Good day, and welcome to Cogeco Inc and Cogeco Communications Inc Q1 2020 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.
Good morning, everybody, and welcome to the first quarter conference call. Joining me today are Philippe Jetté, Marie-Hélène Labrie, André Thériault and Philippe Blais. Before we begin the call, as usual, I would 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 to Philippe Jetté.
Good morning, everyone, and thank you for joining us to discuss the results of our first quarter ending November 30th, 2019. Let's begin with Cogeco Communications. During the quarter, we recorded an EBITDA growth of 4.9% in constant currency. Our increased investment in branding, sales, and marketing over the last couple of quarters, both at CCX and ABB, have resulted in strong customer trends, especially on the internet front. We continued our transformation journey towards more digitization, which has contributed to an increase of EBITDA margin in the quarter and continued improvement in customer service. Atlantic Broadband announced on January 10th that it had signed a definitive agreement to purchase Thames Valley Communications, a broadband service company operating in southeastern Connecticut, for $50 million USD.
As Thames Valley is contiguous to ABB's footprint in the Connecticut network, we will be able to quickly roll out our leading-edge TiVo service and business services to the new footprint and increase market share through enhanced bundle offers. ABB's new president, Frank van der Post, who joined the company on November 4th, will be a key contributor in fueling organic growth and pursuing our acquisition program. He brings a strong customer focus, lots of experience, and as ABB amplifies its marketing activities and reinforce its brand. In December, we announced the departure of Ken Smithard, Cogeco Connexion's president, who will stay for a short transition period. We are grateful for Ken's 20 years of dedicated contribution, as he was instrumental in the deployment of major transformation projects at Cogeco Connexion. A recruitment process for a new president has been launched.
With the grouping of support services as shared services such as procurement, IT, HR, in order to maximize operational synergy, there will be greater focus at the business unit level on growing the top line while achieving strong margins. On the Canadian regulatory front, the Federal Court of Appeal have granted leave to appeal the CRTC decision related to aggregated wholesale internet services. The new rates will therefore not apply until a final judgment is rendered. In parallel, Cogeco, along with other cable network builders and operators, have also filed a petition to the Governor in Council, asking Cabinet to refer the CRTC order back to the CRTC for reconsideration. Two, an application for review and vary of the CRTC order based on substantial doubt as to the correctness of the rate-setting methodology.
Cogeco is not opposed to the regime and support fair competition, but ask that the rules be clear, stable, and fair, especially as it relates to the basis for rate settings and the requirement for internet resellers to gradually invest in networks as was originally anticipated by the regime. We also look forward to the CRTC's public hearing on the future of mobile and the provision of mandated wholesale access. Cogeco believes that the Hybrid Mobile Network Operator or HMNO model it submitted to the CRTC should meet government's policy objectives of increased competition while safeguarding investments in telecommunication networks and promoting innovation. The HMNO model would allow Cogeco to gradually invest in the wireless infrastructure as it grows its market penetration.
Cogeco has a longstanding commitment to high social responsibility standards, and we are building on our track record of social engagement, environmental performance, and solid governance practices to continue to better serve our communities and customers. It is my pleasure to inform you that we will be releasing our new corporate social responsibility report on our website in February. The CSR report will describe the key performance indicators that we have developed to achieve Cogeco's environmental, social, and governance objectives over the medium term, as well as the progress we have made to achieve our key performance indicators. For example, I will highlight that we reduced our GHG emissions on a per-revenue basis by 40% during the past five years, donated 2% of our pre-tax profits to several organizations in the close to 1,200 communities that we serve, and launched a new employee community involvement program at Cogeco Connexion.
Cogeco Communications' nomination to Corporate Knights' Best 50 Corporate Citizens in Canada and 200 Cleanest Companies in the World is a testament to our environmental, social, and governance commitment. We're also proud to see our organization's corporate governance recognized year after year amongst the top 10% of family-controlled, dual-class companies listed on a Canadian stock exchange in The Globe and Mail annual Board Games publication. Let us move to an overview of our consolidated financial results. Note that comparative results from continuing operations exclude Cogeco Peer 1's results, which was sold last May. For the quarter, reported revenue has reached CAD 586.8 million, representing an increase of 1.3% in constant currency. EBITDA has reached CAD 282.1 million, rising 4.9% in constant currency and generating an EBITDA margin of 48.1%. Atlantic Broadband and Cogeco Connexion both contributed to EBITDA's growth.
