Q2 2022 Cogeco Inc and Cogeco Communications Inc Earnings Call

Today's conference is scheduled to begin shortly discontinue the standby and thank you for your patience.

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Good day and welcome to the Cogeco, Inc, and Cogeco Communications, Inc. Q2, 2022 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Patrice Ouimet Senior Vice President and Chief Financial Officer. Please go ahead Mr. Ouimet.

Thank you and good morning, everybody and welcome to this quarterly conference call, which set of Japan I will present, so as usual before we begin this call I'd like to remind listeners that the call is subject to forward looking statements, which can be found in the press releases issued yesterday I'll turn the call over now to finish with it.

Good morning.

And thank you for joining us to discuss the financial results of Cogeco Communications and Cogeco, Inc.

Yeah.

Let me first note that we are satisfied with Cogeco communications overall performance for the second quarter of fiscal 2022, which is in line with our expectations in both our Canadian and U S operations.

On the radio side Cogeco Media's revenue as grown compared to last year. Despite a weaker advertising market due to COVID-19 lockdowns and continued supply chain disruptions impacting many industries.

Starting with our U S operations recent initiatives.

The integration of both Hawaii broadband systems continue to progress very well we are currently focusing on the migration of the customer management systems now.

Now expected to be completed in early Q4.

It's earlier than origin Lee plan.

The integration of the customer management system is a key initiative and key milestones to launch <unk> lines branding.

<unk> service offering.

Our next step will then.

To further interconnect Hawaii network.

The existing Breeze line network and prepare for the launch of our IP TV platform in this market.

In January we launched a full rebrand of our U S business to Breeze line.

As well as our IP TV platform, which is called Breeze line screen T V.

Our <unk> platform offering a superior internet.

And the web powered video experience with launch in some residential markets.

Additional ones being added throughout 2022.

I am proud to say that the rebrand to Breeze line with a success.

We achieved the key launch goals of raising awareness through an extensive.

On the channel marketing campaign.

While ensuring that the transition was seamless for customers.

The announcement was well received in the market.

The media coverage was positive and conveyed both the rationale for the change.

And the benefits to come.

Of course, the building of brand equity does not occur overnight. So we will continue to invest and comprehensive marketing campaigns to further lift awareness and drive sales.

<unk> is moving along with the network expansion in U M cheer and West Virginia.

Where it is already connected to communities and plan to connect another seven communities over the coming months through fiber to the home.

<unk> will offer in these communities a residential internet service with symmetrical speeds up to one gig and commercial customers will have internet speed.

Up to 10 gigabit per second.

Many other franchises.

Agreements with local communities should be concluded in other states in the current fiscal years.

However, given delays in concluding some of the franchise agreements and obtaining permits the completion of certain projects will be postponed to the next fiscal year.

Okay.

Over the past month Cogeco connexion.

As accelerated its construction efforts to connect more homes in underserved communities in Quebec, and Ontario and continues its collaboration with governments to bridge the digital gap between larger been centers and less populated areas.

We are currently focusing our resources on the 13 ice speed Internet network expansion projects, which were awarded in several regions of Quebec, and I've already started deploying our fiber network in many of these communities.

Once we reach the connection phase many households will benefit from <unk> extensive service offering which will include a highly reliable internet service with symmetrical speeds of up to one gigabit per second a flexible and interactive.

Video offering with its IP TV platform and a telephony service.

Finally, we can we continue to prepare for an entry in the mobile wireless market in Canada.

Inside our wireline operating footprint.

This entry will.

It's still it's still contingent.

On the approval by the CRT D C of reasonable terms and conditions for the amendment MTN on service and the negotiation of reasonable rates.

With the incumbents.

<unk> is currently reviewing the terms and conditions for the piano service proposed by the incumbents.

As for Cogeco media the.

The radio stations.

Once again founder way to the top of the new Meredith winter surveys dim.

Demonstrating the continued commitment of our listeners.

We were also pleased to announce in late March that this year D. C rendered a favorable decision on the transaction between Athena and Portugal, which will allow cogeco to acquire radio station CLI and $93 98, three located inside me and Thats an attitude.

