Earnings Call: Q1 2021

Jan 15, 2021

Good day, and welcome to the Cogeco Inc. And Cogeco Communications Inc. Q1 twenty twenty one Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrice Villeneuve, Senior Vice President and Chief Financial Officer of Cogeco Inc. And Cogeco Communications Inc. Please go ahead, Mr. Vinay. Good morning, everybody, and welcome to our first quarter conference call, which Philippe Jose and I will cover. So before we begin this call, as usual, 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. So I'll turn the call over to Philippe Jote. Merci, Patrice, and good morning. Thank you for joining us to discuss the financial results of Cogeco Communication and Cogeco Inc. Let me first note that we are very pleased with the overall performance of Cogeco for the 2021 as both our Canadian and American broadband segments showed strong increases in EBITDA compared to the first quarter of last year. This is largely explained by unique circumstances that were favorable to our business. During the quarter, we continued to experience some of the trends from the past quarters, higher demand from our residential high speed Internet products, and a deferral or reduction of certain expenses due to a more stable customer base higher as a result of the COVID nineteen pandemic. In these unusual circumstances, we have decided to delay certain sales and marketing expenses to the second half of the year in both countries. As for our radio operations, they continue to be negatively impacted by the pandemic, but to a lesser extent than the previous quarter. Although we are pleased to report strong results in the current circumstances, we remain cautious in our management as uncertainties remain on the potential of human operating and financial impact of the pandemic. Pandemic. Starting with Cogeco Connections' recent initiatives, I am pleased to report that we closed the acquisition of Diri Telecom on December 14. The acquisition of the third largest cable operator in the province of Quebec enables Cogeco Connection to expand its activities in more than 200 municipalities in Quebec and adds approximately 100,000 customers to its base. This key strategic acquisition has increased our foothold in Quebec and is highly complementary in terms of geographic areas. We expect that the DiRi the acquisition of DiRi will generate superior growth relative to our current Canadian operations as we will pursue DiRi's network expansion and introduce Cogeco Connection product lineup. During the quarter, we continued to gradually roll out our IPTV service called Apical, which is now offered in approximately 85% of our Canadian footprint. We are planning to launch a marketing campaign next week, which will allow us to attract new customers and upsell a portion of our current customer platforms, a Wi Fi connection, self installation capabilities, and an overall lower delivery cost. We have continued to be active in bidding for network expansion projects as part of various government sponsored programs aimed at providing high speed Internet to unserved and underserved areas. Cogeco was awarded a total of 25 projects in Quebec and Ontario, including four projects for DIRITELICOM since the programs were launched. Furthermore, we have submitted more than 100 additional projects, which are currently being reviewed. With deep roots in regions and rural communities in Ontario and Quebec, Cogeco is at the forefront of solving the connectivity challenges faced by consumers and businesses in underserved and unserved areas. With these network expansions, we will continue to help close the gap in digital access and extend our regional high speed Internet coverage. Finally, as we await the CRTC's conclusion on its mobile wireless services review, we continue to forge ahead with our plan to enter the mobile services market aimed at providing more choice to Canadian customers in the regions we serve. Now turning to the key initiatives at Atlantic Broadband. The main focus in the last quarter has been to put in place a new offer strategy, which is simple, transparent and put broadband at the center of customer experience. We expect our new broadband first offer strategy to increase customer experience and satisfaction while improving both customer lifetime value and contribution margins. The Broadband First offer is currently in market and will be fully launched across the footprint during the second quarter. The related new pricing strategy results around the Internet offering and puts less emphasis on bundling than in the previous construct. Customers will still have access to the full product lineup, but be incentivized to add more services through modular pricing. However, the video product, which still face sizable cost increases, will be priced in line with the cost of delivery and ensure that it continues to contribute to earnings in the long term. For this reason, it will generally not longer be offered to new customers as a stand alone product except for some bulk contract with higher bundling potential. With the increasing number of connected devices at home, it is essential to have a strong Wi Fi customer experience, which means a stable network working well across the home and easy to set up and