Good day, and welcome to the Cogeco, Inc. and Cogeco Communications, Inc. Q2 2021 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.

Good morning, everybody, and welcome to our second quarter conference call, which Philippe Jetté and I will present. 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. Philippe Jetté: Good morning, and thank you for joining us to discuss the financial results of Cogeco Communications and Cogeco, Inc. Let me first note that we continue to be very pleased with the overall performance of Cogeco for the second quarter of 2021 as both our Canadian and American broadband segments showed continued organic growth in revenue and even stronger organic growth in EBITDA compared to the second quarter of last year. We have seen continued growth in our Internet customer base with a majority of new customers opting for Internet speeds of 100 megabit per second and more and a good portion of our existing customer base upgrading their service over the last year, highlighting the importance of our fixed broadband product. In addition the acquisition of DERYtelecom completed by Cogeco Connexion on December 14, 2020 and the Thames Valley acquisition completed by Atlantic Broadband on March 10, 2020 also contributed to our growth. Similar to the previous quarters, EBITDA has organically grown at a greater pace than revenue partly due to a reduction of certain operational expenses, resulting from a more stable customer base as a result of the COVID-19 pandemic. In addition, certain sales and marketing expenses were deferred to the second half of the year in both countries when market activity is projected to return to a normal level. As for our radio operations, they continue to be negatively impacted by the pandemic but the results are nevertheless according to expectations. Let's review more details, starting with Cogeco Connexion’s recent development, the acquisition of DERYtelecom, the third largest cable operator in the province of Quebec closed on December 14th and contributed to the quarter’s growth. The integration is progressing as planned and should generate superior growth relative to our current Canadian operations as we further invest in sales and marketing to improve penetration rates and pursue DERYtelecom’s network expansion plan. We launched in mid January a marketing campaign for our new IPTV service called EPICO, which focus on attracting new customers and upselling a portion of our existing customer base as we gradually migrate them over time. The launch of this service has enabled us to enhance the customer experience and reduce churn. We are not only expanding our service offering but we are also continuing to expand our geographical reach through network extensions in unserved and underserved areas.

Thank you, Philippe. So in terms of the revenue at Cogeco Communications, the results are up 9.8% and EBITDA up 12.2% in constant currency compared to the last year. This was driven by EBITDA growth of 11.2% at Cogeco Connexion and 12.4% at Atlantic Broadband. Free cash flow increased by 14.2% in constant currency. The increase is mainly due to higher EBITDA and a decrease in financial expenses when excluding the noncash interest gain last year, partly offset by an increase in current income taxes and capital expenditures. Capital intensity in the quarter was 18.2%, which is slightly lower than the 20% intensity we expect for the full fiscal year. We are reconfirming current year's financial guidelines, which were revised last quarter to include the DERYtelecom acquisition and reflect higher organic growth expectations. In a constant currency basis, we continue to expect mid to high single digit percentage growth in revenue and adjusted EBITDA and low double digit percentage growth in free cash flow. Philippe Jetté: Thank you, Patrice. On the basis of a strong second quarter, fiscal year 2021 looks very promising as we will continue to manage our costs closely and pursue profitable growth through leveraging the full potential of recent acquisitions, continuing to expand our networks and pursuing various other organic initiatives. Pro forma the DERYtelecom acquisition, our 2.4 times net leverage leaves ample room for other acquisitions and share buybacks. Finally, I would like to highlight Cogeco's continued commitment to environmental and social issues as it has been recognized and endorsed by a number of leading organizations over the last quarter. In January, Cogeco was included in the Corporate Knights list of the Global 100 Most Sustainable Corporations for a second year in the row, gaining 20 ranking points.

Your first question will come from Vince Valentini from TD Securities.

Couple of questions, one probably for Patrice. The delay in SG&A costs into the second half of the year. I guess, we only have four and half months left here in our part of Canada and we're still pretty well locked down. Have you started to spend that money? Is it realistic that you'll play catch up, or maybe slip into 2022?

