we go back a year ago, it looked like the thing was all set to proceed. And was the added caution and sort of postponement a reflection of the fact that you anticipated that the election was clearly coming and a changing government was highly likely, and you needed these assurances? Or were there other things that play in regards to this postponement?
At that time, a lot of thing happened at that time, okay? Very shortly after we made that announcement, we also got some other announcement about the construction of the bridge, the new Champlain Bridge and the new train, light-rail train. And a few weeks even after, we get even some advice. And there was a moratory about the land that we cannot construct anymore because of those constructions. So there was a lot of uncertainties about where it's going to go exactly. The new trail, it was going very close to our facility. It was going on the land we were supposed to build. There was also the city of Montréal that was putting a health construction for a new facility, a water -- something water filtering facilities there. So basically, if we were to start that project at the time, there would've been about 3 major construction projects at the same time. That would be unfeasible at that time. And we have to clear up all the uncertainties about the Champlain Bridge and the light-rail project and construction going ahead. Now those things have been cleared up. But since -- at that time also, there was some signal that there was possibility that the tax credit or tax incentive won't stay on a long-term basis. So now that's mostly the last item that need to be resolved for us to make sure that we could go ahead with that kind of investment. You have to remember, we're talking minimally about a $40 million investment just to construct the facility. You have to invest also in equipment that you need to. You don't attract only those production with the studios. You need to tell them that you have the equipment they will need to do their production. So you have to invest in millions of dollars in equipment also. So before going that far, make sure -- we have to make sure we get that commitment for at least several years that the tax incentive, and even if they can enhance those tax incentives, that will be great because we are competing not only with the other provinces in Canada, we're competing with other countries to attract those production. That's why also we're going to be part in November, in the next 2 years, of the trade mission to L.A. with the BCTQ or the Québec film industry with the Mayor of Montréal to promote Montréal and Québec as a great movie location to produce to come. And we want to really attract not only Montréal, but all the province of Québec that it is very lucrative for all our economy. And hopefully, the government will follow on that path. And I think they already made statement before they get elected that they will sustain that. But now that they are elected, we need a real commitment on that.
And just in regards to timing. Let's go with the assumption that maybe they agreed to give you those assurances some time over the next couple of months, that might be a little premature, but let's make that assumption. Are you able to sort of turn around and start immediate work, such that -- I mean, obviously, we're heading into the winter here, but such that you can have this up and running by the back half of next year? Or is that unlikely from a timing context?
Best time will be right now. Because best time -- it is in wintertime that you have less production into our facilities. And you could start to build and what we call to move to put the poles, which creates a lot of noises. So if we get it in June when you have all your studio full and they are filming, you cannot start the construction at that time. The best timing is probably from -- not now because we are actually Midway into our film production, but let's see, when they're going to hand it beginning of December, that's going to be the best time to start the project. Of course, now, we have to update the plans. We have to get another approval from the town of Montréal. There's an office that you -- all the urban office that you have to get the permits. So there will be, let's say, a few months delay to get those permits back and to get -- to finalize the plan. But all that project was ready to go. To be very honest, we were ready to go. It was approved by the board of TVA as when we announced it. It's really the fact that everything falls down before all those uncertainty related to the construction going around that. At some time, we were not even sure that we were getting some construction that they were building out to our existing facilities. So at that time, you could remember -- you could understand that you need to react and get the clarity about all those things.
Right. So look, I'm not going to hold you to it, Denis, but at the earliest, when is this plant -- or facility, sorry, up and running, do you think, at the earliest?
It will be about, let's say, between 9 to 12 months after we get to start the construction.
Okay. So really, we should be thinking about this as CapEx perhaps during the course of 2019. But in reality, revenue and business contribution in 2020, unlikely earlier.
Yes.
Okay. And do you want to -- is there any CapEx that you can give us? Let's exclude the $40 million from the equation. How should we think about the CapEx in 2018 and 2019 ex the facility?
No. It's not only the question, it is the timing when you're submitting your budget to your Board of Director and you're not getting it approved yet. So I don't want to put it. But we're always around the same amount of level -- the same amount of money that we've been adding the last year. We're about $20 million to $25 million annually. Hopefully, we could then be in a position to sustain that and get the approval of our board about it.
Thank you. So at the moment, that was the last question in the queue.
All right. Thank you, everybody.
Thank you. Have a good day.
And see you next quarter.