Patrice Ouimet - Senior Vice President and Chief Financial Officer Louis Audet - President and Chief Executive Officer

Philip Wong - Barclays Capital, Inc. Jeff Fan - Scotiabank Vince Valentini - TD Securities Rob Goff - Euro Pacific Sanford Lee - Canaccord Genuity Inc. Maher Yaghi - Desjardins Capital Markets Drew McReynolds - RBC Capital Markets Tim Casey - BMO Capital Markets

Good day and welcome to the Cogeco Inc. and Cogeco Communications Inc., Q2 2016 Earnings Conference Call. Today's conference is being recorded. And 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.

Good morning everybody and welcome to our second quarter conference call. Joining me today are Louis Audet, President and CEO; René Guimond, Senior Vice President, Public Affairs and Communications; Andrée Pinard, Vice President and Treasurer; Pierre Maheux, Vice President, Corporate Controller; and [indiscernible] Vice President and Corporate Development. Before we begin this call, I would like to remind listeners that the call is subject to forward-looking statements which can be found in the press releases that we have had issued yesterday for Cogeco Inc. and Cogeco Communications. I will now turn the call to Louis Audet before we proceed with the questions and answers period.

Thank you Patrice, and good morning ladies and gentlemen and thank you for joining us today to discuss the results of Cogeco Communications Inc., and Cogeco Inc. for their second quarter of fiscal 2016. We are pleased with the results presented by both Companies’ which are reporting industry leading growth in PSUs and financial results. Let us begin with Cogeco Communications. Revenue was up 8.3% to reach CAD551.5 million, adjusted EBITDA is up 7.4% to reach CAD248.4 million. These results are in line with our fiscal 2016 guidance which remains unchanged. A quarterly dividend of CAD0.39 per share up 11.4% compared to last year has also been reconfirmed. Let us now look at the individual components of Cogeco Communications. At Cogeco Connexion, we have managed to reduce our video and telephony losses in the second quarter. Our TiVo and retention strategies are showing strong traction. Note that revenue and EBITDA growth has been in the 1% to 3% range which is quite good in such a competitive market. TiVo and our industry leading 120 to 250 megabits per second Internet service continue to be well appreciated by customers. We have successfully launched our new video bundles on March 1 as well as a la carte channel offerings ahead of the December 1 regulatory limit. Some migrations are occurring at an orderly pace and we are focused on protecting our video EBITDA margin not necessarily ARPU. At Atlantic Broadband, revenue and EBITDA in U.S. dollars continue to grow in the 18% range as in the first quarter with 6% being attributable to ongoing operations before the Connecticut acquisition. This is supported by strong organic growth at the Connecticut System acquisition which accounts for the other 12% in U.S. dollars. We continue to build a strong book of enterprise business in the Miami market most recently with the signing of the Panorama Tower, an 83-story mostly residential building, the tallest in the State of Florida. 1 gigabit per second service will be launched in this calendar year in Connecticut. At Cogeco Peer 1, we have suffered our first quarter of slight negative growth compared to the same period in prior years. However, we continue to implement a plan that we developed last summer. All key sales and marketing positions are now filled. Of course the position of Vice President Sales and General Manager in the United States had been filled last September. More recently the position of Vice President Sales and General Manager United Kingdom, Europe, Middle East and Asia was filled January 1, 2016. The position of Vice President Sales and General Manager for Canada was filled on April 4, 2016. And the position of Vice President Marketing was filled yesterday. So we now have all of our key positions filled with highly capable people who will help us to resume growth beyond 2016. Turning now to Cogeco Inc., revenue is up 7.7% to reach CAD578.5 million, EBITDA is up 10.1% to reach CAD252.1 million. These results are also in line with our previously published guidance which remain unchanged. Our outdoor advertising business having been sold at a profit of CAD12.9 million on January 5, 2016. Our media results going forward are based on our radio assets only. We continue to perform well in the radio market of the province of Québec with top audience ratings. A quarterly dividend of CAD29.05 per share up 15.7% compared to last year has also been reconfirmed. In conclusion, we are focused on delivering good results through an emphasis on sales and tight cost operating controls. We continue to seek value creating opportunistic acquisitions especially in cable in the United States. We would now be ready to answer your questions.