No, we do expect to spend it, probably more in Q4 than in Q3, so that's why we maintain our guidance. And also in the US, obviously, as you know, I would say, most of the states are back to normal or close to back to normal. Canada is going to take a bit more time. But over the next few months, we do expect that the situation will change. The other thing to note as well is when you compare it to last year in Q3 and Q4, we will have the smaller acquisition in US, Thames Valley that will be there, which was not the case in Q1 and Q2. And also in Q4 of last year, in Canada, we did highlight $4 million nonrecurring gain relating to running costs and some COVID expenses, which is something that would not be there this year when you do the comparison.

Second question is all of these new wins you're getting in the government programs for rural and underserved areas. Can you just clarify how these work once the networks are built? Do you have full control of the operation in full autonomy to price and market any way you choose, or does the government have some clause attached, given how much of the money they're putting up? Philippe Jetté: Well, they are simply extensions of our existing network. So from a network point of view, it's just an extension, except we are going to complete all of them in full digital fiber to the home mode. So that's for the network part. Now for pricing, we have to be aligned to the large urban centers but there are no pricing regulation at this point. We simply have to be fair and aligned to all other centers in Canada.

And the last, I'll leave the wireless and the stuff to others, but the spectrum auction you can't talk about it. But can you clarify in all of your regions where you are the incumbent cable company. If you added all those up, what would the minimum reserve price be for the 50 megahertz of set aside spectrum? Philippe Jetté: Vince, I can't comment on this at this time given the rules auctions.

Your next question comes from Jeff Fan from Scotiabank.

As Philippe, you mentioned the company had a very good stay when it comes to the balance sheet, so there's a lot of strategic initiatives in front of you. Can you or Patrice talk a little bit about the return profile of the various possible opportunities that's in front of you? You talked a lot about rural broadband expansion, talked a bit about wireless. You don't have to talk about the spectrum, but just wireless services in general and maybe US acquisition. How do you -- what's the return profile at least feels, like how do we think about the second quarter and the priorities? Philippe Jetté: I'll let Patrice go in more details, but it's important that we don't lose sight of the context of the pandemic. It's changing the game in many different places. So on the US side, there is a stronger and faster economic recovery. This will certainly help all products to come back to normal where we can continue our growth. On the Canadian side, as Patrice just mentioned, it will be maybe as strong but certainly delayed compared to the US footprint.

In terms of priorities, we are active on all fronts. It's not as if we have to choose necessarily one versus another, which is a good place to be given our balance sheet and our cash flow situation, which provides the ability to invest. We're always interested in looking at M&A opportunities, as you know. And we've been active, especially in the US, but including in Canada recently, especially with DERYtelecom. So this will continue. These assets are not always for sale. And we have a list. And when we're invited to look at some potential assets for sale, we get involved and we see if there's a good return to do. And that has to do with the quality of the asset, the area where it is, the penetration rates. Obviously, the asking price plays into it as well. So it depends. But I would say we are generally active on that front. In terms of network deployment, there is clearly an opportunity in Canada right now where various levels of government want to ensure that consumers that don't have access to high speed Internet are provided this ability. And Québec came out with a very large program recently. Ontario has different programs and the federal level has different programs as well. So now is the time to do it. It doesn't mean that this will be true in five or 10 years, so we're actively participating in it. In the US, we also participate in some government programs, so the RDOF program. There's a bit more players there. So it really depends on where we did. And there are some other areas where we are simply extending our network like we've been doing in Florida. So we see opportunities to do there. And lastly in mobile that's a bigger question that will depend on what happens, especially on the regulatory front and then we'll have to be able to determine what kind of business and returns we want to generate in that business if we do get into it.

