Cogeco Communications Inc
TSX:CCA
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Cogeco Communications Inc
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Good day, and welcome to the Cogeco Inc. and Cogeco Communications Inc. First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to M. Patrice Ouimet, Senior Vice President and Chief Financial Officer of Cogeco Inc. and Cogeco Communications Inc. Please go ahead, M. Ouimet.
Thank you. Good morning, everybody, and welcome to our first quarter conference call. So joining me today are Louis Audet, René Guimond, Andrée Pinard, Pierre Maheux and Philippe Bonin. So before we begin this call, as usual, I would like to remind listeners that the call is subject to forward-looking statements, which can be found in our press releases issued yesterday.I will turn the call over to Louis Audet.
Thank you, Patrice, and good morning, ladies and gentlemen. Happy new year to you, and thank you for joining us today to discuss the results of Cogeco Communications Inc. and Cogeco Inc. for the first quarter of fiscal 2018. The first quarter has been excellent at Cogeco Connexion and mixed at Atlantic Broadband for strategic reasons and at Cogeco Peer 1 for market-related reasons. Let us begin with Cogeco Communications. Revenue is up 0.8% in the quarter to reach $553.6 million. Excluding the foreign exchange impact, the growth rate would actually have been 2.7%. While EBITDA is down 0.8% at $247.5 million, if we exclude nonrecurring items recorded in both the first quarter of fiscal 2017 and in the first quarter of 2018 as well as the foreign exchange impact, EBITDA would actually have grown by 2.8%. The quarterly dividend remained at $0.475 per share, a 10.4% increase compared to the prior year. Please note that our guidance, while updated today to reflect the acquisition of MetroCast by Atlantic Broadband, remains essentially unchanged for the legacy operations of Cogeco Communications prior to MetroCast.At Cogeco Connexion, first quarter revenue is up 3.2% over last year. EBITDA is up a very satisfying 4.4%. PSU net adds have been disappointing, essentially due to the timing of our rate increases, competitive pressures and the appearance of a bit more cord cutting. We consider these PSU results to be temporary in nature, and our financial results are very satisfying. Please note that we will be putting our new customer relationship management system in service during the third quarter. Consequently, operating expenses in the second quarter will be abnormally high. We expect to be more efficient as a result of this implementation, and we continue to expect annual revenue and EBITDA growth to be in the low single digits.At Atlantic Broadband, the closing of the acquisition of MetroCast by Atlantic Broadband for USD 1.4 billion took place on January 4. The impact of Hurricane Irma, foreign exchange rate variations and operating expenses in preparation for the integration of MetroCast and for the development of significant growth opportunities in Florida, where we have had to build our human infrastructure, have had a negative impact on the quarterly results. Again, we consider this to be temporary and are taking all the steps to capitalize on the growth characteristics of the U.S. cable market. Results will build up progressively through Q2, Q3 and Q4.The U.S. tax reform is having a very positive impact on the value of our U.S. cable assets. The reform extends the period from which we expect to start paying meaningful income taxes and then reduces the income tax rate by approximately 1/3. We are, therefore, much better off today than we had anticipated when we acquired all of our U.S. cable assets, whether Atlantic Broadband, MetroCast Connecticut or the totality of MetroCast.At Cogeco Peer 1, we continue to work on a turnaround, and note that revenue and EBITDA declines in Q1 are lower than last year. We are committed to seek our share of growth in this industry and serving our customers well. We are aiming again this year to generate meaningful free cash flow. As already stated, we do not expect to make acquisitions in this sector.Let us now take a look at Cogeco Inc. Our audience ratings remain solid. The quarterly dividend of $0.39 per share represents a 15% increase compared to last year. The first quarter was characterized by low single-digits declining radio advertising markets, and we are working hard to mitigate these effects on profitability. In Q1, Cogeco repurchased 89,300 shares for a consideration of $7.3 million as part of its normal course issuer bid.A word now about fiscal 2018 guidance. Our guidance is modified to reflect the integration of MetroCast into Atlantic Broadband as well as presenting metrics on a constant currency basis. As you can see, this is a wonderful, strategic growth opportunity. Note that our guidance for the legacy Cogeco Communications implicitly remains essentially unchanged.In conclusion, we are very excited to be welcoming the MetroCast team into our group and are focused on a prompt and successful integration of MetroCast into Atlantic Broadband, as we did 2 years ago with the Connecticut system as well as accelerating our development of the southern Florida market. We are now ready to answer your questions.
