Thank you, all of you who have participated in that. Please participate in it again this year, and, if you're interested, you can find more information on our website. So with that, we'll get back to the conference. I am pleased to turn things over to your moderator for the day, Tim Casey, our senior equity research analyst covering telecom services, entertainment, and cable. Tim, over to you.
Thanks, Kerry, and good morning, everyone. Before we get started, just a couple of housekeeping items. There'll be a Safe Harbor slide that we'd encourage you to look at, and through each presentation, we'll also have the relevant disclosures up on the screen. It is a fireside chat format. I think everybody here is familiar with that. Hopefully, we can get some questions from you and people online, and encourage you to use the app to do that. We do have mics in the room, and you can find the app at BMO Apps slash MT24, and there is information on Wi-Fi and everything on the back of your name card. So with that, welcome everyone, and we'll invite up Mirko Bibic to get started. Mirko?
Hey, thanks for coming.
Appreciate it.
I know you got a busy day. [Appreciate you coming.]
[crosstalk]
Okay. Okay, well, Mirko, welcome back. Thanks for coming. Usually, you know, in these kind of discussions, we get around to a capital allocation and dividend discussion towards the end of the session, but I thought today it's still a very topical discussion point with investors, and maybe if you could just set the table on what the capital priorities are for Bell. I mean, over the past year, you've had a major restructuring, you've announced an asset sale. How are you thinking about capital priorities and maybe some messaging on the dividend for shareholders?
Okay, so obviously a very important question, so good to lead off with it. I would say, I'm going to repeat some of the things that many of you are already familiar with, but just to set the stage. So we've been pretty consistent over the last three, four, five years that, you know, the number one capital allocation priority from kind of 2021 through the end of 2025 was going to be our fibre build. So we still plan to get to our target and of 8,300,000 fibre locations passed by the end of next year. So that would be kind of one key allocation priority. The other thing is we've been, you know, and we've been transparent about the fibre build throughout this accelerated CapEx journey over the last three, four years.
The other thing is, you know, we have indicated now that we do plan to have our payout ratio at 100% or below by 2026. So it kind of maybe, you know, for lack of a better way to put it, consider those two things, kind of two goalposts: get to 8,300,000, get to 100% or below free cash flow payout. So 8,300,000 fibre locations passed by the end of 2025, get to 100% or below on free cash flow in 2026. And then between those two things, we have kind of optionality and flexibility as to what we do. So, you know, if there's some tuck-in opportunities, we'll look at those. We're going to continue to invest in transformation CapEx.
So the CapEx that we need to modernize our business in order to generate future efficiencies will become a big priority. And in terms of fibre build, beyond the 8,300,000 locations passed, what we're really going to focus on first and foremost is fibring- up new communities that get built, so new housing starts. We'll see, we'll see beyond that where we go.
Within the context of that, you've talked about, you know, line of sight to a declining capital intensity profile.
Mm-hmm.
On the last conference call or investor call, you mentioned you thought you could get to 15%. I think you're a little over 16% now. Maybe you can talk a little bit about as you pull back on the stick on CapEx, how you're still going to be able to fund your fibre plans and, you know, transformational CapEx and things like that. How do you balance those two sort of objectives?
We did say that 2023 was going to be the peak year, and it will be 2024. Actually, 2022 was the peak year. 2023, it started to decline, but quite high compared to historical norms. You will see a significant decline this year, and we'll be within our 16.5% capital intensity guidance for 2024, and the absolute CapEx spend next year will be lower than this year. How we manage that, the answer is we've become more efficient in how we run our business. Number two is the fibre build.
You know, the primary focus going forward, as I mentioned, will be beyond 2025, will be on new housing starts. You know, as a baseline to begin with, it becomes a significantly lower baseline than what it has been in the past five years. And we, you know, we'll be very diligent on maintenance CapEx, as we get more efficient and kind of do some zero-based budgeting on some of these items. And the rest will be that discretionary capital, which, you know, in large part will go to transformation CapEx, which will pay off strategically over time.
So-
More, more, more automation, more digitization, more copper decommissioning, et cetera, et cetera.
How should investors think about the financial implications of this? I mean, you're on kind of the home stretch of the accelerated CapEx program, so presumably, you're starting to see some of the benefits of fibre, but I know you need to really complete that. How should investors think about margins and some of the other operational benefits that you're gonna get?
