Q3 2020 Cogeco Inc & Cogeco Communications Inc Earnings Call

[music].

Okay and welcome to the Cogeco, Inc. and Cogeco Communications Inc. Q3, 2020 earnings conference call.

Today's conference is being recorded at this time I'd like to turn the conference over to Mr., Patrice Omega Senior Vice President and Chief Financial Officer of Cogeco, Inc. and Cogeco Communications, Inc. Please go ahead Mr. Omar.

Good morning, everybody and welcome to our third quarter Conference Girl, which I'll cover with footage that they are so we'd before we begin this call I would like to remind listeners that the color subject to forward looking statements, which can be fun press releases, we issued yesterday and I.

And I'll turn the call over to fit it's okay.

Mr. About this and good morning, everyone. Thank you for joining us to discuss the results of our third quarter ending may 31st 2020.

I'd like to start by highlighting the outstanding work performed by our teams across cubic, Ontario, and the U.S. East coast, which enables cogeco to provide high quality connectivity services and increase access to information and entertainment for our customers since the beginning.

Of the covert 19 crisis.

Cogeco subsidiaries of quickly adapted their services through the implementation of personalized measures to offer customers more flexibility.

While encouraging them to make use of our online services, including self serve self installations.

And self repairs.

In the medium term, we intend to capitalize on a number of initiatives.

Which were implemented during the confinement period to accelerate our digital transformation journey.

As we expect that many customers will continue to use our online tools after the pandemic.

Cogeco was particularly proud to have responded to the increased needs of its customers.

Thanks to the capacity.

Reliability and quality of its network, which experienced significant data traffic peaks during the confinement period.

The increase still they're working.

Online educational.

And digital infotainment consumption.

Despite having offered numerous relief initiatives to our customers such as temporary discontinuance of late fees.

And data overage fees.

The third quarter financial results of Cogeco Communications were only modestly impact by the Covidien 19 pandemic as we experienced strong demand for our internet product.

And the lower level of customer Activations, and Disconnections, which contributed to lower operating costs.

However, the third quarter financial results of Cogeco Inc.

We're more impacted due to its exposure to the media business as radio advertising revenue was significantly impacted by the pandemic.

On a positive note, we are seeing modestly improving trends in the radio sector with the gradual easing of confinement measures, helping the retail sector and the economy.

In line with its corporate social responsibility engagement Cogeco was very proud to receive two prestigious recognitions over the last month.

Could you communications has been name to corporate nights 2020, best 50, corporate citizens in Canada for a third consecutive year, placing it among the can eat incumbent needs, which are setting the standard for sustainable growth leadership.

In addition.

We were honored.

To receive the carrying company certification from imagine Canada.

Which recognize our philanthropy quirk and social commitment.

We have always drives to support our communities and are proud to join a network of leaders who are setting the standard for corporate philanthropy in Canada.

Let us continue with Cogeco communications latest strategic development.

Cogeco connection was proud to announce on May 21st that it was selected for 11 infrastructure projects as part of the code and to cubic government new connected regions program.

To accelerate access do I speed internet in underserved regions.

These projects, which are part of the first space of the program.

We'll make it possible to connect more than 15500 homes located in 15 regional municipalities across get back.

These plan network expansions are in addition to the January announcement that Cogeco connection in conjunction with Swift and non for profit municipality led broadband initiative.

We'll deploy its networks to 3600 than 50, more homes and businesses into Wellington and Lampton counties in Ontario.

Cogeco connection as submitted several additional infrastructure projects located in Quebec, and Ontario, as part of the CRT sees broadband fun program.

It also expects to submit other projects under the new improving connectivity in Ontario program.

The federal government Universal Broadband fund program.

As well as for the next call for projects with the Swift program.

As part of our strategy to extend our regional and rural Internet coverage.

And further reinforce our position to enter the wireless market and the disciplined manner.

Cogeco connection acquired on May Onest eat at like.

A company that operates as a full steadily communication service provider in south and get back.

Using a combination of fixed wireless and fiber to home technologies.

As part of the transaction.

Would you go acquired 15 excuse of 3.5 gigahertz spectrum licenses.

The 3.5 gigahertz band is globally recognized for the deployment of Fiveg technologies.

You did ex network spectrum licenses.

And workforce expertise.

We'll be complementary assets.

They cover a large region inner old south filter in Quebec.

And serve approximately 2000 customers.

This transaction represents the third acquisition of spectrum licenses by Cogeco over the last two years.

Speaking of the Canadian operations various strategic objective. We also announce the appointment of synthetic pedal to the position of president of Cogeco connection effective September offers.

If you did it gives a season and dynamic senior executive with over two decades of leadership, but leader at leading telecommunications and financial services companies such as T mobile.

Vodafone Rogers and capital one.

His proven track record and developing I performance teams.

As well as his extensive experience in marketing branding sales and customer service will be strong assets as cogeco connection pursues its grote and innovate.

To deliver distinctive customer experiences.

