Shaw Communications Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Welcome to Shaw Communications' Fourth Quarter and Full Year FY '16 Conference Call. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. [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.

[Brad Shaw:]

Thank you, operator. Good afternoon, everyone and thank you for joining us today. With me today are members of our Senior Management Team including Jay, Vito, Alek and Nancy. 2016 was a transformative year and represents a very deliberate pivot in the strategic direction for Shaw towards long term sustainable growth. The acquisition of Wind provided a critical piece to our converged network and growth strategy as customer demand for a truly mobile product continues to increase. We completed this transformational shift with the sale of Shaw Media assets on April 1, crystallizing substantial value creation since initially acquiring the assets in 2010. We believe the strategic realignment of our asset base positions us well to compete and grow in the future. We exit 2016 with a solid foundation in place, necessary to execute on a strategic initiatives in FY '17 and beyond. Key among these initiatives is to increase the revenue and operating growth profile for Shaw. Through investments we have made in FY '16, our growth services comprised of wireless, BNS and BIS are delivering solid results and our converged network strategy will position us to provide exceptional customer experiences alongside strategic partnerships with best in class technology providers. We have solidified our partnerships with the likes of Comcast, Cisco, Nokia and Broadsoft, enabling us to introduce unique and compelling platforms to both our consumer and business customers. We're excited about our strategic partnership with Comcast and Cisco and in FY '16 we launched FreeRange, our TV e-application, representing the first milestone in our NGV roadmap. We continue to work closely with Comcast in the deployment of the X1 video service which will be deployed across our footprint throughout FY '17. Nokia is our single source provider of our wireless network equipment, where we secured a very attractive fixed-rate contract on the wireless LTE upgrade that is currently ongoing. And we have partnered with Broadsoft and Meraki to support our new managed business product offerings, such as SmartVoice, SmartWiFi and SmartSecurity. In August, we launched WideOpen Internet 150. This ultra broadband service is available to almost 90% of our footprint and capitalizes on our network competitive advantage. The launch of Internet 150 during the quarter helped contribute to our Q4 Internet results. Consolidated RGUs, including wireless net adds of approximately CAD40,000 was positive as we added over 8,000 RGUs in the quarter. Considering the wireless opportunity in front of us, initial success of WideOpen 150 and excitement and anticipation regarding the introduction of our XFINITY TV product, combined with our growing percentage of customers taking our two-year value plans. We clearly have momentum heading into FY '17 with further opportunities to grow RGUs and reduce churn. I will now turn it over to Vito to go through the financial results and provide more details regarding FY '17 guidance.

[Vito Culmone:]