Thank you. [Operator Instructions] And our first question will come from the line of Philip Wong of Barclays. Please go ahead.

Hi, thanks, good morning. I have a question on the wireless side of things and you are now the only sort of major cable company in Canada without a wireless offering. And so I wanted to Louie maybe get your thoughts on what you think about the potential to or what alternatives might be available to you? Are you guys still interested in expanding to wireless or are you assessing those alternatives and what are some of those alternatives available to you that you believe might actually work that might suit your business going forward?

Sure. I'll be happy to give you our point of view, but let me just though try to establish what is really important. We came to the conclusion a long time ago that you do not need to own a wireless property to be successful in cable. Now I am not saying that owning a wireless company is not interesting. It’s highly interesting in and of itself if you can afford it and that's good, but the fact that we do not own such an operation is not a detrimental factor to the operation of our Company. Now having said that if there were an opportunity to get involved in wireless on a profit-making basis we would, but of course given the state of the industry today this would have to be through some sort of MVNO arrangement. And to date negotiating such arrangements in Canada has proven to be a bit difficult, but if ever it becomes easier we would be delighted to do so.

Just as a follow-on to that with Shaw having acquired Wind and obviously the footprint for Wind that is most relevant to Shaw obviously Western Canada leaving the Ontario business as sort of a business that I would imagine could be a potential interesting business for – maybe to us? Do you see any potential for partnership with Shaw on Wind maybe not an outright acquisition of that business, but potentially to partner and to have some sort of arrangement where you can also get favorable rates on Wind, but also contribute some capital to help Shaw build out the Wind business, is that something that an alternative that you guys would consider? I know you’ve said that you don't want to build a wireless network from scratch, but it’s kind of a hybrid if you will between sort of a MVNO arrangement and actually owning a wireless business outright?

Well, I think the Shaw have made a brilliant move. They've acquired a great property that has outgrown its launching challenges. It’s now a great business. I think they've done a super move. They have about 700,000 customers in Ontario which is absolutely fantastic; it’s a great business in and of itself. If ever they want to work with us in partnership we’ll be delighted.

Thanks very much.

[Operator Instructions] And we will now go to our next question from Jeff Fan of Scotiabank. Please go ahead.

Thanks good morning. Couple of questions, one just on the U.S. Cable business. You have been doing pretty well in terms of the video trends for the last few quarters with TiVo, but this quarter seen a bit of reversal on the losses seem to have increased from last year. I’m wondering if you can talk about what cause that is that just a competition or is that cord cutting. I wondered if you can shed some light. And just along the same lines on the video side of the business you have TiVo now deployed both USA and Canada. From a solution perspective I guess are you tied – how tied are you to the TiVo platform especially when it comes to the next generation video services i.e. IP video, next-gen user interface et cetera. Wondering if you are open to other solutions or other partnerships now just trying to get a sense to how tied you are to the TiVo platform? Thanks.

Okay. So I’ll take the first one basically on the – our performance in the U.S., it's true that the video losses are higher than usual, but it's not something that's a trend we believe. What it is basically we have a limited number of losses that we have on the quarterly basis and then what happened this quarter is two things, so we decided to exit some non-profitable business from our Connecticut System we just bought and typically those - some of the bulk arrangements that we have when we acquired business can be non-profitable and obviously require work, so that's a portion of that. So no impact on EBITDA from that standpoint and we did convert a few MDUs from bulk, so that means we serve the whole tower to retailer which means we serve a portion of the tower, the pricing points are quite different between the two. And again this was the choice we made that which is either neutral or positive from an EBITDA standpoint, so we would not – we don't see any other trends than this it was choices we made this quarter.

Would you say your losses would have been pretty consistent from history if you didn't have this bulk change?

That’s right.

Okay.

Now with regards to the second part of your question, we have arrangements with TiVo, they are flexible. They have on their roadmap the migration to IP distribution. There is no urgency to convert to IP distribution. IP distribution provides no visible improvement to a customer service, all it does is that it allows the operator to further optimize the use of his bandwidth. So we are comfortable that the positioning of that transition on the TiVo roadmap is appropriate and if ever we ran into difficulties we could change supplies.

