Good day, and welcome to the Cogeco Inc and Cogeco Communications Inc quarter one 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrice Ouimet, Senior Vice President and Chief Financial Officer of Cogeco Inc and Cogeco Communications Inc. Please go ahead, Mr. Ouimet.
Thank you. Good morning, everybody, and welcome to this quarterly conference call which Philippe Jetté and I will present. Again, as we begin this call, I'd like to remind listeners that the call is subject to forward-looking statements which can be found in our press releases issued yesterday. I'll turn the call over now to Philippe Jetté.
[Non-English content], Patrice. Good morning, and thank you all for joining us to discuss the financial results of Cogeco Communications and Cogeco Inc. Let me first note that we are satisfied with Cogeco Communications' overall performance for the first quarter of fiscal 2022, which is in line with our expectations in our Canadian operations and slightly ahead in our U.S. operations. On the radio side, Cogeco Media continues to face pressure from a slow advertising market in light of the COVID-19 pandemic and current supply chain disruptions impacting many industries. However, all in all, these results position us very well to start on our fiscal 2022 on a solid footing. Let's start with our U.S. operations recent initiatives. We closed the Ohio acquisition on September 1st, which added nearly 690,000 serviceable households and businesses to our footprint.
The integration of these assets is advancing well and according to plan. This acquisition represents a strong strategic fit for Cogeco Communications as it is complementary to our existing U.S. footprint and capitalize on our existing American platform. On January tenth, our U.S. subsidiary announced a full rebrand, changing its operating name from Atlantic Broadband to Breezeline. With the recent acquisition of Ohio and other expansion initiatives, the rebrand aims to better represent its geographic reach, which is now beyond the Eastern Seaboard, the breadth of its product line, and a pledge to an excellent customer experience. As part of the rebrand initiative, Breezeline launched Breezeline Stream TV, a cloud-based IPTV service allowing customers to access live and recorded programs through a single, very easy-to-use interface on every device inside and outside the home, in addition to several popular streaming application.
Breezeline will gradually roll out this new offering across its footprint during the year. We expect the new offering to contribute to free cash flow as it is more capital efficient and allows for customer self- installations. Breezeline is moving along with its plan to invest approximately $82 million in network expansions in fiscal 2022 to reach nearly 70,000 additional homes and businesses with fiber-to-the-home services. Franchise agreements have been obtained in multiple communities in New Hampshire and West Virginia, and many other franchise agreements should be concluded in other states in the current fiscal year. It is an exciting period as we are planning to have our first commercial launch within a few weeks. At Cogeco Connexion, we are also progressing well with our network expansion projects, where we are planning to increase the number of homes passed by 3% by fiscal year-end.
The 13 high-speed internet network expansion projects which were awarded in several regions of Quebec are expected to be completed by September 2022. In addition, we are active in several projects in Ontario with more to come as a major broadband funding program is being launched in the province to connect additional unserved and underserved regions. On the customer experience side, our data analytics capabilities and introduction of new marketing automation leveraging artificial intelligence are resulting in lower churn and improving video and telephony customer trends. We are also continuing to gain traction with our cornerstone high-speed internet services and with EPICO, our IPTV entertainment service.
Finally, we continue to prepare for an entry in the wireless market and are currently participating in a CRTC proceeding that will establish the terms and conditions for access to the incumbent wireless networks. As for Cogeco Media, even though the radio business continues to face pressure of the current economy on the advertising market, we continue to enjoy strong ratings from our listeners based on the fall 2021 Numeris survey results, which confirm the outstanding performance of all Cogeco Media radio stations. In particular, our 98.5 station, which was the most listened to station in all of Canada. I will let Patrice now discuss our financial results.
