Okay, I think we'll keep rolling. Welcome back, everyone. It's great to have Cogeco here with us today. We have CEO Frédéric Perron, I think a familiar face to many of you here. Frédéric, welcome. Thanks for coming.
Thank you, Tim.
I thought we'd start with a general question, and it relates to the restructuring you announced last year, I guess it was, and how you were going to flatten the organizational structure effectively at Cogeco and really manage the business as one business, rather than as two separate operating units. I remember you talking about how you went from three org charts to one org chart and things like that. Maybe just give us an update on the restructuring, because I know it was a multi-year project, the benefits you're seeing, and where you hope to take the company going forward from a strategic perspective.
Sure, I'll be happy to talk about that. Maybe if you don't mind, I can start with a more general update for people on how things are going. I'll remind everyone that we're in our blackout period now. We just finished our fourth quarter of the fiscal year, but I can still comment on general trends. First, I'd like to share that our entry of wireless in Canada is going above expectations so far. We've launched in 13 markets, and we're getting ready over the coming weeks to launch into all of our markets. I can say that sales are ahead of our internal targets so far to a point where we've actually already started pulling back on some of our initial launch offers.
We had some launch offers just to generate buzz at the beginning, and we're already realizing that some of it is not necessary given the early sales velocity that we have. We're starting to pull back already. That would be number one. Number two, as it relates to wireline in Canada, our ability to grow our customer base is still quite strong. The new news that we're seeing is more constructive competitive behaviors on promotional activity in Canada, which is, I've been here for five years, I'd say it's probably the best progress I've seen in five years on promo pullback. In the U.S., we've been losing customers in the U.S. What I can share now is that we're increasingly confident in our ability to turn around our customer trends south of the border. Some of our sales and marketing channels were quite underdeveloped relative to Canada.
We're starting to transpose some of our Canadian practices to the U.S., and we're getting good momentum there. As it relates to our transformation, which is what you're alluding to, we just concluded year one of our transformation, which was merging essentially two countries, two different companies together. I would say we're saving a lot of OpEx. We're saving a fair amount of CapEx. Our savings are ahead of plan for year one, and now year two and three will be increasingly focused on reinvesting in the top line growth, both subscribers, but also ARPU improvements over time. Last but not least, you add all of this up. We said publicly before that we had a goal to keep growing cash flow, specifically a target of $600 million in cash flow in two years. I would say we're quite confident in our progress towards that.
As that keeps happening, we'll be able to keep growing the dividend in quite a healthy way, keep reducing our debt, and eventually buybacks will be an option as well.
Okay, great summary. Given those, what are the strategic priorities, and then we'll get into the two operating units. What are the strategic priorities that the board has set for you? Over kind of a medium term, where do you want to take the company going forward?
It will go back to some of the things I talked about, but first, scale wireless in both countries, but do it in a profitable manner. Our play there is to cross-sell wireless to our existing wireline customer base, to reduce churn, increase sales, improve ARPU. The benefit will come on our wireline business. Second, turn around the U.S. As I said, we're making some good progress there on the subscriber front in particular. Keep executing our three-year transformation. There's so much more we can do around reaping even more benefit from the merger of our two business units, deploying AI, deploying analytics, and keep scaling up our sales and marketing channels. The last one is to deploy, manage the balance sheet and our cash flow. I would say in the short term, in a relatively conservative manner, that will return value to shareholder.
Okay, let's dig into the operations then. Why don't we start in Canada? You mentioned in your opening remarks, you think it's a more constructive pricing environment out there. We've heard pretty much consensus, more or less, from the wireless players that that pricing environment is getting much more stable. Less consensus, I would say, on the wireline side, although I think the tone was generally encouraging. Maybe just dig into it a bit. What are you seeing on the promotion side that lends you to believe that the environment is encouraging for Cogeco?
Yeah, I'd say it's been about three, four months that in our markets, and I'll remind everyone that we operate mostly in rural and semi-rural markets of Quebec and Ontario. It's been about three, four months that we've seen some of our larger competitors pull back on promotions to an extent, as I mentioned before, that I hadn't seen in the past five years, and we've followed on that. We see that as relatively encouraging from an ARPU perspective. On the negative side, there's been some focused promotional activity on fixed wireless access, for example, but I would say that the positive largely outweighs the negative at the current time.
