Shaw Communications Inc.
Q2 2018 Earnings Call Transcript

Published: 12 Apr 2018

[Operator:]

Thank you for standing by. Welcome to the Shaw Communications' Second Quarter Fiscal 2018 Conference Call and Webcast. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. At this time, all participants are in a listen only mode and the conference is being recorded. Following the presentation, there will be a question-and-answer session. [Operator Instruction] Before we begin, management would like to remind listeners that comments made on 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.

[Bradley Shaw:]

Great. Thank you, operator, and good morning everyone. With me today are members of our senior management team including Jay Mehr, President; Vito Culmone, Executive Vice President and Chief Financial Officer; Trevor English, Executive Vice President, Chief Strategy and Business Development Officer; and Paul McAleese, President of Wireless. This morning we release our second quarter fiscal 2018 operating and financial results which includes a record quarter for wireless with postpaid net additions of over 93,000. This strong subscriber performance reflects a number of key strategic priorities delivered by our team over the recent months, including the introduction of the iPhone in the quarter. Enthusiasm surrounding our data center plans and the favorable customer response to our continued network and service improvements. Besides record subscriber additions, we also realized a 5.5% improvement in blended ARPU compared to a year ago. We remained committed to improving the wireless experience for our customers. Our investments have included an upgrade to an LTE advance network, acquisition and initial deployment of additional spectrum, expansion of our handset lineup and providing customers more data for less through our Big Gig data plans. I am pleased to confirm additional enhancements that I've just been finalized including the agreement with Loblaws’ The Mobile Shop to expand our wireless distribution approximately 100 of their locations across Canada. And just a few weeks ago, we completed the reform of our 10 megahertz of AWS 1 spectrum in the East. Looking forward, we remain on track to have the VoLTE launched in fiscal 2018 and we continue deployment of our 700 megahertz spectrum, which will roll out in fiscal 2019. We also commend the federal government on its support for strong and sustainable competition as reflected in the recent announcement of the set aside for the upcoming 600 megahertz auction. This decision will ensure a future for wireless competition in Canada and is a significant win for all Canadians who deserve more from their wireless services. Moving to Wireline, which really is the foundation of this company, and has been built through decades of hard work by thousands of Shaw employees, I'm proud of what we have accomplished. Together we have built the company with our customers at the center and over the years, delivered a high touch customer service model with the professional install approach supported with our manual fulfillment anchored through a powerful and ubiquities network. It was the right thing to do and we built our business on this foundation. It is with the same day-to-day operational focus that we will evolve our delivery of products and services that is a digital by default, primarily self-install and continue network investments targeted to customer values. Total business transformation is at its core about our focus on the basics; customer experience, truck roles in our network. Said in other way, the three key elements of our focus going forward include, a shift of customer interactions with digital platforms, drive more self-installs and streamline the organization that builds and services our network. Through this process, we have realigned the senior management structure to better support our key areas of focus, which includes consumer, business and wireless. While this does not change any of our external reporting, the realignment provides the leaders of each unit additional scope, oversight and accountability for driving their respective businesses. A significant initiative under our transformational roadmap is the Voluntary Departure Program. While approximately 3,300 employees elected to participate, the program was designed whereby executing on the three key elements outlined earlier addresses the vast majority of the staff departures. We remain confident that through the next 18 months and which has been extended to 24 months in some circumstances, we can manage transition with limited disruption to our day-to-day business operations. When I look at Shaw at the Shaw we have built, I remain so excited about our strategic direction and opportunities ahead. We have a Wireless business with tremendous growth opportunity and a step-by-step strategic operating plan that is delivering results in a meaningful way. We have invested in a strong Wireline network that supports the products and services that we provide to both residential and business customers and we have a strong management team and dedicated employees that will lead us through our focus on the fundamentals of our business. We will be an organization that is leaner more agile and in the strongest possible position to capitalize on opportunities that we have in front of us. I will now turn the call over to Vito to review the Q2 fiscal 2018 results.

[Vito Culmone:]