modify. Atlantic Broadband has therefore upgraded its Wi Fi product and has announced on January 11 the launch of a new and enhanced Wi Fi solution. This new solution integrates a leading edge customer facing application, including parental controls and network optimization while facilitating initial installation and providing remote assistance and diagnostics for pro proactive network maintenance. The solution also enables seamless integration of network extenders, which can be added as needed depending of this on the size of the home. The Wi Fi experience improvement is also planned to be launched at Cogeco Connection shortly. As for Cogeco Media, its financial performance was better than expected with a lower decline in revenue relative to the last quarter and improved EBITDA compared to the same quarter last year as we have been maintaining our financial discipline given the continued impact of the pandemic on the advertising market. Regarding recent changes to our executive team, I I am pleased to announce that Zuer Manzurati has joined the Cogeco Group at the November as senior vice president and chief technology officer. Zuer has nearly three decades of experience in the telecommunication industry, several executive positions, planning, and leading major broadband network expand implementations. Zuer's years of experience in telecommunications combined with his drive, leadership, and collaboration skills, will be instrumental in furthering Cogeco's technology and innovation strategy. I will now let Patrice discuss our financial results. Thank you for that. For the quarter, revenue at Cogico Communications is at 5.7% and EBITDA 10.5% in constant currency when compared to the previous year. This was driven by EBITDA growth of 8.9% at Cogeco Connection and 14.3% at Atlantic Broadband. So consolidated revenue reached 619,000,000 and EBITDA reached 311,000,000, generating a margin of 50.3. Free cash flow has also increased by 36.9% in constant currency. The increase is mainly due to higher EBITDA, but also a decline in capital expenditures, financial expenses, and current income tax. Capital intensity in the quarter was 18.8%, which is slightly lower than the 20% target we have for the full year. Quarterly dividend has been reconfirmed at 64¢ for Cogeco Communication, and now I'll discuss the components of it. At Cogeco Connection in Canada, revenue has increased by 2.2% relative to the same quarter last year, mainly due to the cumulative effects of sustained demand for residential high speed Internet since the beginning of the pandemic, a better product mix, and rate increases implemented for certain services. Cogeco Connections EBITDA increased by 8.9% as a result of increased revenue and the decline in operating expenses. Now the decline in OpEx is due partially to lower sales and marketing activity referred to the second half of the year in the context of the pandemic and lower compensation expenses result resulting from an operational optimization program implemented during the fourth quarter of last year. The broadband customer additions were slightly lower than usual in the quarter, but at higher ARPUs due to a better product mix. The video product losses were in line with historical trends. And finally, the phone losses were also in line with historical trends, except that last year had an unusual addition due to a funding strategy used at the time. At Atlantic Broadband, revenue in constant currency increased by 9.8% in the first quarter compared to last year, while EBITDA increased by 14.3%. If we exclude the King Valley acquisition impact, revenue and EBITDA would have grown by 8.212.8% respectively. Organic revenue growth comes mainly from residential and business Internet service customer additions throughout the tenant, rate increases implemented for certain services, and increased political advertising revenue related to The United States Presidential Election. Superior organic EBITDA growth was mainly due to revenue increasing at a greater pace than operating expenses. Similar to Critical Connection, Atlantic Broadband deferred certain sales and marketing expenses to the second half of the year, primarily due to the COVID nineteen situation. Also note that video contract cost increases normally take effect on January 1 and will be fully reflected in the second quarter results. Atlantic Broadband has very strong customer addition additions with 12,000 new Internet customers and has continued to modestly grow video and phone customers as well for the third quarter in a row, partially thanks to the new Florida bulk residential customer activations, which were stronger than usual during the quarter. Let us now take a look at Cogeco Inc. In the first quarter, consolidated revenue increased by 4.3% and EBITDA by 10.4% in constant currency. While the broadband business had strong results, the media business continued to be impacted by the pandemic due to certain segments of the retail industry reducing advertising budgets. Revenue related to the radio operations decreased by 13% versus last year in the first quarter. However, it is an improvement from the last quarter, the previous quarter, q four, where we had a decrease of 29% year over year. We will continue to monitor the