Cogeco Inc. (CCA) Earnings Call Transcript & Summary

[Audio Gap] and we expect sales to ramp up over the coming quarters. Customer satisfaction with the brand is very high, and nearly half of our new sales already come from referrals from existing customers despite our existing customer base still being small. This really shows the growth potential of [indiscernible] as we scale it up. Across our Breeze line markets, we were able to remove some of the more aggressive promotions we were previously using such as months for free, which will improve the lifetime value of the new customers we acquire over time. At Cogeco Media, we continue to leverage our strong market presence to drive consistent growth in our digital advertising solutions despite ongoing volatility within the traditional radio advertising landscape. In summary, we're executing well on what we can control while also remaining clear-eyed about what we can't control. As we approach the third year of our 3-year transformation, we're now focused on AI-based tools to generate additional revenue and operating efficiencies, in addition to continuing to grow our new wireless and digital businesses in both countries. It's also worth noting that we're also planning a further optimization of our capital investments going into next year in both countries to help sustain a strong free cash flow performance and continue to generate attractive value for our shareholders. And on that, I'll pass it over to Patrice for more details.

Thank you, Fred. So since our detailed financial results were published last night, I'll only focus on a few items and then open it up for questions. So as noted in the press release issued last month, we reviewed the current value of our U.S. assets in the third quarter due to ongoing competitive pressures. We recorded a noncash and pretax impairment charge of CAD 1.8 billion or USD 1.3 billion, which mainly impacted goodwill. . On a pretax basis, it amounted to CAD 2.2 billion or USD 1.6 billion. Our current income tax was favorably impacted by this quarter by a retroactive adjustment of $4.5 million, resulting from the acceleration of tax depreciation on certain asset classes in Canada which is in addition to $14.8 million recorded last quarter. We're now assuming a current income tax expense for fiscal '26 of $25 million versus our prior assumption of about [indiscernible] $40 million, which was based on the current effective income tax rate of 8.5%. Aside from the change to our current tax assumption that I just noted, we are maintaining our annual financial guidelines for Cogeco Communications fiscal year '26, which were updated in April. As a reminder, we provide our financial guidelines in constant currency since foreign exchange rates can be volatile and close to half of our revenue and EBITDA is generated in the U.S. Free cash flow, however, is much less impacted by FX rates since U.S. denominated debt and CapEx serve as a natural hedge against FX fluctuations. Looking at the balance of the year, we expect slightly positive year-over-year revenue and adjusted EBITDA growth in the Canadian business. Note that the third quarter had -- was stronger in Canada versus the previous quarters, partially due to some nonrecurring operating cost benefits. In the U.S., on a constant currency basis or U.S. dollars, we expect Q4 revenue and adjusted EBITDA to be lower than the previous year, but at a smaller percentage decline than what was generated in the first 3 quarters of the year. As for consolidated CapEx, similar to last year, we expect an increase in the fourth quarter versus the third quarter spending. Our consolidated debt leverage stood at 3.2x at the end of the third quarter. And during the quarter, we repurchased USD 21 million of term loan B debt securities, and we expect to continue to use excess cash in the U.S. to repurchase TLBs on a regular basis. Finally, at Cogeco Inc., we performed the valuation of our radio assets and recorded a pretax $26 million impairment of intangible assets. And we also maintained the financial guidelines which were issued in April. And now Fred and I will be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] your first question comes from Maria with Scotia Bank.

I wanted to ask you on the impairment charge that you took. Can you maybe detail a little bit what changed in terms of assumptions that led to the review. Specifically, was it related to to ARPU, subscriber trends or general profitability of the business. And what does the impairment tell us in terms of your strategic posture for the U.S. market? Does it change how you approach partnerships, potential asset dispositions or any footprint optimization you plan to do there?

Sure. So I'll start and Fred can complete on the second question. So when you look at the reasons, first of all, we need to conduct valuation work annually. So we did it in Q3. We've seen changes in over the last few years when including in the past year in the U.S., mainly relating to ARPU. When you look at the level of promotions in the market for either acquiring new customers, in retention costs as well. So those have been, I would say, impacted, especially in the past year. And in terms of subscribers, we've been losing some subscribers gaining in some regions, losing in some others, but that plays into the valuation work we did as well. And finally, I would say, valuation of peers in the market have come down quite a bit in the past year as well. So that played also into the decision to perform the valuation.

Amar, it's Fred. On the strategic posture, we're not dogmatic. We always look for the best way to optimize shareholder value. But for now, I just focus the conversation on the different levers we're implementing operationally to improve the business.

Okay. And so when you think about the outlook for the U.S. business in general. It seems like pricing expected to continue to be on intensive side. Do you expect the business to return to growth on the top line and the bottom line and is there a time line that you think we should be expecting that to happen? Is it a medium-term outlook? Or it's still a little bit hard to call a turnaround and bring it into positive growth again.

