Cogeco Inc. (CCA) Q2 2022 Earnings Call Transcript

Cogeco Inc.  (TSE: CCA) Q2 2022 earnings call dated Apr. 14, 2022

Corporate Participants:

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Philippe Jette — President and Chief Executive Officer

Analysts:

Jerome Dubreuil — Desjardins Securities — Analyst

Matthew Griffiths — Bank of America — Analyst

Presentation:

Operator

Good day, and welcome to the Cogeco, Inc. and Cogeco Communications, Inc. Q2 2022 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Patrice Ouimet, Senior Vice President and Chief Financial Officer. Please go ahead, Mr. Ouimet.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Thank you. Good morning, everybody, and welcome to this quarterly conference call which Philippe Jette and I will present. So as usual, 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 the press releases issued yesterday.

I’ll turn the call over now to Philippe Jette.

Philippe Jette — President and Chief Executive Officer

Good morning, and thank you for joining us to discuss the financial results of Cogeco Communications and Cogeco, Inc. Let me first note that we are satisfied with Cogeco Communications overall performance for the second quarter of fiscal 2022, which is in line with our expectations in both our Canadian and U.S. operations. On the radio side Cogeco Media’s revenue has grown compared to last year, despite a weaker advertising market due to COVID lockdowns and continued supply chain disruptions impacting many industries.

Starting with our U.S. operations recent initiatives. The integration of both Ohio broadband systems continue to progress very well. We are currently focusing on the migration of the customer management systems, now expected to be completed in early Q4. That’s earlier than originally planned. The integration of the customer management system is a key initiative and key milestone to launch Breezeline’s branding and service offering.

Our next steps will then be to further interconnect the Ohio network with the existing Breezeline network and prepare for the launch of our IPTV platform in this market. In January, we launched a full rebrand of our U.S. business to Breezeline, as well as our IPTV platform, which is called Breezeline Stream TV. Our IPTV platform offering a superior Internet and the web powered video experience was launched in some residential markets with additional ones being added throughout 2022.

I am proud to say that the rebrand to Breezeline was a success. We achieve key launch goals of raising awareness through an extensive omnichannel marketing campaign, while ensuring that the transition was seamless for customers. The announcement was well received in the market. The media coverage was positive and conveyed both the rationale for the change and the benefits to come. Of course, the building of brand equity does not appear overnight. So we will continue to invest in comprehensive marketing campaigns to further lift awareness and drive sales.

Breezeline is moving along with this network expansion in New Hampshire and West Virginia, where it has already connected two communities and planned to connect another seven communities over the coming months through fiber-to-the-home. Breezeline will offer in these communities a residential Internet service with symmetrical speeds up to 1 gig and commercial customers will have Internet speed of up to 10 gigabit per second. Many other franchises, agreements with local communities should be concluded in other states in the current fiscal year. However, given delays in concluding some of the franchise agreements and obtaining permits, the completion of certain project will be postponed to the next fiscal year.

Over the past month Cogeco Connexion has accelerated its construction efforts to connect more homes in underserved communities in Quebec and Ontario, and continues its collaboration with governments to bridge the digital gap between large urban centers and less populated areas. We are currently focusing our resources on the 13 high-speed internet network expansion projects which were awarded in several regions of Quebec and have already started deploying our fiber network in many of these communities.

Once we reach the connection phase, many households will benefit from Cogeco’s extensive service offering, which will include a highly reliable Internet service with symmetrical speed of up to 1 gigabit per second, a flexible and interactive video offering with its IPTV platform and a telephony service. Finally, we continue to prepare for an entry in the mobile wireless market in Canada inside our wireline operating footprint. This entry will still — is still contingent on the approval by the CRTC of reasonable terms and conditions for the MVNO service and the negotiation of reasonable rates with the incumbents.

The CRTC is currently reviewing the terms and conditions for the MVNO service proposed by the incumbents. As for Cogeco Media, the radio stations have once again found our way to the top of the Numeris winter surveys, demonstrating the continued commitment of our listeners. We were also pleased to announce in late March that the CRTC rendered a favorable decision on the transaction between Arsenal and Cogeco, which will allow Cogeco to acquire radio station CILM 98.3 [Phonetic] located in Saguenay, and Arsenal to acquire the CHOA and Capitale Rock radio station in Abitibi. The deal is expected to close later this month.