Acquired the wild and catheter Hook radio station in the B to B.

The deal is expected to close later this month.

Now regarding recent changes to our executive team I am pleased to announce that Linda Gillaspie has joined <unk> on April <unk>, as senior Vice President and Chief Human Resources Officer.

Linda has more than 25 years of experience in various industries, including telecommunications.

And until recently, she was senior Vice President Human resources and communications at Weston foods for over seven years.

She has held in the past various marketing and corporate functions at Martell among others.

And then does experience, leading human resource teams and our proven leadership skills and strengthening a collaborative and customer centric culture makes her an ideal candidate to support cogeco strategy and talent management goals.

We'd also like to extend our thanks and appreciation to die and new store, who was who is occupied the rules for many years prior to her retirement.

I will now let us.

To discuss our financial results.

So revenue at Cogeco Communications is up 15% and adjusted EBITDA is up 13, 8% in constant currency when compared to the same quarter last year.

This was driven by EBITDA growth of 31, 4% on Breeze line, mainly as a result of the Ohio broadband systems acquisition.

Free cash flow increased by seven 2% in constant currency, mainly as a result of higher EBITDA and lower current income taxes, partially offset by higher capital expenditures and financial expenses.

Capital intensity reached 19, 5% compared to 18, 2% last year due to higher capital intensity in our Canadian operations related to the maintenance and the expansion of clinical connections and network infrastructure.

In the second quarter Cogeco communications continue to be active in its share buyback program with a purchase of a 189000 shares at a cost of $19 million.

Overall Cogeco Communications' financial results for the first half of fiscal 'twenty, two where as expected and the company is maintaining its guidance for revenue and adjusted EBITDA for fiscal 'twenty two.

So lets briefly mentioned cogeco communication and expect in the second half of fiscal 'twenty, two lower acquisition of property plant and equipment than initially planned with a corresponding increase in free cash flow of the $95 million in reduction in expected capital expenditures about half is due to some <unk>.

Work expansion projects, primarily a breeze line, which are taking more time due to delays in permitting and obtaining franchise agreements.

The scope of the expansion is the same but some areas have a few months of delay and will be carried out during the first semester of fiscal 'twenty three.

The other half of the capital expenditures a reduction is due to the timing of other projects, including network investments in our recently acquired Ohio operation, which will be spent over a longer period of time.

So our base capex intensity in fiscal year, 'twenty, two should be approximately 19% and with the network expansion should be about 25% instead of the initial projection of 28%.

Our revised projections for our capital.

Expenditures amounts between 720 and $750 million for the year, including a 101 hundred $80 million to $200 million in network expansion projects.

Free cash flow is expected to decrease between 13, and 23% compared to the previous year, which is a lesser decline than under the previous guidelines.

Excluding the network expansion projects free cash flow on a constant currency would otherwise increase between 16 and 26% compared to the prior year.

As mentioned on the last call, we expect that organic year over year EBITDA growth will improve throughout the third and fourth quarters of both Breeze line and political connection at some of the last year, the marketing and advertising expenses were deferred to the second half of the year. In addition, we had recorded in the third quarter of last year.

$4 $6 million charge related to the CRT C's decision on aggregated wholesale internet rates.

Look at the individual components.

In the U S <unk> revenue and EBITDA and constant currency increased by 31, 3% and 31, 4% respectively. In the second quarter, mainly as a result of the Ohio broadband systems acquisition.

Excluding the Ohio impact revenue in constant currency increased by four 4% mainly from a higher.

Internet service customer base, a higher value product mix and annual rate increases implemented in September .

Last year.

EBITDA, excluding the Ohio impact in constant currency increased by four 8% as a result of organic revenue growth, partially offset by rebranding costs and higher marketing and advertising activity.

We expect a gradual increase in organic year over year EBITDA growth in the third and fourth quarters, as we reduce investments and rebranding.