Thank you, Philippe. Revenue at Cogeco Communications is up 19% and adjusted EBITDA up 14.9% in constant currency when compared to the same quarter last year. This was essentially driven by EBITDA growth of 33% at Breezeline, formerly Atlantic Broadband, mainly as a result of the Ohio systems acquisition. Free cash flow declined by 5.2% in constant currency, mainly as a result of increased capital expenditures, acquisition and integration costs related to the Ohio acquisition, and financial expenses, partly offset by higher EBITDA and lower current income taxes. Capital intensity reached 19.6% compared to 18.8% last year, mainly due to the higher capital expenditures of our U.S. operations related to the Ohio systems network infrastructure and to support footprint expansion combined with accelerated equipment purchases.
In the first quarter, Cogeco Communications continued to be active in its share buyback program with the purchase of 274,000 shares for a total consideration of CAD 29.5 million. Our first quarter was slightly above expectations, we are confirming our Cogeco Communications fiscal 2022 financial guidelines, which were updated in November to include the Ohio acquisition. On a constant currency basis, we still expect that Cogeco Communications will grow its revenue in the range of 15%-17% and EBITDA in the range of 14%-16%. We believe that the Ohio acquisition should still contribute approximately 11.5% of revenue growth and 11% of EBITDA growth.
As for organic revenue and EBITDA growth, we expect the U.S. operations to generate mid single-digit growth, and the Canadian operations to generate low single-digit growth. Excluding the network expansion projects, we expect free cash flow and constant currency to grow between 5% and 15%. As for quarterly results, we expect that organic year-over-year EBITDA growth will gradually improve throughout the fiscal year for both Breezeline and Cogeco Connexion, as we had an unusually strong first two quarters last year, given that certain expenses, such as marketing and advertising, had been deferred to the second half of the year. We expect that capital expenditures will gradually increase throughout the year as network expansions and the Ohio integration capital expenditures will ramp up. Now let's look at the individual components.
In the U.S., Breezeline's revenue and EBITDA in constant currency increased by 31% and 33% respectively for the first quarter, mainly as a result of the Ohio broadband acquisition. Now, if we exclude the Ohio impact, revenue in constant currency increased by 4.6%, mainly as a result of annual rate increases implemented for certain services and a higher internet service customer base and a higher value product mix, partly offset by lower advertising revenue as last year was an election year in the United States. EBITDA, excluding the Ohio impact and in constant currency, increased by 4.3%, mainly as a result of organic revenue growth, partly offset by rebranding costs to Breezeline and higher marketing and advertising activity.
We expect a similar organic EBITDA growth trend in the second quarter as we continue to invest in the rebranding, which will then be followed by stronger growth in the second half of the fiscal year. As we had highlighted when we announced the Ohio acquisition, we expect that revenue generated from the Ohio transaction will gradually decline in fiscal 2022, mostly as a result of a declining video customer base while we integrate the operations and transition to an IPTV platform. We do expect the EBITDA to remain stable. During the first quarter of fiscal 2022, the internet subscriber base remained essentially stable, generally due to low customer movements in the industry following significant customer additions last year, as some customers have accelerated switching to our high-speed internet services.
Other factors include more seasonal disconnects this year, which were unusually low last year in the context of the pandemic. More non-pay disconnects due to the lapsing of some COVID-19 relief programs in the U.S., less bulk unique connections this quarter, and competitive offers in a portion of the footprint. We do expect that internet customer growth will resume throughout the remainder of the fiscal year. The larger loss in video customers is mainly due to a stable internet customer base. The broadband first strategy that we have been using for a year, which is focused on a higher product mix and losses in the Ohio system, which were planned. Finally, we expect that quarterly video customer losses will reduce in the future quarters.
Turning to the Canadian operations, Cogeco Connexion revenue increased by 8.2% in constant currency relative to the same quarter last year. Excluding the impact of the DERYtelecom acquisition, revenue in constant currency declined by 0.6%, mainly due to annual rate increases, which were delayed to November fiscal 2021 in some geographies, and a decline in video and telephony customers, partly offset by the positive impact of a higher internet customer base. Cogeco Connexion EBITDA increased by 0.7% in constant currency relative to last year. Excluding the impact of the DERYtelecom acquisition, EBITDA in constant currency declined by 6.9%, which was as expected as part of our annual guidance.