Now regarding recent changes to our executive team. I’m pleased to announce that Linda Gillespie has joined Cogeco on April 4, as Senior Vice President and Chief Human Resources Officer. Linda has more than 25 years of experience in various industries including telecommunications. Until recently, she was Senior Vice President, Human Resources and Communications at Weston Foods for over seven years. She has held in the past various marketing and corporate functions at Nortel among others. Linda’s experience leading Human Resource teams and her proven leadership skills in strengthening a collaborative and customer centric culture, makes her an ideal candidate to support Cogeco’s strategic and talent management goals. I would also like to extend our thanks and appreciation to Diane Nyisztor, who has occupied the role for many years prior to her retirement.

I will now let Patrice discuss our financial results.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Thank you, Philippe. So revenue at Cogeco Communications is up 15%, and adjusted EBITDA is up 13.8% in constant currency when compared to the same quarter last year, was driven by EBITDA growth of 31.4% at Breezeline, mainly as a result of the Ohio broadband systems acquisition. Free cash flow increased by 7.2% in constant currency, mainly as a result of higher EBITDA and lower current income taxes, partly offset by higher capital expenditures and financial expenses.

Capital intensity reached 19.5% compared to 18.2% last year due to higher capital intensity in our Canadian operations related to the maintenance and the expansion of Cogeco Connexion’s network infrastructure. In second quarter Cogeco Communication continue to be active in its share buyback program with a purchase of 189,000 shares at a cost of CAD19 million. Overall Cogeco Communication’s financial results for the first half of fiscal ’22 were as expected and the company is maintaining its guidance for revenue and adjusted EBITDA for fiscal ’22.

So let’s briefly mentioned Cogeco Communication expects in the second half of fiscal ’22, lower acquisition of property, plant and equipment than initially planned with a corresponding increase in free cash flow. Of the CAD95 million in reduction in expected capital expenditures, about half is due to some network expansion projects, primarily at Breezeline, which are taking more time due to delays in permitting and updating franchise agreements. The scope of the expansions is the same, but some areas have a few months of delay and will be carried out during the first semester of fiscal ’23.

The other half of the capital expenditures reduction is due to the timing of other projects, including network investments in our recently acquired Ohio operation, which will be spent over a longer period of time. So our base capex intensity in fiscal year ’22 should be approximately 19%, and with the network expansion should be about 25% instead of the initial projection of 28%. A revised projection for our capital expenditures amounts between CAD720 million and CAD750 million for the year, including CAD180 million to CAD200 million in network expansion projects. Free cash flow is expected to decrease between 13% and 23% compared to the previous year, which is a lesser decline than under the previous guidelines.

Excluding the network expansion projects, free cash flow in a constant currency would otherwise increase between 16% and 26% compared to the prior year. As mentioned on the last call, we expect that organic year-over-year EBITDA growth will improve throughout the third and fourth quarters at both Breezeline and Cogeco Connexion as some of the last year’s marketing and advertising expenses were deferred to the second half of the year. In addition, we had recorded in the third quarter of last year, a CAD4.6 million charge related to the CRTC’s decision on aggregated wholesale internet rates.

Now let’s look at the individual components. In the U.S., Breezeline’s revenue and EBITDA in constant currency increased by 31.3% and 31.4% respectively in the second quarter, mainly as a result of the Ohio Broadband Systems acquisition. Excluding the Ohio impact, revenue in constant currency increased by 4.4%, mainly from the higher Internet service customer base, a higher value product mix and annual rate increases implemented in September of last year.

EBITDA excluding the Ohio impact in constant currency increased by 4.8% as a result of organic revenue growth, partly offset by rebranding costs and higher marketing and advertising activity. We expect a gradual increase in organic year-over-year EBITDA growth in the third and fourth quarters as we reduce investments in rebranding. High-speed Internet additions resulted from both residential and commercial sectors. The growth in the residential sector was primarily driven by ongoing demand for high-speed Internet offerings, and increased marketing efforts towards Internet-led offerings under our broadband first strategy. The larger loss in video and telephony customers relative to the same quarter last year is mainly due to the broadband first strategy, which is focused on higher product mix, seasonal commercial disconnects and reductions in the Ohio system, which were expected.