Can you compare and contrast Ontario and Quebec there? Are you seeing a similar dynamic in both markets, or is there a differentiation across the border?
The negative promotional activity on fixed wireless access has been in Quebec. The positive improvements in promo pullbacks have been in both provinces.
Okay. On the FWA, in most public calls, you've said that you really haven't seen any impact there. Should investors think that you're starting to see a little bite there, or do you think it's more of a manageable situation?
It's more of a manageable situation. We're not really feeling it in our figures. We've got quite a lot of experience on FWA with our U.S. business, and what we're seeing in Canada is nowhere near. The market is quite different. In the U.S., when some of the players launched FWA, the entry level of the market was quite open for them. In Canada, the entry level of the market is already quite crowded, with a number of sub-brands that are really serving that market. That might be one of the reasons why FWA has not had as much traction north of the border.
Okay. On the business, just in general, you know, you've got a lead product with Internet and then a couple of sub-products on video and voice, which are obviously in decline. You've always talked about an internet-first strategy. How is go-to-market in terms of the various products you offer changing in Canada?
In Canada, yeah, the internet-first strategy has been mostly for the U.S. In Canada, we still sell all products and now wireless as well. I would say even though TV is not growing the same way internet is, it's still a good business and it's still a good cash generator for Canada. TV in the U.S. is smaller, less profitable, not only for us, but for our competitors as well. That's been in our trends for the past few years. We do still sell TV, though, in the U.S., and we will continue to sell TV. Some of the players in the U.S. have stopped selling TV altogether. For us, even if it's gotten smaller, we do see that it helps us serve a specific segment of the market that we otherwise couldn't serve. Of course, in that segment, we make good profit on the internet product.
Right. You also operate two brands in Canada with the Cogeco brand and the oxio brand. Can you compare and contrast what you're seeing on those two businesses? For those on the line or in the room who aren't familiar with oxio, maybe just start and remind people what that business is.
oxio is a Canadian, essentially digital-only internet provider. They used to be a reseller, so a TPIA. We bought them three years ago or so, and now increasingly, we're using them on our own network at good margins. Essentially, we're using them to incubate a digital transformation across our company more broadly. oxio is going way ahead of expectations for us so far. They have one of the highest, if not the highest, customer satisfaction in Canada, and it's really a win-win. You and I were talking during the break. There are many customers who don't want to call us anymore, who don't want to talk to a telecom anymore, and the digital-only model of oxio really works for them. That leads to a customer base that's happier and cheaper to serve.
Is oxio an in-footprint or out-of-footprint strategy for you?
When we bought them, they were primarily out of footprint, but more and more our customer loadings are coming in footprint on our own network. It essentially complements the Cogeco brand, does not cannibalize it very much, and helps us serve a broader spectrum of the population at good margins. By the way, I would also add that I think we've said publicly before that we are seriously thinking of launching eventually an oxio-like model in the U.S. as well.
Okay. Is there any difference in take-up on oxio between Ontario and Quebec?
The take-up is good in both.
In both. Okay. You touched on wireless a bit. You said the trends are encouraging, but maybe let's dig into that a bit. Remind people where wireless fits in kind of your strategic hierarchy, and then, you know, the market that you're trying to address now and where you hope to take that franchise going forward.
Yeah, actually, in both countries, our strategy for wireless is to only sell it to customers who also buy wireline from us, either an existing customer or a customer coming in that's willing to buy both product, wireline and wireless from us. Our goal is to at least break even on the wireless portion. We need to price it in a reasonable way that covers our wholesale costs and our cost to serve on the wireless portion. The benefits come from the wireline portion because wireless will reduce churn, reduce discounting on the wireline, and will help us attract new customers that we could not attract before.
Right. Okay. You mentioned it's available in 13 markets. Can you talk about the rollout going forward? Maybe, you know, how will investors know or how should we define success of the Cogeco wireless product over the next few years?
Sure. In terms of deployment plans over the coming weeks, we will deploy in all markets where we operate in Canada. It's already in most of our markets in the U.S. As it relates to measures of success, it will take some time. I would not expect it to be super visible in the first year, but over time, you'll see the benefit on our wireline performance for reduced churn, reduced discounting, and therefore better subs and ARPU over time.
In terms of disclosure, investors should manage their expectations about when we'll see metrics.
Yes, we will wait until it becomes a larger business and it makes sense to disclose it at that point.
