CA - Cogeco Inc. (CGECF) Q4 2023 Earnings Call Transcript

2023-11-05 06:35:02 ET

Cogeco Inc. (CGECF)

Q4 2023 Earnings Conference Call

November 2, 2023 11:00 ET

Company Participants

Patrice Ouimet - Senior Vice President & Chief Financial Officer

Philippe Jette - President & Chief Executive Officer

Conference Call Participants

Maher Yaghi - Scotiabank

Jerome Dubreuil - Desjardins

Stephanie Price - CIBC World Markets

Matthew Griffiths - Bank of America

Vince Valentini - TD Securities

Drew McReynolds - RBC

Presentation

Operator

Good day and welcome to the Cogeco Inc. and Cogeco Communications Inc. Q4 2023 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.

Patrice Ouimet

Thank you. So good morning, everybody and welcome to this fourth quarter conference call which Philip and I will be presenting. Before we begin the call, as usual, I'd like to remind listeners that the call is subject to forward-looking statements which can be found in the press releases issued yesterday. So, I'll turn the call over now to Philippe.

Philippe Jette

Thank you all for joining this call. While fiscal '23 was a year in which we made significant progress in strengthening our core foundation and delivering on our primary growth factors, we did fall short of the financial guidelines provided.

Headwinds facing the U.S. operations over the course of fiscal year offset the solid growth we experienced within our Canadian business on both revenue and EBITDA. That said, a number of measures were implemented in fiscal '23 to help mitigate the challenges we currently face at Breezeline. These initiatives, along with investments made to prepare for the launch of wireless services within our U.S. footprint, aim not only to improve our efficiency but also to increase our addressable market, strengthen our product mix and improve our customer retention and satisfaction.

As for our fourth quarter, our consolidated results were resilient, driven by an increase in overall Internet subscribers and average revenue per users which offset challenges brought on by inflation, increased competition and global economic uncertainty. During the quarter, we demonstrated once again our intense focus on balancing subscriber growth with financial performance.

In Canada, Cogeco Connexion performed very well in Q4 with strong Internet subscriber addition as well as an increase in revenue per customer. In the U.S., while Breezeline continued to face headwinds from the macroeconomic and nationwide competitive environment, its revenue per customer, adjusted EBITDA and EBITDA margin increased in the quarter, reflecting a better product mix, stemming from its Internet-led strategy, cost efficiency initiatives and the acquisition of higher price point customers which helped offset customer losses at lower price points due to increased competition.

As a group, we continue to execute on our strategic growth priorities. In both Canada and the U.S., we continue to see the financial benefits from our fiber-to-the-home network expansion programs which contributed to new Internet subscribers in both markets. Overall, through these network expansion programs, we've added close to 124,000 homes passed over the last fiscal. If we include those added in fiscal '22, this brings us to 196,000 additional homes passed, representing a 7% growth of our network over the last 2 years.

Many of these expansions were facilitated through governance subsidy programs aimed at reducing the urban rural digital device. It allowed us to expand our fiber network in demographically and competitively attractive areas where we continue to target very healthy penetration rates. We announced in October the completion of the rural network expansion in Quebec, where we expanded services to 180 municipalities through the Quebec and federal government subsidized high-speed Internet network expansion programs.

Meanwhile, in Ontario, we are pursuing our expansion activities and preparing for the construction phase of additional projects with funding support from the Ontario and federal governments. In the U.S., we expanded to adjacent communities in New Hampshire and Virginia. The latter included some unserved homes and businesses under the Rural Digital Opportunity Fund program administered by the FCC. We continue to look forward to the launch of the broadband, equity, access and deployment funding program in the U.S. called BEAD which we intend to participate in.

Under this program, each state will run its own process of allocating funds for fiber – for rural fiber expansions. Within our traditional markets, we continue to position ourselves for future organic growth through our high-quality digital product offerings, distinctive and local customer service, reliable and evolving high-speed network and technology advantage. During the year, we also doubled the network capacity servicing Ohio, in line with our acquisition integration strategy to drive higher revenue per customer over time in that market.

