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Edited Transcript of CGO.TO earnings conference call or presentation 10-Apr-19 3:00pm GMT

Q2 2019 Cogeco Inc & Cogeco Communications Inc Earnings Call

Montreal Apr 19, 2019 (Thomson StreetEvents) -- Edited Transcript of COGECO Inc earnings conference call or presentation Wednesday, April 10, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Patrice Ouimet

Cogeco Communications Inc. - CFO & Senior VP

* Philippe Jetté

Cogeco Inc. - President, CEO & Director

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Conference Call Participants

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* Aravinda Suranimala Galappatthige

Canaccord Genuity Limited, Research Division - MD

* Bentley Cross

TD Securities Equity Research - Associate

* Drew McReynolds

RBC Capital Markets, LLC, Research Division - Analyst

* Jeffrey Fan

Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst

* Maher Yaghi

Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst

* Matthew Griffiths

BofA Merrill Lynch, Research Division - Associate

* Sanford Lee

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Cogeco Inc. and Cogeco Communications Inc. Second Quarter 2019 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.

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [2]

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Good morning, everybody, and welcome to our second quarter conference call. So joining me today are Philippe Jetté, Marie-Hélène Labrie, 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. So I'll turn over the call to Philippe Jetté.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [3]

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Good morning, ladies and gentlemen, and thank you for joining us to discuss the results of Cogeco Communication Inc. and Cogeco Inc. for our second quarter ending February 28, 2019.

Let us begin with Cogeco Communication and the sale of Cogeco Peer 1. One of the major development in the second quarter is the announcement that we reached an agreement to sell Cogeco Peer 1 for proceeds of $720 million, subject to closing adjustment. We expect to close the sale in the current quarter.

Cogeco will remain -- will retain significant fiber capacity in Montréal and Toronto for future needs. This transaction will allow us to regroup completely our resources and effort on the Canadian and American broadband segments with greater flexibility to pursue organic investment and acquisition opportunities.

Note that the following sales announcement, Cogeco Peer 1 operating and financial results for the current and comparable periods were reclassified as discontinued operations. To reflect the reclassification, Cogeco Communication revised its fiscal year 2019 guidelines for continuing operations where revenue is expected to grow by 6% to 8% and EBITDA by 8% to 10%. Capital intensity should remain at similar level to last year and free cash flow is expected to grow by 38% to 45%, mainly as a result of EBITDA growth and declines in financial expenses, current income taxes and restructuring, integration and acquisition costs.

For the quarter, revenue is up 7.6% and EBITDA up 10.5% in constant currency. Reported revenue has reached $584.1 million, and EBITDA reached $280.6 million, generating a margin of 48%.

Cogeco Connexion achieved its best financial performance since the first quarter of last fiscal year with an EBITDA growth of 3.8% in constant currency. Atlantic Broadband has continued to perform strongly with an organic EBITDA growth of 9.7%.

On the wireless side, we have -- as we have advocated for many years in favor of an MVNO model, we were very pleased to see the CRTC launching a consultation to examine the state of the mobile wireless market and to seek comments on its preliminary view that mobile virtual network operators should have mandated access to the network of the national wireless providers. We all remember that the national providers benefited from favorable conditions to launch and expand their operations many years ago. We were also encouraged by the federal government's policy directive to the CRTC, encouraging all forms of competition and the reduction of barriers to entry for regional telecommunication service providers.

Cogeco does favor a facility-based MVNO model, which would allow for progressive and disciplined investment in facility along with some type of partnerships or network sharing arrangement. However, given the consultation time frame and the various discussion at this point that this process will result in, it is too early for me to provide further comments on the specific business model.

The quarterly dividend was reconfirmed at $0.525 per share, a 10.5% increase over last year.