Now turning to our Canadian operations. Cogeco Connexion’s revenue increased by 2.1% in constant currency relative to the same quarter last year. Excluding the impact of DERY, the acquisition we closed last year, revenue in constant currency increased by 0.9%, mainly due to a larger Internet service customer base, rate increases implemented in November and growth in the commercial sector. Adjusted EBITDA increased by 1.7% in constant currency relative to the same quarter last year. Again, excluding the DERYtelecom acquisition, EBITDA in constant currency grew by 0.6%, which was expected as part of our annual guidelines.

We expect a gradual increase in organic EBITDA growth in the third and fourth quarters and we expect less volatility going into the new year and fiscal ’23 in quarterly EBITDA organic annual growth as this year’s results follow a more normal pattern of profitability. The broadband customer additions in the second quarter were slightly lower compared to last year, which benefited from the positive impact of the pandemic. The video customer losses were comparable and selling customer losses were slightly lower than last year.

Let us now discuss Cogeco, Inc. In the second quarter, consolidated revenue increased by 14.7% and EBITDA increased by 13.4% in constant currency. Revenue related to the radio operations increased by 4.9% as the economy was less impacted than last year by public health measures. Even though the advertising market remains soft, we do see signs of a gradual recovery. We are confirming Cogeco’s fiscal ’22 revenue and EBITDA financial guidelines, which were updated in November and reflect the same expected revenue and EBITDA growth at Cogeco Communications. Cogeco’s capital expenditures and free cash flow guidelines were also revised to take into account the revisions at Cogeco Communication.

Turning to our shareholder distributions, Cogeco launched a normal course issuer bid in January to repurchase up to 325,000 shares for the year. In the second quarter, Cogeco acquired 154,000 subordinate loaded shares for a total amount of CAD12 million.

Now back to Philippe for concluding remarks.

Philippe Jette — President and Chief Executive Officer

Thank you, Patrice. As you can see, we have good news to share. And our second quarter financial results and customer trends have improved relative to the first quarter. And we have, therefore, started the first half of the year — fiscal year on very solid ground, and we expect that organic year-over-year EBITDA growth for both Cogeco Connexion and Breezeline will continue to gradually improve in the third and the fourth quarter.

Finally, I would like to give an update on Cogeco’s commitment relating to environmental, social and corporate governance. We were excited that Cogeco Communication was included for the first time in the prestigious sustainability yearbook presented by S&P Global or our excellence in implementing best ESG business practices. In order to be listed in the year book, companies must score within the 15% top performers in their industry and achieve an S&P Global ESG score within 30% of their industry’s top performing businesses.

We recently published our ESG and sustainability report, where we provide an update of our environmental, social and governance performance indicators, along with other information, pertaining to our sustainability strategy and the progress achieved over the last two years. The report will, from now on, be published annually. We are very committed to continuously enhance our sustainability program through the implementation of best ESG practices, which has more recently earned us a place on the Corporate Knights Global 100 most sustainable companies list for a third consecutive year and their Clean 200 list which recognize companies around the world that are leading the way with solutions for a transition to clean future. Cogeco Communications is among only 18 Canadian organizations to receive the honor.

And now, we will be happy to answer your questions.

Questions and Answers:

Operator

[Operator Instructions] We have our first question from the line of Jerome Dubreuil from Desjardins Securities. Your line is now open.

Jerome Dubreuil — Desjardins Securities — Analyst

Thank you. [Technical Issues] Thanks for taking my questions. First one is on the change in terms of capex guidance. It seems like half of it, you control it, and the other half, you don’t seem to control it. So my question is, is this mainly a push forward? So should we expect higher capex maybe in 2023? And also, does this signal any change in capital allocation priorities?

Philippe Jette — President and Chief Executive Officer

Jerome, well, let me start by saying that we were — we are, as usually, very, very disciplined in our engineering and business planning process. So it’s a great news actually that we were able to optimize to lower numbers through careful design and planning and innovative solution findings as well, a reduction of capex. But as you mentioned, there are — there is also another component that is related to just the state of the economy, the supply chain challenge and some equipment that are experiencing some delays. So there are some projects that have been postponed.

