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Executives

Pierre Gagne – Vice President, Chief Financial Officer

Louis Audet – President, Chief Executive Officer

Analysts

Peter McDonald - GMP Securities

Greg McDonald - National Bank Financial

Vince Valentini - TD Newcrest

Rob Goff – Haywood

Bob Bek - CIBC World Markets

Dvai Ghose - Genuity Capital

John Henderson – Scotia Capital

Cogeco, Inc. (CGO) F1Q08 Earnings Call January 10, 2008 11:00 AM ET

Operator

Good day, and welcome to the Cogeco/Cogeco, Inc. Q1 Earnings Conference Call. This conference is being recorded [operator instructions].

At this time I will turn the call over to Mr. Pierre Gagne, Vice President and Chief Financial Officer, go ahead, Sir.

Pierre Gagne

Thank you, good morning, everybody. I have with me Louis Audet, President and CEO, Alex Tessier, our Treasurer, Marie Carrier, Director of Communications, and Éric Simon, Director of Financial Planning.

Of course, this call is subject to theSafe Harbor provision, the usual forward-looking statement provision included in your press release that was released in fact last night. We recommend that the listener read the section in the press release that goes together, of course with this call.

Before we go to our question and answer period, Louis Audet would like to make come comments on the Q1 results.

Louis Audet

Thank you, Pierre, and good morning, ladies and gentlemen. Welcome to this conference call and Happy New Year to you.

The first quarter of fiscal 2008 has been very good. We have continued to growin radio and in cable very nicely, and I will address cable first.

The financial results of Cogeco Cable are among the best in our history. We have recorded very good sales growth of 13.4% compared to last year same period. Excellent EBITDA growth of 17.5%, our EBITDA margin has risen to 39% consolidated. Free cash-flow is at $21.6 million and RGU growth has been a very good 83,000.

We are on track to achieve our guidance, which we maintain unchanged, except of course, for the income tax adjustment to be reflected in the second quarter. This would bring our net profit to $118 million, which will bea record number for this company.

In Canada we have had good RGA growth. We benefit from a rational business environment. We are well exceeding management’s original expectations for Canada, which is more than compensating for the softness that we have witnessed inPortugal.

In Portugal, their pricing environment is evolving into a more rational environment. We are now adjusting to the fact there is one more competitor inthe marketplace, which, of course, was fully anticipated, everyone knew this was coming. Now the adjustment process is underway. Portugal, as you know, was acquired because it was a good source of future growth. It haslow basic penetration, low basic high-speed Internet penetration and is a reservoir of growth for the future for this company. The prospects for Cogeco Cable are extremely good for 2008 and for years to come.

On the broadcasting side now, radio continues to grow nicely on the sales and EBITDA fronts. Audiences continue to grow and we are very satisfied. On the television side, as you know, TQS is currently under the protection of the Law of Arrangement with its creditors. This marks our withdrawal from general interest television, and will be considered as a discontinued operation as of December 17th.

Hence, we’ve revised our Cogeco, Inc, guidance to reflect the disappearance of TQS and include the income tax benefit, as well, in our forecast. Hence if you were to remove the write-off related to TQS, you would find that our net income hasin fact risen 25% in Cogeco, Inc compared to last year.

That complete my comments and we would be delighted to answer your questions.

Question-and-Answer Session

Operator

Thank you [operator instructions]. Please stand by for the first question. The first question comes form Peter McDonald, GMP Securities, please go ahead.

Peter McDonald, GMP Securities

Thanks, can you quantify the higher operating costs inPortugal? How much was marketing and how much of that was re-branding versus back to school promos and was there a specific component specifically related to TV Cabo?

Louis Audet

We’re mentioning that we have a higher cost, when you look at that plus the certification it represents roughly close to €1 million. In fact, if I could expand on your question, when you look atthe results inPortugal in euros, our revenue has increased by 4.5%. You see 2.8% on the press release, that's the effects of foreign exchange. Of course that is 14363 last year and 14119 this year. If you look atit in euros the revenue has increased by 4.5%.

When you’re excluding the additional marketing and the C198 which came close to €1 million, you see that the EBITDA in euros denominated increased by about 4% to 5%. That’s what happened roughly during the quarter. I know when you look at itin Canadian currency it looks a bit awkward, but this is what happened in euros.

Peter McDonald, GMP Securities

Last quarter you talked about having optimism that you’d be able to exceed the 37% margin expectations on a full year basis in Portugal. Are you still moving toward that number?

