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Edited Transcript of SJR.B.TO earnings conference call or presentation 9-Apr-19 2:00pm GMT

Q2 2019 Shaw Communications Inc Earnings Call

Calgary Apr 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Shaw Communications Inc earnings conference call or presentation Tuesday, April 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley S. Shaw

Shaw Communications Inc. - CEO & Non-Independent Director

* Jay Mehr

Shaw Communications Inc. - President

* Paul McAleese

Shaw Communications Inc. - President of Wireless

* Trevor English

Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer

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Conference Call Participants

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* Adam Todd Ilkowitz

Citigroup Inc, Research Division - Senior Associate

* Aravinda Suranimala Galappatthige

Canaccord Genuity Limited, Research Division - MD

* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* 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

* Phillip Huang

Barclays Bank PLC, Research Division - Senior Equity Research Analyst

* Sanford Lee

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. Welcome to Shaw Communications Second Quarter 2019 Conference Call and Webcast. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

Before we begin, management would like to remind listeners that comments made during today's call will include forward-looking information, and there are risks that actual results could differ materially. Please refer to the company's publicly filed documents for more details on assumptions and risks.

Mr. Shaw, I will now turn the call over to you.

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Bradley S. Shaw, Shaw Communications Inc. - CEO & Non-Independent Director [2]

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Thank you, operator, and good morning, everyone. With me today are members of our senior management team, including Jay, Trevor and Paul. Earlier this morning, we released our second quarter results for fiscal 2019, which reflect strong financial performance both in the quarter and year-to-date. We continue to make progress on our strategic priorities and our journey to a modern Shaw, and we are excited about a number of recently announced initiatives.

We delivered growth in our wireless business with postpaid subscriber additions of approximately 65,000 in the quarter. While the subscriber results reflected less active period compared to a year ago, we have grown postpaid subscribers by almost 20% on a year-to-date basis compared to fiscal '18, which, as everyone will recall, included record Q2 net additions last year partly due to our initial launch of the iPhone.

Wireless ABPU increased 7.5% as we continuing to attract customers to Big Gig data plans, partially offset this quarter with additional promotions to compensate for lower market activity as well as higher retention spending by our competitors. As we enhance our customer experience through the rollout of the 700 megahertz spectrum, more and more customers are staying with Freedom as postpaid churn improved 30 basis points to 1.36% in the quarter.

As previously communicated, we are expanding our wireless network in 2019 with the launch of Victoria and Red Deer on February, followed by 6 communities in Eastern Ontario in early March. We are encouraged by the early results and are excited to launch additional markets throughout the remainder of the year.

Over the past few days, we have introduced some new advertising that continues to call wireless customer pain points in a direct manner. We are proud of our wireless network, the improvements we have made in our innovative and data-centric offers.

Canadians need to know that only a wireless device with an abundant data plan doesn't need to be unaffordable or complicated. We have also introduced new prepaid wireless plans, and I'm pleased to announce that we have finalized an agreement with our third national retail distributor, Mobilinq, who will carry Freedom prepaid offers in all 50 of their locations that will start to roll out later this month.

This segment of the market has become increasingly competitive over the last several months. While our priority remains to target and attract higher-value postpaid customers, we can also participate more effectively in the growth of the prepaid market with an attractive offers, including LTE data.

In our wireline business, we delivered improved broadband results over the previous year and previous quarter. The Consumer team is embracing our agile digital-first model, and we are making incremental changes that are driving results.

In Q2, ValuePlan penetration of our new Internet customers was one of the strongest on record, leveraging our fast-for-all campaign that doubled the speeds of our top Internet tiers in late November. We continue to make positive strides with self-install, which is up to 37% of total activity in the quarter. More than ever, it is simple and easy to choose the right Internet plan, order it online, have the equipment delivered and self-provision the services in just a matter of minutes.

On April 4, we launched Shaw BlueCurve, a fresh, new brand campaign that captures this momentum and showcases our technology and transformation to a broadband first all IP company. BlueCurve is a simple and powerful new technology that, besides just speed, gives customers more coverage and greater control over their in-home Wi-Fi experience, while also helping to redefine the relationship with in-home connected devices.

Our BlueCurve Gateway Home app and Pods are the latest innovative in-home Consumer products that we have brought to the market through our Comcast partnership, and enables us to differentiate our Internet service and technology from the competition.