And there is also the COVID impact to city and state processes. For example, obtaining franchise agreement and permits. So all this will — I’m very optimist, will only pick up and improve in the coming quarters, so we can continue our projects as planned.

Jerome Dubreuil — Desjardins Securities — Analyst

Thanks. And just maybe back to — should we expect higher capex in 2023?

Philippe Jette — President and Chief Executive Officer

Yeah. So it’s still a bit early for 2023. We’re going to provide guidance in July. That being said, I would say, base assumption could be that we’d be in a similar place of what we were forecasting for this year originally. So base capital intensity of about 20% and being in the high 20s, including network expansions, I would not assume that we would, at least at this point, that would be over what we were planning originally this year.

Jerome Dubreuil — Desjardins Securities — Analyst

Okay, thanks. And then on the wireless review, it seems like we’re transitioning phase here. The CRTC review is reviewing it right now. Can you confirm if you had seen these conditions? And I know we don’t have the rates yet, but are — if you have seen them, are these terms under which you would be comfortable deploying a service?

Philippe Jette — President and Chief Executive Officer

No. Unfortunately, Jerome, we are still awaiting like everybody else, the results of the terms and conditions from the CRTC. They have not released any anything to anyone.

Jerome Dubreuil — Desjardins Securities — Analyst

Okay, great. And thanks for the call.

Operator

We have our next question from the line of Matthew Griffiths from Bank of America. Your line is now open.

Matthew Griffiths — Bank of America — Analyst

Hi, good morning. Thanks for taking the question. I just wanted to ask on the U.S. broadband side. I see like in this past quarter, your net adds picked up from a relatively soft Q1. And I believe last quarter, you were also talking about increased advertising spend, like the rebranding and the expectation for some bulk contracts in Florida, but I don’t think you mentioned the timing of when they would land. So I was just wondering, did any of those bulk contracts come through this quarter? And — or was the improvement sequentially related to your marketing efforts?

Philippe Jette — President and Chief Executive Officer

Yes. And we were really happy to see in Q2 that actually the three segments, residential, commercial and bulk have actually pick up. So compared to the first quarter, we did not add great numbers in the three segments, but now in the second quarter, the three segments have contributed and bulk is now part of the upside.

Matthew Griffiths — Bank of America — Analyst

Okay. And so was — do you expect more to continue rolling in throughout the year? Or was that what you were referring to last quarter on the bulk contract side?

Philippe Jette — President and Chief Executive Officer

Well, we simply expect to continue to similar success rate that we’ve reported in the past in bulk as well as commercial and residential. So the most important things to us was to bring the three segments back to performance.

Matthew Griffiths — Bank of America — Analyst

Okay. That’s good. Thank you. And one other, if I may. As you’re getting closer to finishing some of these expansions, I think probably Canada, you’re on the closer side. Like, what are your expectations? I know, you’ve given penetration rate expectations, but do you expect subscribers to kind of follow a similar pattern as the base? So in Canada, you disclosed that about two-thirds take two, three services and one-third take one. And in the U.S., it’s roughly the reverse of that. Is that what you would expect in these expanded new territories? Or would you — or would your broadband first strategy suggest that a large percentage in each would perhaps take one service and a relatively small percentage would fall into that two or three category? Just any kind of expectations that you can share would be helpful.

Philippe Jette — President and Chief Executive Officer

Yeah. So it’s probably both. So we do — we will offer the three services. And so it’s fiber-to-the-home Internet. We have the IPTV product in both countries. We just launched one in the U.S. and Canada has been in the market for more than a year, and obviously, the phone product. The natural tenancy, I would say in these areas and also across the board when we have new customers. that at least, let’s say, competition is that you have a higher proportion of people that will take on the Internet than before or than the base. So that’s what we’re assuming. We’re not assuming it’s going to be only Internet, but it will be a lesser share of two and three products than what we have in the global base.

Matthew Griffiths — Bank of America — Analyst

Okay, great. That’s helpful. Thank you very much.

Philippe Jette — President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] No further questions at this time. I turn the call back over to Mr. Patrice Ouimet.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Okay. Well, thank you, everybody, for joining us today. We’re going to be back for our third quarterly call in July. So see you then and feel free to call us in the meantime. Thank you. Bye now.

Operator

[Operator Closing Remarks]