Shaw Communications Inc. (NYSE:SJR) Q2 2020 Earnings Conference Call April 9, 2020 5:30 PM ET

Company Participants

Bradley Shaw – Chairman and Chief Executive Officer

Trevor English – Executive Vice President and Chief Financial and Corporate Development Officer

Paul McAleese – President

Conference Call Participants

Vince Valentini – TD Securities Inc.

Jeffrey Fan – Scotiabank Global Banking and Markets

Tim Casey – BMO Capital Markets

Maher Yaghi – Desjardins Securities Inc.

Drew McReynolds – RBC Capital Markets


Thank you for standing by. Welcome to the Shaw Communications Second Quarter 2020 Conference Call and Webcast. Today’s call will be hosted by Mr. Brad Shaw, CEO and Executive Chair 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 Instructions]

Before we begin, management would like to remind listeners that comments made on today’s call will include forward-looking statements information, and there will be 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

Thank you, operator. Good afternoon, everyone and thank you for taking the time to join us. I just want to let you know from a logistics point of view, myself and the CFO are in Calgary, and the President of Shaw is in Toronto. And I think that’s the day – these days, we have to do it that way. So I just want to give you a little logistics update. But as I mentioned, with me today are Paul McAleese, President of Shaw Communications; and our Chief Financial and Corporate Development Officer, Trevor English.

Before we begin and then behalf of all of us at Shaw, we want to send our well wishes to everyone during these challenging and turbulent times, and we truly hope that each and every one of you and your families are healthy and safe. Today, we will be discussing our response to the COVID-19 pandemic, including our numerous employee, customer and community initiatives. We will also touch upon our second quarter results, which were solid and in line with expectations.

To say that the events over the last several weeks have been extremely challenging would be an understatement, both professionally and personally. Due to COVID-19 and the significant uncertainty that surrounded, many factors fall outside of our control, such as the duration and magnitude of the impacts on our business, the sector, and the overall economy.

The economic challenges from this pandemic are further amplified by the extremely low commodity prices, which will impact many that live and work in Alberta. We are still in a relatively early stages of this pandemic, making it challenging to know that the degree to which we could be affected.

Our management team is closely monitoring the situation and we are exercising agility and being disciplined with our actions. We are focused on the safety of our employees, the integrity of our networks, and the delivery of our products and services through our operational focus, and on maintaining our strong financial position, including our balance sheet flexibility and ample liquidity.

I believe that our business is resilient and that we will emerge from this crisis in an even stronger position. And I want to spend some time highlighting the key actions we have taken to support our employees, customers, and our communities. First, it is incumbent on all of us to do our part to help prevent the rapid spread of this virus and we want to send our deepest gratitude to those that are standing at the frontlines, doing their very best day-in and day-out.

This includes those that work in emergency response and healthcare, grocery stores, public transit, and many other essential functions. It also includes our Shaw and Freedom employees that are serving our customers and maintaining our strong and critical networks. When Canadians need it most, your efforts do not go unnoticed and we sincerely thank you.

From the early days of COVID-19, we were ready to respond. The safety of our employees continues to be our priority one and upon initiation of our business continuity plan, we are able to transition approximately 5,000 employees to work from home. Within days, we implemented additional technology and tools that enabled more staff to work remotely, including our call centers, and we now have almost 80% of our total employee base safely and efficiently working from home.

We still have a relatively small number of employees that are not at home as they perform essential functions for our customers. This includes retail staff at 20 of our [corporate-owned] Wireless retail locations that continue to provide urgent customer service, network support teams who are managing our critical infrastructure and the limited number of technicians providing customers with assistance during these challenging circumstances. All operations are running smoothly and we have frequent communication with all team members to ensure they are supported and that we keep everyone abreast of the situation as it unfolds.

With the majority of Canadians now working from home, relying on video and voice interactions to remain connected, children and students accessing education in a virtual manner, and of course, our customers now utilizing our services as the primary form of entertainment. We have seen significant increases in traffic on our networks.

On our Wireline network, traffic has increased by as much as 50% and what used to be a peak period that lasted for three to four hours in the evenings has now become over 12 hours of peak usage seven days a week. On our Wireless network, we have seen a decrease in data trafficking, offloading the home WiFi networks as more and more Canadians follow the isolation and social distancing preventive measures being rolled out by governments. However, we have experienced 25% increase in voice traffic as more calls are being placed to friends, family, and colleagues on a daily basis.

Our customers are relying on us now more than ever and I am proud to confirm that our facilities-based network performance has been exceptional. It is in trying times like these when Canadians deeply appreciate the value, the strong and reliable services that not only keep them connected and entertained, but also provide them with the medium to carry on with their daily lives under social distancing measures. Facilities-based networks are no longer just the backbone of a digital economy; they have become the economic backbone of our country.