Let us look at the individual components. At Cogeco Connexion, our PSU trends in the quarter have significantly improved relative to the last 2 quarters as our new CMS migration issues have been fixed, and we have ramped up our sales and marketing efforts since last November. The video and telephony customer loss are comparable to last year, while the Internet additions are slightly lower as a result of competition offers. The new CMS will be the foundation piece of Cogeco Connexion's evolution to digitize customer experience enabling quicker response time and greater digital interaction capabilities to enhance the customer experience.

Cogeco Connexion's revenue has grown by 0.8% and EBITDA by 3.8% in constant currency as a result of higher revenue, mainly generated through the rate increase implemented in November and a decline in operating expense mainly attributable to better management of programming costs and cost saving from a workforce reduction program. This program, which targeted administrative functions, was carried during the first and second quarters and is expected to generate $10 million in saving in fiscal year 2019 and $14 million on an annual basis.

We expect that Cogeco Connexion will achieve low single-digit EBITDA growth in the fiscal 2019, mainly as a result of the rightsizing of our workforce and the further operational efficiencies we expect from the new CMS and the ongoing digitize -- digital transformation.

We are advancing well with our digitization program, which is aimed at improving our already high, highly reputable customer service, while reducing our operating costs. Over the last 18 months, we have made great progress over our digital key performance indicators. We have increased e-billing by 65%, reduced annual technical calls by 10%, on-site repair by 15% and have increased self-installs by 40%. We expect further improvements in all our digital KPIs as we improve and implement and ramp up operational best practice and digital tools. We have implemented several of the identify initiatives, but many others will be implemented over the next 18 months.

The number of self-installs will significantly improve when we launch the new IPTV platform later this year, resulting in further reduction of truck rolls.

During the quarter, Cogeco Connexion has contributed to launch new and enhanced features for its customer. Among them, we rolled out a cloud-based, managed Wi-Fi solution for business customers in Québec, thereby, completing our coverage in Canada. It offers faster connectivity, scalable Wi-Fi capability and a management portal allowing to customize settings and offer Wi-Fi access for guests and get insights on Wi-Fi usage to better control IT spending. 1 gig Internet speed is now available to 40% of our footprint and further launch announcement will be made in the coming months with the goal of reaching 60% of our footprint by fiscal year-end.

We were pleased to see the renewed and increased funding for regional and rural Internet connectivity in Canada. The recent budget announcements from the federal government and the Québec government represent over $3 billion for the next decade and are a great opportunity for Cogeco to further expand its network. We believe we are well positioned to obtain funding given our strong regional position.

In the U.S., again this quarter, Atlantic Broadband has been the prime engine of growth as revenue increased by 18.4% in constant currency and EBITDA grew 21.7%, mainly as a result of the timing impact of the MetroCast acquisition completed on January 4, 2018, and combined with strong organic growth. In the quarter ABB achieved organic revenue growth of 5.5% and EBITDA growth of 9.7%.

The strong financial performance is mainly related to the continued growth and upsizing in residential Internet and commercial services, rate increase implemented in October in the MetroCast systems and the ramp-up of the Florida expansion plan, which is now positively contributing to EBITDA. Given that marketing expense in the first half of the year were lower due to the timing of certain initiatives and that the January 1 programming cost increase will fully impact the third quarter, we expect EBITDA to grow at the mid-single-digit rate during the second half of the year.

Atlantic Broadband has also an ambitious digitization program, which is advancing well, in line with what I just explained and described in the Canadian operations. The PSU trend in Q2 were weaker than the comparable quarter last year, mainly due to the timing of bulk activation in Florida.

Let's remember that the second quarter of '18 included a large bulk activation. The '19 Florida ramp-up should mainly materialize in the fourth quarter as we expect to connect and activate many customers. Furthermore, there will be a ramp-up in marketing activities in the second half of this year, which should improve PSU trends.

Atlantic Broadband continues to upgrade its TiVo platform and has just launched the Alexa voice control functionality. Customers with the voice assistant device can now issue hands-free voice commands from anywhere in the room and, among other functionality, Alexa can open streaming apps like Netflix on their TV with a simple voice command. This is in addition to being able to do the same with their TiVo voice-activated remote.