In Canada, we are taking a multi-brand approach to serve new demographics and customer segments. During the last year, we expanded our service offering to include a digital-only experience for a younger generation of residential customers through the acquisition of the OXIO brand. We have continued to invest to support the high growth of OXIO and have been pleased with its performance to date. As it relates to other M&As, we continue to pursue growth by evaluating complementary businesses that will expand our footprint geographically and broaden our capabilities and service offerings as we have done for OXIO. However, we do not expect to undertake any large acquisitions in the near future as we focus on executing our other growth initiatives.

In terms of mobile developments; in Canada, we remain in MVNO access negotiations. But as you will understand, for competitive reasons, we cannot provide any further details on these negotiations. We will reiterate, however, that securing satisfactory wholesale rate for access to incumbent wireless networks will be critical to the viability and long-term success of our mobile entry. We are registered as a qualified bidder in the 3,800 megahertz spectrum auction. While we are not allowed to discuss the auction, we will remind investors that our total spectrum coverage to approximately 4 million people in the Quebec City to Windsor corridor, encompasses 95% of our Canadian high-speed network footprint. In total, we have now acquired approximately $400 million worth of spectrum across several frequency bands that are considered optimal for 5G wireless services.

In terms of mobile in the U.S., we are preparing the groundwork to enter the U.S. wireless market through commercial MVNO arrangements in the states we serve. We expect to be able to provide an update on our mobile progress in both countries in future quarters. Though I'll note that if we are successful in MVNO negotiation, we don't anticipate a material rollout of our Canadian MVNO operations in the short term as we have some preparation work remaining to complete.

Finally, we pursue our sustainability agenda to the implementation of various initiatives that are aligned to the best environmental, social and governance or ESG practices. Additionally, we continue to be recognized by leading voices in ESG commitments and disclosures. Over the past year, we've ranked for a fourth consecutive year among the world's 100 most sustainable corporations according to Corporate Knights for setting a standard and sustainable growth leadership. For the second consecutive year, we were included in the prestigious sustainability year booked presented by S&P Global for its excellence in implementing best ESG business practices. And our governance practices were recognized by the Globe and Mail Board Games as among the best within family-controlled dual-class public corporations.

I will now review our operational results and begin with our Canadian operations. We continue to connect more homes in unserved and underserved communities in Quebec and Ontario. Often with the help of government partnerships where we added another 7,300 homes passed this quarter, bringing the total to more than 96,000 new homes passed over the last 2 fiscal years. Our Canadian team achieved a 15-year record this quarter with the addition of 14,000 Internet customers, thanks to their effective sales and marketing strategies, entry in newly served areas, the contribution from OXIO, under unrelenting focus on customer experience while continuing to grow ARPU year-over-year.

As for our U.S. operations, in Q4, our fiber-network-expansion covered nearly 16,000 new homes passed, bringing the total to more than 99,000 new homes passed over the past 2 fiscal years, further expanding our total addressable footprint. The market remained challenging in Q4, notably for customers at lower speeds and price points due to the macroeconomic environment and competitive intensity. However, the product mix and customer tenure continue to improve with a greater proportion of new connections, taking faster Internet speeds and therefore, driving a higher average revenue per unit and gross margins.

We reported approximately 9,000 Internet net losses, of which 6,000 were in Ohio which is a bit higher than the 2 prior quarters and below our expectations. During the quarter, we continue to densify the network and work to bring our Internet customer base in Ohio to growth as we focus on gaining greater brand awareness. On that front, we have made solid progress and this is being reflected in improving Net Promoter Scores. Outside Ohio, Internet customer net losses were essentially in line with last quarter which were driven by aggressive offers by competitors and response to FWA competition they are facing in other areas.

Now for Cogeco Media, while we continue to face headwinds from a difficult radio advertising market industry-wide, we are happy to report modest year-on-year growth in revenue this quarter with our stations remaining at the top of the ratings and 98.5 Montreal being the most listened-to station in all of Canada, we believe we are well positioned to face the industry's challenges going forward. In the meantime, we continue to expand our multi-platform audio content options with more digital ad tech solutions, social media-oriented formats and state-of-the-art studio facilities.

Now, let me turn the call over to Patrice who will provide more details on our financial performance for the quarter.