Okay. Maybe just a regulatory question. You have been very vocal in opposition to the TPIA. In fact, you have another court application related to it. Maybe refresh for everyone why you think TPIA is bad for business in Canada, bad for the business in Canada, and not just yours, but the ecosystem, and maybe the path or timeline of your latest court application.
Yeah, you're going to get me fired up on this question. The internet resale regime or TPIA regime in Canada is broken and nonsensical. It's not a coincidence that it's only Canada and Belgium that have a regime like that. It's been in place for years. Other countries have been watching it. They have not copied it. There's a reason they have not copied it. It doesn't work. It doesn't work because you're asking players, regional players in our case, to invest in building and upgrading a network. The next day, the government tells us, "Thanks for all those investments. We're going to let the big three use it now. Use your investments." By the way, we're going to dictate for you, we, the government, are going to dictate for you, or a CRTC, how much they're going to pay you. It doesn't work. It needs to change.
We've said it many times. The Prime Minister and the Industry Ministers have not acted on this yet, but they must act. As you say, we're going to take it to court. We're going to have various appeals. We're going to do everything we need to do to make sure that what's wrong gets right. They're not done hearing from us on this file.
What is your proposed solution, if not a TPIA regime? What do you think is the best regulatory structure for the industry?
First of all, let's remember that this regime was created to help the small reseller enter the market and that today is being used by the big three to get even bigger. The big three should not be allowed to use it to get even bigger. There should be symmetry between wireline and wireless. As I said, on wireline, if a big three wants to use our network, they need to make zero investment, and the prices are dictated by the CRTC. When we had to enter wireless, we had to invest $600 million in spectrum, and we had to go negotiate one-on-one a rate that a partner would be willing to give us. It's a complete asymmetry. There needs to be symmetry in place, and the big three should not be allowed to use it.
What is the timeline on these appeals and court applications?
There's a variety of them. We made one last week, but you may see more coming over time.
All right. You also recently took the opportunity to offer some suggestions to the Minister on some other files with respect to regulation. Do you want to just weigh in on a couple of those?
Yes, as part of the Canadian budget process, Minister Champagne asked for our opinion on the upcoming federal budget. What we said in a nutshell is that a top priority would be to bring the CRTC from the 1980s to the 2020s. Part of that is the wholesale regime that I talked about earlier. There is also Canadian media. It is nonsensical that Canadian media, not only us, all the media, TV, newspaper, are suffering because American media is coming in, digital media, over-the-top applications. They are not regulated, and the Canadian media is increasingly regulated. What are we talking about here? Not only is the CRTC not helping Canadian media, they are making things worse. What we're going to keep talking about is, please get out of the way, don't damage Canadian media at the expense of American media, and let us help ourselves.
Okay. Any questions from the floor on Canada before we move over to the U.S.? Okay, let's talk about Breezeline. You mentioned your internet-first strategy, and you continue to offer some video products, but what are you seeing in terms of traction across, I think you're in 13 states, from your various offers out there?
Yeah, what we're seeing is a few months ago, we've said this publicly, that the U.S. market is quite competitive, and we saw a further uptick in competitive activity in three of our states. I would say that since then, the situation remains elevated but stable. We also said that we can do much better in our customer trends in the U.S., and it comes down to our internal execution. As I mentioned in my introductory remarks, our sales and marketing channels have been historically quite underdeveloped in the U.S. You've seen our good sub-performance in Canada. What we're doing now is deploying a lot of the practices that generated those results in Canada south of the border. We're quite optimistic that over time, we can offset a lot of the U.S. headwinds through execution improvements.
Where are you seeing the competition? Is it coming from fixed wireless players? Is it coming from extended fiber builds? Where are you seeing it? I recognize that it's different in most markets, but where are you seeing most of the challenging issues?
To your point, the U.S. market is so much more diverse and heterogeneous than Canada. It's pockets in different states. Fixed wireless access (FWA) is a factor that we've been dealing with for quite some time as something we can deal with. It depends on states. In one state, there's one player that's up for sale, and that's been more aggressive in the market and leading up to the transaction. We expect that this will be temporary in nature. There are other states where former DSL players are upgrading to fiber, similar to what we've been dealing with here in Canada. A lot of that has happened already, and in some cases, there's a little bit of overbuild as well.