situation closely in the coming quarters as uncertainty remains for the economy in general and more specifically for certain categories of advertisements with operations being in lockdown at the moment. Finally, the quarterly dividend has been reconfirmed for Cogeco Inc. At 54.5¢ per share. I will now discuss guidelines. Cogeco Communication has revised its guidelines for the full year to reflect the Dairy Telecom acquisition, which closed on December 14, and the stronger than expected first quarter results, especially at Atlantic Broadband. On a constant currency basis, we do expect mid to high single digit percentage growth in consolidated revenue and EBITDA for fiscal twenty twenty one. The acquisition of Data Telecom is expected to have a positive impact of approximately 3% on both revenue and EBITDA. Now underlying those guidelines, at the Predictable Connection, we do expect to achieve mid to high single digit growth in revenue and EBITDA for the year, which is a combination of the daily acquisition and low single digit organic growth. Note that EBITDA is expected to gradually decline in terms of growth year over year, decline over the next three quarters as sales and marketing costs ramp up in the balance of the year, and certain cost savings related to the pandemic are expected to decline in the second half of the year. Also note that last year's comparative period in 2020 and the last two quarters of the year was especially strong. At Atlantic Broadband, we expect mid to high single digit growth in revenue and EBITDA resulting from strong residential and business sectors and the continued expansion in Florida. Similar to political connection, the type of broadband's growth should gradually decline over the next three quarters as a result of sales and marketing costs ramping up, Internet growth gradually returning to pre pandemic levels, and having the results of the Paynes Valley acquisition in the comparative period for q three and q four. On a consolidated basis, capital intensity is expected to remain at 20%, and free cash flow on a constant currency basis is expected to grow at a low double digit percentage. As for Cogeco Inc, we do expect in constant currency mid to high single digit growth in revenue and EBITDA and a high single digit percentage growth in free cash flow. I will now turn to Philippe for concluding remarks. Thank you, Patrice. On the basis of a strong first quarter, fiscal year twenty twenty one looks very promising despite the unfavorable economic impacts related to the pandemic as we will continue to manage our costs closely and pursue profitable growth through various organic initiatives and acquisitions when possible. Pro form a the Dairy Telecom acquisition. Our 2.5x net leverage leaves ample room for other acquisitions and share buybacks. Through to our commitment to bring new services and competitive choices to our communities, especially in underserved regions, we remain engaged in launching a mobile wireless service in the regions we serve if the regulatory conditions are conducive to our entry in the market and are meeting our financial return objectives. Finally, I would like to highlight how proud I am that we achieved or surpassed essentially all of our corporate social responsibilities targets in the last fiscal year. We have been a trusted and reliable partner for our customers in this challenging environment, and we have contributed to the development of our employees in addition to surpassing our gender diversity objective. Furthermore, we have taken part in developing our communities, surpassing our target donations, and have efficiently managed our environmental footprint by reducing more GHG emissions than our target. Finally, we have maintained a sound culture and a strong corporate governance as we remain in the top tier of family controlled publicly listed Canadian companies as ranked by the Globe and Mail board games. And now we will be happy to answer your questions. If you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Vince Valentini from TD Securities. Yes, thanks very much, and congratulations on these strong first quarter results. First, Patrice, probably, can you flesh out a bit more of the deferred marketing costs that you're talking about, both in terms of quantity, if you can? Are you talking $5,000,000 or $10,000,000 that you expect to catch up on spending in the next three quarters? And also in terms of timing, I assume it starts in the second quarter if your launch of IPTV goes more public starting next week, guys, and the cost ramp up at that time. So that that's question number one. Number two, just more broadly on on allocation of capital and and share buybacks. With your free cash flow guidance going up pretty substantially to low double digits from low single digit growth for this year, and your balance sheet's obviously still pretty strong even after paying for dairy. Is there any consideration to increasing the share buyback program, either the NCIB getting more active or or perhaps even a a substantial issuer bid? Thank you. It's good morning, Vince. Yeah. So on the OpEx side, the so if we look this is a story for both countries for different reasons. What happened is the the COVID situation has slowed down