And maybe I can squeeze one more in on the cable side particularly in Canada. Internet numbers look like it's getting stronger. I wonder if you just give us an update of what you're seeing customers doing with respect to broadband, I guess anecdotally or maybe some of the trends that we are hearing about is just that consumer – obviously demand continues to go up and that’s with higher-speed usage demand so.

So traffic continues to rise at the speed of about 40% a year. That has not abated yet, it continues to be very strong and people increasingly watch on the Internet video programming, so our offering at 120 megabits per second, which is really the best in our marketplaces widely available, of course 92% of the footprint makes it a very attractive service for consumers to buy from us. So that's why they're coming to us.

Any plans for DOCSIS 3.1 in your roadmap in the near medium-term?

Sure, if and when it's necessary we’ll do it. We could already offer if we wanted 1 gigabit per second service on DOCSIS 3.0 and we could further optimize by moving to DOCSIS 3.1 and plan on doing so when the moment is right. But we try not to spend capital until it becomes required to serve our customers.

Okay. Thanks, Louie.

Thank you.

Our next question will come from the line of Vince Valentini of TD Securities. Please go ahead.

Yes, thanks very much. Two questions, first building on what Jeff was talking about the improved Internet sub ads. Can you give us an update on the resellers in the wholesale market? Do you see much of tech-savvy and the other resellers in your territories and do you have any concerns about the recent CRTC changes to the wholesale access rates that could maybe make those guys a little more competitive?

Well, we will be in the process of submitting our cost analysis, so we'll see what comes out of there. To date this competition has not been detrimental to us and it's interesting to note by the way that third-party access has been mandated on line-based services and not on wireless services, which is really an imbalance in the system which is difficult to explain. But having said that, I would rather say that we enjoy the position we're in right now.

Okay. And second you mentioned in your opening comments, still looking opportunistically for acquisitions in the U.S. Is that something you think is getting a little bit more on the front burner or is just your normal commentary that it could happen over the course of years?

I think we're in a position where we could do acquisitions if they present themselves, if they make sense, if they are profitable for our shareholders, but that's never stopped the history of this Company ever since 1987, 1986 has been that half of the growth on average came from internally generated initiatives and the other half came from acquisitions and this will in principle not stop, you know it can or can be periods where it's one more than the other, but if you look at it over the longer term it’s both contributing to the growth.

One other thing, Patrice can you just remind us in your guidance what is the FX assumption for the year that you are using?

We are using 135 for the U.S. dollar.

Thank you.

Our next question will come from the line of Rob Goff of Euro Pacific. Please go ahead.

Okay. Good morning and thank you for taking my questions. The first one would be on the TiVo side. In generalities could you give us an indication or feel for how effective that’s being as a churn reduction tool, is churn going down by 20% where you have TiVo out. Could you also talk to the revenue uptick that you are seeing with the new users?

Yes. The Canadian market being somewhat more competitive, TiVo is effectively more of a retention tool that helps us neutralize the competition. In the United States where there is somewhat less competition it actually serves as an acquisition tool and is devoted to higher-paying customers.

Okay, thank you. And you made a reference to protecting the Canadian cable margins associated with the skinny basic et cetera. Was the margin reference there one of an absolute dollar figure protection or was it EBITDA as a percentage of revenue reference?

It is clearly an absolute dollar protection. The percentages are very interesting, but it's the absolute dollars that we’re interested in.

Perfect. Thank you.

Your next question will come from the line of Sanford Lee of Canaccord Genuity. Please go ahead.

Hi. Louie, can you just give us a quick update on the IPTV overlap with Bell. I think you said it was 43% just wondering how aggressively they've been in your territories?

I’ll take this one, Sanford. So basically there has been not really a change according to our market intelligence on it. So we’re still at 43%, you know this is not necessarily always a very precise number. So we haven't seen this so we change this year – so far this year especially since the last quarter.

Great. And on the Canadian cable results very good, I think it was down 0.6% the best across the country. Can you maybe just give us an idea, if you look at the different buckets of where you can have improvements and that would be new homes growth, competitive wins, and reduced churn? Can you give us a general idea where the majority of your wins and benefits are coming from?

