All right, we're ready to go with the second Canadian telecom company here at our first Toronto conference in 2025. We are very happy to have Cogeco presenting next with Patrice Ouimet, the CFO here this morning. Patrice, thanks for being with us.
Good morning. Thanks for having me.
I want to start with the big strategic shift, if you will, over the last couple of years. It's wireless that you've been deploying in Canada, probably one of the most important developments over the last couple of years, changing your offering to the customers there. I want to hear what is the strategic positioning of your offer versus what the other guys are offering and how maybe was the success of the launch so far?
Sure. Yeah, thanks for having me. Pleased to meet you today. We're very happy with our launch of wireless. We've been working on it for a while. As you know, we are an MVNO player. Basically, we are renting the infrastructure. When you look at the comparison of what we offer, we offer pretty much the same thing as others. We offer 4G, 5G across Canada because that's the network we're using. In terms of features, we have three packages that are available. It's fairly simple for customers. Customers have to take the internet with us, so you cannot just take the mobile products. It's more of a bundling offer. We are also a bring-your-own-device player as well. Basically, we don't offer devices at this point. It might change in the future, but for now, that's what it is.
There's a feature that is very similar as well in terms of what consumers can get with their phone. We offer also for a fee the ability to go outside of Canada. We're talking about the Canadian wireless offer right now because we have one in the U.S. as well.
Yes.
We have alliances as well. People can just pay a fee to basically, when they're on a trip, have access somewhere else.
You have said it is a bundling play for your existing internet subscriber base. I wonder if you can share maybe some numbers over the objective that you will have over time. How much of that subscriber base on the fixed side can we expect will be bundled over time if you have some objectives or maybe also on the churn reduction power that this wireless offering can have over time?
Sure. We just started, obviously, we have our internal projections and they run multiple years. I think the parallel to use is to look at the large U.S. players that have been at it for probably eight years now. Typically, the number of customers that are bundled with both data and mobile is sitting at 15%-20% now. I think getting to double-digit bundles is definitely something we can do over time. It will take several years, especially the early years are slower because you're starting from zero. I think that is the plan. In terms of churn reduction, since we just launched in Canada, the U.S. has been a bit longer, but still early days. We are starting to see some benefits from this in the U.S., but again, in smaller volumes.
I think more importantly, it's well documented in terms of churn with multiple products when you look at different operators throughout the world. We do expect the benefit. It comes at a cost, obviously. We do provide bundling discounts. It depends how much you want to push it. There's always some customers that will shop around to get others. For us, it was quite important to get it to be able to offer the bundle to new customers who are shopping for a bundle, also to use it in retention because it's great right now when we're discussing the various services and prices that customers have. We can now have a different conversation and talk about an additional service that comes at an attractive price for them as well.
Yeah, that makes sense. Going in the same direction that some of the other guys have been saying. I want to stay in Canada for a moment. Frédéric, the CEO, said recently that he was starting to see maybe signs that fiber competition in Canada was stabilizing. The Bell and the TELUS have done the bulk of their build in Canada, some left. If you can maybe update us on the fiber competition.
Sure. We have different competitors, but in terms of fiber competition, which is the main competition that we have, we've had periods where the level of promotions was more aggressive for some years. I would say this year, in the past six months or so, we've seen a more constructive market. A bit less volatile than what we see in wireless generally, where it's been either non-promotional or very promotional. Right now, we've seen, again, a more constructive framework recently.
Good to hear. At the same time, you're taking the competitive aspects in some new areas. You've been launching the Cogeco branded Internet service in Montreal, leveraging the TPIA framework at this time. We've been seeing Videotron kind of doing the same things in Florida. Do you anticipate those are levers that are going to be used meaningfully, or is this just more positioning on the competitive side?
Yeah. Maybe if I cover what we're doing generally, even before that, we bought a company called Axio about two years ago. It allowed us basically to have a second brand because most of our competitors in Canada have at least two brands. And it's digital only. It targets a younger population as well. Very happy with it. We use it both in footprint and out of footprint. Out of footprint, it's using the wholesale TPIA regime. It's available throughout most of Canada at this point, except east of Quebec. When you look at the Cogeco brand, we've historically only used it in our footprint, footprint being an area where we have installations. More recently, as you said, we launched it across Quebec. Given that we have, I mean, our head office is based in Quebec, we have radio stations in Quebec as well.