The quarterly dividend has been reconfirmed at CAD 0.58 per share, representing a 10.5% increase over last year. Let us now look at the individual components. At Cogeco Connexion, revenue declined by 0.5% as a result of not having lapped a full year since we implemented our new customer management system at the beginning of fiscal 2019, as well as lower net pricing from consumer segments. On the other end, commercial services continued to grow nicely at 6% and represent 11% of Cogeco Connexion's revenue. Cogeco Connexion achieved an EBITDA growth of 4.8% as it continues to focus on operational efficiencies and its digital transformation.
However, if we exclude last year's non-recurring items amounting to CAD 7.7 million related to the stabilization of the new customer management system and a retroactive adjustment related to distant signal rates, EBITDA growth would have been essentially flat as we increased sales and marketing investments in the quarter this year. On the other end, our enhanced sales and marketing activities are paying off as customer trends in the quarter resulted in strong PSU additions. Internet and telephony customer growth was strong, and video losses were significantly lower than in past quarters. Overall, for the year, we expect revenue and EBITDA to grow in the low single-digit range. However, the growth will be skewed towards the end of the fiscal year as we are reinvesting in sales and marketing in 2020. Finally, we are making good progress with the development of our IPTV platform and have started our beta launch.
We will progressively launch the service once the development phase is completed. The MediaFirst IPTV platform will then become the new standard video experience for new customer activations. At Atlantic Broadband, revenues and EBITDA have increased by 3.5% and 2.6%, respectively, in constant currency. Revenue growth is mainly related to the continued growth and upsizing in residential internet and commercial services. Rate increases mostly implemented in the fourth quarter and the ramp-up of the Florida expansion plans, partly offset by lower political advertising revenue. Commercial revenue is growing at a strong 7% and represents 10% of overall revenue. EBITDA growth for the first quarter was lower than usual. As we mentioned during the last quarter earnings call, mainly as a result of higher sales and marketing expense and lower political advertising revenue.
If those two elements had been at the same level as last year, EBITDA growth would have doubled to over 5%. Let's also remember that last year, the first quarter had an unusually high organic growth of close to 12%. We expected the EBITDA growth to improve in the second half of the fiscal year as sales and marketing expenses reach a normalized level and revenue growth further pick up as a result of continued positive customer trends. Political advertising is also expected to grow in the back half of the year. We still expect mid-single-digit revenue and EBITDA growth for fiscal 2020. As part of its strategy to leverage digital tools and continually offer improved customer experience, Atlantic Broadband launched a new shopping cart in September, which has increased new customer connections activity via the online channel.
Since December, Atlantic Broadband customers with an Amazon Prime membership can now stream Prime Video content over the Prime Video app on most TiVo devices. TiVo also provides a seamless, integrated search and user experience by including Prime Video content in search and recommendation results. The availability of Prime Video app on TiVo devices continues our multi-phase efforts to enhance functionality and to bring an exceptional best-in-class video experience to our customers. Increased sales and marketing expenditures during the last three quarters and improved management of seasonal disconnects are paying off as PSU trends in Q1 have improved on all fronts relative to last year. Internet growth was significantly higher and video losses were lower. Finally, we look forward to closing the acquisition of Thames Valley Communications, which serves approximately 10,000 customers within the next three months.
This acquisition will nicely complement our presence in Southeastern Connecticut as our business share the same values of customer focus, support in the communities we serve. We will continue to look for further value-accretive acquisition in the U.S. to accelerate our growth. Let us look at Cogeco Inc. In the first quarter, consolidated revenue has increased 1.4% and EBITDA 4.7% in constant currency. Our radio business, now composed of 23 stations, shows satisfying results despite a soft advertising market. Cogeco Media remains competitive, thanks to the excellent ratings of many of our stations. We continue to enjoy a strong focus on high-quality programming and cost efficiency. At Cogeco Inc., the quarterly dividend has been reconfirmed at CAD 0.475 per share, a 10.5% increase over last year.