the number of connections and disconnections. And, for that reason, we thought it was wiser to defer some of these expenses as the economy gets back to, normal in the back end. So you should expect that there's gonna be more in q two, but especially more than that in q three and q four. It would be difficult to quantify, what it is, because actually even the the exact spending by quarter is not fully determined yet. And what we would have normally spent, this quarter without COVID is undetermined as well. So that's why we prefer referring to yearly guidance, and we provided we're a bit more precise than usual on on ABB and CCX, our physical connection, to help you with this. So difficult to quantify more than this, but I would say our our ramp up throughout the year. You'll you also know that our q four ends with the back to school, so that's normally a period where there's more activity. On the capital allocation, we are absolutely in favor of buying back shares. We have been fairly active, I would say, over the past year. Except in the fall, given the circumstances that you know well, we were advised to not buy shares, so that's why you you did not see anything. But we are planning to be active in the future in terms of buying back shares. Normally, an NCIB allows for significant capacity. Our program allows for up to 10% of the float. And given that we haven't bought in a couple of months, we have ample capacity in that program. Thank you. Your next question comes from Jaquon Duquevais from Desjardins. Please go ahead. Your line is open. Yes. Thank you very much. Thanks for taking my question. We've seen a strong acceleration in U. S. Growth. Can you please break down what proportion of this growth is due to political ad rates increase and maybe subscriber, we can calculate it, but with the other two, please. Yeah. The political ads are are this is something we don't control. Obviously, it depends on the on the on the agenda, and it did add about one percent to revenue in the quarter versus last year and about 2% to EBITDA. This goes directly down to the EBITDA line because there's no cost attached to it. Now in terms of price increases, subscriber increases, and also a better product mix as we've been able to sell higher packages than than usual, I would say it's a mix of all three. There's a there's not necessarily one element that that represents 80% of it. So it's a it's a mix. Thanks. And regarding the acceleration in broadband net additions in The US, I'm just trying to understand if this could impact the the seasonality of future net adds. Do you think there's a lot of, summer homes maybe? Should we expect more seasonal disconnections going forward? Well, when we bought MetroCast, there was a bit of adjustment in the year over year comparison, but we're past that now. So I would not assume anything major. You should note, however, that Florida was stronger than usual in terms of of new, I would say, lighting up of the bulk contracts. These contracts takes take a bit of time between selling, building, and lighting up the building. So both in in video and HSI, Florida has added about three to 4,000 PSUs. So that's for both video and and HSI. And so it's been a bit more spotty than usual, but still very good performance on on HSI besides this. So going forward, we do expect to have better performance in The US in terms of the PSC additions than usual given the the the COVID situation. Thank you. Your next question comes from Matthew Griffith from Bank of America. Please go ahead. Your line is open. Hi. Thanks for taking the question. I wanted to ask about the Atlantic Broadband and the the Broadband First strategy, which seems like a little bit of a pivot. I think previously, there's a focus on on the bundle. And I was just wondering what you're seeing in The US that, you know, made you shift like this and, you know, what you hope the the impact will be going forward. And maybe separately, on the integration of dairy, if you could lay out some milestones that you're expecting in the integration, whether it's, you know, I'm thinking of the realization of costs that you may have to incur, upfront, and maybe the realization of synergies as you go through the year. Anything you can kinda talk about how the integration is is expected to play out? Thanks. Thank you, Matthew. It's Philippe. I will address the broadband first. Patrice will add more on Derry. To summarize, the change or the shift that is happening in the market is it's in part driven by the technology change. Video was delivered on dedicated video networks as we all know in the past. And now video is actually moving as an IP application or or an IP service, over the top of these broadband faster and more quality broadband networks that we've been building everywhere. So not only broadband to connect to the high speed Internet is there there's a strong increase there, but video consumption on top of broadband, is becoming more and more popular. So that will certainly create a a world where legacy video will remain for a long time as, it winds down. It will take time. But the new video markets are mostly broadband driven. So that's why we're shifting, to a broadband first, making sure we can install fast and high quality