I think we’re being more attractive to the consumer which in effect has less people disconnecting, more people enjoying the industry-leading benefits of the TiVo service. The industry-leading benefits of a 120 megabit per second service in 92% of our footprint, all the way up to 250 megabits per second in some areas of our footprint. And also with very competitive phone packages. So these are so attractive that our – we are managing to control the churn in a much better way. Now, if I may as an add-on to what Patrice has already said, the percentage overlap with IPTV is an interesting figure, but I think now in the industry, we reached a new stage. The new stage is that whether the service is called IPTV or FTTH or whatever you want to call it, it has become immaterial because what counts for the customer is what he is getting in his or her home. The TiVo service is the most advanced currently available in Canada. I won’t go over all the benefits that we've done before in prior calls unless you ask me to, but these are unique and the high speeds of the Internet service are also unbeat as of now in the country in terms of wide availability. So the fact whether it’s IPTV, FTTH or whatever it is, it no longer matters. What matters is the service into the consumers home and how he feels about the services he's getting.

Great I agree with you there and I guess when I was looking at the 43% I’m kind of pertaining that’s a [indiscernible] with FTTH or FTTP. One last question if I could on the enterprise obviously the results have been much weaker than expected taking a lot longer [indiscernible] you’ve got a lot of the sales and marketing team now finally in place, but at the end of the last call you had indicated you were targeting mid single-digit growth enterprise for 2016. It sounds like you are now not really expect any growth for this year, is that true? And then for 2017 would you be expecting to get that 15% industry growth rate?

So you're right, obviously our results have not been what we were expecting them to be so – actually for this year we’re planning to be flat basically in terms of performance as opposed to the growth we were planning initially and basically with all the measures we have taken and still taking that we alluded to earlier the plan is to resume growth in the New Year. Given that we will come out with guidance for 2017 the next quarter we would rather wait for this quarter to provide more flavor for where we are heading with that particular business unit in 2017.

Okay great and one last follow-up question to Phil’s, you mentioned that it would delighted to work with Shaw on the wireless front was that more on the MVNO side or would you actually consider like some type of joint co-build venture with Shaw?

I don’t think they need a co-builder for their enterprise I think they are doing quite well as they are. Thank you.

Okay. All right, thanks.

[Operator Instructions] And we will now take our next question from Maher Yaghi of Desjardins Capital Markets. Please go ahead.

Yes, thank you for taking my question. I wanted to if you can provide maybe some metrics to describe the current penetration or installed base for TiVo in your networks both in the U.S. and Canada. So that we can appreciate maybe how much of the help that you have seen so far come from TiVo and how much more we can expect if those penetrations increase. And the second question I have is more to do with your upcoming capital deployments, when we look at your CapEx profile can you talk a little bit about where we are in the current CapEx cycle both in Canada and in U.S., are we are at the high end or we in the middle or is there another phase of CapEx deployment that we should expect when you start maybe becoming more aggressive in deploying DOCSIS 3.1 or maybe NFV/SDN in your network?

I’ll answer the first part of the question and Patrice will answer the second part. The penetrations for TiVo we don't really disclose these numbers. However, it is clearly establishing Cogeco Communications and Atlantic Broadband as clear leaders in terms of video quality in the marketplaces we serve. I would also like to add and this is very important that you will probably have seen a press release come out in the last week or two indicating that for the seventh year out of the nine last year's Cogeco Connexion has earned the title of the best service in North America for catering to customer needs as given out by service quality measurement group. This is for all of North America. So it’s two things, it’s a better offering and it’s devoting attention to what the customer wants and resolving their needs on the first call. So it's a number of things. Now I’ll turn it over to Patrice.