Just as residential customers are benefiting from the network investments, so too are Shaw Business customers with speed increases to our top tiers and additional new services, including the launch of gigabyte Internet (sic) [gigabit Internet] in early March. Our year-to-date performance has been strong, and we are delivering on our operating plan and executing better. We still have hard work ahead of us and we are only halfway through the VDP exits. But we have exciting new products, brand and advertising campaigns. And the teams are engaged and motivated to deliver results.

Now I'll turn it over to Trevor to go through the Q2 results in a bit more detail. Trevor?

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Trevor English, Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer [3]

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Thank you, Brad, and good morning, everyone. Our second quarter results have contributed to a strong first half for fiscal 2019.

On a consolidated basis, Q2 revenue of $1.32 billion declined marginally year-over-year largely due to lower wireless equipment revenue as the prior year's quarter included a record subscriber performance.

However, consolidated EBITDA grew by almost 14% with strong contribution from both our wireline and wireless segments.

In our wireless business, we delivered a 26% increase in service revenue to almost $170 million in the quarter as we continue to grow our postpaid customer base, including those who subscribe to our Big Gig data plans. However, equipment revenue of $78 million did decline by 40% due to lower sub loading compared to the previous year.

Blended ABPU in the quarter was up 7.5% from a year ago but did include additional promotions to compensate for the lower activity and the competitive dynamics in the wireless market.

Wireless EBITDA of $52 million in the quarter increased by almost 190% year-over-year reflecting continued subscriber growth, higher ABPU and ARPU, but also the large impact that IFRS 15 had on our Q2 F '18 results.

In wireline, Q2 Consumer revenue was essentially flat at $923 million compared to the prior year. While business revenue increased almost 6%. Wireline EBITDA growth of 7% to $479 million includes approximately $27 million in VDP-related cost reductions.

Second quarter wireline margin of 46% represents a 280 basis point improvement compared to a year ago and does include VDP savings, lower marketing expenses and our overall focus on profitability. We also had onetime favorable accounting adjustments of approximately $5 million in the quarter.

Reinvestments in tools and automation related to our VDP enablement did commence in the quarter, but we continue to expect these investments to accelerate in Q3 and Q4. The shift in timing to the second half of F '19 is largely driven by our product road map. However, regardless of timing, we remain firmly on track to deliver $140 million of combined operating and capital cost savings this year related to VDP.

Capital expenditures of almost $280 million in the quarter was in line with last year with continued reductions in wireline, offset by increased wireless spending, largely related to the deployment of the 700 spectrum and expansion of our network and retail locations into new cities and communities.

We're at the halfway point of the year, and although we have delivered strong EBITDA performance in the 6 month -- first 6 months of F '19, we do not expect these growth rates to carry through to the back half of the year due to tougher comparables as VDP savings did commence in March 2018. The expectation of digital VDP reinvestments in Q3 and Q4 as well as higher marketing spend in the second half to support the launch of Shaw BlueCurve and our new wireless campaign.

Considering all of these factors, we are confirming that we remain on track to deliver F '19 EBITDA guidance of 4% to 6%, capital investments of approximately $1.2 billion and free cash flow in excess of $500 million. However, considering our performance to date and our outlook for the remainder of the year, we would be disappointed if we do not achieve the top end of our EBITDA guidance range.

Brad, back to you for closing remarks.

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Bradley S. Shaw, Shaw Communications Inc. - CEO & Non-Independent Director [4]

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Thank you, Trevor. Let me close by saying that this is such an exciting time for Shaw. We are making progress on several initiatives, including a significant step forward with our IP broadband strategy, supported by a new look and feel with respect to the launch of our Shaw BlueCurve branding initiatives. We will continue to inform Canadians about our innovative and affordable wireless offers, expansion of the network into new communities and our refreshed prepaid offers that enable us to more effectively target that segment of the market. A big, big thank you to all of our teams at Shaw and Freedom that are driving change and delivering results.

Thank you. We'll now turn it back to the operator 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 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 [2]

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A couple of questions, one on the cable side with video and then another on wireless. Just on the video side, I understand the strategy is to not chase after some low ARPU video subscribers. That's obviously not having much of an impact on financials. But strategically, as you look ahead with more customers looking for more flexible TV packaging and TV products, like the one that you actually offer with free range. I'm wondering if that becomes more of a strategic focus for you to try to go after that market, especially given your competitors out there with a skinny product like PIK? And then the second question on wireless is, just on the state of the wireless industry, I think given that the incumbent seem to be quite focused on churn that's having an impact on volume and the overall market, part of that is certainly seasonal but I think that may continue through the rest of the year. I'm wondering from Freedom's perspective, how do you operate? And are there things that you think you can do to try to stir the market a little bit to drive some volume from Freedom's perspective?

