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

Thank you. So, good morning, everybody, and welcome to our third quarter conference call which Philippe Jetté and I will present. So as usual, before we begin this call, I’d 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: Merci, Patrice. Good morning all, and thank you for joining us to discuss the financial results of Cogeco Communications and Cogeco Inc. Let me first note that we're satisfied with Cogeco Communications’ overall performance for the third quarter of fiscal 2021, which is in line with expectations at both our Canadian and American broadband segments. On the media side, for the first time since the start of the pandemic, our radio business has grown with a 23.6% increase in revenue and a significant improvement in our EBITDA margin. With the gradual loosening of restrictions and the economy opening up again in Québec, we are optimistic about the future. So, all in all, these results position us well to start our fiscal 2022 on a strong footing. Before going with the specifics in our segments, I'm excited to discuss our most recent announcement from our U.S. broadband subsidiary Atlantic Broadband that entered into a definitive agreement two weeks ago with WideOpenWest, known as WOW to purchase all of its broadband systems located in Ohio. The WOW Ohio systems pass approximately 688,000 homes and businesses in Cleveland and Columbus, and served approximately 196,000 Internet, 61,000 video, 35,000 telephony customers. For the 12 months ended March 31, 2021, revenue was $244 million and pro forma adjusted EBITDA would have been $103 million, including adjustments to reflect the expected cost structure of a ABB and the run rate synergies. This acquisition allows to add significant scale to our growing and profitable U.S. broadband business. It is a strong strategic fit for the company as it is complementary to a ABB's existing footprint and capitalize on existing platforms. Under the guidance of Atlantic Broadband's experienced management team, we are in a unique position to grow our customer base, revenues and EBITDA to pursue our market expansion strategy. In Canada, the Canadian Radio Television and Telecommunications Commission, the CRTC rendered two important decisions during the quarter. These decisions were balance demonstrating a regulatory approach that takes into account the importance of investment to the expansion of communication services and competition. They provide more certainty for both our wireline broadband network expansion investments, and our plan to enter the wireless market in Canada under the right conditions. Regarding wholesale rates, for Internet services, the CRTC’s May decision to maintain the 2016 wholesale rates provides a more stable regulatory framework. This decision helps to ensure continuity in our current and planned investment, to increase access to high speed Internet in underserved and unserved communities while we wait for the CRTC’s decision following their review on the methodology to establish fair rates.

Thank you, Philippe. So revenue at Cogeco Communications is up 8.8% and EBITDA 5.8% in constant currency when we compare to the same quarter last year. This was driven by EBITDA growth of 6.4% at Cogeco Connexion and 5.9% at Atlantic Broadband. Free cash flow increased by 14% in constant currency. The increase is mainly due to higher EBITDA, the decrease in financial expense and a onetime adjustment to the current income taxes in Québec which harmonize with the federal legislation on accelerated tax depreciation. Capital intensity in the quarter was essentially stable at 20.3% when compared to last year. We are confirming our fiscal 2021 financial guidelines, on a constant currency basis, we continue to expect mid- to high-single-digit percentage growth in revenue and EBITDA and low-double-digit percentage growth in free cash flow. As mentioned we purposely deferred some sales and marketing activities to the second half of the year as we gradually return to more normal operations and exit the pandemic. These expenses have impacted the EBITDA growth in the third quarter we will - and will continue to impact the fourth quarter as well. We expect low-single digit growth at Atlantic Broadband in the fourth quarter due to these additional expenses. And also last year political advertising, which was high and is not expected this year. At Cogeco Connexion we expect the fourth quarter to have similar EBITDA as last year, which means that we expect a decline in EBITDA when excluding the DERYtelecom acquisition as we recorded CAD 4 million in last year, which related to some programming costs and also some pandemic related costs that we were not incurring last year. In addition, we will be delaying some rate increases until the fall this year. So that will make a difference comparing the two quarters. We’re maintaining our CapEx intensity guideline 20% for the full year. And as for share buybacks, Cogeco Communications purchased 414,000 shares in the quarter for CAD 49 million. Philippe Jetté: Thank you, Patrice. As you can see fiscal 2022 looks very promising our businesses are on very solid footing, we’re particularly excited by the network expansion opportunities which should accelerate growth in fiscal 2023 when we’re done with the first wave of construction at the end of fiscal 2022. Finally I would like to give an update on Cogeco’s commitment with regards to environmental, social and corporate governance. We recently unveiled on our website and through social media, our company's commitment on diversity and inclusion. While Cogeco’s action add long add social inclusion at their core, we are now making public our stance on the importance of diversity and inclusion and committing to continued actions on this front. In addition, we were honored to be recognized by Corporate Knights as one of Canada's top 50 corporate citizens for the fourth consecutive year with a new high a 22nd ranking position. For a second year also, Cogeco received a Caring Company Certification from Imagine Canada which recognizes outstanding leadership in community investment and social responsibility in Canada. We are proud of these recognitions and acknowledgments as we continue to strengthen and invest in our corporate social responsibility practices ensuring the company operates responsibly and sustainably. Now, we will be happy to answer your questions.