Patrice Ouimet

Thank you, Philippe. I'll start by mentioning that the growth rates I'll be providing are in constant currency, unless otherwise noted. So in Canada, Cogeco Connexion's revenue was up 4.1% in Q4, resulting mainly from higher Internet service customer base, higher revenue per customer and the OXIO acquisition. EBITDA declined by 0.9% as we had expected due to revenue growth being more than offset by higher operating expenses to drive and support customer growth; including at OXIO which is in a high-growth phase of development. Last year's operating expenses were also lower due to certain year-end adjustments.

In the U.S., Breezeline's revenue was down 2.5% in constant currency, mainly driven by a lower Internet customer base over the past year and an overall decline in video and phone customers, partially offset by higher revenue per user as customers subscribe to increasingly fast Internet speeds. However, while revenue declined, we delivered higher gross profit from a more attractive product mix resulting from more Internet within our revenue mix and our integration of easy-to-use self-install equipment. Combined with cost reduction initiatives, this drove EBITDA growth of 2.2%.

Turning to our consolidated numbers. At the consolidated level, revenue grew by 0.8%, while our adjusted EBITDA remained relatively stable. As reported, capital intensity was 23.8% compared to 30.8% last year due to the timing of certain initiatives and the completion of several rural network expansion projects in Quebec. Including those network expansions, capital intensity was 19.3%. Free cash flow increased to $88.5 million from $34.5 million in constant currency, excluding network expansions, free cash flow increased by 25.5% in constant currency, driven primarily by lower CapEx.

At the end of the quarter, our net debt-to-EBITDA ratio was 3.3x versus 3.4 at the end of Q3. And we are pleased to announce that our Board of Directors has increased the dividend by 10.1% to $0.854 per share. This increase represents our 10th consecutive annual dividend increase of 10% or more -- or more, sorry. We anticipate dividends to represent a payout ratio of about 40% of free cash flow in the upcoming fiscal year or 28% when excluding network expansions.

Turning to Cogeco Inc., revenue in constant currency increased by 1%, while EBITDA declined by 0.6% as a result of Cogeco Communications performance. The media operations revenue increased by 8.3% as the local radio advertising market showed a modest year-over-year improvement, further aided by positive contributions from digital advertising revenue. A dividend of $0.854 per share was declared for the quarter, representing a 16.8% increase over the prior year. This increase now brings the dividend of Cogeco to parity with the dividend paid at Cogeco Communications. And it completes the process we have undertaken to close the gap between the 2 dividends over a 3-year period.

Now let's discuss Cogeco Communications' financial guidelines for the upcoming fiscal year 2024. On a constant currency and consolidated basis, Cogeco Communications expects revenue and adjusted EBITDA to remain stable versus last year. Note that the guidelines reflect an estimated 1 percentage point negative impact on adjusted EBITDA compared to the prior year related to additional preparation costs to offer mobility services in both countries.

At Cogeco Connexion, we expect low single-digit growth in revenue and EBITDA, reflecting stability in our traditional operations, growth in our newly built expansion areas in Quebec and Ontario and success in attracting new customers to our OXIO brand. We do anticipate some EBITDA margin compression in Canada, partially due to incorporating a full year of results from OXIO.

At Breezeline in constant currency, we expect low single-digit declines in revenue and low single-digit EBITDA growth, with revenue decline, reflecting an ongoing competitive landscape for subscriber volume, offset by EBITDA margin expansion due to an improving mix of higher revenue customer, driven by an Internet-first strategy, growth in our network expansion programs and cost optimization. As it relates to corporate costs, we expect these to increase in fiscal '24, reflecting the increase in mobility preparation costs that I noted.

Turning to CapEx; we are expecting to spend between $700 million and $775 million in the coming year, including $140 million to $190 million in growth-oriented network expansions, resulting in a capital intensity of between 24% and 26% or 18% to 20%, excluding network expansion projects.

Free cash flow is expected to decline between 5% and 15%. And excluding network expansion projects, the free cash flow is also expected to decline between 5% and 15% as our network expansion investments are expected to be similar to last year. The declines are being driven by an estimated 10 percentage point negative impact from additional mobility investments which do not include potential spectrum acquisitions. As it relates to the first quarter, we currently expect revenue to decline in the low to mid-single digits in constant currency and EBITDA margin to be slightly lower than in Q1 of last year.

