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Edited Transcript of RCI.B.TO earnings conference call or presentation 23-Jul-19 12:00pm GMT

Q2 2019 Rogers Communications Inc Earnings Call

TORONTO Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Rogers Communications Inc earnings conference call or presentation Tuesday, July 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Staffieri

Rogers Communications Inc. - CFO

* Joseph M. Natale

Rogers Communications Inc. - President, CEO & Director

* Paul Carpino

Rogers Communications Inc. - VP of IR

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Conference Call Participants

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* Aravinda Suranimala Galappatthige

Canaccord Genuity Corp., Research Division - MD

* David William Barden

BofA Merrill Lynch, Research Division - MD

* Drew McReynolds

RBC Capital Markets, LLC, Research Division - Analyst

* Jeffrey Fan

Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst

* Maher Yaghi

Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Tim Casey

BMO Capital Markets Equity Research - Equity Research Analyst

* Vince Valentini

TD Securities Equity Research - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications Inc. Second Quarter 2019 Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Paul Carpino with Rogers Communications. Please go ahead, Mr. Carpino.

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Paul Carpino, Rogers Communications Inc. - VP of IR [2]

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Thank you, Ariel. Good morning, everyone, and thank you for joining us. Today, I am here with our President and Chief Executive Officer, Joe Natale; and our Chief Financial Officer, Tony Staffieri.

Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2018 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ.

With that, let me turn the call over to Joe.

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [3]

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Thank you, Mr. Carpino, and good morning, everyone. Today, I'm pleased to share our results and our progress in the second quarter.

Overall, it was a pivotal quarter for Rogers and the Canadian wireless industry. We continued to deliver strong fundamentals and it is from this position of strength that we introduced fundamental changes to our wireless offering. We made these changes after a thorough and thoughtful analysis on where the industry is going and what matters most to our customers. Now more than ever, customers want worry-free data. 5G is at our doorstep and we need to unlock and unleash customer demand for data. This is a bold and important step forward, and I truly believe it is the right time to lean in and drive this industry direction.

We approach this change with 3 main objectives. Number one, drive growth and data usage by delivering a worry-free proposition for customers. Secondly, get ready for 5G by shifting the value proposition from capped data to focus on the quality and capability of the service, a necessary evolution and a key market construct to prepare Canada for 5G. Thirdly, redefine industry economics around equipment financing and a better customer experience to drive affordability, reduce friction and reshape the subsidy model over time.

Overall, we believe a small moderation in short-term growth rates will yield sustainable, superior economics in the medium and long term. While it is still early days, the response has been overwhelmingly positive. Our customers and our frontline team love the simple, easy pricing. Our national competitor saw the strategic merit of our move and followed our lead. Overall, this was the right move for our customers, our company and our country.

I will share further details on customer uptick in a few moments but first, let me turn to our overall second quarter results. Overall, we continued to deliver strong, profitable growth. In Wireless, we saw strong growth in service revenue and adjusted EBITDA.

We attracted 77,000 postpaid net additions and we executed strong pricing discipline to attract the right customers with the best lifetime value. We grew blended ARPU by 2% and we delivered postpaid churn of 0.99% for the second consecutive quarter, reflecting our steadfast focus on the customer experience and customer base management.

In Cable, we delivered solid growth in revenue, margin, adjusted EBITDA and free cash flow, accompanied by strong Internet loading. We also continued to grow Internet penetration for the 16th consecutive quarter.

On a consolidated basis, we grew revenue by 1% and adjusted EBITDA by 9%. We returned over $300 million to shareholders through dividend payments and share repurchases in the second quarter, and we will return over $1 billion to shareholders this year.

As I said earlier, thanks to these robust fundamentals, we were able to introduce a number of strategic moves to put our customers first.

We were the first national carrier to introduce unlimited data plans with no overage fees and Canadians are responding. 365,000 subscribers are already on these new plans. When you look at our customers who migrated, roughly 2/3 upgraded their price plan choosing to spend more and 1/3 are spending less. Overall, these customers are using 50% more data. This is impressive growth in just 6 short weeks and it's tracking favorably to our business case.

Thanks to the simpler pricing construct and important digital investments, online transactions are up substantially and average handle time is down both in retail and care. A greater reminder that customer experience and cost management do work hand in hand.

In addition, we were also first to introduce both 24- and 36-month device financing. We have made it instantly more affordable for Canadians to purchase the latest devices any day of the year at $0 and interest-free.

In the first 2 weeks, between the 2 options, more than 50% are choosing the 36-month plan. It is clear customers have valued the longer-term payment plan as it helps them purchase the latest devices on more affordable terms. These new financing options not only make wireless services more affordable but by separating the embedded subsidy, it is also more transparent. Overall, we believe this construct should improve device subsidy economics over the long term.

The team delivered these 2 critical customers first initiatives flawlessly and I'm incredibly proud of their execution efforts. We are in a long-term journey to deliver the best possible experience to our customers and these were important moves with more to come.

