Ready to go. Excellent. We will continue on with our program with Cogeco, and thrilled to have Fred Perron, CEO, here with us. Fred, thanks very much for joining with us. I know I think last year you probably just had to come down the road from Burlington, but now you may be commuting from Montreal or.
I still live in Burlington. We're moving to Montreal this summer.
Oh, okay.
I only have.
That's good to give you any credit. You didn't make any effort to come here then.
It was still almost a two-hour ride from Burlington this morning, so.
Okay. That's good enough then. We'll definitely appreciate your time and insights then. A smaller name in this space versus the four we've talked to this morning, but in my mind, maybe the most undervalued on just a pure structural basis when you consider the free cash flow that you've signaled that you can generate in 2027 and beyond, over and above some assets that could potentially have decent value. I'm looking forward to the updates you can provide us today to reinforce that message to people. Maybe last but not least, no exposure to the Canadian wireless market at this point and some of the continuing price war challenges that we're seeing there.
To come to you, just an opening sort of general comment, go as far with it as you want with this question, but the sort of puts and takes to EBITDA for Cogeco Communications through the next quarters, year or two. Do you think we can get to sort of positive EBITDA growth soon, and what would be the drivers behind that?
Sure. Hello everyone. Thanks for being here at or after lunch. First, on your introductory comments, Vince, it's very much true that while we're a smaller stock, we do think that we stand out first because we're not exposed to the wireless sector. We're just entering wireless now, so that's upside for us as opposed to downside. We got one of the strongest balance sheets in the industry and will grow cash flow over the next two years. We also have a three-year transformation that we're going to talk about. As it relates to your question specifically.
A dividend yield that's now equal to a bigger player in this space.
Yes.
Add that to your list of attributes.
Yes. We will continue to grow. Our dividend payout ratio is around 30% of cash flow, so we got room to grow. As it relates to your question on EBITDA, there are a number of puts and takes in our EBITDA, and as you know, we're present in both Canada and the U.S. If you look at the positive EBITDA drivers, we're growing our Canadian internet customer base consistently every quarter, and we're going to continue to do that. We grow our Canadian base at a click of about 4% a year. That could get even better as we launch wireless, which will benefit our wireline customer base by reducing churn and helping us sell to new customer segments as well. 4% a year customer growth in Canada, room to grow further.
Second, we're still able to realize annual price increases in both Canada and the United States. We did one this past February in the U.S., in March in Canada. We measure the stickiness of the rate increases, meaning when you reduce churn and rediscounting, what is the stickiness? The stickiness is just as good as it was in prior years. We get the question, can you still do it? Yes, it's an important part of our business model. Third, but not least, cost reduction. We're doing pretty significant cost reduction in both countries, and we're not done yet. On the negative side of the EBITDA equation, we're losing customers in the United States, but again, we have wireless that will help over time there. There's some cord cutting on TV, but especially in the U.S., the TV is very low margin anyways.
In many cases, we're indifferent if there's cord cutting. And then new customers coming at a lower output, but then we're able to grow them over time. What does that net out as? You know our guidance for this year, which is stable EBITDA. We'll give our guidance for next year in October, but over time, we do see growth, room to grow EBITDA, in particular as wireless kicks in and becomes a more meaningful contributor to our EBITDA. You see Comcast and Charter do claim that wireless has been a game changer for them. That will be one driver, and the other one is our three-year transformation that's on their way. Over time, still an objective to grow EBITDA on top of the cash flow we talked about before.
4% growth in broadband subscribers in Canada. On a net basis, with rate increases, net of promotional discounting, are you seeing at least 4% revenue growth from that segment of your business as well?
Not always. It depends on the quarter. Part of that is new customers coming at a lower rate, and that is the competitive environment we know. Any output projection is included in our guidance.
Just while we're unpacking that, the trend of the portion of those sub-adds coming from the Cogeco brand and existing footprint, coming from Axio and coming from the new rural build areas, are you still seeing growth in all three? Is there any one that's disproportionately growing?