Capital intensity is expected to be modestly above the Q1 of last year. At Cogeco Connexion, in Q1, we expect revenue growth in the low single digits. EBITDA is anticipated to decline also in the low to mid-single digits on higher operating expenses to drive and support customer growth and with EBITDA growth coming mainly in the back half of the year. At Breezeline, in Q1, revenue is anticipated to decline in the mid-single digits, reflecting the competitive environment and video cord cutting as well as the timing of price increases last year which creates a tough comparison for that particular quarter.

EBITDA is also expected to be lower year-over-year in the mid-single digits due to the anticipated revenue decline and partly offset by cost reduction initiatives implemented in the second half of 2023. EBITDA is expected to grow in the following quarters. Below the EBITDA line, at the consolidated level, we expect acquisition integration and restructuring to be at about half of what we recorded in Q4. And in terms of CapEx, we expect it to be approximately flat versus Q1 of last year, reflecting ongoing strategic growth investments, including network expansions and preparations for mobility in Canada and the U.S.

At Cogeco Inc., we have issued the same financial guidelines as Cogeco Communications. Also following the year-end in September, we have refinanced a U.S. senior secured Term Loan B facility through the issuance of a new one for $775 million, that's a 7-year maturity and also a $475 million 5-year maturity farm credit Terminal B. Those are U.S. dollars that I'm quoting. We have also increased the credit limit on our senior secured revolving facility from $150 million to $250 million and extended the maturity date to 2028. The net proceeds were used to reimburse the existing tranche 1 of the senior secured Terminal B facility in the U.S.

Following the refinancing, our weighted average interest rate on our debt is approximately 5.5% and the debt weighted average term to maturity has been extended to 5 years. Due to the increased interest rate environment, we, therefore, expect financial expense to increase by about $10 million in Q1 compared to the fourth quarter of fiscal '23.

And now I'll turn to Philip to provide his concluding remarks.

Philippe Jette

Thank you, Patrice. So as you can see, during the year, we made progress on delivering our strategy. Our priority is to continue to strengthen our core foundation through a distinctive customer experience, high-quality product offering, solid brands, increased digitization and improved operational efficiencies, while we focus our actions on 6 growth factors of pursuing network expansion, evolving our broadband network, expanding into new customer segments, launching and growing mobile services, make accretive and complementary acquisitions and transforming our radio business. Finally, as we pursue our journey for sustainable growth, we do this through our long-standing tradition of social engagement and community involvement, prioritizing digital inclusion and climate action, implementing leading operating practices and pursuing responsible and ethical management.

On this, Patrice and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question. [Operator Instructions] Our first question comes from Maher Yaghi from Scotiabank.

Maher Yaghi

Yes, great. I wanted to ask you, maybe first question on the U.S. cable business. Evidently, you saw the -- you're seeing the success that Comcast and Charter are having in wireless and I definitely understand the view that the bundling of wireless there could be worthwhile, especially that it's not going to cost you much CapEx, like you said. But I wanted to maybe focus a little bit on the fixed wireless competition you highlighted that for the first time, I think in your MD&A, you talked about it in the past but you directly referenced it as a reason for the weakness that you're seeing in the U.S. So can you maybe talk a little bit about what -- how is fixed wireless affecting your business? And at the margin, is it pressuring subscribers are also pressuring your ARPUs down there? And as a follow-up on the wireless side, more in Canada, how much of your CapEx for 2024 that you're targeting are allocated to spend on CapEx and wireless for the launch of your Canadian wireless business.

Philippe Jette

Thank you, it's Philippe. Let me just start, Patrice will add on fixed wireless access, certainly the place we see it the most is in the Ohio footprint in Columbus, particularly. The market there was a 3-player market and with some capacity and an inferior product to more competitors actually inserted this market with Verizon and T-Mobile. So -- they don't have the same product, so they compete at the lower price point but that's where we see it the most. We've said it many times. Eventually, this capacity that they -- this mobile capacity that they're using for fixed wireless access will run out and we are expecting market dynamics to change at that point.