We have a brand name that is known. It makes sense. In terms of materiality of it in the future, we'll see. Quebec is only one portion of where we operate. As you know, we operate in Ontario. We operate in 13 states in the U.S. as well. We'll see. There are a lot of doors that we can service in Quebec, given that we are clearly not the dominant player in terms of size in Quebec. It allows us to use a name that is known throughout Quebec to address these additional doors.
It sounds like more addressing the inbounds than starting to invest more aggressively on the marketing side.
We will have to see. The economics are different, obviously, when you are renting out the network versus when you have invested already. I would say we are not planning necessarily to invest large amounts in marketing, but we will see as we go. It can be inbound, but to have some inbound, you do need to make some investments. There are ways of doing it that are not too expensive to do as well.
I want to move to the U.S. for a bit. There's been headwinds on the general U.S. cable industry with fixed wireless and the fiber buildouts out there. Recently, in the investor communication, you mentioned that you're starting to see that subscriber trends are improving in the U.S. as well for cable, even soft positive net adds in Ohio. Can you maybe unpack a bit of the dynamics behind these comments?
Sure. Ohio specifically has been the biggest pain point we've had. We bought this company several years ago. We bought it at the time. First of all, it was a portion of a company. You need to extract that company from the sellers. That's always cumbersome to do for at least a year. The competition level in the industry grew at about the same time. We were a bit unlucky with our timing. We lost a lot of customers over the quarters, but we've been working hard at it. The losses had been improving over the past year. Finally, in Q4, we just reported on because our fiscal year ends in August, we had a positive number, as you said. That was our plan. Our penetration is not high in Ohio, and it's a great area where we operate.
We see an opportunity to grow this in the future. What we have done as well specifically there is we have invested in the network. We separated it, but we also invested to increase the capacity and the stability of the network as well, which was quite important. We changed the TV product to our solution, an IPTV product, which is very good. Our NPS that we measure, so that is the customer satisfaction in the area, has gone up quite a bit. We are on a good track in that area. You ask more generally in the U.S., we operate in 12 other states as well. It varies. We have areas that are stable. There are others that are more competitive. We use different strategies depending on where we operate.
These strategies include how we promote our products, the type of products we offer as well. Because the speeds we offer on internet is generally at least a gig at the maximum speed. There are places where we offer multiple gigs as well on coax. We offer that as well on fiber. It will vary depending on the area. The idea is to continue to execute well. There is a bit of street fighting as well in all these areas, especially the very competitive areas. Following the reorganization we did last year, we merged basically our Canadian and U.S. management teams together. We are seeing a lot of opportunities in sales and marketing in the U.S. market, which we are not surprised. We knew there would be by doing so. That was one of the reasons we did it. We are executing on it right now.
Yeah, Fred mentioned it on a couple of occasions there. You touched on the competitive dynamics in the U.S. That has led Comcast to make comments on their last earnings calls, basically saying that they were going to be a bit more careful with their pricing increases. I'm wondering if you think this is also the right approach in the Cogeco context, or do you feel compelled to take the same approach?
Yeah. It varies really by region. We do not have necessarily just one approach. I would say when we look at how we price the products, typically, there is going to be an increase that is more important on video, although not every customer takes video because we have to pay video content costs, which are increasing faster than inflation. For the internet product and the other products we offer, it varies. In terms of mobile offering, which is the new service we offer over the past year, that is something that is very attractively priced basically for customers to bundle as well. We will see. I do not necessarily have an announcement to make on that. We do not typically talk about what we will do in the future until we get there because our plans evolve over time and, again, vary by region.
Interesting. Another very interesting development in the U.S. recently that you discussed on your latest earnings was in terms of network evolution. You're converting some of the coax lines that you have directly to fiber. You're not necessarily taking the historical DOCSIS evolution approach, shifting to fiber. I thought that was a bit of a unique and very interesting strategy. Maybe if you can unpack what are the reasons behind this, because some of the investors are going to be wondering, will this company have to do it across our footprint? I think so far you've been saying that you're only doing it on a selective approach. If you can discuss that.