Atlantic Broadband has mostly completed the rollout of its enhanced suite of services with the launch of Enhanced Wi-Fi service in the newly acquired MetroCast system and the launch of Hosted Voice for Business in the New Hampshire and Maine service area, which now cover close to 50% of the MetroCast footprint. The Enhanced Wi-Fi service utilize multiple wireless mesh access points and intelligent routing algorithms to provide the best possible wall-to-wall coverage and speed which dramatically improve video streaming capabilities. Atlantic Broadband currently offer 1 gig Internet service in 50% of its footprint and targets a 90% coverage by the end of this fiscal.

Let us now take a look at Cogeco Inc. where the consolidated revenue has increased 7.3% and EBITDA 10.3% in constant currency. Advertising markets in the radio business continue to be challenging and competition has increased. As a result, we are managing our costs tightly. The integration of our 10 new radio stations is proceeding well, and we are excited at the prospect of a wide coverage throughout the province of Québec. The quarterly dividend has been reconfirmed at $0.43 per share and 10.3% increase over last year.

In conclusion, I would like to note that since the beginning of this fiscal year we have achieved a number of key strategic milestones. We have announced the sale of Cogeco Peer 1 to re-center our resources on growing our broadband segment, both organically and through acquisitions. We have completed the stabilization of the new customer management system in Canada, which is foundational to our future digital projects. We have now fully embarked in a digital transformation which will enable us to better serve our customers through innovative and interactive digital platforms, and better position our service offering. This initiative speaks to our commitment to provide our customers the highest level of service, which has always been part of our DNA. Going forward, we will focus on pursuing profitable organic growth through providing enhanced services to our customers, growing our Internet and commercial services market shares and expanding in select areas such as Florida. We continue to look for attractive acquisition opportunities and will continue to be proactively very engaged in the wireless consultations.

And now we will be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jeff Fan from Scotiabank.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [2]

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A couple of follow-ups and then perhaps a bigger picture question. In terms of just following up on the U.S. cable, you mentioned, Philippe, mid-single-digit growth on EBITDA for U.S. Cable for the second half of the year. Is that on constant currency? And also on the -- you also mentioned a big PSU or bulk transaction in 2018, can you just remind us the magnitude of that, just for us looking at the second half of this year how it compares? And then the last question is just on overall capital allocation. Now that the sale looks like it's going to close soon on Cogeco Peer 1, can you just remind us the use of proceeds and priorities in order of what you think are attractive areas to go after? That would be great.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [3]

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Well, first -- the first part of your question, yes, mid-single-digit organic growth is in constant currency, Jeff. The Florida market were bulk, so condo towers or gated communities, as you can imagine, these are contracts by contracts and they vary, they flip to -- into over years. So that's why the year-over-year comparison sometimes is -- could be difficult as it's not linear. And I simply wanted to remind you that since we had a larger activation last year, just compare the year-over-year given that fact.

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [4]

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And for the capital allocation, so the selling price is $720 million. We have some expenses to pay related to this as we've reported previously. So we're going to be repaying a revolver of about $400 million. So that leaves a little more than $300 million in cash, and we're planning to launch an NCIB as well. I'd say these get done basically over many months or a year. And as we execute this NCIB, we should normally generate additional cash flows from the business as well. So hopefully that answered your question.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [5]

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In terms of your leverage, can you just remind us where you think you want to stabilize that -- the leverage? And then also, just in terms of new business opportunities, I think in the past, maybe you've given us some priorities, U.S. versus wireless, versus other, can you -- now that you've got a wireless proceeding going on, I'm just wondering how that has affected that thinking.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [6]

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So let me just start with the big picture then. We have not changed our strategy forward, Jeff. So investing in our existing networks, I have to describe many initiatives to better the customer experience as well as reduce our operating costs. The look for acquisition in our existing territories is also something on the radar. There are many opportunities, but as you know, acquisition takes a little bit of time to negotiate and eventually to announce. So stay tuned on that front. Now on the wireless, that is the third pillar of our strategy, we are extremely proactive in conversation, we'll continue to be in conversation with the players, and we'll see. As I said, it's too early to announce exactly the business modeling we're looking at and contemplating, but we certainly want to be part of this mobile ecosystem.