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Bradley S. Shaw, Shaw Communications Inc. - CEO & Non-Independent Director [3]

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Thanks, Jeff, and it's Brad here, I'll start first. I think for us at Shaw, the advantage and benefit we have with our Comcast strategic partnership is that they get to go first with the new products and services, and we can learn from that and come in behind and look at what works best for us. I think as a partner of Comcast, we certainly would -- the Flex TV service would be available for us that Comcast launched if we desire to roll it out to our customers. And listen, it's very interesting product as you look at just what's happening within the market, and for those customers that don't take a traditional video package, I think, it could be quite interesting. So we're going to take it and have a look how it fits into both our road map, how and when, because I know that Comcast just launched it on the 21st of March, so this is something we're going to take a closer look at.

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Paul McAleese, Shaw Communications Inc. - President of Wireless [4]

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Jeff, it's Paul. On the stir the market that you say, we've seen pretty significant investments from the incumbents on retention, and you've noted that in some of your recent reports. We're doing a number of things to stir the market right now in the back half of the year. You would have seen the launch of a new campaign over the last week, kind of featuring the fictional model of big wireless and kind of reminding Canadian consumers that there are strong alternatives and better value in the marketplace. And that's a big part of what we have to do is to continue to make sure that our message is out there, and the availability of affordable, large big data buckets is there for everyone within our service footprint. We also are continuing to benefit from a very strong referral base. So as our network matures and improves, our existing customers are increasingly coming on with additional lines, and we're seeing a strong amount of referral volume coming out of that source. And then the last thing I'd say is, we're continuing to make solid deliberate efforts in the growth of our retail distribution. We've opened a number of new corporate stores over the course of last 6 months, we'll continue to open those over the back half of the year. Adding Mobilinq is a nice addition as well, and we'll continue to expand our distribution, both for postpaid and for prepaid, making sure that more Canadians have the availability of access to Freedom services.

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Operator [5]

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Our next question comes from Sanford Lee of Macquarie.

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Sanford Lee, Macquarie Research - Analyst [6]

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I had a question on 2019 guidance. I understand that, obviously, the H2 becomes much tougher as far as comps goes. But if my math is correct, it looks like even at the high end of guidance for this year, that can imply -- that's a negative 0.7% in H2 '19. So I'm just wondering if you can comment on your expectations because you're obviously hoping to be above the high end, I think, on guidance?

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Trevor English, Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer [7]

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Yes, sure. Thanks, Sanford. You are tracking well but there are some investments that they're going to accelerate in the second half. We haven't made that many sort of VDP-enablement investments, that's going to be about $10 million to $15 million in the second half, probably more weighted to Q3 versus Q4 and that's on the OpEx side. Also, some higher marketing spend. We haven't -- the marketing spend has been a little bit lower in the first half of F '19 compared to historical amounts. We, obviously, had some onetime favorable accounting adjustments that hit us this quarter. So all told, we still feel comfortable with our existing guidance. But clearly, we're trending towards the top end. And then, obviously, I would say just on the volatility within the wireless business and what's going on with the dynamics, it's hard to sort of pinpoint exactly what that looks like in the second half. But we do feel comfortable with our current guidance. And if warranted, this is something that we'll probably adjust or we'll take a closer look at Q3 just as we're through another quarter of VDP transition. It's a big quarter for us in Q3, there's about 375 exits in Q3, another 305 exits in Q4. The majority of that frankly is within our operations team, it's about 65% to 70% of the exits in the second half is in the back -- pardon me, is in the back half. So we're being agile, obviously, with our investments but we still feel comfortable with the current guidance that we have out there.

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Sanford Lee, Macquarie Research - Analyst [8]

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Okay, great. And then if I could ask one quickly on the wireless ARPU, not the ABPU but the ARPU itself. I mean, I guess we are used to the company trending at 7% kind of growth range and, obviously, a lot of higher promos in the quarter that sort of thing, so down to 3.5%. It doesn't look like the wireless environment is kind of getting any easier as far as ARPU goes. Can you give us a sense of, I guess, maybe where the competitive environment has been tracking in this current quarter?

