Cogeco Inc. (CCA) Q2 2023 Earnings Call Transcript

Cogeco Inc. (XTSE: CCA) Q2 2023 earnings call dated Apr. 14, 2023

Corporate Participants:

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Analysts:

Aravinda Galappatthige — Canaccord Genuity Inc. — Analyst

Drew McReynolds — RBC Capital Markets — Analyst

Maher Yaghi — Scotiabank — Analyst

Jerome Dubreuil — Desjardins — Analyst

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

Vince Valentini — TD Securities — Analyst

Presentation:

Operator

Good day, and welcome to Cogeco Inc. and Cogeco Communications Inc. Q2 2023 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.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Good morning everybody, and welcome to this second quarter conference call, which Philippe Jette and I will take as usual. So before 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.

So, I’ll turn the call over to Philippe.

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Good morning everyone, and thank you for joining us for the second quarter results of fiscal year 2023. We are reporting consolidated results, which are in line with our expectations. While the industry continues to be impacted by increasing macroeconomic pressures and a more competitive environment, we remain focused on balancing subscriber growth with financial performance while remaining disciplined with our cost structure. We continue to execute successfully on our fiber-to-the-home network expansions program with the addition of 32,000 homes passed during the quarter, which brings us to more than 140,000 home pass over the last 18 months.

This is a 5% increase to our network during the period. Our reliable high speed network, innovative digital product offering, and local customer service have already enabled new internet subscriber additions in these areas, which position us well for the future. For mobile, we are encouraged by the government’s indication that it is looking to support increased competition in the wireless space. We remain focused on meeting regulatory requirements, which we expect shortly, leading to the negotiation of wholesale rights with incumbents. As a reminder, Cogeco owns such spectrum in 91% of its Canadian footprint, which is a requirement for MVNO access.

We are also pleased with our March acquisition of oxio, a telecommunication operation serving about 48,000 residential customers in Quebec, Ontario, and Western Canada. With this great addition, we now have a second brand in Canada to serve younger and price conscious customers with a fully digital customer service. Looking further into the future, we also intend to explore longer term opportunities by allocating up to CAD100 million of capital to new growth opportunities. These funds will be invested over a 5-year period with the objective of generating attractive long-term returns.

The goal is to create new opportunities for growth in a fast changing environment, while building on our innovation, our operational experience, and minimizing investment risk due to the limited size of each investment. Additionally, like the government, subsidized fiber expansions that we are undertaking in Canada, we remain interested in participating in similar extensions under the broadband equity access and deployment funding program in the United States. Each state will run its own process, allocating funds by region, which we expect to begin later in the calendar year.

In terms of recent notable ESG development, Cogeco has been ranked for the fourth consecutive year among the world’s 100 most sustainable corporation according to Corporate Knights. This ranking results from a rigorous assessment of over 6,000 companies around the world generating more than $1 billion in revenue. Cogeco’s performance was particularly recognized for its board diversity, carbon productivity, and sustainable revenue, and investment. I would also like to highlight that we recently published our annual ESG and Sustainability Report, as well as our climate action plan, which detail our environmental, social, and governance commitments, initiatives and performance aim at driving sustainable growth and business resilience.

I will now review our operational results. Let’s start with our U.S. operations. As mentioned earlier, we continued our fiber network expansion where we added 17,000 homes passed this quarter or 68,000 homes passed over the last 18 months. At Breezeline, we continue to focus on growing the customer base. And as you see, we have made progress. Outside of Ohio, we grew our Internet customer by 1,700 both from our current and newly served areas. The product mix has also improved with a greater proportion of new connections taking faster Internet speeds and therefore driving a higher average revenue per unit.

In Ohio internet net losses stood at 5,500, which we would obviously prefer to be a net gain, but is nevertheless an improvement over previous quarters. There is still more work on our plate to return to growth in our Internet customer base in Ohio, and it will take more time to gain greater brand awareness in that market. But we remain focused on our plan where every step counts to set the foundation for future growth. Breezeline also continued to roll-out its IPTV product in Ohio to all its existing customers, and densifying and interconnecting its network fully to Breezeline score.

Moving to the Canadian operations; we accelerated our construction efforts to connect more homes in unserved and underserved communities in both provinces where we added about 15,000 homes passed during the quarter and 73,000 homes passed over the last 18 months. As a reminder, these fiber-to-the-home expansion projects are mostly done in partnership with governments and deployed in an area which do not currently have high speed Internet providers. We are pleased with the results that we are seeing from these expansion projects, which have contributed to growth in customer additions.