Thank you, Brad, and good morning, everyone. On a consolidated basis, second quarter revenue of $1.36 billion increased 12.4% led by significantly higher wireless revenue and continued growth in business and internet. Consolidated EBITDA of $501 million was essentially flat over the comparable period. Let's review each segment in more detail. Starting with Wireless, the second quarter results mark a significant departure from historical results as the combination of all the investments we have made in our Wireless business are beginning to have a material impact on our subscriber numbers and our financial results. Total Wireless revenue of $290 million in the quarter increased by $149 million or 106% as equipment revenue went from $24 million in the second quarter of fiscal 2017 to $148 million in the current quarter. Service revenue also increased by 21% to $142 million, as more customers are on Big Gig plans, resulting in year-over-year Wireless ARPU growth of 5.5% to $38.43. Second quarter Wireless EBITDA of $36 million increased 24% over the same period in fiscal 2017. The reported Wireless margin was 12.4% in the quarter compared to 20.6% in the previous quarter -- in the previous year due to the significant increase in equipment revenues as a percentage of overall Wireless revenue. While the success over device pricing and packaging plans increase our level of subsidy relative to previous quarters, we view this as an attractive investment to profitably grow our subscriber base and we clearly have a healthy balance sheet to support this with approximately $275 million of cash on hand and net debt to EBITDA of 2.0 times as at the end of February 2018. Moving to Wireline, year-over-year consumer revenue declined by 0.8% to $926 million, while our business revenue increased 5.3% to $140 million. Wireline EBITDA of $465 million declined 1.9% compared to Q2 fiscal 2017, but improved by $19 million or 4.2% from Q1 fiscal 2018 reflected our focus on costs. Consumer results reflect positive internet growth offset by declines in both video and phone. During the second quarter we added approximately 5,500 internet RGUs, and we increased internet pricing for new customers as we remain focused on balancing RGU growth and profitability. The video revenue and RGUs declined in the quarter as customers generally continue to shift into lower price packages. With the launch of BlueSky and the X1 platform, we focused on executing of renewal in subscriber growth similar to the results of our U.S. partners when they launched the program a number of years ago. The consumer contact has changed, our competitive environment is very different and we did not achieve the same outcomes. BlueSky and the X1 platform are best-in-class platform, but our customers overwhelmingly recommend and we are pivoting our focus to optimize our video offering for profitability. Business results, which include revenue up by 5.3% and RGU growth of approximately 5,700 where led again by continued success with our Smart suite of products as well as traditional internet, video and data services. With the success we have experienced with our Smart product in the SME market we’ve recently expanded these services to make them available to enterprise customers. Capital spending in the quarter increased by 7% to $288 million driving by increases in both Wireline and Wireless investment. Current quarter Wireless capital of $56 million reflects continued investment in spectrum re-farming and deployment as well as back office system upgrades. Wireline capital spending of $233 million reflect increases in new housing development and success based capital. Free cash flow in the second quarter of $135 million compares to $147 million in the prior year, the decline in the current quarter is due to $19 million of higher planned capital expenditures. As it relates to TBT and the pending departure of approximately 3,300 employees, we recognized the $417 million restructuring charge in the current quarter. Although the actual timing of the payments will occur over a 24 month period. The run rate annualized savings, net of reinvestments specifically related to the Voluntary Departure Program is expected to be approximately $215 million comprised of 60% operating expenses and 40% capital expenditures to be fully realized in fiscal 2020. The F18 impact of the VDP expected savings is approximately $48 million from the exit of roughly 1,200 employees before the end of this fiscal year. Net loss for the quarter of $164 million compared to net income of $147 million in the second quarter of fiscal 2017. The decrease substantially reflects the restructuring related costs recorded during the current quarter in respect of TBT and the related voluntary departure packages. In summary, the first half of fiscal 2018 was in line with our expectations and throughout the rest of the year we remain committed to our balanced approach focusing our efforts and spend on high quality subscribers and growth opportunities. With that I'm pleased to confirm that we remain on track to meet F18 guidance whereby we expect consolidated operating income before restructuring costs and amortization to grow to approximately $2.1 billion, a year-over-year projected increase of approximately 5%. Capital investments of approximately $1.83 billion and free cash flow of approximately $375 million. Our guidance includes certain assumptions related to cost reductions that will be achieved through TBT initiatives, anticipated VDP, roaming cost reductions associated with the CRTC finalized wholesale wireless roaming rates of $12 million expected to realized in the third quarter and short-term incremental costs associated growth in wireless handset sales. Finally, before handing the call back to Brad, I’d like to make a few closing remarks. It's been an incredible fulfilling and enjoyable there years for me at Shaw. To our investor community and external stakeholders, I want to share the confidence I have with Trevor as he takes on his new role as CFO. It's been an absolute pleasure working alongside and during my tenure and I have immense respect for his deep understand of Shaw's business, the industry and stakeholders’ expectations. To Brad, JR and the entire Shaw family thank you for giving me the opportunity to be part of such a special team during what I truly believe has been a transformative time for our organization. I'm so proud of the work we've undertaken. And as today's results, and those still to come will demonstrate, we're emerging from a stronger and with a very promising growth story. One that is rooted in providing great value and service to hard working Canadians and one that no doubt in my mind will reward shareholders in the years to come. There are so many people to thank, our Board of Directors, my colleagues on the executive team and the talented and deeply committed finance team that I have had the privilege of meeting. But above all, special shout to thousands of Shaw employees across the country that work that you do day-in and day-out to continue to be the foundation of the organization success, your attention and care for our customers, for our work and for each other does not go unnoticed. Thanks, Brad and back to you.

[Bradley Shaw:]

Thank you, Vito for the significant contribution to our business. It's been an absolute pleasure to work alongside you for the last three years. You have let a talented finance team and transformed a financial management approach to partnering with the business. On behalf of everyone at Shaw we wish you only the best going forward. Today, as we look to the future at Shaw, we have made the strategic choices that will define our future. We are executing a step-by-step wireless roadmap that we delivered in the quarter and continues to deliver in the market today. Our focus on customer experience, truck rolls and our network in the consumer business provides us with significant upside as well. And on business, we will continue to disrupt [ph] with our products, product suite and opportunities to move up market. All of our business units will always put the customer at the center. Taken together, Shaw is well positioned for growth in revenue, EBITDA and free cash flow. Finally, before we turn the call over, we'd like to take this opportunity to send our love for the players, families, and communities close to the sad events that hit Humboldt, Saskatchewan this week. So many of our employees, our shareholders and our customers have joined together with other Canadians to support those impacted by this tragic event. And this morning around our offices and across this country, thousands of our employees will be participating in Jersey Day Campaign to recognize their support of Humboldt Broncos family. Thank you, operator, we'll turn it back over to questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tim Casey from BMO.