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Paul McAleese, Shaw Communications Inc. - President of Wireless [9]

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Yes. Thanks, Sanford. Two points on ARPU. One is just a reminder that we're continuing to see kind of the build-up of the subsidy amortization it's kind of flowing through that. We aren't fully through our 2-year build of that, of course, so we don't have a benefit of customers that have rolled off the amortization so we're still seeing sort of an ever-increasing amount of impact on that. So that will get better over the course of the next year, but it won't be better in the next 6 months until we hit our 2-year anniversary of the launch of the iPhone. On the broader market, we actually have seen a little bit more pricing -- sort of more rational pricing over the course of last 30, 45 days. During the second quarter, particularly in December and January, we did see kind of narrowing of our price umbrella relative to the incumbents as it kind of was well reported. That's come back up a little bit over the last sort of while, so the discounts that impacted ARPU and ABPU over the course of the last quarter, we think have moderated somewhat in recent weeks.

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Operator [10]

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Our next question comes from Aravinda Galappatthige of Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [11]

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A couple from me. First of all, I know a couple of quarters ago, you've talked about initiating certain cross-selling sort of processes. I wanted to get a sense of what it is in your early feedback and what sort of potential is there? And how would you kind of look to ramp up those initiatives? And secondly, on the wireless margins, I know you alluded to that in your last answer but pretty good number service margins of about 31%. If you kind of track some of your comps that even in fairly limited scale have got to sort of the mid-40s in terms of margin. I wanted to get a sense of how you see that tracking over the next couple of years? Are there sort of any fixed step costs that will probably cause an up and down sort of trend there? Or is there sort of a fairly sort of a steady line in terms of margin expansion going forward?

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Jay Mehr, Shaw Communications Inc. - President [12]

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Yes, it's Jay. Super quickly on cross-selling. We're very much in early days, as I think we mentioned on the January call, we'd open the Chinook store that it's a combined Shaw and Freedom location in the quarter. We also opened Metrotown in the Lower Mainland. And initial trials are extremely positive, it animates the Thor, spent a day in the Metrotown store and it's exciting to be able to talk both products with our customers and make sales. That having been said, we're not contributing a meaningful portion or even close today to pause overall numbers. But it's a nice test for the future. I'll let you take that margin question.

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Trevor English, Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer [13]

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Yes, it's Trevor. Maybe just, Aravinda, on the wireless margin service, we don't see a material step-up in the service margin in the foreseeable future but it's -- we're sort of taking a slow and steady approach as we go about next year. And I don't want to -- I don't think we want to get too much into guidance looking forward beyond F '19. But for the remainder of F '19, I think we talked about it on a consolidated basis within our margin. Within wireless, we sort of see a high teens to low 20%, and we continue to see that in our plans going forward.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [14]

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Great. And just before I wrap up, any change in the geographic mix and the gross adds in wireless?

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Paul McAleese, Shaw Communications Inc. - President of Wireless [15]

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It's Paul. Very modest changes, we opened up the Red Deer and Victoria markets, which have both performed strongly in the first 6 or 8 weeks. Of course, that was offset by the opening of some Eastern Ontario markets in March as well, so no meaningful change yet on the quarter-to-quarter distribution of that. But over the course of the next year, I do expect to see that move a couple of percentage points in the favor of the West.

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Operator [16]

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Our next question comes from Phillip Huang of Barclays.

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Phillip Huang, Barclays Bank PLC, Research Division - Senior Equity Research Analyst [17]

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A couple of questions from me. First is I wanted to get your take on the launch of xFi and BlueCurve later on this year. I was wondering how you expect these new products to potentially change your -- or improve your subscribers on the wireline side? And then I have a follow-up on the wireless side. I was wondering if you could provide an update on the potential to introduce a premium brand into the markets. When do you feel would be the right time for that to happen?

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Jay Mehr, Shaw Communications Inc. - President [18]