Overall, our Canadian team did an excellent job executing on effective sales and marketing strategies, which led our Internet customer base to grow this quarter by 7,800 across our traditional markets and these newly served areas. The Canadian business has also improved its ARPU with an improved customer product mix. For Cogeco Media, our stations remain at the top of the ratings, confirming once again our leadership position even if we are operating in soft advertising markets. In the meantime, we continue to expand our multi-platform audio content options with more digital ad tech solutions.

Now, let us turn the — let me turn the call over to Patrice, who will provide more details on our financial performance for the quarter.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Thank you, Philippe. So, before going into the details of our Q2 financial performance and unless otherwise indicated, I’d like to highlight that my comments will be provided on a constant currency basis. So in Canada, at Cogeco Connections, the revenue was up by 1.7%, resulting mainly from the higher Internet service customer base and higher revenue per customer. EBITDA was up by 3.1%, due to the revenue increase and stable operating expenses. In the U.S. Breezeline’s revenue was down 5.2%, mainly driven by customer losses in Ohio over the past year and an overall decline in video and phone customers, partially offset by high-speed Internet service additions outside Ohio over the past year, a higher revenue per customer, and a better product mix.

EBITDA decreased by 7.8%, reflecting lower revenue and some margin contraction related to the unusually low spending in marketing and advertising and less staff last year in Ohio, while the assets were still operating under the previous owner’s brand. Turning to Cogeco Communications, at the consolidated level, revenue was down by 1.8%, which led to a decline in adjusted EBITDA of 1.9%, mainly due to Breezeline’s performance that I just explained. Capital intensity was 21.2% due to increased activity related to network expansions in Canada. Excluding these projects, capital intensity would have been 15.5% in the quarter.

Free cash flow decreased by 21.5%, reflecting these additional investments in network expansions, higher interest rates, and a decline in EBITDA. Excluding network expansion projects, free cash flow would have decreased by 15.3%. During the quarter, we continued to be active in our share buyback program at a faster pace than in previous quarters, based on a low stock price with a purchase of 845,000 shares for CAD64 million. A dividend of CAD0.776 per share was declared for the quarter, which is an increase of 10% over the prior year.

We anticipate dividends to represent a payout of about 24% of our free cash flows this year, excluding network expansions. As of the end of the quarter, our net debt-to-EBITDA ratio was 3.4 times, which includes the impact of the appreciation of the U.S. dollars against the Canadian dollar. Our balance sheet remains strong with available liquidity of nearly CAD1.2 billion at the end of the quarter. As it relates to Cogeco Inc. revenue declined by 1.6% and EBITDA by 1.8% as a result of Cogeco Communications’ performance. Radio operations revenue increased by 5.3% versus last year, while the advertising — sorry, and market remains soft.

As for buybacks, Cogeco acquired 118,000 shares during the quarter, and a dividend of CAD0.731 per share was declared for the quarter, which is an increase of 17% versus the prior year. Now in terms of our outlook, we are confirming our fiscal 2023 financial guidelines as issued in January for both corporations. Although we continue to experience revenue pressure in the U.S., we have implemented several cost mitigation measures to partially offset this. At Cogeco Connection, we expect a low-to-mid single-digit growth in revenue for the full-year driven by organic growth from our traditional and newly built areas and contribution from the recent acquisition of oxio.

For EBITDA, we expect low-single-digit growth, which reflects overall higher opex to drive customer growth and last year was also impacted by favorable year-end adjustments. In terms of quarterly cadence, we expect sequential growth in revenue in Q3 with the year-over-year percentage increases modestly higher than in Q2. As it relates to EBITDA, we expect margin contraction due to overall higher opex to drive customer growth, including with our oxio brand, which is in a high growth phase. Therefore, we expect a small year-over-year decline in EBITDA in Q3, which was already built in our guidance.

At Breezeline, we expect in constant currency a low-single-digit decline in revenue for the full-year, while EBITDA is expected to be slightly negative. In Q3, we expect a similar mid-single-digit decline in revenue as we saw in Q2, due to customer losses in Ohio over the past year, partly offset by growth in Internet customers elsewhere, and a better product mix as well. As for EBITDA, we expect a low-to-mid single-digit decline in Q3 from lower revenue, partly offset by lower opex. Below EBITDA, I’d like to note that acquisition, integration, restructuring, and other costs are expected to be broadly similar to the second half as the first half.

