Q2 2021 Cogeco Inc & Cogeco Communications Inc Earnings Call

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Conference is being recorded at this time. I would like to turn the conference over to mister pets case. We met senior vice president and Chief Financial Officer of Cogeco link and Cogeco Communications Inc Club ahead and assume we met

Good morning, everybody and welcome to a second-quarter conference call which that and I will present. So before we begin the skull as usual. I'd like to remind listeners that they call this subject to forward-looking statements, which can be found in our press releases issue the expedite alternate call over and out to fit good morning and thank you for joining us to discuss the financial results of Cogeco Communications and Cogeco Inc.

Let me first note that we continue to be very pleased with the overall performance of Cogeco for the second quarter of 2021 as both are Canadian and American Broadband segments life continued organic growth in revenue and even stronger organic growth. Anybody a compared to the second quarter of last year.

We have been we have seen continued growth in our internet customer base with a majority of new customers opting for internet speeds of 100 megabits per second and more and a good portion of our existing customer base upgrading your service over the last year highlighting the importance of our home broadband products.

In addition the acquisition of the of the retailer, completed by Cogeco connection on December 14th, 2020 and the Thames Valley acquisition completed by Atlantic Broadband on March 10th, 2020 also contributed to our growth.

Similar to the previous quarter maybe D A as organically grown at a greater Pace than Revenue partly due to a reduction of certain operational expenses resulting from a more stable customer base as a result of the COVID-19 pain demek.

In addition certain sales and marketing expenses were deferred to the second half of the year in both countries when Market activity is projected to return them in normal level.

As for our radio operations, they continue to be negatively impacted by the pandemic but results are nevertheless according to expectations. Let's review more details about starting with Cogeco connection recent development the acquisition of the Telecom the third largest cable operator in the province of Quebec closed on December 14th, and contribute to the quarters growth. The integration is progressing as planned and should generate Superior growth relative to our current Canadian operations, as we further invest in a sales and marketing to improve penetration rates and pursued it comes Network expansion plans.

We launched in mid-January a marketing campaign for our new IPTV service called Epico which focus on attracting new customers end up selling a portion of our existing customer base as we gradually migrated them over time. The launch of this service has enabled us to enhance the customer experience and reduce churn.

We are not only expanding our service offering but we are also continuing to expand our geographical reach to network extensions in unserved and Lounge areas. In addition to several other projects announced over the last year. We were very proud to announce on March 22nd that we will carry out fibre-to-the-home Network expansion projects in several regions of Quebec in collaboration with the federal and provincial governments.

These Regional infrastructure projects represent an investment of approximately 240 million of which 208 million will come off in the form of government grants.

Once these projects are completed more than 54,000 homes and businesses will be connected to Cogeco connection network representing a 3% increase on pass.

Cogeco will focus, its operating on high-speed internet, but will also offer telephony video Services through its newly implemented IPTV platform.

These fully digital infrastructure investment projects are scheduled to be completed by September 2022.

Including the recent announcement Cogeco has now been awarded a total of 40 Projects in Quebec and Ontario which will accelerate our growth over the next couple of years.

We are also awaiting decisions on several additional Network expansion projects submitted as part of our various government-sponsored programs aim at providing home internet to underserved and Unser variants.

The Ontario government has just announced and its last budget that it will spend an additional 2.8 billion to bring Broadband access to more people across the province by month.

This brings the province total investment to nearly four billion over the over a six-year period Cogeco is Deep Roots and regions and Rural communities in Ontario and Quebec should continue to contribute to its success in securing grants to help close the gap in digital access.

In the Canadian industry. We have also seen the recent announcement of a transaction between Rogers and Shaw when that would wager eliminate the Ford Wireless competitor in a number of markets across Canada.

Lawmakers have already indicated. The Rogers shock combination will be subject to close regulatory scrutiny for Cogeco sparked. We will follow very closely the same as the approval process unfolds. It will involve the competition Bureau the crtc and I said,

This proposed merger as underscored how urgent it is for the federal government to take clear policy steps in the wireless sector that can find life increased competition for all Canadians do that end Cogeco s proposed a balance Middle Ground regulatory solution the hmm hybrid mobile network operator model. This model will allow more Regional Network Builders to participate in Canada's Wireless market and add support from over three hundred communities in Ontario and Quebec already.