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Thanks, Phillip, it's Jay. On your question of xFi and BlueCurve and subscribers, I mean, we're quite excited with where we are in the business. In Consumer, we've had pretty strong financial quarters, we moved back Internet growth in Q1 at 5,600 and Consumer a little better than 11,000 net in Q2. The -- our full philosophy around fiscal '19, we got together with every people manager in the Consumer business in September action part sale and we reorientated the business around profitability, which you've seen in our results. And for us, profitability means monthly recurring revenue, churn and growing our Internet customers. We're actually having good success on all of those things. And I think it's very difficult to read through on the subscriber numbers and understand. I think to Jeff's comments previously, you can see it in the profitability numbers. I'll just say quickly on video because I know it's a matter of discussion, we're not unhappy with where we are in the video business. We've achieved our video revenue every single month for budget this year. Our video ARPU held up nicely in the quarter, and disconnects of cable video decreased 24% from Q2 last year. As has been widely reported, we're not chasing on profitable subscribers, and cable gross adds were 43% lower than Q2 last year, satellites doing great, video ARPU grew nicely and disconnects were also down year-over-year. Wanted to note that if you look at our fiscal year and our plan, and we've made our plan every month in video, including March. If you look at our plan, we have the same video profit margin combined to have light and cable in Q4 as we do in Q1. So we actually maintain video profitability throughout the year. And I know it's hard for you to see that in the subscriber numbers but that's the power of segmentation. To your question about the BlueCurve launch, I mean, we're super excited about how it animates the space and it's a chance for us to take our brand, and Shaw is still a loved brand, consumers in Western Canada like that we take our shoes off at the door and that we take care of our customers. In recent years, the tech and product performance wasn't leading in the market and so BlueCurve is a chance for us to get -- step further, more confident. Modern Shaw is a performance brand and it embraces not only the network but the gear and the overall experience and it's really about shifting your speed coverage and control. Clearly, it also generates new revenue models and you've seen our new video pricing, you've seen our new Internet pricing as -- video was December and Internet April 4, the opportunity to sell BlueCurve Home, the opportunity to sell BlueCurve Pods. While they don't directly reflect subscribers, I think you can see what they do to monthly recurring revenue. And so we're pretty comfortable, it's little-by-little, step-by-step in the consumer business but we're pretty comfortable with the trajectory we're on that.

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Paul McAleese, Shaw Communications Inc. - President of Wireless [19]

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Phillip, it's Paul. On your question on the premium brand, we're really pleased with the growth story we've got on Freedom and it's doing a great job in our life, very efficiently of covering segments right from entry-level prepay up to those $60-plus subscribers that we've been happily loading over the course of the last number of quarters. So for now, that the Freedom brand is doing a really good job of bridging across multiple value segments and we're happy with that. We've been holding on the launch of a premium brand until such time that we're satisfied that the network will support that in the way that we want that story to be told. So nothing to report other than to say that we think patience is the right approach here. As we mature the network, we'll have that option to bring to market later on.

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Phillip Huang, Barclays Bank PLC, Research Division - Senior Equity Research Analyst [20]

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That's very helpful. I just have a quick follow-up, perhaps for Jay. On the wireline side, obviously, you guys have shifted focus on broadband marketing to better capture the broadband-only segment, which is, obviously, a growing segment in the urban market. I was wondering if you can maybe give us some color around to what extent is that sort of contributing to the improvement in your broadband subs? And whether you believe we are seeing the full benefits of that shift yet?

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Jay Mehr, Shaw Communications Inc. - President [21]

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Yes. Thanks, Phillip. It's super early days. And I love the work that everybody on the Consumer team has been doing at Shaw. And for the first 6 months of the year, lots of it was internal, it was channel management, getting our clean structure in place, it's really focusing on our investments, it's on every single day focusing on monthly recurring revenue and churn and growing Internet customers. I think, as you see with the launch of BlueCurve that, that approach becomes quite externally focused. To be clear, our whole approaches in the market is to compete aggressively to be our customers' Internet provider, overwhelmingly, on a 2-year value plan, and then to come up the stack in terms of selling them more services, which absolutely includes video on a home phone, but also includes wall-to-wall Wi-Fi, BlueCurve Home app, cloud-based DBR and all of the new services that are coming on the road map. So totally early days, very happy with the results so far.

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Operator [22]

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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 [23]

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I wanted to ask you, Trevor, on the VDP savings, you had approximately $27 million from what I see in your results in Q2, yet your operating income before amortization was up $32 million. So I'm just trying to figure out your comment about the second half about how much of the decline and growth are we to expect? Because from what I can see is that you are running ahead of those savings in terms of growth. So you're starting base is actually positive year-on-year, even before those savings from the VDP. So are you saying that you're going to invest more than $30 million, let's say, in all these initiatives that you're talking about marketing and IT investments?