In terms of capex, we’ve been pleased with the results of our network expansion so far and our guidance accounts for anticipated increases in the back half of the year, which is typically a busier time to build in the summer months. And as noted in the past, our guidance range already reflects investments related to strategic growth initiatives, including preparing for an eventual launch of mobile services. While free cash flow is therefore anticipated to be lower in the second half of the year, it will represent still a strong growth on a year-over-year basis, most notably in Q4.

And now, Philippe and I will be happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.

Aravinda Galappatthige — Canaccord Genuity Inc. — Analyst

Good morning. Thanks for taking my questions. I’ll just start in Canada. A pretty good broadband net adds number obviously that you’ve reported. It’s good to see. Can you just maybe help us understand how that breaks down between your traditional footprint and your network expansions? And then I guess connected to that, how you see, sort of the sustainability of sort of that strength that we saw in Q2?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Sure. So it’s actually a mix of both. So we are now finally reaping the benefits of the network expansions, especially the ones in Quebec, which are not fully done yet, but we’re advanced and we have delivered many doors already. Ontario will come a bit later as we’re in a building mode right now. So we do expect as we deliver doors in these network expansion areas to continue to see the positive effect for quite a long time actually.

And as for the other areas, we do adjust our marketing and our go-to-market approach on a regular basis as the market evolves. And so it did contribute to the positive numbers you saw in Q2. Obviously, PSUs in our traditional sectors or Internet additions in our traditional sectors can be volatile from one quarter to another, but our goal is always to produce a positive number as we’ve been doing in the past.

Aravinda Galappatthige — Canaccord Genuity Inc. — Analyst

Okay, okay. Thanks for that. And then I was wondering if you can expand a little bit on how things are going in the U.S.; A, with respect to Ohio, is it stabilizing there? And sort of, I know you talked about in the last quarter, but sort of the rollout of your IPTV product there. So how are you seeing retention levels and sort of improvements in Ohio? That would be helpful. And then maybe specifically for Patrice, when I look at sort of the guidance that you’ve indicated for the U.S., I think prior quarter, you mentioned low single-digit growth there. We’re obviously looking for low single-digit declines there. Maybe just talk to us, is it just the sub losses or is there anything on the pricing side, the competitive side that’s sort of adding to sort of that variant?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Great. Okay. So I’ll take your questions on this. So in Ohio, obviously, we did make the changeover from [Indecipherable] to our brand a few quarters ago. And you can see that we’re still — we still lost some customers during the quarter, but it was quite an improvement versus the previous quarter and the one before that as well. So as we look further out in Q3 and Q4, we do expect to see some losses still as we’re continuing to become known in the market because we have ramped up to our marketing activities as we have — we are a new name in the area. And so we do expect this and we’ll see the ideas to reduce these numbers from what we saw — what we’ve seen in Q2. We did lose 5,500 customers in Ohio in Q2 and we are planning to see lower numbers in Q3 and Q4.

In terms of the change in color, as part of our guidance for the U.S., it’s primarily due to the losses we’ve seen in Ohio. We are seeing some ARPU pressure, obviously, in Ohio and in other places as well as it is more competitive than it used to be given the fixed wireless increase in intensity and competition. Across the U.S. in general, not as much as we’ve said in the past for us, it’s more in Ohio than elsewhere, but it has an indirect impact in ARPU. So going forward for the balance of the year, I would say, in the U.S. it’s a mix of PSUs that are a bit softer than what we had planned initially and a bit of pressure on ARPU as well.

Aravinda Galappatthige — Canaccord Genuity Inc. — Analyst

Thanks, Patrice. And last question from me. Maybe to [Technical Issues] on sort of the change in leadership [Indecipherable] you see and what seems to us like renewed push to make sure that, plus on paper in terms of MVNO is actually implemented. Can you just give us a sense of what you think sort of the next steps would be? I mean, what are you waiting for? What do you have to do? Like, how can we think about timelines here?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Yes. Aravinda, it was just a bit difficult to understand your question, but I think you’re asking about our next step for MVNO in Canada. Is that it?

Aravinda Galappatthige — Canaccord Genuity Inc. — Analyst

Yes, that’s correct.