Louis Audet

What you will see, we’ve seen that with the pricing situation in Portugal, we’re starting to see some changes inthe pricing with our main competitor. We think that this change will continue in the quarters to come. It’s a bit early to see if we’ll achieve it. We said we would achieve it by this stage, we haven’t changed our guidance.

To answer your question more accurately, we will need another quarter to seethe progress in terms of pricing competitiveness is evolving toward a more rational level. We see some good signs right now.

Peter McDonald, GMP Securities

If you are unable to put forward any pricing increases for the year, what do you think a reasonable expectation on EBITDA margin would be?

Louis Audet

We’ve already put through arate increase this year, they would average across the board about 4% and they’ve taken effect January 1st. They were, of course, announced around December 1st, and we would expect then to have a drag effect on customer acquisition in December.

Peter McDonald, GMP Securities

Lastly, because we don’t have a Q1 comparison number for your basis, can you give us an idea of the seasonality that would ordinarily bein Q1 versus the rest of the year?

Louis Audet

Typically this is a growth market, it’s a low penetrated market, basic is penetrated in our system about 34%. Typically what you do have is a continuous upward trend, I don’t think it’s a question of seasonality, it’s a question of basically penetrating further and further and rising. Of course no curve is a perfect straight line, sometimes it goes above the line, sometimes it goes under. The general trend, of course, is upward.

Peter McDonald, GMP Securities

Okay.

Operator

Your next question comes from Greg McDonald of National Bank Financial. Please go ahead.

Greg McDonald - National Bank Financial

Thanks, good morning, guys. The question is more of a strategic review than a question. I don’t to debate the subscriber outlook. I think we’ve seen what happened in Portugaul. You’re somewhat saying that the RGU guidance is probably a little more at risk than what is the case inCanada. Overall I think we can all agree that subscriber growth is showing signs of maturity. I think on that backdrop a lot of people would agree with me on this, at least in Canada Cogeco’s footprint is such that you probably have less risk of IPTV threat relative to companies that have more subscribing customers in urban markets compared to your more suburban outlook.

Given the fact that you’ve got less of an IPTV threat I wonder if you might indicate to us as the market transitions to a more mature subscriber growth is the company willing to take a more aggressive bundling strategy. I’m not talking about stand-alone pricing, but bundling pricing to achieve the RGU guidance, or to achieve more of a focus on RGU growth relative to margin growth. I’m thinking more of Canada when I’m asking that question.

Louis Audet

I will attempt to answer your question, I will cover Canada, but I’ll cover more than Canadain answering your question.

We perceive our role as manager for shareholders to optimize the profitability of the company. That’s what we perceive our role to be. Hence ina maturing Canadian environment our success should not be based at the speed of which we bring in RGU. It should be based on how much profit we deliver to the shareholder. When you do have a maturing environment, then you have an obligation requirement to find new sources of growth, our decision to look outside of Canada for, in effect, reservoirs of future growth, how fast that growth occurs depends on the specifics of each market.

We have an example here in Portugal where in the very first year, we exceeded our expectations by very high amounts, so we’ve had wonderful success. Now there’s a disruption because of the competitive situation and you look atthe first quarter and from the meetings that I’ve done this morning, I guess some of you are disappointed with that.

Cumulatively speaking we’re very happy. There are factors across markets, which can occur, but our key responsibility in a maturing Canadian market is to find other reservoirs of growth and this is what Portugal does for us. It’s penetrated, as you know today, basic penetration of our system is about 34%. In the country as a whole video penetration is at 50%. High-speed Internet penetration is at about 35% in the country as a whole. This points to room for substantial future growth, hence our interest in finding other reservoirs of growth, which we are doing now.

Greg McDonald - National Bank Financial

That's helpful, thanks. Can I ask a quick follow-up? With respect to Canada, because it is at a bit of a different maturity level can I take your comments as being long-term profitability or near-term. I’d actually argue and have for some time that I think the cable industry here should continue to press the accelerator on subscriber growth for future profitability. Because you have a window of opportunity for growth right now as the telcos are kind of stuck without a significant broadband product for both television and high-speed data, would you agree with that?

Louis Audet

I think your though is an interesting one. Whether it will cause us to change our behavior, I couldn’t answer that question right now.

Greg McDonald - National Bank Financial

Okay, thanks for your response.

Operator

Your next question comes from Vince Valentini of TD Newcrest. Please go ahead.

Vince Valentini - TD Newcrest

Thanks very much. Maybe a more direct question to what Greg was getting at is: the rate increases in Canada this year, any thoughts at this point? Are you thinking along the same time frame of the March/April rate increases that you put in last year?