I would say, as it relates to an outlook, some of it will be temporary in nature, some of it will stay, but we're confident that improvements in execution will offset a lot of that.
That's worth delving into. When you say improvements in execution, is this related to what you talked about last year about deploying better analytics, or is it something else, more just blocking and tackling that you think you can get better at?
Already with blocking and tackling, we'll get quite far. There are some channels which are much smaller in the U.S. than we have in Canada. As we catch up to what we've been doing in Canada, that will already move the needle a lot. We're getting quite invested into AI and analytics. We've deployed AI tools to all of our employees. We have AI customer service bots in both countries that are generating great results, and there's a lot more we're going to do on that front.
Okay. Let's switch to wireless. You launched your capital light MVNO model in the U.S. much earlier than Canada. Maybe give us an update on how that's going and also, you know, how are you thinking about competition as you mature your go-to-market strategy?
Yeah, wireless in the U.S., I would say we have relatively modest ambitions. The wireless market is even more crowded in the U.S. than it is in Canada. I would say it's nice gravy for us to be able to compete with. I think a good benchmark for investors to look at would be the trajectory that other cable companies in the U.S. have achieved on wireless over the years. As an MVNO, you'll see when you look at it that it does take a few years for it to move the needle. You look at the large cables in the U.S. today, and they do say publicly that at this point, wireless is a needle mover to their P&L, but it's taken a few years.
Has the uptake, I would assume because it was your first foray into that, there might have been a learning curve as opposed to Canada. Can you compare and contrast U.S. go-to-market versus Canada go-to-market?
Our go-to-market is relatively similar. The strategy is relatively similar in both countries, but I would say that the uptake already is much stronger on the Canadian side. It is still early days, but Canada is exceeding our expectations so far. It comes down to a few factors. As I said, the market, we think that the Canadian market is crowded, but the U.S. market for wireless is even more crowded. The markets are different. Our customer base is different as well. Our customer base in Canada was asking for this for quite some time. We were also compiling lists of interested customers. I would say it's a combination of the market as well as the customer base that we deal with.
Okay. Can you give us an update on the Ohio market? I know that's been an area that is of particular interest to investors, given the acquisition you made there a few years back. I know you went to a lot of effort to rebrand and reposition in Ohio. How are you thinking about progress there?
We acquired our Ohio business about four years ago now. There were integration issues at the beginning, which this has long resolved. Ohio today is a great opportunity for us because it's actually close to 40% of our U.S. homes passed, and we got relatively low penetration, so we got lots of room to grow. We have said before that our objective is to get to net customer growth in the Ohio market, and we are confident that we can deliver on that.
On what timeframe? Is that a fiscal 2026 target?
We're in a blackout period right now, but I would say in the not-too-distant future.
Okay. All right. How about on the M&A side? I don't think you've done anything of significance in the U.S. since Ohio. I know you talked about potential dispositions, but I think that's off the table. How are you approaching the M&A side in the U.S.?
On the divestiture side, we had talked about the possibility of asset pruning before we did. There were reasonable opportunities, but I would say that those opportunities were not worth us going through a carve-out of a state because a carve-out can be operationally difficult. It can be a distraction for the company. It can also create disynergies. We have decided at the moment to not do divestitures, but we'll always look at what's available in the future. If the right opportunity comes, we'll consider it. As it relates to acquisitions, small tuck-ins are always possible, but we do not have a plan to do major acquisitions at the time being. Our goal is to grow our cash flow, as I said before, keep growing the dividend, reduce the debt, possibly do buyback, and then we'll see in the future in a few years where that leads us.
Now, why don't we end there? What are your ambitions in terms of leverage? Where do you want to get to? Can you put any a little more meat on the bone there of how investors should think about dividend growth going forward?
Dividend growth will continue as steadily as it has in the past. We remind everyone that we pay a relatively small share of our cash flow in dividends, so we have lots of room to keep growing it. Leverage is coming down. Our CFO has said publicly around 2 turns is our midterm focus. We're on track to deliver that. Once that is achieved in the not-too-distant future, and as we keep growing cash flow, we'll have a decision to make, which is do we go even below 2 turns, or do we do a bit of buyback or both? We still have a bit of time to make that decision, but it's good to have the options on the table.
That's great. Good way to end it. Frédéric, thanks so much for coming.
Thanks, everyone.
Okay, that was great. I appreciate it. Thanks, guys.