Right, so we've been, you know, we've said that the more fibre you build, the more efficient you get in terms of the operations. And you've seen us, even in a kind of very heightened competitive environment, that we've been, you know, the entire industry or sector has been going through in the past year-plus. You've seen us maintain and not increase our margins, depending on the quarter, which is quite an accomplishment actually in a depressed price environment, and that's just a proof point. You know, it's a data point which proves that the more fibre you have, the more efficient you can become in your operations, so we're gonna continue to do it.
Copper decommissioning is just one of the elements, but the more fibre you have, the better network you have, the fewer customer calls you have, the fewer trucks you run, and that keeps, that keeps going. We're gonna have 8,300,000 fibre locations passed. We do not have 8,300,000 fibre customers, so there's still, there's still market share runway, in areas in terms of penetration runway, in areas where we currently have built fibre and in, obviously, the new locations that we're going to open up for sale between now and the end of 2025, and then beyond 2025, as a minimum, new housing starts.
Right. Okay. How about, how does the recent framework of 3rd-party internet access fit into your capital plans and whatnot? When the initial rules were put out, you did announce a lowering of capital or CapEx, pardon me. We don't have final tariff rates, but how are you thinking about TPIA and your capital programs and your go-to-market strategy?
So on those fibre access and TPIA rules, I'll just. If you just think about the decision from the summer, so what's changed is now, as of early next year, there will be access to fibre in Western Canada. So that's a change. You gotta ask yourself why it took nine years to have symmetry between Western and Eastern Canada, but that's gonna come. The second thing that's new is the grace period of five years, which you don't need to give access to fibre built from now till to five years from now. It doesn't really do much, frankly. It's not much of a grace period, you know, 'cause it takes a while to pre-plan, design, then build.
Yeah.
By the time you get all that done, you don't get a five-year grace period. You actually get far less than five years, so that's kind of a nothing one way or the other, and how it factored in. Other than that, basically what I'm trying to say is, other than those two things, nothing much has changed, and our plan had already baked in the decision as it stood from November 2023. You know, that's why when you asked me the first couple of questions, I answered, well, you know, CapEx is gonna come down this year from last year. It's gonna come down even less next year. It's gonna be even less next year. We're gonna go from 16-and-a-half capital intensity to a lower amount.
We're gonna be focused on new housing starts, and other than that, transformation CapEx. That entire answer that I've given you factors in the rules as they exist today. The big unknown is the rate of access, and that rate of access, depending on where it lands, is going to determine how we toggle up or down on the CapEx spend.
Okay, maybe let's shift to competitive environment. How are you finding... You know, there's been a lot of pricing pressure. Let's stick to wireline for now. There's been a lot of bundling, a lot of pricing pressure, in Ontario and Quebec. What's the state of the competitive market from your lens as we go into the fall here?
Okay, so I appreciate the question, trying to kind of contain it to wireline, but it's a bit more kind of dynamic and complex than that because you said it, like there's, you know, there's a bundling dynamic, and it's hard to disassociate pricing in wireless from wireline. So maybe I'll answer it, even though you're trying to direct me to wireline. Let me answer it more generally first, and then you can take me wherever you want to go. The pricing on both sides is, you know, as basically it's the lowest pricing we've pretty much ever seen in the Telecom Industry, like, period, whether you're talking about wireline or wireless, I mean, the numbers are there.
Mm-hmm.
The prices in absolute terms are low, and the data buckets are higher than they've ever been in wireless and in wireline, you've got, you know, attractive pricing for consumers for high speeds. Like, we didn't have 1.5 Gbps speeds five years ago or seven years ago. Certainly, we didn't have 3 Gbps speeds five years ago. Unlimited's been around for a while, so the data buckets in wireline aren't an issue, but the point is, pricing is low. It's as competitive as it's ever been. Consumers are getting tremendous value, but the fact is, that's pressuring ARPU, that's pressuring service revenues. There is still demand growth, particularly for fibre, if you want to talk about wireline.
Oh, you know, the wireless market is still growing, but we can all expect it's gonna grow at a slower pace than we all anticipated a year ago because of the government policies on newcomers and immigration. And then on the wireline side, you've got fibre taking significant share from cable, so cable is under pressure on the wireline side, and some competitors, some cable providers or competitors are choosing to protect share through price reductions. So, you know, it is a difficult environment, like, no question. Good for the consumer, too.
How are you thinking, you know, from what you're seeing in the marketplace, so do you think it is getting worse or? Do you feel that it's stabilizing? What's your read on the pricing environment?