Then just a specific question, in you end-of-the-year release you talked about a $100 million new debenture issue being done on a private placement basis. I’m curious what that relates to. Are you raising funds to prepay your bonds coming due later this year’s or what are those funds earmarked for? Thanks.

Louis Audet

Perhaps I could address therate increase question and Pierre will address debenture question.

We’ve taken note of the fact that both satellite companies are adding a $3 digital access fee to their invoicing. As you know philosophically, we are convinced that the products and services that we sell are very valuable for our consumers. From a theoretical standpoint, we will follow suit with our usual rate increase strategy. What that translates into concretely in terms of how many dollars on which product, when, is still inthe development stage. There is an issue of market-share, profitability and optimization, which we will look at.

Philosophically, we’re not the price setter, but we do follow the rate increases.

Pierre Gagne

With respect to your second question, Vince, in effect we have the maturity in October ’08 of 150 US. If you remember back in 2001 we had the foreign exchange contract at 1.5910 which amounts to about 240 million Canadian. We have another maturing in June ’09 of 150 million, so yes, it’s pre-financing.

Vince Valentini - TD Newcrest

Okay, thanks.

Operator

Your next question comes from Jonathon Allen of RBC Capital Markets. Please go ahead.

Jonathon Allen – RBC Capital Markets

Thanks very much. Two big-picture questions for you, Louis, first going back to Portugal, I agree with your comments that since the acquisition in 2006 results have been much better than the investment community initially feared. But the last couple of quarters with the increased competition on pricing, it is a disturbing trend, especially when we see EBITDA declines this quarter even with the foreign exchange impact excluded from it. It brings to mind that you paid 13 times for the asset a few years ago when it was growing EBITDA 20% to 30%.

The question for you is, this near-term trend that we’re seeing, is this actually something that concerns you? Secondly, can you actually do something about it or is it just a matter of waiting to see if your competitors improve their pricing? Is there anything that you can do as far as repositioning the business to actually get revenue and RGU growth accelerating? Or is ita matter of passively waiting to see if your competitors can do something.

The second big-picture question is with TQS now in creditor protection, there’s really not many assets other than a few of the radio stations at CGO, and I kind of question why we still have two independently trading stocks and is there a desire to combine those two and save some of the public company costs? Thanks.

Louis Audet

Thank you. To your first question, am I concerned? Of course, I'm like everybody else, I like to see double digit EBITDA growth. On the other hand, am I surprised? No, I’m not surprised. We knew this was going to happen. You can not have an independent cable company spin-off from the incumbent Ilec [ph] and expect nothing will happen. Of course, something will happen. Of course, it’s fully understood the moment you enven consider making a transaction like that you know there are going to be pockets of warm air along the way and that’s a risk you accept. You think the asset, in the longer-term, and I do, and we all do, is worth a lot more and constitutes a very good reservoir of future growth.

What can you do? We currently are rated as one of the most reliable services inthe country ahead of our competitors on the range of our services. I think that’s akey differentiating factor that consumers have inmind when they make a decision. We can adjust our expenditures. We can adjust some of our packages. There are a number of things we can do and we are doing. This should not come as a surprise to anyone and it should not be made for more than it actually is, either.

With regards to your second question, I understand the question. The expenditures associated with having public companies arein fact very small. The two-tier structure is one that allows the shareholders of Cogeco, In. to maintain control. And allows Cogeco cable to finance itself and it’s future growth with ample room to do so. So there are no immediate plans to combine the two.

Jonathon Allen – RBC Capital Markets

Instead of asking if there are immediate plans, though, the question is from a Cogeco, Inc. shareholder perspective is hasit traded a significant discount to the net asset value? From the Cogeco, Inc. shareholder perspective, it would make a lot of sense to combine the two unless you were planning to make additional media acquisitions along the way, which would actually put additional assets atthe Inc level.

Louis Audet

Well, thank you for voicing your opinion.

Jonathon Allen – RBC Capital Markets

Okay, thank, Lou.

Operator

Your next question comes from Rob Goff from Haywood. Please go ahead.

Rob Goff - Haywood

Thanks very much, two questions, if I may. First one will bea simple one with respect to your plans inPortugal with an MVNO, in that PTN has discussed doing so in I think Q3 of ’08. The second one is more of a broader theoretical question once again on Portugal. Could you see or conceivably consider a scenario where PTN and Cabovisão were more coordinated and the country was rationalized so that it was more of a cable versus the bigger competitor PT. Soit would be more of a two competitor market versus three?

Louis Audet

That's an interesting question. We have no plans to do that.