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Trevor English, Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer [24]

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Yes, thanks, Maher. I mean, considering the performance to date and plans for the second half of the year, we are very comfortable just confirming the delivery of the $140 million of VDP-related savings during the year. And I think we might be running slightly ahead of our plan with respect to OpEx savings and higher -- being a bit higher but CapEx savings being a bit behind compared to original guidance or plan of $85 million in OpEx and $55 million in CapEx. And just due to a variety of factors, such as in self-installed that, frankly, are a little bit better than expected. And while we're not ready to adjust any of the plans as Q3 is our highest number of employee exits. And we are expected to have accelerated investments in Q3 and Q4 of roughly $15 million, the investments that we did in the first half of the year were in the single digits. So it was fairly light. But if we continue to track ahead of this plan in terms of the upcoming quarter, we will provide an updated on the expected savings breakdown between OpEx and CapEx, if warranted in the F '19 guidance. We are expecting to spend some additional spend in Q3 and Q4 definitely related to marketing with some of the campaigns that were launched last week by Paul on the wireline side and also last week by Jay on the wireline sort of part of the poll at the wireless side. So we generally feel really comfortable again at that topper end of the guidance range of 6%. So there are going to be some other investments. And you can see from Q2 results, it was really driven off of VDP savings. And clearly, in Q3 and Q4, we started to realize VDP savings last year of roughly $16 million in Q3 and $23 million in Q4. So we are lapping some tougher comps. And again, it's really difficult to sort of forecast wireless EBITDA growth just because it really depends on volume and the volatility of the volume loaded.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [25]

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Okay. And then going to wireless side. You guys talked a little bit about your strategy here, but can I talk -- ask you a question about your 5G plans? I mean, a lot of -- some of your peers have started talking about some of the timing of launch of 5G sometime late 2020, early 2021. Can you talk a little bit about how you're going into this upgrade cycle? What's the strategy? Some of the early signs of how much could it cost? I mean, I know you can't quantitate -- give a quantitative answer to this but just maybe, just talk a bit about capital -- I mean, wireless capital intensity as we go into 2020 and 2021?

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Paul McAleese, Shaw Communications Inc. - President of Wireless [26]

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Yes, Maher, it's Paul. So we're not going to give too much on kind of 5G going forward. I think our capital intensity, we've already indicated, is going to remain around the $400 million spend for both this year and next. And no change in guidance on that at this point. Look, we're very excited about the prospects for 5G. It's going to be driven mostly by device availability, which I think you're aware is sort of pushing out a little bit more by the day. We are excited for the prospects on that and, of course, the opportunity to bring a new and differentiated service to the market. At this point, though, I think it's a little speculative for all of us to talk about how this is going to come to market. So we'll give you maybe a little more color on the next call.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [27]

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A bit early. Okay. And one last question on IFRS 16. Again, I'll go back to Trevor. All your peers now, except Cogeco, are running on IFRS 16 for their 2019 fiscal years. You're still using the old methodology. It puts you a little bit at a disadvantage, I would guess. Can you quantify what would -- if you have an early estimate of what your EBITDA impact could be under IFRS 16, that would be helpful?

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Trevor English, Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer [28]

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Yes, thanks, Maher. Clearly, our peers have all reported the impact of IFRS 16 on their F '18 results. Due to different year-end, we're not required to report until Q1 F '20, and of course, our F '19 annual report, we'll have the required disclosure. We're well down the path in terms of implementation for the new policy, but frankly, at this stage, Maher, it would be premature to provide any estimates. But as we go through the work that we need to do behind the scenes, we'll provide the appropriate update at the appropriate time. But nothing for right now.

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Operator [29]

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Our next question comes from David McFadgen of Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [30]

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I have two questions. Just on the wireless ABPU, ARPU, I was wondering if you could comment on what were the factors that cause it to decline from, say, Q1 '19 to Q2 '19? And then the other question is just on the 700 megahertz, you talked about going into fiscal 2020 to have it deployed, but do you think it's possible that it could be all lit up by the end of calendar 2019?

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Paul McAleese, Shaw Communications Inc. - President of Wireless [31]

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David, it's Paul. On ARPU and ABPU, the 2 primary drivers of the discounts are the subsidy amortization effect and in last quarter, the discounts we put in place in order to provide ourselves a little more of a price space versus the incumbents. On 700, do you want to...

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Trevor English, Shaw Communications Inc. - Executive VP and Chief Financial & Corporate Development Officer [32]

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Yes, David, just on that, I mean, I think we talked about it last quarter, we're going as fast and as efficiently as we can. We're really happy with how many sites we've lit up. It will spill over into F '20, though. And I think your assumption, that will be done by the end of calendar '19, is probably a bit premature. It will probably spill into -- the majority into F '20 -- or pardon me, throughout F '20 as well.