[Tim Casey:]

…so how they occurred through the quarter. That's a pretty impressive number you put up with 90,000 adds.

[Trevor English:]

Sorry Tim, it's Trevor, we missed the first part of your question, can you repeat?

[Tim Casey:]

I was just wondering if you could provide little more detail on the Wireless metrics in the quarter, specifically how the timing went on that 90,000 adds you put up it’s a pretty impressive number. Just wondering you cited that it was a pretty busy holiday season. Could you give us some color on how much occurred through the quarter in terms of the holiday season versus January and February? And then maybe some outlook on trends post quarter and as well could you talk a little bit the ARPU of the new subscribers you're loading and how we should think about how the ARPU will trend going forward? Thanks.

[Paul McAleese:]

Hi Tim, its Paul McAleese, thank you for the question. We saw positive right through the quarter and that's continued into the third quarter. Within the quarter itself, the second quarter December was very, very strong. Of course, helped by the December 8th launch of the iPhone. But as you know on net we also had a number of bad days that contributed to the December results. So overall, December was strong, but that momentum continued nicely into the post-Christmas period in January and February. And as I say, we're continuing to be very pleased with what we're seeing from consumers heading into this quarter. On ARPU of new subscribers, we’ve focused our investments Tim, and I kind of classify those as subsidy and distribution commission as well as financing on plans above $50. So we are continuing to see the average new cohort of subscribers come in above the $50 level, which of course is helping pull through the denominator of our historical ARPU. So this is not a $37 ARPU class that we're seeing any longer like we used to.

[Tim Casey:]

Is it fair -- with the 90,000, would that be fair to say it's spread evenly over the three months or would be more of the loads have occurred in December?

[Paul McAleese:]

Yes, a good percentage of the loads as you’d expect due to the seasonality of Christmas happened in December. But we saw strong growth both in January and February as well.

[Tim Casey:]

Thank you.

[Operator:]

Our next question comes from Vince Valentini of TD Securities.

[Vince Valentini:]

Yes, thanks very much. Let's stay with wireless first for a second, Paul, are you worried that these numbers are almost too good in terms of shocking the incumbents, we saw them retaliate for four or five days in December and as you've admitted you lost subs during that period of time. Are you worried that if you keep adding at this pace, I mean, 360,000 on an annualized basis is pretty dramatic. Do you want to maintain this type of pace, and if so are you prepared for retaliation from the incumbents?

[Paul McAleese:]

Yes, thanks, Vince. A few points on that, I think first off we believe, they were on a new and sustainable trajectory. So we're confident in our growth potential. And we’d also agree with many of the analysts on this call that there is ample category growth for the industry to maintain good price rationality. So if you look at what happened over the last quarter, the industry reported strong growth, we're pleased to join those numbers and that group. But a couple of points on the key drivers for Q2, clearly there is some positive effect related to both seasonality and the iPhone launch effect. So I would be cautious in multiplying 93,000 times 4, though are grateful for the confidence. We saw some moderate gains in gross market share and that's I think a fair expectation going forward, that we will continue to take some there. We're now selling a device that or a series of devices that constitute about 40% of gross adds in the Canadian market. We weren't previously offering that, so we'd expect to see some pick up on that. And then finally, and this is really important as we kind of narrate the story, we've seen significant improvements in our customer experience related to the great work that our network team have done on our overall product quality. So it wasn't simply about going out and getting a bunch of more gross adds. We had record levels of customer retention during the quarter and that really helped contribute to the 90,000 as well. So it's not just to go out and get on a story, I think we have done a great job of maintaining existing customer relationships. And the great work that the team has done in advancing the re-farming and allowing what it previously been hundreds of thousands of customers they were on a 3G experience with us, to experience our LTE network and get large buckets of data on the new rate plans really contributed overall. So I would be cautious other than to say that we like the trajectory we’re on, we think there is room for everybody to grow here and we're satisfied with the quarter.

[Vince Valentini:]

Okay. And you mentioned the churn that do you happen you want to give us what your churn number is yet or are you guys still keeping that under wraps.

[Paul McAleese:]

I think we're going to start bringing those metrics to the market perhaps early in the next fiscal.

[Bradley Shaw:]

Yes, I think, Vince, as we get a bit more maturity and normalization in the business we'll start to disclose some of the churn metrics probably in fiscal 2019.

