Q4 2019 Earnings Call
Quarter 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr., Petrobras <unk> Senior Vice President and Chief Financial Officer of Cogeco, Inc. and Cogeco Communications Inc. Please go ahead Mr. we may.
Good morning, everybody and welcome to our fourth quarter earnings call.
Joining me today architecture theme of yet another he talmer instead of the night. So before we begin this call as usual I would like to remind listeners that the color subject to forward looking statements, which can be found in the press releases issued yesterday and I'll turn the call convert to for the JV.
Now see but it's and good morning, ladies gentlemen, and shareholders of Cogeco communication and Cogeco, Inc.
Thank you for joining us to discuss the results of our fourth quarter and fiscal year ending August 31st 2019.
Let us begin would the key accomplishments.
Which have been transformative and our strategic vision for the future.
We have reached several key milestones, which generated strong shareholder value and position could you go well for the future. We completed the stabilization of our new customer management system at Cogeco connection early in the year.
And that started to leverage its capabilities to further improve the quality of the customer experience and to enhance our local marketing strategies through targeted offers that meet customer profiles and segments.
We continued our transformation journey with more digital services.
And the digital initiative.
And the implementation of than you CMS I've enable and operational optimization program at Cogeco connection in the first half of the fiscal year.
Which generated about 10 million in cost savings in fiscal 2019.
And 14 million no no no annual run rate basis.
At Atlantic broadband, we generated an EBITDA growth of 6% in 19 and strong customer growth and the second half of the fiscal year.
As we secured several large bulk contracts in Florida.
And better manage seasonal customers.
We made some capital allocation choices.
With our decision to sell Cogeco Pier one.
An attractive price and launching a share repurchase program.
The sale of Cogeco Pier, one allowed the organization to refocus on its core broadband services business.
And provides greater flexibility to pursue organic investment.
And the acquisition opportunities.
We remain very optimistic on wireless as this year Tc public hearings on the future of mobile and specifically.
The provision of mandated to wholesale access will soon begin in February 2020.
I said.
It's also issued the decision in July creating tier five service areas.
Which could be used in future spectrum license auctions.
This would allow cogeco too we more focus and use its capital efficiently if its participates in future option auctions.
Cogeco believed that the hybrid mobile network, operator model or H. Eminem it submitted to this year Tc.
Should meet the governments policy objectives of increasing competition.
While safeguarding investments into the communication networks and promoting innovation.
With changes to the leadership team during the year, we refined our strategic priorities.
We charged to deliver an exceptional customer experience.
Through continuous innovation of our service offering.
Grow our footprint and obtain our fair share of the market than current segments.
Optimize our cost structure with group synergies.
And operational effectiveness with highly collaborative culture.
Leverage our leadership and digital technologies and client relationship management.
Continue building a strong brand.
And.
Creating an exceptional employee experience to enable the holders.
Speaking of changes to the leadership team.
We just announced the appointment of Frank vendor books.
To the position of President of Atlantic broadband.
The effective next Monday November Ford.
Frank strong strategic marketing knowledge and track record of successfully delivering results.
Particularly in industries.
That are highly customer focus.
Make him an ideal candidate to take the leadership roles at Atlantic broadband.
Yes.
You will bring a strong customer experience focus.
As abbey amplifies, its marketing activities and reinforces brand.
Mr vendor posts joint Atlantic broad brought them from KPN, a Dutch multi service telecommunications, operator with more than 7 million customers in the residential and enterprise markets.
Where he served.
As Chief commercial officer from 2015 to 2018.
Before joining the telecom company Mr. vendor both spent several years.
And the airline and hospitality industries.
Having held senior leadership role for top organization.
Including British Airways.
And Intercontinental hotels.
Where he worked more than 15 years into United States.
We also have just initiated.
A brand refresh across the company.
Cogeco connection and Atlantic broadband.
Will gradually launched or campaigns using during new visual platforms over the next few months.
The brand refresh.
Centered on the customer.
The people and the human touch.
It's reinforces the notions.
Debt at the art of our mission.
The accessibility and proximity with our customers and communities.