High speed Internet additions resulted from both residential and commercial sectors. The growth in the residential sector was primarily driven by ongoing demand for high speed Internet offerings and increased marketing efforts towards Internet led offerings under our broadband first strategy.

The larger loss in video and telephony customers relative to the same quarter last year is mainly due to the broadband first strategy, which is focused on.

Product mix seasonal commercial disconnects and reductions in the Ohio system, which were expected.

Now turning to our Canadian operations physical connections revenue increased by two 1% in constant currency relative to the same quarter last year, excluding the impact of D E.

The acquisitions, we closed last year revenue in constant currency increased by 9%, mainly due to our larger Internet service customer base.

Rate increases implemented in November and growth in the commercial sector adjusted EBITDA increased by one 7% in constant currency relative to the same quarter last year again, excluding the telephone acquisition EBITDA and constant currency grew by 6%, which was expected as part of our.

Our annual guidelines.

We expect a gradual increase in organic EBITDA growth in the third and fourth quarters, and we expect less volatility going into the new year in fiscal 'twenty, three and quarterly EBITDA organic annual growth as this year's results follow a more normal pattern of profitability.

The broadband customer additions in the second quarter were slightly lower compared to last year, which benefited from the positive impact of the pandemic.

The video customer losses were comparable and telephony customer losses were slightly lower than last year.

Let us now discuss Cogeco, Inc. In the second quarter consolidated revenue increased by 14, 7% and EBITDA increased by 13, 4% in constant currency.

Revenue related to the radio operations increased by four 9% as the economy was less impacted than last year by public health measures ease.

Even though the advertising market remains soft we do see signs of a gradual recovery.

We are confirming <unk> fiscal 'twenty two of revenue and EBITDA financial guidelines, which were updated in November and reflect the same expected revenue and EBITDA growth is clinical communications.

Of course, it goes capital expenditures and free cash flow guidelines were also revised to take into account the revisions at Cogeco communication.

Turning to our shareholder distributions Cogeco launched a normal course issuer bid in.

January to repurchase up to 325000 shares for the year in the second quarter Cogeco required 154000 subordinate voting shares for a total amount of $12 million.

So now back to work.

For concluding remarks, thank you Beth.

As you can see we have good news to share in our second quarter financial results and customer trends have improved relative to the first quarter.

And we have therefore started the first half of the year.

Fiscal year on very solid ground, and we expect that organic year over year EBITDA growth for both Cogeco Connexion and Breeze line will continue to gradually improve in the third and the fourth quarter.

Finally, I would like to give an update on <unk> commitment relating to environmental social and corporate governance.

We were excited that Cogeco communication was included for the first time in the prestigious sustainability yearbook presented by S&P Global.

For our excellence and implementing best ESG business practices.

In order to be listed in the year book companies must score within the 15% top performers in their industry.

And achieve an S&P global ESG score within 30% of their industries top performing businesses.

We recently published our ESG and sustainability report, where we provide an update of our environmental social and governance performance indicators.

Along with other information pertaining to our sustainability strategy and the progress achieved over the last two years.

The report will from that one be publish annually.

We are very committed to continuously and then our sustainability program through the through the implementation of best ESG practices.

Which has more recently earned us a place on the corporate Knights Global 100, most sustainable companies list for a third consecutive year and they're clean 200 list, which recognizes companies around the world.

That are leading the way with solutions for the transition to clean future.

Cogeco Communications is among all.

Only 18 Canadian organizations to receive the honor.

And now we will be happy to answer your questions.

As a reminder to ask a question you will need to press star one on your telephone let me draw your question Brad.

Please standby, we will compile the Q&A roster.

We have our first question from the line of Jo Mill.

From <unk> Securities. Your line is now open.

Thank you Basel Hudson Mall and thanks for taking my questions first one is on the the change in terms of our Capex guidance.

It seems like half of it you control it and the other half you don't seem to control it.

So my question is is this mainly a push forward. So should we expect a higher capex maybe in 2023 and also does this signal any change in capital allocation priority.

Message.

Well, let me start by saying that.

We were we are as usually very very disciplined in our engineering and.

