Cogeco Cable's (CGEAF) CEO Louis Audet on Q1 2016 Results - Earnings Call Transcript

| About: Cogeco Communications (CGEAF)

Cogeco Cable, Inc. (OTC:CGEAF) Q1 2016 Earnings Conference Call January 13, 2016 9:30 AM ET

Executives

Patrice Ouimet - SVP & CFO

Louis Audet - President & CEO

Analysts

Sanford Lee - Canaccord Genuity

Maher Yaghi - Desjardins Capital Markets

Greg MacDonald - Macquarie Capital Markets

Bentley Cross - TD Securities

Operator

Welcome to the COGECO Inc., Cogeco Cable Inc. Q1 2016 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 Cable, Inc. Please go ahead, Mr. Ouimet.

Patrice Ouimet

Good morning, everybody and welcome to our first-quarter conference call. Joining me today are Louis Audet, President and CEO; Rene Guimond, Senior Vice President, Public Affairs and Communications; Andree Pinard, Vice President and Treasurer; and Pierre Maheux, Vice President, Corporate Controller.

Before we begin this call, we would like to remind listeners that the call is subject to forward-looking statements which can be found in the press release issued yesterday by COGECO Inc. and Cogeco Cable, Inc.

We will now turn the call to Louis Audet before we proceed with the Q&A period.

Louis Audet

Thank you, Patrice and good morning, ladies and gentlemen. Thank you for joining us today to discuss the results of Cogeco Cable and COGECO Inc. for the first quarter. The first quarter of FY '16 has been a good one for both companies, even if you smooth out the change in the scheduling of management fees from Cogeco Cable Inc. to COGECO, Inc.

Before we proceed with discussing the results, I would like to point out that in a little over an hour, shareholders will be asked to vote on a resolution to change the name of Cogeco Cable, Inc. to Cogeco Communications Inc. which management feels is better aligned with the company's activities. We're also taking this opportunity to streamline, evolve and promote the COGECO brand by rejuvenating somewhat the COGECO logo which we will be presenting towards the end of the annual general shareholders meeting.

Let us then begin with Cogeco Cable. Assuming a favorable shareholder vote, this will be the last time you will officially hear the company designated as Cogeco Cable, Inc. and it will become known as Cogeco Communications Inc. However, the Toronto Stock Exchange symbol is unchanged and remained CCA.

At Cogeco Cable for the first quarter revenue, was up 8.7% to reach $540 million. EBITDA is up 11.6% to $244 million. These results are in line with our FY '16 guidance for all indicators. While free cash flow is lower quarter to quarter, this is essentially due to timing differences only in CapEx which were front-loaded this year. These results are essentially driven by strong growth in our American cable services segment. A quarterly dividend of $0.39 per share, up 11.4% compared to the same quarter last year, has also been reconfirmed.

Let us now look at the individual components. At Cogeco Cable Canada, concurrent with the name change of Cogeco Cable to Cogeco Communications, please note that Cogeco Cable Canada will heretofore be referred to as Cogeco Connexion, with an x. Last spring, we proceeded to hire TAXI, our new advertising agency for Cogeco Connexion. Their work was proudly featured in our holiday campaign this year, anchored on a contemporary position statement, may your holidays be ultra-fiber bright. Building on that same creative idea, the winter campaign will be available as of February 1, on our website, www.cogeco.ca.

The President of Cogeco Cable Canada, Louise St-Pierre has added a new Vice President of Marketing and Innovation to her team. His name is Daniel Boisvert and he has an extensive background in telecom and will be spearheading the introduction of leading edge services and the launch of a powerful new brand expression for Cogeco Connexion.

Louise has also added a new Vice President Business Solution Sales. His name is Antoine Shiu and he has an impressive background in telecom and will be responsible for developing new service offerings and for growing our small medium business customer base. This represents a significant opportunity for the company.