The decline is mainly due to higher marketing and advertising expenses to support overall customer base growth compared to unusually low cost in the same quarter last year in the context of the pandemic. We expect slightly higher positive EBITDA growth in the second quarter compared to the first quarter, as our Canadian operations should resume their organic growth and the DERYtelecom results were included for most of last year's second quarter. We then expect that Cogeco Connexion will generate mid-single digit EBITDA growth in the second half of the year. The broadband customer additions in the first quarter were slightly lower compared to last year, which benefited from the positive impact of the pandemic. The video and phone customer losses were better than last year, resulting from a more targeted marketing and advertising approach by region and by market. Now let us look at Cogeco Inc.
In the first quarter, consolidated revenue increased by 18% and EBITDA increased by 12.9% in constant currency. Revenue related to the radio operations decreased by 2.6%, mainly due to a soft advertising market in the context of the pandemic and the slow economic recovery for media companies. We are confirming Cogeco Inc.'s fiscal 2022 financial guidelines, which were updated in November and reflect the same expectations as for Cogeco Communications. Cogeco Inc. also announced yesterday the launch of a normal course issuer bid to acquire up to 325,000 subordinate voting shares over the next year. Cogeco believes that the purchase of its subordinate voting shares is an attractive use of its liquidity. I'll turn the call over now to Philippe for concluding remarks.
Thank you, Patrice. As you can see, we have started fiscal 2022 on a solid ground, and we expect that organic year-over-year EBITDA growth will gradually improve throughout the year, the fiscal year as we add an unusually strong first half in fiscal 2021. The ongoing trend of customers spending more time at home for work, education or entertainment should continue to have a positive impact on our growth outlook. Finally, I would like to give an update on Cogeco's commitment relating to environmental, social, and corporate governance. On December 7th, Cogeco published its first climate action plan and Task Force on climate-related financial disclosures, outlining the key steps it is taking in support of an urgent climate action, as well as its processes and strategies to assess and manage climate-related risk and opportunities.
Our plan includes actions to reduce our own operational emissions, covering 100% of our Scope 1 and Scope 2 emissions, as well as the most material emissions from our value chain, representing over 67% of our Scope 3 emissions. It also includes actions to ensure long-term resilience by identifying and mitigating our key climate-related risks while maximizing climate-related opportunities. A few weeks after receiving His Royal Highness, the Prince of Wales' Terra Carta seal in recognition of our commitment to creating a sustainable future, Cogeco received on December 7th the prestigious A rating from CDP. This rating demonstrates Cogeco's leadership and commitment to best practices in governance, disclosure and emissions reduction. We are proud of this achievement. Only three Canadian companies achieved this score, and none of our peers in Canada and the U.S. made the A list.
Lastly, Cogeco and Cogeco Communications announced on December 17 that they both transition their term revolving bank facilities into the first syndicated sustainability-linked loans in Canada within the telecommunications and media sector. The facilities incorporate ESG-linked incentive pricing terms, which reduce or increase the cost of funding depending on the annual performance against specific targets. These targets are related to Cogeco's greenhouse gas annual emissions reduction and our digital inclusion initiative to provide 75,000 homes in underserved and unserved areas of Canada with access to high-speed internet service over a three-year period. Additionally, Cogeco and Cogeco Communications will dedicate any savings achieved from the sustainability-linked loans towards internal sustainability initiatives. Now we will be happy to answer your questions.
At this time, we would like to inform everyone, if you would like to ask a question, press star then one on your telephone keypad. Once again, star one to come into the question queue. Our first question is going to come from the line of Aravinda Galappatthige with Canaccord Genuity.
Good morning. Thanks for taking my questions, and Happy New Year. Just a couple of questions from me. First of all, I was wondering if you can sort of flesh out the internet movements in the U.S. I know that historically, seasonality hasn't always been consistent, and obviously the pandemic may have disturbed that as well. I was wondering if you can talk to that variance. Perhaps connected to that, I mean, we know that there's been a bit of a sell-off in the U.S. cable cos, and there is a little bit more awareness around, you know, the U.S. telcos starting to step up their network expansions, and particular sort of upgrades.
wanted to get your thoughts on that and whether you're seeing any of that within your footprint?