It will encourage ongoing Investments to expand and improve Canada's wireless networks while bringing new wireless services to underserved and under and unserved Canadians off.

We continue to be interested to add mobile services to our offer given the right circumstances and maintain LT competition in this sector.

Finally, it's published by the government of Canada. Cogeco connection has filed its application to participate in the Spectrum auction in the 35,000 Acres back.

The auction is scheduled to start on June fifteen twenty Twenty-One and as clearly stated by the rules of this auction. We cannot comment any further off the auction.

Now turning to Atlantic Broadband. We are very pleased with the strong financial performance over the last two quarters as sustained Investments over the last few years. I've paid off.

We have built a strong foundation for continued growth in the coming years with the successful integration of several Acquisitions a significant Florida network extender Network Investments where 1-gig service is now offered essentially everywhere and the ongoing digital transformation and customer service and Ed.

During the last quarter Atlantic Broadband continue to launch several initiatives to both improve the overall customer experience as well as to drive operational efficiencies.

On the customer side revisions to our call centers involving improved call routing additional options extending chat capabilities and further, ivr optimization. I've simplified customer interactions.

In addition we continue to invest in digitization efforts through the use of predicting predictive data analysis and artificial intelligence an increase self-service capabilities. We have made initials drive to fully utilize the strengths of our Network to improve customer service and reduce the expense on the longer-term.

As for service offering the main focus in the last quarter has been to fully launch a new Broadband first offer strategy along with a new end and ends Wi-Fi Thursday across the footprint.

This new offer puts Broadband at the center of the customer experience. We expect that it will also gradually lead to an improvement in customer satisfaction margins and customer lifetime value.

I swear Cogeco media its financial performance continued to be impacted by weaker. Advertising markets do too dependent.

However results were as expected as we continue to maintain our financial discipline.

We should be well positioned for growth when the advertising markets recovers as our listeners continue to put us to put many of our radio stations off at the top of the numerous ranking during the last quarter.

I will now let that to discuss our financial results.

Thank you for that. So in terms of the revenue at Cogeco Communications, the results are at 9.8% and ended up 12.2% in constant currency compared to the last year. This was driven by growth of 11.2% Cogeco connection and 12.4% at the time.

Free cash flow increased by 14.2% in constant currency. The increase is mainly due to higher and the decrease in financial expenses when excluding the non-cash interest last year partly offset by an increase in current income taxes and capital expenditures Capital intensity, and the quarter was 18.2% which is slightly lower than a 20% intensity. We expect for the full fiscal year.

We are reconfirming current Year's Financial guidelines, which were revised last quarter to include the daily Telecom acquisition and reflect higher organic growth expectations with the constant in the constant basis. We continue to expect mid-to-high single-digit percentage growth in revenue and adjust the debit. And Ludlow double-digit percentage growth in freak Asheville as mentioned. We purposely deferred some sales and marketing activities for the second half of the year or when we return to more normal operations post-pandemic.

Those expenses will impact.

Which has otherwise been growing at a double-digit rate for the first six months of the year?

When we announced our next quarterly results in July, we will be in a better position to provide more information on the fiscal 2022 Financial impact of various fiber Network expansion initiatives in both countries.

Extension program includes government-sponsored projects which we would not otherwise be able to undertake profitably on our own as well as plans to expand our Network at home in attractive adjacent areas to our footprint, which is something we've been doing in Florida for a number of years. The extensions in both countries are expected to increase our Capital intensity next month. I also increase our footprint at a higher rate than usual. We believe that those projects are attractive Investments done in conjunction with other Capital allocation priorities, which include wage at least Acquisitions investing in the business and paying dividends.

That's for sure by Banks Cogeco communication cease buying back shares at the beginning of the first quarter as a result of the proposed acquisition of the company down in the second quarter. We have resumed the program and purchased $313,000 shares for $35 million dollars.

Let's look at the individual components.