Patrice Ouimet

On the CapEx, I'll give you a more general answer that we provided in the guidance its basically if you include the cash flow, so it includes CapEx and OpEx -- there's some tax reduction as well coming from this. It's -- the impact on a year-over-year change. So the increase we're making there is about 10% of free cash flow. So for competitive reasons, I won't go into more details and to specifics on this but it gives you an idea of the free cash flow level.

Maher Yaghi

Yes. I saw that number that quote, you said in MD&A. I was trying to figure out exactly what it means. So basically, of the 5% to 10% free cash flow decline 10% is due to wireless CapEx, i.e., if there was no wireless CapEx and operating costs, free cash flow would have been flat year-on-year, basically at the midpoint? Is that how I should be reading this?

Patrice Ouimet

If we had kept the mobility investments which includes OpEx and CapEx at the same level as last year, then the free cash flow would have been stable. So it's the year-over-year increase that's creating that pressure in free cash flow, is that -- if

Maher Yaghi

That makes sense. Okay. And just a follow-up on that. So how should we think about the spending of that cash throughout the year and as we head into getting close to the launch, what is essentially going to be spent on...

Patrice Ouimet

Yes. It's a mix of things. I would say, in terms of cadence, it's spread throughout the year. So we do have salaries. We do have some IT costs in there and some physical CapEx as well. We do own spectrum, as you know, with some deployment requirements as well. So it's all part of that. But I would say it would be -- we already have a team built. So it would be not necessarily meaningfully changing from one quarter to another.

Operator

Our next question comes from Jerome Dubreuil from Desjardins Securities.

Jerome Dubreuil

Another one on wireless. Not that it sounds that you're fully decided. There are some things you still need to check. But I'd like to ask what kind of profitability or IRR thresholds you're looking at for these projects, maybe more a bit in the U.S. I mean, is there an IR threshold similar to what you've been delivering in the past? Or is it more about the growth that could bring you?

Patrice Ouimet

Yes. So obviously, once we are not at a point yet where we're announcing a launch of mobility in either country but we are investing more time and effort into it and dollars, obviously. And we've been at it for a while in Canada, as we've talked about before. In the U.S., it's a bit newer. The approach in the U.S. will be more like other players are doing, at least initially is to go with a pure MVNO. So when you are referring to IRRs, really, it's an extremely capital-light approach where you can basically pay for the service which includes most of the services you need a little different than Canada. And the goal of doing this is, obviously, you can bundle products. And in the U.S., we would be targeting the areas where we operate. As some more specifics on how it could impact our results. It would be more of a fiscal '25 question. And I think once we move closer to announcing launches, then we can probably provide a bit more information at that point.

Philippe Jette

Jerome, keep in mind that on the Canadian side, we will operate within a regulator regulated MVNO regime. So we are progressing in the negotiation. We will update in due time. But there is also a point where arbitration is a part of this regime. We're not there yet. We are negotiating. And eventually, if we can't find all the items that we need to make this a good, viable long-term business, there is an arbitration process.

Jerome Dubreuil

Okay, great. And then, a second kind of similar question but on the cable side in the U.S. Is what we are seeing in terms of fixed wireless having an impact on the mid-teens unlevered returns that you've been alluding to in the past so far? Or are your models maybe longer term and this target still holds?

Patrice Ouimet

Yes. In terms of the -- so you're referring to our network expansions and fiber-to-the-home. Obviously, because these projects are always long term because you load customers over several years. And obviously, we go in areas where there's no fiber-to-the-home. So we come in as a third player there. We've seen some impact in terms of ARPU and cadence of sub loadings but we're still targeting the similar IRRs so it's not to a major level, I would say that would change our targeted returns in the U.S.

Operator

Our next question comes from Stephanie Price from CIBC.

Stephanie Price

I was hoping you could dig into the 6,000 net losses in Ohio which, as you know, a little as higher than the prior 2 quarters. Just curious what you're seeing in the region and how you're adjusting your competitive strategy there? And then also related, just maybe the U.S. market outside Ohio, have there been any changes to the overall competitive environment?

Philippe Jette

Thank you, Stephanie. Well, in Ohio, we as I said, we're investing. We've increased significantly the capacity and the quality of our products. There are network speed and capacity. So our strategy remains to go up upmarket to actually take customer higher-value customers at the mid and upper end of the spectrum. While the -- some are targeting the very low end of this product scale. So we're moving up and it's actually a better product mix and better margins that we're going to find there that we are finding there.

