Welcome back. We're ready to go back to the telecom section of the conference. We're very happy to have Frédéric Perron, CEO of Cogeco and Cogeco Communications, here presenting with us today. Fred, thanks for being with us.
Thanks for having me. Good morning, everyone.
I wanna start with spectrum. It's typically not the question we start with you, but there's been a recent development. There's been a residual auction recently, and if we kinda triangulate the price that was paid during that auction, we were able to derive a CAD 1.5 billion value for your spectrum assets. I think this is something that is not always discussed, but do you need the spectrum that you have to support your wireless business, or is this something that can be monetized one day?
Sure. That spectrum was bought a few years ago when we had less clarity on our path to wireless in Canada. We're happy to have it. As you said, it has a fair amount of value. If we use the last auction, yes, our spectrum would be worth CAD 1.5 billion. If you use other market markers like the 2023 auction, it would be worth even more than that.
Yeah.
Either way, it's a very big number for a CAD 3 billion market cap company, and of course, most analysts don't include that in the value of our company. That would be a clear upside for us. We've now signed a commercial deal with TELUS, which is our network partner. We've kept all of our spectrum for ourselves, so we didn't contribute any spectrum to that partnership, so it's still all ours. What that partnership does is it gives us more flexibility now. It reduces our need to build our own network. It increases our flexibility in possibly monetizing our spectrum over time. We have a few options. Maybe we could use a little bit of it, some of it.
We could subordinate some of it, and we could also, yes, sell some of it. We'll have to see how that evolves, but my key message to investors today is that we're well aware of the value of that spectrum and the upside it could create for us.
Yeah. For the record, we carry some value for that spectrum, but definitely nowhere near CAD 1.5 billion value in our valuation of your company.
If I'm not mistaken, you're one of just two analysts who do that. The others.
Really?
Don't take anything. Yeah.
Interesting.
Yeah.
If you were to point to the most likely path to monetization, you talked about the optionality that you have with that asset. Let's say we think this is the most likely path that we'll get to the monetization of the asset.
It's certainly an option. I don't wanna make promises today, but yeah, monetizing that spectrum is a clear option for us. We'll have to see how the coming years unfold, and we'll keep you updated.
Okay. Great. Now let's talk about the Canadian side of your business. You've been reporting pretty strong internet net adds in Canada over the last little while, and this is in the context of Bell still their fiber deployment is still pretty recent. We got TELUS playing around with TPIA. We got Rogers trying FWA as well. Are you seeing any of those factors having some sort of new impact on the competitive landscape that you operate in?
Yeah. Thanks for mentioning our good subscriber growth. To level set everyone here, we've been growing market share in Canada for the past 12 consecutive quarters. Over the past two quarters, we've had the best subscriber growth in Canada telecoms on a percentage basis relative to our size. We said publicly that the coming quarter would be a bit more subdued, but still some growth. Over time, we see us continuing to deliver very strong sub growth. We got multiple levers at our disposal. We got good sales and marketing on our main brand. We got a second brand called Oxio. We got wireless now, which is also contributing on the wireline side through bundling. Sometimes we do network expansion.
We got multiple levers at our disposal to keep growing our customer base moving forward. The two competitive angles that you're alluding to, FWA and resell, are not particularly material for us.
Okay. Great. Good to know. You mentioned Oxio. This is one of your two brands that you go to market with. I think investors wanna know what is the margin profile? Because it's been a driver of subscribers. You don't disclose what part, but people wanna know if you make money with those subscribers.
We do make money. Oxio is our fully digital brand. You can only buy it online, and customer service is either digital or with an agent, but via chat, so it comes with a lower cost structure. It's a cooler brand for a different audience, oftentimes a younger audience. We use it in two different ways. Sometimes as a reseller, for example, in Western Canada, where we don't operate our own network. That comes at a thinner margin, but more and more we're using Oxio on our own network as a second brand that lives alongside the Cogeco brand, and the margins in that case are very good. They're comparable to what we make on our main brand.
Okay. Great. That's good to know because you have the lowest cost of delivery on that brand.
Correct
Versus the other brand.
Correct.