We also made significant headway on our 5G roadmap. We started to deploy 600 megahertz capable radio equipment and will start to deploy 600 megahertz spectrum later this year. As you recall, we secured 52 of 64 available licenses of this precious resource in every single province and territory. This low-frequency, wide-area spectrum is foundational to our 5G rollout starting next year. Last month, we announced a partnership to open a new national center for cybersecurity at Ryerson University. Last week, we announced the creation of a 5G innovation lab with Communitech in Waterloo. We also completed our first successful 5G test calls in Branson, Toronto and Vancouver.

5G is unlike any other wireless technology we have seen before, and that is why we need the right partnerships to bring the right economic use cases and the right applications to market. Working with Ericsson, a global 5G leader, we will lead and bring the very best of 5G to Canadians.

We also made strategic advances in Cable. I'm pleased to share we're making steady progress on Ignite TV. We expanded our service to Newfoundland and we will expand to New Brunswick later this summer. Over 160,000 customers, almost 10% of our base, are using the service and we're on track to reach our subscriber target for the full year. And we continue to see impressive results including significantly improved early life cycle churn, likelihood to recommend an average revenue per account. This innovative service has a great future road map for the Connected Home and it rests on our leading, reliable broadband network, a network we continuously invest in and build on. Just last month, we introduced Ignite WiFi Hub to give customers more control over the WiFi experience and we now monitor 2.5 million WiFi devices daily to ensure customers have the terrific in-home experience. More broadly, I'm proud of our team's deep commitment to drive our customers' experience. Our multiyear program to drive improvement in channels is paying off. In the call center, service levels are strong, and first call resolution is improving at a healthy rate. In digital sales, adoption is up almost 10% and online sales volume is up almost 50%. In retail, we continue to modernize our in-store experience. Ultimately, this is all about serving our customers where and when they want.

Finally, I am proud to share that our team achieved an employee engagement score of 85%, the highest in our company's history and 5 points above global best-in-class. We believe a high-performing culture is critical to our success and it is a sustainable competitive advantage.

In summary, our fundamentals are robust. We delivered strong growth across all the key value drivers of our business. We made significant headway on our strategic long-term plan. We have a strong management team and a strong frontline team along with the right strategy and the right priorities to lead and win.

I'd like to thank our entire team for their incredible dedication and commitment.

And with that, let me pass it over to Tony.

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Anthony Staffieri, Rogers Communications Inc. - CFO [4]

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Thank you, Joe, and good morning, everyone. Rogers delivered solid Q2 results, reflecting strong quality loading in both Wireless and Internet subscribers, continued margin expansion, healthy service revenue gains and positive blended ARPU growth. As we have highlighted in previous quarters, our focus continues to be on balancing growth opportunities with sound economic returns to ensure we create long-term sustainable value for shareholders and customers alike.

In Wireless, we reported healthy service revenue growth of 3% and adjusted EBITDA grew 10%. Wireless margins were 50.3%, an expansion of 380 basis points from last year as a result of strong growth in Wireless service revenue, successful cost management and the impact of adopting IFRS 16. We continue to execute on our quality loading strategy and delivered 77,000 postpaid net subscriber additions. Contributing to the strong service revenue growth were increases in both blended ARPU and blended ABPU. Blended ARPU was up 2% and reflected our 13th consecutive quarter of year-on-year blended ARPU growth. ABPU was up 4% in the quarter.

As Joe noted, it's early days with our Rogers Implement -- Infinite plans but we are pleased with the results to date. While Infinite had minimal impact in the second quarter, we are excited with the customer benefits and cost savings opportunities that these plans are expected to generate as we move into a 5G world.

In addition to the value these plans provide our customers, we anticipate an ARPU and ABPU lift over time. Already, we are seeing our monthly recurring revenue being net higher for all those customers that have switched to our Infinite plans. Of course, this is impacting overage revenues but at a rate that is shallower and faster than we anticipated. Operationally, we are already benefiting from the simplicity of these plans as we are seeing fewer and shorter calls to our call centers and greater adoption of digital ordering. These types of benefits should drive greater efficiency in our Wireless business going forward. Importantly, both the revenue and cost-saving improvements should be accretive to margin expansion and adjusted EBITDA growth in the future.

Enhancing Rogers' Infinite plans are our newly introduced 24-month and 36-month consumer-friendly device financing programs. These simpler, 0-down, 0-interest financing options now put total control in the hands of those customers interested in acquiring new devices and builds on the savings that all customers can access through the value embedded in our no overages and unlimited data plans.

We currently spend over $2 billion each year on handsets, including significant subsidies that only benefit customers wanting new handsets. With reduced subsidies going forward, combined with eventual securitization of those financing receivables, this plan is expected to expand margins, be accretive to adjusted EBITDA and drive stronger cash flow going forward.

Turning to Cable. We grew revenue by 1% this quarter and adjusted EBITDA by 3%. Our Internet offering continues to be a key driver for our Cable business. Internet revenue grew 7% this quarter, reflecting the movement of Internet customers to higher speed and usage tiers, some service pricing changes and a larger Internet subscriber base. We remain uniquely positioned to meet customer demand for faster speeds and higher data with our ability to offer Ignite Gigabit Internet across our entire Cable footprint. In Q2, we reported 22,000 net Internet subscriber additions. This reflects the 16th consecutive quarter of increasing Internet penetration rates.

