Cogeco 2010 Annual Report Download - page 40

Management’s Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 39
During the fourth quarter of fiscal 2010, a dividend of $0.14 per share was paid to the holders of subordinate and multiple voting shares,
totalling $6.8 million, compared to a dividend of $0.12 per share, or $5.8 million the year before.
Fiscal 2011 financial guidelines
For fiscal 2011, Cogeco Cable maintains its preliminary projections issued on July 7, 2010. The Corporation expects to achieve revenue of
$1,340 million, representing growth of $59 million, or 4.6% when compared to fiscal 2010 financial results. The guidelines take into
consideration the current global economic environment. In Canada, Cogeco Cable’s footprint includes certain regions in Southern Ontario
where the automobile manufacturing industry is a significant driver of economic activity. The sharp downturn experienced by this industry in the
past years is expected to continue to have an adverse impact on the level of economic activity including consumer expenditures on goods and
services within those communities. In previous recessionary periods, demand for cable telecommunications services has generally proven to
be resilient. However, there is no assurance that demand would remain resilient in a prolonged difficult economic environment. These
guidelines also take into consideration the competitive environment and the deployment of new technologies such as FTTH, Fibre to the Node
(“FTTN”) and IPTV by the incumbent telecommunications providers.
Revenue from the Canadian operations should increase as a result of RGU growth stemming from targeted marketing initiatives to improve
penetration rates of the Digital Television, HSI and Telephony services. Furthermore, the Digital Television service should continue to benefit
from the customers’ ongoing strong interest in the Corporation’s growing HD service offerings. Canadian operations revenue will also benefit
from the impact of rate increases implemented in June 2010 in Ontario and Québec, averaging $2 per Basic Cable service customer. Cogeco
Cable’s strategies include consistently effective marketing, competitive product offerings and superior customer service, which combined, lead
to the expansion and loyalty of the Canadian operations’ Basic Cable Service clientele. As the penetration of HSI, Telephony and Digital
Television services increase, the new demand for these products should slow, reflecting early signs of maturity.
European operations are expected to continue to grow their customer base with projected net additions across all services that should result
from the acquisition and retention strategies implemented in the second half of fiscal 2009. The economic difficulties being experienced by the
European market at large and the transitory competitive environment which has plagued the Portuguese telecommunications industry for the
past two years are beginning to assuage, which should lead to an increase in revenue in local currency for the 2011 fiscal year, however the
economic climate is expected to remain difficult in the short-term, and the decrease in the expected exchange rate for the Euro compared to the
Canadian dollar in the upcoming fiscal year is expected to offset the favourable impact on Euro-denominated revenue. For fiscal 2011, it is
anticipated that the Euro should be converted at a rate of approximately $1.35 per Euro, compared to an average rate of $1.4316 per Euro in
fiscal 2010.
As a result of increased costs to service additional RGU, inflation and manpower increases, as well as the continuation of the marketing
initiatives and retention strategies launched in Portugal in the second half of fiscal 2009, consolidated operating costs are expected to expand
by approximately $39 million, or 5.1% in the 2011 fiscal year when compared to the financial results for fiscal 2010.
For fiscal 2011, the Corporation expects operating income before amortization of $530 million, an increase of $20 million, or 3.9% when
compared to fiscal 2010. The operating margin is expected to reach approximately 39.6% in fiscal 2011, compared to 39.8% for the 2010 fiscal
year.
Cogeco Cable expects the amortization of capital assets and deferred charges to increase by $16 million for fiscal 2011, mainly from capital
expenditures and deferred charges related to RGU growth and other initiatives of fiscal 2011 and the full year impact of those of fiscal 2010.
Cash flow from operations should finance capital expenditures and the increase in deferred charges amounting to $340 million, an increase of
$20 million compared to the actuals for fiscal 2010. Capital expenditures projected for the 2011 fiscal year are mainly due to customer premise
equipment required to support RGU growth, scalable infrastructure for product enhancements and the deployment of new technologies, line
extensions to expand existing territories, and support capital to improve business information systems and facility requirements.
Fiscal 2011 free cash flow is expected to decline to $55 million. The decrease of approximately $120 million, when compared to the
$175 million actuals for the 2010 fiscal year, is primarily due to the projected fiscal 2011 income tax payments of approximately $65 million
compared to the fiscal 2010 income tax recoveries of $41 million as a result of modifications to the corporate structure and to the increase of
$20 million in capital expenditures. The $106 million variation in cash income taxes year over year combined with the increase in capital
expenditures will be partly offset by the growth in operating income before amortization. Generated free cash flow should be used primarily to
reduce Indebtedness, thus improving the Corporation’s leverage ratios. Financial expense will increase to $70 million as the anticipated
decrease in Indebtedness will be offset by an increase in the Corporation’s cost of debt reflecting current market conditions and additional costs
related to the new Term Revolving Facility previously described in the “Financial position” section. As a result, net income of approximately
$120 million should be achieved compared to $157 million for fiscal 2010. Fiscal 2010 net income includes a favourable income tax adjustment
of $29.8 million related to the reduction of the Ontario provincial corporate income tax rates for the Canadian operations. Excluding this amount,
fiscal 2011 projected net income of $120 million represents a decrease of $7 million when compared to adjusted net income of $127 million for
fiscal 2010.