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Good day, and welcome to the Cogeco Inc. and Cogeco Communications Inc. Second Quarter 2018 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 second quarter conference call. And joining me today are Louis Audet, René Guimond, Andrée Pinard, Pierre Maheux and Philippe Bonin.So before we begin this call, I would like to remind listeners that the call is subject to forward-looking statements, which can be found in the press releases issued yesterday.And I'll turn the call over to Louis Audet.
Thank you, Patrice, and good morning, ladies and gentlemen, and thank you for joining us to discuss the second quarter results.This quarter, for the first time, our results are favorably influenced by the consolidation of the MetroCast acquisition into Atlantic Broadband that was closed on January 4, 2018. Let us begin the discussion with Cogeco Communications. Revenue is up 8.8% compared to last year in constant currency to reach close to $600 million, and EBITDA is up 7.4% at $268 million. The quarterly dividend was reconfirmed at $0.475 per share, a 10.4% increase over the prior year.Let us now look at its individual components. At Cogeco Connexion, after an outstanding first quarter from a financial standpoint, the second quarter is muted, with flat year-over-year revenues and EBITDA at a slight 1.7% decline in constant currency. We are currently in a readjustment mode, balancing EBITDA and promotional expenditures. Please note that our overall guidance for Cogeco Communications remains unchanged for F2018 and the outlook for Cogeco Connexion is thus congruent with our guidance. We continue to expect annual revenue and EBITDA growth at Cogeco Connexion to be in the low single-digits.On April 10, 2018, Industry, Science and Economic Development Canada (sic) [ Innovation, Science and Economic Development Canada ] disclosed that Cogeco Communications has been accepted to participate in the 2300, 2500 megahertz residual auction. I would like to point out that this is congruent with the company's previously announced strategy to seek out options to offer wireless services in a profitable way respecting its financial means.Let us now turn to Atlantic Broadband. Since the closing of the acquisition of MetroCast on January 4, the ABB team has been executing on a detailed integration plan that was prepared during the interim period between the announcement last summer and the closing. So far, we are very satisfied with the execution of this plan. So the second quarter includes 2 months of MetroCast results in ABB, resulting in a jump of 41.7% of constant currency EBITDA as well as a 2 percentage point increase in the EBITDA margin, which now reaches 44.4%. Excluding MetroCast and in constant dollars, ABB revenues increased 4.1% and EBITDA, 1.9%. The PSU weaknesses in the first quarter has been overcome, and PSU results in the second quarter are well above last year for the same period. Our priority for the immediate future will be to introduce our TiVo video platform as well as higher speed Internet services to the MetroCast territories and to continue to develop the Florida commercial market. With respect to Florida, our acquisition of the FiberLight assets on December 30, 2017, opens further access to the commercial market along a prosperous 100-kilometer-long corridor from Miami all the way up to West Palm Beach. This is a key capital expenditure avoidance and speed-to-market strategy in a market where we are currently enjoying much success.At Cogeco Peer 1, we note that revenues and EBITDA had been essentially stable for the last 3 quarters, and is that is why we believe that we can improve the business. We are committed to seeking our share of this growing market and serving our customers well. Let us now take a look at Cogeco Inc. Our audience ratings remain solid. We're focused on tight expenditure controls to mitigate the prolonged slump in the Canadian radio advertising market. In conclusion, our January 10 guidance remains unchanged. We are focused on generating value from all our assets, and we are also focused on reducing our indebtedness levels.We will now be happy to answer your questions.
[Operator Instructions] Your first question comes from the line of Greg MacDonald from Macquarie.
Louis, quick question on the wireless outlook. So you made reference to your intention to bid on the residual 4G spectrum. I wonder if you might further delineate on whether that's a strategy to gain yourself some negotiating power from a potential MVNO perspective. Or is the rationale on that bidding actually one where you might consider building some wireless assets? And then a second related question to that is, you are a qualifier for the 600 megahertz auction, is the company's intention to actually bid on – bid in that auction as well?
Well, look, as you know, with everything that has to do with auctions for spectrum, we are extremely limited as what we may say or not say during the auction period. So I'm very sorry that I'm not really able to answer your questions. What I can say, however, is that what we are doing today is perfectly aligned with what we've been telling the market now for a couple of years. And that is that we would be interested in adding a wireless service to our offering, but it would need to be in a profitable way and it would need to be within our financial means. So there are many ways to enter the wireless sector. And at the moment by registering for this auction, we are keeping all our options open, which I think is good business. So I'm sorry I cannot add anything more to what I've already said for the reasons you know. But whatever we do, it's going to be within our financial means.