Thank you, Brad. Indeed it has been a very busy and exciting year for us. The reported consolidated results for the quarter include revenue of CAD1.3 billion, up 15.5% and EBITDA of CAD549 million, up 4.6% on a year-over-year basis. Adjusting to exclude wireless results, revenue in the quarter for the combined consumer BNS and BIS divisions was up 2.2%, while EBITDA declined 1% compared to a year ago. Looking at the full-year results, consolidated revenue of CAD4.9 billion increased 8.9% and EBITDA increased 3.8% to CAD2.1 billion. Excluding wireless and media for the full year, revenue increased 2.6% and EBITDA increased 0.9%, compared to FY '15. Diving into the divisional details. Consumer revenue of CAD938 million in the quarter was comparable to the prior year, while EBITDA of CAD418 million declined 3.7%. For the full year, consumer revenue of CAD3.75 billion was also compared all to FY '15 while EBITDA decreased 1.1% to CAD1.67 billion. Flat top line results, due to RGU losses essentially offsetting the impact of the rate increases, combined with increasing -- increased, excuse me -- combined with increased operating expenses associated mainly with the NGV and programming costs as a primary drivers -- are the primary drivers for both the quarter and for the full-year consumer results. BNS results for the quarter include revenue and EBITDA of CAD140 million and CAD70 million, up 5.3% and 4.5%, respectively, over the prior year. Full-year reported revenue and EBITDA grew 5.4% and 3.5% to CAD548 million and CAD265 million due primarily to consumer growth. Core revenue and EBITDA are both up approximately 7% in FY '16 which excludes the Tracking and Broadcast businesses. Strong wireless results in the quarter include revenue of CAD148 million and EBITDA of CAD29 million. Compared to Q3, revenue is up 12% and ARPU, in the wireless group, increased over 3% to CAD37.40. For the six month period included in our FY '16 results, Wireless contributed CAD280 million in revenue and CAD59 million in EBITDA and we expect the Wireless division to continue to drive growth in FY '17. BIS continues to deliver healthy and predictable results. Reported revenue and EBITDA for the quarter was CAD86 million and CAD32 million Compared to Q3, revenue was flat while EBITDA declined approximately CAD1 million or 4.5%, excluding the impact of foreign exchange. The softness in Q4 compared to Q3 is driven by two factors. One is the anticipated departure of a single tenant data center and, secondly, seasonal increase in utility costs. It is important to note that on a full-year basis, business infrastructure services delivered organic revenue and EBITDA growth of approximately 12%, as customer demand continues. Consolidated capital expenditures in the quarter and for the full year were CAD386 million and CAD1.2 billion. The increase in the current quarter compared to a year ago is due primarily to the addition of wireless investments of approximately CAD70 million in Q4. Free cash flow in the quarter was CAD9 million and CAD482 million for the 12 month period which includes approximately CAD132 million in cash flow from discontinued operations. We delivered net income in the quarter of CAD154 million or the CAD0.31 per share which is a decrease over the prior-year due primarily to a nonrecurring gain on the sale of the Spectrum licenses recorded in Q4 2015. Net income for the full year was CAD1.2 billion or CAD2.51 per share compared to CAD1.80 per share in FY '15. The increase in the current year was driven primarily by the gain on the sale of the media division, partially offset by various other nonoperating losses. Let me take a moment, please and address Shomi. As many of you are aware, on September 26, 2016, subsequent to our August 31 year end, Shomi announced that it would be winding down operations effective November 30, 2016. FY '15 and FY '16, we have recognized total equity losses of CAD10 million. Further, in Q3 of the FY '16, you recall we reported an additional CAD51 million impairment. In the months to come, we expect to incur additional costs in relation to the wind down of up to CAD120 million as noted in our subsequent event note. An up-to-date provision for these costs will be reflected in our Q1 FY '17 results. Let me now turn to the particulars of our FY '17 guidance. Our consolidated capital guidance as noted in July, when we provided our Q3 results remains unchanged at CAD1.3 billion. The increase over FY '16 represents the impact -- reflects the impact of a full year of wireless investment. We're introducing consolidated EBITDA guidance to range between CAD2.125 billion and CAD2.175 billion. This EBITDA guidance reflects the expectation of healthy revenue gains across all of our business units, coupled with required strategic investments with a view to providing long term benefits. From a free cash flow perspective, our FY '17 guidance is to exceed CAD400 million. As previously discussed, FY '17 is another year where we will continue to make organizational investments and focus on execution. However, our long term strategy to deliver operating earnings, free cash flow and dividend growth remains our guiding principle. With that, Brad, back to you.

[Brad Shaw:]

Thanks, Vito. Before we take any questions, I wanted to knowledge our employees and customers that were impacted by the devastating fires in Fort McMurray earlier this year. We all came together and supported this tragedy and as the city rebuilds and recovers, Shaw is proud to stand with the community, our customers and our families. In closing, I also want to say a sincere thank you to all Shaw employees for their hard work and devotion over this past year. As we turn the corner and start a new growth chapter here at Shaw, we will continue to work towards many exciting initiatives in FY '17 that are geared toward building a stronger Shaw for the future for all of our stakeholders. Thank you for joining us this afternoon and we will now turn it back to the operator to open for Q&A session.

[Operator:]

[Operator Instructions] The first question comes from Jeff Fan with Scotiabank. Please go ahead.

[Jeff Fan:]

First, I will start off with the consumer margins. This quarter was a little bit weak and, as you guys pointed out, I think there were a couple of cost items. Wondering how you see consumer margins going into 2017 because there was a lot of moving parts with, obviously, price increases putting through, you've got the WideOpen 150 new customers coming in, you have X1 costs and then you have cost savings and programming. Wondering how all of that sort of flows through at the end of the day to consumer margins in 2017?