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Okay. So as I said earlier, we do have to qualify for the MVNO framework in Canada. With spectrum, we actually own 91% of spectrum in our operating footprint. The Ts and Cs from the regulator will actually be approved pretty soon. We’re all awaiting the green light from this federal program. So it’s coming from the CRTC, and we would be negotiating with the three MNOs, the wholesale rates. And therefore after the subsequent steps would — you’ll find us in the market. So I said on the previous call that at the end of this fiscal, we would update and provide more on our commercial plans but right now, it’s more negotiating good rates with MNO, the existing MNOs in our footprint.

Aravinda Galappatthige — Canaccord Genuity Inc. — Analyst

Okay, great. Thank you. I’ll pass the line.

Operator

Thank you. The next question comes from Drew McReynolds of RBC. Please go ahead.

Drew McReynolds — RBC Capital Markets — Analyst

Yeah, thanks very much and good morning. Just a follow-up to Aravinda’s wireless question. Just in the wake of the Rogers-Shaw Quebec or transaction approval. Just wondering, Philippe, if there is, that all kind of influences your roadmap here in wireless? And from a government support perspective, obviously, the language coming out of ISED indirectly the CRTC is to certainly support operators, regional operators like yourself, get a sense that this is going to expedite the process here towards launch?

And particularly once you get into negotiations with the incumbents, do you think we’re going to, kind of see quicker and more, kind of constructive outcomes here from those negotiations? And then second question, just for you, Patrice and my apologies if it’s been disclosed, but just on oxio for modeling purposes, just curious if you’re able to give us either the multiple paid or some other financial metrics around that one? Thank you.

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Thank you, Drew. So for your — the first part of your questions, it certainly provides more predictability in the — throughout the industry now that the — this transaction is over and we know what to expect of it. The next steps will actually be better for everyone throughout the industry. So the regulator has purely supported more competition in wireless. So I think we will see the next step unfolding with more predictability. The three players engaged in that very large transactions are focusing on the West. We have heard some of their plans more to come. But I think now every player is at a better place, understanding the — well, with the conclusion of the transaction and getting ready for the next steps negotiating partnerships and rates.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

And on oxio, so at a high level, it should add about 1% to our revenues at Cogeco Connection during the year, but we will have owned it 4 or 6 months, basically during our fiscal year. On the full-year, it’s a bit more than 2%. On the EBITDA front, it’s not a meaningful number because one thing that’s important with oxio is it’s actually growing really fast. And with these types of businesses, which generate slightly lower ARPUs than in our traditional business, again, it’s a different business model that’s digital only less products as well.

Typically, while you’re in the high growth mode, you need to invest in acquisition costs. So that’s where we are. So that’s why the EBITDA is not a meaningful number. That being said, at one point, we hope it to keep growing for a long time. But at one point, when it reaches steady state, normally then that’s where you see more EBITDA contribution.

Drew McReynolds — RBC Capital Markets — Analyst

Okay, got it. Thank you very much.

Operator

Thank you. The next question comes from Maher Yaghi of Scotiabank. Please go ahead.

Maher Yaghi — Scotiabank — Analyst

Yes. Thank you for taking my questions. Bonjour [Indecipherable] I just wanted to start maybe with your guidance for the U.S. business. So when I look at the first half of the year on EBITDA constant currency, you’re around minus 5.5%, minus 5.6%, and in your prepared remarks, you mentioned that for the year you expect it to be declining in the single — small single digit. So that is implying quite a bit of a turnaround in the second half.

So I’m trying to understand what will drive the growth in the second half to end up with a small decrease for the whole year. Because when I look at your margins, for the U.S., in the second half of 2022, they were already down to the levels that you are running at right now. So are we to expect margins to improve in the U.S. in the second half of this year and if so under what reason?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Yes. So we are expecting a margin improvement in the back half of the year. One of the reason is that we’ve — as I said in the prepared remarks, we’ve looked also at our cost structures. And identified additional cost savings given the pressure on revenue in the U.S. That’s one reason. There is also, for example, in Ohio, we have not put price increases in this year. So there will likely be some later on during the year, which will benefit the back half of the year. So that’s another reason. So yes, we do expect to see a stronger Q4 and Q3 that would be a bit better, as I said, than Q2 basically.