So when you make reference to that financial means, can you just remind me what the upper end of debt leverage would be acceptable within that definition of financial means?
I think you're worried beyond reasonable here.
Okay. I mean, spectrum costs money, though, right? And auctions can sometimes get...
Well, we know that. Yes, so it has to be -- we have to see a path to a profitable wireless business, and so that means that it has to be put together in a manner that is congruent with our financial means.
Okay. Appreciate that. Can I ask a quick follow-on? The enterprise business you've described as stable, is there -- can you give us more detail on the segments within enterprise, specifically I'm noting Canada versus the U.S.? And whether we should be thinking about any prospects for growth? Or is that a business that looks like it's going to be stable for the foreseeable future?
Well, I can assure you that everyone at Cogeco Peer 1 is working very hard to grow the business. So we have not concluded that this business is going to stagnate or stay the way it is. What we have concluded is that we think we have hit the bottom of our decline, and that we are now in a position to grow the business. That's what we believe, that's what we're working on. And the proof will be in the pudding.
And is it primarily -- is the Canadian market at all better than the U.S. market? Is there anything more that you can comment in terms of...
Well, I would say that the colocation and transport business is easier for us than the hosting business.
Okay. So no real change there?
By the way, we're having -- I'm answering your questions right now. But I think the key to our growth strategy, we should not forget, is to continue to acquire U.S. cable systems and integrate them and grow them. That's really the major chapter in our company's growth story.
Okay. And final question and I'll pass it on. What would you say the definition of "fixing the enterprise" segment is? Is that defined as...
The definition is renewing with growth.
Your next question comes from the line of Phillip Huang from Barclays.
This is Ali Taha filling in for Phil. I just have one. On the Canadian side team in cable, looks like the second consecutive quarter with video and net adds are under pressure, perhaps -- is this seeing more competition from perhaps fiber or is there something else at play here, perhaps you could share some details regarding that? And how you see that play out for the second half of the year?
Well, competition in our territories has always been fierce. So it's not that it's new, but it's clear that we have had to work on improving our marketing approach and that's what we're doing. And you'll note that our second quarter is nonetheless better than it has been in the past, if I exclude 2017, which was as unusual year. But if you compare it to 2016 and 2015, I think we're doing okay. And this has -- so we've improved in the second quarter and we continue to work hard to improve in the fourth -- third and fourth quarters.
Your next question comes from the line of Rob Goff from Echelon.
Perhaps a follow-up on the prior question. On the competitive dynamics, are you seeing any change in terms of focus more on promotions or bundling? But just a little bit more sense for any changes or nuances in the competitive dynamics?
Well, I wouldn't say that there are fundamental changes. Clearly, the competitive dynamics continue to increase. But our job is to take what we're dealt and turn it into a success, right, that's our job. So we've had a weakness in the first and second quarter. And our job is to ensure that regardless of what happens, that we do good and we have in the past. And so that we've some work to do. And I think we'll start seeing the results of that in the third and fourth quarter.
And a follow-up if I may. You identified U.S. cable acquisitions as a growth driver. Could you perhaps give a description of the market there in terms of availability of potential targets, valuation parameters on any prospective targets?
Well, as you can imagine, Rob, for valuation, I'm going to have to pass. The way we look at it, you know and you know this is that, it's all discounted cash flow, right? And it's discounted cash flow taking all factors into consideration, whether they are operating or fiscal in nature. It's always a bit difficult to tell because a lot of these companies are owned by families and that requires getting to know them and meeting them and these things take time. But you'll note that in the recent couple of years we've been successful. So we're just going to keep working at it. In the meantime, we have a debt-to-EBITDA ratio to decrease down to the -- to what, 3.4 now? Decrease it down to 3 before we do anything important. So there's time to elapse before we can look at the next transaction. So I think that's enough time for us to look around for the next possible opportunities.
Your next question comes from the line of Jeff Fan from Scotiabank.
Louis, just wanted to follow up on the wireless questions from before and not to be too specific on asking about the auction, but just really your vision for wireless, whether you see wireless as a way to better serve your existing customers that you have in your cable footprint versus do you see that as a new business in new geographies and new opportunities?
You're talking about what now?
Wireless. What's your vision for wireless? Yes.