Our first question comes from Aravinda Galappatthige with Canaccord Genuity.

I'll start with a couple of clarifications for Patrice on the - on the guidance. First of all, for 2022, Patrice, can you just confirm that given there obviously fairly different exchange rates $1.34 for 2021 and $1.27 for 2022, I just want to make sure that the 3.5% to 5.5% revenue growth you’re projecting does not have any sort of FX component to it given its sort of constant currency? And also you mentioned Q4 low single digit growth in ABB I just wanted to make sure that that's in Canadian dollars that's not constant currency.

Yes. Hi Aravinda. So yes, the way we have to look at FX because obviously it's changed a lot since last year is you have to look at this year. We always provide guidance in constant currency. And then once obviously we will report the fourth quarter only next quarter but you already have nine months in the year. We expect the full year FX in 2021 to be about $1.27, obviously there's a still a month-and-a-half left and we are using the same rate to provide our guidance next year. So if the rate stayed at $1.27, then you would end up with the same numbers basically. I don't know if that answers your question.

Yes. It did. And on the Q4… Philippe Jetté: Yes. So in terms of the Q4, my comment is actually in constant currency for ABB. So it's a U.S. dollar comments and again primarily due to - so due to the fact that we’re going to increase significantly the sales and marketing expenses in Q4 versus last year and last year there was an election obviously during the quarter and when this happens in the U.S., we - we do end up with special advertising during this period, which will not happen this year - next year, sorry.

Thank you. That's perfect. And then, a bigger picture question, when I listen to the call and I just think of all the initiatives you have going, there's a lot of growth programs that's operating in parallel. You've got the M&A in the U.S., you've got that network edge outs that Philippe talked about. And I know that Canadian wireless is also a prospect. So, in that backdrop, any comments around how we should think about the balance sheet management, how are you thinking about, are you open to other options, I mean you have a structure on ABB that includes the case on the clean equity. I don't know if that's something you consider. Can you just give us a sense of how you think of sort of managing all these initiatives?

Yes. So, as we disclose when we announced the WOW transaction, we announced that pro forma the transaction would be at 3.1 times of debt to EBITDA. Our long-term target has always been three times, so it's not too far from that. And before the WOW transaction and what you're seeing in this - these reported results were actually quite below our target. So, we do feel actually that we're able to fund all these projects within our guidance. And as we make acquisitions, typically we're able to lever up higher than what our long-term target is and we've done so in the past. We've levered up all the way to close to four times. And our goal generally is to keep our ratings on our debentures, and as we stay within this band as sub-four times, we are normally fine managing it. So that's why we don't foresee a need at this time to make something different in terms of what you're referring to, equity infusion.

Thanks, Patrice. And last question on Canadian cable. Can you just give us a sense of - I know that sector has been enjoying sort of an - Internet upgrade cycle because of the lockdown - work-from-home conditions. Is that still spilling over, are you still seeing that cycle play out even as we sort of come out of these lockdowns? And on the promotional side, at least our surveillance suggests that things are still quite not within a band, certainly not out of control between Rogers and Bell as well, is that sort of your observation, as well? Thanks.