Well, let me just start with one or even two steps back. Before the pandemic, the industry had a run rate. The pandemic certainly changed many customer behaviors, and there was different needs that the industry took care of by connecting even more customers very fast. Now it seems like we're coming back to trends that are in line with pre-pandemic levels. I'll turn to Patrice to answer the second component of your question.
In terms of the build-outs of phone companies with fiber- to- the- home, we have seen some announcements as well, but I would say we have seen little impact so far. We'll have to see in the future. I would say at this point, we're not really seeing much action in terms of converting DSL into fiber- to- the home. Just coming back to the question on internet. Yes, we did run with fairly high- internet subs over the last two fiscal years.
There is less activity right now, and we believe that a portion of customers have made the switch as people were spending more time at home, switched from competitors to our high-speed internet products and the other products we offer. We do expect that the attractiveness is there, and we'll continue to add subscribers, and we do expect future quarters to be more active than what we saw in Q1. There is a bit of a pause from there. Other items relate to you were mentioning seasonality. Last year, we had less disconnections due to seasonality than usual, and we believe it's also due to the pandemic. People were moving less than before, spending more time at home as well. Whereas this year, we're a bit more back to normal.
We also had this quarter less bulk additions in the Florida market. This varies by quarter, but it was a softer quarter. We expect at least the next two quarters to be more active in Florida. The last piece would be the non-pay disconnect. Given the programs, the COVID-19 relief programs that were in place in many states and on the federal level, many of these programs have lapsed now and we've seen higher non-pay churn, which is more usual than last year was unusually low.
Okay. Thank you for those. Thank you for that color. Maybe for Patrice, switching over to CapEx, obviously you provided very specific guidance on 2022. How should we think about network expansion options going into 2023 and beyond? You know, are we likely to see perhaps more, you know, initiatives on the U.S. front as you sort of exploit the new legislation there? Or, you know, is that sort of uncertain at this point?
This year we're planning to spend between CAD 230 million and CAD 240 million, and that's Canadian dollars, total in network expansion. At the high level, it's approximately half and half between Canada and the U.S. Canada right now is very focused on the build in Quebec, which has to be done by September 2022.
There will be little in Quebec in the next fiscal year. We do have smaller projects in Ontario that are ongoing and that will carry over in the next year. There is also a new program coming up in a few months. It's gonna be an auction actually in Ontario. We're gonna be participating, but it's difficult to say exactly how big it will be until we go through the process. That's Canada. In the U.S., we are planning to add about 70,000 homes passed this year. The timing can sometimes change by a quarter, but that's the plan for now. We like this business.
It's something that we've been doing in Florida for a long time, and we're targeting mid-teen unlevered returns on this expansion. As Philippe said, we're gonna have our first network, a very small one that's gonna be live very soon from these expansions. Then throughout the year, especially in the last few quarters of the year, we will have the bulk of it. I do expect that we will be doing more in fiscal 2023. The pace of it will depend on how attractive we see the different opportunities for growth. I would not say it's a permanent situation, but I would expect the U.S. will remain active in fiscal 2023.
Maybe one last point on this is that this year is more of a build period. In fiscal 2023, we do expect to see the benefit of additions of PSUs and obviously some revenues and EBITDA. I would say the bulk of the EBITDA contribution will come the next year. You should start seeing meaningful additions of subs in fiscal 2023.
Okay. Thank you very much. I'll pass the line.
Thank you.
Our next question will come from the line of Jérôme Dubreuil with Desjardins.
Thanks, everyone. On wireless in the U.S., in the past, you appeared to be a bit more focused on M&A and had no intention to partner in an MVNO model. I wonder if you can comment on if your thinking has evolved in terms of stepping into wireless in the U.S. recently.