Sure. It's Fred again. You'll remember at the beginning of the year, of our fiscal year, we'd express some optimism initially about a possible turnaround and you and many others have cautioned us about the market. I would say since then a couple of things have changed. The first one is the competitive environment has gotten further elevated versus the beginning of our fiscal year. And second, inflation has risen in the U.S. as well, it's now north of 4%. Gas -- fuel prices are higher. And as customers see a higher cost of living on fuel, on groceries, on living in general, we see that they're trying to optimize their wallets. And therefore, we've seen harder negotiation behaviors from customers calling our retention line, which is also putting pressures on ARPU [Audio Gap] The 17% to 19% CapEx intensity range that more or less I think has been the place holder here for fiscal 2027 and beyond. Obviously, you're not going to give [indiscernible] the CapEx guidance for fiscal 2027. But just in terms of getting more CapEx efficient seen your peers do the same. Just wondering, Patrice, if you can kind of help us, I guess, directionally where that could land just more broadly over the medium term.

Okay. Great. So in terms of the Canadian performance in Q3, without those elements, we always have one-timers in every quarter in the businesses. But without those in Canada, we would have been closer to the kind of growth we did in the Q1 and Q2, which was about 2%, 2.5%. So it'd be in that ballpark. I mentioned it so that you would not use the Q3 results to apply it to your expectations of Q4. So that would be that one. In terms of capital, I'll cover the third one in terms of capital. So first of all, this quarter, like we did last year was a low CapEx quarter generally. And as I mentioned, Q4 will be a larger capital. And there's different reasons for this. One is just the weather and construction in some areas is easier to do during the fourth quarter. So we'll see exactly where we'll end for the year. But so far, so good in terms of what we've been able to manage for CapEx. I would say historically, we've been running to your point in the, I would say, 18% to, let's call it, about 18%, 19%. And as we continue to work on efficiencies in our procurement activities, also as we group the countries together, we found some efficiencies there. We also are pushing self-installs with customers, which basically reduces the need for truck rolls, which get capitalized when it's new customers. There's a lot of things we're doing on that front. So we'll say exactly where we land, but the idea is to be definitely below 20% as we move forward, we'll see exactly where we land. The reason we were -- I'll disclose on this, the reason we were higher than this in recent years. This was mainly due to the expansion programs in both countries, mainly in Canada, but we had some going on in the U.S. We're close to being done now with those subsidized expansion programs, except for the one in Ontario that Fred mentioned earlier.

Drew, it's Fred. On the second question, Ohio, Wilo, Indeed, we were net PSU positive or growing in Ohio for fourth consecutive quarter, I believe. I'd say Wheeler was only a small part of that still. It's really -- it really comes down to what we've been saying on this call for a while, which is Ohio starting from a lower market share position presents more growth opportunities. So it really comes down to the scaling of our sales and marketing channels in the traditional brand. As I mentioned Tuma heard before, the fourth quarter will be difficult in terms of U.S. PSU losses, but that's outside of Ohio mostly. And it's mostly point-in-time factors. Going into next year, we do see -- while start to scale up. It will take a few quarters the same way Abo took a few quarters in Canada. But I would say we're more confident than ever that -- while has the right success conditions for us. As I mentioned earlier, customer satisfaction is very high, referral rates are very high. So it's looking good for Wheeler. We just have to be a bit patient.

Your next question comes from Stephanie Price with CIBC.

Good morning. Just in regards to the last question, you mentioned scaling up of sales and marketing should help in some of these legacy U.S. regions. Can you talk a little bit about that, where you are in that scaling process? And how do you think about any other read-throughs from Ohio in the rest of that legacy footprint?

Yes. The comment Stephanie, it's Fred. The comment about the scaling up of sales and marketing channels was mostly actually in the context of Ohio to simplify the strategy Ohio was more in PSU growth mode. The rest of the footprint is more in protection and harvesting mode. To answer your question specifically, I would say we're well underway on the scaling of sales and marketing channels on the traditional brand, but not completely done. So it's still ramping up. But then there's Wheeler is really the next big lever. And as I was telling, Drew earlier, it's going to take a few quarters. It will be an S curve, but we're -- I'd say we're even more confident than we were a few months ago about Willow because we now have data.

Okay. And then you mentioned a churn benefit from fixed mobile convergence. Can you talk a little bit more about what you're seeing in regions where you have rolled out mobility? And if you're able to give any early metrics around churn improvements for customers that do have that bundled solution.

Yes. We're not able to measure it, Stephanie, actually, in both countries. The churn benefit is similar in both countries where we see materially lower churn when a customer takes wireless in addition to wireline. We don't quote the numbers. Part of it will be self-selection, but part of it seems to be causality as well. So it's quite encouraging. The only point here is that now it's still applied to a relatively small base of wireless customers. But as it grows, there's really room to believe that it will help in both countries. And even when you look at the U.S. the large cables in the U.S. that launched wireless a few years ago and had the larger wireless base are able to protect their results better. And this is giving us optimism about when we scale it up ourselves in the U.S. as well. It's not a quick fix, but over time, it provides room for optimism.