networks as well as Wi Fi inside the home to make sure that every device, every laptop, every iPad, every connected device inside the home, including the video devices, benefit from a strong Wi Fi platform. So that's that's the shift that is happening and that we're staying ahead of. Now for Yeah. For David, actually, we so we closed about a month ago, and things are going well. Obviously, when we make acquisitions like this, there's an integration of the Teams reporting line. So that's been done already. There's also integration of systems, which takes a bit more time. So that's gonna be bit later in the year. And we we do expect to generate additional revenues from bringing the Cogeco product lineup to DeVries, including on the business side. So this will start soon. And there's cost synergies on procurement that is already in motion. So I would say, I would expect that that all these things will fall into place throughout the year. That was the that was the plan initially. And starting next year, we're gonna be in a normal mode of operation. Thanks. As a reminder to ask a question, please press star followed by the number one. Your next question comes from Jeff Fan from Scotiabank. I want to follow-up on The U. S. Broadband only. I understand the rationale. And I'm wondering what do you think that move will have the impact on margins? Because we've seen other cable companies, smaller ones, secondary and secondary markets that are focused on broadband only strategy, and we've seen pretty significant margin expansion. Your ABB segment has about 45%, and, I mean, 50% margins are not unreasonable to think about. So I'm wondering if you can comment there in terms of the medium, longer term impact. The second question is on Canada. And just to follow-up on, to your comments about entering the wireless market, Leaving Spectrum and leaving regulatory aside, from an operational perspective, I just wanna hear your thoughts or your take on the readiness of Cogeco to enter the market. Specifically, when we talk about things like billing systems within the wireless customers, whether you plan to invest in your own core retail location. Wondering if you can just touch on that maybe in a general sense about the potential cost impact when and if you do decide to enter as a wireless player. Thanks. Okay. Well, I'll just touch briefly on video broadband margins. Pat Patrice can complement, and I will answer your wireless question. So on the shift to broadband, there's definitely an increase in margins there. We all know the contribution margins of broadband is good. And we, as customers, will shift from a legacy video network delivery and legacy CPEs as well that are very costly, to the new ones, IP base, on the broadband fiber optic networks that we're building, there will be an improvement, over time there. So that's that's a gain. Now on the wireless side, it's still too soon with absence of decisions from the CRTC and other decisions that Industry Canada could make and announce in the near term future to to to disclose our go to market strategy. But let me say this, the the the on the adding a wireless mobile wireless layer to our networks in the operating areas, the current operating areas, we have ample capacity. The the transport of all these of of all the the signals can be can be made very easily. We simply have to add the radio access network. The core in terms of transport is already built. It is our it is feeding our broadband strategy today. We have a number of systems that were upgraded in recent years that could handle easily things like, you know, commissioning and and billing. There is a small very small addition to the to the core network that we need to make. We know exactly what to do and how to do it. Now as to the model for the go to market that we will choose, I've said it many times. We will bring more competition to the marketplace with a leading edge market in terms of go to market. So I won't expand more for obvious competitive reasons at this point, but we are first and foremost expecting the CRTC and I said to to address the barriers to entry for regional players like Cogeco throughout Canada. So back to margins with Takis. Yeah. So, basically, what our strategy in The US is more an evolution rather than a break from what we've been doing in the past. Obviously, over time, we've been migrating towards, like the whole industry, having the broadband as the key product. But the way we're restructuring our go to market approach, it's really gonna be focused. It's gonna be more visible So it's more of an evolution, and as Philip said, with new tools as well, new better devices in the home to provide a better service from a broadband standpoint. That being said, we we did generate about 45% in margin last year. We would expect margin to increase a little bit this year. It's our our goal is to remain profitable and generate free cash flow on video, which we're doing today. And as we move into an IT mode eventually, we're not there yet in The US, this will help decrease costs as well and make sure that we have a viable and profitable video product. So difficult to say where we'll be in the future, but we would rather have a gradual increase in margins over a good revenue base, than