Yeah. We do see growth in all three. This year, we're getting a bit of that 4% growth in internet subscribers in Canada. Some of it comes from new builds, although we're not doing that many new builds that are ready this year. Most of it happens in our legacy footprint on the Cogeco brand or on the Axio brand, which is a fully digital brand that we're now using in our own footprint at good margins. Net, a pretty diversified set of growth drivers for the Canadian customer base.
Okay. On the cost cutting, you have a three-year transformation plan in tandem with five strategic priorities that you outlined a year ago. Can you give us an update on where we're at in both of those? Is there anything that's trending better or worse than what you would have thought when you announced the transformation?
Yeah. The transformation's underway. It's a three-year transformation, as you pointed out, with over 150 initiatives. Last year, last calendar year was planning phase. This calendar year is implementation phase, which started in January. We're about five months into it. I would say what's going best is the cost reduction initiatives. We were very strong off the gates on this cost reduction. What's driving the cost reduction is, first, we've merged our Canadian and U.S. operations. There were immediate organizational synergies from that, but that's not done. I would say the organizational synergies will continue to cascade lower down in the organization. There are procurement synergies and there are operational synergies as well. Beyond that, digitization is a real source of cost reduction for us. We have been historically behind our competition on digitization, so just catching up will give us a bit of a lift.
That's in both sales and service. On service, we rolled out a new AI Chatbot for customer service in both Canada and the U.S. That chatbot answered 150,000 customers last month alone, which is for a small company our size, it's significant. Even more interestingly, in Canada, the bot answered 60% of queries without any need for human intervention, and customer satisfaction is very high. In many cases, customers sadly prefer dealing with the bot than dealing with a human because they don't have to wait to get the immediate answer.
I forget. When you hosted us analysts in Montreal in the fall, the 150,000 chatbots per month, there was a figure then. Do you remember what it was? How much is 150,000 per?
We've done a few of those conferences. I know at a point we may have talked about 80,000, but I'd have to go back in time. The bot is not even a year old, so it gives you a sense of the ramp-up. We're deploying new capabilities. At the beginning, the bot was answering more basic questions. As we learn, it's going to be able to answer, I won't say advanced questions, but more medium questions. The next big lift for us is to put the bot in our phone system. When our customers call us, instead of punching one and punching two, they'll start talking with the bot, and that will generate significant synergies as well. Of course, the option of talking to a human will always be there for our customers.
If I look forward to next year with the cost programs getting a bit more traction, just a hypothetical, if revenue growth is flat in 2026 versus 2025, we should see some net EBITDA improvement, or are there still upfront restructuring cost-related transformation that would offset things next year?
Yeah. We'll give our guidance in October. The one thing to watch for is the U.S. competitive environment. We've seen an uptick even in the past quarter of competition in the U.S. We're certainly feeling it in PSU losses in the U.S. this quarter. We think some of that may be temporary. We also have room to keep improving our execution, not only with wireless, but we're scaling up our sales channels, and we're getting much sharper at how we do retention in the U.S. We saw that we were a bit soft with our retention practices. You put all that together, we'll have to see how it nets out. Again, this quarter is tougher. Let's focus on improving that, and then that will flow into the guidance for next year.
I will follow your lead and go there then. In the U.S. subscriber trends, is it a particular region? Is it Ohio? Is it the Northeast? Or is it just everywhere where things have gotten a bit tougher?
It's in particular places. FWA technology was always a competitive factor for us in the U.S., driving some of our subscriber losses. What's changed in recent weeks and the spike I'm alluding to is in two or three states where we've seen some of the players. For example, there's one player that's trying to sell, so they've become more aggressive with their promotional activity. In two other states, some of the overbuilders got aggressive for a period of time. These are mostly, in general, promotional actions. It is true some of it will likely calm down over time. Again, we have room to improve our execution with wireless and some of the other things I was talking about before.
Okay. And one just sort of specific component of the transformation benefits and synergies is the merger of Canadian and U.S. operations. Is that fully complete now on all the run rate benefits we would have seen in the Q2 results, or is there something coming on that?