So on the capital deployments we don't foresee particularly need on the cable side in Canada and U.S. to increase CapEx in years to come if that's your question. We believe that with the upgrades we've done over the years moving to digital lines and all the infrastructure we have put in place that there would not be necessarily a significant ramp up. And what we’re trying to do obviously every year is do the reverse is to maintain CapEx to a number that allows us to perform and provide the best service to our customers, but making sure we’re efficient in doing it. So we would not foresee an increase there. There is a link also with your question on TiVo's, so CPEs so what we put basically in peoples houses is a portion of our CapEx spend and every year we work with manufacturers to try to find solutions that are cheaper basically and by the same token also if we can increase the number of self-installs that reduces the number of trucks that we’re sending to customers houses. So some of that ends up in CapEx, some of that ends up in OpEx, but we put the constant effort and making sure we’re very efficient in the way we provide our service. Now for DOCSIS 3.1 as you know it's a very efficient way of providing fast speeds so a gigabit and that could increase to higher speeds even later. So we foresee that we will be able to convert our systems to DOCSIS 3.1 when we decide to do it within a reasonable CapEx envelope so similar to where we are today. And as you know, we have announced that we’re doing it actually for Connecticut, which is planned to be launched by the end of this fiscal year and that’s within our U.S. subsidiaries CapEx envelope. The goal is not to do everything all at once, but over time we should be able to absorb that in there.

Okay. And just a follow-up question on the TiVo without providing specific numbers, can you talk a little bit about the take-up rate or not the rate itself, but I know in terms of your CapEx numbers any description about how much of it is related to TiVo. And just another question on enterprise side, I know Louie you are doing a lot of work and reestablishing a better platform for growth in that business. It is taking a little bit longer probably than initially anticipated, but can you foresee that business becoming hitting positive revenue growth in fiscal year 2016 or it’s probably more of a 2017 timeframe?

Well, as you can see 2016 is turning out to be a real fixing year isn’t it, so we are going to – I think we're finished doing the fixing, but now you have a new team of people, they have to get used to working together. So I would look for growth more at 2017. However, what I do know or the way we do feel as a Company is that this sector is very attractive. With the talent we have there's no reason why we could not resume interest in growth and it is on the faith of that belief that we are proceeding. With regards to TiVo really I don't think we have anything more to add.

Just maybe one thing related to CapEx, so the satisfaction and the take rate is good with TiVo although I will not add necessarily the percentage as we’re not - we don't disclose it as you know and the satisfaction level for those who have it is very high from the surveys we’re doing, but you should note also that we’re not necessarily pushing the full-fledged TiVo box which is very, very sophisticated to every customer and some customers require less services as you know you need at least two services Internet and video to get TiVo. But we have strategies to push the right boxes basically to the right customers to make sure we can control CapEx.

Okay. Thank you very much.

Thank you.

And your next question will come from the line of Drew McReynolds of RBC. Please go ahead.

Thanks very much. Just a couple of clarifications from my standpoint. Louie or Patrice just on the enterprise side, in the MD&A you talk a little bit about some pricing or re-pricing on the connectivity side. Just wondering big picture, can you just comment on growth prospects between the data hosting side of the business and the connectivity side of the business? And then second question just on the pretty good Internet net ad performance in Canadian Cable. Can you just provide a little bit of color around residential versus business market performance on that front? Thank you.

Okay. Well, on the connectivity this is a business typically that has higher volumes year-over-year and we have the – you have pricing per the same level of data that decreases every year, so that's been the normal trends in the business. Our focus is basically in ramping up the number of customers we have for connected building. And this is something the team is working on and part of the plan we put into place because it requires limited CapEx obviously if the building is already connected. So this is the key area we focus on in that sector. Now in the hosting business in co-location we do have space in our Barrie centre that we built recently and in our Montreal centre with the first spot that open. So we expect to grow those sectors over time, not planning to open new data centres at the moment and we've actually rationalized three small data centres in the U.S. to concentrate our business, sorry into bigger ones. So we’re focusing on all these fronts. On the managed hosting business as we've mentioned in the MD&A we’ve decided to reduce some businesses like dedicated hosting which is a lower margin business to focus on managed hosting. And this is one of the reasons why we’re transitioning some customers from that segment to the other. In the meantime, when we do this we can grow our margins basically on those customers and some customers actually only need dedicated hosting and we simply don't keep those customers going forward.

Okay. That’s helpful Patrice. And just on the Canadian cable Internet net ads just some commentary on the residential market versus the business market?