Well, [Non-English content], Jérôme . It's all prioritized with the size of opportunities, our capacity to execute, on the short and the mid-term timeframe, as well as the return we're expecting to get. Right now, at this point, still in the U.S., we see very strong opportunities to edge out, to expand our networks, with very high- quality fiber- to- the- home networks, increase our market share in adjacent footprint. That is still at the very top of organic or edging out growth right now. We are interested in Canada on the wireless side. We all know that. We are aware of what to do in the U.S., but it's all a question of prioritizations.
Right now, the network expansion, the wireline network expansion in the U.S. are top of our list. We need to know as well in the short future what the Biden infrastructure program will look like. There's another $40-some billion in subsidy that will cascade down to the states. That program is not very well known at the moment in details, but we will continue to monitor that.
Okay. Thanks. That's helpful. Also with the Omicron wave we're seeing right now, obviously this has not impacted the quarter you just reported. Wondering if so far you are seeing maybe similar impacts to the last year on the January 1, or maybe more muted impact.
Well, on the telecommunications side, our operations, our 24/7 operations are very robust against the pandemic right now. We have very good processes. We can cope with the different regulations that are coming from the different states very well. On the media side, it's actually more the markets that is being impacted right now. We have several segments of the market that has not resumed an economic recovery. So they don't really advertise at the moment. Others have supply chain disruption or labor disruption. Some segments have actually quite strong demand, but since they can't supply to that demand with shortage in products or labor, they are slow on advertising.
That's helpful. [Non-English content].
Our next question will come from the line of Vince Valentini with TD Securities.
Thanks very much. First, Patrice, can I try to clarify a couple of the U.S. broadband things you talked about? In your prepared remarks, I think you said for the rest of the year, you expect positive internet adds, but you said it pretty fast. I just wanna make sure that's what you said?
That's right.
Perfect. The churn and the non-pay churn you talked about. If you just look at overall churn of your broadband subs in the U.S., can you tell us if that was stable year-over-year, or did it increase?
I would say we're closer to usual trends, whereas the last year was unusually low. Obviously, as there were a lot of restrictions on people moving and people were highly working from home and also getting education at home, we had less interest from customers to make switches, especially leaving us. We had people interested in moving to high-speed internet on our network, but less people leaving us or actually moving houses as well. That was a bit slower last year. I would say we're more back to normal at this point.
If I look back to two years ago in the first quarter of 2020, your churn would be pretty similar this quarter?
Yes. At the high level, yes. Yeah.
Okay.
It's the acquisition that's a bit slower than usual for the reasons I mentioned, a slight pause or a bit less demand as a lot of people have already moved to our networks in the past two years. This will pick up as well.
Last on this topic, the seasonal disconnect, can you just fill me in on that? I assume this is in Florida, because in Florida, people would be going there in, you know, in the winter months, not leaving there. Is there some region where you have a lot of seasonal households?
We do have households along the coast, so it's not just in Florida. Actually, Florida, we have a sizable bulk business. Whatever is in the bulk contract does not move. It's a yearly contract. We do have add-ons, so some of the contracts will provide just video, for example, and people will take retail internet. These can be disconnected potentially. We also have people in other states higher up that will have vacation homes in the summer. It's a bit the inverse of Florida.
Oh, okay. Two other quick other topics, if you don't mind. Breezeline rebranding, can you give us any sense of how big that is for the full year? I'm surprised that you say it impacted Q1 much because you just announced it this week and Q1 ended in November. You were actually already spending money that got expensed in Q1?
We did, yeah. Obviously, this requires a lot of preparation. To be able to make an effective launch, you need to have everything ready. We did invest some amounts in Q1, and there will be some in Q2 and Q3 as well. I wouldn't say it's the only thing. There's obviously just more general sales and marketing, but that's part of the reason for being a bit lower than usual. We do expect the second half of the year to be higher than usual in terms of EBITDA growth in the higher end of the single digits.
The full amount, which is over the three quarters, is it, like, is it CAD 5 million or more, or is it a more immaterial amount?
It's probably in that range, yeah. It definitely, you need to change logos. You need to rebrand the equipment we use as well, like the trucks. There are some costs to do that and some marketing as well. Yeah, it's a few million CAD, but it's not. I wouldn't say it's just half a million CAD.