If I may just follow up on that last point. Your CRTC MVNO decision looks like it's coming out in the coming days. Can we just revisit that one for a second? You guys have put forward an HMNO proposal. It's a very reasonable sound proposal. But what's next if the CRTC does not come out with a decision that is similar to that HMNO? Does that mean that you forgo wireless? Does that mean you look for alternatives? How should we think about what the next step is given that decision is kind of right in front of us? Philippe Jetté: So Jeff, we won’t speculate of what it could be or could not be but the HMNO proposal has received already a lot of support. It might be called differently by other players in the Canadian ecosystem, but it's a proposal that actually puts equilibrium between investment, innovation and competition. So this is what the lawmakers need to achieve. Of course, it needs to create a reasonable return, a fair return for all players in the ecosystem but investments, innovation and competition are the three items to balance.

Your next question comes from Aravinda Galappatthige from Canaccord Genuity.

The first question is with respect to the upgrades that you talked about in the Internet product during the pandemic. Obviously, you were benefiting from sort of the up tiering of those products. As we think about the tail end of the pandemic for the US, are you starting to see those upgrades perhaps taper off, or are you still as recently as, let's say, the last quarter, you're still seeing a steady rate of upgrades? I just wanted to get an update on that front. And secondly, we know that your competitor, your telco competitor, has sort of indicated a stepped-up broadband expansion, both on the fiber front as well as fixed wireless. Perhaps a little bit early but I was wondering if you're starting to see some of that activity in your footprint that is notable. Philippe Jetté: The pandemic has certainly induced some change, but we think they are going to endure. New subscriber coming in the broadband ecosystem from weaker networks or especially weaker technologies to very capable networks like the ones we're deploying, providing 100 and more megabit per second up to a gig. So there will continue to be an inflow of people wanting very fast Internet service. On the upgrade, same thing. There are more and more devices in the home. There's the video that is also moving to the IPTV platform. So there is more demand for very high speeds. So 100 and more. We have 100, 120 almost everywhere today in many, many different cities and places. Our networks are 1 gigabit capable. So there's a good runway for upgrades for continued upgrade, and the demand is certainly healthy. The pandemic to me has simply accelerated and induced more upgrades. What's interesting as well to notice is that we are gaining also customers coming from pure mobile. They used to be satisfied with the data mobile package but now clearly, it's not satisfactory. They're expensive. They have very limited amount of data. And now we're seeing as well some customers coming from the mobile ecosystem wanting more gigabytes per month and steady connections.

And just a quick follow-up on the wireless matter from the previous question. I just wanted to clarify. Given the Shaw-Rogers announcement, I know that historically, your interest with respect to wireless was mainly with respect to your cable footprint. Has that plan changed at all? I mean, if there's an opportunity to extend a little bit beyond your footprint perhaps at a provincial level, and I'm not talking about a national expansion. Is that also of interest to you, or are you very much still -- is your plan very much along the lines of your cable footprint? Philippe Jetté: This Rogers-Shaw proposal will certainly be scrutinized for many, many months with lawmakers. We will analyze and look at all possibilities. And I have mentioned many times that there is certainly an advantage when you have a wired network to put a mobile layer on top. But as of today, first, let's see what the CRTC will publish this week if the decision comes on our HMNO proposal this Thursday. And given the auction rules, again, we're not at liberty to fully comment on your question.

Your next question will come from Jérôme Dubreuil from Desjardins Bank. Jérôme Dubreuil: First question is on the Biden infrastructure plan. We've seen the proposed tax increase, but also a possible $100 billion broadband funding with, however, some wording on the government's goal to ensure affordability. Can you comment on your initial view of the potential impact of the plan as proposed on your business?