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Paul McAleese, Shaw Communications Inc. - President of Wireless [33]

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David, it's Paul. One other dynamic on that. We are seeing a notable improvement in the calls related to network performance in those markets where we have 700 already performing. So there has been -- clearly pronounced an immediate effect of that, which we're grateful for.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [34]

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So maybe just a follow-up on that. How would you compare your network performance versus the incumbents in the areas that you have lit up the 700?

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Paul McAleese, Shaw Communications Inc. - President of Wireless [35]

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Obviously, much better with 700 lit up. We continue to look for ways to optimize the performance there, but I think every passing day gets us closer and closer to the level of quality that the incumbents are seeing.

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Operator [36]

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Our next question comes from Adam Ilkowitz of Citi.

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Adam Todd Ilkowitz, Citigroup Inc, Research Division - Senior Associate [37]

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Two, if I could. The network expansion and the 700 megahertz roll out that you're doing, can you just describe the type of equipment that you are installing, is it 5G ready? And is it capable of handling additional frequencies, such as those that may be coming up for auction or are available for auction? And then the second question I have is, can you talk about the productivity of the newer distribution points that you've been adding over the past 12 months? Notably, the third-party ones, are they -- do you think that they are selling your "fair share" within those channels or do you see more room for improvement?

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Paul McAleese, Shaw Communications Inc. - President of Wireless [38]

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Thanks, Adam. And answer to your first question is yes and yes, so they are compatible and we are 5G ready on those including in the core. On the second aspect, we are seeing on our new redistribution points, they are always going to be less efficient because they are not specials, right? So our primary distribution for the first number of years of our existence was in owned stores and in dealers control viewers. As we move into areas like The Mobile Shop and Walmart and Mobilinq, I think we're getting our fair share, but as we add those store doors, they are by definition kind of less efficient for us than something like a corporate store. So these are good fill in often times for geography, where maybe a smaller town that has perhaps a Walmart and a Mobile Shop but doesn't have a mall that would support a corporate store. So I think we're always going to seem to be a little less efficient than our kind of incumbent distribution. But we're very happy to have them in the mix and we think they bring a lot to the equation.

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Adam Todd Ilkowitz, Citigroup Inc, Research Division - Senior Associate [39]

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Sure. Maybe just one question on the wireline side. With the introduction of BlueCurve, there are a few branding names from Shaw in the market WideOpen, FreeRange, can you just talk through how you're presenting all these things to the customer? And where you think this is going to make sure you have a clear message?

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Jay Mehr, Shaw Communications Inc. - President [40]

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Yes, I think if you think about where we're headed, there is, for sure, where we keep active products in the market. We have moved away from individual product naming to a much clearer broadband experience naming architecture, so our next set of services in the market is certainly Shaw BlueCurve Home, BlueCurve Pods, you'll ultimately be seeing BlueCurve Video as we roll to IP. You can well imagine just by following the Comcast road map, what interest Comcast fascinates us, you can imagine what products are coming forward from us in the future and those will be under the BlueCurve banner as we really compete to be the customers' Internet provider and then come up the stack and sell them the whole range of services.

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Operator [41]

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Our next question comes from Drew McReynolds of RBC Capital Markets.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [42]

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Just two follow-ups from me. First, on BNS or business services within wireline, obviously, a pretty good growth driver there. Jay, just can you comment on any headwinds or even almost a tailwind because you're the price disruptor, presumably, in that market from the Alberta economy and just overall how that business is tracking? And then secondly, just if we could get a little bit of an update in terms of your views on the CRTC wireless review and clearly the consultation with language on MVNOs, does that, to any extent, push back or change your wireless investment curve in the near term?

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Jay Mehr, Shaw Communications Inc. - President [43]

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Great, Drew, it's Jay, I'll start on the business question as you suggest. And we're quite excited about where we're headed in terms of our business wireline business. Again, as we think about the wireline business, we think about 5% to 7% revenue growth in business. And all of that leading to 1% overall wireline revenue growth. And I think you've started to see the potential power in EBITDA of what's possible about that sort of focus on wireline. In terms of the Alberta economy, I think you've accurately reflected it. Our annual growth rate in Alberta year-over-year is slightly higher than the rest of our business footprint. So we get maybe some benefits. I mean, I think if you go back to the original plan 6 or 7 years ago, in a different economic environment with our Envision fiber assets in Calgary, we would've expected Calgary to drive our growth. So Alberta is neither pulling us down in business nor is it may be the engine that we won so far. We've got super exciting things happening in business, we've got SD-WAN, which really is focused on connecting our multi-location businesses together, we've got Ethernet over DOCSIS, we've got new SIP integration with SmartVoice, SmartWiFi, Smart Surveillance are all coming along, look, for that 5% to 7% growth rate. You see some noise in the RGUs in business, which is largely a culture of a work camp, some of which was in Q2, a little more of that same camp in Q3. We've got a competitive win, again, some of it in Q2 and then in Q3. And RGUs are probably less of a predictor in business because of the way we count modems and stuff, excited about the business going forward, and again, think about that 5% to 7% annual growth rate, but I think a 1% overall wireline revenue growth.

