Calamos Global Total Return Fund (CGO) Q1 2008 Earnings Report, Transcript and Summary

Good day, and welcome to theCogeco/Cogeco, Inc. Q1 Earnings Conference Call. This conference is beingrecorded [operator instructions]. Atthis time I will turn thecall over to Mr. Pierre Gagne, Vice President and Chief Financial Officer, goahead, Sir.

Thank you, good morning, everybody. I have with meLouis Audet, President and CEO, AlexTessier, our Treasurer, Marie Carrier, Director ofCommunications, and Éric Simon, Director of Financial Planning. Of course, this call is subject to theSafe Harborprovision, the usualforward-looking statement provision included inyour press release that was released infact last night. We recommend that thelistener read thesection in thepress release that goes together, of course with this call. Before we go to our question and answer period, Louis Audetwould like to make come comments on theQ1 results.

Thank you, Pierre,and good morning, ladies and gentlemen. Welcome to this conference call andHappy New Year to you. Thefirst quarter of fiscal 2008 hasbeen very good. We have continued to growin radio and incable very nicely, and I will address cable first. Thefinancial results of Cogeco Cable areamong the best inour history. We have recorded very good sales growth of 13.4% compared to lastyear same period. Excellent EBITDA growth of 17.5%, our EBITDA margin hasrisen to 39% consolidated. Free cash-flow is at$21.6 million and RGU growth hasbeen a very good83,000. We areon track to achieve our guidance, which we maintain unchanged,except of course, for theincome tax adjustment to bereflected in thesecond quarter. This would bring our net profit to $118 million, which will bea record number forthis company. In Canadawe have had good RGAgrowth. We benefit from arational business environment. We arewell exceeding management’s original expectations for Canada,which is more than compensating for thesoftness that we have witnessed inPortugal. In Portugal,their pricing environment is evolving into amore rational environment. We arenow adjusting to thefact there is one more competitor inthe marketplace,which, of course, was fully anticipated, everyone knew this was coming. Now theadjustment process is underway. Portugal,as you know, was acquired because itwas a good source offuture growth. It haslow basic penetration,low basic high-speedInternet penetration and is areservoir of growth for thefuture for this company. Theprospects for Cogeco Cable areextremely good for 2008 and for years to come. On thebroadcasting side now, radio continues to grownicely on the salesand EBITDA fronts. Audiences continue to growand we are verysatisfied. On thetelevision side, as you know, TQS is currently under theprotection of the Lawof Arrangement with its creditors. This marks our withdrawal from generalinterest television, and will beconsidered as adiscontinued operation as of December 17th. Hence, we’ve revised our Cogeco, Inc, guidance to reflect thedisappearance of TQS and include theincome tax benefit, as well, inour forecast. Hence if you were to remove thewrite-off related to TQS, you would find that our net income hasin fact risen 25% inCogeco, Inc compared to last year. That complete my comments and we would bedelighted to answer your questions.

Thank you [operator instructions]. Please stand by for thefirst question. Thefirst question comes formPeter McDonald, GMP Securities, please go ahead.

Thanks, can you quantify thehigher operating costs inPortugal? Howmuch was marketing and how much of that was re-branding versus back to schoolpromos and was there aspecific component specifically related to TVCabo?

We’re mentioning that we have ahigher cost, when you look atthat plus thecertification itrepresents roughly close to €1 million. Infact, if I could expand on your question, when you look atthe results inPortugal ineuros, our revenue hasincreased by 4.5%. You see2.8% on the press release,that's the effects offoreign exchange. Ofcourse that is 14363 last year and 14119 this year. If you look atit ineuros the revenue hasincreased by 4.5%. When you’re excluding theadditional marketing and theC198 which came close to €1 million, you seethat the EBITDA ineuros denominated increased by about 4% to 5%. That’s what happened roughlyduring the quarter. Iknow when you look at itin Canadian currency itlooks a bit awkward,but this is what happened ineuros.

Last quarter you talked about having optimism that you’d beable to exceed the 37%margin expectations on afull year basis in Portugal.Are you still movingtoward that number?

What you will see, we’ve seen that with thepricing situation in Portugal,we’re starting to seesome changes inthe pricing with ourmain competitor. We think that this changewill continue in thequarters to come. It’s abit early to see ifwe’ll achieve it. We said we would achieve itby this stage, we haven’t changedour guidance. To answer your question more accurately, we will needanother quarter to seethe progress interms of pricing competitiveness is evolving toward amore rational level. We seesome good signs right now.