As regards to our first-quarter results, our industry-leading TiVo video service and our dominant 120 megabit to 250 megabit per second Internet service have been instrumental in reducing our video service customer losses and generating higher PSU growth than in the past. Note that adjusted EBITDA and margin have also grown in the process.

Let us now look at our U.S. cable, the Atlantic Broadband subsidiary. The integration of the Connecticut system acquired from MetroCast in late August is now essentially complete. Staff, sales, systems, brand and service offering are now aligned to Atlantic Broadband, except for the TiVo service which will be launched shortly. The Connecticut system and strong residential sales, as well as business sales have generated growth in U.S. dollars of more than 18%.

We continue to develop business sales, particularly in the dynamic Miami market and we will be launching a 1 gigabit per second internet service in Connecticut in this year. At subsidiary, COGECO Peer 1, adjusted EBITDA has grown marginally compared to last year. Our renewed management team under Philippe Jette, who was formally Senior Vice President, Chief Strategy and Technology Officer at COGECO is currently executing on a plan we have designed during the summer and fall. We believe this business should grow in line with industry benchmarks in the low double-digits beyond 2016 and we're focused on that objective.

Turning now to COGECO, Inc., the designation of this company remains unchanged, as does its Toronto Stock Exchange symbol, CGO. At COGECO, Inc. revenue is up 8.3% to $583 million and EBITDA is up 9% to $255.2 million. Our media sector, both in radio and transit advertising has performed extremely well in a tough environment, thanks to the -- to attention devoted to the quality of our radio content, as well as overall expenditure controls.

On January 5, 2016, we announced the sale of Metromedia, our transit advertising business to Bell Media's Astral outdoor subsidiary. We entered the business by acquiring Metromedia for $41 million in 2011 which we have operated profitably from then on, up to now.

We have sold the business for $47.5 million at 11.3 times FY '15 EBITDA. The increasing concentration in this advertising market and limited expansion opportunities have caused us to consider and eventually accept Astral's offer. We intend to continue to solidify our position in radio.

In conclusion, we have slightly revised our guidance to reflect the fact that Metromedia will no longer be contributing to COGECO, Inc.'s results, it having of course, reduced its debt load in the process. We will place our investor presentation online later this afternoon, updated with the first-quarter results. We continue to seek value-creating opportunistic acquisitions, especially in cable in the United States. FY '16 is off to a good start and will be a very good year.

We would now be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Sanford Lee, Canaccord. Please go ahead.

Sanford Lee

Louis, it was very nice to see the improvement in the Canadian Cable PSUs because of TiVo. But I was a little bit surprised to see that the implied Canadian cable, the ARPU per PSU was flat, because I thought TiVo was being positioned as a premium bundled product. So can you tell me why the ARPU per PSU was flat year-over-year and do you expect this to increase going forward?

Louis Audet

It may be that our promotional offers were a bit more generous than anticipated. I think that's the likely cause.

Sanford Lee

Okay. Because, I guess, I'm looking at that in the context of upcoming pick-and-pay choices, because you did generate a nice 110 bps increase in margin, whereas I had assumed a little bit of margin pressure because of TiVo revenue share. But do you see the potential for margin improvement at Canadian Cable throughout the rest of this year?

Louis Audet

Well, I wouldn't count on that to further increases, but in the -- if you look long-term, there's no reason why margin can't continue increasing. It's the same question, right? Year after year, we look at ways to become more efficient and increase the margin. So that's a never-ending process and it will continue.

Operator

Thank you. The next question comes from Maher Yaghi of Desjardins Capital Markets. Please go ahead.

Maher Yaghi

Yes, I just wanted to -- it seems your Canadian operation is definitely looking like it's improving in terms of subscriber metrics, [losses] [ph] versus prior years. And probably TiVo is having an impact and also Bell is focusing on more important or bigger geographies and markets having to compete against the big heavy spending that Rogers is doing in Toronto.