[Brad Shaw:]

Jeff, maybe I will start off and, Jay, you can cleanup for me if I missed anything. Clearly as we head into -- a consumer component is a key part of our, obviously, consolidated FY '17 guidance and when you look at the margin activity, clearly a year of it, continued investment for us, content costs and NGV costs, in particular, will weigh heavily into our cost base as we move forward. The business is doing all they can, obviously, from an operational effectiveness perspective and efficiency perspective. But overall, when you look at the cost picture plus the focus, really, on subscriber and revenue growth, I would say that you can anticipate some pressure on the consumer margins as we move into FY '17.

[Jeff Fan:]

Okay. And then the second part of the question or second question really is around your wireless strategy. There is a couple of different approaches. One, if you look at what T-Mobile, with their uncarrier approach in the US, is doing that is certainly one approach. Another approach could be, you could be looking at it as an extension of your cable services into wireless, in which the benefit could come from lower churn of the core business as well as increase in value of the wireless business. Wondering how you can -- how you look at it as you get the upgrade under your belts going through 2017.

[Alek Krstajic:]

We see the Canadian market a little bit different than the US market and I don't think that there is a need to do quite as aggressive an approach as what T-Mobile did down in the States with the uncarrier approach. You are not going to see me growing my hair long and wearing a pink T-shirt and crashing competitors' parties. But in the same way, I don't think there is a need to be as disruptive. We are having a great growth already with the 3G market over the 3G network and I think you will see that kind of thing continue in a much more stable approach to how we attack the market.

[Operator:]

The next question is from Vince Valentini with TD Securities. Please go ahead.

[Vince Valentini:]

Thanks very much. Sticking with the consumer margins from a slightly given angle, you are getting more customers signing up for these two-year value plans. So obviously in year one they get a pretty good discount on their price but then they jump up. Is that something you would expect to see a good snap back in your margins in 2018 if you keep loading a lot of customers on two-year deals?

[Jay Mehr:]

Thanks, Vince. It is Jay. You have correctly identified one of the major shifts in the marketplace. And to be clear, we moved kind of aggressively on two-year value plans on the first of March and amplified that with the launch of WideOpen in July. The benefits of that, in terms of creating symmetrical competition with our primary competitor, you will recall for the last number of years we have been asymmetrical where a large proportion of their base and almost all of their ads were on a contract and ours were on a month-to-month basis. So some costs and some discounting at the front end. I can tell you, having already seen the results from October of the original March six months roll off, we are seeing the churn benefits that we anticipated from that. Over 90% of our WideOpen Internet 150 at launch ads went into a two-year value plan and so the churn and margin benefits, I think, are easy to model from there.

[Vince Valentini:]

Okay. Great. And while I have got you, Jay, X1, can you just clarify this for me. So is there going to be some sort of launch, by say your second quarter of FY '17 or are we talking about a delay until next summer before any of your customers can start to see the full boxes and platform?

[Jay Mehr:]

Vince, you have heard our full voice around WideOpen Internet 150. Please don't read into that, that we're under emphasizing any of the three elements. You'll recall as we talked about the CAD1.2 billion in capital last year and the CAD1.3 billion this year that, that was to complete the ultra broadband upgrades, DOCSIS 3.1 in all markets, X1 in all markets and the LTE build in all major markets and actually most minor markets. All three of those programs are on track and on budget and we are equally committed to all of them. I think you have seen some sequencing. X1 is certainly on time and on budget and we could not be more delighted with our progress. We're in full trial now and initial results installed in homes have been extremely positive for sure. We will go outside of the trial and into installing into customers homes in this calendar year. When you talk about the go-to-market launch, I am not sure how you will measure our approach but we will be in the open market in at least one market in calendar 2016. It is a big part of our FY '17 plan.

[Operator:]

The next question is from Phillip Huang with Barclays. Please go ahead.

[Phillip Huang:]

Thanks. Good afternoon. I have a question on the wireless net adds this quarter. Certainly appears that the market is responding positively to your network upgrade. I was wondering if you could provide a bit of color on where you are seeing the most significant change, if at all, in your wireless subscriber growth momentum. Is it more Western Canada given that is where you started the 3G equipment upgrade and then now LTE-Advanced or is it also more Ontario still?

[Alek Krstajic:]

Hi. This is Alek Krstajic. In absolute terms, the numbers are still -- the majority are coming out of Ontario. If you actually looked at the growth rate, there is a slightly higher growth rate in the West and that you would expect given the network upgrades by changing out some of the 3G equipment, turning on the extra spectrum we had. It had a pretty profound impact on the performance of the network out West and I think with some of this growth you are seeing, it is clearly showing that there is a correlation between better network performance and more growth. But for sure, the majority of the subscribers are still coming out of the East.