[Vince Valentini:]

Okay. One more Wireless question and then a cable or bigger picture question. So given that you're seeing these gross adds now, given that your churn is at record levels as you said. Does that give you confidence that the initial wave of network investment is succeeding and is largely done. I mean, you guys have own win for just about two years and this is the first quarter you finally seen a breakout in your subs. So it was two years of network construction and now starting to reap the benefits of that. Do you still think you are years away and potentially billions of dollars away in terms of CapEx to get your network to a credible point or do you feel this is an endorsement that you're already there?

[Jay Mehr:]

Vince, its Jay. This is not a single quarter result, it’s obviously helped by the holiday season and then a very strong seasonal period in January. This is a new Wireless business that we're building in Shaw and it’s exactly the business that we told you we'd be building on a step-by-step plan and it was also proceeding exactly as we wanted them to proceed. The LTE network is performing well, I know a number of people were surprised with the smaller number in terms of the roaming rebate that we got and it’s simply because our network is better than people think it is, we're not relying on roaming as much as people think we are. On the ring tone [ph] we love the roaming decision, the opportunities on the MVNO, the opportunities that we have with the 600 auction. Everything is proceeding beautifully, to be clear there is no forklift capital in our Wireless plan, this is step-by-step and we're continuing to rollout the 700 where we have great momentum. And we're just going to stick to the plan on Wireless and keep doing what we've been doing.

[Vince Valentini:]

Thanks. And then last question is just on the total business transformation, maybe clarifications in some ways, but also questions. The $48 million in 2018 that must be a run rate as of exiting the year or do you actually think you'll get $48 million of in period savings in Q3 and Q4?

[Bradley Shaw:]

Hey, Vince, thanks for that. I'm going to jump in here a little bit to talk about TBT a bit and then I’ll let Trevor, one of the guys answer that. Total business transformation is absolutely necessary for Shaw to meet customer expectations to compete more effectively, ensure that we capitalize on opportunities to deliver long-term growth. We're approaching TBT from a position of strength, strong Wireline network where we’ve made significant investments to be ready to capitalize on emerging technology, gigabyte speed, IPTV, home gateways, 5G, striving Wireless business with strategic step-by-step plans to grow in a profitable manner. We have a detailed plan to ensure minimal disruptions to our business and a vast majority of the roles, which we talked about can be addressed to modern digital service and automation. I have extremely high confidence in the ability of our leadership team to successfully execute on the plan. And I can tell you that employee morale remains high as change creates opportunities. First of all, fair treatment of employees fosters loyalty among both those who are leaving and those who are staying. Employees that choose to stay are totally excited about the contribution -- the contribution they're going to make the change and want to be a part of this great story we have. Ultimately, I think, when we look at the business and how we’ve run it for so many years in corporate leading, I really think the opportunity for us to make decisions closer to the customer -- works in it’s absolutely needed we go forward. And I love the idea of full accountability in each business unit is I think is absolutely fundamental. So I know there has been a lot of concern about TBT and the voluntary program, but I -- we take things, we plan for this, we -- this is what we do as leaders and you adjust there is plan, these things happen and very confident that we have all the pieces in place to make this very successful for all our shareholders. So in F20 and beyond the increase of free cash flow to shareholders, I think is going to be significant and we really want to make sure as we go forward, we're supporting our long-term initiatives and plan to deliver free cash flow and dividend growth. So sorry for taking your question away, but I thought it was very important to address some of the things here and we’ve taken things very seriously, and I think with us we have -- we may be a little ahead of the curve I'm not sure when you look at traditional businesses and disruption and what people and companies are going through. I think we have certainly see the opportunity to be a more lean and streamline company and are taking the steps and are absolutely focused on the growth businesses, absolutely making sure we make the proper investments as we go forward for the long-term profitability of this company. So thank you for that Vince, and I'll turn it over to you Trevor.

[Trevor English:]

Yes, Vince, its Trevor. Maybe I'll try helping you with the modeling and the financial aspect of it. So in F18, there is about $48 million of savings as we quoted in the press release and that relates to the exit of over 1,200 people between now and the end of August. And I can tell you as of March 29th when the exit started it was about 400 on that day. So the $48 million -- and the early exits I'd say of more leaders, management, corporate folks as we roll out throughout the really 18 months, but in some unique circumstances we have pushed that out some of the exits is about 500 people now into the 24-month period. The saving sort of go from $48 million in F18, the 215 we quoted in 2020 than to help bridge you that's about $150 million in F18 as well. And that's when you get into the 60% roughly OpEx, 40% CapEx. And just maybe a little bit of additional granularity to help you, GDP was really focused on areas within our Wireline business and those savings are really more -- it's about 90% within Wireline versus Wireless. And in fact in F18, it's about 95% that's within Wireless versus -- Wireline versus Wireless. So hopefully that helps you with the modeling, in terms of timing of exits and cash flow, we did book a provision this quarter in -- on the balance sheet. About $18 million have already been spent as of the end of Q2. We've got about $200 million going out of the door related to the exits within the next 12 months and then another $200 million for months 12 to 24. And that's disclosed in the financials in the provision that we took this morning.

[Vince Valentini:]

Excellent, thank you.