The last question, maybe more for Philippe, but whoever wants to answer it. You talked about priorities for investment in relation to that U.S. wireless question. I'm wondering about radio. The CRTC is probably coming out with a review of regulations soon, and I think most people expect and think there should be more allowance for consolidation in Canada and allowing people to own more stations in a market. If that happens, can radio be on your list of priorities for investment to bulk up and take advantage of scale and synergies?
Well, thanks, Vince. It's too soon to answer that question. We will obviously participate. We've been in constant dialogue with our governments, both at the federal level as well as the provincial level. There's a lot of attention, as you know, on media, whether it's papers or radio or television. They've suffered a lot through the pandemic. We will continue to participate through the different forums that are active at this moment, and we'll see what the future will look like for the media sector.
Thank you.
Our next question will come from the line of Jeff Fan with Scotiabank.
Hi, thank you, and good morning. Just a quick follow-up on the U.S. broadband net additions. You said it's gonna be positive for the rest of the year. Can you elaborate on what drives that for the rest of the year? What initiatives you have in place? Maybe you talked about it, but I'm sorry if I missed it. The other question related to the broadband is, in your release, you talked about, or you made mention of competitive offers in portions of your footprint, that resulted in the net additions results, for U.S. broadband. Can you elaborate a little bit on that? Because in your earlier answer, you talked about no evidence of any impact from fiber. Are you seeing impact from fixed wireless?
Because, I guess a couple of bigger players are making a lot of noise, in the U.S. on that one. Thanks.
Well, Jeff, if I could start with the latter part of your question to address the fixed wireless. We've noticed too, there's a number of things that are being said. Now this capacity is coming from capacity that was being built and assigned to mobile initiatives. As you very well know, the ARPU per gig on the mobile network is much higher than fixed wireless, where fixed wireless consumers consume 40x the amount of data than on the mobile side. We will remain skeptical to see major shift from network capacity from mobile to fixed wireless. We will monitor, like you will, what's really being done there.
The high cost of spectrum and the high cost of mobile network builds suggest that fixed wireless is very local, opportunistic, and in small areas.
On the broadband additions in the future, obviously, this is something that is always difficult to predict with accuracy, and that's why we don't provide specific guidance on it. These additions or losses in a specific quarter are a small portion of the overall base. That being said, we do have a number of programs, including the launch of the Breezeline program, so there's a number of marketing activities going on there. I talked about the lapsing of certain government aid that was provided that created some churn. This should normally not be there for a good portion of the balance of the year as the bulk of it was during the quarter.
There's some seasonality patterns as well. As I said, this quarter was a bit more normal, but last year was abnormal. We do expect that the pause we were seeing, given that there we had an accelerated level of addition in the last two years, will not last forever as well. We do expect that activity on the new customer side will start as well. Lastly, as I said, the bulk additions in Florida were low in this quarter. Actually, they were lower than last year. We're gonna have some quarters, because we have good visibility on this, in the balance of the year where you'll see the reverse, where we're gonna be higher than last year.
Thank you. If I may just follow up on Philippe's comment. I totally agree about the cost per gig. I mean, the math says itself. I guess these operators are using excess 5G capacity in their network for fixed wireless. I guess you know, the cost per gig might have an impact longer term as to how big that business may turn out becoming for them. In the shorter term, it doesn't stop them from trying to grow their broadband business, 'cause that seems to be a big focus in printing those big fixed wireless subscriber numbers for the street. Are you concerned a bit about even their attempt?
No, we're not concerned. As I said, it's going to be localized, it's gonna be opportunistic. The high cost of mobile spectrum is sunk, and it won't go away. Eventually they'll have to bring back that capacity in line with the business model that brings the ARPU at the right level. I actually feel for those customers that will be sold something in the interim period, and after some time, they will have to be taken back to move that capacity to mobile. It won't be a great customer experience eventually.