[Phillip Huang:]

Right. That is helpful. Is it fair to assume that the number of distribution points for Western Canada isn't where you want it to be? Maybe you can give us an update on your plans to potentially increase your distribution presence up there?

[Alek Krstajic:]

I can't give you any details on our distribution strategy but I can tell you that if you are trying to grow a business, you are always interested in getting more points of distribution. And so we have got some pretty smart folks that are working hard to try to make sure that we are everywhere our customers are to live, work and play.

[Phillip Huang:]

Got it. Okay. I guess my point, we should not assume that there is going to be a nice spike in distribution points anytime soon for you guys on the wireless side.

[Alek Krstajic:]

I think distribution is a long game. It is hard to build stores, get leases, all that stuff. I don't think you guys will see any kind of spike.

[Phillip Huang:]

Right. Okay. That is hopeful. And then last question for me, on ViaWest. Obviously, if we were to step back and look at your overall business segments, you had significant growth opportunity and investments ahead of you for your core cable and wireless businesses. But ViaWest also has a big growth opportunity and doesn't contribute a lot of cash flow. It's neutral. Just wondering where you rank your priority when you are looking at the different investment options? Or potentially do you look at ViaWest as potentially following the same path as Shaw Media one day? Thanks.

[Vito Culmone:]

Hi. It is Vito here. Well, we just absolutely love what Nancy and the team are doing south of the border and as they help us continue to build our Canadian business, we love the returns. And we think the overall -- and maybe I'll ask Nancy and Brad to chime in here as well, if you like. But the overall market and the demand and the space that we are creating for ourselves is quite unique and continues to return handsomely for us. So we are prepared, quite frankly, to continue to invest in that business. I think a way to think about it over the next couple of years is sort of free cash flow neutral so the investment profile that -- the cash that Nancy and team generate will be reinvested. And maybe, Nancy, want to elaborate on little bit?

[Nancy Phillips:]

No, I think that is right. I think we feel, obviously, continuing to see very high demand for our hybrid platform of services and certainly many of the security of services that we have added here over the last 12 to 18 months. And I would agree wholeheartedly with Vito in terms of the capital investment. We are making the right investments in the right markets. We just brought our Plano facility online here in September so we have got capacity in a very important market amongst all the markets that we represent. Again, we feel very good about the growth profile of business where we are at and the capital intensity that we have applied for both our colocation and cloud-based platforms.

[Brad Shaw:]

Phil, this is Brad. The only thing I would add in there as you look at our pivot this past year and long-term growth and what we are doing, we have three key buckets here that are the growth profile and we are going to make sure that we have managed those. Listen, as we pivoted, there is a little bit of work to do on your stride and how you go forward and everything that has to happen and so all that part of the planning process. But we feel that the performance of the three growth engines are excellent and we want to continue to support that. Timing, cadence and how fast and how far we go really depends on a variety of things, the competitive nature of things. Our timing to come to market. We feel very good and we feel we can support them all as we go forward.

[Operator:]

The next question is from Tim Casey with BMO. Please go ahead.

[Tim Casey:]

A couple for me. One for Vito. Vito, could you give us a little more color on the free cash flow walk down? If we look at the EBITDA and CapEx guidance, I am wondering if there is any add backs on cash taxes or pension accruals or anything that gives you confidence you can get to the CAD400 million. Second, just a comment on what you are seeing regionally in Alberta and Vancouver. There has been some noise about the Vancouver housing market and oil prices have recovered a bit, but just wondering what you are seeing from a macro perspective there. Thanks.

[Vito Culmone:]

Maybe I will take the first one and Jay you can pick up the second one. Our free cash flow below the line actually gets a little clearer here as the years move on. We have got a pretty significant reduction in free cash flow taxes planned for next year and that emanates from the fact that FY '16, Tim, represented the last year of our partnership deferral pick up. Those rules were enacted a few years ago. I would guide the street to a free cash flow full-year number of CAD200 million range. So that contributes significantly to it. And then obviously, the other significant item there is your interest number and I don't see major -- any significant changes here on the interest line through the year. So you can plug in a CAD300 million range number there, which is really consistent with where we landed. We have CAD400 million of bonds coming due in March and when I look at the FY '17 year from where we are standing right now, obviously, it does not have any new financings in there other than potentially the refinancing of that. Other than that, of course, it includes a full year of our Corus dividends. I remember you heckling me last quarter for why is Corus dividends in there, but that is in there of course. We will take it from there. Those are the only media-key components. And when you do the math on that, obviously you will get to your own number on it. We have got the EBITDA and we have got the CapEx and we are committed to delivering more than CAD400 million and as the EBITDA progresses through the year, we will modify. There is obviously, in the CapEx numbers, there is a significant component of success-based capital and that will move around depending, obviously, on how our initiatives are proceeded.