Well, I think that we’re talking mostly about residential.

Okay.

The trends are not necessarily different than they were in the past, so it varies, we don't publish it, but it varies by quarter, but overall we’re not seeing necessarily large difference in the percentage represented by those.

Okay, that's great. And then maybe just a final one for me. Obviously, very good steady growth from the American cable side. Louie or Patrice, can you just comment on as you bump up against what is less competition in the U.S. relative to here in Canada are you capturing share from DSL, from satellite, from fiber-to-the-node or fiber-to-the-home footprints? Can you just give us a little bit of color around those different pockets of competitors?

Well, there is virtually very little fiber-to-the-home in our franchise in the United States, so that solves that. It’s mostly DSL only in 70% of the territory we serve with fiber-to-the-node in 26%, but satellite of course you have two very aggressive satellite services. But the most part people are dissatisfied with what is a substandard Internet service pretty much throughout our footprint at around 5 megabits per second and that's totally inadequate. So that keeps people coming to us by the way in an environment where there is no third-party Internet access, they are competitors, but people come to us because of our superior service. Now although we’re still losing some customers in the video service, we’re losing far less than when we acquired the company and here again TiVo is playing a key part in our retention efforts. Furthermore with regards to the phone service both Internet and phone were largely underpenetrated by the cable company Atlantic Broadband when we bought it. So of course in this case, we’re taking with phone service, we’re taking the business away from the phone company. So I think that more or less summarizes it.

Yes, that’s great Louie. Thank you.

And our next question will come from the line of Tim Casey of BMO. Please go ahead.

Thanks, good morning. Louie, could you comment to all on the basic services hearing that’s ongoing and that you will be presenting and what – could you just frame for us what you expect the scope of the decisions that will come out if it’s possible and maybe a comment on timing as well as obviously what Cogeco’s position is? Thanks.

Well, I’ll do my best. This is a very in-depth hearing. Well, before I say that first of all of course our point of view is colored by our view about the marketplace, so of course you recognize that. So this is a very big hearing, but the country currently 96% of homes in Canada either have access to a 5 megabit down, 1 megabit up service and 96% that's a lot. It is a market that is highly competitive. It is competitive as between the Cable companies, the Phone companies, and resellers on wireline which are not allowed in the United States, but are in Canada. So it’s a very competitive market. So I think logic would dictate that we move towards a government support for underserved areas which would represent about 4% of the country. And given that the market is competitive, we would expect that rates become or remain unregulated. We would expect that there might be a minimal amount of service that is dictated and it will probably increase to 15 megabits down and 5 megabits up and that's quite all right we’re quite prepared with that, but the furrowed areas will require government help. There's no doubt about it. We think government help is the best way to do it and that is the recommendation we have made in our submission.

Thank you.

And your next question will come from the line of Jeff Fan of Scotiabank. Please go ahead.

Thanks. Just quick one that I want to follow-up to Louis comment about maintaining gross profit dollar on the video side. I guess that comment implies that you obviously would like a lot of flexibility on programming costs and managing programming costs. So I guess I wanted to just hear an update from you based on larger commercial dealings right now whether you think there is enough flexibility in some of your programming arrangements to allow you to bring that content cost down as you try to address the changing consumer behavior on what they're purchasing and what they would like to purchase on video side?

I would not necessarily conclude that the cost of programming will go down quite the contrary I think the cost of programming will continue to rise as fewer people take a channel, the ones that do want the channel will pay more. But our experience to date of course we are only six weeks into this is that people will take those people who are interested which are still a very small amount of our customers will take a smaller package that will yield a lower ARPU that will yield to the programming to the programmers following the penetration base rate card, higher wholesale fees per customer, but lower ARPU overall for the customer, but preserved EBITDA for us. That's what we see right now.

Okay, thanks.

Sure. End of Q&A

It appears that there are no further questions at this time. Mr. Ouimet, I would like to turn the conference back to you for any additional or closing remarks.

Okay. Well, thank you everyone for participating in today’s call. We look forward to disclosing our third quarter results in July and until then we remain available for your questions. Thank you.

Thank you. Good bye.

This concludes today’s call. Thank you for your participation. You may now disconnect.