Yes, so obviously there was a period of time in the early part of the pandemic where - I would say, our additions to subscribers was higher than usual. That had to do with some people connecting their house, some people did not have a connection in their house. And some people moving from slow DSL to our high speed Internet. I would say, obviously, that we've been in this for a while now. So I would say, we're more back to normal at this point. But the business is doing well. So it's - I wouldn't say, there's a reduction foreseen. But we’d say, we're more back to normal and more normal growth from that standpoint. In terms of promotions, I would say, it's always been a competitive industry. I think your question was on Canada. It's always been a competitive industry; it's been throughout the pandemic, as well. That being said, because of the pandemic as well. That being said, because of the pandemic some of our sales channels and it was true for other players as well could not be used including door to door agents. This is restarting now. But I would say not say that there would be a much different pattern than what we've seen in the past few months.

Our next question comes from Vince Valentini with TD Securities.

I'm going to try to clarify some of these edge-out and rural expansion numbers because there was a lot of them. So I think if I take a 3% increase in Canadian homes that would be about 59,000 and a 7% increase in U.S. homes would be about 65,000. So can we add those two together and it could be about a 124,000 new homes passed by the end of fiscal 2022, is that correct?

Yes, that's right. On a combined basis, that would be right.

Okay. And the 80,000 figure that is basically just a different metric of how many homes in Canada have been won so far but you won't build out those entire 80,000 by the end of fiscal 2022, is that correct Patrice?

That's also right. Most - I would say a good portion of it will be done in 2022 but some will spill over in the next year - in the following year.

Okay. And then in terms of the CapEx, the CAD 230 million to CAD 240 million that is just your portion of the CapEx for those CAD 124,000 homes, it doesn't include any of the government subsidy money, is that correct?

That's also correct. It's on a net basis and that's how we're going to report it as well for accounting purposes. The subsidies go against the CapEx. So it's always presented net. So that's why, we showed it this way.

Sure. It seems a bit high compared to some of the other wins I've seen from other carriers. I mean if you're spending CAD 1,800 to CAD 1,900 per home passed and then the government is kicking in a big chunk on top of that, some of the figures from other carriers seem to be more well below a CAD 1,000 per home is what they have to spend. So I just make sure - it’s right - you're spending CAD 1,800 to CAD 1,900 per home passed to get these new homes?

Yes. So we obviously, every project is different. There are some in Canada, some in the U.S. as well. In the U.S., there is less government subsidies, whereas in Canada, most of them are with the government subsidies. We do include though some additional costs. So there’s some costs to connect houses from the street. We have some CPEs in there as well, because this is what we're planning to spend next year in these new areas. So, it's not always very comparable. It’s - if - if a distributor will use only the network costs without the connection and the success-based CapEx. So we did include some success-based CapEx in these numbers which explains the part of the difference.

Okay. That's helpful. Thank you. And last one is just to be clear, your 3.5% to 5.5% revenue and EBITDA growth guidance. You're assuming zero contribution from these new homes like none of them will be connected by May, June of next year. So you may get a quarter of - of the year with - with some subscribers hooked up. You're assuming that zero within the guidance?

Yes. That's right. That’s - it’s - we've assumed it zero, because most of it will come at the end of the year and then you’ll - you need to start connecting people. And when we look into the following year end F 2023, then obviously we're going to start seeing some revenues, because we have plans to - it takes a couple of years to attain your run rate. The first year typically you'll have some ramp up during the year obviously. And on the EBITDA front you have some costs also you do some marketing as well. So I would say the major impact of these builds will be in F 2024, but we'll see some of it in F 2023 to a limited extent and none in F 2022.

Our next question comes from Jeff Fan with Scotiabank.

Maybe just to follow up on a couple of Vince’s questions on CapEx. Is it fair to say that this capital increment here or any capital investment, does this include any wireless investments at this point for F 2022? And then also regarding the subscriber take up and penetration I mean I think most people understand that these are areas that you're expanding into within the U.S. and Canada are pretty underserved or unserved and you're going in with fiber. So what should we assume for penetration going forward? I know it's going to take a year or two before you get to that full run rate, but I mean shouldn't we assume something very high like well above 50% penetration once you're into these footprints? And then lastly just from a pricing perspective, how do the rural broadband rates compared to urban, our understanding is real tends to be a bit higher just because of the higher cost, but you've got some subsidies. So how did that all balance in terms of the rates at the end. Thanks.