The merger went very well. I would say we got a lot of synergies, organizational synergies upfront. I would say we're starting to see a lift in performance. For example, we're a bit ahead in our sales and marketing capabilities in Canada. As you can see partially in the results, we're starting to deploy some of that in the U.S., and you'll see the benefit over the coming quarters. Colleague engagement is still very high. There have not been tensions between Canadian and American colleagues the same way you see in the external world. Collaboration is good. On cost savings specifically, it will continue. We got a first wave of organizational cost savings, but there's still room to combine operations lower down in the organization, plus procurement savings.
Historically, we were using different vendors in many, many cases for U.S. and Canada, technology vendors, for example. As we start renewing these contracts, we're combining them, and that drives procurement savings.
To circle back to the U.S. trends. The fixed wireless, I know you've talked about before. I mean, it's still growing, but maybe the pace of growth decelerates based on what AT&T, Verizon, and T-Mobile have said about where they're going to go next. I mean, it's still there. Fiber overbuilds seem to be accelerating, including one made in Canada announcement last week with BCE joint venturing with PSP and targeting an incremental 5 million homes going forward versus the 3 million target they had previously. If it's not them, it's going to be somebody else. It seems inevitable that U.S. cable competition is just going to keep being tough or even get worse for the next at least five years.
Is there any thought that that needs to accelerate capital allocation decisions at Cogeco to say, "We should have less exposure to the U.S.," or maybe think about more asset sales, or are you guys still committed and think you can fight through it?
Yeah. To answer the first part of the question, there is no doubt that the competitive environment in the U.S. is quite challenging. As I said before, execution improvements can go a long way in sales and marketing. Will it bring us to positive customer territory? Maybe not, but we think we can reduce losses over time. The other thing I would say is it is important to de-average the various states. When you look at our Canadian footprint, our market share across different regions is pretty similar. Whereas in the U.S., you do have states where we have 20% market share in a three-player market. We do have room to grow there despite the competitiveness of the market. As it relates to asset sales, we have said publicly that we are open to prune some assets.
We're committed to the U.S. market in general, and I can come back to why. In the short term, we're open to some asset pruning if it makes sense. I would say it's a live file for us, and we'll see how it all unfolds over the coming months.
Correct me if I'm wrong. It's been a live file for a while. How much longer does it stay a live file before it's considered dead?
I think what Patrice has said, this type of question where I defer to my CFO, but I think what Patrice has said before is by the end of this year, if you have not heard anything from us, it is unlikely to happen in the short term.
Okay. Should swaps be factored into that same sort of timeframe and philosophy of thinking about it as well? Even if you cannot sell something at a reasonable price, could there still be an opportunity to have a like-minded cable company saying, "Hey, what benefits you, benefits us in terms of getting better clustering?
We're open to every option. I would say, if anything had to happen, pruning is more likely than swaps. Not that swaps are a bad idea. It's just practically hard to make them work. The U.S. market is so diverse. You need to find a partner that has a complementary footprint, a swap that makes sense. Operationally, it can be tricky. I would say we're open to it, but less likely.
I'm going to try my question again that I asked in the last conference call, although I suspect the answer will be similar. The floor asset seems somewhat unique. It's not a DOCSIS cable asset for the most part. It's fiber to the building or to the gated community. That's where we seem to see pretty vibrant M&A activity and, in some cases, frothy multiples. Is it possible that can be—at least that can be carved off, even if DOCSIS assets are more challenged to sell?
Yeah. I won't get into specific regions. I would say any region that would be a candidate for divestiture would need to make operational sense in terms of its geography and integration within the rest of the footprint, financial sense. So some assets would fetch different prices than others, and strategic sense in terms of how it fits with the rest of our strategy. From there, I would say there are different possibilities, and I'm probably not going to comment further on specific states.
Fair enough. I'm going to pause before I shift gears to wireless and other topics. Anybody in the room want to put their hand up for something to ask Fred? Some of you must live in Oakville, Burlington. Any bad customer service experiences you want to?
We have new customers in the room, so thank you for your business.