Okay, fair enough. One last question just on wireless in Canada. I know there's still quite a bit of uncertainty in terms of how that model might play out. You know, just on your MVNO model, can you just remind us, do you own the core, or is the plan for Cogeco that if you do pursue this, to own your own core? And if so, have you started to make investments in that area? And if you do own your own core, does that have an impact on costs and free cash flow going forward if you do decide to move forward?
That's a good question. No, we have not made a major investment in core. We've always said that we need to control the core part of the network. Now, it doesn't mean that we have to buy it. We could lease it. There are different models out there. It all starts with the terms and conditions that the CRTC will put in the wholesale framework. We are investigating, of course, the latest development in technology, and CapEx is a different order of magnitude. We are also looking at models of pretty much CapEx-like model, where control doesn't mean ownership of every pieces.
Great. That's helpful. Thank you.
Thank you. Our next question comes from Matthew Griffiths with Bank of America Merrill Lynch.
Oh, hi. Thanks for taking the question. I just wanted to follow up on the Canadian Wireless kinda aspirations. You know, I know that the terms and conditions kind of proceeding, if that's the right term, is ongoing, but can you point to any kind of timelines or expectations about when you think it might conclude?
Yes, it's a long process. The CRTC just launched another request for comments with a long list of questions to the industry. All I can really say is that this investigation will need to close for the next step to be set by the CRTC. The best timeframe we have right now is likely very late spring, early summer.
Okay, great. Thanks.
Since the CRTC do not publish roadmaps or timeline, we're all waiting on them to declare something on timing.
Right. Of course. On the 70,000 homes that you are aiming to add in the U.S., I guess this fiscal year, what is the expectation? Well, first of all, can you maybe characterize the area that you're expanding into? Will you be the sole cable operator? Are there existing cable operators in those footprints? What are the expectations for the pace of adding or achieving target penetration levels?
Sure. The U.S. expansion is different than Canada. Canada is in areas that are underserved or unserved. We typically partner with the government to provide it. Generally, well, to be eligible, basically in these areas, the competition will be DSL or fixed wireless or nothing. In the U.S., it's different. We're actually going into areas like we've been doing in Florida for many years. Now, it's more in New Hampshire, so it's more Northeast. We are going into average size cities, average for us, at least. Typically there is one cable operator, and there is also a DSL operator from a phone company. We bring in fiber- to- the- home. It's a different dynamic.
Our penetration rates, we're expecting in the U.S. are different as well. We're targeting 36% over three years, whereas in Canada it's higher at 50%. We are the only one with a fiber product, but there is also a cable operator there, yes.
Okay. You know, maybe just to. You know, I don't wanna beat the fixed wireless thing too much, but, you know, I kind of agree with Philippe's kind of characterization of local opportunistic and in small areas. I think one of the things that, like we're focused on is if these areas, if these local and opportunistic small areas are the areas where you're operating. 'Cause I think the conversation, if we look at it nationally, you know, has one flavor. If we look locally and if you're seeing a growing challenge from the fixed wireless operators in your local areas, that would be, you know, a different conversation. You mentioned you're monitoring it, but are you seeing?
Like, what are you seeing when you monitor in your kind of market intelligence that you're looking at in your local small areas?
No, that's a good question. Of course, if you want to sell excess capacity, you need to start having excess capacity. Where have they built a lot of capacity? It's in dense urban centers. As we are more of a rural and regional operator, we operate in areas where towers are far from one another, so there's far less capacity to be resold there. I would point to areas that are dense, urban, and where excess capacity has already been built.
Okay.
Which doesn't map very well with our operations.
Okay. Okay. Fair enough. You don't see, I mean, 'cause you described basically the T-Mobile model for your area, but you're not seeing it, I guess. That's fair enough. Okay, thank you for the answer.
Our next question will come from Tim Casey with BMO.
Thanks. Just a couple for me. With respect to the Canadian wireless opportunities and the potential remedies coming out of the Rogers and Shaw transaction, given its, you know, there's this possibility certainly that, you know, remedies will be negotiated prior to the final terms and conditions on the MVNO side, how should we think about how you're approaching that opportunity?