[Tim Casey:]

Just to confirm though, Vito, that free cash flow includes the Corus dividends as if they were paid in cash?

[Vito Culmone:]

That is correct.

[Jay Mehr:]

Picking up on the macro economic question, I think, Tim, I think it is clear, and both of us who live and work and raise families in Calgary understand the economic environment. It is, as you can imagine, it is tough, particularly in the small business segment, but throughout the entire economy. And obviously no business, including ours, is immune to that. Clearly Fort McMurray is going through a not normal period, although tremendous resolve from that community to rebuild. There are parts of Alberta that are similarly struggling. We're holding up fine in Edmonton and Edmonton seems to be holding up well. The British Columbia market is very strong from a macroeconomic point of view. Of course, in our business, it is a very monthly bill price-sensitive market in Vancouver, which is just a reflection of the nature of greater Vancouver and the relationship between incomes and housing costs. So while the overall economy is performing very well, I think it is lots of attention to monthly bills and a very strong response to WideOpen Internet 150 in Vancouver, I think for those reasons.

[Operator:]

The next is from Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

[Aravinda Galappatthige:]

Good afternoon. Thanks for taking my question. With respect to the LTE rollout, obviously you are targeting year-end 2017. It is a fairly rapid rollout when you think of some of your peers in the past. I was wondering if you can touch on some of the main challenges in terms of -- logistically in terms of achieving that timeline? Also, I was wondering related to that, if you can touch on your level of satisfaction with hand set availability for AWS-3?

[Alek Krstajic:]

So on the first question, look, the team that is rolling this LTE network out has done this. We have done this a whole bunch of times. Brian O'Shaughnessy was the head of technology at Bell Mobility back in the day and then we did this again a Public Mobile and now we're doing it here at WIND. And so we are very confident with the timelines that we have outlined that will bring this network build in on time and on budget. Otherwise, Brad will be very mad at me. We are very confident about that and again, none of this is rocket science. With respect to your question on handsets, we have visibility on a number of handsets that are going to be available by the time LTE launches. The chip set that is in question is the Band 66 chipset from Qualcomm and a number of the handset manufacturers are incorporating that into their roadmaps. We are quite confident that by the time we turn on the first LTE locations that we will have handsets available.

[Aravinda Galappatthige:]

Great. Thanks for that. With respect to the CapEx side, obviously you are having elevated -- somewhat of an elevated year in terms of CapEx, for obvious reasons. But as we think beyond 2017, I know that you can't discuss numbers but very generally, directionally, how should we think about the post-2017 CapEx levels. Obviously on one hand you have the LGE rollout concluding and there are some savings there and you are obviously stepping up in terms of your broadband upgrade. Should we expect a moderation there as well as we think beyond 2017?

[Vito Culmone:]

Yes. I will start it off and open it up to the team, obviously. Clearly, FY '17 reflects a bit of a spike related to the wireless and incorporating the LTE in our wireless numbers. So as we move forward into FY '18, and whatnot, I think you can expect the wireless group to come off a little bit. Still a fair bit of build to do there but probably a peak there for wireless. Overall, again I think you see the theme here for us, which is all about revenue and growth and investing in key initiatives and ensuring that all of our customers are getting great value and just a great service across the board. We clearly understand and are committed to free cash flow growth and free cash flow growth comes with revenue and operational EBITDA growth primarily. I think it is early to call it a peak necessarily but clearly, committed to free cash flow growth here as we move forward into FY '18, FY '19, beyond the FY '17 guidance we have provided.