While several important regulatory matters are still in front of us, facilities-based operators have showcased their strength during the difficult time and we urge regulators to be mindful of Canada’s relative strength on this front as well as the timing of those decisions as we navigate this period of uncertainty. Not only have we built network capacity that exceeds the significant increase in demand, we also have innovative products that can be self-connected without any need for a truck roll.

This represents a competitive advantage as well as a way in which we can help further protect the health of our employees and customers by greatly minimizing locations where the technician needs to enter a customer’s premise. While customer activity across all our divisions is down, our customer self-connect metric has reached 100% in the past weeks.

This accomplishment along with our ability to pivot our call center staff to a work-from-home environment are concrete examples of this significant organizational efforts undertaken over the recent years to shift our operating model to one that embraces agility and a digital-first bias. This foresight is proving to be extremely valuable.

In addition to providing critical and essential connectivity services, as an industry, we have collaborated in innovative ways and move quickly to support all Canadians as we navigate these uncertain times together, whether it’s through additional video channels, more Wireless data, opening our Shaw Go WiFi network to the public, providing free digital educational models for all Canadian students through our new partnership with EVERFI or donate it to community initiatives to help those in most need. We are putting Canadians first.

To our Shaw employees, thank you for the passion you bring each and every day and your dedication to serving our customers throughout this crisis. We know that rapid change and uncertainty can be difficult, which makes me even prouder of how we continue to support one another and optimistic of what we can accomplish during this unprecedented time.

We do not yet know what lies around the corner or the full impact of COVID on businesses and consumers across the country. In the short-term, we expect that some areas of Shaw will be impacted more than others, such as our business division, which provides many small business with critical connectivity services throughout our footprint.

These challenges are further amplified here in Alberta, which is also being impacted by the rapid collapse in commodity prices. However, I feel confident that we are resilient. We provide critical and essential services to our customers and our communities and Shaw will emerge as an even stronger organization as we continuously adapt and evolve our operations to meet and surpass the demands of Canadians during these challenging times.

I will now turn it over to Trevor to provide some more details on specific areas of our business that we are monitoring closely, some of the early impacts we are experiencing and our updated thoughts on our previously issued F 2020 guidance. He will also briefly review the highlights of our second quarter results. Trevor?

Trevor English

Thank you, Brad, and good afternoon, everyone, and I hope that you, your families and friends are all well and keeping safe during these difficult times. Let me comment briefly on our second quarter results before I address our preliminary views regarding the COVID-19 impacts on our business.

At a consolidated level, Q2 performance was solid and aligned with our plan, resulted in revenue growth of 3.7% and that’s an adjusted EBITDA growth of 9.5% or 2% year-over-year when removing the impact of IFRS 16 in the quarter.

Wireless subscriber and financial momentum remain strong throughout the second quarter, which included competitive holiday promotions for much of December and early January. We drew Wireless postpaid subscribers by 54,000 and increased ABPU and ARPU by approximately 7% and 3%, respectively. Wireless adjusted EBITDA grew by approximately 18% compared to the prior year when removing the impact of IFRS 16.

In our Wireline division, we continue to focus on execution and delivery of stable and consistent results. Consumer revenue declined by 1.5% year-over-year while business revenue increased approximately 5% when removing the impact of our Calgary1 Data Centre disposition in the Q2 F 2019 period.

Excluding the $20 million impact from IFRS 16, adjusted EBITDA is comparable to the prior year, and year-to-date, we’ve generated free cash flow of $375 million. Our second quarter results were not impacted by the COVID-19 events for the challenging commodity price environment. However, in only a month time, we find ourselves in a period of significant and unprecedented uncertainty.

We are monitoring our key operational metrics and performance indicators across our organization daily. While we generally feel very comfortable that we can manage through this crisis, it is difficult, if not impossible to accurately or precisely predict the impacts on Shaw. Brad spoke earlier about the strength and capacity of the networks delivered and I’ll provide some additional data and qualitative insights regarding some of the early impacts to our operations that we are experiencing.

Not surprising subscriber activity across the board is down significantly. For example, the temporary closure of the vast majority of retail stores has meant that Wireless sales have slowed materially in the last few weeks. Customers are simply not making decisions to switch or alter their services during this time. However, this also results in significantly fewer disconnects. We will not achieve our Wireless subscriber loading targets this year. However, we do not expect that the lower net adds will have the material near-term impact on our Wireless financial performance in F 2020 due to lower acquisition-related investments.

Although, of course, this is not our preferred strategy as we’ve been successfully scaling and growing our Wireless market share over recent years, which was also our ambition for this year. We also expect that subscriber activity in our Wireline division will be considerably muted for a period of time. It is likely that some consumer and business behaviors will shift due to economic challenges, including possible download package or ARPU migration, accelerated cord cutting and likely increased difficulty for some customers to pay their bills.