So on the CapEx, it’s - no, it's - these are the expansion wireline CapEx so those are CAD 240 million not referred to so it's more traditional expansion with fiber to the home as you pointed out. In terms of take rates, we are planning and we've added some information in the IR presentation to that effect as well. So we're planning in Canada to get to a 50% penetration rate. Our target is three years to get there. Hopefully we can do better than this but that's what we assume for now with unleveraged returns in the mid-teens. So it's again unlevered is an - it's an important word here so mid-teens. In the U.S., there will be a mix of projects. Some are in areas that have very little competition so underserved and some come with government subsidies. But I would say the majority is not that case where it will be more competitive areas like we're doing in Florida and we've been doing for many years as well. So for that reason the target in the U.S. is 36% over three years as opposed to 50%. In terms of the - and it would be a similar return as well. In terms of the pricing, I would say we don't have a major differences in pricing in Canada. In the U.S., it would be true as well except in Florida when we get into bulk units than usually those more discounts because you're - it's a quite different market and a lot of efficiencies on the capital front. But otherwise I would say it's - you should not assume a major change in our ARPUs.

Okay. Thank you. And then just finally on capital allocation, we've - you’re now committed to the expansion in the U.S. with WOW Ohio assets. You’re committing to network footprint expansion both in Canada and the U.S. So that's a lot of capital to be deployed. In terms of what's next on opportunity, can you talk about the next set of priorities regarding cap allocation?

What's our capital allocation is similar to usual. And it's basically to invest in our business. So grow - grow our business, introduce new products, add capacity as well so we can sell higher tiers of services and there's the IPTV products. So that's one area. Acquisitions have always been the case. I would say obviously with the Ohio acquisition, we should expect smaller transactions if they present themselves in the short term because this one is obviously a larger one. The network expansion is something we find is unique right now as these government subsidies are available to grow in areas where we could not economically do it in Canada before we have to seize that opportunity. So that will probably last. It will last more than one year or we think F 2022 will be probably the larger amount and then declining a little bit in terms of investments afterwards. But it depends on how many additional homes passed we win in the next few quarters as we're applying to a number of these additional projects. And in the - and in U.S. we'll see but we see an opportunity right now to go in areas where we are confident we can get good share and good returns. As for other - other projects we'll have to see how --how the - what comes. And but I would say that's what we're focused on right now.

And maybe it's just to clarify, are you not mentioning wireless because it's pretty low in terms of priority because it's pretty low in terms of return. There's a reason why wireless is not mentioned.

For wireless, actually - sorry, I forgot to mention it. It's one of our capital allocation priorities if we decide to get into it. I will not comment on spectrum options as you know I can't comment on this. But in terms of capital and fixed asset, capital deployment if we do get into it, we've always said and it's still true today that we would like to invest as we grow and benefit initially from the MVNO regime and then invest in networks as we grow as opposed to day one for fixed assets.

Our next question comes from the line of Jerome Dubreuil with Desjardins.

First question on your guidance, again the MD&A says that you expect benefits from work from home will continue after the pandemic. Does that mean you expect customers will stay on the plan as they chose, or do you rather mean that the pace of increased adoption in ARPU growth could be higher for longer?

Yes. So well it's difficult to tell we don't expect major changes. I think the bigger change will be that we initially were able to add more subscribers than normal for the reasons I explained earlier to another question. But in terms of tearing and ARPUs we do expect that people who have upgraded their speed for doing video calls or whatever it is we don't necessarily see a scale back afterwards. And it will probably be more of a back to normal pre-pandemic in terms of future growth.

And then on the Biden executive order from last week regarding potential restrictions to maybe bulk units and contracts with landlords, what percentage of your U.S. business is based on that type of contract and how do you anticipate this decision could impact the business? Philippe Jetté: Yes Jerome, it’s Philippe. Well we do not anticipate material impact from the direction. The Biden administration is actually guiding the FCC and other regulatory and policy bodies. We on the Canadian side, we've experienced many of these in the past. It's highly competitive and the regulatory structure in Canada is already more complex. So we're used to operate under these conditions shall they come. But from what we have seen so far, we do not expect material impact.