[Brad Shaw:]

Maybe building on what Vito just said, to be clear, we have been very transparent that the CAD1.3 billion that we have released for this year will complete virtually all elements of the major and medium-size communities for LTE, the rollout of X1. And not just the ultra broadband rollout of Shaw Internet WideOpen but the DOCSIS 3.1 rollout that makes the gigabit future possible in all of our major markets. So we have certainly disclosed that so that you can see that the money is going toward significant transformational investments. Throughout, if you look at both FY '17, including X1 rollout and FY '18, the role of success-based capital is something that is really hard to predict over many years. Obviously, we are planning on, I think you have heard loud and clear, that we're planning on growing the business and growing the business comes with success-based capital. I think it is that, that is preventing us from giving multi-year information, is what happens with success-based over time.

[Vito Culmone:]

Perfect.

[Aravinda Galappatthige:]

Thanks. A quick clarification. Vito, on the cash tax guidance, do you mind repeating that. Did you say a CAD200 million pick up year-over-year?

[Vito Culmone:]

No. Absolute number of CAD200 million for tax 2017.

[Operator:]

The next question comes from Greg MacDonald with McGuire. Please go ahead.

[Greg MacDonald:]

Thanks. Good afternoon, guys. Just a clarification question. The CapEx for wireless that is embedded in the CAD1.3 billion, can we just deduct that, that is CAD150 million or just because that is what is left in the original guidance on what is being spent on wireless to do the build out? Or is there possibly more than that?

[Vito Culmone:]

It is a little higher than that, Greg, but there is normal capital in the business that runs through. You are not too far off the range--

[Alek Krstajic:]

The math on the build capital is right. Of course, what you are missing in that is there's wireless maintenance and other wireless capital which isn't a massive number but you have to net that up, which is the regular ongoing piece. Right?

[Greg MacDonald:]

Right. I got that. But there is no expansion beyond the original intended?

[Alek Krstajic:]

That is right.

[Greg MacDonald:]

Okay. Question on DOCSIS 3.1 because it was mentioned in the press release. Not sure if I missed something because I have to admit I did not get the chance to read through the release fully, but timing, could you comment on timing when you're going to be 3.1 ready? And on marginal investment that is necessary for that? And Rogers has made a big deal that it is only CAD50 a home pass but I think we all know that there is some spending on the network component to get to a point where you can actually say CAD50 a home on the device. Can you give some color around that? Thanks.

[Brad Shaw:]

My suspicion, and we have not had a discussion on this particular point, is I think you are correct. I am assuming that CAD50 is the incremental cost on the gateway in the home as you purchase DOCSIS 3.1. I think that math suggests that your network upgrades, node splits, CMTS conversions for CCAP, are kind of table stakes in the conversation because you would do that anyway. If that is how you calculate it, then we think that is right. For sure, and if you look at our converged network strategy, our converged network fiber deep strategy is in service of the DOCSIS 3.1 and gigabit Internet and all the things that come with that. So all of that is built into our long-term plans. I am not sure we can give you too much except to say that DOCSIS 3.1 will be available to the vast majority of customer homes by the end of FY '17.

[Greg MacDonald:]

I guess, Jay, what I would ask it is there any outside spending on the node splitting, et cetera, component of it to be DOCSIS 3.1 ready or has that -- is that normal course and we're not seeing a spike this year for that?

[Jay Mehr:]

I don't mind being transparent because I don't think it is a bad story. To be clear, we are doing about 25% more nodes splits than we would have done in the average of the last five years. I don't think that is a particularly material number the shifts much in the model. Nodes splits are only one small piece of the converged network that we are building but there is increased activity, if an extra 25% fiber nodes is increased activity.

[Greg MacDonald:]

Okay. Is there anything to say on continuation of that spend through 2018 or 2019 or are you just not willing to talk about those years?

[Jay Mehr:]

I mean you get yourself into --

[Greg MacDonald:]

I guess what I'm asking over is, where are we in the CapEx cycle on cable network spending? Are we at the peak in 2017 or not?

[Jay Mehr:]

The total network spend in terms of the cable network upgrades, you're looking at CAD1.3 billion, right?

[Greg MacDonald:]

Yes.

[Jay Mehr:]

There is an awful lot of that on success base. The total network spend is 1/6 or 1/7 of that total number and there are ups and downs. I would think if you took a five-year rolling average, I don't think you will see material shifts against the five-year rolling average.

[Vito Culmone:]

I think you would see consistent spending on the network side of things there. It is sort of reflected in our FY '17 base plus or minus10% on it. But as Jay said, overall, relatively, I wouldn't say small but insignificant in absolute dollars but relative to our overall capital guidance, probably third, fourth, fifth largest single bucket.