Pierre Gagne

Maybe to cover PTN Cabo, of course what you seein North America, the players have a more rational approach. That's always welcome when you’re competing against telco. That’s an interesting thought that you’re bringing here. I guess with PTN, they have new management now. They are getting in place. I guess we would have to see how what you’re proposing would make sense and how it could take place. Again, there is always the competitive nature in our business.

But I agree with you, pricing should be more rational. It would make more sense for everybody, and everybody would benefit from that.

Louis Audet

With regards to the MD&O, quite frankly, the fact that a key competitor is going to do it, for us is not sufficient that it’s the right thing to do. Sometimes you have to do something. We have no evidence yet that this is something that we ought to be doing. We’re not dogmatically opposed to doing it, as we aren’t inCanada, by way. We just do it when we think it’s the right thing to do, and until then, we don’t. I think we’re approaching it with a very open mind.

Pierre Gagne

Let’s not forget that inPortugal the mobile penetration is 112%, whereas inCanada it’s about half of that number. It’s a different business case inPortugal than it would be inCanada.

Rob Goff - Haywood

Okay, thank you very much.

Operator

Your next question comes from Bob Bek from CIBC World Markets. Please go ahead.

Bob Bek - CIBC World Markets

Just to clarify on the competition situation in Portugal, the fierce competition you talked about in the quarter, when you did Q4 in late October you talked about the pricing through to late October, then the rational price increase. This is still what we’re talking about in this quarter, right? That’s the effect we saw in Q1, and after October 16th you saw some more rational pricing from competitors, is that the case?

Louis Audet

Yes, it is the case. Of course, it’s hard to cut these things with a knife, so it does have an effect on more than one quarter.

Bob Bek - CIBC World Markets

Okay, so it’s a continuation of what we talked about in Q4 then.

Louis Audet

That's exactly right.

Bob Bek - CIBC World Markets

Okay. Related to that, could you talk about the strategic plan issued by YPTN in December? It’s pretty aggressive growth goals, I guess by them. In particular, one on expanding homes past, materially past the outskirts of existing cabled areas. Is this anything that you would say you would not have expected or that you see as a bit more aggressive than you would have thought in the past?

Louis Audet

I think there are no surprises in that strategic plan. I think it’s what you would expect a newly turned public company to say it’s going to do. Based on our experience, we think management is going to come to the realization that they can’t, probably it’s going to be difficult to do everything. Probably they’re going to have to decide what they do. Of course, maintaining your share price and generating profits to ensure that you maintain your share price is also a key consideration.

I think what you see is an announcement that was fully anticipated by us and could be expected for a new public company. Now they have to generate returns for their shareholders as we do. It’s the best I can say about that.

Bob Bek - CIBC World Markets

That makes sense. Thank you. On the digital launch, it was launched in Q1, but there are no subscribers to talk about by the end of the quarter, is that the case?

Pierre Gagne

What we’ve done is the first step we ‘ve taken, Bob, is convert analog converter to digital converters for PTB services. The next step, which we are within weeks of launching is to offer a service or a package, like a tier, if you will. If you want to compare it in Canada, it would be digital. We’re within weeks of launching that. We may be behind a few weeks, but not more than that. We’re still comfortable with the target for digital.

I wouldn’t read too much on this for Q1.

Bob Bek - CIBC World Markets

Thank you, just one more question, if I could, for you, Pierre, the interest expense, you’re pacing below the reiterated guidance of 72 million. Can you talk about the Q1 pace?

Pierre Gagne

What you may see is how the market evolved. We’re planning to do some initial tests. We did this one, we were planning to do more, when we spent the budget. As you know we’re looking for some euro debt last summer, which didn't come out. We’ll have to see how things evolve during spring time.

In any event, when we announce our results in April for Q2, we will have a revised guidance taking into consideration how things are going in Canada, Portugal, interest rates and so on and so forth with fresh, clean guidance. On the EBITDA line of 425, we’re extremely comfortable with that number.

Bob Bek - CIBC World Markets

Okay, thank you very much.

Operator

Your next question comes from Dvai Ghose of Genuity Capital. Please go ahead.

Dvai Ghose - Genuity Capital

Thanks very much. My first one is a big-picture question for Louis. Does the experience in Portugal make you less like to invest in a cable over-build environment in the future?

Louis Audet

I think this is way too early to draw such a conclusion. You’re in a marketplace where the household density is double what it is in our franchise in Canada. You have one more competitor. I think it’s way too early to draw such a conclusion. We, in fact, maintain our original view, unless proved wrong, of course. This is a very good source of wool, whether it occurs in the fifth or the sixth quarter of what is a long-term investment that is counted in decades, is an interesting. But it shouldn’t worry you too much.