If you areunable to put forward any pricing increases for theyear, what do youthink a reasonableexpectation on EBITDA margin would be?

We’ve already put through arate increase thisyear, they would average across theboard about 4% and they’ve taken effect January 1st. They were, ofcourse, announced around December 1st, and we would expect then tohave a drag effect on customeracquisition inDecember.

Lastly, because we don’t have aQ1 comparison number for your basis, can you give us anidea of theseasonality that would ordinarily bein Q1 versus therest of the year?

Typically this is agrowth market, it’s a lowpenetrated market, basic is penetrated inour system about 34%. Typically what you dohave is a continuousupward trend, I don’t think it’s aquestion of seasonality, it’s aquestion of basically penetrating further and further and rising. Of course nocurve is a perfectstraight line, sometimes itgoes above the line,sometimes it goesunder. The generaltrend, of course, is upward.

Okay.

Your next question comes from Greg McDonald of National BankFinancial. Please go ahead.

Thanks, good morning, guys. Thequestion is more of astrategic review than aquestion. I don’t to debate thesubscriber outlook. I think we’ve seen what happened inPortugaul. You’re somewhat saying that theRGU guidance is probably alittle more at riskthan what is the case inCanada. OverallI think we can allagree that subscriber growth is showing signs of maturity. I think on thatbackdrop a lot ofpeople would agree with meon this, at least inCanada Cogeco’s footprint is such that you probably have less risk of IPTVthreat relative to companies that have more subscribing customers inurban markets compared to your more suburban outlook. Given thefact that you’ve got less of anIPTV threat I wonder if you might indicate to us as themarket transitions to amore mature subscriber growth is thecompany willing to take amore aggressive bundling strategy. I’m not talking about stand-alone pricing,but bundling pricing to achieve theRGU guidance, or to achieve more of afocus on RGU growth relative to margin growth. I’m thinking more of Canadawhen I’m asking that question.

I will attempt to answer your question, I will cover Canada,but I’ll cover more than Canadain answering yourquestion. We perceive our role as manager for shareholders to optimizethe profitability of thecompany. That’s what we perceive our role to be. Hence ina maturing Canadianenvironment our success should not bebased at thespeed of which we bring inRGU. It should bebased on how much profit we deliver to theshareholder. When you dohave a maturingenvironment, then you have anobligation requirement to find new sources of growth, our decision to lookoutside of Canada for, ineffect, reservoirs of future growth, how fastthat growth occurs depends on thespecifics of each market. We have anexample here in Portugalwhere in thevery first year, we exceeded our expectations by very high amounts, sowe’ve had wonderful success. Now there’s adisruption because of thecompetitive situation and you look atthe first quarter andfrom the meetings thatI’ve done this morning, I guess some of you aredisappointed with that. Cumulatively speaking we’re very happy. There arefactors across markets, which can occur, but our keyresponsibility in amaturing Canadian market is to find other reservoirs of growth and this is whatPortugal doesfor us. It’s penetrated, as you know today, basic penetration of our system isabout 34%. In thecountry as a wholevideo penetration is at50%. High-speed Internet penetration is atabout 35% in thecountry as a whole.This points to room for substantial future growth, hence our interest infinding other reservoirs of growth, which we aredoing now.

That's helpful, thanks. Can I ask aquick follow-up? With respect to Canada, because itis at abit of a differentmaturity level can I take your comments as being long-term profitability ornear-term. I’d actually argue and have for some time that I think thecable industry here should continue to press theaccelerator on subscriber growth for future profitability. Because you have awindow of opportunity for growth right now as thetelcos are kind ofstuck without asignificant broadband product for both television and high-speed data, wouldyou agree with that?

I think your though is aninteresting one. Whether itwill cause us to changeour behavior, I couldn’t answer that question right now.

Okay, thanks for your response.

Your next question comes from Vince Valentini of TDNewcrest. Please go ahead.

Thanks very much. Maybe amore direct question to what Greg was getting atis: the rateincreases in Canadathis year, any thoughts atthis point? Are you thinkingalong the same timeframe of theMarch/April rateincreases that you put inlast year? Then just aspecific question, inyou end-of-the-year release you talked about a$100 million new debenture issue being done on aprivate placement basis. I’m curious what that relates to. Areyou raising funds to prepay your bonds coming due later this year’s or what arethose funds earmarked for? Thanks.