Well, we, again and if I were to answer that question for you, I would be contravening one of the key requirements of I said in terms of not disclosing our intention. So I'm terribly sorry that I can't answer your question. But I think I have given you a good feeling for the situation, and perhaps I wasn't clear enough in my earlier statement. The auction is not only on 2300 and 2500 megahertz, it also concerned 700 megahertz and PCS. And I simply overlook that as a simplification, but members of my team mentioned that I should be precise in my comments. So I'm sorry, I had forgotten that. But the key for us is that it should be a profitable business, and it should be within our financial means. That for us is really the key.
Okay. And in terms of capital allocation priorities between U.S. cable acquisitions versus capital towards some kind of Canadian wireless business, how would you put those in terms of -- in front of you in terms of priorities and your ranking?
Well, as you know, what we do in the U.S., usually comes in chunks of $1 billion to $1.5 billion, right? It's about the size of the chunks as they come about. So that's in our plan. But that leaves some leeway to do what we think is reasonable and looks profitable.
Great. And just a question on the Canadian cable side. You guys put through some price increases in the fall, both in Ontario and Québec. But it doesn't look like any of that really flow through. And I'm just wondering, is there anything to read into that in terms of I don't know if it's competition, I don't know if it's the pricing power in your base, or anything that you can comment on about the impact of price increases whether it's flow-through or didn't flow-through in your numbers.
Yes. So Jeff, it's Patrice. It did flow through. So when you look at our revenues, obviously, there's couple of components in there. So you have the PSUs and -- so we have some that are going up in Internet and some that are going down in terms of video and phone. And then you have to look at promotional activity as well. As Louis mentioned earlier in the call, this is something that's a bit higher than before, and this is something we're balancing right now to ensure that we can grow the EBITDA. So but when the price increases go through, they do go through a period of time so they were implemented.
Your next question comes from the line of Bentley Cross from TD Securities.
First, just a couple of clarifications if you don't mind. Louis, on the top of your script, you talked about your expectations for Cogeco Connexion, I think both at a revenue and EBITDA line. Can you just repeat those numbers or what that outlook was?
I'm sorry, can you repeat the question? Are you talking about the past results? Or are you talking about the future?
No, the -- I thought in Louis' script there were some mention of expectation for mid-single-digit growth or something along those lines. Can you just kind of rehash that for us?
It was low single digits, right, for Cogeco Connexion, that's what I said?
Okay. Just wanted to clarify. And I mean, obviously, this quarter wasn't there, so is that just promotions rolling off? Or is there any anomalies in the quarter or future quarters that we should be aware of that maybe I missed?
No, I don't think there are any anomalies. I think we have to readjust our marketing tools and that's what we've done and it's starting to show in January and February. So it's part of the game, it's not a straight line. It goes up, it goes down. When your competitor does something, then you have to readjust and do something else. That's just the way it is, there's nothing really special about it.
Okay. And then just another clarification for me. Louis, in discussing wireless opportunities, multiple times you said kind of within your financial means or something along those lines. Obviously, that can mean a lot of different things to a lot of different people. Could you maybe put some parameters around that? Or just give any sort of clarification?
I am not allowed to do so without running the risk of being disqualified, which I will not run.
Okay, well, then maybe I'll try one last one and just thinking about wireless versus future acquisitions south of the border. How do you prioritize those capital priorities?
I've already answered that question, Vince (sic) [ Bentley ]. And I won't bore you by repeating it the second time.
Your next question comes from the line of Maher Yaghi from Desjardins Capital Markets.
I wanted to ask you a question regarding the Canadian cable business. Louis, you said it's part of the game. So I'm trying to understand, when I look at the historical performance of the Canadian cable business, I have -- going back in my model and I have not seen a decline into the 2% range. So I understand you have a plan, you're executing the plan to get growth back in the business, both on the top line and EBITDA line. But the swing from Q1 to Q2 in terms of growth of EBITDA and revenues was somewhat high. So I'm trying to figure out what took place that caused this year-on-year change in growth trajectories from Q1 to Q2? And how it's going to reestablish itself as you say in the back half of the year?
Yes. So you have to remember that in Q1, there were -- there was a second price increase. So it happened within -- there were 2 basically within the span of 12 months. So that's why we had unusually high numbers in Q1. And then in Q2, obviously, is one normal course. So that's the -- I would say that's the main -- you're asking about the delta between the 2 quarters, that's the main reason. Now in terms of normal course, it has to do with increasing PSUs. So doing, having better PSU performance, which were muted in this quarter and also managing the level of promotional activities with customers, which is something we're doing on an ongoing basis, but it was a bit higher than usual. So this is something in terms of executing the plan we're focusing on in the future.