In Canada Cogeco connection connections Revenue increased by 10.1% in constant currency relative to the same quarter last year. We're while adjusted ebitdar increase by 11.2% excluding the impact of the Telecom revenue and have grown by 2.9 and 4.7% respectively.

Organic Revenue growth resulted from the cumulative effect of sustained demand for residential high-speed internet since the beginning of the pandemic resulting in higher customer ins and also customers transitioning to higher value offerings as well as rate increases implemented for certain services.

Superior organic growth was partially due to some sales and marketing activities being deferred to the second half of the year in the context of the pandemic but also savings resulting from the operational optimization program implemented in the fourth quarter of last year.

The Broadband Customer additions were strong compared to last year and our crews were also higher due to more sales hired tiered products the video product glasses off. We're lower than last year or at least thanks to the new ethical i t t v lounge and finally the phone losses were in line with historical Trends except that last year was awful usually strong.

Turning to Atlantic Broadband Revenue in constant currency increased by 9.5% in the second quarter compared to last year while ever done increased 12.4% off excluding the things Valley acquisition revenue and ebba. Chrome by 8 and 11% respectively in constant currency starting next quarter detains Valley acquisition will be included in last year's numbers and will be comparable.

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Revenue growth comes mainly from higher residential internet customer additions rate increases implemented for certain services and continued Business Services growth similar to co co connection Atlantic Broadband efforts and certain sales and marketing expenses to the second half of the year due to the COVID-19 situation which partially explains the evidence over performance in a quarter.

Broadband Customer additions were higher than last year due to the continued strong demand for the product video customer declined is mainly related to the new Broadband for sales strategy and also the fact that we do not offer video on the services anymore. Generally the phone product was softer than plan in a new approach, but this is something we've addressed since the end of the last quarter turning at taking a look at Cogeco Link in the second quarter Consolidated Revenue increased by 8.5% and 7 / 11.8% in constant currency.

Wireless Broadband business had very strong results the media business continued to be impacted by depend emack due to certain segments of the retail industry reducing the advertising activities.

Revenue related to radio operations decreased by 23.5% during the quarter compared to last year.

However, we continue to closely monitor our class and expect the radio that the decline in the full year to be not as versus the prior-year.

I will not turn turn to select to provide his concluding remarks.

Thank you Patrice.

On the basis of a strong second quarter fiscal year 2021 looks very promising as we will continue to manage our cost closely and pursue profitable through leveraging the full potential of recent acquisitions continuing to expand our networks and pursuing various other organic initiatives off ProForm at the delete any comment position or 2.4 times net leverage leaves ample room for other Acquisitions and share BuyBacks.

Finally, I would like to highlight Cogeco continued commitment to environmental and social issues as it has been recognized and endorsed by a number of leading organizations over the last order.

In January Cogeco was included in the corporate nights list of the global 100 most sustainable corporations for a second year in a row game 20 ranking points. In addition Cogeco was proud to announce that it's new emission reduction targets were approved by the scientists Target initiative as consistent with levels required to meet the most Ambitions ambitious goals of the Paris agreement.

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The first and only telecommunications company in Canada with approved targets from SVT which highlights our leadership and the rigor of our approach.

As part of its Global Climate Ambitions Cogeco has also joined other corporate leaders representing more than 3.6 trillion + Tap in signing the business ambition for one point five degrees Celsius commitment.

Furthermore Cogeco receive a 2020 climate change score of a minus from CVP.

Which puts us in the leadership ban for implementing best practices in measuring understanding and addressing corporate life impacts, and now we will be happy to answer your questions.

Thank you. If you would like to ask a question, please. Press star followed by the number one on your telephone keypad to withdraw your question, please press the pound key or pause for just a moment to compile the page.

Your first question will come from Vince Valentini from TD Securities, please go ahead your line is open. Thanks very much congrats on another good quarter guys, a couple of questions was a you know, probably for Patrice T delay in sg&a cost into the second half of the year. I guess we only have about four and half months left here in our part of life. We're we're still pretty well locked down. Do you have you started to spend that money? Is it realistic that you'll play catch-up or is that maybe slip into 2022?