Perhaps I could address therate increase questionand Pierre will address debenturequestion. We’ve taken note of thefact that both satellite companies areadding a $3 digitalaccess fee to their invoicing. As you know philosophically, we areconvinced that theproducts and services that we sell arevery valuable for our consumers. From atheoretical standpoint, we will follow suit with our usual rateincrease strategy. What that translates into concretely interms of how many dollars on which product, when, is still inthe development stage.There is an issue ofmarket-share, profitability and optimization, which we will look at. Philosophically, we’re not theprice setter, but we dofollow the rateincreases.

With respect to your second question, Vince, ineffect we have thematurity in October’08 of 150 US. If you remember back in2001 we had theforeign exchangecontract at 1.5910which amounts to about 240 million Canadian. We have another maturing inJune ’09 of 150 million, soyes, it’s pre-financing.

Okay, thanks.

Your next question comes from Jonathon Allen of RBCCapital Markets. Please go ahead. Jonathon Allen – RBC Capital Markets: Thanks very much. Two big-picture questions for you, Louis,first going back to Portugal,I agree with your comments that since theacquisition in 2006results have been much better than theinvestment community initially feared. But thelast couple of quarters with theincreased competition on pricing, itis a disturbing trend,especially when we seeEBITDA declines this quarter even with theforeign exchangeimpact excluded from it. Itbrings to mind thatyou paid 13 times for theasset a few years agowhen it was growingEBITDA 20% to 30%. Thequestion for you is, this near-term trend that we’re seeing, is this actuallysomething that concerns you? Secondly, can you actually dosomething about it oris it just amatter of waiting to seeif your competitors improve their pricing? Is there anything that you can doas far as repositioning thebusiness to actually getrevenue and RGU growth accelerating? Or is ita matter of passivelywaiting to see if yourcompetitors can dosomething. Thesecond big-picture question is with TQS now increditor protection, there’s really not many assets other than afew of the radiostations at CGO, and Ikind of question why we still have two independently trading stocks and isthere a desire tocombine those two and save some of thepublic company costs? Thanks.

Thank you. To your first question, amI concerned? Of course, I'm like everybody else, I like to seedouble digit EBITDA growth. On theother hand, am Isurprised? No, I’m not surprised. We knew this was going to happen. You can nothave an independentcable company spin-off from theincumbent Ilec [ph] and expect nothing will happen. Of course, something willhappen. Of course, it’s fully understood themoment you enven consider making atransaction like that you know there aregoing to be pockets ofwarm air along theway and that’s a riskyou accept. You think theasset, in thelonger-term, and I do, and we alldo, is worth a lotmore and constitutes avery good reservoir of future growth. What can you do? We currently arerated as one of themost reliable services inthe country ahead ofour competitors on therange of our services. I think that’s akey differentiatingfactor that consumers have inmind when they make adecision. We can adjust our expenditures. We can adjust some of our packages.There are anumber of things we can doand we are doing. Thisshould not come as asurprise to anyone and itshould not be made formore than it actuallyis, either. With regards to your second question, I understand thequestion. Theexpenditures associated with having public companies arein fact very small. Thetwo-tier structure is one that allows theshareholders of Cogeco, In. to maintain control. And allows Cogeco cable tofinance itself and it’s future growth with ample room to doso. So there areno immediate plans to combine thetwo. Jonathon Allen – RBC Capital Markets: Instead of asking if there areimmediate plans, though, thequestion is from aCogeco, Inc. shareholder perspective is hasit traded asignificant discount to thenet asset value? From theCogeco, Inc. shareholder perspective, itwould make a lot ofsense to combine the twounless you were planning to make additional media acquisitions along theway, which would actually put additional assets atthe Inc level.

Well, thank you for voicing your opinion. Jonathon Allen – RBC Capital Markets: Okay, thank, Lou.

Your next question comes from Rob Goff from Haywood. Pleasego ahead.

Thanks very much, two questions, if I may. First one will bea simple one withrespect to your plans inPortugal with anMVNO, in that PTN hasdiscussed doing so inI think Q3 of ’08. Thesecond one is more of abroader theoretical question once again on Portugal.Could you see orconceivably consider ascenario where PTN and Cabovisão were more coordinated and thecountry was rationalized sothat it was more of acable versus thebigger competitor PT. Soit would bemore of a twocompetitor market versus three?