No questions. Okay. Wireless. I'm going to go to Canada first. It matters more to you. Other names that we cover and other people in this room care about, and then we can talk a little bit about the U.S. too if you want. Remind me when you announced the partnership with EastLink and the unnamed network provider. Was it nine, ten months ago?
It's a few months ago.
It's a few?
It was last summer.
Yeah. So it's with that. I mean, it's getting up close to a year. It doesn't seem like that heroic a task to plug the systems in. You already have customers. You already have building systems. You already have marketing and brand. Is this just technical challenges still to have it fully launched commercially? I know you've done some testing of pre-orders, but there's no commercial launch yet. Is it just the backend systems, or are you actually deliberately holding off going, "Wow, this market just seems to be getting more and more competitive, and maybe we should wait"?
No, no, no. It's not that at all. What I can share with you, look, we can all have an opinion on how long it takes. What I can say is, based on our original timetable from last summer, we're on track, and we haven't missed a milestone. We're quite pleased with how this is unfolding. We want to do it right. We need to train our staff. Our staff is going to be selling wireless services for the first time after decades of selling wireline. It's progressing as planned. We're getting closer. We're starting to take—we're starting to build a sales lead funnel and a list of customers who are telling us that they're interested. That interest is higher than we were expecting.
It comes from both Quebec and Ontario, and it also comes from customers willing to bring their own device, which is what we will do at the beginning. This is all very encouraging. I would also say that we've tested end-to-end calls on the whole system, and that's been successful. We are getting closer. It has nothing to do with the last part of your question, which is any concern about the market. Of course, the wireless market is becoming more competitive, but for us, it's all gravy. We are quite optimistic about what it can do for us. When you look, the benchmark for us for both Canada and the U.S. on wireless is cable MVNOs. The Charters and Comcast of this world, they're the ones that have deployed a similar model.
When you hear—you listen to their CEO speak, they say that wireless is a material needle mover to the overall EBITDA of the company, coming mostly from churn reduction and more acquisition on the wireline side.
Correct me if I'm wrong, but where I sit, if a customer wants to go shopping and is aggressive in Canada, you can find sub-40 hours as a rate plan right now for a decent-sized data bucket and even in some cases a 5G network, not a 4G network. For you guys to really stand out as being cheaper as part of a bundle in that environment, I mean, you'd almost have to go to free on a promotional basis or $10 to really stand out. Is that the intention to try to make a splash to get some subs and attention at first, or is it, "You know what? In this environment, we can just take it slow. We don't even need to be the lowest-cost price out there. We're going to win some customers because they want to be with us because they like our service.
They want it all on one bill, and maybe they'll pay us $40. We don't have to go to $20 to win some. Can you level set us on how you think about it?
We don't want to lose money on wireless. At a gross margin level, our objective is any wireless new add would be at least break even on the wireless portion of it.
Day one?
I'll come back to that. It would drive a benefit on the wireline because you get wireline churn reduction, discount reduction, and more sales. Therefore, this would be a gross margin accretive overall. Of course, there are some fixed costs right now in our P&L. These are already in our P&L, and it would take a certain volume to cover the fixed costs over time. Again, it's not to lose money on any incremental ad. As it relates to launch promotions and things like that, yeah, that can always be more aggressive, but that's just a short-term launch promotion to get attention.
I've heard that in the industry before, and sometimes the short-term turns into 24 months. When you say short-term, you're thinking three, at most six months, or like 12-plus?
Look, it's tricky. It's short-term is what I can say. It's not 24 months. It's a limited number of months to get the attention with the launch.
Over time, the objective is clearly to have positive gross margin from wireless and also bundling churn benefits for broadband as opposed to just taking share in wireless with lower prices.
Yes. When you look, we do not have a crazy internal penetration target that would lead us to do stupid things. Again, when we benchmark ourselves with Comcast and Charter, it is a relatively modest penetration curve, but one that is achievable, one that lets us protect the margin, and one that is still EBITDA accretive to the overall business over time.