But one has to ask the question about, when you guys saw Shaw's decision to get into wireless and the reasoning of having that service in the bundle, when you look around in terms of your Canadian presence and not having that service, can you maybe talk about how you view your position in the marketplace? And how can you see the long-term support of the service, if wireless is becoming more important which it seems to be the case?

Louis Audet

Sure. Well, I'm happy to answer your question. But I will start by adding a grain of salt to one of the introductory comments you made. Please do not underestimate the strength with which Bell competes in our marketplace.

They are very competitive and they always have been. So please don't conclude that it's less competitive than it was. It's still very competitive. So I just wanted to get that one straight, so that no one thinks that we're enjoying a preferential treatment--

Maher Yaghi

I wasn't implying that for sure.

Louis Audet

That surely isn't the case. Okay. Now with regards to wireless, I think this is -- well, I think that it looks like an excellent transaction for Shaw and it's one that they could afford and that's -- I think that's good for them. But the fact that it's good for some players, doesn't mean that not having it is bad for other players.

We continue to think and there continues not to be indications in the marketplace that you need a quad play to be successful. This is simply not something that shows up on our radar screen when we think about customer churn. So it's not a necessity.

Now if ever it does become a necessity, then we will probably consider the resale of somebody else's products. And, of course, that is less profitable than owning a company and that's something that -- that's a bridge we've already crossed. That's something we accepted implicitly, when we decided not to bid for -- when we decided not to bid for spectrum.

Maher Yaghi

I agree with you, Louis. No, the quad play in North America is still not -- really a big seller. We're starting to see some hints of it being used in Europe actually, but it's definitely not -- hasn't gone into North America yet. And when it comes to the use of the cash -- and so, as we delever from the recent transaction, can you talk about -- you still have a very low free cash flow distribution ratio for your dividends and…

Louis Audet

Well, I think this a -- and thanks for asking the question, because it in fact reinforces the earlier answer to your first question. It's all a question of capital allocation and decisions about where you will make the best return. And clearly, we think we can get -- and I think we've demonstrated that we're getting superior returns in U.S. cable.

So we would like to buy more of these U.S. cable as they become available. So I think that's the decision we've made. So as free cash flow grows, so does dividends, but keeping margin to reimburse debt and keeping firepower to acquire further U.S. cable systems which have provided us with wonderful growth this quarter, if you look at the numbers.

Maher Yaghi

And just one last question, a housekeeping. Sorry, if I missed it in the beginning, I was on another call. But can you maybe tell us what was the organic growth rate for EBITDA in the U.S. operation, excluding the recent acquisition? And also, what was your enterprise business revenue growth rate excluding currency fluctuations? And just in terms of that operation itself, you had indicated in the past that you expect it to move into revenue growth rate -- we should see revenue growth in the second half of 2016. Do you still believe that to be the case?

Patrice Ouimet

I'll take this one. So in U.S. dollars without the acquisition, the growth in revenue and EBITDA is about 6.5%, if I take a mix of the two. So it was a very good quarter. Mind you, there was some price increases during the quarter which were a bit faster than what we did last year. But it's a very good performance we had, compared to peers in the U.S.

In terms of the enterprise, without the foreign exchange and it's a mix of U.S. dollars and the pound, it's mid single-digit loss in terms of revenues and EBITDA. And as we're refocusing the portfolio and making other changes that Louis mentioned earlier, we weren't specific -- you mentioned you weren't on the call. But basically, all the actions that were determined to be done over a number of quarters and that was decided last year, we're in the process of doing this right now. And in terms of going forward, for the enterprise side, we still see beyond this year going back to our normal growth for the industry which we feel is a low single-digit. Although for this year, it's a year of transition. So we're planning to be in mid single-digit growth in Canadian dollars.

Maher Yaghi

Sorry, did you say low single-digit as the long-term revenue growth rate for the industry? I thought you had previously said low double-digits--

Patrice Ouimet

I'm sorry, it's double-digit.