As well as our focus on customer service and trust.
The new visual platform is also modern and dynamic.
Let's move to consolidated financial results.
Note that the results from continuing operations exclude cogeco peer ones result.
And all growth figures our express in constant currencies.
Reported annual revenue reached two point $33 billion, representing an increase of 6.8%.
EBITDA.
As reach 1.1 billion rising, 8.5% and generating an industry leading margins of 47.5%.
Superior EBITDA growth was achieved mainly by the additional four months contribution of from Metro Cats, but also mid single digit organic growth that they BB and low single digit growth at CCX as expected.
First quarter revenue is up 2.7% and EBITDA of 4.3% when compared to the same period last year.
Reported revenue reach.
583.7 million and EBITDA 275.6 million generating a margin of 47.2.
Cogeco connection achieved an EBITDA growth of 3.6%.
Customer trends are now back to normal and have significantly improved compared to last year.
Atlantic broadband, 4.1% EBITDA growth was inline with last quarter.
And reflects higher marketing expense into second half of the fiscal year.
More activation of bulk properties in Florida.
An increase marketing spending as paid off.
As primary service unit net addition of 7431.
Once again more than double in the quarter compared to last year.
The quarterly dividend has been increased from 52.5 cents to 58 cents per share representing a 10.5% over increase over last year.
Let's now, let's now look at the individual components.
But could you connection Rps you trends continued to improve.
Thanks to the ramp up of marketing and sales effort.
Cogeco connections revenue remained essentially the same compared to last year's quarter, mainly as a result of rate increase upset by trailing impac of declines in residential video and telephony customers in Q4 2018 in Q1 2019 the peer.
Good where we transitioned to our new CMS.
Commercial services revenue growth continued to be strong at 6% and represents 10% of cogeco connections revenue.
As customer trends that stock delays.
We expect overall low single digits revenue growth that cogeco connection for fiscal 2020.
Good good cogeco connections EBITDA.
Has grown by 3.6% in the quarter.
Mostly as a result of lower workforce expense, resulting from an operational optimization program into first half of fiscal 2019.
There is room for further margin improvement as we pursue our digital transformation.
In the last year, we have introduced a new self installation option for our phone product.
And then sorry, cogeco dots year website.
As well as provided.
New self serve functionalities.
Among other initiatives pursued in fiscal 2019 E building has increased by 85%.
NPS you additions through online channels have increased 50%.
Our evolution towards Internet protocol division or IP TV.
Which will provide highly customizable video content.
A voice activated control.
Wireless the enabled equipment and more.
Is underway with pre launch preparation.
Our media first IP TV platform is expected to be progressively launch at the beginning of calendar year 2020.
With plant availability to most of the footprint in the first half of the year.
Media first we'll then become the new standard video experience for new customer activation.
During 20 in fiscal 2019, we have focused on leveraging our superior internet speeds and expanded our gigabit offer offering.
To reach about 60% of our footprint.
To provide enhanced value for our customers.
We have again.
The increase internet speeds in October with no changes in pricing.
On August 15, CFTC issued its costing decision to set final rates for aggregated to wholesale Internet services for resellers.
Significantly lowering the interim rates it that previously fix in 2016.
And applying the new rates on the retroactive basis.
On September 30 September 13.
Digital communication.
Along with other to telecommunication service providers.
Jointly filed an application for leaf to appeal to this year DC.
Order.
To the federal court of appeal.
Two weeks later Dfc a granted an entrance stay with the result for the time being of not having to implemented a new rates nor to make the retroactive payments estimated at 25 million for the corporation as of August 30, Onest 2019.
The corporation as therefore, not recorded the impact of the new reduced rate in 2019 financial statements.
Atlantic broadband revenue and EBITDA increased by 6% and 4.1%, respectively, mainly due to organic growth in upsizing residential internet and commercial services.
Rate increases and the ramp up of our Florida expansion plan.
In fiscal 2020, we expect mid single digit revenue and EBITDA growth.
While we expect revenue growth to be fairly consistent throughout the year.
We expect EBITDA.