Let me conclude by confirming that we are maintaining our FY 2020 guidance and are on track to pursue profitable growth, organic growth through providing enhanced customer experience, growing our internet and commercial services market share, and expanding in selected areas. We will continue to look for attractive acquisition opportunities and are looking forward to participating in the wireless consultations, which will start in February. Now, we will be happy to answer your questions.
Thank you. In order to ask a question, you will need to press star one on your telephone keypad. To withdraw your question, press pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Jeff Fan from Scotiabank. Your line is open.
Thank you. Good morning, everyone. Just wanted to dig into the Canadian revenue a little bit, particularly the residential business down 1%. There is a few things going on there. It looks like very good loading that you saw in the quarter as you mentioned. I was wondering if you can talk a little bit about the pricing environment, I guess particularly ARPU, and particularly maybe in reference to third-party resellers or TPIAs related to internet, whether you saw a little bit more pressure from competitive activity there. Maybe help us with the outlook in terms of subs and ARPU for the remainder of the year on Canada. Thanks.
Sure. Hi, Jeff. This quarter, you are right. We did actually provide a bigger push on bundles, basically. You can see that the phone actually is higher than usual. It had an impact on ARPU. It's always a fine balance and these strategies evolve throughout the year. They're never set in stone for a full year. This quarter, that was the story. We do expect that the balance of the year, more generally, we'd have
We'd be more in line with what we've been doing in the past. Mind you, when we do provide bundling promotions, which again, come and go during the year, often they're for many months. These are things, the promotions will last of a particular campaign during the year while you're running another one as well. In terms of TPIAs, I would say that generally there's nothing special about this quarter. We haven't seen any particular change in the way the TPIAs are evolving in the market. In terms of outlook, if you focus, obviously the PSUs will be more volatile in a quarter, whereas our base of customer is more stable, obviously. It's always a choice, again, on how many PSUs we want to get and how much promotions we want to give.
If you look at the internet PSUs we have done in the first quarter, you know that historically, because of the seasonality, the first quarter is always stronger. We're satisfied with what we've done in terms of PSUs for the first quarter. Typically, in the next three quarters, you see the PSUs being at a lower level than in Q1.
Okay, that's helpful. Just maybe a clarification on the U.S. side. You guys mentioned about the impact of sales and marketing political ads. Just on the revenue front, specifically, are you able to quantify, excluding the political ads impact for revenue, the U.S. revenue, what the growth rate would've been?
I don't have that offhand, but it does vary by quarter. We do expect that in Q3 and Q4, actually, it will go the other way. The political ad will be stronger, and actually it will be more impactful than what we've seen in Q1 year-over-year. We did provide an idea on the edit that if you include also the marketing spend, you should expect a stronger second half. If you look at the first quarter, actually, in terms of growth year-over-year, and you compare this to the industry in the U.S., it's somewhat in line. It's a mix again, of the products we offer, the growth in Florida, the results of the acquisitions we've made, and also seasonality in the different regions that we have.
Right. Just final question regarding wireless. As you sit back, you have a proceeding going on, and it probably sounds like it's going to be very lengthy. How do you guys think about balancing between your vision of building a hybrid business versus a straight MVNO business? You guys have talked a lot about the HMNO. Are you married to that? Are there other options that could be opened up in the next few months or years where that gives you an opportunity to approach a different model, perhaps with the same return or less risk?
There are two fundamentals that we believe in. First, we believe in facility-based infrastructure, wireline or wireless. Network operators need to build over time their own network. The second is we are pro-competition. We do not fear competition. We enjoy it. We will be there to compete and the wireless and wireline worlds are converging. We put in front of Canadians and the CRTC a model that actually helps building wireline and wireless and because they are converging, everybody is building converged network today, even if they don't call it converged network, that's what we all do. This is how you should be looking at it. The V in MVNO is never something we've supported. We don't like the idea of a virtual player that only sits on top of the networks of others forever without investing in any networks.
We propose to also contribute to investment to build over time our network, our presence in the market, compete, and help build a stronger industry for Canadians. Our HMNO model does not include a virtual participation in that space.
Okay. Thank you.
Your next question comes from Vince Valentini from TD Securities. Your line is open.
Thanks very much. Can you help us at all with IFRS 16 and how it impacted each of your Canadian and U.S. segments in the quarter in terms of EBITDA?