Our next question comes from the line of Matthew Griffith with Bank of America.

Sorry to stick on CapEx, but I wanted to ask if you could give us some indication about the split between the expansion of CapEx between the two countries and particularly you mentioned that the 7% homes passed growth in the U.S. may continue the following year into 2023. So just curious if the level of elevated CapEx on the investment would continue at the same rate in that following year and what that level could be?

Yes. So the split for fiscal 2022 is close to half and half it's a little more in Canada a little less than the U.S., but close to half of that. And that's why we're seeing obviously we have a smaller base of homes passed in the U.S., so that's why you're seeing a bigger increase. As to future years, we'll have to see, it will depend on how the year goes and what we want to do. So we'll have to have that discussion a bit later on. As we see success in building and attracting customers will - we'll adjust our level and interest in adding capital to it. But we do expect to invest some capital in F 2023 as well, is it going to be at the same level is still a question mark.

Okay. Philippe Jetté: Matthew maybe just to add a little bit to this. When we look at the demographic and some high growth potential areas that are not very far from our existing footprint, we see a lot of options, but as Patrice just mentioned, we will go on to success base. We will certainly leverage a lot of our financial discipline, but our very strong field operations. We are very optimist in our ability to operate at the field level and actually win market share and then go from there.

And maybe just one more. The U.S. seems to be ahead of Canada on the progress of reopening the economy. I think you alluded to in both markets, the sales and marketing expense picking up as you progressed into the year and into the beginning of next. And should we see what's reported - EBITDA margins for the U.S., as indicative of how the reopening, additional cost to sales and marketing will impact Canada, as well or is it - is there other distinctions that you'd like to draw? Philippe Jetté: While there’s not a major customer behavior between the two countries. It's more in relation to the market demographic and the competition level at the market level. So we have excellent products, really good customer service. And this is what really is making a difference, customers during the pandemic has adopted higher speed and our services. We're expecting that first they will retain high speed access. And second, the application space continue to deliver more and more application hungry. And the sweet spot now of the speed for - in terms of tearing is between 100 and 500 megabit. So we can continue to support the high demand and keep people connected.

Okay.

And last, if I can add also on the margins, if I got your question correctly, as well. In terms of margins in Canada, we are seeing next year to be in a similar place as of this year. That's EBITDA margins. And in the U.S., we'll probably see an increase as we have introduced broadband first and it emphasizes Internet plus video. Although we're going to introduce an IPTV product so we're still believing in the video product but still we do expect more skewing towards Internet that should benefit the margins. And when you compare the two countries then it's a little different because the consumption of video is different than the U.S. versus Canada. And the packages are typically bigger more expensive. And that's why the EBITDA margins naturally are lower in the U.S. The dollars can be there but the percentage is naturally lower in the U.S. than in Canada.

We have a question from the line of Drew McReynolds with RBC.

Thanks very much. And thanks for all the detail Philippe and Patrice, are very, very helpful. Just one real quick one for me. Just on the margin question I know you related to some higher programming costs in the U.S. that cycled in this quarter. We don't talk about programming costs too often up here in Canada. But can you just update us on the dynamic of those costs. And obviously your ability to absorb any inflation there?

Yes, I would. Just to be clear my comment was more year-over-year or country-to-country but this quarter did not have anything special in terms of programming. That being said the programming costs are usually increasing every year obviously. We signed multi-year deals. So some years can be - can have more renewals than others. We've seen years in the past where the costs on a subscriber basis was double-digit, but I would say it’s single-digits now. So that's something we can manage. We do pass through those cost increases to customers as well. But at the same time, we try to offer flexibility to customers again through our broadband first approach and IPTV product. If customers want to allocate dollars between video and Internet, the idea is to provide that capacity. To the extent, we can control it within the guidelines of the content - contracts we have.

I'm not showing any further questions at this time.

Okay, great. Well, thanks everyone for being on today's call. So we look forward to disclosing our fourth quarter results in November, and feel free to call us if you have any questions in the meantime. Thank you. Philippe Jetté: Bye now.

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