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [7]

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And on the leverage, so our leverage from what we disclosed yesterday is 3.3 turns of debt-to-EBITDA. And if you were to pro forma the sale of CP1, you'd be up 2.9x. And obviously, over time, generally, we're able to decrease this unless we make an acquisition, obviously. Our long-term target is still about 3x, so pro forma the sale of CP1 we'd be slightly under that, but very close to it.

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Operator [8]

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Your next question comes from the line of Aravinda Galappatthige from Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [9]

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I'll start with the question on the U.S. PSU movement, the net adds. I know that in the past, in the prior quarter you talked about some of the seasonal movements due to the footprint in New Hampshire and Maine. With that in mind -- and I know you cited that in Q2 as well -- with that in mind, when we look at the second half, should we -- it follows that we should be looking at year-over-year stronger numbers based on your prior reporting. Is -- are there other sort of dynamics that come into play when we look at the second half for U.S. PSU net adds?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [10]

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Sure. So I would say this quarter was a bit weaker than usual. So generally, we have a new advertising campaign that's starting right now. So just -- that's a general comment for the overall footprint. So we should expect benefits from this. And as we stated before, or Philippe mentioned in his presentation, we should expect more advertising costs as well in the second half, which partially benefited this -- the EBITDA this quarter. So we basically are going to invest more in the back half and it just happened to be like this, this year.

In terms of seasonal, so it's true. There were some seasonal disconnects in this quarter, and I would say if you look going forward in terms of reconnects, the seasonal reconnects, we would expect that this current quarter, the third quarter, and a bit in the fourth quarter would be the time where it's reconnecting. It's mainly in the MetroCast areas, because in Florida, actually, we sign a lot of bulk agreements. So in the MetroCast area last year, we had just bought the company. So I would say we're better equipped to basically make sure that we get our fair share of the reconnects this year. And lastly, in Florida last year, we had -- to Jeff's question, we had larger bulk activations in the second quarter. We expect this year that we're going to have larger bulk activations in the fourth quarter and those are from signed transactions that's basically in construction right now. So it will fluctuate from quarter-to-quarter, but obviously, in Florida, we have a better visibility as we're able to -- we typically sign these deals a number of months before we install.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [11]

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And just staying on the U.S. I know you alluded to this a little bit in the prior answer. But can you just give us an update as to what the landscape looks like when you think about U.S. Cable targets? I know in the past, you've kind of given us a sense of sort of the family owned and privately -- the PE owned cable networks that are out there. Any change in that landscape over the last year or so that you can perhaps update on?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [12]

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No. It would be the same. Actually there's been very little transactions over the past year. So it basically means that the owners are the same as a year ago. So we are ready to make acquisitions, and when companies are looking to sell we're typically there when we can be at the table looking at it. But I would say we're fairly active looking at potential transactions, but they obviously have to be available.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [13]

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Okay. And last question on Canada. Obviously you're coming -- you're emerging from sort of the CRM-related difficulties. As you look to kind of rebalance, sort of get back just to subscribe the growth particularly on the Internet side, any sort of spillover from that period of customer issues? I mean, is there -- is any feedback to suggest that there was some sort of goodwill lost and so on? I mean, I'm trying to get a sense of how much you can kind of recover from that period as you kind of build -- get back to a sort of sub growth phase.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [14]

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Well, I guess, the important factor here is that we serve our customer with very good, exceptionally good customer service. And customers, they -- in the areas where we serve, they know that, they knew that, they know that and we are -- we have returned to that high level of customer service. I personally believe that this is the key component that customers are looking for to be served. So yes, my expectation is that some of these customers that went and try other solutions for a short term will return as well as we are much better equipped not to lose any on our own doing. And I admit we went through a difficult period, but that period is completely over. We are fully operational with new processes and a new system that match very well.