Hi events know we do extend to we do expect to spend it probably more into for than in Q3. So that's why we we maintain our guidance office and also in the US have you says, you know, I would say most of the states are back to normal or close to back to normal. Canada is going to take a bit more time. But off the next few months, we do expect that the situation will change the other thing to note as well is when you compare to last year in Q3 and Q4, we will have the smaller Acquisitions then us things Valley that will be there, uh, which was not the case since you wanted to 2 and also, uh in Q4 of last year in Canada, we did highlight the four million dollar non-recurring game where you're leading to running costs and some COVID-19 expenses, uh, which is uh, which is something that would not be there this year well,

Do the comparison thank you said question is all of these new wins. You're getting in the government programs for Rural and underserved areas. Can you clarify how may work once the networks are built. Do you have full control of the operation and full autonomy to to price and Market any way you choose or does the government have some some claws attached given how much of them are putting up?

Well, they

They are simply extensions of our existing Network. So from a network point of view. It's it's just an extension except we are both going to all complete all of them in a fiber full digital fiber-to-the-home mobile. So that's for the network part. Now for pricing would have to be aligned to the large Urban centers, but there are no pricing regulation at this point. We simply have to be a fair and aligned to walk through all other centres in Canada.

Excellent, and the last I'll leave their Wireless and if you know stuff to others, but the the Spectrum auction you can't talk about it, but can you clarify by in all of your regions where you are the incumbent cable company if if you had it all those up, what would the minimum reserve price be for for the fifty megahertz wage? I've set aside Spectrum or events. I can't comment on this at this time given the rules auctions. Thanks.

Your next question comes from Jeff Van from Scotiabank, please go ahead your line is open.

Thank you. Good morning is Phillip you mentioned the company at a very good State when it comes to the balance sheet. So there's a lot of strategic initiatives in front of you. Can you or or Patrice talk a little bit about the return profile of the various a possible opportunities that's in front of you. You talked a lot about rural Broadband expansion talked a bit about Wireless. You don't have to talk about the spectrum app. Just Wireless services in general and maybe u.s. Acquisition. How do you what's the return profile? You still like? How do we think about the pecking order and the priorities things?

Oh that that is going more details, but it's important that we don't lose sight of the context of the pandemic. It's changing the game in many different places. So on the US side the there's a stronger and faster economic recovery. This will certainly help all products to come back to normal and where we can continue our growth on the Canadian side of that is just mention it will be maybe a strong but certainly the late compared to the u.s. Bank.

In terms of priorities we are active on all fronts. It's not as if we have to choose necessarily one versus another which is a good choice to be given our balance sheet and the our Cashflow situation which is uh, which provides an ability to invest we're always interested in doing and looking at the office in the opportunities as you know, and we've been active and especially in the US but the including in Canada recently, especially with daily Telecom. Uh, so this will continue the the the assets are not always for sale and we have a list and when we have a when we're invited to look at some potential assets for sale, we we get involved and we see if there's a a good return to do and and that has to do with the quality of the asset, uh the area where it is the penetration rates, uh, obviously dead.

Asking price that plays into it as well.

So it's it depends but I would say we we are generally active on that front in terms of network deployment. There is clearly an opportunity in Canada right now with their various levels of government wants to ensure that uh, that consumers that don't have access to high-speed internet, uh are providing disability and Quebec was came out with a very large program recently Ontario has different programs and the federal level has different programs as well. So long now is the time to do it. It doesn't mean that this will be true in five or ten years. So we're actively participating in it in the US. It's a we also participate in a government uh-uh programs. So the art of program, uh, there's a bit more player there. So it really depends on where we did and there are some other areas where dead

We are simply extending our Network like we've been doing in Florida. So we see opportunities to do there and lastly and mobile. That's that's a bigger question that will depend on what happens, especially on the regulatory front and then we'll have to be able to determine what kind of business and returns wage to generate in that business if we get if we do get into it.