Growth to be lower in the first half of the fiscal year end to pickup in the second half mainly due to the timing of various sales and marketing initiatives.
Thats were launched this fall.
We will increase marketing spend in fiscal 2020, launching Atlantic broadband omni channel marketing.
Designed to build increase awareness among residential and business prospects.
And for existing customers with traditional digital and social platforms.
Market specific initiatives.
And customer segmentation are being further develop to optimize campaigns and elevate response rates.
The impact of increased marketing spend should be partly offset by delivering more services through digital platforms.
A new online shopping cart was launched in September 2019 through a service gateway.
Which allow customers to select new services modify existing ones and scheduled and installation appointment without the need for agent assistant.
This service has been integrated in our online account management portal.
Which also allow customers to view account information make bill payments requests ehealth and troubleshoot equipment.
And more.
Meanwhile, the implementation of a new workforce management platform.
Which also leverage various digital tools.
We'll improve customer communication as well as operational efficiency and productivity.
The PSC trends in Q4 were strong.
Largely due to activation of both properties in Florida.
But also due to the general traction gain from increased sales and marketing efforts.
In F 20.
We continue to extend our network in Florida.
And focus on securing more long term bolt contracts.
Hi, Atlantic broadband as achieve its goal of offering one gig internet services and over 90% of its footprint.
And we'll continue to expand to service, where there is sufficient demand.
During the fiscal year Abbey also introduce major video and enhancements through its.
Tivo platform.
Providing ease of use for customers.
Enhancements.
Included in Dx included the expansion of voice control.
The launch of Amazon Alexa functionality.
The launch of a new mobile app for multi screen viewing.
And the migration to IP video on demand.
Let us now take a look at Cogeco, Inc.
In the fourth quarter.
Consolidated revenue increased 2.7% and EBITDA, 4.1%.
Despite the challenges presented by the advertising market for some time.
The Cogeco media team as work hard to ensure ratings remain strong at our radio stations.
We have completed the integration of the 10, New radio stations acquired last November .
And our key Montreal stations have continued to benefit from high ratings during the quarter.
We have been managing our costs tightly in the media sector in order to ensure that we continue generating attractive free cash flows from the business.
To maintain our strong market share many stations I've also recently enriched or programming.
In addition, as we continue to increase our presence in digital digital world. The Cogeco media team launch a mobile application, providing listeners with access to it stop rated content.
At Cogeco inked a quarterly dividend has been increased from 43 cents to 47.5 cents per share a 10.5% increase over last year.
We are maintaining our fiscal 2020 financial guidance at the levels disclose in July .
On a constant currency and consolidated basis Cogeco Communications Inc. expect.
Finally in fiscal 2020 revenue to grow between two and 4% and adjusted EBITDA between 2.5% and 4.5%.
In fiscal 2020 their capital intensity ratio.
Is expected to be slightly higher than fiscal 19, but is still expected to remain below the 20% level.
Higher capital expenditures are expected at HBV due to the continued Florida network expansion and additional investment.
In our network infrastructure.
Stable capital expenditures are expected at Cogeco connection.
Free cash flow on a constant currency basis should grow by 5% to 11%.
Mainly as a results of increasing EBITDA and declining financial expenses.
As you can see.
2020 looks very promising as we will continue to pursue profitable organic growth.
Through providing and then services to our customers.
Growing our internet and commercial services market shares.
Expanding in selected areas such as such as Florida.
And preparing a discipline entry in the mobile market.
We continue to look for attractive acquisition opportunities and are proactively engage into Canadian wireless regulatory consultants.
And now Pattison I will be happy to answer your questions.
Thank you at this time as you would like to ask a question. Please press star followed by the number one on your telephone keypad. If you are using a speakerphone. Please lift your handset before pricing any Keith.
Our first question comes from the line of Jeff San Fran Scotia Bank. Please go ahead.
Good morning, Thanks for the opportunity to ask questions.
Just start with the us broadband.
PS use.
The loading this quarter was a little bit lighter than last year with.
Even though you saw some increase in some of your both contracts can you talk a little bit about Dod and.