[Operator:]

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

[Drew McReynolds:]

Yes, thanks very much . Just a couple of follow-ups on the Wireless side. Wondering, I guess, Paul, if you can just talk to I think you launched the online sales channel, but more broadly just from a loading perspective and your distribution footprint. Can you just provide a little bit more granularity, where some of this is coming from and I think in previous quarters you've commented on the relative loading between the Ontario market and DC and Alberta. So just wondering if you could add some granularity there? And I'll have one follow-up, if that's okay. Thanks.

[Paul McAleese:]

Yes, thanks, Drew. We are very, very pleased with performance of the distribution over the course of last quarter. As you know, we split broadly evenly between distributors and our corporate stores in terms of their gross activations over the course of a quarter. We continue to see that split through the second quarter and we continue to see the consistent split between -- or historical split between the East and the West. East is about 70% of our gross adds and the West is about 30. And again, some -- possibly some opportunity there in due course. So we're very pleased to have brought on our first national retailer in Loblaws, which we will be starting to activate as early as this week in those stores. Not only the first time Drew that we sit on a shelf with our competition. So we're eager to see how that plays out over the next little while, but very confident.

[Drew McReynolds:]

Okay, that's great. And Paul, just a follow-up, I think last quarter you were asked a question just on a wireless wireline bundle potentially within 12 months in the Shaw branded wireless service. Is there any update there that you can provide us just given what's happened with your deployment roadmap across all the wireless initiative. Thanks.

[Jay Mehr:]

Yes, it's Jay Mehr, I’ll take that Drew. More to come on that file I think we have been very clear that we have a crisp and clear plan of wireless that we're executing on a step-by-step basis and was on wireless run. As you can appreciate on the wireline side of the business we're going through some pretty major structural transformation. We've got lots of work to do on that side. So things will come in the future, but I don't have anything to add today except that we're going to continue to lean into the wireless momentum that we have today.

[Drew McReynolds:]

Thank you very much

[Operator:]

Our next question comes from Jeff Fan of Scotia Bank.

[Jeff Fan:]

Good morning, everyone. Just a couple of quick follow-ups on Wireless, if I can, and then a question on the cable business. With respect to the adds, Paul is it fair to say the contribution to your improvement in nets is pretty balanced between contribution from gross as well as lower churn. And then also in terms of contribution to your gross, how would you describe what are you getting from BYOD versus the equipment, those subscribers that come within equipment sale.

[Paul McAleese:]

Hi, Jeff. Thank you. I will work in kind of reverse order here. So BYOD continues to be an important part of our business. In the second quarter, we actually saw historically low percentage of our gross adds coming from BYOD, so sub 50%. So again, we are focusing on those longer-term relationships that we can acquire through putting higher value customers on better devices, on begin Big Gig rate plans, many of them financing their device for a couple of years. A good solid anchor relationship that we can build on for years to come. We still love the value to the customers and we love the value that we can bring them, but that has in the second quarter been a smaller part of the overall business. On gross adds -- sorry the first part of the question if I could, because it was a split. Yes, versus churn, I’d say that’s an even split in terms of their relative weighting to the overall piece. We are really pleased with the retention story that we're building over the last couple of quarters. And I can't overstate the fact that when you take hundreds of thousands of customers from a 3G to an LTE experience as we've been able to do, we're really starting to reap the dividend of that in terms of the customer experience. So yes, but an even split I would say between those two.

[Jeff Fan:]

Okay, thanks. And then a question on cable, more specifically the consumer revenue as we look out to the second half of the year. There's a lot of moving parts. You put through some price increases, you’ve made some changes to your promos, yet at the same time you do have some subscribers who are coming off of promo plans. Can you help us kind of think through all those moving parts on how the second half consumer revenue will track. How is it going to look with all those moving parts? And then, and then I guess the bigger question is you've had some management changes recently. I guess one of the things that I guess I want to get my head around is with respect to pricing and packaging decisions, and how that has -- that responsibility may or may not have changed within the organization in terms of where that decision rest?

[Trevor English:]

True, Jeff, its Trevor, maybe I'll help with the bridge on the second half in terms of the consumer revenues side. Clearly, there has been lots of movement with reduction in promos some rate adjustments in Q2 that have been made that will flow through into Q3 and Q4. We've also announced and I think it's been talked about there's some -- our annual rate adjustment comes in on Q4, June 1st. And that is forecasted to contribute about $7 million on -- $7.5 million of revenue on consumer as well. So clearly this is all of the moves that we've made in Q2, Q3 -- or Q2, Q1 and even in the back half of 2017 will flow through into Q4 consumer revenue where there's a fairly significant ramp, which is what we're expecting. And that's all embedded in the guidance that we confirmed as well this morning.

[Jay Mehr:]

Yes, and building on the, Jeff, its Jay. The $7.5 million on the rate adjustment is on a monthly…

[Trevor English:]

On a monthly basis.

[Jay Mehr:]

Just to be clear. And result on Wireline revenue we’ve seen at start of this quarter already are performing exactly like we’re out there performing. So we're seeing the nice steps back in terms of the ramp that go through in Q4. Jeff in terms of leadership changes, we've got a crisp organizational structure in the current pricing and packaging and marketing is now within each of our three business units of wireless, consumer and business. We have great confidence in the teams that are driving each of those business units and we think we've got a great level of focus on what each of our jobs are ahead. There is opportunities in all three of those cases. The opportunities are not the same. And as each other's -- so I think the predication and focus on those functions will be very important for us going forward.

