Cogeco 2011 Annual Report Download - page 45

44 COGECO CABLE INC. 2011 Management’s Discussion and Analysis (MD&A)
Investing activities in the fourth quarter of 2011 amounted to $261.1 million compared to $107.8 million for the same period the year before.
Fourth-quarter fiscal 2011 investing activities include the acquisitions of Quiettouch and MTO for a total of $132.3 million. The remaining
increase of $21 million is mainly due to the following factors:
• An increase in support capital spending stemming from the construction of new facilities and the acquisition of new service vehicles
in the Canadian operations;
• An increase in customer premise equipment spending mainly due to the timing of equipment purchases to support RGU growth in
the Canadian operations. This increase was partly offset by the decrease in customer premise equipment spending reflecting lower
RGU growth in the European operations.
In the fourth quarter of 2011, Cogeco Cable generated free cash flows of $24.4 million compared to $19.2 million in the prior year. The increase
in free cash flow is the result of an increase in cash flow from operations outpacing the increase in capital expenditures.
In the fourth quarter of 2011, Indebtedness affecting cash increased by $10.6 million, mainly due to the business acquisitions for a total amount
of $132.3 million and the dividend payment of $9.7 million described below, partly offset by the cash inflows of $66.2 million from the changes
in non-cash operating items, the decrease in cash and cash equivalents of $40.6 million and the free cash flow of $24.4 million. Indebtedness
was reduced mainly through net repayments on the Corporation’s Term Revolving Facility of $11.2 million. In the fourth quarter of 2010,
Indebtedness affecting cash decreased by $53.4 million mainly due to the inflows generated by changes in non-cash operating items of
$67.4 million and the free cash flow of $19.2 million, partly offset by the increase in cash and cash equivalents of $21.8 million and the payment
of dividends totalling $6.8 million described below and an increase in deferred transaction costs of $5.2 million. Indebtedness reduced mainly
through a decrease of $44.7 million in bank indebtedness and net repayments on the Corporation’s term and revolving loans of $7.6 million.
During the fourth quarter of fiscal 2011, a dividend of $0.20 per share was paid to the holders of subordinate and multiple voting shares,
totalling $9.7 million, 42.9% higher than the dividend of $0.14 per share, or $6.8 million the year before.
Fiscal 2012 financial guidelines
Cogeco Cable’s fiscal 2012 preliminary financial guidelines, as issued on July 6, 2011, have been updated to reflect the acquisitions of
Quiettouch and MTO completed in the last quarter of fiscal 2011. Cogeco Cable now expects to achieve revenue of $1,455 million,
representing growth of $94 million, or 6.9% when compared to fiscal 2011. The guidelines take into consideration the current uncertain global
economic environment. In Canada, while the recovery phase seems sustainable, recent reforms to the mortgage market and further tightening
from the Bank of Canada will nonetheless constrain housing market activity and should coincide with a contraction in consumer spending. 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. In Portugal, during the third quarter of fiscal 2011,
the unfavourable economic environment continued to deteriorate, with the Country ultimately requiring financial assistance from the
International Monetary Fund and the European Central Bank. As part of the negotiated financial assistance package, the Portuguese
government has committed to financial reforms which include increases in sales and income taxes combined with reductions in government
spending on social programs. These measures are expected to put further downwards pressure on consumer spending and the rate of growth
for our services has diminished and is expected to continue to slow down in this environment. These guidelines also take into consideration the
competitive environment that prevails in Portugal and, 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 from the Canadian operations should increase as a result of RGU 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. Canadian operations revenue will also benefit
from the impact of rate increases implemented in April 2011 in Ontario and Québec, averaging $2 per Basic Cable service customer and, in
October 2011, averaging $1.75 per HSI customers. Cogeco Cable’s strategies include consistently effective marketing, competitive product
offerings and superior customer service, which combined, lead to the expansion and loyalty of the Canadian operations’ Basic Cable service
clientele. As the penetration of HSI, Telephony and Digital Television services increase, the new demand for these products should slow,
reflecting early signs of maturity. Canadian operations’ revenue will also benefit from the recent acquisitions of Quiettouch and MTO.
Management anticipates that the decline in the customer base of the European operations, which began during the second half of fiscal 2011,
is likely to continue in the next year. Net losses are expected in Basic Cable and Digital Television service customers partly offset by net
additions coming from HSI and Telephony service customers. Management is expected to maintain its retention strategies and marketing
initiatives implemented over the last few years, but the economic difficulties being experienced by the European market at large and the
competitive environment which has plagued the Portuguese telecommunications industry for the past years are continuing to negatively impact
the financial results of the European operations. As a result of the economic environment in Portugal, revenue in local currency is expected to
decrease in fiscal 2012. For fiscal 2012, it is anticipated that the Euro should be converted at a rate of approximately $1.35 per Euro, compared
to an average rate of $1.3735 per Euro in the 2011 fiscal year.
As a result of the acquisitions combined with increased costs to service additional RGU, inflation and manpower increases in the Canadian
operations, as well as the continuation of the marketing initiatives and retention strategies launched in Portugal in the past few years,
consolidated operating costs are expected to expand by approximately $60 million, or 7.6% in the 2012 fiscal year when compared to fiscal
2011.
For fiscal 2012, the Corporation expects operating income before amortization of $600 million, an increase of $34 million, or 6%, over
fiscal 2011, reflecting revenue growth which is expected to exceed the increase in operating costs. The operating margin is expected to reach
approximately 41.2% in fiscal 2012, compared to 41.6% for the 2011 fiscal year.