That's aninteresting question. We have no plans to dothat.

Maybe to cover PTN Cabo, of course what you seein North America, theplayers have a morerational approach. That's always welcome when you’re competing against telco.That’s an interestingthought that you’re bringing here. I guess with PTN, they have new managementnow. They are getting inplace. I guess we would have to seehow what you’re proposing would make sense and how itcould take place. Again, there is always thecompetitive nature inour business. But I agree with you, pricing should bemore rational. Itwould make more sense for everybody, and everybody would benefit from that.

With regards to theMD&O, quite frankly, thefact that a keycompetitor is going to doit, for us is not sufficient that it’s theright thing to do. Sometimes you have to dosomething. We have no evidence yet that this is something that we ought to bedoing. We’re not dogmatically opposed to doing it, as we aren’t inCanada, by way.We just do itwhen we think it’s theright thing to do, and until then, we don’t. I think we’re approaching itwith a very open mind.

Let’s not forget that inPortugal themobile penetration is 112%, whereas inCanada it’sabout half of that number. It’s adifferent business case inPortugal than itwould be inCanada.

Okay, thank you very much.

Your next question comes from Bob Bek from CIBC World Markets. Please go ahead.

Just to clarify on the competition situation in Portugal, the fierce competition you talked about in the quarter, when you did Q4 in late October you talked about the pricing through to late October, then the rational price increase. This is still what we’re talkingabout in this quarter, right? That’s the effect we saw in Q1, and after October 16th you saw some morerational pricing from competitors, is that the case?

Yes, it is the case. Of course, it’s hard to cut these things with a knife, so it does have an effect on more than one quarter.

Okay, so it’s a continuation of what we talked about in Q4 then.

That's exactly right.

Okay. Related to that, could youtalk about the strategic plan issued by YPTN in December? It’s pretty aggressive growth goals, I guess bythem. In particular, one on expanding homes past, materially past the outskirts of existing cabled areas. Is this anything thatyou would say you would not have expected or that you see as a bit more aggressive than you would have thought in the past?

I think there are no surprises in that strategic plan. I think it’s what you would expect a newly turned public company to say it’s going to do. Based on our experience, we thinkmanagement is going to come to the realization that they can’t, probably it’s going to be difficult to do everything. Probably they’re going to have to decide whatthey do. Of course, maintaining your share price and generating profits toensure that you maintain your share price is also a key consideration. I think what you see is an announcement that was fully anticipated by us and could be expected for a new public company. Now they have to generate returns fortheir shareholders as we do. It’s the best I can say about that.

That makes sense. Thank you. On the digital launch, it was launched in Q1, but there are no subscribers to talk about by the end of the quarter, is that the case?

What we’ve done is the first step we ‘ve taken, Bob, is convert analog converterto digital converters for PTB services. The next step, which we are within weeks of launching is to offer a service or a package, like a tier, if you will. If you want to compare it in Canada, it would be digital. We’re within weeks of launching that. We may be behind a few weeks, but not more than that. We’re stillcomfortable with the target for digital. I wouldn’t read too much on thisfor Q1.

Thank you, just one morequestion, if I could, for you, Pierre, the interest expense, you’re pacing below the reiterated guidance of 72 million. Can you talk about the Q1 pace?

What you may see is how the market evolved. We’re planning to do some initial tests. We did this one, we were planning to do more, when we spent the budget. As you know we’re looking for some euro debt lastsummer, which didn't come out. We’ll have to see how things evolve during spring time. In any event, when we announce our results in April for Q2, we will have a revised guidance taking into consideration how things are going in Canada, Portugal, interest rates and so on and so forth with fresh, clean guidance. On the EBITDA line of 425, we’re extremely comfortable with thatnumber.

Okay, thank you very much.

Your next question comes fromDvai Ghose of Genuity Capital. Please go ahead.

Thanks very much. My first one isa big-picture question for Louis. Does the experience in Portugal make you less like to invest in a cable over-build environment in the future?

I think this is way too early todraw such a conclusion. You’re in a marketplace where the household density is double what it is in our franchise in Canada. You have one more competitor. I think it’s way too earlyto draw such a conclusion. We, in fact, maintain our original view, unless proved wrong, ofcourse. This is a very good source of wool, whether it occurs in the fifth or the sixth quarter of what is a long-term investment that is counted in decades, is an interesting. But it shouldn’t worry you too much.