[Jeff Fan:]

And just one specification, is the cable or the Wireline segment, I guess , between consumer and business how are those segments now or managers being evaluated? Are they all evaluated on a more P&L basis now?

[Jay Mehr:]

Yes, there is -- on all three of our segments where everyone is very crisply measured on metrics and we've got a job to do clearly consumers got a profitability plan that we're supportive of. And to be clear, where the consumer business is on its EBITDA budget for the first six months of this year and will continue to be we're focused on this and we always plan a strong second half business, absolutely. There is a focus on P&L, there is also focus on growth. We saw a little bit of moderating in our growth curve and may take us a quarter or two to get back north of that 7% instead of the 5.3% we're at this quarter. But to be clear, we continue to believe there is lots of growth in the business side and we're asking our leadership team to deliver that.

[Jeff Fan:]

Okay, thanks guys.

[Operator:]

Our next question comes from Philip Huang of Barclays.

[Phillip Huang:]

Hi, good morning guys. I want to go back to ARPU, obviously it’s bit of a leg end because just given the big base that you have. So it's pretty impressive for us to see such a nice job. Now, that you've mentioned that the ARPU new subs are all coming sort of above $60 level. Should we expect pretty strong acceleration in terms of growth here? Or are there any offsetting factors that we should also take into consideration as the year progresses. And then I also have a follow-up question on the wholesale roaming rate that now that it's finalized, I see that you reverse expenses of $12 million in fiscal Q3. I'm assuming that's related to the retroactive application of that. Just wondering if you could comment on the savings going forward, given that that’s presumably for two years. Should we assume that you're going to get $6 million of benefit per year going forward or do you expect a bigger number because obviously you’ve bigger start related to that now? Thanks.

[Paul McAleese:]

Hi, Philip, its Paul, I'll take the first one on ARPU. We think this is just a kind of great consumer satisfaction story for our Wireless business. And in a lot of respects I think the ARPU story is sort of quite predictable. There were two key drivers over the course of the quarter to just to kind of bring your focus to one is those investments I spoke about that really were focused on $50 plus rate plan. So everything from how we commission our distribution through to how we induce an infant customers say whether through financing or for subsidy we're really focused and we’ll continue to be focused on that higher value subscriber relationship. So we are driving a significant number of new subscribers into the equation that are helping build that $37 historical number up to a much better figure like you've seen in the second quarter, here at $30.5. Another thing that I want to focus on is it's not as obvious from the outside is that we've been actively upgrading our new existing subscribers to our Big Gig rate plan. So we have historically had a relatively low migration history with our customers that's always been a sort of a net zero for us as customers come in another rate plans often related to their travel needs. Over the course of the last number of months though we have developed this great value equation for our customers. We're seeing tens of thousands of subscribers move on a regular basis from a historical lower value rate plan into a new $50 plus rate plan. So there is certainly happening above and below the line here that contributing to that that growth. And we think, that you will continue to see from us those investments focused on that on net ARPU growth. So I think that story will hopefully continue.

[Vito Culmone:]

And Philip, just on the accounting, it's about $12 million in Q3 that we will be booking for the retroactive from the impact of the lower roaming rates. And to Jay’s comment maybe it’s not as big as people thought, it's about an annual impact of about $5 million in terms of what we'll see as the run rate going forward.

[Phillip Huang:]

Okay, got it. That's very helpful for growth. I want to ask a follow-up on the cable side. Obviously, you guys have shifted away from the promotions for the past quarter recognizing that the bigger growth opportunity obviously lies in wireless, should we assume that this is the type of approach going forward? Should we assume the level of subscriber trends to be similar into future quarters or is this sort of like -- have been flows low that depending on the market condition, I just want to get your take on what you -- where sort of subscriber retention and growth for that sort of land in terms of your priority as it relates to the promotion that you're thinking through as the year progresses. Thanks.

[Jay Mehr:]

Thanks. Phil, its Jay, I will give you some color there. Clearly our growth opportunities exist on Wireless as you have seen and we're going to continue to lead into the wireless opportunities. We continue to have a growth opportunity in business, there is an opportunity to come off market and business. And so don't -- despite the fact that it was some slight moderating in our growth results this quarter and maybe next you'll see us continue to drive business if there is a growth opportunity. There is lot of noise on the consumer side of the business as you adjust pricing and promotional periods and competitive environment and we continue to exist in a very competitive environment. So it's a little bit tricky to map out specific subscriber numbers in an area of very moving pieces. I think it's clear to Vito’s comments that when we originally launched BlueSky we wanted to duplicate the success that our American counterparts achieved a few years ago into launch of the X1 platform and drive market share growth and you've heard us communicate clearly with the team a year ago that winning look like plus one in terms of the new subscribers. It’s clear as we executed that strategy that we got a different outcome and that was a strategy in the current environment, both with our competitive environment in Western Canada where people have already moved to smaller packages and just everything that's happening in video today, which I think is global not just a Western Canadian thing, but that approach wasn’t going to achieve the same outcome. So we’ve seen a shift video to more of a profitability approach and you'll see us do that going forward, whether or not you will see a moderating video RGU losses over the next coming quarters. It certainly would be our intention to do that, but we will do that within the context of profitability. The dynamics of our broadband business is good, what’s fantastic about the Comcast roadmap is it’s a total home solution and the industrial design and that relationship with Comcast is terrific for us and you'll see those benefits shift even more to the broadband solution and our broadband revenues going forward.