Patrice Ouimet

Yes. And if I can add also, we've introduced an IPTV product. So that -- not every customer has TV services but obviously, this is a lot more modern as a platform. And we're proactively rolling out this service for those who have it. And we obviously are continuing our marketing and awareness campaigns. So between all these things and the infrastructure investments that Philippe referred to which provide a lot more stability and strength in the network, we have a good basis then to be able to do what we intend to do which is to grow the business there. And outside Ohio, we are in different areas, so we operate in 13 states, -- so we are some that are growing, some that are a bit more under pressure and some that are more neutral. So that's why every quarter, we'll have some -- if you look at the past few quarters, we've had some increases and decreases. This one had a small loss in the Q4. And it partially has to do with what's happening nationally in the U.S., partially due to the FWA competition, especially in big urban cities that are putting some pressure on other players and impact on ARPU.

Stephanie Price

And maybe just one more for me on capital allocation. So you've raised the dividend by 10% this quarter and it seems like you paused buybacks over the last few months. So just curious what your thoughts on capital allocation at this point.

Patrice Ouimet

Yes. So, in terms of the dividend for CCA, we kept the trend that we had in the past of 10% and we still feel comfortable with the level of free cash flow payout which is going to be about 40% in the coming year. We always see the share buyback program as more opportunistic. So we did buy a lot in the last 2, 3 years. But more recently, as we've made investments in OXIO, for example. And a lot of investments in network expansions, we reduced this as we're a bit higher than our target leverage. So not by a major margin but still a bit higher. So that's why we haven't been active more recently.

Operator

Our next question comes from Matthew Griffiths from Bank of America.

Matthew Griffiths

My first question really is just does your guidance include an assumption that wireless gets launched in this current year? I understand the wording, I think, around the inclusion in free cash flow which sounds like almost preparatory work. But I was wondering if the revenue and EBITDA numbers are assuming a launch occurs in the year? And then maybe just on Ohio and the U.S. generally. I know this quarter was a bit more negative than you had anticipated. But what is your level of confidence? Or how much visibility do you think you have on when you can kind of turn that broadband subscriber trajectory around and return to growth. And maybe just lastly, if there's any comment you can make on in subscriber growth is challenging and competition is intense and showing those signs of really abating. How much -- how do you feel about your ability to raise prices as a tool to generate growth under the current conditions?

Patrice Ouimet

All right. So in terms of the guidance, because when -- as Philippe said, we're not necessarily planning to launch in either country in the early part of the year. So when we are ready to announce a launch, we'll come back to you. But in terms of the guidance, -- we do have some costs that we're going to invest in. But to the extent there's any revenue in the top line, it will not be a meaningful number. So it's not a very precise answer because we are not ready necessarily to provide exact timing. But I would say there's not any meaningful revenue in the top line. In terms of... Shall I continue... Yes, in terms of Ohio. In our assumptions, obviously, we're working hard with all the investments we've made and what we discussed earlier on this call to turn the Ohio situation.

And we're seeing some positive signs from it as well in terms of NPS scores, for example which we do measure in the area. And our plan is to turn that to a positive number during the year. And in terms of ability to raise prices, this is always something we look at. It's normal to see some price increases as we have, obviously, to cover inflation in our costs. But obviously, it's something we're mindful of, especially in the current context of the economy and we'll take decisions throughout the year on where we want to go with this. But we did put some in the last quarter in Q4 of fiscal '23.

Philippe Jette

We stay encouraged by product mix moving up. And also, as I said before, customer tenure as well. The customers are recognizing the value of our products and they're staying with us. The NPS score is also improving. In terms of price increase, we are not going to make it easy to our competitors and we try to create even more efficiencies in our operation and reduce our own cost to push the absolutely minimum price increase to the market, sometimes even below inflation.

Matthew Griffiths

Okay. I mean, can I follow up maybe just with the -- is there any way you can kind of give us or prepare us for when you do launch wireless assuming you launch in the markets, I know that's a step, maybe you don't want to even kind of acknowledge at this stage because it's early and you don't want to give anything away. But should we be anticipating that guidance would most likely be revised down? Because they were -- in the early period of launching a new service like that, you would most likely have to absorb losses even if it's ultimately successful but in the early period, is that what we should be anticipating just to get some expectations set around, whether it's this year or next, when it does eventually come?