Operator

Thank you. The next question comes from Greg MacDonald of Macquarie Securities. Please go ahead.

Greg MacDonald

Let me jump back to the Canadian Cable business. I want to first ask, is there anything unusual in the quarter that would have accounted for a hit to revenue? I don't think there is, but I just wanted to pre-ask that?

Louis Audet

Not, there's nothing special. It was a -- we were just better at doing what we're doing, but there was no silver bullet.

Greg MacDonald

Okay. So let me phrase it this way. It feels to me like there is some pre-unbundling promotional activity going on in the market on the part of all carriers and you made reference, Louis to the competitive offers in the markets.

If I were to look at this and say, it feels to me like there is a reprice going on in cable that will have a sustainable impact on the market, would you say that that's an accurate description? Or am I being too negative on the outlook here, because I put this in context--

Louis Audet

I think you are anticipating -- you are anticipating the events, Greg, in my opinion. I think this will begin happening in March, when the obligation to make Skinny basic and smaller packages available will definitely have an impact on video ARPU per customer.

And the speed at which this transitions will be largely -- we will largely be the masters of our own fate. If we manage this carefully, it will be a gradual transition, where video ARPU per customer reduces, but video EBITDA per customer remains either stable or increases if we play our cards right. So I think -- I wouldn't -- I think your descriptor is -- will probably be accurate later in the spring.

Greg MacDonald

So you don't think so far it feels to me like you've -- well, it's not feeling, there's fiction here or there is fact here. The ARPU on cable in Canada is lower than what the consensus number was. And I think what we're all trying to understand is, whether companies including Bell's IPTV product are repricing the bundles down now, in anticipation of unbundling, to try and get ahead of that potential churn. Do you think that's happening in the market?

Louis Audet

No, I don't think that would be an optimal business decision.

Greg MacDonald

So it's literally, there is competition in the market right now and that's what's affected the result? The revenue is down year-over-year and so I think people are asking that question for that reason.

Louis Audet

Yes, sure. Well, we did lose some customers in the process. We know that. We've -- in this quarter, we've lost less than we had in the past. In FY '15, we lost less than we had in 2014. In 2014, we lost less than we had lost in 2013. So the trend is headed in the right direction, in terms of reducing customer losses. But there are losses and yes, it is having an impact.

Greg MacDonald

Okay. So, a couple quick follow-ons on that, what is the ARPU of TiVo customers higher or lower than the current average ARPU on cable?

Louis Audet

It is higher.

Greg MacDonald

It is higher. So to the extent that you are controlling churn -- because it was a good subscriber number overall. I know you are losing subs, let's face it, all cable companies are losing subs. It -- generally speaking, the customers you are keeping as a result of the TiVo strategy have higher ARPU, so there should be some protection there, right?

Louis Audet

Yes.

Greg MacDonald

What about the broadband sell-through for those TiVo customers? Is that higher or lower than a typical sale?

Louis Audet

No, by definition is higher, because in fact, the two are sold together, right?

Greg MacDonald

They're sold together, right.

Louis Audet

Otherwise, the TiVo experience is truncated.

Greg MacDonald

And then, the final question, Louis, price increases, were the price increases that went through this quarter, what's the timing of price increases?

Patrice Ouimet

It's basically going to be in the February, so February 1. But by the time it basically it goes through with the billing cycle, it takes about a month. So the price increase I was referring to before was in the U.S. That was done in August of 2015, but in Canada, it's going to be in February of 2016.

Operator

Thank you. The next question comes from Bentley Cross of TD Securities. Please go ahead.

Bentley Cross

I wanted to first ask about Louis your thoughts about U.S. cable acquisitions in light of the slide in the Canadian dollar, wondering if you have any views there? If that scares you off at all or if you want to speculate on the state of the U.S. dollar and the Canadian dollar, so you're all guns blazing?