Great. I wanna touch on the wireless aspect of your business in Canada, kinda the same angle for the question. It's still a very recent launch. You've been investing in that as an effort to improve the bundling power that you have. What do you think is the timeline when wireless achieves profitability on the EBITDA side?
Yep
In Canada?
Yeah. We're very pleased. We launched wireless in Canada last year, and in the U.S. a year prior. We're pleased with the sales results so far. What we see in the U.S., because we've been there longer, is that our cable customers who now also buy wireless from us have a significantly lower churn over time. We see a clear benefit from that, and the rest of the industry has seen that as well. We expect to see the same on the Canadian side. As it relates to financials, there is a fixed cost element to running a wireless business. That fixed cost is already in our financials, in our run rate that we're reporting. What you'll see now is, as we continue to load subscribers, that will offset our fixed costs over time. You know, it's only upside from here.
In terms of when exactly it turns fully EBITDA positive, we'll have to see. It will take some time. You know, it becomes less negative essentially starting now.
Okay.
All right.
Great. I should have started the presentation by mentioning, you know, you're in your quiet period, so we'll try to avoid the.
Yep
Topics that are too near term. Maybe back to your last quarter conference call. You discussed that you were seeing a clear path to improved financial performance in the U.S. in the second half of the year. Can you point maybe to the main drivers of that improvement you're seeing in the back half?
Yep. We're improving our subscriber trends in the U.S. That's driver number one. Driver number two is we did a price increase on our customer base in February, and that's proving to be quite sticky. Number three, we got a number of in-flight revenue and costs initiatives that are delivering right now, and that's what's gonna contribute to a better second half of the year in terms of our U.S. financials.
Okay. Great. We talked about your Oxio brand in Canada being a bit of a lower cost option here. Seems like you like the model because you launched an equivalent in the U.S. a couple weeks ago, which is called welo. I think I pronounced it right, hopefully.
Yep, you got it. You got it.
A fully digital brand. We've seen prices. Didn't look at it this morning, obviously, but we've seen prices being quite aggressive at the $25 mark per month. Is that the kind of pricing that we should be expecting going forward, or we're talking more of a launch offer here?
It's just a new launch offer. Each time we launch something completely new, there's a launch offer for the first batch of customers. We've done that for wireless in Canada, and we've since removed a lot of these offers. I would expect the same for welo as well, meaning that the prices will go up following our initial launch. We're quite optimistic for that second brand in the U.S. As we said before, our Oxio brand in Canada is a big driver of our growth and being the best performer in customer growth in Canada in the industry. Now we're launching the same in the U.S. We're also starting from a lower market share level in our U.S. footprint, so we have more upside from a second brand like that.
That's good that you have the experience from the Canadian aspect of your business. We've seen the last couple of quarters really cable cos in the U.S. seem to be fighting back a bit more against fixed wireless and the fiber deployment. Do you think welo needs to have a material marketing spend because this is not a brand that is known at this point?
Yeah, just to the first part of your question, there's an almost irrational negativity towards U.S. cables right now, but they start from a different starting point than we do. The large cables in the U.S. have a market share of 50%-60%. Our market share, on an aggregated basis, is in the low 30s% in the United States, so we have less to lose, more to gain. Now in your question specifically, the marketing cost for this new brand, welo, are a minimum because it's digital, so you don't really have commissions in terms of sales. It's also a grassroots type of program where customers refer other customers, which reduces your marketing cost. For Oxio in Canada, there are some months where half of our sales come from other customer referrals, and that helps us keep the marketing budgets low.
Interesting. I'm looking at your wireless strategy in the U.S. That's been around for a little longer than in Canada. Is this something that could be launched on welo as well? I'm thinking about there are tools in the U.S. that help you launch wireless services with reach, notably. Do you expect to launch wireless service on welo eventually?
One day, we have the option of adding wireless both onto welo in the U.S. and onto Oxio in Canada. It's not in the cards in the short term because we wanna grow these brands on the wireline side and acquire kind of a significant base of customer that we can then cross-sell to. At one point, not in the immediate term, at one point in the future, it's an option we have for sure.
Okay. Great. Yeah, bundling works for lower cost as well.
It does.