Okay. And in your MD&A, you mentioned that you saw an increase in wireless substitution in your territory because of promotional activities that the wireless companies are doing in your area. It doesn't look like that has changed. Is there something you can implement right now in your markets to change that because it has -- is starting to accelerate quite a bit?
Well, that's for the phone?
Yes, exactly.
Yes, and -- well, for the phone lines, there's a portion of that is tied to the bundles we're selling. So a lot of people will take phone together with 1 or 2 other products. So as the other products are performing well, then the phone is tied to that as well. Fundamentally, in terms of substitution and some customers just not having -- just having 1 phone line, which is wireless rather than 2 home phone, this is a trend obviously, and will continue. The good news for us is we're more in suburbs and more rural areas, where we'll have a lot of our customers that will have homes and several people in the home. So a home phone is still very valuable for many of our customers.
So do you expect the trend to stabilize in the back half of the year? Or we should expect these losses to continue?
We would expect it to stabilize as it stabilizes with the other types of products as well. But obviously, every year, we do -- we are losing some phone lines because of the fundamental shifts of some customers moving to wireless.
Okay. And I have a question on the Canadian -- well, on the Peer 1. So you're talking in terms of the business, you're seeing positive underlying fundamentals improving in that business. But when we look at the top line and the EBITDA, it doesn't show in the financials. So I'm trying to figure out, when are we going to start seeing those results show up on the financial side?
Yes. Well, that's an excellent question. And we are -- everyone is working very hard to generate that growth, and it would be inappropriate for me to try to predict what it will be and when. So I'll ask you to excuse me, but I'm unable to answer the question, your question. The only thing I can tell you is that we have a dedicated team of highly capable people, who have been playing together now for a little over 1.5 years. And I am expecting improvements to materialize but I cannot tell you when.
Okay, we understand. And one last question. Louis, when you look at the Canadian business, I think you've been asked this question before, but do you feel the value of the Canadian business, the Canadian cable business could be worth more to somebody else operating the business than to Cogeco? And i.e., do you feel as a company, you can get more upside using the value that somebody else puts on that business and deploying it like you've been doing it nicely in the U.S. better so that Cogeco shareholders get upside from that and potentially, other operators in Canada get upside from the Canadian cable business?
Yes. So yes, you're right, I have answered that question numerous times. And it seems that my answer -- people don't understand my answer. So I'll give it to you one more time. We are not traders. We do not trade in goods. We buy companies. If they need fixing, we fix them, and we make them grow and prosper. So that's exactly what we're doing. We are a proudly Canadian company, and we will continue developing and nurturing our products and services in the cities we have the privilege of serving. And I hope nobody's holding their breath because you're going to die.
This response is assuming you can grow the business, right?
Well, look, we have exemplary margin in this business. We're in the 52% range. Where if you look beyond the 2 quarters that we're talking about, the first and second of this year, our performance and our KPIs have been above what everybody else has been doing in the industry. So I don't know where this notion comes from that somebody could do better, I mean, I really don't understand that.
Okay, that's fair.
Thank you and please put a -- forget about that one, just close that chapter because you're wasting your energy.
Your next question comes from the line of Matthew Griffiths from Bank of America Merrill Lynch.
I was going to ask a question on the wireless being mindful of your constraints. But in the past, you've said that you don't see a benefit to the cable business, and the businesses of people who are also running wireless, has that view changed?
No, it hasn't. So and let us make distinctions. We have said a number of times that you can run it successfully, very successfully, actually, cable businesses without necessarily having a wireless product in your lineup, and that's what we've been doing now for years. And if you compare our fundamentals in terms of customers, ARPU, margins, that statement has held up very -- backed up very solidly by the evidence. But what we have at the same time recognized is that being able to operate profitably a wireless service is a very attractive -- can be a very attractive proposition. So we've shown openness to exploring that avenue. But one does not contradict the other.
Right. Okay. And my other question is, so in the Canadian footprint, we've seen kind of a very gradual trend towards fewer customers taking kind of single service and more than taking 2. However, in the U.S., in their footprint -- or in your footprint in the U.S., we see kind of a rise in the single-product customer. Can you kind of talk about what the differences are in those -- in the markets and what's driving that?