Okay. Can we segue to the regulatory environment that oversees the MVNO framework and then also the TPIA framework? Any evolving thoughts about what happens over seven years, or are you still quite comfortable that the current network provider would be willing to extend, or the CRTC would waive the seven-year sunset clause so that you'll never have to build your entirely independent facilities in wireless? I'll just leave it open-ended if there's any updates on the TPIA file that you'd like to share with us, Fred.
Sure. If we start with wireless regulation in Canada, the deal we have with one of the big three network providers on the table is a five-year deal. It does not require us to build a network. We are confident that we'll have multiple options at our disposal over time, starting with this five-year deal. We could always choose to build some network in, say, downtown Oakville if we have a lot of customers there, and it's more economical for us to use our own antenna. We could always do a network co-build, but right now, the deal we have on the table does not require any network build. We are confident that we'll sort out, continue to follow a capital lightweight of deploying wireless. That's what I would say for regulation on the wireless side.
Now, if I could talk to you for a minute about regulation on the home internet side, there's the TPIA regime that was put in place in Canada to let players like TekSavvy and other resellers start a business and bring competition to Canada by reselling the network of others. That only exists in Belgium and in Canada. There's a reason for it, but we were supportive of it because it brings competition. Now, the issue is that it's not the smaller players reselling our network now; it's the big three. More and more, it's the big three reselling the network of Cogeco, and that's wrong. That kills investment, and it's not the right thing. We really appeal to the new cabinet that was appointed yesterday to take action on that. The big three should not be reselling the wireline networks of small regional players.
Something has to be done, and we're appealing to them to do something about it.
As you know, you're not the only one making that appeal. I think there's very few on the other side of that argument who think it should be allowed. Is it just an appeal from you, or are there any insights as to what either the CRTC or the new government are thinking about this file to make you think there's some hope they—I would say reverse it because the existing rules do allow us to use the others—all three of them to use other people's networks. To reverse that, is there any sense you have that that's hopeful?
The one sense I have is that there's a process underway where we have made an appeal to the CRTC, and others have as well. They do have to look at it, and I look forward to having more conversations with them about it.
To unpack it, to make sure I understand your criticism or concern, it's not so much that these big three players are using your network incrementally. It's that they are using a fiber network in your region and it creates more competition, or is it that they're actually hogging more capacity on your cable network?
It's both. At the end of the day, they're using a no-investment mean. The big three through this regime are using a no-investment mean of essentially hurting smaller regional players. The analogy I would use is, what if airlines were forced to let bigger airlines fly their planes? It's not okay, especially in a world where it essentially stifles investments in Canada, and it's not okay in a world where the government wants independent, sovereign Canadian companies that are investing. It's against those principles.
Excellent. With our last minute, I want to go back to—I think there are much important points for the story for investors and for you to have other things you focus on, but this step up in free cash flow in 2027. I mean, fiscal 2027 is only three and a half months away from starting. As we get closer and closer, you still see visibility that approximately $150 million of rural CapEx falls off, and that goes straight to free cash flow, or is it possible we see some other offsets to that?
Yeah. The question alludes to the fact that we do see our free cash flow go up over the next two years. Fiscal 2026 starts in three and a half months for us, and fiscal 2027 is 12 months later. We are quite confident it will happen because it is within our control. It comes mostly from a reduction in CapEx, which is the natural end of some projects. We were building new rural networks in Ontario. Our CapEx was elevated because of that. It is finishing next year. Good news is then the networks will be ready and will get loaded up with customers for a couple of years. We were also investing and upgrading our network to higher speeds, and we are approaching the point of being done there. We have more speed on our network than customers can use.
The natural conclusion, successful conclusion of those projects will result in an easing off of our CapEx, which will result in an increase in the cash flow in the next two years. How this cash flow will be used? First, we'll keep growing the dividend as we've been doing every year. As I said at the beginning, we have room to do, plenty of room to do that. We'll keep bringing down our debt. Our debt is around 3.4 times today, which is lower than a number of competitors, but we want to bring it down to around 3 by the end of fiscal 2026. We have room to resume share buybacks as well over time as well.
Excellent. With that, we've run out of time, but Fred, thanks very much as always for your time and insights.
Thank you, everyone. Thanks.