Maher Yaghi — Scotiabank — Analyst

Okay. And the price increase in Ohio, you’re doing it in the midst of price pressure that you’re seeing from other participants in the marketplace. Are you worried that this could increase the churn and we could see a reacceleration of subscriber losses in that part of your business? And just to go back on maybe one comment you made, you mentioned the small improvements that you expect to steadily see in Ohio, but if we look at the overall U.S. business, are we to expect or should we be on the lookout for broadband net adds to turn positive sometime this year on a net basis overall?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

So on the price increase, first, let’s remind that — remember that we have not in the Ohio market increased our rate still. And we are trailing the others in terms of rate increase. So we’re not expecting this to become another major factor of churn. And the rate of the increase is actually lower than the inflation rates that we can see and read every day in the U.S. So we very diligently work our cost structure to opex reduction, to have a just right increase for that market.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

An obviously we’ll be able to talk more about pricing strategy later on as we go on because we generally don’t talk too much about it before we make our decisions for competitive reasons. And then for the PSUs or sorry, the Internet additions in the U.S., so as you saw this quarter, we did have a positive number except for Ohio. So that’s why with Ohio was negative number. To your question, we do expect in Q3 to still be negative, net of Ohio because the additions elsewhere will probably be slightly lower than what we’ll do in Ohio. Again, it’s still early in the quarter, so we’ll have to see where we end up. And for Q4, the idea is, obviously, we’re aiming to be neutral, but it’s a bit early to talk about it.

Maher Yaghi — Scotiabank — Analyst

Okay. And my last question is on the guidance, again the 1% contribution from oxio is that implied already in your guidance or we should be adding it on top of your guidance that you provided for the year? Because you made that transaction after you provided your initial guidance. So I’m trying to figure out if you had already included it in your guidance or not?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Yeah, it is in the guidance. We did see a bit more pressure in the U.S. in terms of revenue since last quarter for the reasons I mentioned, so a bit in Ohio, a bit of ARPU as well. So — and oxio is included in our guidance.

Maher Yaghi — Scotiabank — Analyst

Okay. So it makes up for the weakness that you felt during the quarter, during the last couple of quarters to pad your — to get into your guidance. Sorry, one last question on capex for wireless. Does the CAD100 million over 5 years include wireless expansion or its capex or cable? You mentioned the CAD100 million in your prepared remarks, is that pure cable or it’s some allocation for wireless as well?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Well, first on wireless, we are working on the capital light model and again this year in our guidance everything is included even mobile. So there won’t be additional capex required for mobile in year. We will talk about the future when time comes, but we are working on a capital efficient, a capital light model. Now, when it comes to the fund that we’re setting aside, it’s not targeted to wireline coax, fiber, mobile. It’s actually — the idea here is simply to identify growth opportunities that are small, but could pay back over the longer term. So these dollars will actually have a long-term return model and they’re small investments.

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Maher, we don’t necessarily have a target in mind at this point. So it will just come in the future. But assuming we do make some small investments, they would be accounted for as investments, not capex.

Maher Yaghi — Scotiabank — Analyst

Okay. Thank you very much.

Operator

Thank you. The next question comes from Jerome Dubreuil of Desjardins. Please go ahead.

Jerome Dubreuil — Desjardins — Analyst

Yes. Thanks for taking my questions. First one I have is on the B program in the U.S., you mentioned on the call that you expect this to start a bit later this year. Are we talking about the process starting or actual dollars being allocated?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

It’s the process starting. So it’s a two-level process in the United States. So it has to be defined at the federal level through the NTIA and then assigned to each state. And each state will actually define the local rules to funnel the money available in the market. So right now, the U.S. is still at this stage where they are optimizing maps like really terrain maps and identify how many households are included in every areas.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

And Jerome, typically there’s a delay between winning some of these — because these are subsidized bills between the time you win and we’ll see with how we do in our interest level depending on the opportunities there because we still don’t have all the details. But once you do win an area, you do need to do some work for design. You need to make sure you have access to poles. So there’s quite a bit of a delay before you start actually spending real money on these programs.

Jerome Dubreuil — Desjardins — Analyst

Yeah. Okay. That’s clear. Thanks. Another one I have, you talked about a 5-year period investment in terms of new networks. Does that include the B Program or — and do you expect some additional government participation that we may not have factored in so far?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

No, the B Program will actually be a program that will stand on its own part of our major initiatives. Again, the fun here is really to focus on the long-term. So we would like to have three cylinders, a short-term, a mid-term and a long-term funnel of activities to — or opportunities to generate growth. So we’re actually initiating a cylinder for the long-term small things that could either pay us later in time.