So yes, on the tax front, you'll remember that about three years ago, the tax rates have decreased in the US and at that point, we did record a noncash tax gain. I think it was $73 million. If the tax rate does increase from what we understand to be 21% to 28% in the future then the reverse would happen, we would book a non-tax gain loss, it would be a smaller amount. So that's probably the extent of it for us. There's a discussion on minimum tax rates as well but we have -- given all the acquisitions we've done, we have a number of assets that can shield taxes and tax losses as well. So we're not currently taxable in the US. As it relates to the network expansion, I would say this is good news. Typically the way these programs are structured is that it creates an opportunity to extend networks, just like in Canada, in areas where customers or residents don't have access to high speed Internet. So either they have nothing with wireline or they have something that's very slow, especially on DSL. So this could be an opportunity for us to extend our network. We'll have to see what it means in reality and how it translates into programs, but we're not really seeing it as a threat, but as an opportunity. Jérôme Dubreuil: And then still in the US, I think it looks pretty clear that FX will be a headwind next quarter. Can you explain a bit how this affects you on the cost side and if there are hedges in place?

So the way we manage -- and there's also even a page in our investor presentation, if you want to look at it. But the way we manage our foreign exchange exposure is we try to be fairly neutral from a free cash flow standpoint. And a large portion of this is done through borrowing in US dollars, which will shield cash flows from our US entity. We do have some financial instruments as well from time to time. But I would say the bulk of it is US borrowings. You're right that in terms of revenue and EBITDA, these are things that we cannot shield. So they will get impacted temporarily by changes in foreign exchange rates. But again, free cash flow has very minimal impacts.

Our next question comes from Drew McReynolds from RBC Capital Markets.

Two follow ups for you, Patrice and then maybe one for Philippe, on the just some housekeeping. On the FX side in terms of interest expense and depreciation, amortization at the consolidated level, just remind us how the higher Canadian dollar is impacting those line items? And secondly, on the sales and marketing, I can't recall if this has been kind of quantified in terms of the savings or the absence of dollars that you've spent due to COVID. Is there anything you could kind of unpack for us relative to the underlying cost efficiencies that you're getting across the business?

On the second question, we have not quantified the sales and marketing as we're not quantifying on even the base amount, obviously, that is included in our cost. That being said, if you want to have some view of where we're heading, we have obviously the guidelines for the full year. But as we've said on the last call, I'll mention it again today to reconfirm it. If you look at Cogeco Connexion and ABB, in constant dollars, we would expect that the EBITDA would be mid to high single digit growth year-over-year, and that's true for both countries. Canada does include the DERY acquisition. And as you know, for the first six months we've been running at the higher rate than this in the two countries. So you can triangulate what should be the growth rate in the second half of the year. In terms of FX we do have a dollar impact of FX rates in our MD&A, more at the EBITDA level. So I'm not sure I have an answer for you for financial expenses directly. But I can comment on what we did in the second quarter. So last year was $35 million in terms of financial expenses. If you do exclude a special gain we had on the refinancing we did last year of $23 million and that decreased to $31.8 million this year. So it's a reduction of $3 million, and that has to do with lower interest rates and also a reduction in the overall debt level. I'm not sure if it answers your question, I'm happy to add more comments on this.

That's fine, Patrice, we can take that offline. And maybe one for you, Philippe, just on the wireless side. I think the horse has been kind of beaten here in the Canadian side until we get more information here. Can you just provide an update on your latest thoughts on wireless in the US and the importance of getting that kind of service in some way, shape or form onto your offering over time? Philippe Jetté: Yes, for the wireless in the US and we've said that before, we have good opportunities and other priorities right now that we think we should get at before spending more time investigating both fixed wireless access for broadband expansion as well as mobile introduction. So we will get there but we have other priorities in network plans, investment and customer experience as well as M&A that are higher on our priority list for the US market at this point and not to forget the investments we're making in Florida. So there's a number of good leads in the US that we will continue to explore before getting there.

We have no further questions in queue. I'd like to turn the call back over to the presenters for any closing remarks.

Okay. Well, thanks, everyone, for being there today. We're looking forward to meeting with you again for the third quarter results in July, and feel free to reach out if you have any further questions. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.