[Operator Instructions] Your first question comes from the line of Greg MacDonald from Macquarie.
I wanted to ask you a bit of a strategic question, and I'm hoping you'll give me at least some context on this. So the growth of the company and the acquisition focus is clearly now on U.S. cable. We've made -- that's been clear over the last few quarters. Wondering about the Canadian cable assets and how strategically important they are, particularly when there's increasingly a case to be made that wireless and wireline convergence is something that strategically is important. Would the company ever consider selling Canadian cable assets to help fund further growth in the U.S.? Can you give us some thoughts there on -- in terms of what -- where your strategic focus lies?
Sure. That is definitely not in our mind, no, definitely not. We are a Canadian company. We take pride in serving our Canadian customers and being active in the Canadian market. Were there other acquisition opportunities in Canada, we would execute on them. There aren't. So we've turned to the U.S. market, and we're very happy we're doing so. The wireless fixed network convergence thesis has, as of yet, not advantaged cable operators. This is not to say that wireless is not a desirable business. It's a very desirable business. If you got your spectrum when it was free and if you're one of the dominant players, it's an excellent business to be in. But cable metrics for these companies are no better than ours. So there's no -- this convergence theory is very theoretical. So no, this is not in our plan, and we do not see incentives to do so in any way.
So just to follow-up on that issue, Louis. The one interesting thing we've seen in the last quarter was the success that Shaw has had with its Big Gig plans and, in particular, the incumbents' response to that. There is some view that this is largely an urban-focused phenomenon. Is the mix of your cable properties in Canada contributing to your view in that sense? And one might make an argument that there are a number of people in the Toronto market in particular that would look to go wireless for their only-broadband exposure. Do you think that, that's just something that might be a Toronto phenomenon but not necessarily an Oakville or other markets that you operate in phenomenon? Is it a mix issue?
Well, there are demographic reasons why that could be a correct interpretation. But I think more fundamentally, please keep in mind that wireless means of delivery are not economical for huge tonnage of data. Remember that on a wireline network, 126 gigabytes per month are transited while on a wireless connection, it's about 1.6 gigabytes. And the reason for that huge gulf is that the demands of high-quality video viewing for Internet, on Internet require a wireline connection because that's economical, because it's not dependent on a scarce resource that spectrum is. So I think that is really the explanation to -- the answer to your question.
Okay. And then just lastly. In your comments opening, you made some reference to the impact of PSUs and the fact that you anticipated that this was only a temporary impact. But you talked about timing of rate increases. I can see that relationship. But you also talked about competition and cord cutting. So should we draw the conclusion that the timing of rate increases was the much larger impact in the quarter, that competition and cord cutting, that it's there, but it wasn't the biggest impact from your comments?
Well, rate increases, certainly, having rate increases in a shorter period than 1 year certainly had an impact. But more importantly, and I said this on prior occasions, results fluctuate from quarter-to-quarter. And competitors take actions, and other competitors take counter actions. So you can't just take a quarter and say, well, gosh now, this is a sign of things to come. In my opinion, you cannot make that statement. Once it's happened for many quarters in a row, then you can say, well, okay, something's happen. Until then, our competitors do things; we react. We take some initiatives; they react. So of course, it's in constant movement. So I wouldn't try to draw longtime conclusions on it. That's why we say we view it as temporary. Now I concede you that we might be wrong, and we'll see with the passage of time.
Right. But has Bell Canada had a bigger impact? Have they been more aggressive in the quarter relative to previous?
No, I think they've been -- I think we've been less successful in countering their offers, and that's for us to correct.
Got it. And then finally, given your comments, can we conclude then in the second quarter to date you've actually seen some [indiscernible]?
Well, I won't comment on the second quarter to date, I think. But please excuse me, but we cannot start doing that. It's just -- we're going to be a dog's breakfast if we start doing that.
[Operator Instructions] Your next question comes from the line of Maher Yaghi from Desjardins Capital.
