Cogeco, Inc.  ( TSX : CCA) Q1 2022 earnings call dated Jan. 14, 2022

Presentation:

Operator

Good day and welcome to the Cogeco Incorporated and Cogeco Communications Incorporated Quarter One 2022 Earnings Conference Call. [Operator Instructions]

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

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Thank you. So good morning, everybody, and welcome to this quarterly conference call, which Philippe Jette and I will present. So again as 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.

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

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

Merci, Patrice. Good morning, and thank you all 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 first quarter of fiscal 2022, which is in line with our expectations in our Canadian operations and slightly ahead in our US operations. On the radio side, Cogeco Media continues to face pressure from a slow advertising market in light of the COVID-19 pandemic and current supply chain disruptions impacting many industries. However, all in all, these results position us very well to start on our fiscal 2022 on a solid footing.

Let’s start with our US operations recent initiatives. We closed the Ohio acquisition on September 1st, which added nearly 690,000 serviceable households and businesses to our footprint. The integration of these assets is advancing well and according to plan. This acquisition represents a strong strategic fit for Cogeco Communications, as it is complementary to our existing US footprint and capitalize on our existing American platform.

On January 10th, our US subsidiary announced a full rebrand changing its operating name from Atlantic Broadband to Breezeline. With the recent acquisition of Ohio and other expansion initiatives, the rebrand aims to better represent its geographic reach, which is now beyond the eastern seaboard, the breadth of its product line and a pledge to an excellent customer experience.

As part of the rebrand initiative, Breezeline launched [Phonetic] Breezeline Stream TV, a cloud base IPTV service allowing customers to access live and recorded programs through [Phonetic] a single, very easy-to-use interface on every device inside and outside the home, in addition to several popular streaming application. Breezeline will gradually roll out this new offering across its footprint during the year. We expect the new offering to contribute to free cash flow as it is more capital efficient and allows for customer self installations.

Breezeline is moving along with its plan to invest approximately US$82 million in network expansions in fiscal 2022 to reach nearly 70,000 additional homes and businesses with fiber to the home services. Franchise agreements have been obtained in multiple communities in New Hampshire and West Virginia and many other franchise agreements should be concluded in other states in the current fiscal year. It is an exciting period as we are planning to have our first commercial launch within a few weeks.

And at Cogeco Connexion, we are also progressing well with our network expansion projects, where we are planning to increase the number of homes passed by 3% by fiscal year-end. The 13 high-speed Internet network expansion projects which were awarded in several regions of Quebec are expected to be completed by September 2022. In addition, we are active in several projects in Ontario with more to come as a major broadband funding program is being launched in the province to connect additional unserved and underserved regions.

On the customer experience side, our data analytics, capabilities and introduction of new marketing automation leveraging artificial intelligence are resulting in lower churn [Phonetic] and improving video and telephony customer trends. We are also continuing to gain traction with our cornerstone high-speed Internet services and we [Phonetic] typical our IPTV entertainment service. Finally, we continue to prepare for an entry in the wireless market and are currently participating in a CRTC proceeding that will establish the terms and conditions for access to the incumbent wireless networks.

As for Cogeco Media, even though the radio business continues to face pressure of the current economy on the advertising market, we continue to enjoy strong ratings from our listeners, based on the Fall 2021 Numeris survey results, which confirm the outstanding performance of all Cogeco Media radio stations, in particular our 98.5 station, which was the most listened to station in all of Canada.

I will let Patrice now discuss our financial results.

Patrice Ouimet — Senior Vice President and Chief Financial Officer

Well, thank you, Philippe. So revenue at Cogeco Communications is up 19%, and adjusted EBITDA up 14.9% in constant currency, when compared to the same quarter last year. This was essentially driven by EBITDA growth of 33% at Breezeline formerly Atlantic Broadband, mainly as a result of the Ohio systems acquisition. Free cash flow declined by 5.2% in constant currency, mainly as a result of increased capital expenditures, acquisition and integration costs related to the Ohio acquisition and financial expenses partly offset by higher EBITDA and lower current income taxes. Capital intensity reached 19.6% compared to 18.8% last year, mainly due to the higher capital expenditures of our US operations related to the Ohio systems network infrastructure and to support footprint expansion combined with accelerated equipment purchases.

In the first quarter, Cogeco Communication continue [Phonetic] to be active in its share buyback program with the purchase of 274,000 shares for a total consideration of CAD29.5 million. As our first quarter was slightly above expectations, we are confirming our Cogeco Communications fiscal 2022 financial guidelines, which were updated in November to include the Ohio acquisition. On a constant currency basis, we still expect that Cogeco Communication will grow its revenue in the range of 15% to 17% and EBITDA in the range of 14% to 16%. We believe that the Ohio acquisition should still contribute approximately 11.5% of revenue growth and 11% of EBITDA growth.

As for organic revenues and EBITDA growth, we expect the US operations to generate mid single-digit growth and the Canadian operations to generate low single-digit growth. Excluding the network expansion projects, we expect free cash flow in constant currency to grow between 5% and 15%. As far quarterly results, we expect that organic year-over-year EBITDA growth flow [Phonetic] gradually improved throughout the fiscal year for both Breezeline and Cogeco Connexion as we had an unusually strong first two quarters last year, given that certain expenses such as marketing and advertising have been deferred to the second half of the year. We expect that capital expenditures will gradually increase throughout the year as network expansions and the Ohio integration capital expenditures will ramp up.