While we do expect revenue to be impacted to some degree, we have significant operating and capital levers and flexibility to help protect EBITDA and free cash flow. Considerably lower customer activity will also mean that investments in promotions, subsidies and advertising will be lower than expected, which will help to partially offset topline pressure. We’ve already reduced costs in some areas such as travel and discretionary spending, and we will continue to thoughtfully optimize our cost structure as required.

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Capital expenditures would likely moderate in the near-term as growth and activity slows and some projects are deferred. In addition to the impacts from the pandemic, the pressure on commodity prices also represents a risk to our business. We generate approximately one third of our consumer Wireline revenues from Alberta. Our business division generates approximately 35% of its revenue from Alberta and for greater clarity we generate approximately $140 million in annual revenue that is directly related to oil and gas and hospitality sectors, both of which we expect will continue to face an uphill battle for an unknown period.

However, through our close relationships with our business customers, we are proactively working with those that have experienced significant and immediate economic challenges. While we’ve seen an increase in pricing concessions in our business division in March and early April, we do not consider the impact to date to be material. We are providing essential and critical connectivity services to our business customers as well. However, with limited visibility, it’s difficult to estimate the impact to our business customers across our footprint.

We hope the challenges faced in the businesses are temporary and we continue to monitor this division closely as we believe is there potentially more immediate near-term financial risks relative to our consumer in Wireless business. However, when we reach a period of stabilization, we believe that we have an opportunity for our business division to be more disruptive and gain incremental market share as we have a strong portfolio of essential products.

It is also important to keep in mind that business accounts for approximately 10% of our consolidated revenues. Thus, we believe the overall near-term impact to our organization to be manageable. It is still early days, and we do feel comfortable with the daily trends we are experiencing. However, considering the significant uncertainty that exists, we are not able to predict the magnitude of the impacts over a longer time period as the environment continues to rapidly evolve.

We believe a cautious and prudent view of our business and financial performance going forward is necessary, and we now expect to deliver adjusted EBITDA growth in fiscal 2020 and free cash flow is expected to be substantially in line with our previous guidance which continues to support our current dividend levels.

I believe it is worth reiterating the strength of our balance sheet, which has always been a strategic asset for us. Leverage remains at 2.5x, which represents the low-end of our target leverage range of 2.5x to 3x post-IFRS 16. We have no debt maturing until November, 2023 and we’re also in an enviable position from a liquidity perspective. We have a fully committed and substantially undrawn $1.5 billion credit facility, which was also recently renewed until December, 2024.

In this environment, investors have become increasingly focused on bank covenants and I’m pleased to confirm that we’re comfortably in compliance. Our debt covenant limit is 5x and we’re currently under 2x, while our fixed charges coverage ratio covenant requires a minimum of 2x and we’re currently at approximately 10x. This information was included in our Q2 MD&A.

In our press release we also announced that we intend to suspend additional share repurchases under our NCIB program. This reflects the uncertain environment we are all operating in and we believe investors are focused in placing more value on preserving liquidity and maintaining a strong balance sheet at this juncture. As a reminder, we have purchased and canceled approximately 5 million Class B shares as of the end of March at a total cost of approximately $130 million.

Before turning the call back to Brad, I want to remind investors that while there’s some near-term headwinds, we believe we are in a strong and enviable position compared to other industries or sectors. As a management team, we are focused on ensuring the safety and health of all of our stakeholders, including our employees, customers and shareholders.

Our networks are performing extremely well and we are providing critical and essential services to all of our customers. We continue to believe that we will be able to effectively mitigate operational and financial risks and we will continue to deliver strong free cash flow that supports our dividends and liquidity in this uncertain and challenging environment.

Brad, back to you.

Bradley Shaw

Thank you, Trevor. I want to close by acknowledging the profound impact that my dad JR had on this industry, our company and employees, and of course, on myself and my family. Many of you reached out with your condolences upon receiving the news and I want to thank you for having our family in your thoughts and for your kind words. JR was a pioneer. His vision, 50 years ago was to provide choice and connect people to the things around them and he always cared deeply for our employees and of course our customers.

He was still very much involved and engaged in everything we were doing in our business. I will miss his guidance in the conversations dearly. However, I know he would be proud, he would be proud of each and every Shaw employee for once again rising to the challenge. He would be proud of our networks on providing critical services that keep customers, families and businesses connected.

He would be proud that our facilities-based investments have proven invaluable in our daily lives during this time of crisis, and above anything else he would be particularly proud of how we are all taking care of one another. His legacy will carry on and will be a beacon of confidence and perseverance for myself and each of our employees during these challenging times, while we pay tribute and more in the passing of our iconic and exceptional leader, my father, a husband and a friend.

I want to remind listeners that our company has a bright future. The Shaw family management team remains committed to our role as a leading provider of critical and essential products and services for Canadians. JR built this company to exceed the demands of our customers, and through the passion and hard work of our employees, we will continue carry on his legacy for years to come.