So if you'd asked me that question, if I'd been sitting here in Q2, I would've said it's getting worse, and we all know it. We all saw the results. If you'd asked me in the first week of July, and you know, going through July, I would've said, "Ah, there's some kind of potential stability here," 'cause we tried to lead pricing up after Canada Day. And I saw some movement there and some stabilization, and I think kind of was a more rational pricing in early July, which we tried to lead, while still delivering the best value that consumers kind of would have ever seen other than maybe in Q2 and Q1 and or the last, you know, two quarters, let's say.
But recently, with back to school, it's reverted back to what we saw in many, many periods of time in Q2. So what we're doing is, look, if that's gonna be the industry dynamic for the next little while, we are not going to chase after every load. We're gonna chase. We are going to focus our efforts and our execution on accretive loads. And I've talked about this before, we're continuing to do it. Premium brand loading, bundling, and sure, kind of in that segment of consumers that are looking for better value, maybe flanker brand or prepaid, we want those customers, too, but so long as kind of we land them in the right spot and then migrate them up.
So that's how we're going to be operating, definitely not a sales at all costs, because frankly, that's not what we need to deliver for our shareholders, our investors, and we won't. So we're gonna continue to drive efficiencies in how we operate, which goes back to some of your earlier questions.
How are you thinking about the three brands? And you've recently introduced some other nameplates, you know, on the lower end side. It seemed like in the second quarter, you made a bit more progress on the newcomer category or the cohort, we can call it that. How are you thinking about how you've managed the brand segmentation? 'Cause I know you've made some changes, you know, with Virgin and what not. Maybe talk a little bit about that.
Our progress in the newcomer category has been very strong in the past few months, maybe, you know, a year or so. It comes with focus and getting our fair share in that segment. What we're doing, I talked a little bit about this on our results call in, when was it now? May. August. August. It's about making sure that there's proper stratification between the Lucky brand or the prepaid brands, Virgin and Bell. What had happened in Q2 and Q1 is kind of flanker brand pricing collapsed. What happened is customers who would've more traditionally, more appropriately should have been landing on prepaid were actually buying the flanker brand service. Why not?
I think what we tried to do is create that distinction between what we offer in terms of features, and the pricing, and the data buckets, so that those who really should be landing in the prepaid segment are landing there, and then we migrate them up. And then particular focus, in our case, on landing people in on the Bell brand and bundling. So on bundling, that's, you know, on one end, we've done significant improvements on the newcomer category in prepaid, and on the other side, we on premium brand loadings and bundling, we increased year-over-year in Q2. Year-over-year, we had a 23% growth in the number of new customers who are taking both services from us when they first joined Bell.
So that's big growth on bundling, and you know, it comes with a little bit of a price discount, but the lifetime value of that customer is much better, and it comes with lower churn, which you know, is a factor in determining your lifetime value. So that's what we're trying to do. And in some of the new brands, No Name Mobile, going really well. You know, early days, but it's working well. And some of the other new distribution channels that we've had in the past two years are really working well. So Staples is strong.
And then we'll see on the conversion of The Source stores to Best Buy Express, but there's a transition period there, 'cause when we announced that deal, we closed, you know, not over 100 Source stores, so those are no longer in the fleet. And then The Source stores that remain are being converted to Best Buy Express, and of course, what that does is you have to close a store, you know, you're closing a store for a number of weeks, you retrofit it, and then it's got to ramp up again. So, you know, the impact of that sales reduction from The Source fleet is being felt in Q2, Q3, Q4, so you'll see a reduction in volume from those channels, and it'll come back next year when Best Buy Express hits kind of cruising altitude.
Right. You talked a little bit about it, but maybe just put some context around what the potential implications are, changes in immigration policy. It's obviously been a volume driver for some of the flanker brands the last couple of years. Seems like the government is committed to putting some caps on it. It... What do you think the implications are for the business?
It's gonna just be lower growth, and we all expect it. I mean, that's the short answer. So now you look at what are the elements of growth in the wireless sector. So we have, you know, we still have lower penetration, wireless penetration in Canada compared to the U.S., so that'll continue to be there. You still have opportunities to, you know, move customers from kind of either prepaid or flanker to a premium brand, which I've talked about, so that pre to post migration or the flanker to premium migration, so that's a growth element. We still have some room to grow the proportion of customers in the base that are, you know, moving up to 5G, so that usually comes with a pricing uptick.