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Operator [15]

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Your next question comes from the line of Sanford Lee from Macquarie.

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Sanford Lee, Macquarie Research - Analyst [16]

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You mentioned in your opening comments about the Internet net adds in Canada being lower year-over-year because of competitive factors. Is that competitive factors aggressive pricing moves? Or are you talking more about increasing FTTH footprint overlap?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [17]

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Well, I would say, the competitive intensity is similar to what we have normally. So we -- it comes from different areas. So obviously, our competitors, like we do, will run different campaigns and advertising, promotional activity, so this moves all the time. But I would say it's usually intense and it still is. In terms of fiber construction, there is some fiber construction every year, and so it's still the case today. But I would say there has not been a significant pickup in the past year. So no, it's not as if there was a number of large cities that were done. And some of the fiber that's being constructed now is in the fiber-to-the-node areas, which means that the competition already offers their key products, including the video product. So it's just a faster Internet speed. That's a bit different than going from a DSL territory to fiber-to-the-home. But I would say both are going on, but there are some areas that are going from the fiber-to-the-node to fiber-to-the-home.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [18]

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Our existing product on the -- if we talk about speed is very, very well positioned. We offer 120 megabit per second everywhere, and you've seen us make announcement on up to 1 gigabit. Let's remind ourselves, the offers taken in the market are far less than the 120 megabit per second. So we feel we have an excellent product that is already deployed across our footprint and a better customer experience. So combine great product with a great customer experience. So don't look on the product side. The promotional and advertising is more where sometimes we see some difference in the marketplace. But we're working really hard segmenting our marketing efforts to address promotional campaigns launched by our competitors and win our fair share of the marketplace.

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Sanford Lee, Macquarie Research - Analyst [19]

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Great. And I guess sort of on a related issue, competition from fixed wireless Internet services. I know it is fairly early, but can you give us any commentary on what you're seeing in terms of markets that you do face competition from fixed wireless?

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [20]

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Yes. Well, that will be very short because we haven't seen in our footprint any fixed wireless major activities going on. So that remains mostly theoretical for now.

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Sanford Lee, Macquarie Research - Analyst [21]

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Okay. Also the FiberLight business that you acquired, I believe it had customers. Is that in your Internet subs and it's in your base as well as in the net adds now?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [22]

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It was, so those were business customers. So I would say, it's large dollars per customer. So they are in but it's a very small number of customers. So it's really -- if you were to see the list, it's very common names in the U.S. of consumers of bandwidth.

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Sanford Lee, Macquarie Research - Analyst [23]

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I guess in that -- the partially driving the large increases in the ARPU, the U.S. dollar ARPU possibly from some of that?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [24]

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It has an impact because we did -- and we acquired that network. Basically, it's a dual reason. So there is obviously these customers, which and will grow with new customers as well and has also an ability to grow our bulk activity with this network. But you're right. In terms of ARPU, the customers we acquired came with higher ARPUs that we -- versus what we typically do. On the commercial side, most of our customers are SMEs, and we have larger customers as well, but I would say the bulk are SMEs, whereas this network, the bulk was larger enterprises.

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Sanford Lee, Macquarie Research - Analyst [25]

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Great. And then the last one on the U.S. Cable and the -- it looks like the U.S. Cable has performed quite well year-to-date. Can you tell us what you're hearing and what you're experiencing now as far as cable valuations?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [26]

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Yes. It's difficult to say, because as I was saying earlier, there has been little transactions in, let's call it, the last year. So it's -- obviously, when we look at the transaction, we look at the benefits of that particular transaction, which includes many elements, including, obviously, where it is, the population it serves, penetration rates, synergies, all these things, and that impacts the -- ultimately the multiple we're paying. And it also -- some transactions done by others, well, depend basically what their strategy is and what they're willing to pay to integrate it in their business.