Louis, I wanted to ask you, you've made it clear many times in the past that if the regulatory environment in Canada would have been different, then you would have potentially thought about going into an MVNO business in wireless. But can you comment about your U.S -- the MVNO market in U.S. is a bit more open than Canada. Do you have any thoughts about any reasons to activate an MVNO business for you to offer wireless services to your cable customers in the U.S. segment that you are in?
Well, that's an excellent question. Our -- when we get around the table to discuss that issue, we are invariably struck by the fact that we consider ourselves to be still underpenetrated with high-margin products in the U.S., whether video or Internet or phone, and increasingly so with the acquisition of MetroCast. So when you consider how you're going to spend your infrastructure dollars and your selling time when you have an incoming call, how do you apportion your selling time? We consider it far more advantageous to increase the penetration of our existing services. Now that being said, and I agree with you, it's a lot easier to get MVNO status in the United States because there's not this oligopoly over there. So there's more freedom to do things and create things. So yes, when our penetration achieves levels that free up selling time, then we'll be delighted to launch an MVNO service and offer it to our customers. And by the way, we'd be delighted to do so in Canada. But here, the cards are just not in favor of new entrants because new entrants are not really considered seriously, in my opinion. So there is no will on anybody's part to seriously negotiate an MVNO agreement. Industry Canada has yet to decide that smaller spectrum assignment areas are going to be on the table. We don't know what other favorable spectrum set-aside conditions will be. The roaming fees are currently shutting out any potential competition. And as 4 prior bankruptcies showed, amongst other things, fair pricing and expeditious processes for tower sharing are still lacking. So when these issues get resolved, if they get resolved, then we would love to enter the mobile market. Of course, as long as we earn more than our cost of capital because this is an economic decision. As we have said previously, this is not a condition to operating a successful cable company. But if it's profitable in its own right, yes, sure, we're interested.
Okay, great. And for the U.S. market, when you talk about increasing penetration, can you maybe say what kind of penetration rates you'd like to see being maximized before starting to think about offering a wireless service? And just a follow-up on the U.S. business again. Also, we saw your CapEx line investments that you're doing in Florida and for MetroCast in 2018 put some pressure on the free cash flow. Can you talk about how -- is this a 1-year type investment? And should -- I know -- if we look a little bit further out in 2019, should we expect those CapEx investments to taper off?
So Patrice in a few seconds will answer the CapEx question. I'll try to answer your penetration question. So this is highly contingent on demographics and the competition, so -- and propensity to adopt new technologies. And this varies by city. So it's very difficult to say, well, it's going to be x percent, because it's not. It's going to be in a lower competition area with a high propensity for Internet and for new technology adoption. The target penetration rate might well be higher than in a lower-income, "less prone to accept new technology" area. So it varies by city. So in fairness, I can't answer the penetration question for that reason, but I think Patrice can answer the CapEx question to your satisfaction.
All right. Just on the CapEx, so we have mentioned previously that the CapEx level at ABB would be higher this year as we're accelerating the growth there. So we had talked about low-20s -- or I would say, mid-20s in terms of capital intensity. We have decided -- there was an asset available for sale, so we've decided to buy some dark fiber, which in Canadian dollars is $20 million. So this one is a onetime. We have also made an offer for the balance of the business that had some customers that's subject to regulatory approval, so that's USD 35 million, so that would come later and would be counted as a business acquisition, not as CapEx. When we look further down, we're still planning to do a multiyear push in Florida. So if you look at next year, 2019, we would expect -- obviously, we'll come out with guidance later on this year. But we would expect something above 20% in terms of capital intensity, but not as high as this year, which is now mid- to high-20s. And because it does include that CAD 20 million or USD 16 million -- USD 16.5, I think, million. Under normal circumstances, if we were not doing this push, normally our capital intensity would be sub-20%, as we were before.
Your next question comes from the line of Vince Valentini from TD Securities.
Let me start with the U.S. and the accelerated growth you mentioned, Patrice. So we've seen, I think, 5 quarters in a row now with the revenue growth. And talking in U.S. dollars, so forget about the exchange rate fluctuations. In U.S. dollar terms, the revenue growth has been decelerating for ABB, and this quarter was only 4.2%. And at the same time, the costs are going up, and EBITDA was actually negative growth this quarter, even if you take out the hurricane charges. So can you bridge that gap for me? Where is this accelerating growth? It seems like things are getting a bit tougher in the U.S. market, and we're seeing that with other cable companies, obviously, as well with more video competition and programming costs going up. So maybe you can fill us in a bit more on how you see things turning the other direction?