[Greg MacDonald:]

Okay. That is couple. On timing on sort of ready to go with DOCSIS 3.1?

[Jay Mehr:]

You said into fiscal, right?

[Brad Shaw:]

Yes. I said everywhere that matters and the fiscal, surmise from that. I think you have read from other players when they are going to be ready, we are going to be right there. You will certainly see some product offerings in the spring.

[Operator:]

The next question comes from Maher Yaghi with Desjardins Capital Markets. Please go ahead.

[Maher Yaghi:]

Thank you for taking my question. Can you help us understand the way you are looking at your hand set subsidy model for wireless. When we look for the end of your upgrade cycle for LTE and, given that handsets that -- the hand set cycle that was launched this year did not include Band 66, I am trying to understand for most, if not all customers, who want to benefit from your LTE network will require a new handset. I am trying to figure out -- I am trying to wrap my head around your handset subsidy and what is that going to imply in terms of CapEx allocation?

[Alek Krstajic:]

Thanks for the question. I think it is too early to get into discussing what -- and quite frankly, I would not discuss what the subsidy strategy will be around handsets. What I will say is that I don't think this is any different than what every other carrier has gone through in the past when they have upgraded to LTE. And if people want to take advantage of the benefits of a new network, they have to get a handset. What we have seen happen is the cost of handsets has continually decreased. I think the availability in calendar 2017 of low price Band 66 handsets will make it very simple so that I don't think there is any major hurdles to overcome on this issue.

[Jay Mehr:]

I would agree, Alek. As we do our longer-term projections, it is not capital, Maher, but it is working capital. If you think about the cash to pay for the equipment and then whatever, whether the customer is on a tab or a tab boost program. But not overly significant if we proceed with the existing sort of model.

[Maher Yaghi:]

Right. This is something we will probably be talking about next year but just in terms of the model itself, we are seeing more and more handset life cycle being extended. So in order to get a customer to switch, it is going to be requiring more upfront payments. When you look at your cash flow programs for beyond 2017, in addition to the CapEx cycle for network upgrade on cable and ViaWest growth, et cetera. When you look at your capital allocation, it all is within the free cash flow metrics that you are producing. Maybe trying to understand long-term how the debt structure is going to look like in maybe 2018, 2019.

[Jay Mehr:]

Yes. Maybe we are ahead of ourselves. I'm happy to take off-line with you, Maher I think it does start with what is our customer proposition and how do we want to position ourselves in the market place. Is it something different than today? What does that look like? As you say, there's a lot of moving pieces. I think as the commercial team works through that, we will obviously be part and parcel of what's the potential implication or consequence of that. We will let the commercial guys lean in and develop their strategy and do their work.

[Maher Yaghi:]

Okay. That is fair. And just my last question is on your guidance. If I look at your consolidated guidance, and I know you have not broken up the guidance by segments but are there any segments that will show trends in terms of growth that is different -- materially different in 2017 versus what you saw in 2016? When I look at consumer business network services or business infrastructure services.

[Jay Mehr:]

That's is a tricky question. Listen, when it comes to BNS, BIS in wireless, we really like what we are seeing. Obviously, Business Infrastructure Services, FY '16 over FY '15 have the impact of INetU. Those growth rates will moderate as we move into FY '17 over FY '16 and obviously FY '16 also reflected the favorable foreign exchange but double-digit revenue, EBITDA, we are very, very comfortable there. We like what is happening in Business Network Services, wireless, we're going to obviously -- we're not going to give you guidance on what we see the wireless business doing but we like what we see there. So to answer your question, no fundamental changes in the health. If anything, on the front foot across those three business units and the investment on the consumer side, as we said.

[Operator:]

The next question comes from Rob Goff with Echelon Wealth Partners. Please go ahead.

[Rob Goff:]

Thank you very much for taking my question. I actually have two questions. The first one would be a little bit backward looking. Could you address the level of price increases that you took in August? And then the second question would be, you had talked to the take-up rates on the two-year packages. Could you repeat what that level was and whether or not you sort of have a steady state percentage that you would like that to be at? Thank you.