Louis Audet

Please remember, that we have created a freestanding independent financial structure in the United States. So that in fact, in principle we don't have to convert Canadian dollars to U.S. dollars for our net moves in all likelihood.

Bentley Cross

Okay. And just following up on the last question on rate increases, should we expect similar magnitude of last year of CAD2 to CAD3 on internet and cable?

Patrice Ouimet

So I'm sorry, I'm not sure I got the question. You're asking about price increases in Canada?

Bentley Cross

Yes, last year I believe it was CAD2 to CAD3 on cable and internet and you expect a similar magnitude this year?

Patrice Ouimet

Yes, exactly. So there is a price increase of CAD2 on the phone which we did not do last year, but this is a new one this year. We're increasing internet prices by CAD2 to CAD3. And the video is not increasing, however, there's going to be some changes in video with the new rules basically as they come through during the year. So that's going to be -- we're going to make further announcements on video as the year unfolds.

Bentley Cross

And last one from me, I just wanted to follow up on some of the earlier questions on the subs. Obviously, it was a good quarter and TiVo probably driving that, maybe increased internet speeds, I wondered what else was driving that, if there is any other secret sauce that you guys are willing to disclose?

Louis Audet

Well, I think the other aspect clearly is that people understand that our 120 megabits per second service is industry-leading. It is available virtually everywhere throughout the cities we serve and people like it. It works well. It's easy to use and it's industry-leading and competitively priced.

Bentley Cross

As a follow-up to that, Louis, where is Bell's footprint on fiber relative to you guys now? You have an estimate as to what the overlap might be?

Patrice Ouimet

Well, the overlap we talk about normally is IPTV, so not necessarily fiber and that's around 43% right now by the telcos. It's mainly Bell, but by the telco. And in terms of fiber overlap, it's still limited. We don't see it that much. And in terms of speeds, Louis talked about the 120 megabits.

We're at 250 also in certain areas in Ontario. And as you know in the U.S., we've announced that were launching 1 gigabit in Connecticut. And eventually, there's going to be more announcements, either in the U.S. or in Canada as we launch DOCSIS 3.1.

Operator

[Operator Instructions]. The next question comes from Sanford Lee of Canaccord. Please go ahead.

Sanford Lee

I have just two more quick follow-ups. Louis, your comments seem to indicate that you've tempered your growth expectations now to a double-digit at enterprise, kind of pushing it out to 2017. But are you still maintaining the positive free cash flow guidance for 2016 in enterprise?

Louis Audet

Yes, we're. So we're planning to be free cash flow positive. The double-digit growth actually was already planned for the next year, although our single-digit growth -- our mid single-digit growth basically for this year is somewhat lower than what we had planned initially in the year. But double-digit, we weren't planning this for this year.

Sanford Lee

And then, the last one just to follow up on Bentley's with the U.S. cable and in light of the sliding C dollar. I guess the only thing on the negative side is that your consolidated net debt goes up. So how should we keep that in to factor with trying to maintain your investment grade rating?

Patrice Ouimet

Yes. So the rating agencies obviously see through this. So what happens is the debt -- about half the debt is in U.S. dollars and it gets marked to market. So as the dollar moves, we see the impact immediately in the quarter, but the EBITDA takes 12 months to kick in.

So as we all know in the past two years or so, a rapid decline in the dollar and it has not reversed since then. But as we look at the EBITDA, pro forma EBITDA with a stable currency for full-year, then you can do the math and basically you see the leverage going down. So this hasn't been an issue. And we also have ample room basically where we stand with our rating.

Operator

[Operator Instructions]. There are no further questions at this time. Please continue.

Patrice Ouimet

Okay. So we're going to wrap up. Thank you everyone for being on today's call and we're looking forward to talking back to you for our second quarter results. And we'll be issuing a press release on the exact timing of it. In the interim, we remain available for questions.

Louis Audet

Thank you, everyone and happy New Year and all the best to everyone.

Patrice Ouimet

Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the conference call for today and you may now disconnect your line and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!