Sure. Yeah. It's fairly tactical. We are targeting areas. First of all, there's new technologies that allow players that already have the infrastructure locally. Most of our network is made up of fiber all the way to the nodes. It's just the last portion that is not for many areas where we operate. That infrastructure is quite expensive to build, but it's there right now. There's new technologies that allow us to take fiber from there and split it basically a bit further out, closer to the homes. That cuts the cost quite a bit. It doesn't work everywhere in terms of cost benefit. We do it selectively where it makes sense.
That's the first thing we look at is to make sure that the investment we're making there is not too different than what we would have made in any case in the next future years to split the spectrum and implement DOCSIS for. That's one thing. We typically target areas where we have higher market penetration as well. It's tactically done. We've looked at where we think the market will evolve in the future in terms of the different players out there. That's part of the equation. I would not assume that we'll do it everywhere. We could technically do it, but it would not make financial sense to do so.
That makes sense. I want to go on the consolidated side now. In terms of the streamlining plan, I think this has been a big initiative since Frédéric took the helm, basically. I'm wondering where we are in terms of the restructuring roadmap or streamlining. How much left is there in terms of efficiencies?
Sure. We announced basically we'd do a three-year transformation plan last year. We are done with the first year. It went pretty well, actually. The first thing we did is we restructured our operations, as I mentioned earlier, with the management teams now handling the two countries. That has been going well, actually, not just in terms of cost reduction, but efficiencies and decision-making. Every day, like any company, we have to make decisions on where we allocate money, the technologies we are choosing as well. That allows us to be a lot faster. We also saw a portion of the reduction in CapEx we had in the year we just reported on came from this, basically. There is more streamlining on how to operate. That is good.
As we're just started basically the year two, and it's going to be year three as well, we will continue on reducing costs, but also we will focus more on revenue generation. That's basically using more data to make every decision we make, whether it's on pricing, retention, promotions. There's a lot of information we can use. We're using a lot more AI to do that as well. It's the buzzword of the day. We're not selling AI, but we're using AI quite a bit now. We will.
It can be adjacent to that industry.
For sure. For sure. If I give you examples as well on cost reductions, some that we've done and some that are coming, we've implemented chatbots that are handling about 50% of the chat sessions now with customers. The satisfaction is pretty good also with customers. We're changing the voice systems as well for natural voice. We've been doing a lot of preventative maintenance in the network. The idea, sorry, is to use the information we have at the modem level of customers and make interventions before it becomes an issue. Often it's not visible to the customer. That has allowed us to increase NPS for that portion of the business and also reduce costs over time.
Best customer service is not having the call in the first place.
Exactly.
That's what they say. You touched on the efficiency of the CapEx rollout going forward. You've also been talking about kind of the slowing down of the subsidized network deployment, especially in Ontario. Quebec is largely done now. What we've been wondering on that in terms of reduced CapEx expectations, will that have an impact in terms of even the growth going forward?
Sure. Until a few years ago, we were running our capital intensity below 20%. We were in the 18%-19%. The idea is to return there, probably even lower than this over time. What happened in the past few years is we started building more outside of our territory. We built in Quebec. These were subsidized builds, where the various government entities pay for a portion of the build. Otherwise, it does not make sense to do on our own because they are a bit more remote than we normally do. That is behind us in Quebec. In Ontario, we are about halfway through it. We have about 50,000 doors to do. We have done 25,000. The balance, most of it will be this fiscal year. We have a smaller project going on in Virginia as well in the U.S..
is going to be less of these programs going forward from what we anticipate. We will revert back to a lower capital intensity. Now, to your question, will it impact future growth? First of all, for this year and the next two years, we will benefit from these builds we have been doing. If you fast forward to three years and on, I know it is a long time period, with a level of intensity that is lower, we will continue to build in territory. That is basically new streets and new neighborhoods that pop up in the areas where we normally operate. We always do these. It makes a lot of sense. The local infrastructure is all there. It is quite easy, actually, to extend the network by those new streets. That growth will continue.
Modeling this, I know we've talked about this before, three years out, it would have an impact on year-over-year growth in EBITDA by less than 1%. Now, 1% is not that big. There are a lot of things that can move the EBITDA by 1%. The money we're going to save from this, obviously, is going to be reinvested somewhere. Either it's something we do at the shareholder level, or it's something we do by reinvesting into, let's say, an acquisition or something else that will create growth as well.