Now let’s look at the individual components. In the US, Breezeline’s revenue and EBITDA in constant currency increased by 31% and 33%, respectively for the first quarter, mainly as a result of the Ohio broadband acquisition. Now, if we exclude the Ohio impact, revenue in constant currency increased by 4.6%, mainly as a result of annual rate increases implemented for certain services and a higher Internet service customer base and higher value product mix partly offset by lower advertising revenue as last year was an election year in the United States.

EBITDA excluding the Ohio impact in constant currency increased by 4.3%, mainly as a result of organic revenue growth partly offset by rebranding costs to Breezeline and higher marketing and advertising activity. We expect a similar organic EBITDA growth trend in the second quarter as we continue to invest in the rebranding, which will then be followed by stronger growth in the second half of the fiscal year. As we had highlighted, when we announced the Ohio acquisition, we expect that revenue generated from the Ohio [Phonetic] transaction will gradually decline in fiscal ’22, mostly as a result of a declining video customer base, while we integrate the operations and transition to an IPTV platform, but we do expect the EBITDA to remain stable.

During the first quarter of fiscal ’22, the Internet subscriber base remain essentially stable generally due to low customer movements in the industry following significant customer additions last year as some customers have accelerated switching to our high-speed Internet services. Other factors include more seasonal disconnects this year, which were unusually low last year in the context of the pandemic. More non-pay disconnects due to the lapsing of some COVID relief programs in the US, less [Phonetic] bulk unique connections this quarter and competitive offers in the portion of the footprint.

We do expect that Internet customer growth will resume throughout the remainder of the fiscal year. The larger loss in video customers is mainly due to a stable Internet customer base. The broadband first strategy that we have been using for a year, which is focused on a higher product mix and losses in the Ohio system, which were planned. Finally, we expect that quarterly video customer losses will reduce in the future quarters.

Turning to the Canadian operations, Cogeco Connexion’s revenue increased by 8.2% in constant currency relative to the same quarter last year. Excluding the impact of the DERYtelecom acquisition revenue in constant currency declined by 0.6%, mainly due to annual rate increases which were delayed to November fiscal 2021 in some geographies and a decline in video and telephony customers, partly offset by the positive impact of a higher Internet customer base. Cogeco Connexion’s EBITDA increased by 0.7% in constant currency relative to last year.

Excluding the impact of the DERYtelecom acquisition, EBITDA in constant currency declined by 6.9%, which was as expected as part of our annual guidance. The decline is mainly due to higher marketing and advertising expenses to support overall customer base growth compared to unusually low cost in the same quarter last year in the context of the pandemic. We expect slightly higher positive EBITDA growth in the second quarter compared to the first quarter as our Canadian operations should resume their organic growth and the DERYtelecom results were included for most of last year’s second quarter. We then expect that Cogeco Connexion will generate mid single-digit EBITDA growth in the second half of the year.

The broadband customer additions in the first quarter were slightly lower compared to last year, which benefited from the positive impact of the pandemic. The video and phone customer losses were better than last year, resulting from a more targeted marketing and advertising approach by region and by market.

Now let us look at Cogeco Inc. In the first quarter, consolidated revenue increased by 18% and EBITDA increased by 12.9% in constant currency. Revenue related to the radio operations decreased by 2.6%, mainly due to a soft advertising market in the context of the pandemic and the slow economic recoveries for media companies. We are confirming Cogeco Inc’s fiscal ’22 financial guidelines which were updated in November and reflect the same expectations as for Cogeco Communications. Cogeco Inc., also announced yesterday the launch of a normal course issuer bid to acquire up to 325,000 subordinate voting shares over the next year. Cogeco believes that the purchase of its subordinate voting shares is an attractive use of its liquidity.

I’ll turn the call over now to Philippe for concluding remarks.

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

Thank you, Patrice. As you can see we have started fiscal 2022 on a solid ground, and we expect that organic year-over-year EBIDA growth will gradually improve throughout the year, the fiscal year, as we had an unusually strong first half in fiscal 2021. The ongoing trend of customers spending more time at home for work, education or entertainment should continue to have a positive impact on our growth outlook.

Finally, I would like to give an update on Cogeco’s commitment relating to environmental, social and corporate governance. On December 7th, Cogeco published its first Climate Action Plan and Task Force on Climate Related Financial Disclosures outlining the key steps, it is taking in support of an urgent climate action as well as its processes and strategies to assess and manage climate-related risks and opportunities. Our plan includes actions to reduce our own operational emissions covering 100% of our Scope 1 and Scope 2 emissions, as well as the most material emissions from our value chain representing over 67% of our Scope 3 emissions. It also includes actions to ensure long-term resilience by identifying and mitigating our key climate-related risk, while maximizing climate-related opportunities.

A few weeks after receiving His Royal Highness The Prince of Wales’ Terra Carta Seal in recognition of our commitment to creating a sustainable future. Cogeco receive on December 7th, the prestigious “A” rating from CDP. This rating demonstrates Cogeco’s leadership and commitment to best practices in governance, disclosure and emissions reduction. We are proud of this achievement. Only three Canadian companies achieved a score and none of our peers in Canada and the US made the “A” list [Phonetic].

Lastly, Cogeco and Cogeco Communications announced on December 17, that they both transition their term revolving bank facilities into the first syndicated sustainability linked loans in Canada within the telecommunications and media sector. The facilities incorporate ESG linked incentive pricing terms, which reduce or increase the cost of funding, depending on the annual performance against specific targets. These targets are related to Cogeco’s greenhouse gas annual emissions reduction and our digital inclusion initiative to provide 75,000 homes in underserved and unserved areas of Canada with access to high-speed Internet service over a three-year period. Additionally Cogeco and Cogeco Communications will dedicate any savings achieved from the sustainability linked loans towards internal sustainability initiatives.

And now we will be happy to answer your questions.

We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.

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