Thank you, operator. We will now take questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Vince Valentini of TD Securities. Please go ahead.

Vince Valentini

Yes. Thanks very much. And first, my deepest condolences, Brad to you and your family and the whole Shaw organization. Obviously, JR was not just a great business leader and builder, but an absolutely wonderful man, and he’ll be missed by everybody.

Bradley Shaw

Thank you.

Vince Valentini

I’ll try to leave you alone and direct my questions to your new President, Paul McAleese, [indiscernible] on the appointment. I have two questions for you. One on Wireless, one on the Wireline and cable business. On Wireless first. I know you warned us on the Q1 call in January that there could be a bit of an increase in churn, given what was going on in December, and it obviously came through that way. Can you talk a little bit about how the quarter progressed? Did February calm down a little bit versus some elevated levels in earlier on in the quarter? And then also, what are your thoughts on what happens to both churn and equipment costs now that we’ve entered the social distancing period? That’s the one on Wireless.

I’ll throw out the Wireline one to just you can have them both. You’re obviously a bit newer to the cable and consumer business and just wondering if you have any early perspectives on that business that you can share with us today.

Paul McAleese

Hi, Vince. Thank you very much for those. Yes. I mean, I’m very happy to report that, while churn was certainly at a level that was elevated during the last quarter, we saw a really market improvement in the period between December and February. So you recall that we’re rolling off the original iPhone cohort from the late December 2017 period.

And as I said, I think our team did a great job of managing that really for the first time, a program of that scale. But just for contrast, the churn rate, February versus December was about 100 bps lower. So we saw a really sort of significant reduction in that. Rolling forward, of course, with the level of activity or the lack of activity that you’re seeing in the marketplace today, I would expect to see a churn fall to record low levels. I suspect across all operators, you’ll see that. And we’ll be reporting more on that obviously in July, but we’ve definitely seen improvements on that front.

On the equipment side of things with the limited activity we’re seeing in retail, we will expect to see elevated levels of EBITDA relative to expectations, of course, because of the dilutive effect of growth. This quarter, in some respects, is going to be essentially a lost quarter for growth for Wireless. It’s just simply not enough activity at the top of the bucket. So expect to see a relatively neutral performance there or worse. And equipment, well one part of the equation I suspect will be – will have a very solid EBITDA performance to report driven by the lack of equipment activity. Does that answer those questions, Shaw?

Bradley Shaw

Yes, sir. First impressions of consumer, it’s early days, it’s funny. I guess, I officially start today, so thank you for the kind words. It’s been interesting getting to spend more time with the team and get under the hood, and we have this fantastic franchise that we’ve built over the years here and that management have nurtured to a great spot. A number of observations I’d make and I think these really represent opportunities across the Western footprint.

And my first observation is that there’s this striking and probably, frankly, inexplicably to me, difference between Internet pricing in Eastern Canada versus Western Canada, something I think I’ve always known, but never really appreciated the depth of which. And I’ll use maybe this example, Vince to gig pricing. If you visited the Rogers and the Bell websites today, you’d find that gigabit pricing in Western or rather in Eastern markets is kind of harmonized at about $115.

And clearly, the market had judged that to be the appropriate price point for that kind of premium to your service. If you move westward, TELUS has launched gig at $85, which is this sort of – at least for me, this perplexing Western Canada discount. And that discount really continues right down the rate card. It’s just a lot less expensive in Western Canada. While we’ve yet to launch our gig service, and frankly I would say Shaw hasn’t necessarily been any more discipline on this front.

But it seems like both competitors have been very focused on volume versus quality. That’s evident when you look at the lower Wireline margins of ourselves and TELUS relative to our Eastern Canadian peers. And moving forward, we’re going to want to make sure that we have adequate fuel to manage the significant demand surges that we’ve seen across our footprint in recent weeks. I suspect those won’t relent anytime soon.

Second observation on consumer is what I would really describe as a sort of jarring level of competitive intensity in the West relative to the East despite the near maturity of the Internet category. It’s odd that in an industry that’s approaching 100% penetration, the value of all this back and forth between ourselves and our competitor trading customers, it’s not clear to me sort of the value of that.

So it kind of brings, when you look at recent weeks that brings these strategies under even greater scrutiny for me. I think the utility of our Internet product is at an all time high. It’s being consumed at record levels. It’s performing at spectacular thresholds. If we’re going to continue to support the massive and structural surge that we’ve seen in usage, we need to ensure that our pricing supports the investment and the yield that’s required. So it’s early days. I would say though that we are looking very carefully at the rate card. And I would just say, continue to watch this space.

Vince Valentini

Thank you.

Bradley Shaw

Thank you.


Our next question comes from Jeff Fan of Scotiabank. Please go ahead.