Yeah. Do not get me wrong, protecting the ROIC is paramount.
Every decision is based on return on investment in what we do.
Yeah. That brings the next question on free cash guidance. You've been giving some longer-term guidance in terms of your free cash objectives. Now you just released your annual guidance for the year, which the midpoint is approximately CAD 540 million for the year that just started. I'm wondering if that means we're on track for you to achieve the CAD 600 million free cash in the fiscal 2027.
Yeah, for sure. Actually, the year we just finished, we did better than we thought on free cash flow. That came partially through the reorganization. There were some additional benefits we were not expecting initially. Yeah, we're still aiming for next year to be at around CAD 600 million in free cash. The big increase will come from a reduction in CapEx. As we're repaying debt as well, we have less interest costs. We're seeing it every year. That should help there. I would say that is currently our plan.
We're on track. Great. One of the hidden assets that I get questions about is your spectrum assets. You do own quite a bit of spectrum. It is also a valuable C-band spectrum. Everyone likes mid-band that you bought under the CRTC set-aside rule. Attractive pricing there. You were following the rules there at the time to be eligible to the MVNO framework. The question is, do you need to keep that spectrum to have your wireless endeavor ongoing? Maybe we can start thinking about additional monetization strategies around that valuable asset.
Sure. First of all, we want to be efficient in the way we operate. That's why we went the MVNO route. We had to buy spectrum to be allowed to use the MVNO. The way the auctions were done, we had to buy large territories. For example, to operate on the periphery of Toronto, we needed to buy all of Toronto, which we did. We spent about CAD 600 million. A lot of it was at attractive pricing. If you look into the future, we will have probably a mixed use of this spectrum. The one that's in footprint, we're planning to use to have access to MVNO, like we're doing right now. As we buy these spectrum licenses, we need to deploy equipment as well. You can use it to offload data, obviously. That's another use.
Going forward, you can look at different things we can do with this. You can help basically negotiating attractive MVNO partnerships for the longer term. You could have some network sharing agreement. We'll have to see. For sure, also there could be some monetization or renting out the spectrum, especially when you look at areas where we don't have a physical operation, like downtown Toronto. We have some in Montreal, Quebec City, Ottawa as well. It is all mid-band spectrum, which is used for 5G. For sure, it's a great hidden asset that is nonproductive right now, which is sitting on our balance sheet. More to come on this in the future.
Maybe just more on the renting out, on the subordination, is there something that would preclude you from doing that right now?
Yes. There are some. There are two things. First of all, in the last auction of mid-band, there was a period of five years that was limiting the ability to own more than a certain quantity of spectrum. There is also a moratorium on selling more than 10% of your spectrum holdings that came about the same time. This one does not have an expiry date, but something that I presume in time will change. We will have to see. Right now, as the auctions were not that long ago, the players, including us, have acquired a lot of spectrum. Because it is a key spectrum for 5G, there is not another one coming up in terms of spectrum auction. We do see a need by several players over time. I think this is more of a medium-term play.
Okay. Interesting. Maybe a last one. In terms of capital allocation, you brought leverage down to 3.1 turns. There may be some little changes with DFX because of your U.S.-denominated debt there. Largely, you're at your leverage objective right now. Is there going to be a change in terms of capital allocation, maybe more buyback, or you want to keep going on the leverage, maybe changing the leverage target objective, or what's the plan there?
Yeah. Our long-term leverage target has been three times to EBITDA at a consolidated level for a very long time. I've not decided to change this for now. We're comfortable in terms of our dividend payout ratio. We're at about 30%. It's comfortable to be at and to continue to be able to increase it over time. We've run buyback programs for many years in the past. We stopped when we made a larger acquisition of shares about 18 months or 24 months ago. It's still in the plans to reactivate this in the future once we go below three times debt to EBITDA. Given the strong free cash flow generation we have, normally we can do both. We can increase three things. We can increase the dividend.
We can have a buyback program and reduce leverage normally, except when we're doing all these investments and network expansions, which are coming to an end soon. I think this is in the plans. We'll definitely have a discussion internally of where we want to be. Is it three times for the long term or something lower? More discussions internally on this. We'll see how the economy evolves as well.
Yeah. Great. That's all the time we had. Patrice, thank you very much for your insights.
Thank you.