Yes, sure. We -- so on the revenue side, as we're doing this push, we are expecting a number of new customers to come online throughout the year, and it's really building out every quarter. So we would expect in the U.S. on the top line, barring any other changes obviously, especially in Florida, a buildup in Q2, Q3 and then Q4. So you would expect the second half of the year to be better than the first half. I would say for this quarter -- I know you're talking about previous quarters as well, but for this quarter, there's a number of items. On the revenue side, we had the elections last year, which added some revenues, advertising revenues. And this was a bigger number than what we're expecting this year. We always have some every year as there's different elections going on. But obviously, there was a bigger push last year. So that's light on this quarter. Should play a little bit in Q2 as well, but not as much as in Q1. On the cost side, as we've mentioned previously, we have basically invested ahead of integrating MetroCast because, as you know, we've bought networks as opposed to the head office. So we had to hire some people. Now we've closed the transaction. So now we're going to have obviously those costs, but the benefit of owning the network and the revenues and the EBITDA that come from it. There's also costs that we've added in, especially in Florida, in advance of securing these new customers. So I would say the toughest quarter from that standpoint is Q1 as we're going to be lighting up these customers over the remainder of the year.
And these are -- these new customers are signed contracts you have that just haven't kicked in yet? And are they -- these are business customers, I assume.
It's a mix. So we have a mix of business customers, and we have MDUs as well as in the U.S. And yes, they are signed. We always have pipelines of potential new customers down the line. But an example is, one we've mentioned before, is Panorama Tower in Miami, which is a mix of business and MDUs, or condos, is one that is progressing in terms of construction and will be lit this year. So that's just one example. I must add also that Hurricane Irma, besides the cost that we've incurred there, have slowed down some of the activity. So that means the selling activity as people were busy, obviously, taking care of their business as opposed to signing up new contracts. And some construction activity, for example, the Panorama Tower, is a bit later than planned in terms of construction because of the hurricane.
Okay. Just a couple more other quick ones. Did you discuss the tax reform on this call yet? Sorry, I got in a bit late. What is the impact of U.S. tax reform on your -- both your balance sheet and your go-forward tax liabilities?
Okay. So no, I have not. We've added a page on our investor presentation, that's Page 11, where we discuss the future. So let me start with the balance sheet before, which is disclosed in our MD&A. We do have a net tax liability in the U.S., so we will rerate that liability. And the change you should expect in Q2 basically, in Canadian dollars is $90 million. So that's the $90 million you should see at that time. Now going back to the future -- this is noncash, obviously. Going back to the future, the Page 11 of the IR presentation, there's a couple of things that will happen. So if you take the federal rate and add the state taxes as well, overall, we were currently at 40%, if we were paying taxes, which I'll get back to. With the new enacted rates, basically this drops to 27%. So if you look down the line, if the rules stayed as currently enacted, you would see the permanent income tax rate go from 40% to 27%. So that's one thing. Another thing is, we are able now to -- for a period of time, to fully deduct capital expenditures. So that means new CapEx. But it also means CapEx that we've acquired. And what we've acquired through the MetroCast acquisition, which just closed, counts. So basically, we'll be able to expense about $265 million worth of fixed assets as part of that. So the only difference here is timing. Obviously, we're able to write it off immediately as opposed to do it throughout period a time. So I'll just go on the other items because obviously, it's a major change in U.S. tax laws. Another item is there are some elements to consider, including limitation on interest deductibility, which we don't think will really impact us. There's also a minimum tax concept that will slightly impact us over time. And taking all this together, what it will do is it will extend the period of time where we are not taxable, because we were not currently given some tax losses we had before, and also what we did through the acquisitions, which contain some tax value. So this period will extend now until 2024. So until 2024 -- or sorry, 2025, we do not expect to pay significant taxes. There will be a period of time where we will pay taxes below $10 million, that's the minimum tax. And then after that, we'll start paying taxes at -- based on the normal rate, less the amortization of certain assets that we bought in MetroCast, which we disclosed previously. So overall, this is all very good. Obviously, for us because long term, we are now in -- we have basically seen our income tax rate cut by 1/3.