[Phillip Huang:]

That's super helpful, thanks very much.

[Operator:]

Our next question comes from Greg McDonald of Macquarie Capital Market.

[Jay Mehr:]

Operator, we're not hearing the question come through.

[Operator:]

Our next questioner in the queue is Aravinda Galappatthige of Canaccord Genuity.

[Aravinda Galappatthige:]

Good morning, thanks for taking my question. Just a single question remains. Just wanted to revisit the comments you made about BYOD, obviously recognizing that it's not been a major driver in the last couple of quarters. But with the re-farming done and some of the commentary we have from a few players that appears to be a meaningful opportunity, particularly for the regional wireless players. So should we kind of expect you to sort of apply more energy in that area as we kind of look to the second half for additional wave of sort of growth on the wireless side.

[Jay Mehr:]

Let me start and I'll let Paul finish. Look we hit a market theme where consumers felt mistreated by the way data was being offered by our competitors and the combination of that with the launch of the iPhone and energy in the marketplace. We hit a theme and we focused on that theme. And so we can only do so many things at once the re-farming actually helped us benefit our existing customers by moving them from 3G to LTE and that helped us with churn benefits and other things. To say that our BYOD powder still drive it absolutely is. Although to be clear you know the majority of our customers are in Ontario and we just completed that re-farming in the last few weeks. So there's certainly more opportunity on BYOD, but the same token recognize that we love the characteristics of the cohort that's on-boarding today. And we're not leave that alone in order to chase BYOD. We've got some levers going forward that you haven't even seen us use yet. I don’t know if you want to add to that point.

[Paul McAleese:]

No, that's perfect.

[Jay Mehr:]

Okay.

[Aravinda Galappatthige:]

Okay, that's great. Thank you.

[Operator:]

Our next question comes from Maher Yaghi of Desjardins Securities.

[Maher Yaghi:]

Thank you for taking my question and congratulation on all the nice wireless results. I wanted to first ask a question on -- you mentioned in your prepared remarks that Q3 is still looking good in terms of wireless loading. If I look back at the last year, we saw a slight decrease 10,000 to 15,000 decrease in net ads, is that what your -- what we should look at in terms of quarter-over-quarter type movement in net adds or just something special in Q2 that took place that Q3 we should expect a more normalized level of loading? And I have a second question to just follow-up on that.

[Jay Mehr:]

Yes, we've got great momentum and we've had a nice start to the quarter and things continue to go well. We did lag -- there is seasonality in the business and you do have to look through sort of the adds in the business, last year we did 19.8 basically 20,000 post first quarter it always rounds up to 20, but I am sure it was 19.8. The pace that we're going, you can absolutely hold us accountable to double that. Could we do better than doubling that we might do a little bit better than doubling, but I don't -- I mean, if you think about something in the fours, I would consider that to be sort of the current trajectory given the level of activity that we have in the marketplace. If you follow that seasonality curve, you should expect more from us in Q4 than that because that’s how the business unfolds. But I really don't want to get too speculative on guiding to specific numbers in a very competitive and floating environment, we're going to do the right thing. Just wanted to give you some context of where it heads at based on what we are seeing today.

[Maher Yaghi:]

No you actually did more than I had expected. So thank you for that. In terms of your guidance, now when I look at your OpEx and CapEx savings from the VDP which add up to $48 million, add up the $12 million from CRTC net back you get about $60 million. But you're sticking with your previous guidance of 375 on free cash flow. Can you just try and explain what are the other things happening behind that is not helping in guiding up the numbers.

[Jay Mehr:]

Yes, I would say one thing, Maher, it’s obviously the success of the wireless business has the near-term pressure on margins that frankly, we didn't initially forecast and we talked a little bit about the impact of the additional wireless equipment sales and there's actually a negative margin on that. So that is one of the things that keeping us on the original guidance along with some of the other favorable items including the $12.5 million or the $12 million related to the one-time CRTC benefit. So there's a few things positive, but one of the things holding us back obviously is the success and the near-term margin impact of some of our wireless activities, which we're very happy with. But that's why we're sticking with the original guidance that we have in place.

[Paul McAleese:]

I think I’d add there Maher is as you’ve heard in our prepared remarks how video is performing, perhaps vis-à-vis our original guidance is a bit of a headwind compared to that, but where we expect to come out of Q4 presents a very favorable picture going forward in 2019 and thereafter.