Dvai Ghose - Genuity Capital

I think that's fair. Coming back to Bob’s question, in the past you said about 60% of Cabovisão’s homes passed to overlap by TV Cabo, given the more aggressive build-out plan since the spin-off, has that number changed and is it likely to change in your opinion?

Louis Audet

I think that you can expect that it will change. Sure, I think you can expect it to change.

Dvai Ghose - Genuity Capital

Okay, would you respond with a more aggressive over-build in their territories as well?

Louis Audet

Our job is to make money. So we do what we think is the right thing to do to make money. I don’t have an easy answer for you. But I can tell you that’s our job, it’s to make money and that's what we spend our time thinking about.

Dvai Ghose - Genuity Capital

Okay, two last quick ones, if I may. You alluded to the fact that a lot of the competitive pressures that we saw atthe end of the fourth quarter and the beginning of the first quarter suggesting that with rate increases, more favorable currency and so on that conditions may be improving in Portugal on a financial as well as growth basis. Is there any evidence that you can give us of that in terms of perhaps run-rate of RGU growth or revenue or capital growth inthe second half of the quarter versus the first? Can you give us an idea of the progression?

Pierre Gagne

It’s difficult to look atit this way, but I just want to explain that when you want to compare Q2m the currency last year was at 1.51 Canadian per euro and right now we’re trending at about 1.46-1.47. You will have, let me out it this way, a $0.05 difference quarter-over-quarter. With the price increase that we pout in place in January should improve on our results. It’s very difficult to cut itthe way you want us to at this stage of the game.

Dvai Ghose - Genuity Capital

Makes sense. This is the last question and I think I know your answer. The AWS rules in Canada have obviously been very enticing, potentially for new entrance. Not enough to change your mind?

Louis Audet

At this stage, no.

Dvai Ghose - Genuity Capital

Okay, thanks very much.

Pierre Gagne

We’ll take one last call.

Operator

Your last question comes from John Henderson at Scotia Capital. Please go ahead.

John Henderson – Scotia Capital

Thanks very much. First off RPU inPortugal looks as if it did correct in euros by about almost 5% inthe quarter on a revenue per RGU basis. I wonder if you could comment, is that particularly retention initiatives inthe quarter, or what might have brought that down? Then is that a new level from which we should see price increases applied?

Louis Audet

I’m sorry, you said that the RPU was down?

Speaker

Well, your RGUs are up 9%, your revenue is up 4.5%.

Louis Audet

I think what you should think of it as, there were some promotional pressure that bought our RPU lower. These promotional pressures are abating and we have added rate increases to that.

John Henderson – Scotia Capital

Okay, that’s kind of what I expected as an answer. Turning to Canada, margin improvement has been really nice over the last few quarters. In fact, three quarters ina row you exceeded 45% margins excluding the management fee. Q2 last year showed some margin weakness on increased costs, down at 43% margins. I was wondering if there were certain one-time elements last year, in second quarter, or we should expect these 45%-ish margins sustainably?

Pierre Gagne

We had abig push, if you remember, last year on the RGU in Canadain telephony and opening up new areas and so on and so forth. I’m going now with my memory, which is often not that great. We had that situation, I my memory serves me well, on the Q2. As we said, once we reach a certain level of penetration for telephony, after that, the EBITDA margin is improving and we’ve said that, if you remember late fiscal 2006. We said as the penetration for telephony improves this will drive somewhat the EBITDA margin, You see that in the quarters for the second half of the year and this year. We are anticipating improvement of the EBITDA margin. I wouldn’t venture to say over time, but we should improve our EBITDA margin nicely over this year.

John Henderson – Scotia Capital

I’ve got to point at 24% EBITDA growth in EBITDA growth in Canadian operations as outstanding. I just have one last follow-up on TQS. Would you say that it’s kind of EBITDA positive right up to December 17th?

Pierre Gagne

It’s hard to say December 17th. It was positive Q1, but we knew as we were coming into Q2 and the Q4 that it would be more difficult. You've seen the sales and the revenue that were done. It’s hard for us right now to estimate what will be, or to consolidate the revenue up to December 17th. I don’t have an exact figure of what it will be. We should anticipate a meaningful figure in terms of time whether it’s positive or negative.

John Henderson – Scotia Capital

Okay, thanks very much.

Pierre Gagne

Thank you, this completes our conference call. The next one is scheduled around April 10th, Friday. If you have further questions, Alex and I are available to answer these questions. Thank you for your participation and have a great day.

Operator

This concludes the conference call for today. Thank you very much for your participation and have a nice day.

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