accelerate, margin on a declining revenue base on video. So that's the goal at this point. Thanks for the color. Well, maybe we could just simply add as well as the CPE are costing far less with IPE on IPE and broadband networks. The CapEx savings there will also be reused for network expansion. So we will grow these broadband networks, and the video expenditures will decline. Great. Thank you. Your last question comes from Tim Casey from BMO. Please go ahead. Your line is open. Yeah. Hi. Thanks. I'm wondering if you could, give us given, you know, as you say, it's an evolution into broadband. Would you be willing to share, any numbers on what the ARPU levels you're getting out of broadband in both territories? And second, just a point of clarification, Patrice. You said prices start to come in, in January, I believe, in The U. S. Could you just review for us the magnitude of price increases, I guess, on both sides of the border and when they would kick in? Thank you. Okay. Let me start with the last one. So on video price increases, we normally sign multiyear contracts. So, usually, they're two or three year contracts, and there's some years that are more lumpy than others. This year, there's a bit more than last year starting in January 1. It's not all the contracts. It's a portion of them. And in Canada, it's a bit more normal. Overall, in both countries, on a per customer basis, we expect mid single digit increase in video cost. It used to be higher than this in The US. It used to be low double digit at one point. And so that's why we're managing this closely. Sometimes we have to make choices also on the on the video programming that we carry to make sure that the channels we carry are profitable and we can generate the revenue on. So that that would give you a a view of it. So you should not expect a a great increase or but but even last year, a number of programs did kick in on on Jan first. Now we don't segregate our our revenue by or our ARPU by product, So that's not really something I could comment on at this point. However, with the new strategy, which is early days, we have it in market right now, and we've had it in in a non promote nonpromoted fashion. So it's it's small scale just to test the water. It's going well, and we've been able to increase ARPUs, especially on the broadband side so far for with what we have. So we'll be able to talk more to that once we're at a larger scale end market and comment on what we're seeing. Thank you. And we do have a follow-up from Vince Valentini from TD Securities. Please go ahead. Your line is open. Yeah. Thanks for getting me back in. A couple of things we haven't addressed, Patrice. The timing of your own rate increases to customers as opposed to the programming cost increases that you're absorbing. I think some of that stuff got delayed because of the pandemic over the past twelve months. Can you just level set us and remind us when the last price increases were and what what the most likely schedule is for the next round? And then the other question for for the fifth, if you want, is the playbook for acquisitions in The US. Any update there on how the pipeline looks of of the targets that could become available? Is this our thing that's is there much for sale? Price is still pretty high. Do you have any hopes if something might get done in the next six to twelve months? That'd be great. Thanks. Okay. So on the price increases, we did have some price increases on some products in Ontario in June, and we had some in Quebec in starting in November. Overall, if you take the two of them, it's about 3% on an annual basis, and that does include video as well. So we need to, obviously, increase prices on our our products to match inflation, and and then we need to be able to maintain margins on on video. So that's about 3%. In The US, it was about 4%, and the price increases were done in September. As to the future, it's something we generally don't comment on because we prefer announcing it to our customers at the same time. And and these decisions vary during the year, especially during COVID. As you pointed out, we did slow down the price increases by a number of months to help our customers. So we'll we'll see we'll have to see how this plays out in the future, but I would not necessarily assume anything unusual going forward. For M and A in The US, we continue to view the sizable potential in The US market. There's a number of companies still between 30 to 40, maybe a little bit more. But the pandemic has certainly had an effect there. Conversations are taking place, but negotiations have been slowed down. So we continue to be optimistic. We continue to work very hard on acquisitions. And you've seen that we've closed three in the past year. We would like to do more than that, but we have to be we are good partners, but we need to to take the time it takes to do it well and do it right. Thank you. I would now like to turn the call over to the presenters for any closing remarks. Okay. Well, thanks for participating today. We're gonna be back with second quarter results in April, and feel free to call us if you have any questions in the meantime. Thank you. Have a good day. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.