Jeffrey Fan

Thanks. Good afternoon and let me express my condolences to Brad and the family and the team as well and hope all of you guys are doing well. I’ve got a couple of questions. I’ll start on the Internet. The self-install more than 50% in the quarter, clearly impressive and especially going to 100% perhaps that’s because of the situation we’re in. Are you seeing a bit of a pickup in activation because of your ability to self-install just because I think the telcos have – tend to have a tougher time to do self-install just because of the way the network is architected.

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And then the second part to that Internet question is whether there is any switching happening in the early weeks from places where there isn’t fiber deployed by your competitors as more people work from home probably need a as robust the broadband network as you need.

And then the second question is on Wireless. Paul, you mentioned Q3 is probably a bit of a lost quarter, and depending on how long this goes, if it goes through the summer, Q4 might be the lost quarter as well in terms of activations. But if we look across the value, post COVID-19, how do you think about the landscape because by then, we’re going to have more pent-up demand for upgrades. We haven’t have people with older phones that are looking to upgrade, do you have any early thoughts as you look across the value? I know this is still early and how that landscape may look?

Paul McAleese

Hi, Jeff. Yes, thank you. On the self-install, I’m so pleased that we made the investments in recent years that we did and the team whether a little bit – a bit of good planning and a bit of good luck, I suppose that we were able to take such advantage of it right now. And it’s been – the customer experience has been fantastic. So we’re getting great reviews on this. I’d say it’s maybe a little early to tell whether there’s really any competitive pickup there. There hasn’t been a lot of activity on switching to answer the second part of your question directly.

And while you’re right, there is the advantage of our self-install relative to a fiber-install for our competitor. I think as an industry, frankly, we’ve all done a good job of accommodating the kind of demand for customers to be able to do some of this on their own. So I wouldn’t anticipate a significant pickup there. Honestly, across the board, I think all of the major players have done a good job of making sure that customers feel safe in their homes and supported. So as an industry, I would give us a broad amount of credit and not suggest that it’s going to create a surge and opportunity for us.

On the Wireless question, post COVID. Yes, I mean, I think we are in a great place. We’re really well positioned competitively both during the pandemic and I think post pandemic. So I’ll pull that apart into two pieces, Jeff. During, we have, of course, as you know, lower ARPU and probably fair to say more overall values than the incumbents. So I think that makes us a less vulnerable household expense and some of our peers. I’ve had a number of specific instances where people that are on fairly expensive competitive plans have reached out to me in recent days and made the cut over to Freedom simply because they’re starting to spend more time looking at their bills than maybe they would have been in a pre-COVID world. So I like what that signals.

For me, it is early days and it’s small sample, but those things usually come true. As you exit the pandemic, and we emerge from this crisis, the value position that we’ve established for Freedom in the last two to three years is going to resonate even more with Canadians. And it happens to coincide with essentially the completion our 700 build. We’ve done such a strong job with our retail distribution. And with all that opens back up and the market sort of starts to seek – it starts to open up again. I think you’re surmising this correctly. You’re going to see a lot of wear and tear on phones over this kind of close down period. We’re seeing certainly a quiet period for upgrades, quiet period for new sales. There’s going to be a definite surge.

Hard to say where Apple is with their new product introduction in September. We won’t know that until the rest of the market, but if they were to come back out with that, you can only imagine that emerging that sort of some point in the summer seeing that that new product introduction and then all the other things factoring in. I really like where we sit is an opportunity where we’ve worked hard to establish ourselves as a high value player for consumers. And you’ve seen the same numbers that I have. When you see some of the employment figures, these are all households that are going to be looking for better value, but they’re not going to be coming out of the Wireless category. So I like where we sit.

Jeffrey Fan

Okay. Thanks Paul.

Paul McAleese

Thank you, Jeff.


Our next question comes from Tim Casey of BMO. Please go ahead.

Tim Casey

Hi. I too would like to express my sympathies to Brad, specifically, and to everyone at Shaw. Paul, a couple of questions for you, it might be too early, but are you – is there any indication on any implications for supply chain disruption with respect to the expected surge in demand for all the pent-up demand for phones and whatnot? Any indications on that?

And just on the video – pardon me on the Wireline side, can you talk a little bit about what you’re seeing or what you expect to see in terms of video mix? And specifically, how are you treating your sports channels now in terms of credits to customers or whatnot because obviously sports has been so important to keeping the traditional bundle. And I acknowledged that that’s not your focus, but it’s still a profitable part of the bundle. If you could just address how you’re looking at that. Thanks.

Paul McAleese

Yes. I’d be happy to, Tim, and thanks for your kind words on the, off the top there. On supply chain, we’ve been really fortunate. There was a few days of darkness where we didn’t really have a lot of communication with the major OEMs. I’m just referring to Wireless to start with and they simply didn’t know how their pipeline was going to read. But we – thanks to the strength of the balance sheet, we’ve always got a reasonably good inventory position and we entered the pandemic with a sort of decent size holding.