Great. We touched very quickly on the pace of the fiber builders in the U.S. You talked about your lower penetration or market share over that footprint, which helps you probably in the future. Have you seen any change in the pace of fiber building in your markets? Because we're seeing the big goals that the fiber deployment companies have right now. In your specific markets, is there any change in the dynamics there?
Yeah. The fiber question is a funny one, right? Because even in Canada, and I'll come back to your question in a second, but even in Canada, three years ago, we were always getting the question from people like you, "How are you gonna fight with fiber in Canada?" And now our competitors are mostly fiberized in Canada, and we still have the best subscriber growth in the industry. It's possible to successfully fight fiber, and we've now proven that for 12 quarters in a row. Now turn to the U.S., we don't see our ability to compete with fiber being much different there. It's just that the U.S. is a bit later in their fiberization, whereas our competitors in Canada are pretty much done with their fiberization. It has been happening in the U.S.
In our markets, we think it's about 50% of the DSL that has been upgraded to fiber already. Where will it stop? You know, one of our competitors in Canada seems to have stopped at 70%. Let's see where it stops in the U.S. The key point here is a lot of the fiberization in the U.S. has now happened with a bit more to go.
Your expectation is that what we've been seeing in Canada in terms of the impact on your subscriber pool is gonna be similar in the U.S. with the future building, is what I'm hearing.
The markets are different, so it's a bit tough to draw inferences like that. My messages are, we've proven for several quarters that we can fight fiber very well in Canada. We have similar marketing tools and approaches in the U.S. Our technology is competitive. Of course, when a competitor fiberizes, you see an impact at the beginning because they do marketing and things like that. Now a lot of that has happened with just a bit more to go. With a bit more to go. Yeah.
Okay. Great. Kind of a similar question on the satellite technology. You know, we're seeing Starlink. They recently bought Spectrum in the U.S., so a bit of a different dynamic in the U.S. than in Canada. Do you see Starlink eventually becoming a relevant competitor on your footprint in the U.S.?
Yeah. It's interesting. A couple of weeks ago, Starlink made an announcement at Mobile World Congress in Barcelona, and it triggered a bunch of questions around that. Now, it's important to take a step back and say that their announcements were mostly about wireless, not wireline, where they're partnering with wireless companies to increase the coverage. For example, if you're in very remote areas with your cell phone, Starlink, and you don't have your 5G coverage, Starlink will help you give additional coverage. Starlink has since come out and said, "We're a complementary service. We're not a substitutional service." So that's where a lot of the noise has been. Our business is still primarily wireline. Their announcements were less about that. When you look at the engineering of satellite versus wired connectivity, you know, there's only so many houses that a satellite beam can cover.
Right.
Even with new generations of Starlink, they have generation three coming, it's still a relatively small percentage of homes. You cannot have two beams at the same time because it can cause interference. There are clear limitations to how much, how many customers they can get, so that's the view at the moment.
Right. All makes sense. Speaking of your network, you discussed something two quarters ago, which I thought was very interesting, from a networking perspective, in the sense that you are switching directly from your HFC hybrid fiber- coax structure directly to fiber to the home. That's something I don't think I've seen another cable co doing. I know cable cos have been deploying fiber for 15 years probably at least. What does it mean for your DOCSIS roadmap, and do you think you need to be fiberizing your whole network essentially?
The answer to the last part of the question is no. We will not be fiberizing our whole network. We've been quietly and frugally upgrading our network in both Canada and the U.S. Now, the majority of our network has 1 Gb speed, which is more than what any customer needs, and frankly, more than what most devices can handle. That's the majority of our network in both countries. We even offer 2 Gb in a lot of our network now. We're in good shape, and we've done that within our existing CapEx envelope. The program that you're talking about, fiberizing parts of our network, is a relatively targeted and focused program where it makes sense in certain density areas where we wanna protect our customer base against incoming competition, we can sometimes upgrade our network from cable to fiber using a strand mount technology. Again, I would see that as a very focused program.
Mm-hmm.
I would not see that as a big capital deployment plan.
Okay. Interesting. One of the most interesting aspects of the Cogeco story from an investment standpoint, I think, is your CAD 600 million free cash flow guidance for 2027, which starts in September.
September 1st. Yeah.