Here and there, you got pockets of price increase opportunities, so we'll see—we'll execute on those. But in terms of overall demand, while the market will still grow, it'll grow by less because of government, you know, government policy on immigration.
Right. So when you boil it all down, should investors expect any improvement in service revenue profiles, or are you expecting it to be, you know, what we've seen recently?
Well, like I said, I think because of all the factors I mentioned, historically low pricing, some compression in the rate of growth for newcomers, and cable companies, some of them trying to protect their wireline market share through price. You're going to see ARPU and service revenue, that's gonna like, it has to impact ARPU and service revenue.
Right. And is there a big difference between the Ontario and the Quebec market for Bell in terms of competitive dynamics?
Well, by and large, no. Wireless pricing's lower in Quebec. It's been like that for forever, really. And on wireline, you know, we are still under-indexed in terms of fibre internet market share in the province of Quebec, compared to the other territories where we operate. Now, the rate of, you know, market share growth is solid, because we're making tremendous strides in Quebec. But in terms of, you know, in absolute market share, it still remains lower in Quebec than elsewhere.
Okay. Any questions from the floor? Just raise your hand if anybody has any. We've got one in the back there.
Can you talk about your debt situation with the recent downgrade, and how you're addressing it, or how you're planning to address that in your capital structure, please?
So we've done some. We, as part of the kind of when Tim asked me the first question on capital allocation, of course, one of the elements between let's finish the 8.3 million and let's get below 100% on the payout ratio, and kind of the flexibility in between those two things, debt reduction's clearly one of them. The proposed divestiture of Northwestel plays into that. I mean, that's a proof point that we're taking debt reduction quite seriously. I mean, that's a, it's a win-win-win announcement on all fronts. So we're supporting economic reconciliation.
We get that assets in the hands of local owners that will really focus on serving that community with a clear eye on what, you know, the local communities need, with tremendous support from Bell commercially, by the way, going forward, and we'll take the proceeds and pay down debt. Now, that could lead to, you know, up to five basis points improvement in our leverage ratio, but that's just one example to show you that it's something that's taken seriously.
Is there another one?
I guess this morning there's been a lot of focus on kind of some negative headwinds: pricing, volume, competitiveness, regulatory. What's been one positive on this entire space going forward?
For Bell in particular, so I'll give you a general answer. I think, you know, we all go through cycles, so it's not like we haven't been through this type of cycle before. It's just that, you know, if we had gone through a period like this maybe in 2008, 2009, 2010, you know, the compression in pricing would've started from a higher absolute pricing point than it is today. So you know, that's one. It will stabilize. It's just a question of that kind, is it gonna stabilize in one quarter or three or four? For Bell in particular, the positives are, like, fibre is the winner.
I'm saying something that I've said over and over again, and I think we all know, but it's clear, like, fibre is winning and that puts our peers who are on a different network under pressure, so that's positive for BCE shareholders. Another thing that's positive for me is, yeah, we have a focused strategy that I think is starting to kind of really hunt on in the enterprise segment with the things we're doing. It's a very focused strategy, where we're the leaders in connectivity, and then we're able to kind of add a suite of business solutions to that that customers are paying attention to more and more.
So it's Connectivity, Cyber with Security, it's Digital Automation and Managed Workflow Automation, and that suite of services is getting attention. It's you know, contact center, AI-powered contact center services, things we deploy internally, we now offer to customers, and there's interest in that. Our strategic alliance with ServiceNow, these are things that I think you know, when I'm here a year from now, I'll be able to show some meaningful progress. I think that's a nice tailwind for us.
Anyone else? Oh, in the back.
Sorry if I missed this earlier, but can you just talk about how you're gonna get the payout ratio below 100%? Obviously, EBITDA growth is, you know, not as strong and or won't be as strong. Just kind of curious how you get it below 100%?
We're gonna continue to drive EBITDA growth through, you know, managing... Well, so first of all, you manage the revenue line through the strategies that I've kind of outlined here in general terms. I focus on the right accretive customers. So that'll... And then go find new sources of revenue on the enterprise side, I think media stabilizing. So those are all good things on the revenue side, despite the pressures I've been pretty candid about. On the EBITDA line, you know, we continue to drive efficiency. Again, we've been really good at it, so ultimately, EBITDA is still growing, and that's because we're managing the top line, the way I said, and we're also being very, very diligent on costs, and that's why transformation CapEx remains quite important.