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Sanford Lee, Macquarie Research - Analyst [27]

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Just quick last one. I just wanted to know if you wanted to comment or refute the CCTS finding, which sort of show a large increase in the customer complaints over the last 6 months and again, in January, acknowledging that it does, I guess, refute the CMS transition?

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [28]

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Well, it's actually that the period covered by the report is exactly when we had some issues with the CMS migration. Now that we have fixed these issues, we expect our numbers to come back where they were a very distant from the #1 position in that report.

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Operator [29]

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Your next question comes from the line of Bentley Cross from TD Securities.

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Bentley Cross, TD Securities Equity Research - Associate [30]

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Just a quick question on the guidance. I know it's -- the year to guide has stated 8% to 10%, even though Business ICT or Peer 1 is gone. Just -- I know it's small but mathematically, I would have expected that to boost the EBITDA growth rate. Can you maybe talk about some of the puts and takes in there?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [31]

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Yes. So there's a couple of things. So obviously, we removed CP1 from the prior numbers and the future numbers. There is also -- and there's an inorganic portion in there as well from MetroCast. But I would say, we -- that's why we have a range. We -- it could have been that the -- by redoing the guidance with one less division, the numbers could have changed. But as you pointed out, CP1 was not a large part of our business. So the -- when we came out with the original guidance, we did not expect as much issues with the transition in the CMS system in Canada. So we're -- as you know, we're back on track now but that had an impact obviously on the Q4 of last year and Q1 of this year. So that played a little bit into the expected growth rate for this year, which does include, obviously, the performance you saw in the last quarter in Q1.

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Operator [32]

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Your next question comes from the line of Maher Yaghi from Desjardins.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [33]

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Congratulations again on the sale of Peer 1, it was nicely priced. I wanted to ask you a question on the penetration of Internet in your Canadian territory -- Canadian footprint. You're putting a lot of focus on Internet, and cable companies in general are doing so, less relying on TV to grow. But when I look at your Internet penetration rate in Canada, it seems to have peaked in the second quarter of fiscal year 2018, and since then it has been declining. I wanted to get your view on the trend that we're seeing over the last 3 quarters. Is that something that you are focused on turning around? And what is your objective, in general? Because in the States when I look at your Internet penetration rates, there -- they have been from 46%, 47% just until you did the MetroCast acquisition and that boosted the percentages. So is 45%, 46%, is that where things should settle in Canada? Or you could hope for more than that?

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [34]

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Okay, well, thanks for that question, Maher. The peak you alluded to, in that time frame, we had this CMS issue. And if you remember, we had said that customer service was very important, and at the time, we redirected our sales and marketing effort to the customer experience. So that explain why our sales and marketing activities were less than efficient during that period and the Internet sales, certainly, were lower because of that. Now that the CMS is behind and the sales and marketing are back in growth mode, I'm expecting that the Internet market will continue to grow as there is still a huge potential out there.

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [35]

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Yes. And if I can add to this, there's still a large portion of our footprint that's covered by competition in DSL, so that's very low-speed Internet. So there's a great opportunity there and we're working on this. And what works against that obviously is when competitors rebuild their networks, then we have to adjust in these territories. So -- but overall, some capacity to grow still.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [36]

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Okay. And the potential long term is -- what do you believe is a good target to achieve over the next 2 years in terms of penetration?