I think, first of all, it would be great to hear you reiterate that objective. If we're trying to see a bit longer term, is this a one-off? Does that rely on a low CapEx year? Or essentially, what is behind the CAD 600 million assumption?
I am reiterating that objective. We've been increasing our annual free cash flow quite substantially over the past two, three years. It will continue to grow to CAD 600 million in the fiscal year that starts September 1st. I can reiterate that. To the other part of your question, it's not just a one-time, it's for the subsequent years as well. Now, CAD 600 million, our market cap is CAD 3 billion, so it's a lot of money for us becoming available. Even after we've paid our dividend, we'll have about CAD 400 million left, either to further reduce our leverage below the three turns target that we have by the end of this year and/or do things like buyback programs, for example.
Okay. Good to hear. I think a part of that CAD 600 million is, from where we are right now, comes from a reduction in CapEx that you're expecting in the coming years. Can you help us, maybe have comfort that this reduction in CapEx will not come with a change in EBITDA trajectory?
Yeah. I'll answer where it comes from, and it's gonna help answer the other question which is it comes from three places. First, it's not the biggest, but there is a reduction in interest expense as we keep paying down our debt, so that helps the free cash flow. Second, there is an end to some of our network expansion programs, which will create a natural end to some CapEx expenditures. The third one is, we see synergies in maintenance CapEx. A year and a half ago, we merged our Canadian and American businesses. In the past, they were operating independently with different vendors, different systems, different engineering teams. As we've merged those two businesses with one engineering team, we see clear synergies in using the same vendors, same approaches, and also fewer pet projects.
We're seeing clear synergies on maintenance, CapEx. Now, to your question about is it gonna hurt EBITDA in the future? No, because first thing I said, reduction in interest expense. It's just a reduction in interest expense.
Yeah.
CapEx, maintenance synergies is just synergy on the maintenance. The end of those rural network expansion programs I was talking about, there are still many years. You build those projects, you extend that network, and then you start loading customers, and the customer loadings usually last a few years. There's many more years of customer loadings to come from that one. That's a long way of saying that, no, this will not put additional pressures on the EBITDA development.
Okay. That's good to hear.
Yeah.
The other thing that's been contributing to your EBITDA recently is your three-year transformation program which you communicated when you took the helm of the company a little while ago. As you look forward, what are maybe the most promising aspects or sources of growth that you see beyond that three-year program that you've communicated?
We're just starting to scratch the surface in terms of reducing our cost structure. We started this three-year program 18 months ago or so we're halfway through it. The genesis of it was a benchmarking of how many times our customers call us, what's the duration of each call? How many times do we roll a truck to try to fix a problem at a customer's house? Sometimes we don't even need to. We benchmark all that and we realize that we could be a lot more efficient. Customers still call us a lot. Those calls are still very long. We're starting to improve that, and you see it in our cost structure, which is starting to reduce.
We're on track to deliver our three-year targets with one and a half year left to go. That will only be the beginning. We see several more years of that. You've seen us improve our EBITDA margins by about 50-100 basis points per year, and we expect that to continue for the coming years as well.
Right. A lot more to do. That's good to hear.
Yeah.
Maybe last question we touched quickly on the capital allocation that your CAD 600 million of free cash enables. At this point, you haven't been doing buybacks for a little while. I think you're a bit more focused on deleveraging right now. Do you think that this is still the right balance at this time? When do you expect you will resume the buybacks?
Our debt leverage ratio is about 3.2 turns right now. For many years, we've had a target of three. We're still on track to achieve that target by the end of this fiscal year, so by the end of this August for us. The CAD 600 million in cash flow kicks in. Keep paying dividend. We've been raising the dividend a little bit every year. We can actually do both if we want to. We can decrease our leverage further below the three turns. If the right opportunities come, we could also restart a buyback program. We have the luxury of capital allocation. We could do all three, dividend, leverage, and buyback. How we optimize between the three is something we will be discussing with our board this summer, and then we'll be updating you at appropriate time.
The first objective is to meet the three turns, leverage level, and then we reconsider?
Yeah. It's just a balance. As I said, we have the luxury of capital allocation. It's just how you allocate is something we'll be discussing with our board. Yeah.
Okay. Great. We're out of time. Frédéric, thanks a lot.
Thank you so much.