It’s been very clear that in recent days this sort of pipeline looks to be back up and running. So we don’t anticipate any issues. Of course, diminished volumes help us there, Tim as well, right. So we’re not seeing a huge surge in demand, but we seem to be getting really good signals from the major OEMs and that seems quite comfortable. So no real issues there.

On the Wireline side, I’ll answer the question you didn’t ask. We likewise have great continuity of supply for all of our major residential CPEase as well. So I think across the board, we’re in good shape there. So nice to see the supply chain kind of opening up a little bit again, rather than where it was a few weeks ago.

On Wireline, in the video mix and sports, it’s a very dynamic situation as you can imagine. A little color on this. This sports league, almost to a one, of course, had not formally canceled their seasons. I know that all of them were looking at options on how they might be able to recover, particularly the ones that are kind of heading toward the playoffs. So they’re all looking at options and that in that regard on, let them comment on that specifically, but it does put the people that are on those sports rights into a tricky position.

We’ve been fortunate. We haven’t seen a great deal of customer inquiry around that, so it hasn’t been a pressure point for us. When we get formal notification, if in fact the seasons are canceled, that may affect the economics. And if that does, then we’ll look at how that might affect the customer building. At this point it’s actually been sort of fairly static. Customers aren’t asking networks or other major league sports.

Leagues are not canceling. I suspect all of that will change over the course of the next couple of weeks as we hear more about, specifically basketball and hockey, but there’ll be more to follow there. But right now, it’s actually been a fairly flat conversation and nothing really to report on that front.

Tim Casey

Okay. Have you seen a noticeable uptick yet on the other side on the more general entertainment and movie packages?

Paul McAleese

Yes, we’ve seen a nice uplift in video-on-demand, whether people are just reaching the end of Netflix or what’s happening, but it’s been a nice short-term lift there. A little more entertainment at home compensating again for the lack of sports programming, I suspect, Tim, as well. So that’s been decent because those are relatively small numerators on our video denominator, but it is good to see good signs of life there.

The long-term trend for video hasn’t abated, but certainly the moment where you’re turning your home into your primary entertainment and sort of almost like a cinema, you seen some of the studios move up releases and move things right past theatrical and into VOD. So we’ve had a nice lift from that. But I suspect that the long-term trend on video will remain where it was after this.

Tim Casey

Thank you.

Paul McAleese

Thanks Tim.


Our next question comes from Maher Yaghi of Desjardins. Please go ahead.

Maher Yaghi

Thank you for taking my question. And I also would like to offer my condolences to Brad and to the Shaw calamity team. Maybe just a question on Wireless. Trying to understand a little bit better the consequences of a lower trend in the upcoming quarters on your operation. Can you share with us how much of your net additions during a typical Q3 or Q4 are due to churn customers from incumbents? So customers who are taking a new plan not churning from somebody else.

Paul McAleese

Yes. You just broke a little bit there. I think I picked up the majority of it Maher. The significant majority of our existing customers are from other carriers that are reporting in a number. So that lack of market activity is one of the reasons that you’re seeing us with relatively – kind of relatively flat to down performance expectations for this quarter. So we operate best and thrive most in an active environment where people are out shopping and comparing value and we’ve always thrived in that scenario. So we are very measured in our expectations for the next 60 or 90 days.

Maher Yaghi

Right, exactly. So when I look at in a period where churn is likely to be significantly down, you’re going to be saving quite a bit of cost on your closure of stores and on handset subsidies, you’re going to be also likely saving a lot of money on that. I’m trying to get a sense on, when you talk about EBITDA continuing to grow for the year, if we break it down from in Wireless versus Wireline, would it be fair to say that on the Wireless side you actually could end up with the year upon versus your prior expectations while Wireline would be lower than your prior expectations?

Trevor English

Hi Maher, it’s Trevor. That’s a fair conclusion. That’s exactly right. In the near-term, the financial performance of our Wireless business is probably frankly either on plan or slightly ahead of our original guidance, but clearly there’s some more risk in our Wireline business then what we were striving to achieve, which is very consistent $490 million to $500 million of quarterly EBITDA, and of course, I’m quoting pre-IFRS 16 numbers, but you’re exactly right.

Maher Yaghi

Right. So if I take it one step further and I look at 2020, 2021, so this – I guess lack of loading that you’re doing in Wireless. And as there’s pent-up demand, what kind of strategy can you implement to make up for the lost time of not loading customers? You’re going to be facing probably a refresh cycle from your existing customer base, which would took iPhones a couple of years ago, you also have a bunch of new customers that will churn at the same time. I’m trying to figure out the impacts on your working cap, on your cash flow requirements, at the same time as we have 5G coming up probably next year with the spectrum auction and the investment in that. So like, how do you view free cash flow in that context in 2021?