That's very helpful. I have one last question, just -- I want to make sure I understand your guidance here. So you're using a $1.32 exchange rate. So effectively, if the exchange rates stays here around $1.25 all year, you're setting yourself up that your guidance is $10 million to $15 million higher than what's really achievable. That's how you're choosing to present your guidance. Just want to make sure I'm clear on that.
No, it's actually a little different. We're trying to do the reverse. So with the MetroCast acquisition, the U.S. cable exposure in terms of EBITDA, is about 35%. And we have some U.S. exposure in Cogeco Peer 1 as well. And the problem we were getting into is that our range could easily be not met on the positive or negative side because of fluctuations in exchange rates. So what we have done, we've adopted a new methodology, which is used by several other Canadian and U.S. companies that have big exposures in 2 currencies, and we've done a lot of research on this. And what we're doing now -- so when you look at our guidance on Page 18 of our MD&A, we are giving it in constant currency but there's no dollar attached to it, except for the CapEx. So when you think about revenues, the organic growth, except -- so basically, excluding any FX impact, should be 11% to 13%, including MetroCast -- sorry, it's organic and MetroCast, but excluding any FX impact. From there, people can basically use the exchange rates they want for the future. Nobody's got a crystal ball, obviously, and adjust it. So we are not providing them anymore in millions of dollars because we know this can fluctuate very easily because of FX, but giving it in percentages, and you can attach to it. The only difference -- and I'll finish on this, the only difference is on CapEx. We chose to put this one, like many other companies are doing, in millions of dollars because CapEx can fluctuate significantly from 1 year to another for various reasons. So we put it in dollars, and that's the only one that's presented at last year's exchange rate of $1.32.
Okay, that's helpful. The EBITDA guidance, if I can just focus on that one, when you say plus 10% to 12%, none of us should take your 2017 actual results and add 10% to 12% to that and assume that's your guidance. It's not your guidance. Your guidance is just for the underlying change prior to any currency moves. But the actual result will vary based on whatever currency we want to plug in. Is that what you're saying?
Exactly.
[Operator Instructions] Your next question comes from the line of Jeff Fan from Scotiabank.
Most of my questions are already answered, but I do want to touch on the Florida investments and -- at ABB and dark fiber and new acquisition. I just wanted to get your perspective on how do you think about payback and return on some of those investments. We don't have full visibility on what's going on in the Florida and South Miami -- South Florida market. Maybe you can just remind us what the growth opportunities are, and where your penetration is, and those types of things that gives us some comfort on the return of investment.
Sure. Well, as you know, we don't really publish figures about that. But what we can say is that southern Florida market is an extremely dynamic and growing market and is really the link between the United States and South America, hence, the great growth that it is enjoying. A lot of the bids we participate in are firm-price, firm-duration bids, such that when you get in, you know that your return is guaranteed. So a lot of the business we're doing right now is signed on that basis. So without adding much more than that, unless Patrice has a few things that he would like to add, that gives us a lot of comfort.
Yes, if I can add also, so obviously, in those deals or wherever we invest, we want to earn more than our cost of capital, higher margin. It depends on the areas. And for competitive reasons, we don't get into the details. Deals we're signing on the business side usually have higher ARPUs and interesting margins. On the MDU side, usually there are long-term contracts, about 5 years. Many of them are 10 years. So it ensures basically long-term viability for these CapEx we're putting in. And just to touch upon the dark fiber acquisition and subsequent acquisition of the company in Florida we've announced as well, it's a mix basically, of enabling us to accelerate our growth and also to do some CapEx avoidance as it's -- as we're buying dark fiber. Basically, this fiber exists, and we don't need to lay it out.
Great. I don't know if there's a way of quantifying this, but I'm assuming you've done a lot of work around what the size of the telecom cable market is in South Florida, and what your current share. Can you just at least give us some sense of the opportunity from that perspective?
No, I don't think we're in a position to do that.
[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.
Okay. Well, thank you, everyone, for participating in today's call. So we look forward to talking to you back in April for our Q2 results. And in the interim as usual, feel free to call us if there's any additional questions.
All the best for the new year to everyone.
This concludes today's conference call. You may now disconnect.