For the then it was most recently chief commercial officer at T Mobile Poland.

Where he led the team of 3000 people, serving 7 million customers.

He successfully build the company's commercial portfolio from the ground up.

Refresh the brand.

Substantially improve the client service approach and fostered strong employee engagement.

It will be based in our Burlington, Ontario office.

Moving onto M&A is the Tames Valley communication acquisition.

Was close on March 10.

For an amount of U.S. 50 million.

The upcoming launch of and then bundles and the Tivo video platform on this footprint.

Is expected to contribute to increase penetration services.

Given that teams valley is contiguous to our existing Connecticut operations.

We also expect to generate operating efficiencies.

We continue to look for further value accretive acquisitions in the U.S. to accelerate our growth.

As we enjoy a solid financial position at both Atlantic broadband and Cogeco Communications.

Given a net leverage ratio at 2.7 times net debt to EBITDA.

Excess cash at two and a 294 million pro forma.

The 200 million debenture that we will redeem on July 20 it.

Unused revolving credit facilities of close to a billion.

And significant positive free cash flow generated each quarter.

We have decided to renew our normal course issuer bid to repurchase up to 1.9 million shares over the next year.

Or 10% of the public float.

Note that we repurchased 90% of the maximum permitted shares for an amount of <unk> hundred 75 million during the last program.

And we continue to be active under the current program.

Let me move to an overview of our consolidated financial results I'd Cogeco communications.

For the quarter reported revenue as reached 600 than 5.8 million.

Increasing by 1.1% and constant currency.

It did D.A. has reached 294.7 million.

Increasing by 1.9% in constant currency.

And resulted in an EBITDA margin of 48.6%.

Atlantic broadband revenue and EBITDA growth were partly offset by modest decline at Cogeco connection.

Capex intensity at 20.4% was higher than the same quarter last year due to higher capital expenditures at both Cogeco connection and Atlantic broadband.

Although we expect full year expenditures to be in line with our initial expectations.

The quarterly dividend as been reconfirm at 58 cents per share.

Let us look now at the financial results of the individual components.

Cogeco connections reported revenue.

Has declined by 1.6% relative to the same quarter last year.

Mainly as a result of video customer losses, and lower net pricing from consumer sales, mostly as a result of the carryover effect of product bundles being more actively promoted from the fourth quarter of fiscal 19 to the second quarter of fiscal 2000.

The revenue decline was partly offset by the continued growth in internet services customers and rate increases.

When compared to the second quarter of the current fiscal year.

Revenue declined by a modest 0.5% due to the impact of the pandemic as we did not charge data overage fees.

And credits were given to customers subscribing to sports packages.

Cogeco connections a bid the declined to 1.1% relative to the third quarter of last year.

Mainly as a result of lower revenues and higher bad debts due to the economy downturn related to covert 19.

Partly offset by lower marketing initiatives.

And installation cost as customers were largely performing self installation and remote repairs during dependent Mick.

No that EBIT da as actually grown by 3.7% relative to last quarter as a results a result of lower operating expenses.

The organic loss in primary service units has remained stable relative to the same quarter last year.

But the client mix as improve due to the increase in during that subscription and service upgrades as our high quality connectivity services are more than ever sought after during a period, where teleworking and online education are essential.

[noise] Atlantic broadband revenue in constant currency increased by 4.5% into third quarter compared to last year.

While EBITDA increased by 7.1%.

Excluding the impact of the teams Valley acquisition and a nonrecurring gain on disposal of property of U.S. 1.7 million recorded on a as enough set to operating expenses.

Revenue and EBITDA would have grown 3.1% and 4.1% respectively in constant currency.

Organic revenue growth.

Comes mainly from both residential and business Internet service customers.

And rate increases mostly implemented during the fourth quarter of fiscal 19.

Partly offset by a decrease in video service customers.

And the suspension of late fees charged to customers combined with lower political advertising sales in the context of covert 19.

Organic EBITDA growth was mainly related to an increase in revenue and lower marketing expenses.

Partly offset by an increase bad debts as a result of the economic downturn related to the pandemic.

P.S. Yoo additions in Q3 were slightly lower than during the same quarter last year.

Due to the provision related to non paying customers.

Which Atlantic broadband as not disconnected.

As part of its keep American connected pledge with the Federal Communication Commission.

Let us now and take a look at Cogeco, Inc.

In the third quarter.

Consolidated revenue has declined by <unk>, 0.6%.

And EBIT da as increased by 1.1% and constant currency.

The communications segment contributed positively to the Grote well the media business, although on a much much smaller scale.

Was significantly more impacted by the covert 19 pandemic.

As the bulk of its radio revenue is generated from the retail industry, which is significantly affected by the current crisis.

As most [noise].

Retail store in Quebec were forced to close temporarily during the months of March April and May they significantly reduce or completely stopped their media spending.

This at a direct came back on our radio business, which recorded a year over year decline of 33% and revenue.