Well, Tim, this is a good question, and again, we're depending on the three bodies that are very closely monitoring this transaction. We've expressed concerns, as you know, to the CRTC for different reasons, to the Competition Bureau and to ISED. Now, they are running their analysis and evaluation right now. It's not known exactly.
The conclusion they will draw, each of them. We still need to give it a little bit more time to see where the three analysis will point to. We could speculate a lot, but right now, let's give them the time to achieve some analysis and results, and we'll see.
Okay, related to that, you know, there is, you know, some speculation in the market, certainly from your investors with respect to the block of shares owned by Rogers. I know this is a topic that's been on or been around for a few years, but given the accelerated CapEx initiatives you have, which are clearly all on strategy. At a high level, what would your appetite be or where would the potential to repurchase shares be within your capital priorities?
Yeah. It's definitely part of the capital deployment, and we've been active with a normal course issuer bid. If this situation presented itself, we could play a role, and that's what we've said all along, although it would be a role because it's a sizable investment. We do believe that buying back our shares is a good investment of capital as long as we can pursue the other things we're doing. Fortunately, we're in a good financial situation and generate a lot of free cash flow. Now, given the various acquisitions we've made in the past year, our leverage is a bit higher than our target. Our target long-term is 3x EBITDA.
We do have some capacity to play a role if ever this came along.
Thank you.
Thank you.
Our last question for the day will come from the line of Drew McReynolds with RBC.
Yeah, thanks very much, and Happy New Year, everyone, and thanks for squeezing me in. Two clarifications. First, Philippe, on the wireless framework, timing. The late spring, early summer that you just provided, that's simply to get the terms and conditions finalized by the CRTC, and presumably subsequent to that, you then go into commercial negotiations. Have I got that right?
You got it. It's exactly that. We need to first see reasonable terms and conditions, and then we will get into negotiation with more than one incumbents.
Okay. Okay, perfect.
On the rate.
Okay, thank you for that. Patrice, just a clarification on the Canadian broadband side. When you were talking about Q2 EBITDA being slightly better underlying than Q1, you know, I believe Q1 was down 5% or 6%, are you turning that into growth in Q2 or just a sequential improvement in that decline?
No, it would be a positive number. We, in the next quarter, when you compare to last year, DERYtelecom will be there for most of the quarter. We bought it two weeks into the last year's quarter, second quarter. Yes, we do expect the organic EBITDA to be, I would say, definitely not the size of negative number we've had in Q1 for the various reasons I've explained. Including the DERYtelecom acquisition, which again is only two weeks impact, then that's definitely a positive number in Q2.
Okay. Okay, super. Thank you. Last one for me. Obviously a lot of competitive dynamic discussion in the U.S. Just in Canada, can you just give us an update on, you know, any incremental fiber- to- the- home impact? Obviously, Bell's accelerating its fiber- to- the- home expansion through 2021 and all through this year as well. Just, are you seeing anything out there in the market? Thank you.
Yeah. The expansion or conversion of the phone company from either DSL or FTTN into fiber has been going on for many years. I wouldn't say that the past year we've seen a big difference. There's been a bit more, but we're competing at about 50% in our footprint with fiber- to- the- home. The rest is a mix of fiber- to- the- node and DSL. We are fairly well equipped. We offer a gig in terms of top speeds in a large portion of our network, and especially in the areas where we want to do it. Something we could accelerate if we wanted to as well.
We have a good IPTV video product as well, EPICO, that we launched a year ago, which is a fairly interesting voice-activated. Basically all the bells and whistles in it. And then on top of it, we have these network expansions we're doing now. It's, I would say nothing special this year versus what we've been seeing in past years.
Great. Thank you very much.
Thank you.
At this time, I see no further questions in the queue. I would like to turn the call over to Mr. Jetté and Mr. Ouimet for their closing comments.
Okay. Well, thanks for being there today, and we look forward to talking about our Q2 results in April. Feel free to call us if you have any questions in the meantime. Have a good day.
Once again, we'd like to thank you for participating in today's Cogeco conference call. You may now disconnect.