Whether this is related to timing or how should we think about.
The unit growth and maybe if you can just give us a little bit of color in terms of the.
Gross loading or churn.
Within within that particular segments and then second question is just on the margins.
I guess based on your guidance it looks like Youre expecting some margin improvement in 2020.
It does sell like that.
Canada is going to go through some improvement and may be us because of some of the higher costs, maybe gone the other way, but maybe you can just help us clarify dots in how we should think about the segment margins. Thanks.
Sure. So on the PSC is in the US actually so we have the discussed on last call that we're expecting in the fourth quarter to have.
Some larger properties in Florida being added on saw the ideal happen.
So that basically push the video our customers significantly higher slow was due to this.
Normally if you like if you look at the last few years in this quarter and only have we have a small loss of video customers, but it was it was a plus this time.
Going forward for video you should expect should not expect in the coming quarters larger bumps like you've seen in this quarter.
And in Q3, as we've discussed previously as well.
We have the seasonal reconnects, we do expect going forward that we'll have a bit less seasonal effects and the numbers.
That being said this you're referring to some softness in Q4 versus last year, you're probably referring to.
Internet only who are the internet PS used.
There were a little softer than last year and.
I would say normally we would expect something a little higher than what we have in Q4, but those are not major major changes that would be true for phone as well.
So I'll move onto to margin. This step answers your question.
Yes, I guess just quickly follow up but I mean is or is.
What was the quarters.
Weakness related to was it.
Gross sales or was there some thing related to churn.
Just trying to maybe help us out there.
It's I would point to anything particular and again the changes are not.
That much actually the additions in if you look at Internet PS use were higher than what they were.
In two years ago.
They were.
Probably lower than three years ago. So I mean from year to year. The variations are not major just a few thousands up or down.
So it's always a mix of some customers that churn unsung some level of.
Acquisitions.
We're trying to always manage also the net ARPU lose.
The margins to make sure that we are not just adding PS used but we're adding good PS use unprofitable businesses. So nothing in particular to that there okay.
On the margins, we do expect.
Small increase actually in both countries.
Next year.
It's a mix of different things so we have obviously.
We manage our costs.
So that was referring to the number of Digitization projects. We have on the go so that does help than in costs.
As we grow the topline as well obviously the word generally able to.
To manage this especially in the us on how the topline growing faster than.
Sorry, as the it's a larger base, so we're able to grow the EBITDA faster than the the topline.
But.
I would not expect a major change in the coming year, but a slight increase in both countries.
Okay. Thanks Patrice.
Your next question comes from the line of my her Yaghi from Deutsche Bank. Please go ahead.
Thank you for taking my question on just.
First start with your guidance and.
I am.
Trying to figure out what.
Separates or what differentiates here cable assets from those off let's say Shaw Rogers, even be CDN tell us.
They are they all had a positive.
Just as they switched to for a 16.
Let's see if I'm trying to figure out.
These companies, even though they have wireless operations of the did benefit on their wireline business from the switch to buy a for a 16 in your Mdna. You mentioned that you don't expect to see a material increase and the era, but the or.
Other metrics related to the switch so I sort of 16 I'm trying to figure out why is this the case.
Okay. So the.
We thought it would not be materials with about $6 million. That's what we expect to be the increase in EBITDA next year, it's a mix of Ccxone Bebe.
So it is lower definitely than what you've seen with other players.
The main reason is a is because of wireless without it has to do with leases. So.
Our wireline company like we are typically operates less stores and then a wireless company.
And when a wireless company does wireline as well I would presume that a portion of the leases are attributed to wireline.
So where again if you only operate wire line you will make a choice to have less stores, it's not necessary to have to carry those stores. That's probably one of the reasons I would not be able to tell you necessarily what.
What was done in detail that the other companies, but that would be my.
My thinking on the other thing would be also obviously if the.
Call centers are located in lease.
Areas versus owned buildings that makes a difference.
We owned real estate I would say the bulk of our employees are owned real estate, so that probably plays into it as well.
Will you be providing.
As the year progresses.
The actual split off I have for us.