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Bradley S. Shaw, Shaw Communications Inc. - CEO & Non-Independent Director [44]

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Drew, this is Brad here. Just to comment on the mandated MVNO. Like others in the industry, we were very surprised, if not shocked, to see the CRTC come out with their preliminary view in support of mandated MVNO. Clearly, we are absolutely opposed to this view, and we'll be participating in a comment period as to why the mandated regime is not only bad for Canadians but also bad for the future of sustainable wireless competition in Canada and the future of 5G in Canada. We think we are absolutely doing our part being more -- bringing more affordable services to Canadians. And listen, this is something we're going to go through, there's going to be many stages over the course of the year and even in the election. But again, we're going to be an active participant but it's really hard for me to comment right now on how these changes are going to make it -- affect our decision-making but I can just tell you, we're going to be very active and a full participant in that process.

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Operator [45]

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Our next question comes from David Barden of Bank of America.

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David William Barden, BofA Merrill Lynch, Research Division - MD [46]

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I wanted to maybe ask a little bit about the consumer broadband business. Obviously, we had the 2x lift and speed in the quarter, so I guess there would have been 3 effects. One would have been the potential up-sell from the Internet 100 plan up to the 300 and 600 from an ARPU perspective, a churn benefit and then potentially a gross add benefit. So I was wondering if you could kind of maybe map out how those things kind of unfolded in the quarter? And how we could think about them sustaining into the forward quarters? And then depending on the answer to that question, could we expect a miniature version of that to follow in the business side of the house, now that we've kind of doubled speeds there?

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Jay Mehr, Shaw Communications Inc. - President [47]

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Yes, I think that's an insightful question. We've got some win at our back in the Internet business. Our gross adds are up on a year-over-year basis, and this is even higher to -- prior to BlueCurve and really animating the market. When we talk about our approach to profitability in the Consumer business being monthly recurring revenue and managing that every single day when you open up the shop in the morning and you close it at the end of the night, you have an extra dollar in monthly recurring revenue that's our goal, dramatically lowering churn and growing Internet customers. On the churn side, we know on the Internet that our ValuePlan customers -- 2-year ValuePlan customers have 60% lower churn than our month-to-month customers and over the life of the customer that's 45%. Notably, in September, 43% of our Internet gross adds were on ValuePlan, and in February, that moved to 78% of our gross adds. So you can just play those churn characteristics, really more starting in August and flowing through Q1 and Q2 and you'll see what's happening there. I think, also, if you look at our pricing that we launched April 4, it's all about base management and you can see the opportunity to move from our a month-to-month Internet 100 pricing, up $3, $5, $7 and move all the way up to Internet 600 in a ValuePlan with the XB6, with the BlueCurve Gateway and BlueCurve Home and that whole experience. So you can see the monthly recurring revenue focus on Internet in that pricing. And so every conversation is about just moving that customer up. So I think you'll see all of those things coming together and you'll see churn improvements also happening as we unfold. So we're pretty excited about the trajectory of our consumer business generally and Internet and broadband in particular.

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David William Barden, BofA Merrill Lynch, Research Division - MD [48]

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And then do you see that flowing through into the business side, now that you've kind of taken the same approach there?

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Jay Mehr, Shaw Communications Inc. - President [49]

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Yes, we think that's right. We're excited about the business side of the business and we were a bit more involved with some of the Meraki platforms in the SmartWiFi services that exist. The leadership of Katherine Emberly and the team there are doing a terrific job on base management and are probably a quarter or 2 later in terms of some of those moves because of the speed changes and those things. But that will be a big part of moving business to the high end of that range.

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Operator [50]

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There are no further questions at this time. I would like to turn the conference call over to Mr. Brad Shaw for closing remarks.

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Bradley S. Shaw, Shaw Communications Inc. - CEO & Non-Independent Director [51]

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Great. Thanks, everyone. Thank you, operator, and we'll talk to you soon.

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Operator [52]

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