[Maher Yaghi:]

Okay. Yes, that's what I had kind of implied because when you look at the -- you look at all of the improvement versus your previous guidance it comes out to maybe 150,000, 100,000 of higher than expected loading, which seems quite large. But yes, on the cable side, I just want to final -- just one last question when you look at your network what are the additional investments that you feel you need to do in 2019? I know you don't want to provide actual dollar forecast on CapEx. But maybe can you just tell us what are your big projects for 2019 on wireless in terms of store additions, network expansion, spectrum, implementing new spectrums in your network. Things like that, just qualitatively maybe.

[Paul McAleese:]

Yes, thanks for the question. Our plan has not changed, we're going to continue to execute the plan. I think there was some surprise maybe that in terms of executing the Videotron spectrum we prioritized 25,000 before 700. I think that was maybe counterintuitive to people. I hope you can see today the importance of that in terms of what it does for our base in terms of being able to move them from 3G to LTE and the opportunity for them to come up market. I recognize people will have other views that we should have done 700 first. We started 700 and we're moving down that path as planned, and that'll be the chunk of next year's wireless spend. Throughout our segments again there is no forklift capital. We've got some VDP savings in capital. And so I don't think you'll see anything scary in our capital trend over the next couple of years. And when Brad talks about increasing free cash flow with or without Corus dividends. That's all part of our future as we move forward over the next few years.

[Maher Yaghi:]

Okay, thank you very much.

[Operator:]

Our next question comes from Rob Goff of Echelon Wealth Partners. Mr. Goff, your line is live. Our next question come from David McFadgen of Cormark Securities.

[David McFadgen:]

Great, thanks for squeezing me in. A couple of questions. So first of all, just on the Wireline RGUs, I was wondering if you thought that there's a path to get those to be stable. And I would think that if you actually had a Shaw mobile product and you bundled it with the existing wireline services that that will go along with stabilizing those RGUs. Just wondering what your comments on that. And then secondly just on Loblaws, is the 100 locations a starting point, could it grow to be something more significant than that? And are there other organizations that you're talking to that are similar to Loblaws?

[Bradley Shaw:]

Let me start with RGUs and I'll let Paul talked more about Loblaws. Look there is lots of noise as we shift our approach to the consumer market and we have got lots of work to do. Do we aspire for better RGU results than we’ve got, absolutely. And we continue to balance that. When you think about Wireless, Wireless is the single biggest growth opportunity at Shaw. We don't think of it as a vehicle to stabilize Wireline results. We think it is the fundamental creator of shareholder value for our future. And so we're going to drive that as an absolute business with the level of focus and commitment that you've seen. Is there an opportunity to bundle, of course there is, are there opportunities for us to do things in the future for sure. Would we like to get a greater share of broadband adds than we’ve got this quarter, yes. But we are in a very challenging environment, and we need to -- we're not going to do it at all costs. We're going to perform in a disciplined way and make choices in terms of where we invest. Paul do you want to talk a little bit about Loblaws.

[Paul McAleese:]

Yes, thanks David, its Paul. The 100 Loblaws locations mobile shop locations, that's the total within our coverage, but we'll have those in service fairly quickly in within this quarter. So that will the cap of it. On other retailers, we are really fortunate that over the last number of quarters, we should have demonstrated strong credibility. As you know most -- a good percentage of Canadian wireless retail that’s controlled by our competition. So we will continue to be excluded from that, I would surmise. But there are certainly retailers of mobile in this country that are, I think starting to recognize that we represent an important opportunity for them to provide value to their customers that otherwise doesn't exist today with the carriers that they are listing. So we're always open to the conversation for a place on their shelf and happy to take those phone calls as we have been in recent months.

[David McFadgen:]

Okay, thank you.

[Operator:]

Our next question comes from Rob Goff of Echelon Wealth Partners.

[Rob Goff:]

Good morning and thank you for circling back. My question goes back to a comment that was made on the impact of migrating wireless subscribers. Could you perhaps dive a bit more into that and sort of weigh off the benefit to ARPU of migration versus the new subs coming on the 50 plus programs.

[Paul McAleese:]

Hi Rob, its Paul. Just maybe go back to the historical, we used to do a very small percentage of our subscriber base every month that would migrate, and the typical behavior would be, I'm on a $50 plan, I'm going to Florida, I'm going to go down to a $30 plan and then when I get back I’ll jump back to the $50. So the kind of net, over the course of the year for us basically a null event. What we've seen of late is a significantly larger percentage of our base every month migrate and we're used to be kind of zero economic impact, our average migration right now was a positive nearly $6. So you can imagine that sort of consequence of that. I don’t have the number in hand in terms of the weighting between that and you. But we continue to recognize and see that our existing subscriber base sees incremental value, particularly after the re-farming and moving to the Big Gig rate plans. So I would speculate at this point that over the coming quarters we will continue to do favorable migrations that will positively influence ARPU.

[Rob Goff:]

Thank you very much.

[Operator:]

Mr. Shaw. There are no more questions at this time.

[Bradley Shaw:]

Great.

[Operator:]

This includes the time allocated to today's conference call. You may disconnect your lines.

[Bradley Shaw:]

Thank you, Operator, thanks everyone. Have a great day.

[Operator:]

Thank you for participating, and have a pleasant day.