In addition, Internet ARPU grew compared to the prior year quarter. We also expanded Cable margins by 130 basis points this quarter due to continued focus on efficiencies and product mix shift to higher-margin Internet. And importantly, we again made good strides in reducing our CapEx intensity in Cable down to 29%. Combined with our EBITDA margin expansion in the quarter, our cash margin for Cable expanded to 19% this quarter from 11% last year. Good progress towards our goal of 25% cash margin by the end of 2021.

Moving to Media. Revenue was 3% lower, largely as a result of the sale of our publishing business in the second quarter and lower revenue from the Toronto Blue Jays. This was partially offset by higher subscription and advertising revenue, generated by our Sportsnet properties. Media EBITDA was strong up 20% driven by efficiencies and lower Toronto Blue Jays salaries. On a consolidated basis, we delivered total revenue growth of 1% and strong adjusted EBITDA growth of 9%. We invested $742 million in CapEx for the quarter, which increased 13% year-over-year. The increases in capital expenditures in Wireless this quarter are a result of the ongoing investments being made to augment our networks as we continue to drive towards a 5G world. Capital intensity was a bit higher this quarter driven by both the timing of our investments as well as lower revenue in our hardware sales.

With respect to cash flow and returning capital to shareholders, we generated free cash flow of $609 million this quarter, an increase of 2%. The increase this quarter was a result of higher adjusted EBITDA partially offset by higher planned capital expenditures and higher cash income tax payments in the quarter. We do, however, anticipate our cash tax rate to be in the 6% range for fiscal 2019, as a percent of adjusted EBITDA, compared to our full year 2018 cash tax rate of 8.2%.

During the quarter, we continued to demonstrate our commitment to returning cash to shareholders through dividend payments of $257 million and repurchasing $50 million in Class B nonvoting shares. Our debt leverage ratio at the end of Q2 was 3.0x, reflecting a 50 basis point increase compared to the end of 2018. IFRS 16 lease accounting drove 20 basis points of the increase and the completion of our 600 megahertz spectrum purchase added 30 basis points. With a healthy business and strong free cash flow, we expect to continue reducing our leverage moving closer to 2.5x in the future. We had liquidity of $2.6 billion at the end of the quarter and have solid investment-grade credit ratings with a stable outlook.

Additionally, our balance sheet is well positioned with long-term maturities and low interest rates on our outstanding debt.

In summary, we're very pleased with our Q2 results and the long-term outlook for Rogers.

We remain laser-focused on effectively managing our base business, driving greater efficiency throughout the operations, improving the customer experience and ensuring our growth is underpinned by sound economic fundamentals.

With that, I'll ask the operator to open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Barden of Bank of America Merrill Lynch.

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David William Barden, BofA Merrill Lynch, Research Division - MD [2]

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I guess first, just if I could get a little clarification, Tony, I think you said in your -- sorry, Joe, in your prepared remarks that you -- we should expect the short-term moderation in growth with respect to the Infinite plan. But then, you shared some stats that roughly 2/3 of the customers who are adopting plans thus far are spending more. So just to kind of understand the next couple of quarters, are we expecting growth to slow down or is this actually going to help from kind of a cadence standpoint over the course of the next couple of quarters? And then second, I think you highlighted that about 10% of the base has now the new Ignite TV program. I was wondering if you could kind of elaborate a little bit about kind of what the goals and the shape of that are in terms of expectations for the rest of the year and into next?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [3]

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David, thank you. Why don't I start and, Tony, then you can chip in. So when you look at the 2/3 that upgraded to the plans versus the 1/3 and you do the sort of monthly service revenue math on that, we're seeing a net positive, a net positive in monthly service revenue. The moderation of overage and we said last time when we were having meetings that overage for Rogers is less than 5%, the overage over time will diminish and therefore moderate our growth rates as a whole. And that's exactly what we're seeing. We're still seeing a healthy, vibrant wireless market with penetration growth opportunities with data growth opportunities and we think we've picked a good price point with respect to these unlimited plans and we think that will just serve in the medium to long-term to drive sustainable growth in the business as a whole. In the short term, we'll see some moderation. I mean, Tony, feel free to comment on that specifically, if you like?

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Anthony Staffieri, Rogers Communications Inc. - CFO [4]

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Sure. I'll put a fire point on it, David. So you saw in the second quarter, service revenue growth of 3%, and as Joe said, the recurring MRC is coming in quite nicely on a positive basis. It's the overage piece that as you would expect and we expected some of that to melt. It's not as much as we thought, more of it in terms of subscribers. But that's in our opening remarks, we said it was shallower than we expected. So that 3%, you can expect a slight moderation of that growth rate in the back half of the year on service revenue. But again, it's only 6 weeks into the plan. And so as best as we can estimate it, that's what we're seeing. For the rest of the year, we don't expect it to be a material impact to our Wireless service revenue.