To mitigate the negative impact of such a decline the business took immediate actions to reduce its cost base.

Which partly lowered the negative impact of results.

The severity and length of the crisis and its economy can pack on radio advertising revenue, especially on the retail industry remains unknown at the moment.

We do however, expect our media business to be in a strong position from a market share perspective.

When the situation eventually stabilize as the numerous spring rankings as four of our stations at the top marking.

At the top of market ranking.

The quarterly dividend as been reconfirm at 47.5 cents per share.

HM.

I will now discuss financial guidelines.

Based on the experience gain while operating during dependent Mick.

And the fact that there is one quarter left to the current fiscal year.

Cogeco Inc. and Cogeco communications are introducing financial guidelines for the current fiscal.

Ending Uh huh.

I'll goes on August or 30, Onest 2020 on a constant current currency basis.

We expect that both companies will achieve low single digit percentage revenue and EBITDA growth.

And mid single digit percentage free cash free cash flow growth.

For the fourth quarter of fiscal 2020.

We expect positive revenue and EBITDA growth at Cogeco connection.

At the Atlantic broadband, we expect that organic revenue and EBITDA year over year growth will be in line with the Q3 performance.

When excluding nonrecurring gain of one point sevenmillion as discuss.

At Cogeco media.

We expect a further decline in advertising revenue.

As the easing of confinement measures in Montreal occurred only gradually in June.

However, we are currently seeing modestly improving trends in our advance bookings.

Our multiyear revenue and EBITDA organic growth plans.

Called for low single digit growth in Canada, and mid single digit growth in the U.S. and mid single digit consolidated free cash flow growth.

However, the performance of underperformance in a fiscal year 2021 will depend on a number of factors, including the impact of covert 19.

And the related state of the economy and competitive dynamics in Canada and the U.S.

We will provide guidelines for F 21.

When we have sufficiently sufficient visibility on how that Covidien 19 crisis will evolve and its impact on the economy.

Let me conclude by saying that we are very pleased with how our teams have responded to the covert 19 crisis showing great adaptability agility.

And strong did occasion.

We were able to navigate through significant changes in the way we operate during their confinement period and expect to improve operations going forward.

By capitalizing on the lessons learned.

And a new opportunities and new opportunities arising from increased connectivity needs.

On this we will be happy to answer your questions.

At this time likes to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.

First question comes from a line of are being that Alex.

Your line is open.

Hi, good morning, Thanks for taking my questions.

A couple from me first of all our the Canadian that an internet subscriber numbers, obviously very good result, a and the current conditions I was wondering if you can provide a little bit real color on that front I know that reduction in China is a big part of that but competitively you guys have a significant advantage in terms.

To speed I was wondering you can whether you can talk to the.

To the extent to which that became a bigger factor this quarter and how we should think about that at a future.

When you think about the competitive landscape that and then.

The U.S.

Is there any change in the M&A landscape.

You know I know that you keep an eye on a group of a potential targets there.

Is it fair to say that the current conditions.

Potentially a half of that transaction at all maybe bring some of those plays to the table of it soon to in light of some of the pressure they might be feeling in the in the near term.

I'll leave it there thanks.

All right, so hi already.

So I'll take your questions a on the strength so the Canadian Internet numbers I would say, it's always difficult to know exactly where Ah.

Than your customers are coming from but generally a you can see them in two buckets. The one that is customers moving from DSL to our network or if they can but mainly DSL to our network, which is a lot faster as you know we offer 120, megabits everywhere and that gigabit them 70.

<unk> percent of that territory in Canada.

So that's what that's a portion so people wanting faster internet or the other one there's a you know what obviously a lot of people working from home now there are some people that did not have internet lines, but home and have installed Internet line. So they were [noise].

Sorry are only running TV at home or not and and access to the Internet was through wireless so I would say would come from those two.

We we do expect that this strong growth.

In the quarter.

And people working from home well be less prevalent in the future obviously as people have installed themselves to be able to work from home.

That being said, we do still expect strengths in the coming quarter, because again, our speed advantage will remain for for a long time.

On the a U.S. M&A landscape.

Its actually a bit the reverse like us most players have businesses that have had some impact from cold. It so more cost us some lost revenues, but more strengths and internet numbers. So I would say generally we're we're seeing this across the board and.

Most players.

I'm, sorry, <unk> are generating cash flows.

So there are some processes that are we were expecting to happen earlier in the year that have been postponed.

But we do expect that fits all that are they will come back to markets. So we shouldn't normally get back to normal market and ER and looks like coming months that would be our argue obviously with what's going on right now in the states in terms of consignment 10 different states first wave second wave well.

Did you see how it involves a obviously when we make an acquisition we have to be able to visit the the operations. So this will be the key thing to look out.

Great. Thank you.

Your next question comes from a line of vans Valentini from TD Securities. Your line is open.

Yeah, Thanks very much.

First question on free cash flow in your guidance I, just want to make sure I understand this.