I think that's fair. Coming backto Bob’s question, in the past you said about 60% of Cabovisão’s homes passed tooverlap by TV Cabo, given the more aggressive build-out plan since the spin-off, has that number changed and is it likely to change in your opinion?

I think that you can expect that it will change. Sure, I think you can expect it to change.

Okay, would you respond with amore aggressive over-build intheir territories as well?

Our job is to make money. Sowe do what we think isthe right thing to doto make money. I don’t have aneasy answer for you. But I can tell you that’s our job, it’s to make money andthat's what we spend our time thinking about.

Okay, two last quick ones, if I may. You alluded to thefact that a lot of thecompetitive pressures that we saw atthe end of thefourth quarter and thebeginning of the firstquarter suggesting that with rateincreases, more favorable currency and soon that conditions may beimproving in Portugalon a financial as wellas growth basis. Is there any evidence that you can give us of that interms of perhaps run-rate of RGU growth or revenue or capital growth inthe second half of thequarter versus thefirst? Can you give us anidea of theprogression?

It’s difficult to look atit this way, but Ijust want to explain that when you want to compare Q2m thecurrency last year was at1.51 Canadian per euroand right now we’re trending atabout 1.46-1.47. You will have, let meout it this way, a$0.05 difference quarter-over-quarter. With theprice increase that we pout inplace in Januaryshould improve on our results. It’s very difficult to cut itthe way you want us toat this stage of thegame.

Makes sense. This is thelast question and I think I know your answer. TheAWS rules in Canadahave obviously been very enticing, potentially for new entrance. Not enough to changeyour mind?

Atthis stage, no.

Okay, thanks very much.

We’ll take one last call.

Your last question comes from John Henderson atScotia Capital. Please go ahead. John Henderson – Scotia Capital: Thanks very much. First off RPU inPortugal looksas if it did correct ineuros by about almost 5% inthe quarter on arevenue per RGU basis.I wonder if you could comment, is that particularly retention initiatives inthe quarter, or whatmight have brought that down? Then is that anew level from which we should seeprice increases applied?

I’m sorry, you said that theRPU was down?

Well, your RGUs areup 9%, your revenue is up 4.5%.

I think what you should think of itas, there were some promotional pressure that bought our RPU lower. Thesepromotional pressures areabating and we have added rateincreases to that. John Henderson – Scotia Capital: Okay, that’s kind of what I expected as ananswer. Turning to Canada,margin improvement hasbeen really nice over thelast few quarters. Infact, three quarters ina row you exceeded 45%margins excluding themanagement fee. Q2 last year showed some margin weakness on increased costs,down at 43% margins. Iwas wondering if there were certain one-time elements last year, insecond quarter, or we should expect these 45%-ish margins sustainably?

We had abig push, if youremember, last year on theRGU in Canadain telephony andopening up new areas and soon and so forth. I’mgoing now with my memory, which is often not that great. We had that situation,I my memory serves mewell, on the Q2. As wesaid, once we reach acertain level of penetration for telephony, after that, theEBITDA margin is improving and we’ve said that, if you remember late fiscal2006. We said as thepenetration for telephony improves this will drive somewhat theEBITDA margin, You seethat in thequarters for thesecond half of theyear and this year. We areanticipating improvement of theEBITDA margin. I wouldn’t venture to sayover time, but we should improve our EBITDA margin nicely over this year. John Henderson – Scotia Capital: I’ve got to point at24% EBITDA growth inEBITDA growth inCanadian operations as outstanding. I just have one last follow-up on TQS.Would you say thatit’s kind of EBITDA positive right up to December 17th?

It’s hard to sayDecember 17th. Itwas positive Q1, but we knew as we were coming into Q2 and theQ4 that it would bemore difficult. You've seen thesales and the revenuethat were done. It’s hard for us right now to estimate what will be, or toconsolidate therevenue up to December 17th. I don’t have anexact figure of what itwill be. We should anticipate ameaningful figure interms of time whether it’s positive or negative. John Henderson – Scotia Capital: Okay, thanks very much.

Thank you, this completes our conference call. Thenext one is scheduled around April 10th, Friday. If you have furtherquestions, Alex and I areavailable to answer these questions. Thank you for your participation and have agreat day.

This concludes theconference call for today. Thank you very much for your participation and have anice day.