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [5]

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So we think we picked the right balancing point for the future health of the business and the ability to make the shift and pivot it with the right economics and we're very pleased with the results so far. Early days but very pleased so far. On your question around Ignite TV, we -- our goal is to migrate the entire base over the next couple of years. We're taking a thoughtful approach in doing it steadily quarter-by-quarter. We're seeing good resultant economics of customers that do move. As I said earlier, it shows up in better churn. It shows up in higher ARPA and most importantly, it shows up in very strong likelihood to recommend of the service as a whole. And one thing we're making sure is that we do it in a manner that's not stirring our base and we're just doing it in a manner that is thoughtful and at a pace that makes sense overall. And over the course of next couple of years, we should be completing the migration.

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David William Barden, BofA Merrill Lynch, Research Division - MD [6]

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Just as a quick follow-up. You called out the kind of expansion of the Ignite TV as kind of a contributor to the higher Cable CapEx this year? Is that going to plan? Or kind of the trajectory in Cable CapEx intensity seems to be falling rather than rising. Is there anything to kind of talk about there?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [7]

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What we're seeing, David, quite frankly is very good unit cost efficiencies that are driving that Cable capital intensity down. We are getting the migrations from legacy to Ignite that we expected. The unit costs on a per home basis are at and in fact slightly better than we anticipated. We've talked about a legacy to home costing us upwards of $1,100 and the new Ignite platform at under $400 and falling. And so that's coming in as expected. But on top of that, what we're seeing is efficiency improvements in our node segmentation program as well as efficiency improvements in our truck rolls and installation rates. So that's what you see coming through. So we do see it as sustainable declines in our Cable capital intensity.

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Operator [8]

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Our next question comes from Vince Valentini of TD Securities.

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Vince Valentini, TD Securities Equity Research - Analyst [9]

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Let's stick with that last point first. So I believe in your original guidance in January, you were talking about Cable CapEx intensity not really declining much from the sort of low 30s percent last year. You're now at 29% year-to-date and you're saying it's kind of sustainable. So did I read correctly that Cable CapEx may be coming in a bit below what you thought originally, Tony, but on the flip side, it looks like your Wireless CapEx is -- potentially on the 5G side is ramping up. So total CapEx is still where you thought, but it's a bit of shift from Cable into Wireless?

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Anthony Staffieri, Rogers Communications Inc. - CFO [10]

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Let me clarify a few of those points. So on Cable CapEx, yes, we do think it's sustainable. So as you look through the back half of the year, our expectation is it will continue to sit around 29% to 30%, so below what we originally thought. On the Wireless side, the uptick that you saw in the second quarter was really as a result of timing. And so we don't see it necessarily transcending to the back half of the year. So on a total basis, our CapEx may come in slightly below or in the lower range that we provided in guidance.

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Vince Valentini, TD Securities Equity Research - Analyst [11]

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That's very clear. And just back on the unlimited trends and so forth. Can I clarify in different way? The 365,000, I'm not 100% sure and I think that's as of basically now, or in the last couple of days? Or is that as of the end of Q2?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [12]

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It's as of like yesterday.

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Vince Valentini, TD Securities Equity Research - Analyst [13]

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Okay. And is that virtually all migrations? Or does that include a lot of new gross adds coming in on those plans as well?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [14]

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It's a combination of migrations and new customers.

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Vince Valentini, TD Securities Equity Research - Analyst [15]

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And would you -- can you characterize that at all or would it be mostly migrations or...

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [16]

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No. It's as expected. We're not getting into the specifics of it but as expected, it's been a great attraction for new customers and also a good opportunity for existing customers. So we're happy with that balance overall.

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Vince Valentini, TD Securities Equity Research - Analyst [17]

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Okay. And last on that is...

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [18]

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And the thing to bear in mind is like I mean we're really happy to see the positive ARPU that we're getting from the monthly revenue. And as we kind of weighed our way through the overage, we think there's goodness on the other hand. Bear in mind that as I said earlier, overage is less than 5%. And if you were to do a full economic analysis on that small piece of revenue, on an entire business, a full economic analysis around what is the extension which we speak to those customers, are negotiating that overage number, are dealing with it on their bill, are having follow-up conversations with them, are issuing credits, are driving a propensity to churn around it, it is in some ways revenue with no real economic outcome. So weaning ourselves up that revenue and driving the goodness around unlimited plans given the positive ARPU we're seeing so far, again early days, we think is the right formula for the business moving forward. And you think about the fact that we have some of the lowest data growth rates globally, right, that's not sustainable. That's not in an environment where we're going to head into 5G where customers are afraid of using data. So I mean it all kind of hangs together from that perspective, Vince.

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Vince Valentini, TD Securities Equity Research - Analyst [19]

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Fully appreciate that and you kind of segued. My last question is, in terms of those cost reductions and the benefits you see, is it fair to say even though you may be seeing a slight moderation in service revenue growth for the back half of the year that you can fully make up for that at the EBITDA line with various cost initiatives. So whatever your guidance was before or consensus was before you're still comfortable with?