Jerome Dubreuil — Desjardins — Analyst

Okay. Thanks. And then last one on wireless. You provided good color on the timeline here, but correct me if I’m wrong, but you also, sort of control the timeline of your eligibility, right? Is it fast for you to become eligible and maybe have your home network, home mobile network or you’re just not even sure this is still a requirement from the government?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

We know it is a requirement. We have clarified that with both the CRTC and ISED, it does not need to be very big in scope. We understand exactly what it means, what it needs to be. And as I said, it will come soon enough to qualify and have us negotiate with the MNOs. The key for us is really to find those rates, those wholesale rates, as quick as possible and then we can see what other plans will be made of after that.

Jerome Dubreuil — Desjardins — Analyst

That’s helpful. Merci Beaucoup.

Operator

Thank you. [Operator Instructions] The next question comes from Matthew Griffiths of Bank of America. Please go ahead.

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

Hi, good morning. Thanks for taking the question. Just one on your comments about, I guess going forward in the Canadian footprint, you mentioned to expect some higher capex to drive growth in the back half of the year. I was just wondering, is that related to the new territories that you’re opening up or is that mostly related to, kind of increased competition that we’re seeing in the market? And if it’s the latter, do you expect that to continue? Like should we be assuming this carries on? And secondly, on the oxio acquisition, I was wondering if you could elaborate on your plans for the oxio, how do you expect to like, what should we expect to see Cogeco do with that platform? Thanks.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Sure. So on the expansion it’s actually the former that’s related to our expansions. And I would say, the –outside the expansions, our capex level can fluctuate from quarter-to-quarter, but overall is relatively stable. And the expansion is where there’s a lot of, obviously, a lot of outside construction and typically you have more of that during the summer months than in the first half where you’ll have the winter months.

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

Sorry, Patrice. If I said capex, I’m sorry, I meant to — I think your comment was about opex in the second half, impacting EBITDA. Maybe I got that wrong, but sorry if I said capex when I was asking the question, but I meant to ask about opex.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Okay. Okay. Sorry. And I think I heard capex, but I could be wrong as well. So yes, so basically we do have some investments we’re making and one of them is in the oxio brand which leads to your other question where we’re seeing a lot of growth and basically there’s a portion of investments that comes with it. Otherwise its other elements that we’re just seeing for the back half of the year, but it’s still — we’re still remaining within the guidance that we have provided. Did you want to comment on the oxio?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Yes. So but just before going to oxio, to us, it’s really striking always the right balance between growth in terms of PSU and the business overall and returning capital to shareholder and increase shareholder value. So we do have a number of very good expansion programs contributing in the short and the mid-term as well to the growth of the business.

So we’re allocating to these programs as they come with partnership with governments and subsidies. So that’s really good to create waves of growth for the business. Quebec had a couple of waves and we can already see the payoffs now. Ontario is following and we’re preparing, as we mentioned, [Indecipherable] in the U.S., so we’re creating these paddles — these hard paddles of growth for the organization. And in this context, you should think of oxio as just another wave of growth.

They operate — they will continue to operate almost independently of the Cogeco brand in the market. So we are going to keep their brand. They are operating in five provinces. We will go and capture growth. PSU as they are growing very fast and they will keep on growing for many years and we will continue to stimulate that growth in the market. So think of it as just another wave or hard paddle for growth.

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

Okay. And if I may follow-up on that, so how do you balance, it seems like the industry as a whole is adding this vector of potential growth, and if you’re all looking at this wholesale vector to support growth, what do you feel the net effect of that would be because obviously, this is one vector for you. There’s other players that cumulatively, that’s three vectors of potential decline that are coming at you. How do you see that balancing in the industry?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

Well, it’s all about your agility in the end, your cost structure. With oxio, we have a fully digital model. It’s a low cost structure, high growth. I feel really good about capturing volume. And by definition outside of our footprint. So feel good about the possibility there with oxio.

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

Okay. And if I could just sneak one other one in just on the dividend, is there at the target payout ratio that you guys have in mind as you increase the dividend or is it more — you’re more focused on sustaining the current growth rate going forward?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

I guess we look at both, generally, we’re — although we don’t state us as a policy, we’ve historically and still the case trying to be within 25% to 35% of free cash flow. And depending on which free cash flow you’re using, for example, for this year with or without the network expansion, you’re at least two numbers. But we do look at the pace of growth as well. So given that the payout is not a large one, we have capacity to keep growing the dividend. We typically do this in Q4, so we’ll have to have those discussions with the Board. But so far at this point, I don’t see a reason why we would not be able to keep growing the dividend at a faster pace than what you typically see in the industry.