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [37]

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Well, we won't put a number on this, but let's say that, as I described earlier, we have a superior product in the market. It's very fast and reliable. Combined with a great customer service, this is what customers are expecting from their service provider. We should do very well.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [38]

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Okay. And in terms of margins in the Canadian broadband services business, you mentioned that you are going to invest a bit more in marketing in the next couple of quarters now that the system is up and running. What is a good target in terms of margins in that business? Because as the switch from video to Internet continues, you really -- normally you should expect margins to keep growing. What is the upside here in terms of margins in the next couple of years in the Canadian business?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [39]

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So we're, I would say, in the 53%-ish area right now. We've been able to grow it every year even before the -- I would say, a bit more focus on Internet as you are pointing out. So more Internet, obviously, will direct us to higher margins normally. But we do a lot as well on our OpEx front. That's part also of the digitization project. That's a program that was referred to before. So we see upside there. Difficult to know exactly where we will be in the future, but we've been able typically to grow probably a point a year. And we see a lot of upside at being able to, again, better serve our customers with more tools then at the same time work on our cost side. The other thing I can add is on the video front, with the new IPTV product we should expect some savings there. We still believe that video is a good product, and we -- our approach is always to offer the best solution possible. That's why we introduced TiVo early on. We're going to introduce the new IPTV platform as well. So the idea is to provide everything the consumer needs. And again, our areas of operations are more suburban and rural, which means that you have more single dwellings and TV is still an important product for many people.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [40]

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Okay. And my last question on capital intensity. Now that you have sold Peer 1, when we look at the Canadian and U.S. business combined, what is a more sustainable capital allocation intensity ratio that we should be looking at in terms of the business over the next couple of years? I know you gave a guidance for the year. Is that what we should use in terms of an average capital intensity ratio going forward?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [41]

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Well, we've been running Canada between 18% and 19% for a few years and that includes all the digitization which requires some capital rolling out, gigabit which will be at 60% in a couple of months. So we're able to do a lot within this. So 18% to 19% is probably not a bad number to use going forward. But we might have some upside there as well as we roll out smaller CPEs for video going forward with the IPTV introduction. So once we're there and we have introduced that, then we'll be able to talk more about it. But I would say it's probably a right range to use. At ABB, we typically run below 20% as well except more recently when, obviously, we bought dark fibers initially from FiberLight before we completed the acquisition. And we're investing more in Florida as Florida now is -- the additional expansion is generating revenues and EBITDA, it puts less pressure on the intensity. So we're expecting low 20% at ABB this year, and going forward, we'll probably get back down below 20%. We'll -- you have to stay tuned on this when we're done with our budgeting exercise which is in a couple of months for next year, but if you think a couple of years, should be below 20%.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [42]

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Okay. And sorry, one last question I forgot. It's the closing requirements to -- for the Peer 1 sale. Are there any closing conditions that the buyer still has not fulfilled?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [43]

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There's still -- there's a number of things we have agreed with the buyer to do before the transaction closes. We're very well advanced than this but not fully done yet so we should expect to close it this quarter.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [44]

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How about the financing of the transaction?

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [45]

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No, that was already arranged before we announced the transaction.

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Operator [46]

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Your next question comes from the line of Matthew Griffiths from Bank of America Merrill Lynch.

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Matthew Griffiths, BofA Merrill Lynch, Research Division - Associate [47]

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I just had 2 quick kind of follow-ups, if I could. One is on the bulk transactions in Florida. I was just curious if this kind of once-a-year type of pace is what we should expect going forward or if maybe the opportunity is potentially larger and we might see these pop into the results more frequently going forward. And then the second thing I wanted to follow up on was just on this digitization push that you're doing. I was wondering where you are, if you're still kind of in the investment phase of this or if that is largely complete perhaps and now you're in the process of kind of harvesting some of those benefits more. And kind of related to that, whether or not kind of Canada or the U.S. is maybe more advanced in that process, if there's a difference.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [48]