Bradley Shaw

So let me pull apart a couple of pits of parts of that question. So first off, I don’t know that we make up for lost ground here. I think the subscribers ultimately that – when the market has stalled this way, I don’t know that we all of a sudden see an extra 100,000 subscribers that show up in September and October. So it’ll just have a natural rhythm to it. But I would say it’s fair to say this probably puts a temporary hold on growth and that considered over multiple years. We’ll catch up, but it’s not going to happen within a quarter.

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In terms of how this rolls into free cash flow expectations and 5G investments, I think those are all – this is a relatively modest bump in the road for us. If you think about the impact of adding 50,000 or 60,000 or 70,000 new subscribers on the subscriber base of 1.8 million and you can do the math, it’s just simply not going to be that meaningful in terms of its contribution in the next six to 12 months. So I don’t think it really puts any of our planning for 5G investments or network into jeopardy here.

Trevor English

Yes. Maher, it’s probably premature to talk about F 2021 and a lot of granularity considering where we’re at with the environment. But I would say, I sort of go back to the strength of the balance sheet, the strength of liquidity regarding spectrum acquisition costs around the 3,500 and capital required to build out our business as we have to probably slow some things down. We’ve got lots of levers here and lots of financial strength to operate in that environment in F 2021 when we’re through this.

Maher Yaghi

That’s fair. Thank you for that. And my last question. And I agree with you, it’s tough to put new guidelines not knowing when this pandemic is going to be over. You mentioned about the free cash flow. My last question is on CapEx. How much CapEx reduction do you expect at this point in time that you’ll see because of this pandemic happening? Is this a significant or material reduction in CapEx that you’re now looking at or – in 2020 or not material?

Trevor English

Yes, again, it’s difficult to answer that. Frankly, we hope it’s not a material reduction in capital expenditures if we can get the back-to-business is normal quick. But if you look at, for example, year-to-date capital within housing development and success-based capital, that was about $200 million in the first half of the year. Clearly that category is not going to be as high in Q3 and Q4 in the context of the environment.

But it’s very difficult. Again, hard to precisely predict how much less – how much sort of CapEx relief, and I really think of it more as deferral of capital in F 2020 because of the environment. And I think that’s why we did – we pulled or withdrew our previous guidance, but we tried to give some comfort around EBITDA growth still this year and free cash flow substantial in line. We just need a little bit more flexibility considering the uncertain environment.

Maher Yaghi

Definitely. Okay. Thank you very much.

Trevor English

Thank you.


Our next question comes from Drew McReynolds of RBC. Please go ahead.

Drew McReynolds

Yes. Thanks very much, and condolences to you Brad and the Shaw family and the organization and to you, Paul, congrats on the position. A couple of follow-ups on my end. Maybe starting with you, Paul on the – just on the government pricing objective on the 2 to 6-gig plan. Can you talk to your big picture view on how your positions relative to that? And we certainly did see a little bit of jockeying before the crisis hit from the incumbents, so love your perspective on that.

And then second, maybe for you, Trevor, just some housekeeping. In terms of the cash restructuring costs, they are below what you originally provisioned for in the – the TBT program seems to be substantially complete. Are you expected to kind of meet the full $437 million in cash restructuring?

And just second question on the pension funding status, just remind us, frankly, where that sits. I think you locked a lot of that exposure down a few years ago, but an update there would be great. Thank you.

Paul McAleese

I’ll take it first, Trevor.

Trevor English

Sure. Yes.

Paul McAleese

Yes. Thanks to you for the kind words. We’re big believers in driving greater Wireless value for Canadians and that’s really been the ethos. We’ve been running this company since we acquired it some years ago. And I think the regional carriers have demonstrated that they have been the drivers of change and the drivers of value in the market really specifically over the last two or three years. But it without us, I think you’d still see the incumbents in a very different place on pricing.

So the availability of affordable Wireless is widespread. It may not necessarily exist on the incumbents, but it’s certainly available with ourselves and our regional peers. And that quality of product has increased substantially over the last two years specifically. So I’d start by saying that some of this to me still looks like a solution to a problem that isn’t obvious to me. So with specific reference to the governments 25% sort of directive on 2 to 6-gig plans, we’re seeing a natural growth of data usage. It’s going to push a lot of customers that might be in that bucket today up into a post 6 or a larger than 6-gig plan two years from now regardless.

You’ll recall, Drew, this isn’t a stage reduction. It’s simply a moment in time. So it’s kind of a balance sheet snapshot of it. Two years from now, the government will take a read and we’ll want to see that decline. It’s fine. It’s not really going to affect us. I suspect a great percentage of the market. So probably not an overwhelming measure in the market by the time it’s done. Look, we applaud the government’s initiative to try and drive change, but we think the market does that best and we’ve been demonstrating that really for the last number of years. So that’s really all we have to say on that. I’ll hand over to Trevor.