If I may just follow up on that last point you crtc MB no decision. Looks like it's coming out in the coming days. Can we just revisit that one second you guys have put forward and H mno proposal. It's a very reasonable sound proposal. But what's what's next if the crtc does not come out with a decision that is similar to that H mno. Does that mean that you forego Wireless? Does that mean look for Alternatives? How should we think about what the next step is given that decisions kind of right in front of US Banks of what it could be or could not be but the 870 proposal as receive already a lot of support. It might be called differently by other players and they can eat in ecosystem, but it off.

It's a proposal that's actually put equilibrium between investment and Innovation and competition. So this is what Thursday makers need to to achieve. Of course. It needs to create a reasonable return a fair return for all players at the ecosystem. But investment Innovation off competition are the 3 items to balance.

Great. Thank you.

Your next question comes from aravinda from canaccord genuity, please go ahead your line is open. Good morning. Thanks for taking my question on the first question is with respect to the upgrades that you've talked about in the internet product during the pandemic. Obviously, you were benefiting from sort of the up tearing of these products as we think about the tail end of the pandemic for the how you starting to see those upgrades perhaps taper off or you still you know, as recently as let's say the last month. Are you still seeing a steady rate of upgrades? I just wanted to get an update on that front and secondly how we know that you know, your competitor you tell competitor has dedicated a stepped-up, you know, Broadband expansion boards on the fiber front as well as the fixed-wireless, perhaps a little bit early, but I was wondering if you starting to see some of that activity in your foot print.

That is that is notable.

Thank you.

So well, thanks for that question. The the the the pandemic is certainly induce some change but we think they are they are month to injure subscribe new subscriber coming in the Broadband ecosystem from weaker networks or especially weaker Technologies to month due to a very capable networks. Like the ones were deploying providing a hundred and and and more megabit per second up to a gig so there will continue to be an inflow of people wanting very fast internet service on the upgrade same thing. There are more and more devices in the home. There's the the the video that that is also moving to the IP TV platform. So there is more the man God

For very high speeds. So a hundred and more we we we have a hundred hundred and twenty almost everywhere today in many many different cities public places are networks are one gigabit capable. So the there's a good run away for upgrades for continued upgrade and the demand is is certainly a l t v to me as simply accelerated and induce a more more upgrades. What's interesting as well to notice is that we are gaining also customers coming from Pure mobile. They used to be satisfied with the data mobile package, but now clearly it's not satisfactory. They're expensive day of very limited amount of data and now we're seeing as well as some customers

Coming from the mobile ecosystem wanting more gigabytes per month and steady connections.

Thank you and just a quick follow-up on the wireless matter from the previous discussion. I just wanted to clarify, you know, given the show Rogers announcement. I know that historically your interest with respect Wireless was mainly with respect to your cable footprint. Um has that plan changed at all. I mean if there's an opportunity to extend it beyond your footprint, perhaps it a provincial level and I'm not so not talking about a National Expansion. Is that also of interest to you or you very much still is your plan a very much along the lines of your cable footprint. Yeah, this this Rogers siya proposal will certainly be scrutinized for many many months off with lawmakers. We we we will analyze and look at the all possibilities and I've mentioned many times that there is certainly

An advantage when you have a wired Network.

To to put a mobile layer on top, but as of today first, let's let's see what the crtc will will publish this this week. If if the decision comes on our hm, and no proposal this this Thursday and given the auction rules again. We can't we're not at Liberty that, to fully comment on your question.

Thank you very much. I'll talk to the line.

As a reminder to ask a question, please. Press star followed by the number one. Your next question will come from please. Go ahead.

Thanks for taking my question. First question is on the bottom infrastructure plan. We've seen the proposed tax increase but also a possible hundred billion Broadband funding. However some wording on the government goal to ensure affordability. Can you can you comment on your initial view of the potential impact of the plan as proposed on your business wage? Yeah. Sure. Hi Jewel. So yes on the tax front, you'll remember that about three years ago. The tax rate had decreased in the US and at that point we did record a non-cash tax game. I think it was seventy-three Million if the tax rate doesn't increase from what we understand to be 25 to 28% in the future. Then the reversal. And we would book and on tax game loss. It would be a smaller amount. So that's probably the dog