And business planning process. So it's a great news actually that we were able to optimize to lower numbers.

Through careful design and planning and innovative solution findings as well a reduction of Capex, but as you mentioned there is also another component that is related to just the state of the economy the supply chain.

Challenge in some equipment that are.

Experiencing some delays. So there are some projects that have been postponed and there is also the COVID-19 impact too.

City and state processes for example, upturn in obtaining franchise agreement and permits so all this will I.

I am very optimistic optimistic will only pick up and improve in the coming quarters. So we can continue our projects as planned.

Okay. Thanks, and just just maybe back to or should we expect a higher capex in 2023.

Yes, so it's still a bit early for 2023, we're going to provide guidance in July .

That being said I would say a base assumption could be that we'd be in a similar place what were what we were forecasting for this year. Originally so base capital intensity of about 20% and being in the high Twenty's, including network expansions I would not assume that we would at least at this point.

That we'd be over what we were planning originally this year.

Okay. Thanks, and then on the wireless review it seems like we're transitioning phase here.

Cherokee SEC review is reviewing it right now.

Can you confirm if if you have seen these conditions and I know, we don't have the rates yet.

But if you have seen them are these terms under which you would be comfortable deploying our service.

No. Unfortunately as you.

We are still awaiting.

Like everybody else are the results of the terms and conditions from the CRT C. They have not released any.

Anything to anyone.

Okay great.

We have our next question from the line of Matthew Griffiths from Bank of America. Your line is now open.

Hi, good morning, Thanks for taking the question I just wanted to ask on the on the U S broadband side.

I see like in this past quarter, your and that's picked up from a relatively soft Q1.

I believe last quarter you were also talking about increased advertising spend like the rebranding and the expectation for some bulk contracts in Florida, but I don't think you mentioned the timing of when they would land. So I was just wondering did any of those bulk contracts come through this quarter and or.

Was it was.

Was the improvement sequentially related to your marketing efforts.

Yes, and we were really happy to see in Q2 that actually the three segments residential commercial and bulk of actually a pickup so compared to the first quarter.

We did not add so.

We did not had great numbers into three segments, but now in the second quarter. The three segments have contributed and bulk is now part.

Of the.

The upside.

Okay, and so was do you expect more to continue rolling in throughout the year or was that what you were referring to last quarter on the on the bulk contract side.

Well we are.

We simply expect to continue to similar success rate that we've.

We've reported in the past.

In bulk as well as commercial and residential solar to the most important most important things to us was too.

Bringing the three segments back to performance.

Right. Okay. That's good thank you and one other if I may.

<unk>.

You are getting closer.

Two finishing some of these expansions I think play Canada.

Closer side like what are your expectations I know, you've given penetration rate expectations, but do you expect subscribers to kind of follow a similar pattern as the base. So in Canada, you disclosed that about two thirds take two or three services and that their take one and in the U S. It's roughly.

The reverse of that is that what you would expect in these expanded in new territories or would you wait your broadband first strategy suggests that a large percentage in each would perhaps take one service in a relatively small percentage would fall into that two or three category just any.

Kind of.

The expectations that you can share would be helpful.

Yes, so it's probably both so we do we will offer the three services.

So its fiber to the home Internet, we have the IP TV product in both countries. We just launched one in the U S and Canada has been in market for more than a year.

And obviously the phone product.

Earl tendency I would say in these areas and also across the board when we have new customers that leave let's say competition is that.

You will have a higher proportion of people that will take on the internet than before or than the base. So that's what we're assuming we're not assuming it's going to be.

On the Internet, but it will be a lesser share of 2% and three products than what we have in the global base.

Okay, Great. That's helpful. Thank you very much.

Sure.

Once again, if you would like to ask a question. Please press star one.

Okay.

Oh.

No further questions at this time I will turn the call back over to Mr. <unk>.

Okay, well. Thank you everybody for joining us today, we're going to be back for third quarter.

Quarterly call in July So, we'll see you then and feel free to call us in the meantime, thank you.

Bye now.

This concludes today's conference call you may now disconnect.

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