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Anthony Staffieri, Rogers Communications Inc. - CFO [20]

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That's right, Vince. And I think you said it well. Notwithstanding some of the, as you would expect, forecasting an estimation that we're going through on the revenue side. What we do know with a higher degree of certainty are the cost reductions are coming in. First and foremost, subsidy changes have been implemented and you see that when you look at our websites and how the cost of the device is factored in to the 24- and 36-month periods as well as on the subsidized plans, you see some moderation in the subsidies there on the Fido brand. And so that's already started to happen. But as Joe said, in terms of average handling time on a call, we're seeing very good reduction and there are other pieces of it that we had talked about customers coming in on auto-pay, e-bill and again, while it's early days, that's coming in nicely as well. And so on a net-net basis, what we do have good line of sight to is a strong impact to EBITDA and free cash flow.

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Operator [21]

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Our next question comes from Maher Yaghi of Desjardins.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [22]

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I just wanted to go to maybe a little bit bigger picture here on the health of the Wireless market in general. When I look at your gross adds, still down year-on-year but half of the decline that we saw in the first quarter. Can you talk a little bit, Joe, about the overall wireless postpaid market. How is it changing, shifting with introduction of these unlimited plans? And your competitive positioning in the market?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [23]

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Sure. Thanks, Maher. So overall, we're still very bullish about the growth opportunity in the wireless market. The circumstances around that have not changed. Penetration opportunity in Canada is still very strong, 87% penetration on the road to -- similar to the U.S., 120% penetration. So that penetration gain is still available to us. We're seeing and modeling in our forecast overall subscribers growing at about 4.5% for the year, end of period to end of period. So we're still seeing that kind of growth and believing it's there for the taking. I would say to you that the first part of the year, Q1 was quiet when we talked about in the last call, but we saw the market wake up about halfway through Q2 and it's been active and strong ever since. And bear in mind that we're still in the early part of the year. Despite half of the calendar year having gone by, 2/3 of the volume of our industry happens in the second half of the year between all the various Black Friday, back to school, et cetera. We think that some of the affordability options that we've introduced will help to stimulate that growth opportunity and that's part of thinking behind Infinite and behind device financing. We're very pleased with what we're seeing around the 36-month plans already. Clearly, Canadians have spoken and have said, "You know what, we love the choice between 24 and 36 months. We love the affordability options." In 6 weeks, we've seen more than half of our customers, more than half of the 365,000 customers who have chosen the Infinite plans to -- or the ones who have gone on financing have chosen 36 months as a whole, right? That's an impressive start to equipment financing and more to come. On a macro perspective, some of our view was to unlock the future growth potential. We had to do 2 important things. One is take away the fear and the burden of overage. When the overage regime in Canada was such that people were paying $100 for 1 gig of overage or had to sign up to a number of top-up approaches that they had to manage and worry about whether their son or daughter or family member was using too much data, et cetera, it creates a burden on our customers and it shows up in the data growth rates. While we've seen already that with this cohort of Infinite customers, we've seen those growth rates climb substantively. And then you take a look at affordability of handsets. Handsets are getting more expensive, not less expensive. So we have, in some ways, a duty to our customers to help them figure out how to afford these handsets through choice of 24 or 36 months, et cetera. And so we think those are 2 very important catalysts to continue driving the growth opportunity that exists in our market as a whole. Wireless as a service for everyday life is becoming even more vital and important and it's insinuated itself into every facet of life. And therefore, I think the upside continues to be very strong. The applications around 5G, I think, all the early days right now and all day right now, they all seem rather theoretical in nature. We were having a very similar conversation on the advent of 4G, and look what it's done to change the approach for consumers and to create the on-demand economy. The 5G will create a new real-time economy with all kinds of use cases that we have only begun to anticipate and I think it's still -- it bodes well for both the medium and long-term growth prospects of our sector.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [24]

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Great. And just a follow-up on the second half you mentioned that it's very important as we all know. In your planning into the launch of the unlimited plan, did you have in mind or your market research indicate that the early adopters of these unlimited plans are mostly guys who would upgrade or downgrade because I'm looking at your 2/3 of the new unlimited plans takers are -- have upgraded versus downgraded. So do you believe in the second half are mostly guys who would continue to upgrade? Or how do you see this taking place in the second half with the back-to-school period?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [25]

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Well, in our modeling when we had put together our outlook for the infinite plans, our expectation was that early on, the majority of customers would be downgraders and they would chase the savings quickly and the upgraders were going to take a while, understand the plan, understand the commitment they're making to a higher price point and that always takes a bit of time. And so, we actually had the inverse modeled in our plan and so we were quite pleasantly surprised to see the inverse happening. And so our expectation then is, with upgraders waking up and adopting the plan sooner than we expected, I think we should expect to continue to see that. Will it be in that direct proportion? Don't know. But I think it's off to a good start as we've said with the MRC being net positive. That's what we had hoped as the long-term outcome and it's happening sooner than we expected. So good news on that front but again 6 weeks into it.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [26]

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Great. And just one last question.