As you significantly drive down your CapEx needs, that's the single biggest driver of, you know, the free cash flow growth that we're gonna be delivering, and that's how I can say, you know, sit here and talk to Tim and you and say, "Yeah, we'll be at 100% or below in 2026." It's not far away. Could we have done it in 2025? Sure, but then you're sacrificing the 8,300,000 locations. I wanna finish that. And that's not new, I mean, that's been outlined since 2020, actually, during COVID, that we were gonna spend more than usual for the long-term strategic benefit of BCE consumers and shareholders. So we're gonna finish that play, although it's a reduced play. We initially had a 9,000,000 locations pass target.
Just maybe following up on a couple of things on the leverage discussion. Northwestel disposition, that is on track-
Mm-hmm.
Still expected to close next quarter?
I expect it to close by the end of the year.
Yeah.
Yeah.
Okay. Any other assets that, you know, are... You're looking at? I mean, we get asked about the Satellite business quite often. Is that something you think you could monetize?
Look, at all the... If you're gonna, if you go through the list, I think-
I got a whole list.
Yeah. Look, let's just, I won't give you a specific answer on any of it, so maybe I'll just give you a general answer for all of it. I think use the Northwestel example, well, the Northwestel announcement as clear indication that we will take seriously any opportunity to monetize definitely non-core assets and even assets which are linked to our core business if we can surface the right value, and then pay down debt or redeploy to something that's even more strategic.
How are you?
It's not just an ambiguous conceptual answer to kinda move on. Like, we're doing it.
Yeah. How about tower assets? That's always been viewed as a strategic asset. Is your thinking evolving in any way on that topic?
Same answer.
Fair enough. MLSE?
Same answer.
2026 story, maybe?
Same answer. If there's a way to surface value, we'll look at it.
Okay. How about let's just talk a little bit about the media business. Obviously some challenges there. You're trying to transition to much more of a digital go-to-market strategy. What's the update on the media business?
There is advertising growth. Let's just take a step back, redefine it. There is advertising growth. Some parts of advertising, you know, are perhaps not coming back, but nevertheless, there is advertising growth, and it's digital. It's, there's no magic to it. That's why in 2020, I indicated that there's gonna be a strategic pivot in media to digital. And those things, and kind of the digital element, is working really well. We've got, you know, Crave continues to hunt. The Crave distribution on Amazon's been a big success. On Thursday, we launched the distribution of TSN, you know, the TSN app, or what we used to call TSN Direct, but TSN on Amazon as well.
So just shows you that we're, you know, when we say we're shifting to digital, we're really going digital. We've launched 10 FAST channels to, you know, execute on that advertising opportunity. The other part of the media business that's in, you know, relatively good shape is out-of-home. So we're growing that with the recent acquisition or closing of OUTFRONT Canada. So, you know, the areas with promised potential growth, we are leaning in more and more, and we're being really diligent in terms of managing our costs and divesting or closing some of the underperforming traditional assets. And we're gonna continue to do it, like diligently executing on the digital pivot. That's the strategy.
There may be some legacy assets that become available. Would you have any appetite to add to your media portfolio?
In terms of... Well, we just did it with the acquisition-
Okay
... of the out-of-home asset. So if it's on strategy, yes.
Okay.
If it's not, no.
Yeah, got it. Mirko, I'll leave the last word to you. What's your message to investors as we close out Q3 here?
The two or three questions have been really good. In terms of, you know, how we're gonna, you know, deliver on getting the, you know, payout ratio down, manage the balance sheet, and, you know, where are there signs of promise? I think, you know, the market will stabilize because, look, you can't run a profitable wireless business at a $36 ARPU. Ours is not that, thankfully, but you can't run a wireless business at $36 ARPU, so at some point, this is going to stabilize, number one. There's still growth in the industry. We're gonna continue taking share on fibre 'cause that's just working. You know, we will not relent on cost efficiencies. We won't.
It's our job to manage the environment we're in, whether or not it's competitive or just macroeconomic, and we're gonna do it. The enterprise strategy is showing promise. The Bell Media strategy, there's gonna be relentless focus on digital. So all those are positive elements, and, you know, that's what we do. We've got to deliver for shareholders, get the payout ratio down, get debt down, and we have a path to it, and I've been very, very candid about CapEx is coming down, and the payout ratio is gonna get within 100, and from there, we just keep grinding away.
We'll leave it there. Mirko, thank you so much.
Thank you.
That was excellent.
Thanks.