[Vito Culmone:]

You want me to start with August? In August about 95% of all of our consumer cable experienced an increase. I would say that Internet increased CAD2 to CAD3 and video increased CAD3 to CAD5. When you look across our customer base, maybe a rule of thumb would be three quarters of our customer base will experience a bill increase of CAD3 to CAD5-ish Trevor, is that-- you're good with that, right?

[Trevor English:]

Yes.

[Vito Culmone:]

CAD3 to CAD 5. That is sort of the range of that we did in August. Obviously, all of that is public information. Any additional color on that, Jay?

[Jay Mehr:]

Just to say that the response has been consistent with previous years. Conversion rate consistent with previous years. Sorry, the second question was around the two-year plan?

[Rob Goff:]

Yes. I did not quite get what that current tick-up rates were and then the follow on there was, is there a level that you would like to see in the marketplace taking the two-year tick-ups?

[Jay Mehr:]

Yes. I think what we wanted to do was create an environment with symmetrical competition and really the need to pivot to the growth by reducing our churn. I would say we are achieving both of those objectives and like the results so far. As a design principle, we would like more than half of our customers, overall of our gross adds, to join us on value plans. I think it is fair to say we have been achieving that number. From a competitive perspective, we're happy to play. It is clear that the shift in a competitive trajectory was not understandably being well received by some of our competition. They have got more aggressive outside of service agreements. That is okay too. We are trying to create symmetrical competition and we are happy to play in whatever space makes sense. I think those are high level design principles that can help you, Rob, but they are certainly not guiding in that we are married to them. We are pretty excited about what is made possible with the combination of altered broadband powered by DOCSIS 3.1 with the launch of X1 and the arrival of wireless. And so we are prepared to play in the competitive environment in order to change the competitive trajectory from the historical levels.

[Operator:]

The next question comes from Robert Peters with Credit Suisse. Please go ahead.

[Robert Peters:]

Thanks very much for taking my question. Just wondering, when we look at the cable side of things and the cost associated with the kind of ramp up of FreeRange TV, just wondering if you can quantify or give us maybe some idea of how much of those kind of directly overlap with the X1 spending.

[Alek Krstajic:]

In terms of cost, to be clear, when we talk about next generation video or X1 costs, we are talking about the whole program and, regardless of whether or not it is paid on operating maintenance basis or a license fee or whatever the piece of that is, we conclude -- we consider FreeRange and X1 to be all one bucket. We disclosed that in FY '17 that was roughly CAD75 million, which broke down CAD25 million in OpEx and CAD50 million in CapEx.

[Robert Peters:]

That was FY '16?

[Alek Krstajic:]

That was FY '16. And then in FY '17 the total amount is about the same, CAD75 million with the numbers reversed, CAD50 million going into OpEx and CAD25 million in CapEx. We said that a quarter or two ago and we have got costs certainly so that is how things are unfolding.

[Brad Shaw:]

That is correct.

[Robert Peters:]

Perfect. Thank you very much. May be just a question on satellite. When you look at the satellite business, I notice you guys are investing to convert some of the channels from the MPEG-2 encoding to the MPEG-4 encoding. And so clearly there is investment being made there. I was just wondering, when we think about satellite long-term, I was wondering have you disclosed the mix between the rural and the urban subscribers or kind of provide any outside of your footprint subscriber base?

[Brad Shaw:]

I don't think that we have done a sort of by-province disclosure. We have certainly disclosed that we consider 2/3 of our base to be rural and that is consistent and very much how we think about the business. The business is performing well and has had some general stability. A reminder to everybody that we have the cabin and camp disconnect that happened in Q1 and that is roughly about 10,000 connections. You will probably see them again in Q1 and you will see a strong spring as cabin and camp connects come on. I think the math of that MPEG-2, MPEG-4 conversion, you will like in terms of what it means for long-term transponder cost savings and what it does to consumer margins in years three, four and five. It also brings a modern and significantly improved experience in a number of customers' homes. I think that is pretty much a no regrets investment as you see us roll through that.

[Robert Peters:]

Does the conversion to MPEG-4 open up the ability to do 4K on the satellite or is that something where you need a new one launched?

[Brad Shaw:]

I don't think we are speaking about 4K on satellite. I think you are correct in suggesting the capacity available creates optionality and flexibly. Maybe we will be leave that there.

[Operator:]

Mr. Shaw, there are no more questions at this time.

[Brad Shaw:]

Thank you, Operator, and thanks for everyone for joining us and enjoy the election next week.

[Operator:]

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