Patrice Ouimet

Sure. So I'll comment on fiscal '24 which we just released in terms of guidance. So we are not planning to change it based on what you mentioned. So we have factored in our plans. It's just that we are not ready publicly to discuss timing of what we're planning to do in the countries at this point. But we're not planning to change guidance for this. As we look forward to future years, then we'll talk later when we are ready to discuss launches, if that answers your question.

Philippe Jette

It's been some time we're at this and I've said it many times, we are working on a capital-efficient model to launch mobile services.

Operator

Our next question comes from Vince Valentini from TD Securities.

Vince Valentini

The question I have starts with the guidance on EBITDA. Just to be clear, Patrice, the 1% drag from wireless, you're going to put that all through the corporate line. It won't impact the Canadian or U.S. divisions at all? And I mean, it just -- it seems like it's $14 million, 1% of what you did last year would be around $14 million. Am I misreading that somehow?

Patrice Ouimet

Yes. So the increase versus last year would be around $14 million, you're right, about 1%. And there is, I would say, the bulk of it is in the corporate line. That's right, as sort of in prelaunch mode at a larger scale. But we have a bit of it in the business units as well.

Vince Valentini

So to follow up in Patrice, if we know it's $14 million of OpEx and you say it's 10% hit to free cash flow, why is it that you think we don't have the CapEx number? I mean I can't -- are the cash tax savings like material on $14 million of OpEx?

Patrice Ouimet

But again, this is the increase in year-to-year, right? It's not the absolute number. But if I heard your question correctly, I'll try to answer it. So you had the increase in OpEx and then we do have some IT integration costs which falls just below the EBITDA line. And we do have some CapEx as well and then some tax reduction coming from these investments. That provides for -- if you take a 10% of free cash flow, you do get to about an increase of $40 million net on this.

Vince Valentini

So, the IT costs you're talking about, could be characterized as a type of CapEx as well. Could they not?

Patrice Ouimet

They used to. And now given the new roles for the past few years, there's a number of IT costs that are not capitalizable anymore. But -- so that's why they're being shown basically just below the EBITDA line.

Vince Valentini

And then just to clarify again, as you've highlighted and as it's abundantly obvious, the U.S. MVNO would be entirely reselling somebody else's network with no obligation to build. So it would be not just CapEx light, it would be almost CapEx 0. So, any CapEx you do imply in your free cash flow has to be vast majority in Canada. Is that incorrect?

Patrice Ouimet

That's right.

Vince Valentini

Okay. So I wondered just make sure I clarify all those numbers first. And just as one other big picture question. Look, I know you think wireless is important to your future. But you've already spent $400 million on spectrum. There's more spectrum coming than just tip of the iceberg. -- you're already having operating losses and incremental CapEx. That may all seem finding good when your share price is over $100 but now that you're at $56, what does the Board think about this in terms of weighing that longer-term risky investment versus just simply buying back your stock?

Patrice Ouimet

Well, our network builders Vince, we build high-quality networks, high-quality products to be selling in the market. We expand our coverage. That's our business model. So we work constantly on providing this service as the best price possible, the lowest cost possible and keep on adding. Now with mobile or wireless and wireline services coming together, it's a necessary evolution going forward to have the two products.

Vince Valentini

Can I ask a similar question on the expansion CapEx and the rural stuff. Is the amount this year still seems quite high. Nobody knows exactly what's going on with the BEAD program and the U.S. trajectory. But for the Canadian stuff, would you expect a big decline in 2025 because you've already finished Quebec and you should be pretty much finished the Ontario network wins in this fiscal year, so that there's a big step down in '25? Or is there -- does it stay at the same high run rate for a few years?

Patrice Ouimet

Yes. For Canada, you're right that -- so we're done with Quebec. The focus now is Ontario. There is more construction than fiscal '24 in Ontario than in '25. So there should be a step down. But we're not going to be fully done this year because we're -- as part of this, there's many smaller projects as part of the total build and some come earlier than later. And then I do expect that after that in '26, that would be pretty much done. We always do a bit of construction every year as there's new expansions in new neighborhoods in the areas where we operate. But the subsidized build should be higher this year, slower next year and probably no or very close to 0 in 26 in Canada.