For a 16 versus I as far as 16, so that we can track.
The French differential.
Counting method that you're doing.
Well, given that's only 6 million for the whole company I don't think we're going to be doing it.
It's really immaterial in the quarterly basis.
But if if there were a change in our estimates going forward and material one than with the with we would highlight as if we are for some reason were wrong in our estimate, but it's it's really not that material number at this point.
Okay, and the only reason I'm asking is that if they take a company like Shaw. They had 155 million dollar impact and they say 55% of it as wireline, even though the desegregate alder wireless stores to the freedom brand this would be hard too.
Put any kind of retail stores on on the wireline business in terms of leasing at lease accounting so.
There's still a significant gap is there.
Eight different accounting that you're doing for attachment pulls on things like that.
Might make a difference.
It's possible I you will have to ask the other companies, but I I. We did see reports of that came out and that appeared to be the one that was the different especially for wireline I think the other one were much smaller on the wireline piece.
So it is possible within the rule there are certain types of leases like infrastructure or pull attachments that could be treated.
Depending on where the company chooses and treatment could be going one way or the other.
So that could be or reasons for this particular question.
Okay.
Okay Thats for sure so I'm, Tom stuff, you're U.S. operation was definitely in all of your leverage is declining on a quarter on CCH Corp. side can you tell us maybe update us on leverage off your us.
Business itself.
And where do you see it.
Okay.
The reduction in the leverage or do you see it going before you become more aggressive in terms of pursuing M&A.
Yes so.
In fact, you with a number of TBD, but it's it's sub five.
It's it's probably four and a half first times EBITDA approximately.
I would need to calculated but it's in that area.
It has come down since we made the acquisition the metro cash as we were close to I think five 5.4 times EBITDA.
We have ample capacity right now to to be able to make acquisitions in the us.
Because we have we basically have facilities that are available right now and we actually have cash on the balance sheet.
So and it would be very easy for us to to grow.
Basically our leverage in the us if we wanted to.
So this is not really a gating item for US we are always actively looking at additional acquisitions in the us on the could be substantial amounts we could put on the structure there if ever we needed to we could also.
Contribute additional equity from the Canadian entity into the US entity, if if it's where for a bigger acquisition and we have basically tapped out the.
The leverage capacity in us and unconfirmed now that it's actually four and a half times is what we have in U.S.
Great, Okay, and when it comes to your U.S. cable operation you.
You are you mentioned a few times the your interest in.
Playing our offering wireless system NVNO opportunity presents itself, but are there other are there.
Other opportunities and then you and the Canadian.
I'm business to expand into.
Segments that you're currently not and in rural areas for example, or things like that.
And there it's believed in in the U.S. our.
Todd top priority number one priority right now will remain on.
Looking for acquisition and expanding our footprint.
When we will.
Deploy a kidney wireless on the Canadian side, we will build it in such a way that it will benefit the a BBU as operation.
Entity.
But thats that's future. So we have to stay focus on growing the footprint us acquisition in the us while we sort out the Canadian wireless future build a platform and eventually look for synergies it will be in the it in that playbook and not or other.
Okay. Okay, great. Thank you very much.
Your next question comes from the line to Matthew Harrison from Bank of America. Please go ahead.
Thanks for taking the question.
Just wanted to stay with the U.S. expansion for secondly could you.
If a lot of experience now operating the U.S. across diverse markets up and down to the east coast.
Wondering if.
After these years of operating you've kind of narrowed your focus at all on terms of.
Where you would want to expand or what what segments you want to expand into I'm thinking about how Florida always seems to be at the forefront of conversations of growth in the U.S. and.
I'm wondering what your thoughts are there and just separately kind of more detailed on the bulk activations in Florida, you just mentioned video.
There are no broadband associated with the bulk activations or is that kind of a future opportunity to go into or is it depend on the contract I just any kind of.
Insight would be helpful and helping to understand that thanks.
Sure. So in terms of acquisitions, we're actually looking throughout the U.S. So we don't have and the particular region that.
That we're limiting ourselves to add to the extent. This we're a very small acquisition then that would have to be very close to where we operate.