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [27]

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Bear in mind that as a portion of our entire base, the potential upgraders are vastly larger, vastly larger than the portion of downgraders. What we're seeing is the customer perception of value, the customer's value for money mindset saying that what worry-free data is worth spending a bit more for, and as a result, we're seeing more of the upgrader population move earlier on that, which is nice to see actually.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [28]

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Yes. I agree. And just one last question on Cable. The net adds on Cable on high-speed. How do you -- just can you talk a little bit about the competitive picture in GTA area as the competition increases on fiber-to-the-home. The pricing environment?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [29]

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Sure. Well, first of all, the competitive landscape and intensity has not changed in either direction, frankly. It's been roughly the same as it has been the last long while as a whole. Bear in mind that as I mentioned earlier, this is 16 quarters, 4 years of Internet penetration growth for our organization. We're now sitting at 57% penetration across our footprint of 4.4 million homes and businesses past. And those numbers are holding up whether it's in a competitor's fiber territory or not. It's holding up in condo buildings in Downtown Toronto. It's holding up in suburban parts of Canada. It's holding up in more sparsely populated parts of Canada where we have a footprint in operations as a whole. What we really see from customers more than anything else is they want Internet reliability. They want Internet and WiFi that works and works well and the fact that we've got a capability of a 1 gig service with now managed WiFi capability across the entire base and some more developments are coming on that front. Our new WiFi Hub is a great product and device. It allows our customers to manage the WiFi in their home, but also allows our technicians and our service operations people to look into the house and see how the WiFi is performing, and to take a look to proactively manage that WiFi environment for our customers, even before they call or even before they notice they have a problem. So we're doubling down on this notion of reliability. We think it's the #1 item that matters most, and we're seeing customer response from that value proposition as a whole. There will continue to be competitive intensity in the market, that's not going to change. But we're very excited about the Ignite road map and what's coming around the corner and as a result, there's some really interesting stuff coming. We've got a new generation of WiFi extenders that will be launched sometime very soon. We've got new capability around television viewing, new opportunities around the Connected Home. So we'll continue to create reasons to believe in the Rogers product set and reasons to buy for people that will overcome some of the price-only competition that we've seen historically.

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Operator [30]

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Our next question comes from Drew McReynolds of RBC.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Two from me. First, Joe or Tony, on the unlimited plans that you have out there in market, you talk about wanting to stimulate data consumption. Can you, I know early days, but provide us a little bit of an update in terms of what you're seeing in terms of behavior in those unlimited plans relative to what the behavior was before? And then secondly, bigger picture, just on the regulatory outlook. In the last 6 months, I think if you look at all the wireless pricing changes that are there in the Canadian market, it's been pretty amazing to see and how fast it's all unfolded. Maybe, Joe, talk about whether expectations have changed from a regulatory standpoint as we look forward into the wireless hearing?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [32]

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Tony, do you want to take the question on data?

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Anthony Staffieri, Rogers Communications Inc. - CFO [33]

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Sure. I am going to take that.

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [34]

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Drew, on data, we said from the outset that one of the key success points we would look at on this is actually driving up data growth. Within our population and it's probably not dissimilar to the rest of the industry, what we saw was daily usage growth slowing to about 20% year-on-year. And so what we wanted to do was really ignite that growth rate. For customers, of the 365,000 customers that have switched to the new plans, what we saw immediately within the 6-week period is sequentially, their usage grew by 50%. So when you look at it sequentially as well as year-on-year, very healthy data usage growth, which was the behavior we were expecting. We didn't expect it as quickly as we thought. There are some reasons for that, the biggest one being customers no longer toggling their WiFi on and WiFi off switch. And so just by leaving it off, they're comfortable using the data, which is the experience we wanted and that's what we're seeing in the usage rates.

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Anthony Staffieri, Rogers Communications Inc. - CFO [35]

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And, Drew, on the regulatory front, one thing that some of the moves that we've made have done especially around unlimited and equipment financing is really demonstrates -- it really demonstrates that we are perfectly aligned with the overall agenda for the government on the regulatory front with respect to making wireless services more accessible and more affordable for Canadians. And my simple view of it is, the more we focus on what's important to the customer, the more we focus on the customer experience as a whole, the more aligned it becomes with the overall regulatory view and policy of government and we've had some very encouraging conversations around some of the moves that we've made most recently, very supportive conversations from the minister and other members of the cabinet as a whole. And we think that's a good sign. We've got a very precious resource in Canada and that is wireless infrastructure. Our networks are truly amongst the best in the entire world in terms of capability, in terms of reach to rural parts of the population, in terms of speed. Pick any metric and Canadian networks are amongst the best in the world. And the best avenue we believe to drive the continuous investment of that precious resource and drive economic return from that investment in a country that's partially populated as Canada is to make the voice of the customer be the loudest on the landscape to preserve that infrastructure for the use in the future and for 5G and all that brings. So I'll get off to my platform but I would just say to you that we think these are all aligned to what matters most and we're seeing good support from that on that front.