Philippe Jette

Vince, let me link those 2 components for greater clarity here. We invest -- we have invested massively upgrading our broadband networks. Every new expansion has been in fiber. There was a lot of investment to create a high quality, a superior broadband network, knowing that mobile networks or wireless services are 95% wired based on fiber optic networks. It's only natural to add the wireless over and above the investment we've made in improving our broadband network. It goes together. We're at that stage.

Operator

Our next question comes from Drew McReynolds from RBC.

Drew McReynolds

Yes. A couple for me. Just shifting gears a little bit here on the macro side for a couple of quarters now, in the U.S., you've alluded to a softer macro environment. In Canada, among all the Canadian operators, there just doesn't appear to be anything that's really worth noting outside of the edges and outside of media. Just wondering if you can kind of compare and contrast the 2 countries in terms of what you're seeing in real time here because it all feels like something is coming here in Canada but no one's really flagging anything at this point? And then secondly, just back to the U.S. wireless MVNO initiative, you've kind of brushed that off going back 3 or 4 years. I think we're all certainly up to speed on dynamics in the U.S. market. Just love at a high level why now, what has changed specifically in your thinking on wireless, whether that's consumer-driven or competitive driven? Any of that high-level context be great...

Philippe Jette

There was always a barrier to entry in wireless markets but the one on the U.S. side has been lowered significantly by the MNOs wanting to enter into commercial deals. So that's one of the significant change. So now there are MVNOs and even MVNEs in the U.S., there's a market and it's much more easier than it was a number of years before to strike a good deal, although it's a very light MVNO, meaning you only need some IT equipment and sales and marketing to jump in this market. So it's -- the market has evolved on the wholesale commercial basis in the U.S. I forgot your first question. What your referring...

Drew McReynolds

Yes. Some on the macro side, macro headwinds, just comparing the 2 countries where in Canada, at least it feels as if we hear from all the operators, like not a big issue but I'm not sure everyone is buying it at this juncture.

Philippe Jette

Yes. Well, of course, in Canada, we focus on our markets. We expand and we keep the high-quality products, keeping our customers app here. Yes, there are competitive pressures. We can see here and there are some price points to prove it. But we're well equipped to fight in our territory to protect our existing base and grow where we have expanded network. So it's not the same level of intensity that we see in some places in the states and it's very large players that sometimes they can't seem to have the ability to adjust their pricing level at the city level. So when they suffer from competitive intensity in some place, they lower price in larger area than needed. That's not something we see in Canada. I think we're more disciplined in Canada and we can fight market by market when needed.

Drew McReynolds

And sorry, Philippe, just as a follow-up to, thank you for that contrast. On the macro side, in terms of economic headwinds, just what you're seeing here in Canada and how that contrast to the U.S.

Philippe Jette

Well, we see on the consumer market on both sides, I had all inflation is there. The pressure on the consumer is really high. There seems to be a little bit more challenge for consumers in the U.S. market.

Patrice Ouimet

If I can add also, obviously, we do track this very quickly, very carefully and it varies a lot by the regions we operate, especially in the states we operate in very different regions. In terms of tracking our bad debt, this is something that's under control. I would say the major difference would be on the video side, partially because there's more over-the-top offerings in the U.S. but also for consumers that want to reduce their bills. That's sometimes a way that they're using. Although I must say, more recently, we're seeing signs of stabilization. We have yet to see this in our real numbers but from different information, we're seeing as people take different OTT services, it does add up as well. And those costs on the OTT side are going up quite rapidly as well. So it's evolving but I would say the rate of attachment on TV products, is obviously a lot lower in the U.S. and that's something that has impacted the telecom operators, especially on the revenue side.

Operator

There appear to be no further questions. I will turn the conference back to Mr. Ouimet.

Patrice Ouimet

All right. Well, thank you, everybody and we'll be looking forward to talking to you for the next quarterly call in January and feel free to call us if you have any questions. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.

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Cogeco Inc. (CGECF) Q4 2023 Earnings Call Transcript