But larger ones.
Would could be anywhere in the U.S. So.
We have the.
Our operation is managed from an area very near Boston.
And then we have regions that are controlling basically all they were in 11 states. So we have regions I can controlling different states.
So we could add another region in the future if we wanted to.
In terms of the bulk activation so the way. It works is when you sign off.
A tower or or gated community you can have only video you can have only internet you can have the two of them or sometimes even the phone.
And what happens so a large when we signed up was was video only and what happens is then we so entering that then phone and other products directly to the consumer.
But it doesn't happen in one quarter typically takes a bit of time too.
Especially in Florida as people are not always there physically in the summer.
So it takes a bit of time to sign up the additional services.
Great. Thanks.
Is there any additional questions at this time. Please press star followed by the number one on your telephone keypad. Your next question comes from the line of drew Mcreynolds from RBC. Please go ahead.
Thanks, Thanks, very much two questions first on the TV business.
I think certainly cogeco has pretty good glimpse of cord cutting and cord cutting rates across Ontario versus Quebec.
And then you got a good ones into the U.S.. So maybe just an update on what you're seeing on.
The TV cord cutting side, and then secondly for U sleep on the hybrid and I know model.
Certainly our perspective and Weve.
Road on this has been that.
It seems to be it really reasonable solution out there.
For.
For a lot of boxes that need to be ticked by different stakeholders.
Your tone seems a little bit more positive today, then what I've heard in the past wondering if you're at all able to give us an update on are there any conversations you've had.
With the government or the CR GC.
And then as a follow up to that.
Are you as you alluded to I think in your submission against.
A pure reseller pure NVNO model.
Or is that something if you don't get a hybrid that you'd still be interested in pursuing.
Thank you.
Well thanks drew.
That need to start with your first question on the.
Cord cutting.
Personally I I find that this term has been abuse.
Too much by analysts in the marketplace with customers are looking for is complimenting different services altogether. So they are looking for content. Some of it is available on linear.
Systems other.
Our available at the time, you want to watch on.
Either pay per view or subscribe Vo D oar revealed the but also with Deo TT platforms now even more choice coming and this is where cogeco focus we're developing platforms, where where Netflix where you to where linear where vo d. and subscript subscribed.
The all these different sources of content.
All.
Integrated into very simply is simple to use interface. So.
Through your remote you have access to the different sources.
And I think thats, the the power of aggregation.
And Thats, how we we please our customers. So it's not about cutting anything it's about adding different sources of content through the same.
Platform.
It's really how we see it now for your second question on a neighborhood.
And I know model.
I would I given your question I think you.
Already understood with we're proposing with we've put in front of this year DC.
That process as started a couple of months ago now.
If you picked up anything in milestone I think it's only because the.
Public hearings are finally coming.
They've been delayed a little bit because the competition Bureau needed more times to actually compute.
Data on on additional region or regional views.
As I understand it so now the audience our in February .
We're very excited to participate I think we have a very good model good proposal that will actually.
Serve in maintaining.
The network investments in the industry.
Promoting innovation as well as increasing competition. So I think we are striking all of the angles. The government than this year DC is looking for.
And again might on must be simply.
The different because I'm excited for these upcoming audience that our clothes.
And as further resellers, we've we were always clear we.
Don't see in any markets work.
Wireline wireless or other markets.
Resellers and Rebuilders.
That aren't do not intend to invest an ecosystem as benefiting the ecosystem. So if you want to be part of an ecosystem.
You have to eventually invest.
To our views it's okay to use some wholesale access to others to start but this as to also have an end.
So you promoting competition is one thing, but writing on others for ever is a very different thing and we're not for that neither the four rebuilders or simply Reis resellers that would stay there so the letter of investment.
Is key.
But at the same time, you have to let new players.
Entered the system for investments.
I hope that answers the three questions.
That does thank you.
There are no further questions at this time machine, we may I turn the call back over to you.
Okay well. Thank you everyone. Then we're going to be back in January with our next results so pretty call us in the meantime, if you have any questions. Thank you.
Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.