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Operator [36]

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Our next question comes from Tim Casey of BMO.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [37]

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Yes. Two from me. One, Joe, could you talk a little bit about what you're seeing in -- across brands? Given the new Infinite plans are all on the premium brand and it looks like chatr had a decent quarter at least in loading terms, just wondering what you're seeing, if anything, in terms of movement across brands as the new plans have been introduced? And second point, how should we think about any regulatory discussions with respect to the 3-year financing plan. You said more than half of customers so far have responded to them, but I know there is a little bit of confusion there about how those plans will fit in with the code. Just wondering how you would frame that to be?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [38]

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Okay. Thanks, Tim. One of our goals in launching Infinite was to really focus the value proposition for each of our 3 brands in Wireless and I'm happy to report that through this change, Fido has done very well and kept momentum that it had, strong momentum it had, and on top of that, chatr is performing well. We're trying to create delineation where the Rogers brand is a brand that is about customers that want worry-free unlimited data and a more-for-more value proposition. The Fido brand is aimed at people that are looking to spend somewhere in that $40 to $60 range, want a good experience, want a good service and a good network, but have less opportunity to spend the higher amount. And the chatr brand is available as a great service to anyone with a great value proposition, and an opportunity for people that are either budget constrained or that want to manage their wireless services in a very new approach. It's good for people that are new in Canada. I see a lot of new Canadians on the chatr brand. It's great for students. So we're really doing a better job of sharpening the segment focus of each of the parts of Canadian market across the 3 brands. The goal being that each of the 3 brands is attractive to those different parts of the market and drives good strong economics in and of themselves and we're happy with that result as a whole.

In terms of regulatory discussion, we feel that our approach is right for consumers. We've given consumers a choice of 24 or 36 months. We've separated the equipment financing from the monthly service fee. So it's completely transparent and open and customers, whatever they like, can pay off the balance and do whatever they want with their phone at that point. So we think it's very customer-friendly, very transparent, very open. We believe it is completely aligned with the intent and the spirit of the wireless code and regulation and we've been incredibly cooperative with the surge you see around providing information and insight into why these plans are right for consumers and we will await their -- we await their consideration.

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Operator [39]

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Our next question comes from Jeff Fan of Scotiabank.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [40]

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I've got a few very quickly. Just number one on overage. Because you launched the plans, the Infinite plans, I guess late in the quarter, was there any impact of overage in your second quarter number? I guess we'll start to see a little bit more of that in the third quarter and second half. Just wanted to clarify that. And then also clarifying the, I guess, the moderation in growth. I'm wondering as you kind of go through this transition, when should investors expect to see an -- reacceleration of the service revenue growth as you look further out and how you model out the impact of Infinite? And then I guess the last one is on network usage. It's great to see that those that have come across on Infinite are seeing an increase of 50%. As you sit back on the network capacity, what are your thoughts in terms of how this may or may not impact capacity, and therefore, Wireless CapEx? And whether usages over time could maybe substitute some of the broadband usage or fixed broadband usage that's in the home and that's I guess more of a longer-term story.

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Anthony Staffieri, Rogers Communications Inc. - CFO [41]

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Jeff, I'll start with first one straightforward. Virtually, no overage impact in the second quarter, as you said we launched it 2 weeks before the end of the quarter and so it -- there was hardly any impact in the second quarter. I think the second part of your question is how do we see this sort of unpacking in terms of time. Our expectation was that the full implementation of this was going to play itself out over 6 to 8 quarters, somewhat in line with the contracted base. May happen a little sooner but what we sort of see is on the overage side, it's happening at a more moderated pace than we expected, so that might suggest it goes on a little longer but as we've said, it's really a moderation to the growth rates and it's probably all we can say. It's, as we said, 6 weeks into it. So it's tough to predict, but we're expecting a longer impact rather than shorter. It's not unlike -- one of the analogies we've been talking to some of you about is Roam Like Home. When we did that what we saw was a very quick adoption of the value proposition and a much quicker in terms of probably 4 to 5 quarters adoption and impact on the revenue melt that it had. And so -- for what it's worth, that's somewhat of an analogy both in terms of value proposition as well as materiality of the amount. That's probably all we can say at this point on that one.

In terms of network, we've modeled network consumption and impacts over the long term. We feel very comfortable with the types of growth rates that we would anticipate. We benchmarked them against different countries in the world and their data growth rates and their consumption. We've got a great spectrum position, enhanced recently by the 600 megahertz acquisition as a whole. So we've got the ability to deliver the capacity. In terms of going forward, we're investing in 5G and adding more capability, which will deliver even more capacity at a better unit cost, and as I said earlier, in 5G it's inevitable that we'll make -- as the industry makes the pivot from data as a scarce resource that is measured by just tonnage or quantity to a pivot around the quality of service or capabilities that customers are paying for, and there are new technologies that are coming along that will even create further capacity of migration from 3G to 4G across the entire footprint, 4x4 MIMO technology with great capacity. New spectrum of 3500 will create strong capacity. We came from a paradigm, if I can use that phrase, paradigm of scarce data was sort of a thing that defined the 3G and 4G era. The 5G era will be defined more by the level of capability and quality of the service. And I think that's the important thing to bear in mind. A dynamic spectrum sharing will change that opportunity in a big way. So we feel very confident around that overall, Jeff.