Sure. It's about CAD 7 million per year. It's close to half and half in the U.S. and in Canada. It's about CAD 700,000 for the Canadian business and $700,000 for the U.S. business. It's a little more skewed towards the U.S. It can change by quarter, but that's what it was for Q1.
Patrice, if you adjust for that as well as the CAD 7.7 million of unusual items last year, Canadian EBITDA growth was slightly negative in the first Q1, I believe.
Sure.
Can you just talk to that a little bit? It seems a bit inconsistent with the improving trends in your subscriber numbers this quarter and in recent quarters. Is that just the sales and marketing costs? Do you have confidence that you'll get back to positive EBITDA growth pre-IFRS 16 in Q2 and Q3?
As Philippe mentioned earlier, the story for the year in Canada, we do expect more growth in the back end of the year, more towards Q4, than Q2 and Q3. In terms of the first quarter, you're right. It's slightly down, if you do exclude IFRS and the items from last year. We did invest a lot more in marketing costs. Last year, given that we were still actually in the stabilization phase of the IT implementation, we had significantly reduced the marketing expenses. We went the other way this year, and we actually added more than usual. The ARPU were a bit lower than usual as well, so that played into it. Overall, you should expect for the Canadian business, both top line and EBITDA, to see a low-digit growth rate for the full year.
Okay. I know you talked to [Tyrie] a bout MVNO in the last question, but can I just clarify from a different angle? The government seems to be signaling pretty strongly that even though there's a hearing come up in February, they're going to wait two years to see how the industry's evolving on competitive dynamics and prices for consumers coming down before they would go to any sort of widespread mandated MVNO access. Is it your view that those rules are so favorable for you that it's better to wait for two years and see how things shake out? Is it better to try some sort of negotiated hybrid solution with one of the existing carriers much sooner than that two-year timeframe?
Okay. Well, I'm not too sure where you pick up the signals for two years. That's not the signals we're seeing. I think governments at all levels have expressed a view that the sooner competition brings better wireless services for Canadians, the better. CRTC is usually a long process, so it won't happen overnight. We have the hearings, and after a decision is made, there will be a certain period of time for the industry to adjust and make this wholesale regime real. I'm personally convinced it could be done in less than two years. We depend on a regulatory process here. I'm picking up signals that, purely political signals, that it would be a better environment for Canadian wireless users to have something like an HMNO sooner in place.
Okay, thanks.
Again, if you would like to ask a question, please press *1 on your telephone keypad. Your next question comes from Matthew Griffiths from Bank of America. Your line is open.
Hi. Good morning. Thanks for taking the question. I just wanted to ask about, as you move closer and eventually get to the launch of the IPTV product or platform, how the CapEx will evolve over the year and how the expenses in Canada may evolve as well as that product comes out into the market. Just secondly, on the Thames Valley small acquisition. When that closes, should we expect to see some expenses come through on that in the U.S.? I know it's small, but there seems to always be some expenses associated with the acquisitions. Just a clarification, too. On the 10,000 customers that's associated with Thames Valley, is that PSUs, or are those homes? So the potential number of PSUs would be greater, assuming every home takes on average more than one service. Thanks.
Okay, great. Well, let me start with the last question. Actually, the 10,000 are customers, they're not homes. The homes is bigger than this, and they're not PSUs as well. It's a customer count. On the CapEx with the IPTV, we would not expect a significant impact this year as we're going to roll it out when we're ready to roll out. Steady state as we are live with IPTV across the regions. Obviously, the IPTV box costs are going to provide some savings. We'll refine the numbers as we launch, and we can point to it. What you can do is you can look at the CPE costs that are detailed in our financial statements. They're separate when you look at the fixed asset spend.
That does include TV CPEs, but also obviously modems and other types of CPEs that we have. Over time, we could expect a point and a half probably in terms of capital intensity reduction related to this. Now it doesn't mean that overall we will get there, because we might want to recycle that money and invest in development in rural areas or other investments we're making. If we do get into the HMNO Program, there might be some investments there, but just from a CPE perspective, that would be it. I'm sorry, can you repeat your second question?
It's the CapEx and then the cost associated with the closing of the acquisition, if there was anything that we should expect.
Okay.
What's the second?