Sure. If you look at the -- if you're referring to the statistics on this quarter in the U.S., more specifically, and I'll answer more generally, but just to state this one. It does include MetroCast, and MetroCast had a much higher penetration in Internet-only services. And that's one of the reasons we bought it as well because we believe we can increase the penetration in video and phone. So that's one of the reasons. But more generally, there is -- it's tied to the discussion on the phone lines we were talking about. The 3 bundle is, over time, is reducing. And you see some shift moving to 2 bundle. And there are some customers that will be satisfied with just -- with Internet. So that's, I would say, across the industry, more prevalent again not necessarily in our territories, which are more suburban and rural. When you have a few people in a house, it's more difficult to operate simply on Internet without video, but that's a trend. So hopefully that answers your question.
Yes, it does. But in the U.S., it seems as though the single product is -- and it's not just for this quarter that did recognize that step-up, but obviously, it seems very attributable to MetroCast. But just prior to that, that seemed to have been the case as well. And I was just curious if there was something you were seeing that was driving that? Or if it was just as you say the same as sort of the phone falling off and this is just the way the customers are falling out of that trend?
I cannot point to any particular explanation. I'm sorry.
[Operator Instructions] Your next question comes from the line of Drew McReynolds from RBC Capital Markets.
Just 2 follow-ups. Patrice, for you on American broadband margins with MetroCast coming in and a couple of the other assets and the integration. Can you just give us modeling help in terms of margin assumptions once all this dust settles? And second question either for you, Louis or Patrice, just in terms of cord cutting and the rate of cord cutting or substitution, you addressed in Canada the impact of the ebbing and flowing of competition. Can you just comment whether you are seeing any accelerated cord cutting in your footprints, and maybe as usual contrast Québec with Ontario?
So we don't think we are seeing acceleration. I think we're seeing more or less ongoing erosion. And we keep working at trying to slow it down. Of course, in our dreams, we stop it. But that -- to date, that hasn't happened. And we -- our job is to create value, so whatever we do, we work with all the variables to create value and come up with a positive economic value added at the end of the year. And that's our guiding light, that's our compass, say, more than anything else. So that the rest is important to be followed very closely. But in the end, it's all about value creation, and that's what we're working on and have been continuously now for many years.
And so on the margins, basically, last year, we were at about 42.2%. When we announced the acquisition of MetroCast, we have mentioned because we bought the business with a higher margin, that we would see a pickup and we would invest additionally, in some marketing costs and brand launch costs. Now with this quarter, it was a little higher than on a combined basis than what you should expect for the full year. It should be a little shy of this, but we were expecting and we're still expecting an improvement of margin year-over-year. So what we have said at the time is besides any other changes, the improvement would be about 1.5 points. As video [ cutting cost ] increases from year-to-year, you see some impact on the video margins. So in summary, a little less than what you're seeing in the second quarter for full year, but definitely higher than last year. We're, for your information, we're planning to launch our brand conversion of MetroCast in about a month and we're going to launch TiVo as well and then do speed increases in the balance of the year in the MetroCast territory.
[Operator Instructions] Your next question comes from the line of Sanford Lee from Canaccord Genuity.
On the topic of trying to manage your promotions and profitability, my question is more tied to competitive environment versus the telcos. Way back in 2015, I think you said that Cogeco's Canadian cable ops based IT, for IPTV competition is about 33% of your territories. Can you give an update to this figure? I'm asking just because PC has now turned its efforts too much around the surrounding area towards fiber program?
So -- and Sanford, sorry the line is not great. But if I heard you correctly, you'd like to understand what our competition profile is in Canada with -- in terms of IPTV?
That's correct. And then maybe a quick update with the U.S. operations now with the acquired MetroCast?
Sure. Well, in terms of Canada, there's not that much difference. Basically, about 1/4 of our territory is in terms of competition is fiber-to-the-home, another 1/4 is fiber-to-the-node, so that together is about 1/2 IPTV and still 1/2 about DSL and satellite. So these things move from time to time, but I would say no major movement recently. And in terms of the U.S., it's also similar. It's about 3/4 is DSL and the balance is primarily fiber-to-the-node, and then you'll have some small percentage of fiber-to-the-home of about 6%.
[Operator Instructions] There are no further questions at this time. I'll turn the call back over to the presenters.
Okay. Well, thank you, everyone, for participating in today's call. I'm looking forward to disclosing our third quarter results in July, and feel free to call us if you have any questions in the meantime. Thank you very much. Have a good day. Bye.
This concludes today's conference. You may now disconnect.