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Okay. Well, let me start with the bulk question for Florida. So we are still ramping up our operations, sales, sales operation, marketing. And right now, you're right, they come in more in spike. It's totally our intent to level that and have an ongoing sales and marketing more regular activities and the pipeline won't spike as much. So you should expect for the years to come more regular deployment. So that's for the first part of your question. The digitization, as I said many time, the foundation was this new CMS system. So there was already a large investment made there. It's up and running. The first phases, and I just reported some KPIs for the first 18 months of our program, so we're doing already very well on billing and truck rolls and on-site repairs and self-installs. Over the next 18 months, there will be more benefits coming. They don't require as much investment, because the platforms and the foundation is there. It does require some incremental investment here and there and you should expect more benefits to show up, and I will be glad to report as to where we are in future meetings.

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Operator [49]

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Your next question comes from the line of Drew McReynolds from RBC.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [50]

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Two quick ones for me, Patrice. On the fiber-to-the-home overlap with your footprint, can you remind us where that stands right now? And with respect to your free cash flow guidance for fiscal '19, perhaps provide us with an update on cash taxes assumed in that guidance and maybe the medium-term outlook for the cash tax rate into the next couple of years. If you have that kind of visibility right now, that would be great.

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [51]

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Okay. So on the fiber-to-the-home, and as I said earlier, this moves every year a little bit. So it's around 30% right now of our footprint within the footprint where we have Dell as a competitor. And the balance is made up of fiber-to-the-node and primarily DSL as well. That's where we are right now. On the free cash flow guidance for this year, the cash tax is estimated on a consolidated basis at 12%. That's a lower number than what we had before and it's pursuant to the reduction we got or an accelerated depreciation at the federal level and Québec will also follow up -- follow with a similar program. So it's about 12%. And going forward, while it is difficult to know exactly where we will end up but these programs are not just for 1 year. So we should expect that over time it will go up but it takes a few years basically to go up significantly from that percentage.

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Operator [52]

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(Operator Instructions) Your next question comes from the line of Jeff Fan from Scotiabank.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [53]

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I just have a follow-up on Wireless. Philippe, you mentioned that it's too early to discuss any business model. Is it fair to say that you're adopting maybe a more wait-and-see approach given what the CRTC has decided to do with respect to the MVNO proceeding and that it might be difficult at this point to kind of paint which path you're going to take until you know what the rules look like? I'm just wondering what your thinking is there and why it's too early and how this regulatory proceeding may or may not play a role into that.

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [54]

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Yes, well, of course, we are in -- we're anticipating more good news from industry, ISED as well as on the CRTC. I mentioned that the public hearing has been scheduled. So the work is -- has started, and we are in active conversation, as you can imagine, not only with the government but also with industry players. My position at the moment is just to be -- to work on these things and when we will have meaningful announcement, we will make them, but at this stage, it's private commercial conversations and government conversations that are taking place.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [55]

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And your expectation for what's coming out of ISED, can you elaborate on that a little bit more?

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Philippe Jetté, Cogeco Inc. - President, CEO & Director [56]

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Well, ISED has been very public and very clear that they want Canadians to benefit more from a market that will bring more competition, more innovation and greater choice for Canadians. So ISED has also issued policies to the CRTC to look at future regulatory environment that would benefit Canadian. We certainly think, given our existing networks, our existing footprints, the relationship we already have with significant base in Québec and Ontario as well as if you consider the number of home pass and business where our network is already installed, we have a large and significant presence. So we know we can contribute to this ecosystem. Now it's a matter of the regulatory framework to land and commercial negotiations to take place and continue.

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Operator [57]

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There are no further questions at this time. I turn the call back over to management for closing remarks.

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Patrice Ouimet, Cogeco Communications Inc. - CFO & Senior VP [58]

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Okay. Well, thanks, everyone, for being on the call today. We're going to be discussing our third quarter results in July. So see you then and feel free to call us in the meantime if you have additional questions. Thank you.

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Operator [59]

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Thank you. This concludes today's conference call. You may now disconnect.