No. Actually, it's a good network that we bought. As usual, we do invest a little bit, especially, we're going to roll out our TV products, but nothing major, which also will be absorbed into our overall envelope.
Yeah. Okay, great. Thank you.
Sure.
Again, if you would like to ask a question, please press star one on your telephone keypad. The next question we have is from Maher Yaghi from Desjardins. Your line is open.
Thanks for taking my question. Yourself, in the past, have always said that you look at the market and you respond to what's going on. I wanted to ask you, the price promotions and the bundling that you offered and that has pressured some of the pricing parameters, and you have in the Canadian business, was that a proactive call that you did or it's a follow-on to what you saw in the market? If it's a reaction to what your competitors are doing in the market, why do you think it's a short-term phase?
Thank you, Maher. Well, the market is dynamic, competitive. It will remain dynamic and competitive. We were a little bit the cause of our own problem. If you remember last year, we went through a system change and slowed down sales and marketing. We had to pick up, catch up. Investment had increased, but also we needed to reconvince some customers to come back home and regain our foothold in our existing market. What you see now is good progress in terms of PSUs. Customers are coming back. We will remain aggressive to make sure we continue to fight for our fair share of the market, and catch every opportunity for customers to come back to Cogeco Connexion.
I see. Is there a risk that you reprice doing that, some of the base that you have in those markets or these offers are it's hard to only offer savings to new customers at a certain time. Eventually, it leaks into the base. Is there any fear that it could leak into the base?
Well, that's why we led with a bundle strategy of three products. We have very good offers on the marketplace, but we favor bundles of three products as opposed to single or dual.
Okay. Have you seen any changes in wholesale activity in your market? It seems like it has helped you guys over the last couple of quarters, and you mentioned it in your MD&A. Is that still a strong push for subscriber gains in Ontario?
Not really different than in the past. Other players are competitive. On the TPIA side, again, they are a niche player, and I think they've captured a good share of the niche they were playing in, and their presence is established and growing at a lesser rate.
Okay. My last question is on cost savings. You seem to have a good grasp on your costs. When I look at your content cost, it's improving, it looks like. What other activities could you undertake to continue to get those savings rolling in as revenue now is turning slightly negative? How much more can you strip out costs from your Canadian business to offset?
We have already exposed quite a lot of our digitization activity. We always look for process improvement. Digitization, to come back on this one, self-serve, self-cancel, self-troubleshoot, the ability to change your TV lineup, all these things they do reduce calls at the call center. They improve the experience as well. They improve loyalty. On the ABB, CCX shared services, we have also improved and expanded shared services between the two groups. There are some functions where the U.S. and the Canadian companies are collaborating greater, and all of these things are translating into more efficiencies and economies.
There's still quite a bit of runway you believe on that?
We are very creative. There are still a number of things we have on our IT roadmap to facilitate customers and employees as well. There's an external and an internal program to help redesign process to be quicker, more efficient. Yes, we have a view on future savings this way and better experience for employees and customers.
Okay. My last question is on the Florida expansion. How should we look at that expansion in terms of loading the network? I understand that initially it is more like a TV product, and then we should see the internet loading coming in and more absorption. How much are we far into the loading of your Florida expansion that we have not seen yet in the subscriber numbers?
Yeah. In Florida, we have the base business that we've had for a long time. As we're expanding, obviously we sign properties and typically every quarter you'll have some new properties that go live. There was a larger one recently we talked about in previous quarters. This one actually was a TV product and we're well into plans right now to sell the other products like internet and phone or additional TV products as well. That's going well. Obviously, as you know, in Florida, most of the activity happens in the fall when we add other products. There are some properties where we sell internet only, some others where we'll sell a duo or even a trio. It will depend on the property.
More generally, as we've been at it now for some time, the expansion in Florida, I think when you look at our overall numbers in the U.S., we do have seasonality in other areas, especially vacation homes more north up the coast. We have Florida as well that's growing. When you look at the first quarter results in terms of PSUs, again, focusing on the internet, probably a good number to look at on a run rate basis and before obviously we make further acquisitions.
Okay. Thanks, Patrice.
There are no further questions. I'll turn the call back over to the presenters.
Okay. Well, thank you everybody. We'll be looking forward to talking to you in April for the next quarter.
Thank you.
Thank you.
Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.