The extent of it for us there's a discussion on minimum tax rates as well. But we have a given all the Acquisitions we've done. We have a number of assets that can Shield taxes and tax loss as well. So we're not currently taxable in the US as relates to the network expansion. I would say this is good news. Typically the way these programs are structured is that it creates an opportunity to extend networks just like in Canada in areas where customers or residents don't have access to high-speed internet. So either they have nothing with Wireline or they have something that's that's very slow, especially on the SL. So this could be an opportunity for us to expand our Network glad to see what this what it means is reality and how it translates into programs. Um, but we're not really seeing it as a threat but as an opportunity

Okay. Thanks and then fill in the US, I think it looks pretty clear that FX will be a headwind next quarter. Can you explain a bit how this affects your view on the south side and if they are hedges in place, yeah, so the way we manage and there's also even a page in our investor presentation. If you want to look at it that way we manage our foreign exchange exposure is we tried to be fairly neutral from the free cash flow standpoint and the large portion of the service is done through boring and US Dollars, which will shield cash flows from our us entity. We do have some financial instruments as well from time to time, but I would say the the bulk of it is off us borings. You're right that in terms of Revenue and Eva. These are things that we cannot feel so they will get impacted temporarily By changes in foreign exchange rates. Yep.

Against free cash flow always has very minimal impacts.

Thank you.

Your next question comes from Drew McReynolds from RBC Capital markets, please go ahead your line is open.

Yeah, thanks very much to follow-ups for you Patrice. And then maybe one for on the just some housekeeping on on the FX side in terms of interest and depreciation amortization that the Consolidated level just remind us. You know, how the higher Canadian dollars is impacting those line items and secondly on the sales and marketing I can't recall if you know, this has been kind of Quantified in terms of the savings or you know, the absence of dollars that you've spent do to COVID-19. Is there anything you could kind of unpack for us relative to the underlined cost efficiencies that you're getting across the business sure. I am on the second question. We have not Quantified the sales and marketing as we're not quantifying even the the base amount. Obviously that we that we is included in our cost.

That being said if you want to have some view of where we're heading we have obviously the guidelines for the full year. But as we said on Thursday, I'll I'll mention it again today to reconfirm it if you look at Cogeco connection and a b b in constant dollars, we would expect that the epidural with the mid-to-high single-digit growth year-over-year and that's true for both countries in Canada does include the data acquisition and Thursday, as you know, for the first six months, we've been running at a higher rate than this and the two countries. Um, so uh, so you you can triangulate what should be the growth rate in the back half of the year in terms of effects or we we do have a dollar impact of effects ranging.

R m d m a more at the level. So I'm not sure I have an answer for you for financial expenses directly, but I can wage is on what we did in the second quarter. So last year was $35 million in terms of financial expenses. If you do exclude a special gain we have on offer on the recent. I think we did last year twenty-three million and that decreased to Thirty one point eight million this year. So it's a reduction of three million and that has to do with lower interest rates and also reduction the overall that level I'm not sure if the X was your question. I'm happy to add more contacts on this. That's fine Patrice. We can take that off line and maybe one for you Philip on the list on the wireless side. I think the the horse has been kind of beaten here in the Canadian side until we we get more information.

Here, can you just provide updates?

On your latest thoughts on Wireless in the US and you know the importance of you know, getting that kind of uh service in some way shape or form onto your offering overtime. Thank you for the wireless for Wireless in the US we and we've said that before we moved we are good opportunities and and other priorities right now that we think we should get out before spending more time investigating both fixed wireless access or Broadband extension as well as mobile introduction. So we will get there but we have other priorities in network plans, um investment than customer experience as well as MMA that are more that are higher on our priority list but dead.

Quest Market at this point and not to forget the Investments. We're making in Florida. So there's a number of good leads in the US that we will continue to to explore before getting their got it. Thank you very much.

We have no further questions in queue. I'd like to turn the call back over to the presenters for any closing remarks.

Okay. Well, thanks everyone for being better today. We're looking forward to meeting with you again in the third-quarter third-quarter results in July and feel free to reach out if you have any further questions. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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