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

Thank you very much.

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

At the highest level, we do have a very predictable business. It’s stable. It has stability. We generate high free cash flow and we have modest leverage in the end. So where our capital allocation strategy is really of growth investment and return to capital dividend is one part of that. The good news is, we can actually do many or act on many of these levers and investing in our products continue to invest in growing our footprint dividend as part of that. And we have also supplemented all these with meaningful buybacks in the past two years. So all-in-all, it’s about balancing all these things and growing and returning value to shareholders.

Matthew Griffiths — Bank of America Merrill Lynch — Analyst

All right. Thank you very much.

Operator

Thank you. The next question comes from Vince Valentini of TD Securities. Please go ahead.

Vince Valentini — TD Securities — Analyst

Thanks very much. First, I just want to clarify a couple of things on oxio. So Patrice, the revenue guidance is slightly impacted, but to be clear, you said there’s no EBITDA contribution this year. So your EBITDA guidance stays the same and that’s pure with no acquisition contribution. Is that fair?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

I would say it’s none, but it’s not material in EBITDA. And then — and that’s right. So we — it did not really have an impact on, or a material impact on the EBITDA front, but in revenue there was more of an impact.

Vince Valentini — TD Securities — Analyst

Thank you. Does that also imply that not many of the oxio customers are actually in your territory and currently wholesaling the Telco Network so that there’s no immediate benefit of shifting volume to your own cable network and get a quick pick up? I assume there’s none of that or else the EBITDA would be a bit better?

Patrice Ouimet — Senior Vice President and Chief Financial Officer

That’s right. And I would say, and again, we’re not necessarily disclosing the exact EBITDA figure for oxio, but the main reason why it’s not like some others we’ve seen before is that it’s growing fast and there’s a sizable investment on the acquisition front. But to your question, we — most of the customers are outside our footprints. They’re mainly in large urban centers as opposed to being in areas where we operate.

Vince Valentini — TD Securities — Analyst

Thank you. My last question is on wireless probably more for Philippe, but you’ve mentioned a couple of times capital light in terms of the MVNO strategy, I’m just trying to reconcile this with the CRTC rules that currently say you have to build out your own network over 7 years. So are you expecting them to back down from that or change those rules or would you say capital light, you’re basically just talking for the first couple of years, but eventually you’d have to buy more spectrum and build your own network if you did avail of the current CRTC regime, is that not fair?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

We’ve said many times that we are building a capital light model, we have not changed our mind. The model is a little bit different. The traditional model where you built and you tried to find customers and load up revenue, here we will be able to rent, sell in actively market and sell fine customers and gradually build where we need to, and only where and when we need to as we can lease capacity for a long time. And we have other options as well, partnerships or other means of complementing our strategy with win, win, wins in the market. So we have not changed our mind. On the model we have in plans and we need to go through the next steps and we’ll see where it goes.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Obviously, as we move forward, as we do it in everything we do, if there’s opportunities for us to reduce investments in the end of the period, assuming it’s the period we’re looking at today or reduce operational risk. These are always things that we’ll look at. There’s ways of doing it with other folks as well. But at this point, we’re very focused on getting going with the regulated MVNO as a base, but there’s upside to that after a year in operation.

Vince Valentini — TD Securities — Analyst

Okay. No, no, that’s good. I lied. Let me throw in one more question, I’m just surprised to be able to ask it, but do you want to comment on The Globe and Mail article from earlier this week like the things that were talked about there in terms of asset swaps or participating in a buyback? I assume you don’t want to comment, but I want to make sure you have the opportunity because nobody else asked?

Philippe Jette — President and Chief Executive Officer, Cogeco Inc. and Cogeco Communications Inc.

No, we don’t have any comments.

Vince Valentini — TD Securities — Analyst

Fair enough. Thanks.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. There are no further questions at this time. I will turn the call back to Mr. Ouimet for closing remarks.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Okay. So thanks everyone for being there today. We should be reporting our Q3 numbers in mid-July, so feel free to call us in the meantime. Thank you.

Operator

[Operator Closing Remarks]