Trevor English

Yes, thanks Paul. And thanks Drew for the questions. Just on the restructuring costs. So we’re about $390 million into the VDP payments and we’ve got about 200 folks left or so that are leaving post Q2, Drew. But just want to remind everyone that we did offer employees the option to defer the payments over two tax years. So there will be some payment, residual payment that’s left that gets paid out in January, 2021 of that $50 million. That’s why it looks like a relatively large number for a relatively few number of employees to lead the company.

On the pension status. As of February 28 or the end of the quarter, pardon me, February 29, we’re at about 85% from a funded perspective. And post quarter end, clearly there’s been a lot of movements specifically also with executive changes, but also which will reduce the liability, but also with volatility in the equity markets, which will obviously have an impact on the assets side of things. So net-net, though, we don’t expect a material change from the funding status, but I guess we’ll have to wait to see where the interest rate environment and corporate spreads go on our quarter end of May 31.

Drew McReynolds

Okay. Got it. Thank you, both.

Trevor English

Yes. Thanks.


Our next question comes from David Barden of Bank of America. Please go ahead.

Unidentified Analyst

Thank you. It’s actually Matthew on for David. And allow me to extend my condolences as well for the passing of JR. So my first question is, I just wanted to clarify, I’m pretty sure that you are indicating that the EBITDA growth that you’re expecting, it’s pre-IFRS if I’m not mistaken, it’s not post-IFRS. I just want you to clarify that.

And then on the Wireless side, I’m assuming that this current situation could potentially last an unknown length of time. I was curious about what percentage of Wireless sales or growth adds that you can generate – have been generating in a normal environment from the online channel? And if you see capacity for that to potentially increase? And also, it sounds like the consumer behavior hasn’t really changed as of yet given the dramatic change in circumstances.

You’ve already spoken to kind of the video packages. It sounds like you haven’t seen much movement aside from VOD, but in a typical slowdown or recession, how long does it typically take in the Wireline business to start to have customers reaching out to make changes? It’s been said on the call that a lot of these services are kind of indispensable and I don’t suspect lots of people will drop them, but just in terms of generating calls into make money saving kind of optimization changes? Like, when would that you expect to see that behavior? Thanks.

Trevor English

Maybe I’ll start, Paul. Matthew, thank you. Yes. It’s on pre-IFRS 16 in terms of EBITDA growth, but obviously on a post-IFRS basis, it’s also positive even better. So yes and yes. Paul?

Paul McAleese

Matthew, it’s Paul. On your question about online sales, we have as an industry really been challenged by this model. It’s difficult in Canada given what unfortunately is a very high degree of fraud with – when we open this up. We have had some success and will continue to have success in shipping phones or upgrading phones to people with whom we already have an existing relationship. So that’s obviously something that we can progress on. And we’ve had a bit of an uptick in recent weeks with the sale of prepaid sims online, which, of course, carries a much lower attendant risk because we’re not shipping phones.

So I wouldn’t – I would put by the way our online sales, like less than 1% of our total gross. It’s almost de minimis. And I don’t expect that it will move significantly from that. So unfortunately the wider you open the aperture of that, the more risk you assume and the more fraud you seem to find. So don’t expect – at least with our view of the risk, don’t expect us to look to widen that channel anytime soon.

On your question about consumer behavior, how long, it’s funny, it will come in stages. It probably took about a minute and when all this hit for the first customer to call and look to change their behavior, but it’s again been a relatively small numerator of people who have called and look to affect their pricing with us. Trevor and I were chatting earlier today and during the last recession, admittedly a different time and different circumstances, but we didn’t see significant declines in consumer demand for our product. And I would say that Internet now is materially more critical for the management of a home, particularly with things like in-home education and stuff now.

So having that turned down relative to all the other discretionary expenses in the household, it’s just not something that’s going to come in big waves. Certainly, we’re definitely going to see individuals who are going to have to cut back and we’re going to definitely see some cancellations like I outlined. But in the main, we have a really high degree of confidence in where this is going to settle out.

Wireless has its own unique retention capability, but Internet is just – and you’re all experiencing it is just reaching a level of utility in a household that it’s simply never experienced before. So when you look at the kind of the cost per day of this, and what you get out of it, we’re just not seeing that many – that much pressure on the topline here. So – and we’re encouraged by that. We’ll continue to see changes in that performance as we see more and more people unfortunately getting the unemployment figures. But for now, we’re really pleased with the performance.

Unidentified Analyst

Great. Thank you.

Paul McAleese

Thank you.


This concludes the question-and-answer session. I would like to hand the conference call back over to Mr. Shaw for closing remarks.

Bradley Shaw

First of all, thank you everyone for your comments. We really appreciate the support and thinking of the family, and we want to wish you all safety in this world we live in and all the best to you. And I would just make a point that we look forward to talking to you in early July, and stay safe. Thank you. Thank you, operator.


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