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Paul Carpino, Rogers Communications Inc. - VP of IR [42]

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Thanks, Jeff. Ariel, we have time for 2 more questions, please.

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Operator [43]

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Certainly. Our next question comes from Simon Flannery of Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [44]

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Joe, you talked quite a bit in the past about surfacing value from some of your investments. How are you prioritizing that at this point? And then maybe just a follow-up on the video business. Can you just talk about what's going on in that business in terms of quote cutting? What are you seeing in gross adds? What are you seeing in churn? And how does the profitability split? I think you said the margins are higher in Internet, but any color you could give us around what happens when -- on a video loss versus an Internet add?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [45]

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On servicing value, Simon, for some of our investments, I've got nothing really new to report. We continue to look for opportunities that make sense for the business in the long term and when we have something that is meaningful, we'd be happy to share what we're thinking. With respect to video, video -- what we're seeing in the video market is really the market is coming together in sort of 2 segments as a whole. The overall market roughly runs at about 50% margin versus Internet as you know is largely CapEx and fixed cost and the margin is much stronger as a whole. What we're finding is at the top end of video market we're doing very well. We're doing very well for customers that want lots of content, want an abundance of choice and programming as a whole and we're seeing very strong ARPU growth in TV as a whole. We're seeing 4% ARPU growth as a result of that continued growth in that part of the market and it's driven by Ignite TV and the things that we're doing. It's the other part of the market because we think the market is sort of being 2 sets of customers, the quasi-OTT kind of appetite and there are some service offerings in different parts of the country that require very little investment in terms of installation of set-top box and TV services for a very basic service starting at about $5 a month. We don't have a play in that part of the market yet, but something is on the horizon for us and there our goal is to create more choice for customers where they have a very affordable entry point and then through the course of time, they can buy content in a much more snackable approach. They can buy a series or an episode. They can buy the Raptors playoff as a service overall. They can add on as they see fit. And we would see ourselves merchandising this as an add-on to Internet. And to take a step way back, that is our goal. Internet is our primary service, broadband to the home and we'll continue to find offerings whether it's video, all you can eat video or all you can choose video or whether it's Smart Home Monitoring or the Connected Home to add value and add opportunity for that broadband connection, but we're still very bullish on video, still think it's an important part of our business. It's going through the transformation that we see all around the marketplace, frankly, globally. Happy with our addressing of the video opportunity on the front end of the market and more to come with respect to the other part of the market.

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Operator [46]

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Certainly. Our final question comes from Aravinda Galappatthige of Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Corp., Research Division - MD [47]

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Two quick ones from me. Number one on the wireless side. Fully recognize the simplification of the wireless offerings under the new structure. For Joe or Tony, maybe just do you worry that, that perhaps creates gaps in the market that will allow your competitors to maybe take a little bit more share? As you think about the $75 plan, in Rogers still, obviously, there isn't anything that's again really lower than that. So you're kind of forced to go to the flanker. Do you feel that for that segment of the market at -- once $55, $60 or $65 plan that, that creates a gap that might cost some share drain there? And second question real quick on Media. Tony, I was wondering if you can give us a little bit more color on the puts and takes we should think about in the second half. I know there was a little bit of noise around the salaries and distribution from MLB as well as publishing sales. I was wondering if there is anything notable for the second half?

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Joseph M. Natale, Rogers Communications Inc. - President, CEO & Director [48]

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I'll take the first one. Tony, you can take the second one. So, Aravinda, we, as I said earlier, are really trying to create crisper delineation between the brands. We have done a very thorough analysis of the Rogers base and the opportunity for that base to sign up to the Infinite plans and we're very happy with the delineation that we've created around these price points. As I said, Fido is doing very well. So we're pleased with that direction as a whole, and we'll continue to march forward. Now at the end of the day, the market will continue to evolve. It's a dynamic market, but we're pleased with the way we're approaching it and we're confident it's the right direction.

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Anthony Staffieri, Rogers Communications Inc. - CFO [49]

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On the second part of your question, Aravinda, a couple of things. I think you should expect to see good healthy top line and EBITDA growth in the second half for Media. The Jays viewership and monetization will continue to struggle, but in the back half we have the other sports franchises coming onboard, hockey and basketball notably. And so we expect that to drive good numbers as we head into the fall. And that's underpinned by continuation of radio having a very good solid growth trajectory into the back half. That combined with the cost efficiencies that you've seen in the second quarter that will continue into the back half. So I think the outlook for Media continues to be strong for us.

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Paul Carpino, Rogers Communications Inc. - VP of IR [50]

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Thanks, Aravinda, and thanks, everyone, for joining us on the call today. If there's any follow-up questions, please feel free to reach out to the IR team. Thank you.

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Operator [51]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.